ALLAHABAD HIGH COURT

Income Tax Appeal No. - 349 of 2013

Hon'ble Sunil Ambwani And Hon'ble Surya Prakash Kesarwani,JJ.

Shambhu Chopra, Sr. Sc, It For the Appellant :

JUDGMENT

We have heard Shri Shambhu Chopra, learned counsel for the income tax department.

The affidavit of service has been filed.

This appeal under Section 260A of the Income Tax Act, 1961 arises out of the order dated 14.6.2013 passed by the Income Tax Appellate Tribunal in ITA No.4667/Del/2011 relating to the assessment year 2008-09.

The appeal has been preferred on the following substantial questions of law:-

"1. Whether on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in directing the Assessing Officer to condone the delay and irregularity in filing form no.10 if the assessee has spent the amount in next year ignoring the non-compliance of statutory provisions of filing from 10 within prescribed limit and that the delay in filing of form no.10 can only be condoned by the Commissioner of Income Tax as per CBDT Circular No.273 dated 3.6.1980.

2. Whether on the facts and circumstances of the case, the Hon'ble ITAT has erred in law in directing the Assessing Officer to allow the exemption claimed by the assessee ignoring the judgment of Hon'ble Supreme Court in the case of Commissioner of Income Tax v. Nagpur Hotel Owners' Association (247 ITR 201) which holds that Form 10 was to be filed before completion of assessment."

We have gone through the orders of the Assessing Officer, CIT (A) and ITAT.

Brief facts giving rise to the appeal are as follows:-

"The brief facts of the case are that the assessee is a society registered under the Societies Act and also registered u/s 12A of the Income Tax Act, 1961. The society is running MG Public School at Circular Road, Muzaffarnagar. The assessee filed its return of income declaring nil income as per computation of income as under:-

However, the Assessing Officer observed that assessee had not utilized funds for charitable purpose as per the provisions of the Act and held as under:-

"Again from perusal of the return it is noticed that the total receipts of the assessee is Rs. 1,97,84,940/- which included sale of land for Rs. 24,01,245/-, becomes total receipts of Rs. 2,21,86,240/-. The total application of funds as indicated in Income & Expenditure account is Rs. 97,10,705/-. The expenditure on capital asset is at Rs. 81,99,026/- made up of the following. Thus total application of fund is at Rs. 1,79,09,731/- i.e. (Rs.97,10,705/- + Rs. 81,99,026/-). In brief out of total receipts of Rs. 2,21,86,240/-, the application of fund is only to the extent of Rs. 1,79,09,731/- which is only at 80.72%.

As the application of funds is less than 85% and there is no application u/s 11 (2) along with the return, the exemption u/s 1 of the Income Tax Act, 1961 is not available to the assessee. Accordingly, vide notice dated 18.12.2009 and dated 29.12.2009 the assessee was required to explain why the exemption u/s 11 may not be disallowed. Vide letter dated 4.3.2010, the assessee furnished its reply as under:-

"That the Trust is carrying on activity of providing education to the children irrespective of caste and creed and mainly on charitable purposes. In the year under consideration, the return of income has been filed along with the audit report in Form No.10B along with application for allowability of accumulated funds of Rs. 24,04,624/- to be used in the next year. The copy of application is being enclosed for your ready reference. The exemption u/s 11 of the Income Tax Act, 1961 cannot be denied while the funds accumulated have been kept in bank as per provision of section 1 (5) (iii) with Schedule-I."

Along with this reply, the assessee also filed notice u/s 11 (2) (a) of the IT Act read with Rule 17 of IT Rules, 1962 for accumulation of income. The letter is addressed to Addl. CIT."

The Assessing Officer, however, did not consider the contention of the assessee and made the disallowance because of the following:-

i) the notice u/s 11 (2) (a) is not in a specified form as per Rule 17 of IT Rules, 1962. The prescribed form is Form No.10.

ii) the letter states that amount of Rs. 24,04,624/- shall be utilized in the next year and it does not state the purpose for which it is being accumulated.

iii) The application dated 26.9.2008 is filed on 21st October, 2008 and therefore cannot be considered as notice as it should have been filed before expiry of time allowed u/s 139 for furnishing of return of income which is 30th September of each year.

iv) The notice is signed by Shri Dinesh Mohan, Advocate and not by Secretary or the President of the Society.

Dissatisfied with the order, the assessee filed appeal before Ld CIT (A) who after going through the submissions and on the basis of material on record, allowed the benefit of capital expenditure of Rs. 81,99,026/- and reduced the taxable income to Rs. 42,75,263/- by making the following calculation.

The Income Tax Appellate Tribunal relying upon CIT v. Zirat Mir Syed Ali Hamdani, Srinagar decided by Jammu & Kashmir High Court and CIT v. Nagpur Hotel Owners Association, 247 ITR 201 held that information with full details as required in Form No.10 was furnished for setting apart and carrying forward the unspent amount for spending in next year. The Tribunal found that the contents of Form 10 are similar to the contents of letter sent by the assessee. The Assessing Officer denied exemption on the ground of technical default of not conveying its intention on the prescribed form. The provisions of Section 11 (2) providing for requirement of exercising the option within the specified time is directory. The Tribunal held that the Assessing Officer has power to condone the delay specially in the circumstances than the assessee had filed audited balance sheet for the assessment year 2009-10 (the next assessment year) before the Assessing Officer for claiming for unspent amount was spent in the prescribed period. He also demonstrated that the assessee had made investment in next year amounting to Rs. 1,25,17,086/- and thus the purpose of the provisions of the Act have been achieved.

In CIT v. Nagpur Hotel Owners' Association, 2001 (247) ITR 201 the Supreme Court held that the notice of accumulation must be given to the assessing authority under Section 11 before the assessment is concluded. It was held that the assesssing authority must have this information at the time he completes the assessment. In the absence of any such information it will not be possible for the assessing authority to give the assessee the benefit of such exclusion, and once the assessment is so completed, it would be futile to find fault with the assessing authority for having included such income in assessable income of the assessee. Therefore, even assuming that there is no valid limitation prescribed under the Act and the Rules even then. It is reasonable to presume that the intimation required under Section 11 has to be furnished before the assessing authority completes the concerned assessment. In the present case the application under Section 11 (2) was not filed with the return. The information, however, was given during the process of the assessment, before the assessment was completed. The assessee had given notice under Section 11 (2) (a) of the Act read with Rule 17 of the Rules of 1962 for accumulation of income to the Addl. CIT. The Assessing Officer, however, did not consider the contention of the assessee.

We do not find substance in the contention of Shri Shambhu Chopra that unless the information, which was otherwise provided by the assessee is furnished in Form No.10, the Assessing Officer could not have taken into consideration and was entitled to reject it. The benefit of the exemption is on setting apart of the 85% amount to be spent in next year before the assessment is complete, and not on the furnishing of information on prescribed form. There was sufficient material before the Assessing Officer both in the shape of the information furnished within the prescribed period and the proof of not only setting apart 85% of the amount to be spent in next year but also the expenditure of that amount in the next year. The insistence of furnishing of information on Form 10 as a condition precedent, is insistence on the form and not the substance of the provisions of the Act.

The Tribunal has taken precaution, and remanded the matter to examine the books of account of the assessee for assessment year 2009-10 to find out whether the amount was spent in the next year and if the investment exceeds unspent amount within the prescribed period, with directions that if such finding is arrived at, the Assessing Officer will condone the delay and irregularity in filing Form 10, and should allow exemption, if found to be eligible otherwise.

We do not find any error of law in the order of the Tribunal. When a request by way of letter, which complies with the requirement and furnishes all the information required in Form No.10 was made available on record and there was sufficient proof before the Assessing Officer that the amount was not only kept apart but was also spent in next year, the adherence to the form and not substance, was not valid exercise of power by the A.O. and CIT (A).

The questions of law nos.1 and 2 are decided in favour of the assessee and against the department.