Exemption for accumulated funds under s. 11(2) allowed for utilization in grace year, full relief granted

ITAT Mumbai allowed the assessee's appeal concerning exemption of accumulated funds under s. 11(2). CPC had disallowed exemption for unutilized accumulated amounts. Relying on its own decision for the same assessment year (AY 2023-24) in a comparable case, the Tribunal held that the assessee was entitled to deduction under s. 11(2) for Rs. 24,34,928 utilized during the grace year (6th year), as per the legal provisions applicable at the time of accumulation. Accordingly, the assessee was granted relief in full.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, for income accumulated under section 11(2) in FY 2016-17, utilisation in the sixth year (FY 2022-23) continues to be permissible in AY 2023-24 despite the amendment to section 11(3) by the Finance Act, 2022.

1.2 Whether the amendment to section 11(3)(c) by the Finance Act, 2022, omitting the words "or in the year immediately following the expiry thereof", applies prospectively only to fresh accumulations from AY 2023-24 onwards, or also to existing accumulations of earlier years.

1.3 Consequent to the above, whether the adjustment in the intimation under section 143(1) denying exemption on utilisation of Rs. 24,34,928/- from accumulated income was legally sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Applicability and temporal scope of the amendment to section 11(3) (Finance Act, 2022) vis-à-vis accumulations made in FY 2016-17 and utilisation in the sixth year

Legal framework (as discussed in the judgment)

2.1 The Court referred to the statutory scheme of sections 11(2) and 11(3), as analysed in a coordinate bench decision for the same assessment year:

(a) Section 11(2) permits accumulation of income (where 85% is not applied in the previous year) for a period not exceeding five years, subject to prescribed conditions.

(b) Under the unamended section 11(3)(c), income accumulated under section 11(2) which is not utilised "during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof" is deemed income of the previous year immediately following the expiry of that period, effectively allowing a total window of six years (5 years + 1 grace year) for utilisation.

(c) The Finance Act, 2022 amended section 11(3)(c) with effect from 01.04.2023, omitting the words "or in the year immediately following the expiry thereof", thereby removing the additional one-year grace period and providing that such income becomes taxable on expiry of the five-year period itself.

(d) The amendment is stated in the Finance Act and in the Memorandum explaining the provisions to take effect from 01.04.2023 and to apply in relation to AY 2023-24 and subsequent assessment years.

2.2 The coordinate bench decision, extensively reproduced and followed, also referred to:

(a) The Memorandum to the Finance Bill, 2022 explaining that the amendment to section 11(3) was intended to bring "consistency in the provisions of two exemption regimes" and align the treatment under section 11 with that under section 10(23C).

(b) The principle against retrospective operation of taxing provisions as laid down by the Supreme Court in the decision interpreting retrospective vs. prospective application of tax amendments, emphasising lex prospicit non respicit and "fairness" as the basis for presumption of prospectivity where a provision imposes a new burden or disability.

Interpretation and reasoning

2.3 The Tribunal adopted and applied the reasoning of the coordinate bench for AY 2023-24 on an identical issue, holding in substance that:

(a) For accumulations made in FYs 2016-17 and 2017-18, the governing law at the time of accumulation allowed utilisation within the original five-year period plus the "year immediately following the expiry thereof", i.e., a total of six years.

(b) The Finance Act, 2022 did not alter the maximum five-year accumulation period under section 11(2); it only removed the additional one-year grace period in section 11(3)(c) prospectively.

(c) The amendment is expressed to be effective from 1 April 2023 and to apply in relation to AY 2023-24 and subsequent years, without any indication that existing accumulations made under the old regime would lose the earlier-available grace year.

(d) Both the language of the amending provision and the stated legislative intent (to bring consistency prospectively between the two exemption regimes) support the view that the amendment applies only to fresh accumulations pertaining to previous years commencing on or after 1 April 2022, and not to accumulations validly made in earlier years.

(e) Existing accumulations, having been made under a legal regime which expressly permitted utilisation in the sixth year, carry an "accrued" right to that time window; to curtail that right retrospectively would offend the principles of fairness and the presumption against retrospective imposition of tax burdens.

2.4 Applying that legal position to the present facts, the Tribunal noted:

(a) The assessee had accumulated Rs. 32,50,000/- under section 11(2) in FY 2016-17.

(b) Out of this, Rs. 24,34,928/- was actually utilised in FY 2022-23 (the sixth year from FY 2016-17), and tax was voluntarily paid on the unspent portion of Rs. 8,15,072/- under section 11(3).

(c) Under the law as it stood at the time of accumulation, the assessee was permitted to utilise the accumulation during the five-year period or in the immediately following year; thus, utilisation in FY 2022-23 (grace year) was fully within the permissible statutory window.

(d) The subsequent omission of the grace-year language in section 11(3)(c) by the Finance Act, 2022 could not operate to retrospectively disallow utilisation of accumulations made in FY 2016-17, as this would amount to applying a burdensome amendment to past transactions contrary to settled interpretative principles.

2.5 The Tribunal also noted that another appellate authority (Addl./JCIT(A), Chennai) had taken the same view in a comparable case for AY 2023-24, specifically holding that the omission of the grace-year wording applied only to accumulations made from AY 2023-24 onwards, and that Finance Act, 2022 had not been enacted with retrospective effect for earlier accumulations.

Conclusions on Issues 1 & 2

2.6 The amendment to section 11(3)(c) by the Finance Act, 2022, effective from 01.04.2023, is to be applied prospectively in relation to fresh accumulations from AY 2023-24 onwards, and does not disturb the extended utilisation window (5 years + 1 year) available in respect of accumulations made in earlier years such as FY 2016-17.

2.7 For the assessee's accumulation made in FY 2016-17, utilisation in FY 2022-23 (the sixth year) remained permissible under the law applicable at the time of accumulation, and the assessee was entitled to exemption under section 11(2) in respect of Rs. 24,34,928/- so utilised.

Issue 3: Sustainability of the adjustment under section 143(1) denying exemption on utilisation of accumulated income

Interpretation and reasoning

2.8 The dispute under section 143(1) arose because the Centralized Processing Centre, while issuing intimation, disallowed the assessee's claim of utilisation of Rs. 24,34,928/- from accumulation on the ground that, in view of the amended section 11(3), the prescribed period for utilisation had expired and, therefore, the amount had to be added back to income.

2.9 Having accepted, on merits, that the amended section 11(3)(c) could not be applied to deny the statutory grace-year utilisation for accumulations made in FY 2016-17, the Tribunal held that the utilisation in FY 2022-23 was valid and continued to qualify for deduction under section 11(2).

2.10 By "respectfully following" the coordinate bench decision and applying the same legal analysis, the Tribunal concluded that the disallowance/adjustment made in the section 143(1) intimation, and upheld by the first appellate authority, was unsustainable in law.

Conclusions on Issue 3

2.11 The utilisation of Rs. 24,34,928/- from the accumulation of FY 2016-17 in FY 2022-23 constituted valid application of accumulated income within the permissible statutory period, and the assessee was entitled to exemption under section 11(2) in respect thereof.

2.12 The adjustment made in the intimation under section 143(1) denying such exemption and adding the amount to income was not legally warranted and was directed to be deleted.

2.13 The assessee's appeal was allowed, and relief was granted to the full extent of the disputed addition relating to utilisation of accumulated funds.

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