2024 (6) TMI 1518 - AT - Income Tax

Seven-day filing delay condoned; only net income after charitable expenses taxable under s.11; trust appeal allowed

ITAT BANGALORE condoned a seven-day delay in filing Form 10B as a procedural lapse, held that only income net of charitable expenses - not the entire ... Denial of exemption u/s 11 - delay of 7 days in uploading Form 10B - CPC, Bangalore (AO) has not allowed the expenses claimed by the trust for carrying out the charitable activities - HELD THAT:-In respect of first issue, we find that recently in the case of Gagan Deep Charitable Trust [2024 (2) TMI 629 - ITAT AHMEDABAD] has held that filing of Form 10B report is a mere a procedural lapse. We hereby condone the delay for filing Form 10B in the impugned case. Taxing of entire receipt, due to procedural lapse it is worthy to note that the coordinate bench in the case of HMV Educational Cultural & Social Trust [2023 (3) TMI 1151 - ITAT BANGALORE] has held that only income portion net-off all the expenses is to be taxed not the entire receipt. We hereby condone the delay in respect of filing the Form 10B and restored the matter to CIT(A) to allow the benefits of section 11 in accordance with law. Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether non-filing or delayed filing of audit report in Form 10B with the return of income is a substantive bar to claiming exemptions under sections 11 and 12 of the Income Tax Act, 1961, or is merely a procedural lapse capable of condonation. 2. Whether the Assessing Officer may treat entire receipts of a trust as taxable where Form 10B was not filed on time, or whether taxation (if any) should be confined to income after allowing bona fide charitable expenses. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Effect of non-filing/delayed filing of Form 10B on entitlement to sections 11 and 12 exemptions Legal framework: Sections 11 and 12 provide exemptions for income applied/accumulated for charitable/religious purposes, subject to compliance with prescribed conditions. Rule 17B and the requirement to file audit report in Form 10B (electronically under rule 12(2)) govern procedural compliance. CBDT Circulars (delegating condonation power to CIT(E)) are relevant to remedy procedural defaults. Precedent Treatment: The Tribunal relied on decisions of coordinate Benches (including an Ahmedabad Bench) and the Hon'ble Jurisdictional High Court holding that non-filing of the audit report with the return is a procedural omission and not a substantive impediment to claiming exemptions. The Tribunal followed those decisions and treated them as controlling, noting there were no contrary decisions placed before it. Interpretation and reasoning: The Court examined the distinction between substantive law (entitlement to exemption) and mode/stage of filing (procedural). It accepted that the Finance Act/Rules made electronic filing mandatory as to mode, but that the substantive requirement is availability of the audit report to the Assessing Officer before completion of assessment proceedings rather than its contemporaneous filing with the return. The power under Section 119 (and CBDT circulars) to provide administrative relief and the delegated power to CIT(E) to condone delays were recognised; where such relief is sought and initial lower authority rejected condonation, the Tribunal can condone delay if guided by binding precedent that treats the omission as procedural. Ratio vs. Obiter: Ratio - Non-filing of Form 10B along with the return is a procedural omission and, where the audit report is otherwise available to the revenue before assessment, cannot defeat substantive entitlement to exemptions under sections 11 and 12. Obiter - Observations regarding the delegation of power under CBDT circulars and comparative discussion of rule changes as 'mode and stage' distinctions serve as explanatory reasoning but are ancillary to the central holding. Conclusions: The Tribunal condoned the 7-day delay in filing Form 10B as a procedural lapse and restored the matter to the CIT(A) to decide entitlement to exemptions strictly in accordance with law. Filing Form 10B is mandatory in manner (mode) but failure to file with the return does not ipso facto vitiate the trust's entitlement to sections 11 and 12 if the report is available and delay can be condoned. Issue 2 - Extent of taxation when Form 10B was not filed timely: entire receipts versus income net of expenses Legal framework: The assessment of charitable trusts requires determining income/gains and whether amounts are applied for charitable purposes; taxation must reflect taxable income after permissible deductions/expenses unless law provides otherwise. Precedent Treatment: The Tribunal referred to a coordinate Bench decision holding that where there is procedural lapse in filing Form 10B, the Assessing Officer may not lawfully tax entire receipts; taxation should be confined to income after allowing expenses legitimately incurred for charitable activities. Interpretation and reasoning: Treating failure to file Form 10B as procedural implies the substantive tax position should not be altered to the appellant's detriment by converting receipts into fully taxable income. The reasoning is that disallowing all expenses and taxing gross receipts would be disproportionate and inconsistent with the substantive entitlement to exemptions where procedural default alone is at issue. Ratio vs. Obiter: Ratio - In cases of procedural lapse in filing Form 10B, the Assessing Officer should not treat entire receipts as taxable; only income net of allowable charitable expenses is to be taxed. Obiter - Reference to specific coordinate Bench reasoning is used to support restoration to the appellate authority for reconsideration rather than providing exhaustive tax computation guidance. Conclusions: The Tribunal directed restoration to the CIT(A) to decide the exemption claim in accordance with law, implicitly rejecting any approach of taxing entire receipts solely due to procedural non-compliance. The appropriate course is assessment of taxable income after permitting bona fide charitable deductions, subject to verification and applicable statutory conditions. Cross-references and remedial directions Where delay in filing Form 10B is sought to be condoned, CBDT circular delegating condonation power to CIT(E) is a relevant administrative remedy; however, binding judicial precedent treating such non-filing as procedural supports condonation and restoration for merits adjudication. The Tribunal followed coordinate Bench and High Court pronouncements and remitted the matter to the appellate authority to determine entitlement to sections 11 and 12 and the correct taxable quantum (if any) consistent with the principles above.