ITAT Allows Section 11 Exemption on Accumulated Income Despite New Amendment Not Being Retrospective

The ITAT Delhi allowed the assessee's appeal against the disallowance of the section 11 exemption claim related to accumulated income. Although the assessee had set apart the accumulation from AY 2017-18 and was required to apply it within five years plus a one-year grace period, the tribunal held that the statutory amendment effective from AY 2023-24 could not retrospectively affect previous accumulations. Relying on Supreme Court precedents, the tribunal found no basis to reject the exemption claim for prior years and reversed the lower authorities' decisions.

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ISSUES:

Whether the amendment to section 11(3)(c) of the Income-tax Act, 1961 by Finance Act, 2022, effective from AY 2023-24, applies retrospectively to accumulated income set apart prior to the amendment.Whether the grace period of one year following the expiry of the five-year accumulation period under section 11(3)(c) is available for utilization of accumulated income in AY 2023-24 after the amendment.Whether the Commissioner of Income Tax (CPC) was justified in making an addition under section 143(1) for an incorrect claim apparent from the return regarding exemption under section 11.

RULINGS / HOLDINGS:

The amendment to section 11(3)(c) effective from AY 2023-24 is prospective in nature and does not apply retrospectively to accumulated income set apart before the amendment. The law as it stands on the first day of the assessment year is applicable for determining tax liability, but prior accumulations are not hit by the amended provision.The additional grace period of one year following the expiry of the five-year accumulation period, omitted by the Finance Act, 2022 amendment, is not applicable retrospectively; hence, accumulated income set apart before the amendment can utilize the grace period.The CPC was within its jurisdiction under section 143(1)(a)(ii) to make adjustments for an incorrect claim apparent from the return; however, in the facts of this case, the disallowance of exemption on accumulated income beyond the permissible time limit as per the amended section 11(3)(c) was not justified because the amendment does not apply retrospectively.

RATIONALE:

The Court applied the principle that the law in force on the first day of the assessment year governs the assessment for that year, referencing the Supreme Court decision in CIT v. Vatika Township Pvt. Ltd., which held that statutory amendments are prospective unless expressly stated otherwise.The Court distinguished the present facts from other precedents cited by the lower authorities, noting that the amendment does not stipulate retrospective application to prior accumulations.The Court relied on the principle of stricter interpretation of taxing statutes as laid down in Commissioner Vs. Dilip Kumar & Co. (2018), holding that the exemption claim for accumulation prior to amendment should not be disallowed based on the amended provision effective from AY 2023-24.The Court acknowledged the CPC's power under section 143(1)(a)(ii) to adjust incorrect claims apparent from the return but found that in this case the adjustment was not warranted due to the prospective nature of the amendment.

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