2007 (1) TMI 231 - AT - Income Tax

Summary

Issues:
1. Disallowance of exemption of income under s. 11(1)(a) and taxing the income at a specified amount.
2. Rejection of claim of accumulation of income under s. 11(2) for a period of ten years instead of five years.
3. Failure to appreciate corrected Form No. 10 submitted during assessment proceedings.
4. Disallowance of accumulation under s. 11(2) and exemption of income under s. 11(1) by the CIT(A).
5. Compliance with provisions of s. 11(2) regarding accumulation of funds and filing of Form No. 10.

Analysis:

Issue 1:
The appeal was against the order of the CIT(A) confirming the action of the AO in not allowing the exemption of income under s. 11(1)(a) and taxing the income at a specified amount. The assessee claimed the deduction of total income under s. 11 of the IT Act, 1961. The AO noted discrepancies in the accumulation of funds and set apart for a specific charitable purpose, leading to the disallowance of the claim of exemption.

Issue 2:
The main contention was the rejection of the claim of accumulation of income under s. 11(2) for a period of ten years instead of the prescribed five years. The AO observed that the society had resolved to accumulate funds for ten years for constructing a school building, contrary to the provisions of the Act. The CIT(A) upheld the AO's decision, emphasizing the requirement to set aside funds for five years and file Form No. 10 accordingly.

Issue 3:
The assessee argued that the period of ten years mentioned in Form No. 10 was an oversight and was rectified by a resolution passed before the completion of assessment. The Tribunal found that the lower authorities failed to appreciate the rectification made by the assessee and held that the claim should not have been disallowed based on a technical mistake.

Issue 4:
The CIT(A) concluded that the assessee did not comply with the provisions of s. 11 of the Act, specifically regarding the accumulation of funds for a specific period. The Tribunal disagreed, stating that the assessee had filed Form No. 10 before the completion of assessment and rectified the period of accumulation within the prescribed time frame.

Issue 5:
The Tribunal held that the Departmental authorities were not justified in rejecting the claim of the assessee based on technical grounds. It was emphasized that the provisions of s. 11(2) do not specify a time limit for filing Form No. 10 or investing the accumulated funds, making the time limits mentioned in the rules directory in nature. The Tribunal directed the AO to allow the benefit of accumulation as claimed by the assessee, ultimately allowing the appeal.