CIT's denial of Section 12A exemption for 8-day audit report delay overturned, technical considerations shouldn't override substantial justice

Orissa HC set aside CIT's denial of exemption under Section 12A due to 8-day delay in filing audit report in Form 10B. Court held that technical considerations should not override substantial justice, particularly given COVID-19 pandemic circumstances and technical glitches. The authority failed to properly exercise discretion under Section 119(2)(b) for condonation of delay. Matter remitted to CIT with directions to consider audit reports for AY 2021-22 and 2022-23 as if filed within prescribed period and grant consequential relief.

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1. ISSUES PRESENTED and CONSIDERED

- Whether the Commissioner of Income Tax (Exemption) was justified in rejecting the petition for condonation of delay under Section 119(2)(b) of the Income Tax Act, 1961 in filing the audit report in Form 10B for claiming exemption under Section 12A of the IT Act for the Assessment Years 2021-22 and 2022-23.

- Whether the delay of approximately 30 days in filing the audit reports for the respective assessment years constitutes sufficient cause warranting condonation under the discretionary powers vested in the Commissioner under Section 119(2)(b).

- Whether the technical glitch and the prevailing Covid-19 pandemic situation constitute sufficient cause to condone the delay in filing the audit report.

- Whether the denial of exemption on the ground of delay in filing the audit report is a justifiable exercise of discretion or an arbitrary and pedantic approach contrary to principles of substantial justice.

2. ISSUE-WISE DETAILED ANALYSIS

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

The legal framework involves Section 119(2)(b) of the Income Tax Act, 1961, which empowers the Commissioner of Income Tax to condone delay in filing documents if sufficient cause is shown. The audit report in Form 10B, prescribed under Rule 17B of the Income Tax Rules, 1962, is a mandatory document for claiming exemption under Section 12A of the IT Act.

The petitioner filed the audit reports for Assessment Years 2021-22 and 2022-23 with delays of approximately 30 days beyond the due dates. The Commissioner rejected the petition for condonation of delay, finding no sufficient cause.

The Court noted that the Commissioner exercised discretion but failed to appreciate the sufficient cause put forth by the petitioner, particularly the technical glitches and the ongoing Covid-19 pandemic situation. The Court emphasized that the power under Section 119(2)(b) is discretionary and must be exercised judiciously, considering the facts and circumstances.

The Court referenced Circular No.16 of 2024 dated 18.11.2024, which delegated power to the Commissioner to condone delay up to 365 days in filing Form 10B for Assessment Year 2018-19 and subsequent years. Despite this, the Commissioner did not exercise discretion in favor of the petitioner.

The Court found that the Commissioner's approach was pedantic and did not conform to the principle that substantial justice should prevail over mere technicalities.

Issue 2: Whether technical glitches and Covid-19 pandemic constitute sufficient cause for condonation

The petitioner contended that the delay was caused due to technical glitches and the ongoing Covid-19 pandemic, which impeded timely filing. The Court took judicial notice of the pandemic situation around March 2022 and found the petitioner's explanation to be genuine and unchallenged by the Income Tax Department.

The Court relied on precedents, including the decision in Action Research for Health and Socio-economic Development vs. CBDT, where similar facts were considered, and condonation of delay was granted in light of the pandemic and technical difficulties.

The Court emphasized the principle that when technical considerations and substantial justice conflict, the latter must prevail. The pandemic and technical issues were held to constitute sufficient cause for condonation.

Issue 3: Whether denial of exemption on ground of delay is arbitrary and contrary to principles of justice

The Court observed that the petitioner had been availing exemption under Section 12A since Assessment Year 2017-18, and the delay was only marginal (30 days). The Court opined that denial of exemption merely on account of delay in furnishing the audit report, which could be filed later with sufficient cause, was unjustified.

The Court criticized the Commissioner's refusal as an arbitrary exercise of discretion, lacking proper application of mind and ignoring the principle of substantial justice.

It was held that the audit report in Form 10B is procedural and can be filed even before assessment, as supported by the Gujarat High Court decision in Sarvodaya Charitable Trust vs. Income-Tax Officer (Exemption).

The Court directed the Commissioner to reconsider the audit reports as if filed within the prescribed period, granting consequential relief to the petitioner.

3. SIGNIFICANT HOLDINGS

"This Court is of the considered view that the benefit of exemption should not have been denied merely on account of delay in furnishing audit report, which could be produced at a later stage either before the Assessing Officer or the Appellate Authority by assigning sufficient cause."

"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... 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."

"The audit report in Form 10B prescribed under Rule 17B of the Income Tax Rules for claiming exemption under Section 12A of the IT Act is procedural and can be filed even before assessment."

Final determination: The order rejecting the petition for condonation of delay was set aside. The matter was remitted to the Commissioner of Income Tax (Exemption) to consider the audit reports filed with delay as if filed within time under Section 119(2)(b), and consequential relief was directed to be granted to the petitioner.

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