Income tax exemption cannot be denied for eight-day delay in filing audit report under Section 12A Rule 17B

The Orissa HC ruled in favor of the petitioner who was denied income tax exemption under Section 12A due to an eight-day delay in filing the audit report in Form 10B under Rule 17B. The court held that exemption should not be denied merely for delayed submission of the audit report, especially considering the COVID-19 pandemic and technical difficulties faced during March 2022. The court noted the petitioner's genuine stance regarding technical glitches and the continuing pandemic situation. The matter was remitted to the Commissioner of Income Tax (Exemption), Hyderabad, with directions to reconsider the audit report and grant consequential relief to the petitioner.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

• Whether the Commissioner of Income Tax (Exemption) ("CIT") was justified in rejecting the petition for condonation of delay of 305 days in filing the audit report in Form 10B under Rule 17B of the Income Tax Rules, 1962, for claiming exemption under Section 12A of the Income Tax Act, 1961 for the Assessment Year 2022-23;
• Whether the delay caused due to a technical glitch and the ongoing Covid-19 pandemic constitutes sufficient cause to condone the delay under Section 119(2)(b) of the Income Tax Act;
• Whether the CIT exercised judicial discretion properly and in accordance with the law while rejecting the application for condonation of delay;
• Whether procedural delay in filing the audit report should result in denial of exemption under Section 12A of the Income Tax Act, especially when the audit report can be filed even before assessment;
• The applicability and scope of Circular No.16 of 2024 dated 18.11.2024, which confers discretionary power on the CIT to condone delay up to 365 days in filing Form 10B;
• Whether the refusal to condone the delay amounts to arbitrary exercise of discretion and denial of substantial justice.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of rejection of condonation of delay under Section 119(2)(b) of the Income Tax Act

Relevant legal framework and precedents: Section 119(2)(b) empowers the CIT to condone delay in filing documents if sufficient cause is shown. The audit report in Form 10B is required under Rule 17B for claiming exemption under Section 12A. The Court also referred to Circular No.16/2024, which delegates discretion to the CIT to condone delay up to 365 days for Assessment Year 2018-19 and subsequent years.

Court's interpretation and reasoning: The Court found that the CIT rejected the condonation petition without properly appreciating the cause of delay. The Court emphasized that the CIT failed to apply his judicial discretion in a pragmatic manner and instead adopted a pedantic approach.

Key evidence and findings: The delay was 305 days beyond the due date of 07.10.2022, with the audit report filed on 09.09.2023. The petitioner claimed the delay was due to a technical glitch and the ongoing Covid-19 pandemic. No objection was raised by the Income Tax Department regarding the genuineness of this claim.

Application of law to facts: Given the discretionary power under Section 119(2)(b) and Circular No.16/2024, the Court held that the CIT ought to have condoned the delay considering the circumstances, especially the technical difficulties and pandemic-related hardships.

Treatment of competing arguments: The Income Tax Department argued that no sufficient cause or genuine hardship was demonstrated. The Court, however, found the petitioner's explanation credible and noted that the Department did not contest the technical glitch claim.

Conclusion: The rejection of the condonation petition was arbitrary and lacked proper application of discretion.

Issue 2: Procedural nature of filing audit report and its effect on exemption claim under Section 12A

Relevant legal framework and precedents: The audit report in Form 10B is mandatory for claiming exemption under Section 12A. The Gujarat High Court decision in Sarvodaya Charitable Trust vs. Income Tax Officer (Exemption) was relied upon, which held that furnishing the audit report is procedural and can be filed even before assessment.

Court's interpretation and reasoning: The Court agreed that the filing of the audit report is procedural and should not be a ground to deny exemption if filed with sufficient cause after the due date.

Key evidence and findings: The petitioner had been availing exemption since Assessment Year 2021-22, and the delay in filing the audit report for 2022-23 was the only issue.

Application of law to facts: The Court held that denial of exemption solely on the ground of delay in filing the audit report would be unjust and contrary to the principle of substantial justice.

Treatment of competing arguments: The Department's strict approach was rejected in favor of a more pragmatic and justice-oriented interpretation.

Conclusion: Delay in filing the audit report, when explained by sufficient cause, should not result in denial of exemption under Section 12A.

Issue 3: Effect of Covid-19 pandemic and technical glitches as sufficient cause for delay

Relevant legal framework and precedents: The Court referred to its earlier decision in Action Research for Health and Socio-economic Development vs. CBDT, where pandemic-related difficulties were recognized as sufficient cause for condonation of delay.

Court's interpretation and reasoning: The Court took judicial notice of the continuing Covid-19 pandemic around March 2022 and accepted the petitioner's claim of technical glitches as genuine hardship.

Key evidence and findings: No objections were raised by the Income Tax Department regarding the pandemic and technical glitch claims.

Application of law to facts: The Court held that substantial justice requires that technical and pandemic-related hardships be considered as sufficient cause to condone delay.

Treatment of competing arguments: The Department's failure to dispute the hardship claim was noted.

Conclusion: The pandemic and technical glitches constituted sufficient cause for condoning the delay.

Issue 4: Proper exercise of discretion by the CIT under Section 119(2)(b) and Circular No.16/2024

Relevant legal framework and precedents: Section 119(2)(b) confers discretionary power on the CIT to condone delay. Circular No.16/2024 explicitly authorizes the CIT to condone delay up to 365 days for filing Form 10B for Assessment Years from 2018-19 onwards.

Court's interpretation and reasoning: The Court found that the CIT did not apply his mind conscientiously and failed to appreciate the discretionary power vested in him by the statute and Circular.

Key evidence and findings: The CIT's order was found to be arbitrary, lacking proper reasoning and ignoring the petitioner's explanation and relevant legal provisions.

Application of law to facts: The Court held that the CIT's rejection of condonation was an improper exercise of discretion.

Treatment of competing arguments: The Department's reliance on absence of hardship was rejected in light of the petitioner's credible explanation and the discretionary power available.

Conclusion: The CIT's order was set aside for failure to exercise discretion properly.

3. SIGNIFICANT HOLDINGS

The Court held:

"Taking cognizance of well-established principle that when technical consideration and cause of substantial justice are pitted against each other, it is the substantial justice which is to prevail, this Court holds that mere technicality should not have been ground for claim of exemption under Section 12A of the IT Act."

"The Commissioner of Income Tax (Exemption), Hyderabad has not applied his conscientious mind in proper perspective... the refusal to condone the delay invoking power under Section 119(2) of the IT Act being arbitrary exercise of discretion having regard to the fact-situation."

Core principles established include:

• Delay in filing audit report under Rule 17B for claiming exemption under Section 12A can be condoned if sufficient cause is shown;
• Technical glitches and pandemic-related hardships constitute sufficient cause for condonation of delay;
• The CIT must exercise discretion under Section 119(2)(b) judiciously and in a manner promoting substantial justice rather than strict technicality;
• Denial of exemption solely on procedural delay without appreciating sufficient cause is arbitrary and unsustainable;
• Filing of audit report is procedural and can be accepted even after the due date, subject to condonation of delay.

Final determinations on each issue were in favor of the petitioner, setting aside the CIT's order rejecting condonation of delay and directing the CIT to consider the audit report filed on 09.09.2023 as if filed within time, and grant all consequential reliefs.

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