Exemption under Section 11 allowed when accumulated funds utilized within prescribed period plus one additional year

ITAT Pune ruled in favor of the assessee regarding denial of exemption under section 11. The assessee accumulated funds in FY 2016-17 and utilized them in the sixth year (FY 2022-23). CPC taxed these funds in AY 2023-24, but ITAT held that under applicable provisions, taxation should occur in the fifth year only, not sixth year. The tribunal found that accumulated surplus funds were utilized within the prescribed period plus one additional year as permitted under then-existing provisions. ITAT set aside the lower authority's order and directed deletion of the adjustment, allowing the assessee's appeal.

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The core legal questions considered by the Tribunal in this appeal are as follows:

1. Whether the accumulated income of Rs. 90,70,20,511/- during financial year 2016-17, which was required to be utilized within five years under section 11(3) of the Income Tax Act, 1961 ("the Act"), can be taxed as deemed income in assessment year 2023-24, given that the utilization occurred in the sixth year (financial year 2022-23)Rs.

2. Whether the amendment to section 11(3) of the Act, which restricts the non-utilization period to five years and removes the provision allowing utilization in the year immediately following the expiry of the five-year period, applies retrospectively to accumulated income prior to assessment year 2023-24 or only prospectivelyRs.

3. Whether the Central Processing Centre (CPC) had the jurisdiction under section 143(1) of the Act to make the addition of deemed income on a debatable issue without a detailed inquiryRs.

4. The correct interpretation and application of the provisions of section 11(2) and 11(3) of the Act, including the impact of amendments introduced by the Finance Act, 2023, and relevant procedural requirements such as filing of Form 10 for accumulation of income.

Issue-wise Detailed Analysis

Issue 1: Taxability of Accumulated Income Utilized in the Sixth Year

Legal Framework and Precedents: Section 11(2) permits a charitable trust to accumulate income not applied for charitable purposes during the previous year, subject to conditions including furnishing a statement specifying the purpose and period of accumulation not exceeding five years. Section 11(3) provides that any income accumulated under section 11(2) but not utilized within the prescribed period shall be deemed income of the trust in the year immediately following the expiry of that period.

Prior to the amendment effective from 01.04.2023, the law explicitly allowed utilization of accumulated income either within five years or in the year immediately following the expiry of the five-year period (i.e., the sixth year). The Tribunal referred to the decision in M/s. Phulchand Gulabchand Charitable Trust vs. ITO, which held that the accumulated income could be utilized in the year immediately following the five-year period without attracting tax as deemed income.

Court's Interpretation and Reasoning: The Tribunal noted that the accumulated amount was from financial year 2016-17, thus the five-year period ended on 31.03.2022, and the year immediately following (the sixth year) ended on 31.03.2023. The assessee undisputedly utilized the accumulated amount before 31.03.2023, i.e., within the sixth year. Therefore, under the law prevailing at the time of accumulation, the utilization was timely and no deemed income should arise.

Application of Law to Facts: The CPC's addition of Rs. 90,70,20,511/- as deemed income in assessment year 2023-24 was premised on non-utilization within five years. However, the Tribunal found that the utilization in the sixth year complied with the law as it stood at the time of accumulation.

Treatment of Competing Arguments: The Department contended that since the utilization occurred after the five-year period, the income was taxable in the sixth year. The Tribunal distinguished between the law as it stood before and after amendment, emphasizing that the amendment removing the sixth-year utilization option was prospective and not applicable to the current case.

Conclusion: The Tribunal concluded that the addition of deemed income was not justified as the accumulated income was utilized within the permissible period under the law in force at the time of accumulation.

Issue 2: Applicability of Amendment to Section 11(3) and Its Prospective Nature

Legal Framework and Precedents: The Finance Act, 2023 amended section 11(3) to remove the option of utilizing accumulated income in the year immediately following the five-year period, thereby mandating taxation of unutilized income strictly after five years. The Memorandum explaining the provisions of the Finance Bill, 2022 clarifies that these amendments apply from 1st April 2023, i.e., assessment year 2023-24 onwards.

The Supreme Court's ruling in CIT vs. Vatika Township Pvt. Ltd. was cited to underscore the principle that amendments imposing burdens or liabilities are presumed to be prospective unless expressly stated otherwise.

Court's Interpretation and Reasoning: The Tribunal held that since the accumulated income related to the financial year 2016-17, the pre-amendment provisions apply. The amendment removing the sixth-year utilization option is prospective and does not affect the accrued rights of the assessee under the earlier law.

Application of Law to Facts: The Tribunal found that the assessee's right to utilize the accumulated income in the sixth year was an accrued right under the law at the time of accumulation and could not be retrospectively curtailed by the amendment.

Treatment of Competing Arguments: The Department argued that the amendment was applicable and the income should be taxed in assessment year 2023-24. The Tribunal rejected this, relying on the principle against retrospective taxation and the legislative intent expressed in the Finance Bill's Memorandum.

Conclusion: The amendment to section 11(3) is prospective and does not apply to accumulated income prior to assessment year 2023-24.

Issue 3: Jurisdiction and Powers of CPC under Section 143(1)

Legal Framework and Precedents: Section 143(1) allows CPC to process returns and make adjustments only in cases of arithmetical errors or incorrect claims apparent from the return. It does not empower CPC to decide debatable legal issues.

The assessee contended that the addition was a debatable issue and thus beyond CPC's jurisdiction.

Court's Interpretation and Reasoning: While the Tribunal acknowledged the contention, it primarily decided the appeal on substantive grounds of law and did not explicitly rule on CPC's jurisdiction. However, it implicitly supported the view that CPC should not make adjustments on debatable issues without detailed inquiry.

Application of Law to Facts: The addition was made by CPC in the intimation under section 143(1) without detailed examination, which the assessee challenged as beyond CPC's scope.

Treatment of Competing Arguments: The Department maintained that CPC's action was justified due to non-utilization within the prescribed period. The Tribunal found merit in the assessee's argument, considering the issue debatable and requiring detailed examination.

Conclusion: Although not the primary basis for decision, the Tribunal's reasoning supports that CPC's adjustment on this debatable issue was not justified.

Issue 4: Procedural Compliance and Conditions for Accumulation under Section 11(2)

Legal Framework: Section 11(2) requires the trust to furnish a statement in prescribed form (Form 10) specifying the purpose and period of accumulation, which shall not exceed five years, and to invest the accumulated money in specified modes. Failure to comply can lead to forfeiture of exemption.

Court's Interpretation and Reasoning: The Department emphasized that the trust complied with procedural requirements and utilized the accumulated amount, but after the five-year period. The Tribunal, however, found that since utilization was within the sixth year allowed under the law at the time, procedural compliance was adequate.

Application of Law to Facts: The assessee had filed the necessary forms and utilized the funds for charitable purposes within the permissible period as per the law at the time of accumulation.

Treatment of Competing Arguments: The Department argued non-compliance with the time limit, while the assessee stressed compliance with conditions and timely utilization under the law applicable at the time.

Conclusion: Procedural requirements were met, and utilization was timely under the applicable law, negating the basis for deemed income addition.

Significant Holdings

"The words 'or in the year immediately following the expiry thereof' was omitted by the Finance Act, 2022 w.e.f. 01.04.2023 which is applicable for assessment year 2023-24 onwards. It is an admitted fact that when the trust accumulated an amount of Rs. 90,70,20,511/- during the financial year 2016-17 it was required to utilize the same within a period of 5 years from the end of the relevant assessment year or in the year immediately following the expiry thereof. In other words, the assessee was required to utilize the same before the end of the 6th year i.e. financial year 2022-23. The assessee in the instant case undisputedly has utilized the amount before 31.03.2023."

"A legislation, be it a statutory Act or a statutory Rule or a statutory Notification... Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation... Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not backward."

"In light of the above discussion, we are of the considered opinion that since the assessee in the instant case has utilized the accumulated surplus funds in the year immediately following the prescribed period of 5 years i.e. before 31.03.2023 and the amendment to the provisions of section 11(3) are held to be prospective in nature, therefore, the Ld. Addl / JCIT(A) in our opinion is not justified in upholding the intimation of the CPC making adjustment of Rs. 90,70,20,511/- u/s 11(3) as deemed income of the assessee which was accumulated in the financial year 2016-17 and when the provisions at the relevant time prescribed the utilization of the amount within a period of 5 years or in the year immediately following the prescribed period of 5 years."

Core principles established include:

• The trust's right to utilize accumulated income in the year immediately following the five-year accumulation period (the sixth year) under pre-amendment law is an accrued right and cannot be retrospectively curtailed.
• Amendments imposing tax liabilities are presumed prospective unless expressly stated otherwise.
• The CPC's power under section 143(1) is limited and does not extend to making adjustments on debatable legal issues without detailed inquiry.
• Procedural compliance under section 11(2) and related rules is essential for accumulation and exemption claims.

Final determinations on each issue were in favor of the assessee, leading to the setting aside of the addition of Rs. 90,70,20,511/- as deemed income and deletion of the corresponding demand raised by the CPC and upheld by the Ld. Addl / JCIT(A).

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