2025 (8) TMI 831 - AT - Income Tax

Exemption under Section 10(23C)(v) Allowed Despite Delay in Audit Report Filing, Technical Breaches Overlooked

The ITAT Chennai allowed the assessee exemption under section 10(23C)(v) despite the delay in filing the audit report under section 139(1), holding the ... Denial of exemption u/s.10(23C)(v) - assessee has failed to file its Audit Report within the due date prescribed u/s 139(1) - whether the audit report has to be filed within the time stipulated u/s. 139(1) is mandatory? - HELD THAT:- Legal issue is to be answered in favour of the taxpayer and considering the facts of the present case the computation benefit u/s. 10(23C)(v) of the Act needs to be granted to the assessee especially in view of the nature of receipts under consideration inasmuch as the receipts in the form of offering/Hundial collections predominantly to an institution wholly for religious purpose cannot partake the character of taxable receipts thereby, justifying our decision for dispensing such technical breach. The ground of the Revenue on the second facet of electronic filing of audit report is rejected. Accordingly, we order so. Assessee has been notified as an exempted entity in terms of Section 10(23C)(v) of the Act by virtue of a notification dated 30.12.1978 issued by the Union Secretary to the Government of India. Thus, having held that the nature of receipts cannot be brought within the ambit of taxation, namely the offerings from the general public to an institution recognised and notified as wholly existing for religious purposes, the denial of exemption on technical breach would defy the principles of fairness in taxation. We find that the definition of income in Section 2(24)(iia) of the Act, the voluntary contribution does not generally have the character of income but deemed income in case of non-corpus donations to enforce the requirement of the application of prescribed part of income for approved objects. Assessee being a government-controlled entity and the accounts are periodically placed and approved by the State Assembly, the presumption of application of the receipts being deemed as income for the purpose of this Act should automatically flow therefrom. Therefore, the benefit of tax exemption u/s. 10(23C)(v) of the Act should be extended to the Assessee by dispensing with the technical breaches as discussed hereinbefore. Accordingly, we order for deleting the computation of assessable income made as part of the two re-assessment orders as a consequence to the decision of grant of tax exemption u/s. 10(23C)(v) of the Act for which we direct the JAO to grant such exemption in its entirety. Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDERED Whether the failure to file the audit report within the due date prescribed under Section 139(1) of the Income Tax Act, 1961, precludes the assessee from claiming exemption under Section 11 or Section 10(23C)(v) of the Act? Whether the failure to file the return of income within the due date prescribed under Section 139 of the Act affects the validity of exemption claim under Section 10(23C)(v)? Whether the filing of the audit report electronically in Form No. 10B/10BB within the prescribed time is mandatory or directory for claiming exemption under Section 10(23C)(v)? Whether the Assessing Officer's action of adding back the entire receipts without considering related expenditure (i.e., ignoring surplus/deficit) is legally sustainable? Whether the reassessment proceedings initiated under Section 147/148 of the Act are valid, considering the procedure prescribed under Section 148A and the faceless assessment regime? Whether the non-compliance with principles of natural justice and faceless regime vitiates the reassessment and appellate orders? Whether the nature of receipts (offerings, donations) to a notified religious entity falls within the scope of taxable income or is exempt under the Act? Whether the exemption provisions inserted by amendment effective from AY 2016-17 (Section 13(9)) apply retrospectively to AY 2013-14 and 2014-15? 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Effect of Non-filing of Audit Report and Return of Income within Due Date on Claim of Exemption under Section 10(23C)(v) Legal Framework and Precedents: Section 139(1) mandates filing of return of income within prescribed due dates. Section 10(23C)(v) provides exemption to notified religious entities subject to conditions including filing of audit report in prescribed form. Section 13(9), effective from AY 2016-17, explicitly prohibits exemption if return or statement is not filed within due date under Section 139(1). Judicial precedents from Gujarat High Court have held that delay in filing audit report is procedural and directory, not mandatory, for claiming exemption. Court's Interpretation and Reasoning: The Court observed that the statutory prohibition under Section 13(9) was not applicable to AY 2013-14 and 2014-15, as it was introduced effective AY 2016-17. Therefore, the Revenue's reliance on Section 13(9) to deny exemption was legally untenable for the years under consideration. The Court further held that the audit report filing requirement under Section 10(23C)(v) and Section 139(1) is primarily to assist the Assessing Officer in validating the computation of assessable income and is directory in nature. Key Evidence and Findings: The assessee had failed to file the return and audit report within the due date but had subsequently filed the return and audit report (though not electronically uploaded) in response to notices under Section 148. The source of receipts (offerings, donations) was undisputed and the accounts were audited under the Tamil Nadu Hindu Religious and Charitable Endowments Act, causing delay in audit finalization. Application of Law to Facts: Given the procedural nature of the audit report filing requirement and the absence of specific prohibition for the assessment years in question, the Court directed that exemption under Section 10(23C)(v) be allowed. The Court emphasized that the purpose of audit report is to validate income computation and non-filing within due date should not defeat substantive compliance and exemption entitlement. Treatment of Competing Arguments: The Revenue argued for mandatory compliance and denial of exemption for non-filing within due date, relying on statutory provisions and AO's order. The assessee argued procedural delay due to statutory audit under state law and cited judicial precedents supporting directory nature of filing requirements. The Court favored the assessee's position. Conclusion: Non-filing of audit report and return within due date under Section 139(1) is procedural and directory for the assessment years 2013-14 and 2014-15. The exemption under Section 10(23C)(v) cannot be denied solely on this ground. Issue 3: Mandatory vs. Directory Nature of Electronic Filing of Audit Report Legal Framework and Precedents: The Income Tax Act mandates filing of audit report in Form No. 10B/10BB electronically from AY 2013-14 onwards. Judicial precedents have held that electronic filing requirement is procedural and non-compliance should not defeat exemption claims if substantive compliance is established. Court's Interpretation and Reasoning: The Court noted that the assessee had not electronically uploaded the audit report due to technical reasons but had filed the audit report manually. The Court held that electronic filing is a procedural requirement and failure to comply should not defeat exemption claims when the audit report is available for verification. Key Evidence and Findings: The audit report was not electronically uploaded but was filed manually and accepted by the Assessing Officer post-facto. The Court found no prejudice to Revenue in accepting the manual audit report. Application of Law to Facts: The Court applied the principle of purposive interpretation and fairness, holding that electronic filing is directory and the assessee should be given opportunity to rectify procedural lapses. Treatment of Competing Arguments: Revenue insisted on strict compliance with electronic filing mandate; assessee pleaded for acceptance of manual filing and opportunity to file electronically. The Court accepted the assessee's submissions. Conclusion: Electronic filing of audit report is procedural and directory; failure to electronically file within due date does not disentitle the assessee from exemption under Section 10(23C)(v). Issue 4: Legality of AO's Addition of Entire Receipts Ignoring Related Expenditure Legal Framework and Precedents: For charitable/religious trusts, income is computed on surplus basis (receipts minus expenditure). Precedents emphasize that gross receipts cannot be taxed without considering related expenses. Court's Interpretation and Reasoning: The Court held that the AO's approach of taxing gross receipts without considering related expenditure and surplus/deficit was erroneous and contrary to law and facts. Key Evidence and Findings: The assessee's accounts and bank statements demonstrated the source and application of funds. The AO ignored these and taxed gross receipts. Application of Law to Facts: The Court directed that income computation must consider net surplus and not gross receipts. Treatment of Competing Arguments: Revenue supported AO's addition; assessee argued for net surplus computation. The Court sided with the assessee. Conclusion: Addition of gross receipts ignoring related expenditure is unsustainable; income must be computed on net surplus basis for exemption claims. Issue 5 & 6: Validity of Reassessment Proceedings and Compliance with Section 148A and Faceless Regime Legal Framework and Precedents: Reassessment proceedings under Section 147/148 require compliance with procedural safeguards under Section 148A (effective from 01.04.2021) and faceless assessment rules. Non-compliance may render proceedings invalid. Court's Interpretation and Reasoning: The assessee challenged the reassessment on grounds of procedural irregularities, lack of opportunity, and non-compliance with faceless regime. The Court noted these grounds but held them as not determinative for the exemption claim, leaving some issues unanswered as academic. Key Evidence and Findings: Notices under Section 148 were issued; however, procedural compliance under Section 148A and faceless regime was questioned by the assessee. Application of Law to Facts: The Court found no sufficient reason to invalidate reassessment orders on these grounds but allowed exemption claim on merits. Treatment of Competing Arguments: Revenue defended reassessment validity; assessee raised procedural lapses. The Court partially accepted assessee's grounds but did not set aside reassessment solely on these grounds. Conclusion: Procedural irregularities in reassessment proceedings were noted but did not preclude grant of exemption; some procedural issues left open. Issue 7: Nature of Receipts and Taxability Legal Framework and Precedents: Contributions, offerings, and hundial collections to religious institutions notified under Section 10(23C)(v) are exempt from tax. Section 115BBC excludes voluntary contributions from income except for corpus donations. The definition of income under Section 2(24)(iia) excludes voluntary contributions generally. Court's Interpretation and Reasoning: The Court recognized the receipts as offerings and donations to a notified religious entity, which are not taxable receipts under the Act. The Court emphasized the fairness principle and the historical and statutory context of the temple's status. Key Evidence and Findings: The assessee is a notified religious entity managed by government department; receipts are from devotees and public offerings; accounts are audited under state law and placed before State Assembly. Application of Law to Facts: The Court held that such receipts cannot be treated as taxable income and attempts to tax them on technical grounds are unjustified. Treatment of Competing Arguments: Revenue sought to tax receipts as income; assessee asserted exemption under statutory provisions and notified status. The Court sided with the assessee. Conclusion: Offerings and donations to notified religious entity are exempt from tax and cannot be taxed as income. Issue 8: Applicability of Section 13(9) Amendment (Effective AY 2016-17) to Earlier Assessment Years Legal Framework and Precedents: Section 13(9) inserted to prevent exemption if return or statement is not filed within due date under Section 139(1), effective from AY 2016-17. Court's Interpretation and Reasoning: The Court held that the amendment is prospective and cannot be applied retrospectively to AY 2013-14 and 2014-15. Therefore, denial of exemption on this ground is legally unsustainable. Key Evidence and Findings: The assessment years under consideration predate the amendment. Application of Law to Facts: The Court rejected Revenue's attempt to apply Section 13(9) retrospectively. Treatment of Competing Arguments: Revenue argued for retrospective application; assessee opposed. The Court rejected Revenue's stance. Conclusion: Section 13(9) amendment is not applicable to AY 2013-14 and 2014-15; exemption cannot be denied on this ground. Additional Observations and Directions The Court directed deletion of the computation of assessable income made by AO in reassessment orders and directed grant of exemption under Section 10(23C)(v) in entirety. The Court allowed the assessee's cross objections partly and dismissed Revenue's appeals. The Court left other issues raised in cross objections unanswered as academic. The Court recognized the unique status of the assessee temple as a government-controlled religious institution with statutory audit and notification under Section 10(23C)(v). The Court emphasized principles of fairness and purposive interpretation in tax exemption claims for charitable/religious entities.