Funds accumulated in A.Y.2017-18 under ss.11(2)/(3) usable for charitable activities through A.Y.2023-24 under five-plus-one rule; disallowance deleted under s.143(1)(a)

ITAT held that funds accumulated in A.Y.2017-18 under ss.11(2)/(3) could be applied for charitable activities up to A.Y.2023-24 (five+one year rule). Following prior ITAT precedents and the rule of consistency, the Tribunal set aside the CIT(A)'s disallowance made by adjustment under s.143(1)(a), directed deletion of the disallowance and allowed the assessee's grounds of appeal.

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ISSUES PRESENTED AND CONSIDERED

1. Whether income accumulated under section 11(2) and set apart in a particular assessment year, but applied in the sixth year from the year of accumulation, is taxable where, prior to the Finance Act, 2022 amendment, the statutory language permitted utilisation "within a period of five years or in the year immediately following the expiry thereto".

2. Whether the Finance Act, 2022 amendment to the relevant provisions of section 11(3) applies retrospectively to deny benefit of utilisation made in the year immediately following the five-year period when the utilisation occurred before the amendment's effective operation.

3. Whether the adjustment made by CPC under section 143(1)(a) treating accumulated income as deemed income is justified where the assessee filed Form 10 for accumulation and applied the accumulated funds within the permissible period as understood under pre-amendment law.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Legal framework

Legal framework: Section 11 (and specifically sections 11(2) and 11(3) as applicable at the relevant time) governs exemption of income applied for charitable or religious purposes and permits accumulation or setting apart of income for application for such purposes; the pre-amendment scheme allowed utilisation "within a period of five years or in the year immediately following the expiry thereto" (i.e., five years plus an additional immediate year).

Precedent Treatment: The Tribunal in multiple coordinate decisions has interpreted the pre-amendment wording to allow application of accumulated funds in the year immediately following the prescribed five-year period; those coordinate decisions have set aside assessments treating such utilisation as deemed income.

Interpretation and reasoning: The Tribunal reasons that where funds were accumulated in assessment year 2017-18, the five-year period runs up to 31.03.2022 and the statutory phrase permitting application "in the year immediately following the prescribed period of 5 years" authorises utilisation up to the end of the next financial year - thus permitting application in assessment year 2023-24 (the sixth year from accumulation) under the law as it stood when accumulation and application occurred.

Ratio vs. Obiter: Ratio - under the pre-amendment statutory scheme, an assessee who accumulates income may validly apply those funds in the year immediately following the five-year period and such application is not exigible to be treated as deemed income. Obiter - ancillary observations on administrative timing or filing dates not essential to this legal conclusion.

Conclusions: Application of accumulated funds in the sixth year (i.e., the year immediately following the five-year period) was permissible under the statutory scheme prevailing at the relevant time and therefore such application cannot be disallowed as deemed income under section 11(3) as it stood then.

Issue 2 - Prospective vs. retrospective effect of Finance Act, 2022 amendment

Legal framework: The Finance Act, 2022 amended the language of section 11(3) (and related provisions), removing or altering the phrase that permitted utilisation in the year immediately following the five-year period.

Precedent Treatment: The Tribunal has held in recent coordinate decisions that the Finance Act, 2022 amendments are prospective in nature and do not affect transactions completed before the amendment's effective operation.

Interpretation and reasoning: The Court applies the prospectivity principle to hold that the amendment cannot be read to retrospectively deprive an assessee of a legitimate statutory entitlement that existed at the time of accumulation and application. Where the assessee utilised funds before the amendment took effect (i.e., applied accumulated funds before 31.03.2023 as relevant to the facts), the pre-amendment entitlement to apply in the year immediately following the five-year period survives.

Ratio vs. Obiter: Ratio - the amendment is to be construed as prospective and cannot invalidate legitimate utilisation made under the pre-amendment provision. Obiter - discussions on legislative intent beyond prospectivity are ancillary.

Conclusions: The Finance Act, 2022 amendment does not retroactively render taxable amounts that were validly applied under the pre-amendment scheme; thus utilisation in the sixth year made before the amendment's operative effect remains allowable.

Issue 3 - Validity of CPC adjustment under section 143(1)(a) where Form 10 was filed and funds applied within permissible period

Legal framework: CPC's adjustments under section 143(1)(a) may disallow amounts not in conformity with statutory provisions; Form 10 filing under section 11(2) registers accumulation and indicates intention to apply accumulated funds for charitable purposes within the statutory period.

Precedent Treatment: Coordinate Tribunal decisions have annulled CPC adjustments where accumulation and subsequent application were in accordance with the pre-amendment statutory timeline and Form 10 had been filed, directing deletion of the adjustment.

Interpretation and reasoning: On the facts, the assessee filed Form 10 for accumulation in A.Y.2017-18 and applied the aggregated accumulated funds (including later accumulations) in A.Y.2023-24. Applying the rule of consistency and the Tribunal rulings cited, the Court finds that the CPC's adjustment treating the 2017-18 accumulation as deemed income is not justified because the application occurred within the statutory period permissible under the then-applicable law.

Ratio vs. Obiter: Ratio - where Form 10 has been filed and application of accumulated funds occurs within the permissible period under pre-amendment law, a CPC adjustment treating such application as taxable is erroneous. Obiter - procedural observations regarding sequence of accumulations across years are explanatory rather than decisive.

Conclusions: The CPC's disallowance of Rs. 12,40,644 (the amount accumulated in A.Y.2017-18 and applied in A.Y.2023-24) is to be deleted; the appellate authority should allow the claim of application and not treat the amount as deemed income.

Cross-references and Rule of Consistency

Coordinate decisions addressing identical statutory language and identical factual matrices were followed; the Tribunal applies the Rule of Consistency to align the present decision with prior bench rulings holding that pre-amendment accumulations may be applied in the year immediately following the five-year period and that the Finance Act, 2022 amendments are prospective.

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