Commissioner of Income Tax vs Industrial Extension Bureau

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Akil Abdul Hamid Kureshi, J.—Leave to amend Questions framed in Tax Appeal No. 1029 of 2013. These appeals arise in the following background.

Respondent-assessee, who is common in both the appeals, is a registered public charitable trust. For the Assessment Year 2009-10, the assessee filed return of income which was taken in scrutiny. During the course of assessment proceedings, the Assessing Officer noticed that a sum of Rs. 59.17 lakhs [rounded off] which was the income of the assessee was not spent by the Trust. After putting the assessee to notice, he added such amount to the income of the assessee. The assessee approached the CIT (A) and contended that the assessee always desired to exercise option available under clause (2) of Explanation to Section 11(1), for which purpose, a communication was also addressed on 22nd September 2009. However, on being pointed out that there was an error in the figure indicated and such figure, in subsequent letter dated 13th February 2011 was written, correcting the figure from Rs. 59,17,600/- to Rs. 1,05,67,047/-.

This was opposed by the Revenue contending that the assessee had once exercised option available under clause (2) of Explanation to Section 11(1), for which no declaration in the prescribed form was made. In any case, the request of correcting the figure came long after the last date of return has expired.

CIT(A) accepted the assessee''s contention in part. He accepted that amount of Rs. 59,17,600/- should be allowed to be accumulated since declaration was already made before the last date of filing the return. He, however, rejected the claim towards larger amount observing that such option had to be exercised before the due date of filing the return. This was not done. This period cannot be extended indefinitely. He, therefore, granted benefit of Explanation (2) to Section 11 to the extent of Rs. 59,17,600/- and not for the entire amount of Rs. 1,05,67,047/-, as requested by the assessee.

This order of CIT(A) gave rise to two cross appeals. Revenue questioned CIT(A)''s order granting any benefit at all to the assessee. The assessee similarly filed appeal before the Tribunal to the extent its prayer was curtailed. These appeals were disposed of by the Tribunal by a common judgment allowing the assessee''s appeal and rejecting the revenue''s. In the process, the Tribunal made following observations:--

"6. We have heard the rival contentions and perused the material available on record. As per Section 11(1) of Explanation (2) - if, in the previous year, the income applied to charitable or religious purposes in India falls short of 85 per cent of the income derived during that year from property held under trust, or as the case may be, held under trust in part, by any amount - (i) for the reason that the while or any part of the income has not been received during that year, or (ii) for any other reason, then, in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-section (1) of Section 139 for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes. The contention of the learned counsel for the assessee is that the option has been exercised and he has drawn our attention towards page No. 8 of paper-book and also drew our attention towards page Nos. 9 and 10. In letter dated 22/09/2009, it has been brought to the notice of DDIT, Gandhinagar for option exercised by the trust to allow to spend the surplus of Rs. 59,17,600/- which was further revised vide letter dated 20/06/2012 to Rs. 1,05,67,043/-. The only controversy is to be decided is whether the letters dated 22/09/2009 and 20/06/2012 are valid option which would entitle the assessee in terms of the Explanation-2 of Section 11(1). We find that the Hon''ble High Court of Jammu & Kashmir has held that the requirement of exercising the option is directory in nature. Further, it has been held that sub-section (1) & (4) of Section 139 have to be read together and, on such a reading, the inevitable conclusion is that a return made within the time specified in sub-section (4) has to be considered as having been made within the time prescribed in sub-section (1) or sub-section (2) of Section 139 of the Act. In other words, if a return is filed within the time specified in sub-section (4) of Section 139 of the Act and the option contemplated by the Explanation to Section 11(1) is exercised in writing along with such return, the requirements of the Explanation to Section 11(1) would stand satisfied. In the instant case, the contention of the assessee is that it has exercised option and while exercising the option, the amount written of Rs. 59,17,600/- was wrongly mentioned. However, the same ought to have been Rs. 1,05,67,047/-. We find that ld. CIT(A) has agreed with the assessee to the extent that the A.O. has decided this issue on a wrong basis. However, learned CIT(A) did not allow to correct the mistake on the basis that the extended time limit available till the finalization of assessment proceedings as has been decided in case of Section 11(2) is therefore not available to the assessee. As it is an option which decides taxation of income in two years, it cannot but extent to after the return has been filed. It would, in a way, mean revising the return through back door which is not permissible. Even otherwise, the letter of extra accumulation was filed only in November 2011, when even the time of filing the revised return u/s. 139(5) has elapsed. This could not be permitted. Therefore, the assessee was allowed of income under Explanation (2) to Section 11 to the extent of Rs. 59,17,600/-. We have considered all aspects of the matter. In the present case, there is no dispute that the mistake was committed while exercising option for allowing accumulation of income. The contention of the assessee is that such mistake is bona fide and the assessee cannot be deprived of legal claim on the basis that the claim was not made within time, since the requirement of exercising option is directory in nature. Under the peculiar facts of the present case, we feel that learned CIT(A) ought to have considered the submissions of the assessee that the requirement of exercising option is being directory in nature, therefore, a liberal approach to have been adopted. We are, therefore, of the view that in the light of the judgment(s) of Hon''ble High Court of J & K, the Assessing Officer has decided this issue on a wrong basis, therefore, we do not find any merit in the ground of the Revenue, the same is hereby rejected."

We notice that under Section 11 of the Act, a charitable trust unable to utilize its income derived from property held under trust wholly for charitable or religious purposes to the extent of 85% would have an option either in terms of clause (2) of Explanation to sub-section (1) thereof, or as provided under sub-section (2). When such an option is covered under sub-section (2) i.e., the income is sought to be accumulated or set apart for the period prescribed, that the requirement of making a declaration in the prescribed manner arises. In case of an option under clause (2) of Explanation to sub-section (1), there is no such requirement of making declaration but the requirement is exercising of such option in writing before the expiry of the time allowed under sub-section (1) of Section 139 for furnishing the return of income.

In the present case, the assessee did exercise such option as is apparent from the letter dated 22nd September 2009 at page-9 of the paper-book supplied by the counsel for the assessee. In such letter, the assessee conveyed to the Department that the assessee gave a notice of option exercised by the Trust to allow to spend surplus amount of Rs. 59,17,600/- that may remain at the end of the previous year ended on 31st March 2009, during the immediately following the previous year i.e., 2009-10. In the caption, the assessee referred to as the subject-Notice of option exercised as required under clause (2) of Explanation to Section 11(1). 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 sub-section (2) of Section 11. The caption of the said communication dated 22nd September 2009 as well as the contents of the letter make this clear. If that be so, the assessee cannot be precluded from pursuing such option on the ground as was done by the Assessing Officer that no declaration in the prescribed form was made. As we have noticed that such declaration was required only if the assessee''s option was to be covered by the provision of Section 11(2) of the Act.

It is true that in such option exercised on 22nd September 2009, the assessee indicated a smaller figure of Rs. 57,17,600/- and it was only later that the same was corrected to Rs. 1,05,67,047/-. However, 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 carry over of the un-spend income to the next year was clear. We notice that in case of Trustees of Tulsidas Gopalji Charitable and Chaleshwar Temple Trust Vs. Commissioner of Income Tax, , the Bombay High Court and in case of Commissioner of Income Tax Vs. Ziarat Mir Syed Ali Hamdani, , the Jammu & Kashmir High Court have held that 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. Even otherwise, without going to the extent of holding such time limit as directory and not mandatory, in the facts of the present case, in our opinion, the Tribunal 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. In the result, Tax Appeals are dismissed.