Finance Act 2022 amendment applied prospectively; pre-amendment accumulated funds retain original six-year utilisation window under impossibility doctrine

ITAT held for the assessee that the Finance Act, 2022 amendment removing the additional one-year utilisation window must be read prospectively and does not curtail the six-year time window available for pre-amendment accumulations. Applying the doctrine of impossibility, the tribunal found it would be impracticable to deny existing accumulations the previously available period to be utilised; therefore funds accumulated in FY 2016-17 and 2017-18 remained usable within their original six-year windows. The assessing officer's additions were deleted and the appeal was allowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether amendment by Finance Act, 2022 (w.e.f. 01.04.2023) omitting the words "or in the year immediately following the expiry thereof" in Section 11(3)(c) can be applied to amounts accumulated in FY 2016-17 that were utilised in FY 2022-23.

2. Whether an amount accumulated in FY 2016-17 that is not utilised by 31.03.2022 but is utilised during FY 2022-23 becomes assessable in AY 2023-24 under Section 11(3) read with Section 115BBI, or should be assessed in AY 2022-23.

3. Whether the doctrine lex non cogit ad impossibilia and principles on retrospectivity of substantive statutory amendments prohibit retrospective application of the Finance Act, 2022 amendment to vested accumulations.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Applicability of Finance Act, 2022 amendment to existing accumulations (legal framework)

Legal framework: Section 11(2) permits accumulation of income for a period of five years; Section 11(3)(c) (as in force prior to 01.04.2023) deemed accumulated income to be income if not utilised within five years "or in the year immediately following the expiry thereof". Finance Act, 2022 omitted the additional one-year clause effective 01.04.2023.

Precedent Treatment: The Tribunal relied on contemporaneous ITAT decisions holding the amendment prospective and not applicable to accumulations arising before 01.04.2023 (decisions reproduced in the judgment applied in favour of the assessee).

Interpretation and reasoning: The Court examined textual effect and legislative intent, noting that the amendment is expressly effective from 01.04.2023. The Court applied principles that substantive amendments affecting vested rights should not be construed to have retrospective effect absent clear legislative intent. Further, practical impossibility of utilising previously accumulated funds if the additional year were removed was highlighted.

Ratio vs. Obiter: Ratio - The amendment is prospective and does not apply to accumulations made prior to its effective date; existing accumulations retain the one-year additional window for utilisation. Obiter - Observations on broader legislative policy were limited to context and not necessary to decision.

Conclusions: The Court held the amendment must be read prospectively; accumulations of FY 2016-17 are governed by the pre-amendment text including the additional one-year period ending 31.03.2023.

Issue 2 - Correct assessment year for deemed income where utilisation occurs in the additional one-year period

Legal framework: Section 11(3) provides that accumulated income not utilised in the prescribed period shall be deemed to be income of "the previous year in which it is so applied ... or, as the case may be, of the previous year immediately following the expiry of the period aforesaid".

Precedent Treatment: The Tribunal reproduced and followed ITAT decisions applying the pre-amendment provision to allow utilisation in the year immediately following the five-year expiry and treating taxability accordingly.

Interpretation and reasoning: The Court found that under the pre-amendment provision an assessee had a six-year window (five years plus the year immediately following expiry) to utilise accumulated amounts. For accumulations in FY 2016-17 the additional year extended to 31.03.2023; utilisation in FY 2022-23 therefore falls within the statutory window existing at the relevant time. The Court also observed that taxing in AY 2023-24 (i.e., treating the amount as income in FY 2022-23) would be inconsistent with the time when the deemed income arose if the amount could have been brought to tax in AY 2022-23 under an alternative reading; however, the decisive point was that utilisation in FY 2022-23 was permissible and thus not taxable as deemed income.

Ratio vs. Obiter: Ratio - Utilisation in the year immediately following the five-year period (i.e., FY 2022-23 for FY 2016-17 accumulations) is within the pre-amendment statutory window and prevents deeming of the amount as income; thus no addition in AY 2023-24. Obiter - Discussion on technicality whether the AO should have assessed in AY 2022-23 rather than AY 2023-24 is explanatory but secondary to the primary ruling on permissibility of utilisation.

Conclusions: The Court held that amounts accumulated in FY 2016-17 and utilised in FY 2022-23 are not to be treated as deemed income for AY 2023-24; the claim of deduction/utilisation stands and the adjustment made by CPC was to be deleted.

Issue 3 - Application of doctrine of impossibility and protection of vested rights against retrospective amendment

Legal framework: Canonical principle that legislation should not be construed so as to make performance impossible (lex non cogit ad impossibilia); substantive amendments affecting vested rights are generally prospective in absence of clear retrospective language.

Precedent Treatment: The Court relied on reasoning in several Tribunal decisions which applied lex non cogit ad impossibilia and held the amendment could not retrospectively eliminate the practical opportunity already available to trustees/assessee to utilise accumulated funds.

Interpretation and reasoning: The Court reasoned that removal of the additional one-year period with effect from 01.04.2023 could not be construed to retroactively extinguish the assessee's time window that had already commenced under the law as it stood when the accumulation occurred. To do so would create an impossible compliance requirement and would affect vested expectations; hence the amendment is to be applied prospectively to future accumulations.

Ratio vs. Obiter: Ratio - Doctrine of impossibility and protection against retrospective curtailment of vested rights support prospectivity of the amendment; therefore existing accumulations retain the originally available time window. Obiter - Broader policy comments on legislative competence to enact retrospective fiscal amendments were ancillary.

Conclusions: The Court concluded that constitutional and interpretative principles (including lex non cogit ad impossibilia) militated against retrospective application of the Finance Act, 2022 amendment to accumulations made in FY 2016-17; thus the assessee's utilisation in FY 2022-23 was valid.

Treatment of precedents and disposition

Precedent Treatment: The Court expressly followed and applied recent ITAT decisions with analogous facts which held the amendment prospective and deleted adjustments made by CPC/Assessing Officer.

Interpretation and reasoning: The Court found these decisions directly on point and persuasive; accordingly, consistent application required allowing the appeal and deleting the adjustment of Rs. 1,58,301.

Conclusions: The appeal was allowed and the adjustment made by CPC was deleted in line with the rationale that accumulations of FY 2016-17 could lawfully be utilised up to 31.03.2023 and are not rendered taxable by the Finance Act, 2022 amendment.

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