Trust wins appeal after late audit report filing leads to section 11 exemption denial without proper opportunity

ITAT Chennai allowed the appeal filed by a Trust against denial of exemption under section 11. The Trust filed its audit report 32 days late, leading to exemption denial. The CPC processed the return but later denied exemption without proper opportunity as required under section 143(1). ITAT held this violated natural justice principles since the Trust had filed the audit report before processing. The order was set aside, directing the Trust to apply for delay condonation per CBDT Circular 2/2020, and CPC to reprocess the return after providing proper opportunity to the assessee.

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Issues:
Appeal against dismissal of rectification application under section 154 of the Income Tax Act, 1961 regarding disallowance of exemption under section 11 for failure to file Audit Report within due time.

Detailed Analysis:

Issue 1: Dismissal of rectification application by Ld.CIT(A) and CPC
The assessee Trust filed an appeal against the order of the Ld.CIT(A) dismissing the appeal and upholding the action of the CPC rejecting the rectification application under section 154 of the Income Tax Act. The main grievance was the disallowance of exemption under section 11 due to the alleged failure to file the Audit Report within the stipulated time. The Ld.AR argued that the assessee had the right to file the return of income along with the Audit Report within the timeline provided by section 139(4) of the Act. The Ld.DR, on the other hand, referred to Circulars empowering the Ld.CIT to condone the delay in filing the Audit Report.

Issue 2: Compliance with provisions of the Income Tax Act
The Tribunal noted that the assessee Trust, a registered Public Charitable Trust, filed its return of income for the relevant assessment year but with a delay in filing the Audit Report. Due to reasons beyond control, the Audit Report was filed after the due date. The CPC processed the return, taxing the entire receipts as income and raised a demand. The Tribunal observed that the CPC should not have denied the exemption under section 11 without giving proper opportunity as stipulated by the Act. The Tribunal highlighted the violation of natural justice and the compliance of the assessee with the filing requirements.

Issue 3: Application for condonation of delay
Considering the provisions of section 12A(1)(ba) read with section 139(4A) and Circulars issued by the CBDT, the Tribunal directed the assessee to file an application for condoning the delay in filing the Audit Report. The Tribunal emphasized the need for the CPC to process the return afresh and pass orders after giving an opportunity to the assessee if any adjustments are proposed. The appeal was allowed for statistical purposes.

In conclusion, the Tribunal set aside the order of the Ld.CIT(A) and directed the assessee to follow the procedures outlined in the Circulars to address the delay in filing the Audit Report, ensuring compliance with the provisions of the Income Tax Act.

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