2014 (3) TMI 146 - HC - Income Tax

Option given under clause (2) of Explanation to Section 11 (1) of the Act - Unspent income of the Trust Held that - The assessee did exercise the option as is apparent from the letter supplied by the assessee - the assessee conveyed to the Department that the assessee gave a notice of option exercised by the Trust to allow to spend surplus amount that may remain at the end of the previous year ended on 31st March 2009 during the immediately following the previous year ie. 2009-10 - Two things are thus abundantly clear firstly that such option was exercised before last date of filing the return which was 30th September 2009 and secondly that such option was exercised in terms of clause (2) of Explanation to Section 11 (1) of the Act - This was clearly not an option under subsection (2) of Section 11 - The caption of the communication dated 22nd September 2009 as well as the contents of the letter make this clear thus the assessee cannot be precluded from pursuing the option on the ground as was done by the Assessing Officer that no declaration in the prescribed form was made the declaration was required only if the assessee s option was to be covered by the provision of Section 11 (2) of the Act. The Tribunal has taken note of facts on record namely that the option in fact was exercised within the time permitted under the statute - It was a bona fide error to indicate a wrong figure - The intention to avail carryover of the unspent income to the next year was clear - Relying upon Trustees of Tulsidas Gopalji Charitable And Chaleshwar Temple Trust v. Commissioner of Income Tax 1993 (9) TMI 75 - BOMBAY High Court Commissioner of IncomeTax v. Ziarat Mir Syed Ali Hamdani 2000 (11) TMI 110 - JAMMU AND KASHMIR High Court - the requirement of exercising an option within the time permitted under clause (2) of Explanation to Section 11 (1) of the Act is directory and not mandatory - Substantial compliance thereof would therefore be sufficient - the Tribunal had committed no error in granting the benefit to the assessee for the entire amount since it was a mere oversight or bona fide error in not indicating the correct and full amount for the option under clause (2) of Explanation to Section 11 (1) of the Act Decided against Revenue.

Summary

Issues:
1. Exercise of option under clause (2) of Explanation to Section 11(1) for accumulation of income by a charitable trust.
2. Correctness of the amount indicated in the option exercised.
3. Requirement of making a declaration in the prescribed form for exercising the option under Section 11(2).
4. Whether the time limit for exercising the option under Section 11(1) is mandatory or directory.

Issue 1:
The judgment revolves around the exercise of the option under clause (2) of Explanation to Section 11(1) by a charitable trust for the accumulation of income. The assessee, a charitable trust, filed its return of income for the Assessment Year 2009-10, indicating an amount to be accumulated. The Assessing Officer added this amount to the income of the assessee, leading to a dispute regarding the correct exercise of the option. The CIT (A) partially accepted the assessee's contention, allowing accumulation of a portion of the amount. The Tribunal, in its judgment, analyzed the provisions of Section 11(1) and Explanation (2) to determine the validity of the option exercised by the assessee. It held that the requirement of exercising the option is directory in nature, and substantial compliance suffices. The Tribunal concluded that the assessee's exercise of the option within the prescribed time was valid, thereby granting the benefit for the entire amount sought to be accumulated.

Issue 2:
A significant aspect of the judgment concerns the correctness of the amount indicated in the option exercised by the assessee. Initially, the assessee indicated a smaller figure in the option, which was later corrected to the actual amount. The Tribunal acknowledged this discrepancy but emphasized that the exercise of the option within the stipulated time was crucial. Despite the error in the initial figure, the Tribunal considered it a bona fide mistake and upheld the validity of the option for the entire amount, as the intention to carry over the unspent income was evident.

Issue 3:
The judgment clarifies the distinction between exercising the option under clause (2) of Explanation to Section 11(1) and the requirement of making a declaration in the prescribed form under Section 11(2). It highlights that the declaration is necessary only if the option falls under Section 11(2), not under clause (2) of Explanation to Section 11(1. In this case, since the option exercised by the assessee was under the latter provision, the absence of a formal declaration did not invalidate the option.

Issue 4:
Regarding the nature of the time limit for exercising the option under Section 11(1), the judgment emphasizes that the requirement is directory, not mandatory. Citing precedents from the Bombay High Court and the Jammu & Kashmir High Court, the Tribunal held that substantial compliance with the time limit suffices. In the present case, the Tribunal found no error in granting the benefit to the assessee for the entire amount, considering the oversight in indicating the correct figure as a bona fide mistake.

In conclusion, the Tribunal dismissed the Tax Appeals, affirming the validity of the option exercised by the charitable trust for the accumulation of income, despite discrepancies in the indicated amount, and clarified the procedural requirements and the nature of the time limit for such options under the relevant provisions of the Income Tax Act.