2025 (7) TMI 1367 - AT - Income Tax

Disallowance of exemption claimed u/s 11 - disallowance made by CPC u/s 143(1) - procedural lapse in verifying the audit report HELD THAT - It is not in dispute that the Form 10B was uploaded by the Chartered Accountant on 24.09.2022 and verified by the assessee on 17.04.2023 before the CPC processed the return on 21.04.2023. The exemption u/s 11 was denied solely on the ground of procedural lapse in verifying the audit report despite its availability to the Department before the intimation was issued. In our considered view as supported by the judicial precedents cited the requirement to file Form 10B is directory and procedural and substantive compliance by the assessee entitles it to the exemption claimed. As relying Associated Chambers of Commerce and Industry of India 2024 (8) TMI 370 - DELHI HIGH COURT appellant assessee has to be held to be eligible and entitled to exemptions under Section 11(1) and 11(2) of the Act and the alleged ground of non-filing of audit report alongwith return of income which was at the best procedural omission could never to an impediment in law in claiming the exemption. Appeal of the Assessee is allowed.

Summary

ISSUES:

Whether the exemption under section 11 of the Income Tax Act can be denied solely on the ground of delayed verification of the audit report in Form 10B beyond the due date.Whether the requirement of filing and verification of Form 10B along with the return of income is mandatory or directory for claiming exemption under section 11.Whether procedural lapses in filing or verifying Form 10B can justify denial of exemption when the audit report is otherwise available before assessment or processing under section 143(1).The legal effect of the electronic filing requirements and the timing of submission of Form 10B on the entitlement to exemption under section 11.

RULINGS / HOLDINGS:

Exemption under section 11 cannot be denied solely on the ground of procedural lapse in verification of Form 10B, especially when the audit report was uploaded within time and available to the department before processing of the return; the requirement to file Form 10B is "directory and procedural."The delayed verification of Form 10B does not affect substantive compliance entitling the assessee to exemption under section 11, as "filing of audit report is held to be substantive requirement but not the mode and stage of filing, which is procedural."The denial of exemption under section 11 on the basis that the audit report was verified after the due date is not sustainable, given that the audit report was available to the Assessing Officer before completion of assessment or processing under section 143(1).The electronic filing procedure introduced by the 2015 Act and 2016 Amendment Rules imposes a procedural obligation, but does not alter the substantive law regarding entitlement to exemption under section 11.

RATIONALE:

The Court applied the statutory framework of the Income Tax Act, 1961, specifically sections 11, 12A, and procedural provisions under section 143(1), alongside relevant Rules including Rule 12(2) of the Income Tax Rules, 1962.Judicial precedents were extensively relied upon, including authoritative decisions by the Delhi High Court and Gujarat High Court, which established that the requirement to file Form 10B is procedural and directory rather than mandatory in a substantive sense.The Court referred to the judgment in Associated Chambers of Commerce and Industry of India v. Deputy Commissioner of Income-tax, which recognized reasonable cause for delay in digital filing and emphasized the importance of substantive compliance over procedural technicalities.The Supreme Court's ruling in Commissioner of Income-tax v. Nagpur Hotel Owners' Assn. was cited to underscore that the assessing authority must have the necessary information before completing assessment to grant exemption, and that subsequent filing after assessment completion does not entitle exemption.The Court noted that the 2015 legislative amendments and 2016 Rules introduced mandatory electronic filing but did not change the substantive entitlement to exemption, a view supported by the Gujarat High Court in Association of Indian Panelboard Manufacturer.It was emphasized that denial of exemption based solely on procedural non-compliance, when the audit report was available before assessment completion, conflicts with the legislative intent and judicial interpretation.There was no dissenting or concurring opinion; the Court uniformly held that procedural lapses in verification or filing timing do not justify denial of exemption under section 11 where substantive conditions are met.