2025 (6) TMI 40 - AT - Income Tax

Tax Exemption Under Section 11: Procedural Compliance Flexibly Interpreted, Allowing Late Audit Reports and Correctable Errors

Swami Satyaprakashanand Shiv Mandir Trust Versus Income Tax Officer, Kotdwar

Swami Satyaprakashanand Shiv Mandir Trust Versus Income Tax Officer, Kotdwar - TMI 1. ISSUES PRESENTED and CONSIDERED- Whether the filing of the audit report in Form 10B within the prescribed due date is mandatory or directory for claiming exemption under Section 11 of the Income-Tax Act, 1961.- Whether a typographical error in selecting the assessment year in Form 10 electronically filed under Rule 17(2) of the Income Tax Rules is curable and non-prejudicial.- Whether the delay in filing Form 10 can be condoned by the Commissioner of Income-Tax (Appeals) under Section 119(2)(b) of the Act.- Whether the Assessing Officer was justified in denying exemption under Section 11 of the Act on the ground of late filing of audit report.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Mandatory or Directory Nature of Filing Audit Report in Form 10B for Claiming Exemption under Section 11Relevant Legal Framework and Precedents: Section 11 of the Income-Tax Act provides exemption for income derived from property held for charitable or religious purposes. Rule 17(2) and Rule 19(2) of the Income Tax Rules govern the filing of audit reports in Form 10B to claim such exemption. The due date for filing the audit report is linked to the due date for filing the return under Section 139(1).Several High Court and Tribunal decisions have considered whether the audit report must be filed strictly within the due date or whether late filing before completion of assessment suffices. Notably, the Hon'ble Madras High Court in CIT Vs. A K S Alloys Pvt. Ltd., the Karnataka High Court in Commissioner of Income Tax vs. ACE Multitaxes Systems (P) Ltd., and the Delhi High Court in Commissioner of Income Tax v. Contimeters Electricals (P) Ltd. have held that filing the audit report along with the return is not mandatory but directory. The filing of the audit report before the completion of assessment satisfies the statutory requirement.Court's Interpretation and Reasoning: The Tribunal relied on the above precedents, emphasizing that the audit report's timely filing is not a condition precedent to claiming exemption under Section 11. The Court observed that the assessee had filed the audit report before the assessment order was passed, albeit beyond the due date, and thus the requirement was effectively satisfied.Key Evidence and Findings: The assessee had filed the audit report in Form 10B on 10.05.2022, which was within the due date for filing the return under Section 139(1). The audit report was uploaded on the portal on 12.08.2022, which was after the due date but before the assessment order dated 31.03.2023. The AO denied exemption solely on the ground of late filing of the audit report.Application of Law to Facts: Applying the legal principle that the filing of audit report is directory and not mandatory, the Tribunal found that the assessee complied with the statutory requirements before the completion of the assessment. Therefore, the denial of exemption on the ground of late filing was not justified.Treatment of Competing Arguments: The Revenue argued that the audit report must be filed within the due date and that the AO was correct in denying exemption. The Tribunal rejected this argument, relying on binding precedents that hold the filing is directory and can be completed before assessment.Conclusion: The Tribunal held that the filing of the audit report in Form 10B beyond the due date but before assessment is acceptable, and the exemption under Section 11 must be allowed.Issue 2: Typographical Error in Selecting Assessment Year in Form 10 and Its EffectRelevant Legal Framework: Rule 17(2) of the Income Tax Rules requires filing of Form 10 for accumulation or setting apart of income for specified purposes. The form must mention the correct assessment year. The question is whether an inadvertent typographical error in selecting the assessment year is fatal to the claim.Court's Interpretation and Reasoning: The Tribunal observed that the error in selecting assessment year 2021-22 instead of 2022-23 was inadvertent and directory in nature. Such a clerical mistake does not defeat the substantive right of the assessee to claim exemption, especially when the correct assessment year was subsequently rectified by filing a corrected Form 10 dated 28.02.2024.Key Evidence and Findings: The assessee filed Form 10 electronically with an incorrect assessment year but later rectified the error. The application for condonation of delay under Section 119(2)(b) was pending adjudication before the CIT(A).Application of Law to Facts: Given the directory nature of the rule and the rectification made, the Tribunal held that the typographical error did not justify denial of exemption.Treatment of Competing Arguments: The Revenue contended that the error was fatal and that the CIT(A) lacked power to condone delay. The Tribunal did not accept this, emphasizing the non-mandatory character of the procedural requirement and the pending application for condonation.Conclusion: The Tribunal concluded that the typographical error was curable and did not warrant denial of exemption.Issue 3: Power of CIT(A) to Condone Delay in Filing Form 10Relevant Legal Framework: Section 119(2)(b) of the Income-Tax Act empowers the Central Board of Direct Taxes or any income-tax authority to condone delay in complying with any procedural requirement.Court's Interpretation and Reasoning: The Tribunal noted that the application for condonation of delay in filing Form 10 was pending before the CIT(A). While the Revenue argued that the CIT(A) had no power to condone delay, the Tribunal implicitly accepted that such power exists under Section 119(2)(b), subject to adjudication.Key Evidence and Findings: The pendency of the condonation application and the absence of any adverse order on it were relevant. The Tribunal directed the AO/CPC to allow exemption, indicating that the delay should be condoned.Application of Law to Facts: The Tribunal applied the principle that procedural lapses can be condoned in the interest of justice, particularly when there is no prejudice to the Revenue.Treatment of Competing Arguments: The Revenue's contention on lack of power was rejected in light of the statutory provision and judicial precedents.Conclusion: The Tribunal held that delay in filing Form 10 can be condoned and should not be a ground for denial of exemption.Issue 4: Justification of AO's Denial of Exemption Under Section 11Relevant Legal Framework: Section 11 provides exemption to charitable trusts subject to compliance with procedural requirements including filing of audit reports and Form 10.Court's Interpretation and Reasoning: The Tribunal found that the AO's sole reason for denial was late filing of audit report and Form 10. Given the directory nature of these requirements and the filing before assessment, the AO's denial was unjustified.Key Evidence and Findings: The assessee filed audit report and Form 10, albeit with some delay and typographical error, both rectified before assessment completion.Application of Law to Facts: The Tribunal applied the principle that procedural lapses do not defeat substantive rights and that exemption should be allowed if the assessee complies before assessment.Treatment of Competing Arguments: The Revenue argued strict compliance was mandatory. The Tribunal rejected this view based on binding precedents.Conclusion: The Tribunal directed the AO/CPC to allow exemption under Section 11.3. SIGNIFICANT HOLDINGS'Filing of audit report along with the return is not mandatory, but directory and if the audit report was filed at any time before framing the assessment, the requirement of the provision of the Act should be held to have been met.''The inadvertent typographical error in selecting assessment year in Form 10 electronically filed is directory in nature and not mandatory.''Delay in filing Form 10 can be condoned under Section 119(2)(b) of the Act and should not be a ground for denial of exemption.''The Assessing Officer erred in denying exemption under Section 11 solely on the ground of late filing of audit report and Form 10, when these were filed before completion of assessment.'Core principles established include the directory nature of procedural requirements related to audit report and Form 10, the curability of clerical errors, and the power of income-tax authorities to condone delays in procedural compliance to uphold substantive rights of the assessee.Final determinations were that the exemption under Section 11 must be allowed, the appeal of the assessee was allowed, and the AO/CPC was directed to grant exemption accordingly.