2023 (6) TMI 1279 - AT - Income Tax

Denial of Tax Exemption Upheld for Non-Filing Auditor's Report

The Tribunal upheld the denial of exemption under section 11 of the Act by the National Faceless Appeal Centre, Delhi, due to the non-filing of Auditor's ... Denying the exemption u/s. 11 - non-filing of Auditor’s Report in Form No. 10B along with the return of income - HELD THAT:- In the present case clearly shows the audit report itself was dated 21-11-2018 which demonstrates that at the time of filing return of income audit report was not ready, consequently we can say the claim u/s. 11 was not quantified. We note that it is a substantial failure of the assessee in getting the books of account audited before prescribed due date and also before filing the return of income. Thus, there is no dispute, the audit report was not ready before filing return of income, in the absence of which the assessee however, claimed exemption u/s. 11 of the Act without auditor’s quantification. Thus, no infirmity in the order of NFAC, Delhi in confirming the intimation issued by the CPC, Bangalore u/s. 143(1) of the Act denying the exemption u/s. 11 of the Act. Thus, the grounds raised by the assessee fails and are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether denial of exemption under section 11 for non-filing of Auditor's Report in Form No. 10B with the return of income is justified where the audit report was not prepared at the time of filing the return. 2. Whether non-filing of Form No. 10B is a mere procedural/directory defect permitting subsequent filing (during assessment or on appeal) so as to sustain claim of exemption under section 11. 3. Whether the Assessing Officer or appellate authorities are obliged to permit filing of Form No. 10B after filing of return but before completion of assessment, and whether subsequent production of Form No. 10B cures the defect for grant of section 11 exemption. ISSUE-WISE DETAILED ANALYSIS Issue 1: Justification for denial of section 11 exemption where Form No. 10B was not prepared at time of filing return Legal framework: Section 11 provides exemption for income of charitable trusts; specified statutory scheme requires furnishing of audit report in Form No. 10B (read with provisions governing filing of return and related documents) to substantiate claim for exemption. Precedent Treatment: Decisions of the Hon'ble High Courts (Calcutta and Gujarat) and Tribunal authorities have addressed whether filing of Form No. 10B is directory or mandatory, and whether it can be furnished subsequently; some authorities permit subsequent filing before completion of assessment or at appellate stage in appropriate circumstances. Interpretation and reasoning: The Court observed that the audit report in the present matter was dated 21-11-2018 while the return was filed on 23-09-2018, demonstrating that the audit report was not ready when the return was filed and the claim under section 11 was not quantified at that time. The Tribunal treated the absence of an auditor's quantification prior to filing as a substantial failure - namely, failure to get books audited before the prescribed due date and before filing the return - and not merely a procedural lapse. The timing of preparation of the audit report is therefore material: where the audit report post-dates the return and the claim was made without auditor's quantification, the defect cannot be treated as harmless or merely procedural in the facts at hand. Ratio vs. Obiter: Ratio - where the audit report comes into existence only after filing of the return, the non-filing prior to the return constitutes substantial failure and justifies denial of exemption under section 11; Obiter - general observations on remediability in different factual matrices (e.g., where audit report existed but was not uploaded) are not determinative of the present ratio. Conclusions: Denial of exemption under section 11 by the Assessing Officer and confirmation by the appellate authority were justified on the ground that Form No. 10B did not exist at the time of filing the return and the claim was unquantified; the appeal against such denial fails. Issue 2: Whether non-filing of Form No. 10B is procedural/directory and curable by subsequent filing Legal framework: Distinction between mandatory and directory provisions informs whether substantial compliance suffices; jurisdictional decisions have held furnishing of audit report may be procedural/directory in some circumstances, permitting later filing. Precedent Treatment: The Court reviewed authorities relied upon by the assessee (including High Court and Tribunal decisions) which held that filing of Form No. 10B is directory and that substantial compliance or production before completion of assessment/appellate stage may suffice. Those precedents were considered applicable only where the audit report was already in existence or where the defect was procedural. Interpretation and reasoning: Applying those precedents to the present facts, the Court distinguished them: in those cases the audit report had been prepared (or was available) and late filing was a procedural lapse; by contrast, when the audit report did not exist at the time of filing and the return asserted exemption without auditor's quantification, the procedural rationale does not apply. The Tribunal emphasised factual differentiation: prior authorities permitting later filing were inapplicable where there was a 'substantial failure' to obtain the audit before the due date of return. Ratio vs. Obiter: Ratio - the characterisation of Form No. 10B filing as directory applies only where substantial compliance is possible because the audit report exists; it does not apply where the audit report was not prepared before filing and the exemption was claimed without auditor quantification. Obiter - general endorsement of permissibility of filing at appellate stage in other factual contexts. Conclusions: Non-filing of Form No. 10B is not uniformly curable by subsequent filing; where the audit report did not exist at the time of filing the return and the claim under section 11 was unquantified, later filing does not cure the defect and exemption can be denied. Issue 3: Obligation on AO/Appellate Authorities to permit filing of Form No. 10B before completion of assessment Legal framework: Assessing Officers have statutory duties and powers under assessment procedure; case law recognises that where an audit report exists but was not filed with the return, AO may allow its filing before completion of assessment to avoid undue consequences, reflecting directory treatment in some contexts. Precedent Treatment: Cited High Court and Tribunal authorities suggest AO should allow filing before completion of assessment when audit report exists but was not filed; these authorities were relied on by the assessee to argue that the CPC/AO should have permitted filing or considered the Form No. 10B on record during proceedings. Interpretation and reasoning: The Court acknowledged those authorities but distinguished them on facts: the audit report in the present matter post-dated the return and was not merely an omitted filing. Consequently, there was no scope to regard the AO or appellate authority as having erred by not permitting post-return filing to validate an earlier unquantified claim. The Tribunal also noted factual assertions about lack of internet facilities or not receiving CPC intimations were not sufficient to convert substantial failure into a curable procedural lapse in the absence of auditor's quantification at filing. Ratio vs. Obiter: Ratio - where the audit report is not available at time of return, AO is not obliged to permit subsequent filing to validate an earlier unquantified claim; Obiter - procedural expectation that AO may allow filing when audit report exists but was not filed. Conclusions: No infirmity found in confirmation by appellate authority of the 143(1) intimation denying section 11 exemption; where audit report did not exist when return was filed, authorities were justified in denying exemption and need not entertain post-facto filing to cure a substantial defect.