Delay in filing Form 10B condoned; exemption under s.11 saved, s.119(2)(b) applied to avoid genuine hardship

HC held that the requirement to file Form 10B with the return is procedural and directory, and substantial compliance is sufficient. Observing that denial of exemption u/s 11 to the charitable educational institution would cause genuine hardship and defeat the purpose of s.119(2)(b), HC found that the authority had failed to consider this aspect. Relying on prior precedent, HC quashed the impugned order for A.Y. 2017-18, condoned the delay of 1128 days in filing Form 10B, and directed the Respondents to treat the form as filed in time and to process the return on merits within three months.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the assessee's application for condonation of delay in filing Form 10B under Section 119(2)(b) was liable to be rejected on the ground of delay in filing the condonation application itself, in light of CBDT Circular No. 16/2024.

1.2 Whether the statutory requirement of furnishing the audit report in Form 10B along with or before filing the return of income is procedural/directory so as to permit its belated filing, and whether the delay of 1128 days in filing Form 10B was condonable under Section 119(2)(b).

1.3 Whether the authority acting under Section 119(2)(b) erred in rejecting condonation by (a) disbelieving the explanation based on auditor's mistake/communication gap, (b) considering the exemption claim on merits and (c) applying a strict approach in favour of the Revenue instead of the "genuine hardship" standard.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Delay in filing condonation application and applicability of CBDT Circular No. 16/2024

Legal framework (as discussed)

2.1 The Court noted that the assessee's application for condonation of delay in filing Form 10B was made under Section 119(2)(b). CBDT Circular No. 16/2024 dated 18 November 2024 prescribes a period of three years within which such condonation applications should be filed.

Interpretation and reasoning

2.2 The Court recorded that the assessee, by additional affidavit, explained the delay in approaching the authority for condonation: it was following up with its Chartered Accountants whenever recovery notices were received and filed the condonation application upon their guidance.

2.3 The Court held that, at the relevant time when the assessee's application was made and disposed of, there was no statutory or circular-based mandate prescribing any specific limitation period for filing such condonation applications. Circular No. 16/2024 came into force subsequently.

2.4 The Court further observed that the impugned order did not reject the condonation application on the ground of delay in approaching the authority but only on the ground that the explanation for delay in filing Form 10B was not acceptable.

Conclusions

2.5 The Court accepted the explanation for the delay in filing the condonation application and held that there was no legal impediment, at the relevant time, requiring the application to be filed within a particular period. Circular No. 16/2024 had no adverse bearing on the assessee's application. The matter, therefore, had to be decided on the core issue of delay in filing Form 10B.

Issue 2 - Nature of requirement to file Form 10B with the return and condonability of delay in filing Form 10B

Legal framework (as discussed)

2.6 The dispute arose from denial of exemption under Section 11 on the ground that the audit report in Form 10B, though obtained on 30 September 2017, was not e-filed along with or before filing the return, as required by Section 12A(1)(b) read with the first proviso to Rule 12(2) of the Income-tax Rules.

2.7 The assessee invoked Section 119(2)(b) and CBDT Circular No. 10/2019 dated 22 May 2019 for condonation, asserting that the audit report had been obtained before filing the return and later furnished, and that the conditions of the Circular were met.

2.8 The Court considered the decisions of the Gujarat High Court in Sarvodaya Charitable Trust v. ITO (Exemptions), relying on CIT v. Gujarat Oil and Allied Industries Ltd., which held that the requirement of furnishing the audit report with the return is procedural and directory, and that substantial compliance suffices.

Interpretation and reasoning

2.9 The Court noted that the assessee had specifically contended before the authority that furnishing the audit report along with the return is a procedural requirement and that the report can be admitted even if filed subsequently. This contention was not dealt with in the impugned order.

2.10 Relying on Sarvodaya Charitable Trust and Gujarat Oil and Allied Industries Ltd., the Court treated the requirement to file the audit report along with the return as a procedural provision, directory in nature, where substantial compliance is adequate.

2.11 The Court accepted that the delay of 1128 days in uploading Form 10B arose due to miscommunication and misunderstanding between the former and new firms of Chartered Accountants, where the new firm believed it was only engaged for audit under the Bombay Public Trust Act, 1950 and not for tax compliances. The assessee, being a charitable institution, was entirely dependent on professionals for tax compliance.

2.12 The Court relied on the co-ordinate bench decision in Al Jamia Mohammediyah Education Society v. Commissioner of Income-tax (Exemptions), where similar delay in filing Form 10B attributable to the oversight of the Chartered Accountant was condoned as a human error, and noted that the Supreme Court had declined to interfere with that decision.

Conclusions

2.13 The Court held that the requirement of furnishing Form 10B along with or before the return is procedural/directory, not substantive, and that belated filing can be accepted where there is substantial compliance.

2.14 Considering the explanation based on professional error and dependence on Chartered Accountants, the Court held that the delay of 1128 days in filing Form 10B was condonable under Section 119(2)(b) and ought not to result in denial of exemption merely on that technical ground.

Issue 3 - Scope of discretion under Section 119(2)(b), "genuine hardship" and error in rejecting condonation by reference to merits and strict construction

Legal framework (as discussed)

2.15 Section 119(2)(b) empowers the Board or authorized authorities to condone delay and grant relief where adherence to the prescribed time limits would cause "genuine hardship" to the assessee.

2.16 The Court referred to its decision in Western Arch Developers v. Pr. Commissioner of Income-tax (Central), which held that the expression "genuine hardship" in Section 119(2)(b) is to be construed liberally and that condonation of delay only enables the matter to be decided on merits.

2.17 The Court also relied on its decision in St. Anne's Church v. Commissioner of Income-tax (Exemptions), where, in similar circumstances involving a charitable trust, delay in filing Form 10 was condoned, holding that refusal of condonation would impose grave hardship and that the trust should not be saddled with liability solely due to inadvertent error of the Chartered Accountant.

Interpretation and reasoning

2.18 The Court observed that the authority, in the impugned order, rejected the condonation application by (a) treating the explanation based on auditor miscommunication as unacceptable, (b) emphasizing that the assessee had not complied with provisions in preceding and succeeding assessment years, (c) noting absence of supporting documents, (d) referring to reminders and non-compliance, and (e) asserting that exemption provisions must be interpreted in favour of the Revenue.

2.19 The Court held that, at the stage of considering condonation under Section 119(2)(b), the authority was not called upon to decide the exemption claim on merits; its task was confined to considering whether the delay in filing Form 10B should be condoned.

2.20 The Court found that denial of exemption under Section 11 to a charitable educational institution running schools with around 5,000 students would cause "genuine hardship" and adversely affect its functioning. The very purpose of Section 119(2)(b) is to mitigate such hardship.

2.21 The Court reasoned that a liberal approach is mandated in construing "genuine hardship": if delay is condoned, the only consequence is that the claim is decided on merits after hearing both sides; whereas, refusal to condone, on a purely technical lapse, may visit the assessee with substantial and disproportionate tax burden.

2.22 Referring to St. Anne's Church and Al Jamia Mohammediyah Education Society, the Court reaffirmed that a charitable trust should not be foisted with heavy tax liability solely because of an inadvertent error or oversight of its Chartered Accountant.

Conclusions

2.23 The Court held that the authority under Section 119(2)(b) erred in (a) ignoring the procedural nature of the filing requirement, (b) failing to adopt the liberal "genuine hardship" standard, and (c) considering factors going to the merits of the exemption claim instead of focusing on condonation of delay.

2.24 It was concluded that refusing condonation in the facts of this case would result in genuine hardship to the assessee charitable institution, contrary to the object of Section 119(2)(b). The impugned order was therefore quashed and set aside, the delay of 1128 days in filing Form 10B was condoned, and the Revenue was directed to treat Form 10B as filed within time and process the return of income in accordance with law within three months from the date of uploading of the Court's order.

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