1991 (4) TMI 56 - HC - Income Tax

Charitable trust allowed exemption u/s 11; belated Form 10B treated as curable defect under ss 12A, 139, 292B

HC held that the assessee, an admittedly registered charitable trust regularly granted exemption in earlier years, was wrongly denied exemption u/s 11 ... Entitlement to benefit of exemption u/s 11 - audit report in Form No. 10B was not filed 'along with the return' - Charitable Trust - Defects In Return - rectify the defect u/s 139(9) - Charitable Trust - compliance with the requirement of section 12A(b) - Whether, the provisions of sections 12A, 139(5), 139(9), 292B and the scheme, as a whole, the Tribunal was right in law in holding that the lower authorities were not correct in denying exemption u/s 11 to the assessee for the assessment year 1984-85 ? - HELD THAT:- Admittedly, the assessee is a charitable trust and is registered with the Commissioner of Income-tax. It was not disputed that the assessee, for the past several years, was treated as a charitable institution and granted exemption under section 11 of the Act. The assessee has been denied the benefit of exemption under section 11 as the audit report in Form No. 10B was not filed along with the return and the filing of the said report later on March 6, 1987, did not satisfy the condition stated in section 12A. The denial of the exemption is supported on the ground that the provisions of section 12A are mandatory. There is no doubt that section 12A specifically states that the provisions of sections 11 and 12 shall not apply in relation to income of any trust if conditions stated therein are not fulfilled and, in the conditions, it is provided that the accounts of the trust should be audited and the report of the auditor (in Form No. 10B) should be furnished 'along with the return'. If section 12A is read in isolation and the rule of strict and literal construction is applied, the approach of the Revenue in this case has to be held as correct. But we see no justification for applying the rule of strict construction or for considering the provisions of section 12A in isolation. One has to look at the purpose of the provisions. One has to construe the provision to ensure coherence and consistency to avoid undesirable consequences. Where the audit report was made ready after the return was filed, there was no reason why such audit report should not be allowed to be filed before the completion of the assessment. At this stage, we may also mention that the assessee made an application dated June 18, 1984, seeking extension of time up to September 30, 1984, as audit of relevant papers and statements was not completed and was likely to take more time. The said application was not rejected and it can safely be presumed that extension sought tip to September 30, 1984, was granted. The return submitted on September 27, 1984, has to be treated as a return under section 139(1). On completion of audit, the assessee furnished the report in Form No. 10B on March 6, 1987, purporting to act under section 139(5) of the Act. By filing the said report, the assessee definitely removed an omission or defect existing in the return furnished on September 27, 1984. No mala fides have been alleged. No case has been made out that the delay in getting the accounts audited and in filing of the report in Form No. 10B defeated any object of the Act or the assessee's action was in substance not in conformity with the intent and purpose of the Act. In our view, the income-tax authorities fell into error in denying the claim of exemption under section 11 of the Act. It was not disputed, as we have already indicated, that the assessee, for the past several years, was treated as a charitable institution and granted exemption under section 11 of the Act. The view of the lower authorities that the audit report submitted on March 6, 1987, not being filed with the revised return did not satisfy the condition in section 12A and that the provisions of sub-sections (5) and (9) of section 139 were not applicable cannot be sustained. The object of both the sub-sections, in our view, is to get removed and rectified all defects and omissions in the return filed, whether discovered by the assessee or by the Assessing Officer. Both the provisions are enabling provisions inserted to facilitate reflection of correct income in the return and assessment thereof. These provisions can be simultaneously applied. Assessing Officer ought to have given the assessee an opportunity to submit the audit report as the return was defective inasmuch as the audit report was not filed along with the return. In this case, as we have already noticed, the said defect was rectified by the assessee by filing an audit report in the prescribed form before the completion of the assessment. The income-tax authorities took a hypertechnical view of this matter. Where the assessee has complied with the provisions of the Act in the course of the assessment proceedings by curing the defect in the return by filing an audit report, the Income-tax Officer cannot ignore such audit report or the return in completing the assessment. Normally, it should be possible for a charitable or religious trust or institution to file the auditor's report along with the return of total income, where such trust or institution claims exemption under sections 11 and 12. However, in cases where for reasons beyond the control of the assessee some delay has occurred in filing the said report the exemption as available to such trust under sections 11 and 12 may not be denied merely on account of delay in furnishing the auditor's report and the Income-tax Officer should record reasons for accepting a belated audit report. Thus, we answer the question in this reference in the affirmative and in favour of the assessee. Issues Involved:1. Filing of audit report along with the return.2. Compliance with section 12A(b) of the Income-tax Act.3. Applicability of sections 139(5) and 139(9) for rectifying defects in the return.4. Interpretation of mandatory provisions and the intent of the Legislature.Summary:1. Filing of Audit Report Along with the Return:The assessee, a charitable trust, filed its return for the assessment year 1984-85 on September 17, 1984, declaring a deficit but did not include the audit report in Form No. 10B as required u/s 12A. The audit report was later submitted on March 6, 1987, before the completion of the assessment. The Income-tax Officer denied the exemption u/s 11 due to the absence of the audit report 'along with the return.'2. Compliance with Section 12A(b) of the Income-tax Act:The Commissioner of Income-tax (Appeals) upheld the Income-tax Officer's decision, stating that the assessee violated the mandatory provisions of section 12A(b) and thus was not entitled to the exemption u/s 11. The Tribunal, however, found this view to be overly technical and concluded that the authorities were incorrect in denying the exemption since the audit report was filed before the assessment was completed.3. Applicability of Sections 139(5) and 139(9) for Rectifying Defects in the Return:The Tribunal and the court considered sections 139(5) and 139(9), which allow for the rectification of defects in the return. The court noted that the assessee could have filed a revised return with the audit report, and the Income-tax Officer should have allowed the assessee an opportunity to rectify the defect. The court emphasized that the provisions of section 12A should not be read in isolation and that the intent of the Legislature should be considered.4. Interpretation of Mandatory Provisions and the Intent of the Legislature:The court opined that the provisions of section 12A are directory, not mandatory, in the sense that the Assessing Officer can allow the filing of the audit report any time before the completion of the assessment. The court highlighted the importance of coherence and consistency in interpreting the provisions to avoid undesirable consequences. The court also referred to a CBDT circular which stated that exemption should not be denied merely due to a delay in furnishing the audit report if reasons for the delay are recorded.Conclusion:The court concluded that the income-tax authorities erred in denying the exemption u/s 11 to the assessee. The question referred to the court was answered in the affirmative and in favor of the assessee, with no order as to costs.