Finance Act 2022 amendment applies prospectively; trusts may use FY2016-17 accumulations until 31-03-2023, no addition for assessment year

ITAT AHMEDABAD held that accumulated income relating to F.Y. 2016-17 could be utilized until 31-03-2023 and the Finance Act, 2022 amendment must be applied prospectively to fresh accumulations from 01-04-2022; the amendment does not curtail the six-year window available for existing accumulations. Consequently, no addition could be made for the impugned assessment year in respect of the trust's accumulation for F.Y. 2016-17.

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ISSUES PRESENTED AND CONSIDERED

1. Whether amendment to section 11(3)(c) removing the additional one-year period following the five-year accumulation period (Finance Act, 2022, w.e.f. 01.04.2023) applies retrospectively to accumulated income arising prior to the amendment or only prospectively to accumulations arising on or after 01.04.2022, for purposes of exemption under section 11(2) and deeming under section 11(3).

2. Whether accumulated income pertaining to financial year 2016-17, utilized in the sixth year (i.e., in the year immediately following the five-year period), can be claimed as exempt under section 11(2) for assessment year 2023-24 in view of the amendment.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Applicability of the amendment to section 11(3)(c): legal framework

Legal framework: Section 11(2) permits accumulation of income for a prescribed period (five years as amended w.e.f. 01.04.2016). Section 11(3)(c) provided that accumulated income not utilised "during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof" shall be deemed income; words creating the additional one-year window were omitted by Finance Act, 2022 effective 01.04.2023.

Issue 1 - Precedent treatment

Followed: Several ITAT decisions (Ahmedabad, Mumbai, Pune benches) interpreted the amendment as prospective, holding the extra one-year window available for pre-amendment accumulations; these decisions were applied by the Tribunal to control similar assessments.

Issue 1 - Interpretation and reasoning

The Tribunal reasons that the amendment, though enacted in 2022 and notified w.e.f. 01.04.2023, cannot be read so as to deprive trusts of the time-window that existed when the accumulation arose. Applying principles against construing statutes to produce impossibility (lex non cogit ad impossibilia) and against retrospective application of curative constraints that would frustrate reasonable reliance, the Tribunal holds the omission of the one-year window must be applied prospectively to fresh accumulations from the period starting 01.04.2022 onwards, and not to existing accumulations whose five-year period then carried an additional year for utilisation.

Issue 1 - Ratio versus obiter

Ratio: The operative ratio is that an amendment removing the one-year additional period is to be given prospective operation insofar as it would otherwise extinguish a time window already accrued in respect of pre-amendment accumulations; therefore, existing accumulations retain the benefit of the additional year available under the pre-amendment statutory scheme.

Issue 1 - Conclusion

The amendment to section 11(3)(c) is prospective in effect with respect to fresh accumulations post the relevant cut-off and does not apply to accumulated income arising in financial years prior to the effective date where the assessee had, under the unamended provision, an additional year to utilise the funds.

Issue 2 - Claim to exemption for accumulation of FY 2016-17 utilized in sixth year

Legal framework: Under the unamended Section 11(3)(c) the accumulated amount not utilised within five years or in the year immediately following the expiry thereof is deemed income; therefore utilisation in the sixth year satisfied the statutory requirement for accumulations arising in FY 2016-17.

Issue 2 - Precedent treatment

Followed: ITAT decisions dealing with identical facts held that utilisation in the year immediately following the five-year period (sixth year) was permissible for pre-amendment accumulations and that corresponding disallowances made under CPC intimation or AO are to be deleted.

Issue 2 - Interpretation and reasoning

The Tribunal applies the contemporaneous statutory position governing the accrual of the obligation to apply accumulated income. Since the funds were accumulated in FY 2016-17 when the law afforded a five-year plus one-year window, the assessee's utilisation in the sixth year falls within the permitted period. The Tribunal rejects strict literal application of the later amendment to deprive trust of the time already available and emphasises administrative impossibility and fairness: the assessee could not be required retroactively to meet a shortened period which, by calendar operation of the amendment's effective date, left no time to act.

Issue 2 - Ratio versus obiter

Ratio: Where accumulation arose prior to the amendment, utilisation in the year immediately following the five-year accumulation period (i.e., the sixth year) qualifies for exemption under section 11(2) as per the law applicable at the time of accumulation; therefore such utilisation cannot be taxed under section 11(3) by applying the later amendment.

Issue 2 - Conclusion

The accumulated income pertaining to FY 2016-17, utilised in the sixth year, is allowable as exempt under section 11(2) for assessment year 2023-24; the addition under section 11(3) / the consequent tax under section 115BBI is to be deleted.

Cross-reference and practical effect

The Tribunal consistently relies on and aligns with coordinate benches holding the amendment prospective; where accumulated funds arose before the amendment's effective change and were utilised within the six-year window afforded by the unamended provisions, such utilisation preserves exemption and precludes deeming under section 11(3) for the later assessment year.

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