2025 (9) TMI 1030 - AT - Income Tax

Appeal allowed: Trust's set-aside of Rs.95 lakh and Form 10 filing met s.11(2), investments met s.11(5) requirements

ITAT JAIPUR - AT allowed the appeal, holding that the trust's set-aside of Rs.95,00,000 for charitable purposes and timely filing of Form 10 satisfied ... Exemption u/s 11 - Accumulation u/s 11(2) - AO disallowed the claim for accumulation observing that the investment in prescribed modes under section 11(5) was not made during the relevant financial year - HELD THAT:- It is not in dispute that the appellant had set apart Rs. 95,00,000/- for charitable purposes, and Form 10 was filed within the prescribed time, further the assessee has complied with the conditions laid down in Section 11(2) of the Act as well as rightly deposited the amount in Schedule Bank as per Section 11(5)(iii) of the Act. This amount was lying in the appellant’s bank account with a Scheduled Bank as on 31.03.2018. Thereafter, the same was invested in fixed deposit receipts with the same bank on 07.04.2018 and 09.04.2018. There is no allegation of misapplication of funds or deviation from the objects of the trust. Section 11(5) prescribes the modes of investment for accumulated income. The mere fact that the investment in fixed deposit was made a few days after the end of the financial year, despite the funds being securely parked in a Scheduled Bank throughout, cannot be a valid ground for denial of exemption. The requirements of section 11(2) and 11(5) must be interpreted harmoniously and with a view to promote the object of the legislation. The appellant has substantially complied with all the conditions required for accumulation under section 11(2) of the Act, and the disallowance solely on procedural grounds is unjustified. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether accumulated income claimed under section 11(2) is excludible from total income where (a) Form No.10 was filed within the due date under section 139(1), (b) the sum remained in a scheduled bank account as on the last day of the previous year, but (c) fixed deposit investments in the prescribed modes under section 11(5) were created a few days after the end of the previous year. 2. Whether a technical non-compliance as to timing of conversion of bank balance into prescribed mode (FDRs) defeats exemption under sections 11(2) read with 11(5) when there is no diversion or misapplication of the funds and substantive conditions are otherwise satisfied. 3. Whether amendment to the filing requirement under section 11(2)(c) (requiring Form 10 to be filed two months before the due date) is applicable to the year under consideration and can be invoked against the assessee. 4. Consequentially, whether interest under sections 234A, 234B and 234C survives where the assessed addition under section 11(2) is deleted. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 11(2) and section 11(5) where funds were in scheduled bank on year-end but FDRs created after year-end Legal framework: Section 11(2) permits exclusion of accumulated or set-apart income if conditions (a) furnishing prescribed statement specifying purpose and period (Form No.10), (b) investment/deposit of the money in modes specified in section 11(5), and (c) furnishing the statement on or before the due date under section 139(1) are complied with. Section 11(5) prescribes modes (including deposits with scheduled banks) in which accumulated income must be invested. Precedent Treatment: The Court considered authorities emphasizing substance over mere procedural form and the principle that technical lapses should not defeat substantive compliance. Earlier decisions were invoked by the appellant to support substantial compliance; the Tribunal applied those principles rather than distinguishing or overruling them. Interpretation and reasoning: The Tribunal examined the factual matrix: (i) Form No.10 was filed within the due date under section 139(1); (ii) the accumulated amount was held in a scheduled bank account as on 31.03.2018; (iii) conversion into FDRs with the same scheduled bank took place on 07.04.2018 and 09.04.2018; and (iv) there was no allegation of diversion or misapplication. The Tribunal held that the object of sections 11(2) and 11(5) is to secure safe earmarking of charitable funds and prevent diversion, and that when funds are demonstrably secured in a scheduled bank on the year-end and subsequently placed in the prescribed deposit mode with no diversion, the timing of physically creating FDRs a few days after the year-end does not defeat the statutory scheme. The provisions must be read harmoniously and purposively; strict formalism that penalizes bona fide holding of funds in a scheduled bank when substantive conditions are satisfied would frustrate legislative intent. Ratio vs. Obiter: Ratio - where (i) Form No.10 is filed within due date, (ii) funds are in a scheduled bank on the last day of the previous year, and (iii) subsequent investment in the prescribed mode occurs immediately after year-end with no diversion, the accumulation qualifies under section 11(2) read with section 11(5). Obiter - broader comments on flexible application of the provisions to promote legislative object; not a general license to delay prescribed investments indefinitely. Conclusion: The Tribunal concluded that the assessee substantially complied with sections 11(2) and 11(5); the disallowance of Rs.95,00,000 on the ground that FDRs were constituted after 31.03.2018 was unjustified and directed deletion of the addition. Issue 2 - Effect of technical non-compliance (timing) and role of substantive compliance Legal framework: Statutory conditions for exemption are time-linked; however, judicial doctrine permits treating minor procedural lapses as non-fatal when substantive conditions are satisfied and there is no prejudice, diversion or mala fide conduct. Precedent Treatment: The Tribunal relied on and applied the principle from earlier decisions that minor procedural irregularities should not defeat substantive rights of charitable institutions when conditions of investment and purpose are otherwise met. Interpretation and reasoning: The Tribunal found that denial premised solely on timing of conversion into FDRs, despite funds being in a scheduled bank at year-end and no misapplication, amounted to elevating form over substance. The requirement of investment in modes prescribed by section 11(5) was met in substance because the bank balance was with a scheduled bank at year-end and was 'converted' into FDRs immediately thereafter; this satisfied the protective aim of the provision (security and earmarking). The Tribunal applied a purposive construction to avoid an outcome contrary to the object of the exemption scheme. Ratio vs. Obiter: Ratio - where substantive conditions are met and there is no diversion, technical timing irregularity in creating prescribed mode investments shortly after year-end may be treated as substantial compliance. Obiter - cautionary note that routine or prolonged departure from prescribed timelines without justification may not attract like relief. Conclusion: The Tribunal held that technical non-compliance as to timing did not justify denial of exemption in the present facts and deleted the addition. Issue 3 - Applicability of later amendment to section 11(2)(c) Legal framework: Section 11(2)(c) (as amended later) prescribes earlier filing of the statement in certain years; amendments have prospective application unless expressly retrospective. Precedent Treatment: The Tribunal treated the amendment as prospective and therefore inapplicable to the assessment year under consideration. Interpretation and reasoning: The submission that the filing requirement had been tightened by a later amendment (requiring Form No.10 two months prior to the due date) was rejected as not applicable to the year under appeal. The Assessing Officer's reliance on the amended clause in the remand report was described as misplaced; a change in statutory timing applicable from later assessment years cannot be invoked retrospectively to invalidate compliance in the earlier year. Ratio vs. Obiter: Ratio - later amendments to statutory filing timelines cannot be applied to earlier assessment years absent express retrospective operation. Obiter - remand reports cannot be used to raise new legal positions contrary to the law applicable to the assessment year. Conclusion: The Tribunal held the amended timing requirement inapplicable to the year in issue and rejected the objection based on that amendment. Issue 4 - Consequential deletion of interest under sections 234A, 234B and 234C Legal framework: Interest under sections 234A/234B/234C is consequential on tax demand/assessed income. Interpretation and reasoning: As the Tribunal deleted the addition under section 11(2), there remained no assessed income on which interest could be levied for the year under appeal. Ratio vs. Obiter: Ratio - where assessed addition is deleted, consequential interest charged on that addition cannot survive. Obiter - none. Conclusion: The Tribunal directed deletion of the interest levied under sections 234A, 234B and 234C as consequential to the deletion of the assessed income.