2010 (9) TMI 716 - AT - Income Tax

Exemption u/s 11 - Form No. 10B - Scrutiny - Failure to get account audited - Failure to furnish report in Form 10B - Held that - it is now well-settled that a procedural provision, ordinarily, should not be construed as mandatory, if the defect in the act done in pursuance of it can be cured by permitting appropriate rectification to be carried out at a subsequent stage - Having regard to the object of section 12A, it cannot be said that the Legislature intended that, even where the trust has got its accounts audited and the certificate obtained in Form No. 10B before the assessment is completed, merely because such report could not be filed in the course of the assessment proceedings, it would deprive a trust from getting the exemption if it is otherwise entitled to it in law - the assessee had complied with the provisions of section 12A(1)(b) of the Act - In the given facts and circumstances of the case we are of the view that the CIT(A) was justified in holding that the assessee was entitled to exemption under section 11 of the Act - In the result, the appeal of the revenue as well cross objection of the assessee are dismissed

Issues Involved:
1. Exemption under Section 11 of the Income-tax Act, 1961.
2. Admissibility and impact of the trustee's statement under Section 131.
3. Validity of the affidavit of retraction filed by the trustee.
4. Requirement of filing the mandatory Audit Report under Section 10B with the return of income.
5. Tax treatment of various incomes (capital gains, interest, donations, sundry income, and dividend income).

Detailed Analysis:

1. Exemption under Section 11 of the Income-tax Act, 1961:
The primary issue was whether the assessee Trust was eligible for exemption under Section 11 despite not filing the Audit Report in Form No. 10B along with the return of income. The Assessing Officer (AO) denied the exemption, citing non-compliance with Section 12A(1)(b), which mandates the filing of an audit report. The CIT(A) overruled this, stating that the requirement to file Form No. 10B along with the return is not mandatory but directory, and compliance can be achieved if the report is filed during the assessment proceedings. This view was supported by judicial precedents, including the Hon'ble Calcutta High Court's decision in Hardeodas Agarwalla Trust, which held that filing the audit report during assessment proceedings suffices for compliance.

2. Admissibility and impact of the trustee's statement under Section 131:
The AO relied heavily on the statement of the trustee, recorded under Section 131, where the trustee indicated that no audit report in Form No. 10B was prepared. The trustee later retracted this statement via an affidavit, claiming a misunderstanding and lack of expertise in tax matters. The CIT(A) accepted the retraction, emphasizing that the trustee's statement was not conclusive, especially when contradicted by documentary evidence such as the audit report filed during the assessment proceedings.

3. Validity of the affidavit of retraction filed by the trustee:
The trustee filed an affidavit retracting his earlier statement, asserting that the audit report in Form No. 10B was indeed prepared but omitted from the return due to oversight. The AO dismissed this affidavit, questioning its credibility. However, the CIT(A) accepted the affidavit, noting that the AO did not provide substantial reasons to reject it and did not cross-examine the trustee to verify the claims made in the affidavit.

4. Requirement of filing the mandatory Audit Report under Section 10B with the return of income:
The AO argued that the failure to file the audit report along with the return disqualified the assessee from claiming exemption under Section 11. The CIT(A), supported by judicial precedents, held that the procedural requirement of filing the audit report along with the return is not mandatory. The CIT(A) cited the principle that procedural lapses should not deny substantive rights if rectified during assessment proceedings. The Tribunal upheld this view, confirming that the assessee complied with Section 12A(1)(b) by filing the audit report during the assessment.

5. Tax treatment of various incomes (capital gains, interest, donations, sundry income, and dividend income):
The AO treated all the incomes as "Income from other sources" after denying the exemption. The CIT(A) directed the AO to allow the exemption under Section 11, thus treating the incomes as exempt. The Tribunal upheld this direction, dismissing the revenue's appeal and confirming that the assessee was entitled to the exemption.

Conclusion:
The Tribunal dismissed the revenue's appeal and upheld the CIT(A)'s decision, granting the assessee exemption under Section 11. The Tribunal also dismissed the assessee's cross-objection, as it became redundant following the dismissal of the revenue's appeal. The judgment emphasized the directory nature of procedural requirements and the importance of substantive compliance, even if achieved during assessment proceedings.

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