Trust’s Section 11 exemption cannot be denied solely for belated Form 10B filing

Trust’s Section 11 exemption cannot be denied solely for belated Form 10B filing, as it is a directory provision, even if filed during appellate proceedings.

Issue:

Whether an Assessing Officer (AO) can deny exemption under Section 11 of the Income-tax Act, 1961, to a charitable trust solely on the ground that the prescribed tax audit report in Form 10B was not filed on or before the due date of filing of the return under Section 139(1).

Facts:

• For Assessment Years 2020-21 and 2021-22, the assessee (a charitable trust) claimed exemption under Section 11.
• The Assessing Officer (AO) disallowed this claim.
• The sole ground for disallowance was that the assessee had not filed its prescribed tax audit report in Form 10B on or before the due date for filing the return under Section 139(1).

Decision:

The court held in favor of the assessee. It ruled that compliance with filing the Form 10B tax audit report was a directory rather than a mandatory provision for the purpose of claiming exemption under Section 11. The court further noted that the Form 10B could even be uploaded during appellate proceedings. Therefore, the claim of exemption under Section 11 was to be allowed.

Key Takeaways:

• Section 11 Exemption and Form 10B: Section 11 grants exemption to income derived from property held under trust for charitable or religious purposes. A condition for claiming this exemption, when the total income (computed without applying Sections 11 and 12) exceeds the basic exemption limit, is that the accounts of the trust must be audited, and the audit report in Form 10B must be furnished.
• Mandatory vs. Directory Provisions: In tax law, the distinction between mandatory and directory provisions is crucial.
  • Mandatory: Non-compliance renders the action or claim invalid.
  • Directory: Non-compliance may lead to consequences but does not necessarily invalidate the action or claim, especially if there is substantial compliance with the core purpose.
• Judicial Interpretation of Form 10B Filing Deadline: The court interpreted the requirement of filing Form 10B by the Section 139(1) due date as directory in nature, not mandatory for the very claim of exemption. This means that a delay in filing Form 10B, as long as it is filed eventually (even during appellate proceedings), should not be the sole reason to deny a substantive exemption under Section 11, provided other conditions for exemption are met.
• Substance Over Form: This ruling aligns with the principle of substance over form, where the substantive right to exemption (if the trust genuinely meets the criteria of charitable activities and application of income) should not be denied due to a procedural lapse.
• Distinction from other Sections: It’s important to note that for some other sections (e.g., Section 10(23C) for certain institutions exceeding a specified turnover, or specific provisions related to accumulation under Section 11(2)), strict adherence to filing of relevant forms by due dates can be mandatory conditions for exemption. However, for the general audit report in Form 10B for Section 11, the courts have often taken a liberal view.
• Favorable to Charitable Trusts: This decision provides significant relief to charitable and religious trusts, protecting their exemptions from being denied solely on the technical ground of belated filing of Form 10B.