2025 (7) TMI 1299 - AT - Income Tax

Reopening of assessment u/s 147 - accumulated income under section 11(2) added as deemed income provisions of section 11(3)(c) - HELD THAT - Regarding the first Ground of Appeal namely reopening of assessment is bad in law is not acceptable for the simple reason that No regular assessment made under section 143 3 of the Act against the return of income filed for the asst. year 2008-09. Hence there is no question of forming any opinion on the Return of income filed by the assessee. Further it is admitted by the assessee that the unutilised accumulation of Asst. Year 2002-03 only can be added as deemed income u/s 11(3) of the Act which is taxable in the sixth year namely in the Assessment Year 2008-09. Therefore for all these reasons the reopening of assessment is valid in law and ground no.1 raised by the assessee is liable to be dismissed. Accumulated fund in the F.Y. 2007-08 - scope of amended provision - time limit of accumulation - As per the sub-clause (c) of Section 11(3) the accumulated amount shall be deemed to be the income of the assessee if it was not utilised within the period of five years as mentioned in Section 11(2)(a) of the Act or in the year immediately following the expiry thereof . Thus the assessee had time limit of five years and one additional year to utilise the accumulated funds. Since the funds were accumulated in this case in the F.Y. 2007-08 the extended time period for utilisation of fund was till the end of the F.Y. 2008-09. In the present case the assessee had utilised funds to the extent of Rs. 2, 60, 00, 000/- in the additional one-year period and accordingly claimed the deduction in the return for A.Y. 2008-09. The contention of the assessee that the amended provision would create an impossible and absurd situation as the assessee would be left with no time to utilise the funds accumulated in F.Y. 2002-03 is legally not correct. Since as per the unamended provision the assessee had additional one year to utilise the funds and the above one year period was omitted vide Finance Act 2022 with effect from 01-04-2023 only. Therefore we deem it fit to set aside this issue to the file of JAO to verify the claim made by the assessee trust. AO shall verify the year-wise accumulation and ensure that deemed income u/s 11(3) is taxed only in the 6th year after the expiry of the 5-year accumulation period. AO shall also examine whether any income has already been offered to tax in a later year to avoid double taxation. Thus the Ground No. 2 raised by the assessee is partly allowed.

Summary

ISSUES:

Validity of reopening assessment under section 147/148 of the Income Tax Act, 1961.Taxability of accumulated income under section 11(2) and deemed income provisions of section 11(3)(c) of the Income Tax Act.Interpretation of the time period for utilisation of accumulated income under section 11(2) and 11(3)(c) prior to amendment effective 01.04.2023.Applicability of deduction under section 11(1)(a) on accumulated income added as deemed income.Prevention of double taxation on accumulated income offered in different assessment years.

RULINGS / HOLDINGS:

The reopening of assessment under section 147/148 was held valid as there was no prior regular assessment under section 143(3), and the Assessing Officer had formed a valid reason to believe that income chargeable to tax had escaped assessment.Accumulated income not applied within the prescribed period under section 11(2) and the extended period under section 11(3)(c) shall be deemed income of the previous year immediately following the expiry of such period, consistent with the statutory language "shall be deemed to be the income of such person of the previous year immediately following the expiry of the period aforesaid."The time period for utilisation of accumulated funds before amendment included five years plus an additional one year ("or in the year immediately following the expiry thereof"), and taxation of unutilised accumulation must occur in the sixth year after the expiry of the accumulation period, not earlier.The Assessing Officer must verify year-wise accumulation and utilisation to ensure that deemed income under section 11(3) is taxed only in the correct assessment year to avoid double taxation.The deduction under section 11(1)(a) of 15% on accumulated income added as deemed income was not granted by the Assessing Officer and upheld by the appellate authorities.

RATIONALE:

The Court applied the provisions of sections 11(2) and 11(3) of the Income Tax Act, 1961, as they stood prior to the amendment effective 01.04.2023, interpreting the statutory language literally to determine the correct year of taxation of accumulated income.The Court relied on the statutory framework that allows accumulation of income for five years and an additional year for utilisation before deeming unspent income as taxable, emphasizing that the charging provision for accumulation not utilised within the prescribed period arises only after expiry of this extended period.The Court noted the legislative amendment by Finance Act, 2022, which omitted the phrase "or in the year immediately following the expiry thereof" from section 11(3)(c), effective 01.04.2023, thereby clarifying the timing of taxation of accumulated income for future cases but held it inapplicable retrospectively.The Court directed remand to the Assessing Officer for detailed verification of year-wise accumulation and utilisation to prevent double taxation, reflecting adherence to principles of fairness and statutory compliance.The Court rejected the argument that reopening was based on mere change of opinion, noting absence of prior scrutiny assessment and proper compliance with procedural requirements under section 148.