Amendment to Finance Act 2022 s.11(3)/s.115BBI held prospective; pre-AY2023-24 accumulations not taxable as deemed income

ITAT (Ahmedabad) held that the Finance Act, 2022 amendment to s.11(3)/s.115BBI is prospective and does not apply to accumulations made before AY 2023-24. Since the assessee accumulated Rs.30,00,000 in FY 2016-17 and utilised it in FY 2022-23 within the extended time under pre-amendment s.11(3), the amount cannot be treated as deemed income or taxed under s.115BBI. The tribunal set aside the CIT(A) order, deleted the Rs.30,00,000 addition, and allowed the appeal, directing the AO to give effect to the order.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the amendment to section 11(3) by the Finance Act, 2022 (effective 01.04.2023) which curtails the period for utilisation of accumulated income and introduces taxation under section 115BBI, applies retrospectively to accumulations made prior to Assessment Year 2023-24.

2. Whether income accumulated in Financial Year 2016-17 and utilised in Financial Year 2022-23 (the sixth year) can be treated as deemed income under section 11(3) and taxed under section 115BBI.

3. Whether the adjustment made by CPC under section 143(1) and confirmation by the appellate authority to tax the said utilisation under section 115BBI is sustainable in law.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Applicability (prospective vs. retrospective) of the Finance Act, 2022 amendment to section 11(3) and consequential section 115BBI:

Legal framework: Prior to the Finance Act, 2022 amendment, section 11(3) permitted accumulation of income for up to five years with an implied ability to utilise the accumulated amount in the sixth year; Finance Act, 2022 amended section 11(3) (with effect from 01.04.2023) and introduced section 115BBI to treat delayed utilisation as deemed income taxable in the year of utilisation.

Precedent treatment: Coordinate tribunals have construed the amendment as prospective, holding that the amendment does not affect accumulations made before Assessment Year 2023-24 and that such pre-2023 accumulations could be utilised within the time window available under the unamended law.

Interpretation and reasoning: The Tribunal examined the temporal operation of the legislative amendment and the facts showing accumulation in F.Y. 2016-17 and utilisation in F.Y. 2022-23. The reasoning adopted follows consistent decisions of coordinate benches which recognize the settled principle that penal/taxing amendments are to be read prospective unless legislative intent for retrospective operation is clear. Applying that rule, the Tribunal concluded the Finance Act, 2022 amendment could not be applied to pre-existing accumulations; the unamended regime governed utilisation and taxation for amounts accumulated prior to the effective date.

Ratio vs. Obiter: Ratio - the amendment is prospective and does not apply to accumulations made prior to Assessment Year 2023-24. Obiter - none necessary beyond reaffirmation of general prospectivity principles.

Conclusion: The amendment introduced by Finance Act, 2022 is prospective; it does not apply to accumulations made in F.Y. 2016-17.

Issue 2 - Whether utilisation in the sixth year (F.Y. 2022-23) of amounts accumulated in F.Y. 2016-17 constitutes deemed income under section 11(3) post-amendment:

Legal framework: Under the unamended section 11(3), income accumulated for charitable/religious purposes could be applied within five years of accumulation; historical judicial interpretation permitted utilisation in the sixth year without treating it as income. The amended provision (post 01.04.2023) restricts such additional time and criminalizes/delineates delayed utilisation as deemed income taxed under section 115BBI.

Precedent treatment: Coordinate ITAT decisions dealing with facts where accumulations prior to the amendment were utilised by 31.03.2023 have held that utilisation in the sixth year cannot be taxed under the amended provisions; tribunals allowed the trusts the benefit of the longer window available under the erstwhile law.

Interpretation and reasoning: Applying the prospective view of the amendment (Issue 1), the Tribunal reasoned that the utilisation in F.Y. 2022-23 fell within the permissible period under the unamended provision applicable at the time of accumulation. Since the tax consequence under section 115BBI arises only where the amended law governs, treating the sixth-year utilisation as deemed income under the amended scheme would be applying the amendment retrospectively, which the Tribunal rejected.

Ratio vs. Obiter: Ratio - utilisation in the sixth year (here F.Y. 2022-23) of amounts accumulated in F.Y. 2016-17 cannot be taxed as deemed income under section 115BBI because the Finance Act, 2022 amendment is prospective. Obiter - clarification that factual timelines (date of accumulation, permitted window, date of utilisation) are determinative for applicability.

Conclusion: The Rs.30,00,000 utilised in F.Y. 2022-23 cannot be treated as deemed income under section 11(3) or be taxed under section 115BBI.

Issue 3 - Validity of CPC adjustment under section 143(1) and confirmation by appellate authority:

Legal framework: CPC adjustments under section 143(1) must conform to applicable law; appellate review checks legality of such adjustments. Taxing adjustments premised on application of statutory amendments require correct determination of temporal applicability.

Precedent treatment: Coordinate tribunal decisions have set aside similar CPC adjustments where the amended provisions were held prospective and inapplicable to pre-amendment accumulations.

Interpretation and reasoning: Because the Tribunal concluded the amendment is prospective and the utilisation occurred within the window available under the unamended law, the CPC's adjustment and the appellate confirmation were legally unsustainable. The Tribunal applied established principles of statutory construction (prospectivity of penal/taxing amendments) and followed consistent judicial precedent to annul the tax treatment adopted by CPC and confirmed by the lower appellate authority.

Ratio vs. Obiter: Ratio - CPC adjustment and appellate confirmation taxing the utilisation under section 115BBI are not sustainable where amendment is prospective and accumulations pre-date its effective operation. Obiter - procedural propriety of CPC adjustments requires careful legal analysis of amendment applicability.

Conclusion: The adjustment of Rs.30,00,000 by CPC under section 143(1) and its confirmation by the lower appellate authority must be deleted; the Assessing Officer is directed to remove the addition under section 115BBI.

Cross-References and Practical Point:

The Tribunal's conclusions on Issues 1-3 are interdependent: the finding of prospectivity (Issue 1) drives the result that sixth-year utilisation of pre-2023 accumulations is not taxable under section 115BBI (Issue 2), which in turn renders the CPC adjustment and appellate confirmation unsustainable (Issue 3). The Tribunal relied on consistent decisions of coordinate benches to support the proposition that amendments curtailing previously available time windows for non-profit accumulations are to be applied prospectively unless expressly made retrospective by Parliament.

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