2010 (9) TMI 817 - AT - Income Tax

Exemption U/s. 11 - Audit U/s. 12A(1)(b) - CIT(A), erred in directing the AO to allow the benefit of exemption u/s. 11 of the Act, 1961, no appreciating the fact that the trustee Shri Madhav V. Shah during the course of statement u/s. 131 recorded in this office on 13/10/2008 had categorically stated that the audit was never conducted and no audit report in form No. 10B was ever prepared and further not appreciating the fact that the conduct of audit U/s. 12A(1)(b) being the mandatory condition for allowance of exemption u/s.11 of the I.T. Act, the assessee was not eligible for exemption U/s. 11 of the I.T. Act - Held that - Shri Madhav V. Shah has claimed in his affidavit that he had never said that the books of accounts of the trust had not been audited - this claim of Shri Madhav V. Shah to be acceptable - In this regard, find that along with return of income the assessee had filed report of auditor which was required to be given under the Bombay Public Trust Act, 1950 - The said report of the auditor clearly mentions that the assessee maintains profit and loss accounts and also disclosed receipts and disbursement correctly - This report is dated 11/10/2006 and had been filed along with return of income - In these circumstances we are of the view that the report in Form No.10B, which is similar to the report under the Bombay Public Trust Act, 1950 would not have been obtained by the assessee - The plea of bonafide omission to file form No.10B along with return of income is deserves to be accepted - There is no reason why the affidavit of Shri K.P.Mehta, C.A filed in this regard should be rejected - Held that the assessee had complied with the provisions of section 12A(1)(b) of the Act - Thus, the CIT(A) was justified in holding that the assessee was entitled to exemption under section 11 of the Act - Decided in favour of assessee.

Issues Involved:

1. Eligibility for exemption under Section 11 of the Income Tax Act.
2. Admissibility and impact of the trustee's statement under Section 131.
3. Validity of the trustee's affidavit of retraction.
4. Requirement of filing the mandatory audit report in Form No. 10B.
5. Classification of income and computation under the normal provisions of the Income Tax Act.

Detailed Analysis:

1. Eligibility for Exemption under Section 11 of the Income Tax Act:
The primary issue was whether the assessee trust was eligible for exemption under Section 11 of the Income Tax Act, 1961. The Assessing Officer (AO) denied the exemption on the grounds that the mandatory audit report in Form No. 10B was not filed along with the return of income. The CIT(A) directed the AO to allow the exemption, concluding that the assessee had complied with Section 12A(1)(b) of the Act by filing the audit report during the assessment proceedings. This decision was upheld by the Tribunal, which referenced the Hon'ble Calcutta High Court's ruling in CIT vs. Hardeodas Agarwalla Trust, stating that the requirement to file the audit report with the return is not mandatory and can be rectified before the assessment is completed.

2. Admissibility and Impact of the Trustee's Statement under Section 131:
The AO relied on the statement of the trustee, recorded under Section 131, where the trustee allegedly stated that no audit report in Form No. 10B was prepared. The CIT(A) and the Tribunal found that the trustee's statement was not correctly recorded and noted discrepancies. The Tribunal accepted the trustee's affidavit, which clarified that the trustee was not aware of the specific audit requirements and that the statement was signed without fully understanding its contents.

3. Validity of the Trustee's Affidavit of Retraction:
The trustee, through an affidavit, retracted the statement given under Section 131, claiming it was made without full knowledge of the facts. The AO dismissed this affidavit, but the CIT(A) and the Tribunal accepted it, emphasizing that the AO did not cross-examine the trustee or provide substantial reasons to reject the affidavit. The Tribunal found the affidavit credible and consistent with the facts.

4. Requirement of Filing the Mandatory Audit Report in Form No. 10B:
The AO argued that the failure to file Form No. 10B with the return of income disqualified the trust from exemption under Section 11. The Tribunal, however, upheld the CIT(A)'s view that the omission was a bona fide oversight and that the subsequent filing of the audit report during the assessment proceedings was sufficient compliance. The Tribunal referenced judicial precedents, including the Hon'ble Calcutta High Court's decision, which supported the view that procedural requirements should not be construed as mandatory if rectifiable.

5. Classification of Income and Computation under the Normal Provisions of the Income Tax Act:
The AO treated all income as "Income from Other Sources" after denying the exemption under Section 11. The assessee, through a cross-objection, argued that income should be computed under the normal provisions of the Act, considering specific heads like capital gains and dividends. The Tribunal dismissed the cross-objection, stating it had no legs to stand on given the main appeal's dismissal.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to grant exemption under Section 11, dismissing the revenue's appeal. The Tribunal found the assessee had substantially complied with the audit requirements, and procedural lapses were rectifiable. The cross-objection by the assessee was also dismissed as it was contingent on the revenue's appeal. The decision emphasized the principle that procedural requirements should not unduly penalize taxpayers if rectifiable before the assessment's completion.

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