Court allows trusts' benefit under section 11(1) despite late option, citing directory nature of deadline.

The High Court of Jammu and Kashmir ruled that the assessee-trusts, Ziarat Mir Syed Ali Hamdani and Ziarat Syed Hassan Mantaqi, were entitled to the benefit under section 11(1) despite failing to exercise the option under section 11(2) within the stipulated period. The Court held that the requirement to exercise the option within the specified time was directory, not mandatory, and the assessing authority could condone the delay if a valid reason was provided. The decision favored the assessee-trusts and concluded that they were entitled to the benefit under section 11(1).

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Issues Involved:
1. Whether the assessee-trust, which failed to exercise the option u/s 11(2) within the stipulated period, is entitled to the benefit u/s 11(1) in respect of the unutilized portion of income.

Summary:

Issue 1: Entitlement to Benefit u/s 11(1) Despite Failure to Exercise Option u/s 11(2) Within Stipulated Period

The High Court of Jammu and Kashmir was tasked with determining whether the assessee-trusts, which did not exercise the option u/s 11(2) within the stipulated period, could still claim the benefit u/s 11(1) for the unutilized portion of their income. The two trusts involved were Ziarat Mir Syed Ali Hamdani and Ziarat Syed Hassan Mantaqi, both Muslim religious trusts formed before 1947.

For Ziarat Mir Syed Ali Hamdani Trust, the Income-tax Officer rejected the claim for the benefit of clause (2) of the Explanation to section 11(1) because the option was not exercised within the time allowed u/s 139(1) or 139(2). The Tribunal, however, allowed the appeal of the assessee, relying on the CBDT Circular No. 273, dated June 3, 1980, which authorized Commissioners to admit belated applications u/s 11(2) read with rule 17 of the Income-tax Rules, 1962.

Similarly, for Ziarat Syed Hassan Mantaqi Trust, the Income-tax Officer and the Appellate Assistant Commissioner rejected the claim for exemption on the grounds of untimely exercise of the option. The Tribunal, however, condoned the delay and allowed the benefit, again relying on the CBDT Circular No. 273.

The High Court noted that the real controversy was whether the requirement of exercising the option under clause (2) of the Explanation to section 11(1) before the expiry of the time allowed u/s 139(1) or 139(2) was mandatory or directory. The Court concluded that sub-section (1) and sub-section (4) of section 139 must be read together, and a return filed within the time specified in sub-section (4) should be considered as filed within the time allowed u/s 139(1) or 139(2). Therefore, the option exercised by the assessee along with the return submitted u/s 139(4) was valid.

The Court also considered whether the requirement to exercise the option within the specified time was mandatory or directory. It concluded that while the requirement to spend the income within the specified time was mandatory, the requirement to exercise the option within the specified time was directory. The assessing authority has the power to condone the delay if satisfied with the cause shown for the delay.

The Court, thus, reframed the question to address the real controversy and answered it in the affirmative, in favor of the assessee and against the Revenue, concluding that the assessee-trusts were entitled to the benefit u/s 11(1) despite the delay in exercising the option u/s 11(2). The reference was disposed of with no order as to costs.

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