Finance Act 2022 amendment applies prospectively; six-year window protects assessee from retrospective taxation of accumulated income

ITAT MUMBAI - AT allowed the appeal, holding the Finance Act, 2022 amendment is prospective and cannot retroactively deprive the assessee of the six-year window to apply accumulated income. Accumulations relating to FY 2016-17 (Rs.35,66,540 utilized in FY 2022-23; remaining Rs.14,33,460 declared) cannot be taxed in AY 2023-24 and AO additions were set aside. Accumulations for FY 2017-18 fall within the time window up to 31-03-2024, so the impugned addition of Rs.40,00,000 cannot be taxed in AY 2023-24 and was set aside; any taxability, if applicable, is for the subsequent year.

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ISSUES:

Whether the amendment to Section 11(3)(c) of the Income Tax Act, 1961 by the Finance Act, 2022, which omits the phrase "or in the year immediately following the expiry thereof," applies retrospectively to accumulated income from prior years or only prospectively to accumulations from FY 2022-23 onwards.Whether accumulated income from FY 2016-17 and FY 2017-18, utilized within the extended period of six years (five years plus one year grace period) as per pre-amendment law, can be taxed in AY 2023-24 under the amended provisions.Whether the addition of unutilized accumulated funds to total income under Section 11(3) for AY 2023-24 is justified when utilization occurred within the permissible time frame prescribed by the law as it stood at the time of accumulation.Whether the failure to provide adequate opportunity of being heard through Video Conferencing violates principles of natural justice rendering the order invalid.

RULINGS / HOLDINGS:

The amendment to Section 11(3)(c) by the Finance Act, 2022, effective from 1st April 2023, is prospective in nature and applies only to accumulations made on or after that date, not to accumulations made in earlier years. The Court held that "the amendment has to be applied prospectively in respect of fresh accumulations" and "cannot be applied retrospectively."Accumulated income from FY 2016-17 and FY 2017-18, utilized within the six-year period allowed under the pre-amendment provisions (five years plus one year grace period), cannot be brought to tax in AY 2023-24. The Court found that the assessee had utilized Rs. 35,66,540/- for FY 2016-17 before 31.03.2023 and Rs. 40,00,000/- for FY 2017-18 before 31.03.2024, thus no addition under Section 11(3) is warranted for AY 2023-24.The addition of Rs. 35,66,540/- and Rs. 40,00,000/- to total income for AY 2023-24 was set aside as the utilization was within the legally allowed time frame under the law prevailing at the time of accumulation. The Court stated that "the amendment does not debar the assessee from availing the said time window in respect of existing accumulations."The issue of violation of natural justice due to absence of video conferencing opportunity was raised but not specifically adjudicated upon in the judgment; the Court focused on substantive tax issues.

RATIONALE:

The Court applied the legal framework under Section 11(2) and Section 11(3) of the Income Tax Act, 1961, as amended by the Finance Act, 2022. Section 11(2) permits accumulation of income for a maximum period of five years, subject to prescribed conditions, with an additional one-year grace period allowed under the pre-amendment law as per Section 11(3)(c).The amendment by the Finance Act, 2022 omitted the phrase "or in the year immediately following the expiry thereof" from Section 11(3)(c), effectively reducing the permissible utilization period from six years to five years, with effect from 1st April 2023 (AY 2023-24 onwards).The Court relied on the principle that amendments to taxing statutes are presumed prospective unless expressly stated otherwise, citing the Supreme Court decision in CIT vs. Vatika Township Pvt. Ltd., which affirms the presumption against retrospective taxation amendments that impose burdens or liabilities.The Finance Bill, 2022 and its explanatory memorandum were examined, revealing the amendment's intent to align two exemption regimes prospectively without affecting accrued rights or existing accumulations.Co-ordinate Bench decisions on identical issues were followed, which held that accumulations made prior to 1st April 2022 are governed by the pre-amendment provisions, allowing utilization within six years.The Court emphasized the principle of lex prospicit non respicit (law looks forward, not backward) and the doctrine of fairness, underscoring that the assessee is entitled to rely on the law as it existed at the time of accumulation.The Court remanded related issues of utilization evidence for prior years to the Assessing Officer for fresh consideration, ensuring compliance with procedural fairness.

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