The new, stricter rule for utilizing a charitable trust's accumulated income applies only prospectively to fresh accumulations and does not apply retrospectively to past accumulations.

The new, stricter rule for utilizing a charitable trust’s accumulated income applies only prospectively to fresh accumulations and does not apply retrospectively to past accumulations.

Issue

Does the amendment made by the Finance Act, 2022, which restricted the time period for utilizing accumulated income under Section 11(3) of the Income-tax Act, 1961, apply retrospectively to income that was accumulated in prior years, or is it prospective in nature, applying only to new accumulations?

Facts

An assessee-trust had accumulated a certain portion of its income in the Financial Year 2016-17, as is permitted under Section 11.
It subsequently utilized this accumulated amount during the financial year relevant to the Assessment Year 2023-24 and claimed the corresponding exemption.
The Assessing Officer (AO) disallowed this exemption. The AO’s argument was that the amount had remained unutilized at the end of the fifth year, and therefore, the exemption was lost. The AO was applying a new, stricter time limit that had been introduced into the law by an amendment in the Finance Act, 2022.

Decision

The court ruled decisively in favour of the assessee.

It held that the amendment that was made by the Finance Act, 2022, to Section 11(3) is prospective in nature and not retrospective.
This new, stricter rule applies only to fresh accumulations that are made by a trust from the previous year starting on or after April 1, 2022 (i.e., from FY 2022-23 onwards). It does not apply to existing accumulations that were made in earlier years.
Therefore, the accumulation that was made by the trust back in FY 2016-17 continued to be governed by the old, more lenient provisions that were in force at that time.
Under those old provisions, the assessee had a time window until March 31, 2023, to utilize the funds. Since the utilization happened within this original time limit, the AO’s addition was incorrect and was set aside.

Key Takeways

Amendments that Impose Restrictions are Generally Prospective: A new law or an amendment that imposes a new restriction or takes away a previously available benefit is almost always presumed to be prospective in its application. It applies only to events that occur after the law is changed, not to past events.
Vested Rights are Protected: The trust had a “vested right” under the old law to utilize its accumulated funds within a certain, established period. The new amendment cannot be used to take away this existing right for accumulations that were made in the past.
The Law of the Year of Accumulation is What Matters: The conditions and timelines that apply to a particular batch of accumulated income are the ones that were in force in the year that the income was originally set apart for accumulation.
Important Clarity on the 2022 Amendment: This ruling provides crucial clarity for all charitable trusts. It confirms that the changes that were made to the rules for utilizing accumulated income by the Finance Act, 2022, are not meant to penalize trusts for their past accumulations that were made under the old legal framework.

IN THE ITAT AHMEDABAD BENCH ‘SMC’

Sarangpur Talia’s Pole Punch Trust

Income-tax Officer

Dr. B.R.R. Kumar, Vice President
and Siddhartha Nautiyal, Judicial Member

IT Appeal No. 929 (Ahd.) OF 2025
[Assessment year 2023-24]

SEPTEMBER 16, 2025

Samir Vora and S.N. Divetia, ARs for the Appellant. Rajenkumar M. Vasavda, Sr. DR for the Respondent.

ORDER

Siddhartha Nautiyal – Judicial Member. – This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), ADDL/JCIT(A)-9, Delhi vide order dated 24.02.2025 passed for A.Y. 202324.

2. The assessee has raised the following grounds of appeal:

“1. The Ld. Addl./JCIT [A] has erred in points of law and or on facts in sustaining the addition of Rs.2,00,000/- u/s 115BBI of the Act in respect of accumulated income u/s 11(2) of the Act for R.2,00,000/- utilised in the F.Y. under consideration being the sixth F.Y. from the year of accumulation i.e. F.Y. 2016-17 on the ground that the accumulated income of Rs.2,00,000/- has been utilised beyond the period of 5 years from the F.Y. of accumulation by virtue of amendment in section 11(1)(c) of the Act applicable from Asst. Year 2023-24. For the sake of convenience, a table showing the “pre and” post amended provision of section 11(1)(c) is appended herewith.

The addition of Rs.2,00,000/- ought not to have been made by virtue of amended section 11(1) (c) of the Act as it was impossible to implement the amended 11(1)(c) from A.Y. 2023-24. The Finance Bill 2022 was tabled in the Parliament on 01-022022. The said bill received the assent of the President of India on 30-03-2022 leaving only one day to spend accumulated income u/s 11(2) of the Act which was otherwise allowable if accumulated income is spent by the end of sixth financial year as per the pre amended provisions of section 11(1)(c) of the Act. The addition of Rs.2,00,000/-has been made liable to tax @ 30%plus cess @ 4% of 30% u/sll5BBloftheAct.

In facts and circumstances of the case as mentioned above, the addition of Rs.2,00,000/- deserves be deleted. “

4. The brief facts of the case are that the assessee, Sarangpur Talia’s Pole Punch Trust, was denied exemption under section 11 of the Income Tax Act (Act) in respect of Rs. 2,00,000/- of accumulated income. In the order passed u/s 143(1) of the Act, the CPC disallowed this amount on the ground that it remained unutilized at the end of the fifth financial year from the year of accumulation (i.e., FY 2021-22, being the fifth year from FY 2016-17), and added the same to the total income of the trust, resulting in a demand of Rs. 78,660/-. The CPC added this amount on the basis that since the assessee trust had not utilized the accumulated income within the statutorily prescribed period of five years, the exemption under section 11(2) of the Act could not be granted, even though the amount was in fact admittedly spent in the sixth year (i.e. FY 2022-23).

5. The CIT(A) upheld the disallowance and dismissed the appeal of the Act. It was contended before the CIT(A) that the amendment to section 11(3), which imposed a strict requirement for the utilization of accumulated income within five years, only came into effect on 01.04.2022, just one day before the end of the fifth year (i.e., on 31.03.2022). The assessee submitted that it was impossible for trusts to comply with this new requirement within such a short notice. The assessee further highlighted that this issue was not unique to them, but affected thousands of trusts across the country, prompting widespread representations and requests for relief from CBDT under section 119(2)(b). A copy of such representation dated 06.02.2025 addressed to the Member (Legislation), CBDT, was placed on record. However, the CIT(A), while acknowledging the above facts, held that the amendment was already part of the statute applicable to A.Y. 2022-23 and that Taxing Statutes must be interpreted strictly, regardless of any hardship or administrative difficulty. Relying on a series of judicial precedents, the CIT(A) held that there was no room for liberal or equitable interpretation in the application of a taxing statute. Since the amount of Rs. 2,00,000/- was admittedly utilized in the sixth year, the requirement of section 11(3) of the Act, as amended, was not fulfilled, and thus the exemption could not be allowed. The appeal was therefore dismissed, and the addition by the CPC was sustained.

6. The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee. We are of the considered view that the present issue is directly covered in favour of the assessee by the Ahmedabad ITAT decision in the case of Meshri Mahajan Vanda v. ITO (Exemption) 93 (Ahmedabad – Trib.)[02-09-2025] in which ITAT held where assessee trust accumulated income pertaining to financial years 2016-17, assessee had time window till 31-3-2023 by which it could utilize accumulated income. The amendment brought in by Finance Act, 2022, did not debar assessee from availing said time window in respect of existing accumulations and amendment had to be read prospectively in respect of fresh accumulations for period pertaining to previous year starting from 1-4-2022 onwards. While passing the order, ITAT made the following observations:

7. We have heard the rival contentions and perused the material on record. We note that the present issue is directly covered in favour of the assessee in light of the Ahmedabad ITAT decision in the case of Shri Krishnanagar Vaishvsamaj (supra). It would be useful to reproduce the relevant extracts of the Ruling, for ready reference:

“7. We have considered the rival submissions. In the present case, the assessee had accumulated fund of Rs.4,60,000/- in the F.Y. 2016-17. As per provisions of Section 11(2) of the Act, a trust is required to apply 85 % of income during any previous year to charitable or religious purposes. However, if it is not able to apply 85% of its income during the previous year, it is allowed to accumulate such income for the period of five years. In fact, the time limit of accumulation was earlier ten years which was restricted to five years w. e.f. 01.04.2016. The provision of Section 11(3) of the Act stipulates that if the income so accumulated is not utilised within the prescribed period, it shall be subjected to tax at the end of such period. In this regard, it is relevant to reproduce the Section 11(3) of the Act at relevant point of time which is as under:-

(3) Any income referred to in sub-section (2) which—

(a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or

(b) ceases to remain invested or deposited in any of the forms or modes specified in subsection (5), or

(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section 72[or in the year immediately following the expiry thereof]*,

(d) is credited or paid to any trust or institution registered under section 12AA 73[or section 12AB] or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10,

74[shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited or credited or paid or, as the case may be, of the previous year immediately following the expiry of the period aforesaid].

72 Words “or in the year immediately following the expiry thereof shall be omtt. by the Act No. 6 of2022, w.e.f 1-4-2023.

7.1 As per the sub-clause (c) of Section 11(3), the accumulated amount shall be deemed to be the income of the assessee if it was not utilised within the period of five years as mentioned in Section 11(2)(a) of the Act, or “in the year immediately following the expiry thereof. Thus, the assessee had time limit of five years and one additional year to utilise the accumulated funds. Since the funds were accumulated in this case in the F. Y. 2016-17, the extended time period for utilisation offund was till the end of the F. Y. 2022-23. In the present case, the assessee had utilised funds to the extent of Rs.2,32,073/- in the additional one-year period and accordingly claimed the deduction in the return for A. Y. 2023-24.

7.2 The CPC has disallowed the claim while processing the return for the reason that the additional one-year period for utilisation offunds was omitted vide Finance Act 2022 w.e.f 01.04.2023. The contention of the assessee is that the amended provision would create an impossible and absurd situation as the assessee would be left with no time to utilise the funds accumulated in F. Y. 2016-17. The original five years’ time period in this case had expired on 31.02.2022. As per the unamended provisions, the assessee had additional one year to utilise the funds. The removal of additional one-year period would create an impossible or absurd situation as the assessee will be left with no time to utilise the accumulated funds. The doctrine of impossibility (lex non cogit ad inpossibilia) would be applicable in the situation when assessee would be left with no time to utilise the accumulated funds. The amendment cannot be interpreted in such a way that it makes impossible for the assessee to utilise the accumulated funds within the time period as originally provided under the provisions of the Act. It is a settled position that legal rules should not be applied rigidly or literally, when doing so would lead to an unfair or impossible outcome. Rather, the legal obligations should be interpreted with a degree of practicality and reasonableness, taking into account the specific circumstances of the case. The law does not require anyone to perform an act that is genuinely impossible to achieve. While interpreting the amendment, the legal obligations have to be interpreted with a degree of practicality and reasonableness, taking into account the specific circumstances of the case. Considering this aspect, the Ld. CIT(A) was not correct in rejecting the appeal of the assessee. Since the assessee had utilised the funds within the time period as originally provided under the Act, the adjustment made while processing the return is deleted.

8. In the result, appeal of the assessee is allowed. ”

8. In the case of Dadar Digamber Jain Mumukshu Mandal v. CIT (Exemption) 661 (Mumbai – Trib.) [15-07-2025], the assessee trust filed its return of income for assessment year 2023-24, claiming exemption under section 11 of the Act. During relevant year, assessee utilized accumulated income of Rs. 35.66 lakhs and Rs. 40 lakhs pertaining to financial years 2016-17 and 2017-18 respectively. The Assessing Officer noted that as per amended provisions of section 11(3)(c) of the Act, accumulation period was limited to five years and, thus, he brought said amount to tax as income of assessee. The ITATheld that amendment to section 11(3)(c) by Finance Act, 2022 with effect from 1-4-2023 which omitted extra period of one year following expiry of initial period of accumulation of five years is prospective in nature and, thus, same would be applicable only to fresh accumulations from assessment year 2023-24 onwards. Therefore, as far as accumulation relating to financial years 2016-17 and 2017-18 were concerned, assessee had time window till 31-3-2023 and 31-3-2024 respectively by which it had to utilize accumulated income and in that view of matter, amendment brought in by Finance Act, 2022 with effect from 14-2023, does not debar assessee from availing said time window in respect of existing accumulations and amendment has to be read prospectively in respect of ofresh accumulations for period pertaining to previous year starting from 1-4-2022 onwards. Therefore, where assessee had accumulated income during financial years 2016-17 and 2017-18 and utilized same within period of six years, same could not be brought to tax in assessment year 2023-24 and, thus, addition made by Assessing Officer was to be deleted.

9. Further, in the case of Yashwantrao Chavan Maharashtra Open University v. CIT(E) 988 (Pune – Trib.)/ITA No. 505/pun/2025 vide order dated 23.06.205, the Pune ITAT while dealing with similar set of facts and issue for consideration, made the following observations:

“21. In light of the above discussion, we are of the considered opinion that since the assessee in the instant case has utilized the accumulated surplus funds in the year immediately following the prescribed period of 5 years i.e. before 31.03.2023 and the amendment to the provisions of section 11(3) are held to be prospective in nature, therefore, the Ld. Addl / JCIT(A) in our opinion is not justified in upholding the intimation of the CPC making adjustment of Rs.90,70,20,511/- u/s 11(3) as deemed income of the assessee which was accumulated in the financial year 2016-17 and when the provisions at the relevant time prescribed the utilization of the amount within a period of 5 years or in the year immediately following the prescribed period of 5 years. Even otherwise also we find merit in the argument of the Ld. Counsel for the assessee that the 5 year period ends on 31.03.2022 and therefore the unutilized amount could have been brought to tax in assessment year 2022-23 and not in assessment year 202324. In the light of the above discussion, we set aside the order of the Ld. Addl / JCIT(A) on this issue and direct the Assessing Officer/CPC to delete the adjustment. The grounds raised by the assessee are accordingly allowed.

22. In the result, the appeal filed by the assessee is allowed. ”

7. Accordingly, in light of the assessee’s facts and the aforesaid discussion and decisions reproduced above, we are of the considered view that there is merit in the contentions advanced by the assessee that as far as the accumulation relating to the period of F.Y. 2016-17 is concerned, the assessee had the time window till 31-03-2023 by which it could utilize accumulated income and in view of the matter, the amendment brought in by the Finance Act, 2022 does not debar the assessee from availing the said time window in respect of existing accumulations and the amendment would have to be read prospectively in respect of fresh accumulations for the period pertaining to previous year starting from 1st April, 2022 onwards. Further, as far as the impugned assessment year is concerned, no addition can be made for accumulation of income pertaining to financial year 2016-17 as the assessee continues to be guided by the provisions as existed at the relevant point in time and the time window of six years as provided. The amendment made by the Finance Act, 2022 cannot curtail the said time window and has to be applied prospectively in respect of fresh accumulations.

8. In the result, the appeal filed by the assessee is allowed.