2025 (6) TMI 1626 - AT - Income Tax

Denial of exemption claimed u/s. 11 - delay in filing the audit report u/s 10B- procedural provision - mandatory v/s directory requirement - HELD THAT - We find that the assessee had not been granted the exemption under section 11 as there was delay in filing the audit report u/s.10B of the Act but the same was available at the time of processing of the return. As decided in Indian Sugar Mills Association 2024 (1) TMI 1445 - CALCUTTA HIGH COURT filing of the auditor s report along with the return of income has to be treated as a procedural requirement and therefore directory in nature and not mandatory. Hence after examining the facts of the case we deem it appropriate to set aside the order of the ld. CIT(A) as well as the intimation order passed by the CPC and remit the matter back to the file of the Assessing Officer for considering the claim of the assessee afresh as the audit report was available at the time of processing of the return therefore the claim u/s. 11 of the Act could not be denied. The Ld. AO is directed to allow the claim u/s 11 of the Act as per law and after considering the audit report filed on Form No. 10B - Appeal of the assessee is treated as allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

a) Whether the delay of 83 days in filing the appeal before the Tribunal should be condoned;

b) Whether the delay of 767 days in filing the appeal before the Commissioner of Income Tax (Appeals) was justified and whether the Commissioner erred in not condoning the delay;

c) Whether the Assessing Officer (AO) was justified in denying exemption claimed under section 11 of the Income Tax Act on the ground that Form No. 10B (audit report) was not filed within the due date;

d) Whether the AO could disallow the exemption claimed under section 11 by processing the return under section 143(1) of the Act, which is limited to arithmetic errors and does not permit substantive additions or disallowances;

e) Whether the claim of exemption under section 11 can be denied for procedural delay in filing Form No. 10B, considering the nature of the requirement as mandatory or directory;

f) The procedural propriety and correctness of the orders passed by the AO, Commissioner of Income Tax (Appeals), and the correctness of the intimation under section 143(1) of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

a) Condonation of Delay in Filing Appeal Before the Tribunal

Legal Framework and Precedents: The Tribunal has the power to condone delay in filing appeals under the provisions of the Income Tax Act, subject to the appellant showing sufficient cause for the delay.

Court's Interpretation and Reasoning: The Tribunal noted that the delay of 83 days was due to the appellate order being received in the email spam folder and no physical copy being served. The appellant became aware of the order only upon receipt of a subsequent hearing notice for another assessment year and promptly filed the appeal.

Key Evidence and Findings: The appellant's explanation that the appellate order was missed due to technical reasons (email in spam folder) was accepted as reasonable cause.

Application of Law to Facts: Given the reasonable cause and prompt action upon discovery, the Tribunal condoned the delay and admitted the appeal for adjudication.

Treatment of Competing Arguments: No adverse submissions were made by the Revenue on this point before the Tribunal.

Conclusion: Delay of 83 days in filing the appeal before the Tribunal was condoned.

b) Delay in Filing Appeal Before the Commissioner of Income Tax (Appeals)

Legal Framework and Precedents: Appeals before the Commissioner of Income Tax (Appeals) must be filed within prescribed time limits. The Commissioner has discretion to condone delay if sufficient cause is shown.

Court's Interpretation and Reasoning: The Commissioner did not condone the delay of 767 days in filing the appeal. The appellant cited non-availability of digital signature certificate (DSC), non-availability of intimation order, and financial constraints as reasons for delay.

Key Evidence and Findings: The appellant's contradictory statements regarding receipt of intimation and procedural difficulties were noted. The Commissioner relied on the Supreme Court decision in Ajay Dabra vs Pyare Ram & Others to deny condonation.

Application of Law to Facts: The Tribunal did not disturb the Commissioner's order on this point, as the delay was substantial and explanations were not found sufficient.

Treatment of Competing Arguments: The appellant argued that the delay should be condoned due to procedural and technical reasons, but the Commissioner disagreed.

Conclusion: The delay before the Commissioner was not condoned; however, this issue became less significant as the Tribunal admitted the appeal on condonation of delay before itself.

c) Denial of Exemption under Section 11 on Ground of Delay in Filing Form No. 10B

Legal Framework and Precedents: Section 11 of the Income Tax Act provides exemption for income of charitable/religious trusts subject to compliance with conditions including filing of audit report in Form No. 10B. The timing of filing Form No. 10B is crucial. The question is whether the requirement is mandatory or directory.

Precedents relied upon include:

• CIT (E) vs Indian Sugar Mills Association (High Court) holding that filing the auditor's report along with the return is procedural and directory, not mandatory;
• Income Tax Officer vs Camellia Educare Trust;
• Hari Gyan Pracharak Trust vs Deputy Commissioner of Income Tax;
• Gyandeep Charitable Trust vs ADIT;
• Shri Visha Oswal Jain Sewa Samaj vs ITO;
• Packers (India) vs ITO;
• CIT vs Pesticides India Ltd.;
• CIT vs Mahesh Kumar A Rathod;
• Anita Seth vs DCIT (ITAT Kolkata Bench).

Court's Interpretation and Reasoning: The Tribunal observed that the audit report in Form No. 10B was filed on 3.2.2021, which was after the due date prescribed under section 139(1) for filing the return but before processing of the return under section 143(1). The AO denied exemption solely on the ground of delay in filing Form No. 10B.

The Tribunal relied on the High Court ruling in Indian Sugar Mills Association, which held that the filing of the audit report is procedural and directory. Therefore, delay in filing should not result in denial of exemption if the report is available at the time of processing.

Key Evidence and Findings: The audit report was available at the time of processing the return, and the return was processed under section 143(1) without objection to its validity.

Application of Law to Facts: The Tribunal held that the AO erred in denying exemption merely on the ground of delay in filing Form No. 10B. Since the audit report was available at the time of processing, the exemption claim under section 11 could not be denied.

Treatment of Competing Arguments: The Revenue argued that the delay in filing Form No. 10B was fatal to the claim of exemption. The appellant argued that the requirement is procedural and delay should not affect exemption. The Tribunal sided with the appellant.

Conclusion: The denial of exemption under section 11 on the ground of delay in filing Form No. 10B was held to be incorrect.

d) Validity of Disallowance of Exemption by AO under Section 143(1)

Legal Framework and Precedents: Section 143(1) of the Income Tax Act permits processing of returns for arithmetical errors, incorrect claims apparent from the return, or inconsistencies. It does not empower the AO to make substantive additions or disallow exemptions based on factual disputes.

Court's Interpretation and Reasoning: The Tribunal noted that the AO processed the return under section 143(1) and disallowed the exemption claim under section 11 on the ground of delayed Form No. 10B filing. The Tribunal observed that such disallowance is not permissible under section 143(1) as it involves a factual dispute requiring adjudication.

Key Evidence and Findings: No arithmetical error or incorrect claim apparent from the return was found that justified disallowance under section 143(1).

Application of Law to Facts: The Tribunal held that the AO cannot deny exemption under section 11 by processing the return under section 143(1) without proper adjudication.

Treatment of Competing Arguments: The appellant relied on judicial pronouncements to support this position; the Revenue contended that the denial was justified.

Conclusion: The AO's action in denying exemption under section 11 through processing under section 143(1) was held to be improper.

e) Remand to AO for Fresh Consideration

Court's Interpretation and Reasoning: The Tribunal set aside the orders of the AO and the Commissioner of Income Tax (Appeals) and remanded the matter to the AO for fresh consideration of the exemption claim under section 11 after considering the audit report filed in Form No. 10B.

The Tribunal directed the AO to allow the claim under section 11 as per law and permitted the assessee to make submissions in support of the claim without unnecessary adjournments.

Conclusion: The matter was remanded for fresh adjudication in accordance with the law and judicial precedents.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Filing of the auditor's report along with the return of income has to be treated as a procedural requirement and, therefore, directory in nature and not mandatory."

"The claim under section 11 of the Act could not be denied merely because the audit report in Form No. 10B was filed late, if the report was available at the time of processing the return."

"The Assessing Officer cannot disallow exemption claimed under section 11 by processing the return under section 143(1) of the Act, as section 143(1) does not empower the AO to make substantive additions or disallowances based on factual disputes."

"Delay of 83 days in filing the appeal before the Tribunal is condoned on showing reasonable cause."

"The orders of the AO and the Commissioner of Income Tax (Appeals) are set aside and the matter is remanded to the AO for fresh consideration of the exemption claim under section 11 after considering the audit report."