MESHRI MAHAJAN VANDA,BHAVNAGAR vs. THE ITO (EXEMP), BHAVNAGAR

3. The brief facts of the case are that the assessee filed return of income declaring total income of Rs. 2,51,699/-. While processing the return of income, the CPC made an adjustment of Rs. 1,58,301/- by treating this amount as deemed income under Section 11(3), chargeable under Section 115BBI of the Act. This was based on the reasoning that the said amount was accumulated in Financial Year (FY) 2016-17 under Section 11(2), and since it was not utilised by 31.03.2022, it was deemed to be income of FY 2022-23 (relevant to AY 2023-24). Upon receiving a notice of adjustment, the assessee submitted that the accumulated amount had in fact been utilised in FY 2022-23, which, as per the law prevailing at the time, was still a permissible period of utilisation. The assessee argued that the amendment made by the Finance Act, 2022, which removed the allowance for utilisation "in the year immediately following the expiry" of five years came into effect only from 01.04.2023 and therefore applied only to accumulations made from FY 2022-23 onwards. Consequently, the assessee submitted that this amendment could not apply retrospectively to accumulations made in FY 2016-17.

4. In the appeal before the CIT(A), the assessee reiterated that the law prior to the amendment made by the Finance Act, 2022 allowed utilisation in the year following the expiry of the five-year accumulation period, which would be FY 2022-23 for accumulations made in FY 2016-17. The assessee submitted that the retrospective application of the amendment Meshri Mahajan Vanda vs. ITO(E) Asst. Year –2023-24 - 3– would be both legally incorrect and practically impossible, as the amended law was not in force at the relevant time when such utilisation decisions had to be made. The assessee relied on legal principles such as lex non cogit ad impossibilia (the law does not compel the impossible) and placed reliance on Supreme Court rulings to argue that a substantive amendment, particularly one affecting vested rights, must apply prospectively unless stated otherwise. The assessee also contended that the AO erred in taxing the amount in AY 2023-24 rather than AY 2022-23, which would be the correct assessment year as per Section 11(3)(iii) of the Act. Despite these arguments, the CIT(A) upheld the adjustment made by the CPC. In the appellate order, Ld. CIT(A) held that under Section 11(2) read with Section 11(3), the amount accumulated in FY 2016-17 was required to be utilised by 31.03.2022. Since the assessee admitted that the utilisation took place in FY 2022-23 (i.e., after the due date), the amount rightly became taxable in FY 2022-23 (relevant to AY 2023-24). The CIT(A) referred to the language of the amended provision and the CBDT notification, which stated that the amendment was effective from 01.04.2023 and would apply to AY 2023-24 onwards. Accordingly, the appeal of the assessee was dismissed.

“7. We have considered the rival submissions. In the present case, the assessee had accumulated fund of Rs.4,60,000/- in the F.Y. 2016-17. As per provisions of Section 11(2) of the Act, a trust is required to apply 85% of income during any previous year to charitable or religious purposes. However, if it is not able to apply 85% of its income during the previous year, it is allowed to accumulate such income for the period of five years. In fact, the time limit of accumulation was earlier ten years which was restricted to five years w.e.f. 01.04.2016. The provision of Section 11(3) of the Act stipulates that if the income so accumulated is not utilised within the prescribed period, it shall be subjected to tax at the end of such period. In this regard, it is relevant to reproduce the Section 11(3) of the Act at relevant point of time which is as under:- (3) Any income referred to in sub-section (2) which— (a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or (b) ceases to remain invested or deposited in any of the forms or modes specified in subsection (5), or (c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section 72[or in the year immediately following the expiry thereof]*, (d) is credited or paid to any trust or institution registered under section 12AA 73[or section 12AB] or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, 74[shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited or credited or paid or, as the case may be, of the previous year immediately following the expiry of the period aforesaid]. 72 Words "or in the year immediately following the expiry thereof" shall be omtt. by the Act No. 6 of 2022, w.e.f. 1-4-2023. 7.1 As per the sub-clause (c) of Section 11(3), the accumulated amount shall be deemed to be the income of the assessee if it was not utilised within the period of five years as mentioned in Section 11(2)(a) of the Act, or “in the year immediately following the expiry thereof”. Thus, the assessee had time limit of five years and one additional year to utilise the accumulated funds. Since the funds were accumulated in this case in the F.Y. 2016-17, the extended time period for utilisation of fund was till the end of the F.Y. 2022-23. In the present case, the assessee had utilised funds to the extent of Rs.2,32,073/- in the additional one-year period and accordingly claimed the deduction in the return for A.Y. 2023-24. 7.2 The CPC has disallowed the claim while processing the return for the reason that the additional one-year period for utilisation of funds was omitted vide Finance Act 2022 w.e.f. 01.04.2023. The contention of the assessee is that the amended provision would create an impossible and absurd situation as the assessee would be left with no time to utilise the funds accumulated in F.Y.2016-17. The original five years’ time period in this case had expired on 31.02.2022. As per the unamended provisions, the assessee had additional one year to utilise the funds. The removal of additional one-year period would create an impossible or absurd situation as the assessee will be left with no time to utilise the accumulated funds. The doctrine of impossibility (lex non cogit ad inpossibilia) would be applicable in the situation when assessee would be left with no time to utilise the accumulated funds. The amendment cannot be interpreted in such a way that it makes impossible for the assessee to utilise the accumulated funds within the time period as originally provided under the provisions of the Act. It is a settled position that legal rules should not be applied rigidly or literally, when doing so would lead to an unfair or impossible outcome. Rather, the legal obligations should be interpreted with a degree of practicality and reasonableness, taking into account the specific circumstances of the case. The law does not require anyone to perform an act that is genuinely impossible to achieve. While interpreting the amendment, the legal obligations have to be interpreted with a degree of practicality and reasonableness, taking into account the specific circumstances of the case. Considering this aspect, the Ld. CIT(A) was not correct in rejecting the appeal of the assessee. Since the assessee had utilised the funds within the time period as originally provided under the Act, the adjustment made while processing the return is deleted.

Meshri Mahajan Vanda vs. ITO(E) Asst. Year –2023-24 - 6– 8. In the case of Dadar Digamber Jain Mumukshu Mandal vs. Commissioner of Income-tax (Exemption) [2025] 176 taxmann.com 661 (Mumbai - Trib.) [15-07-2025], the assessee trust filed its return of income for assessment year 2023-24, claiming exemption under section 11 of the Act. During relevant year, assessee utilized accumulated income of Rs. 35.66 lakhs and Rs. 40 lakhs pertaining to financial years 2016-17 and 2017-18 respectively. The Assessing Officer noted that as per amended provisions of section 11(3)(c) of the Act, accumulation period was limited to five years and, thus, he brought said amount to tax as income of assessee. The ITAT held that amendment to section 11(3)(c) by Finance Act, 2022 with effect from 1-4-2023 which omitted extra period of one year following expiry of initial period of accumulation of five years is prospective in nature and, thus, same would be applicable only to fresh accumulations from assessment year 2023-24 onwards. Therefore, as far as accumulation relating to financial years 2016-17 and 2017-18 were concerned, assessee had time window till 31-3-2023 and 31-3-2024 respectively by which it had to utilize accumulated income and in that view of matter, amendment brought in by Finance Act, 2022 with effect from 1- 4-2023, does not debar assessee from availing said time window in respect of existing accumulations and amendment has to be read prospectively in respect of fresh accumulations for period pertaining to previous year starting from 1-4-2022 onwards. Therefore, where assessee had accumulated income during financial years 2016-17 and 2017-18 and utilized same within period of six years, same could not be brought to tax

“21. In light of the above discussion, we are of the considered opinion that since the assessee in the instant case has utilized the accumulated surplus funds in the year immediately following the prescribed period of 5 years i.e. before 31.03.2023 and the amendment to the provisions of section 11(3) are held to be prospective in nature, therefore, the Ld. Addl / JCIT(A) in our opinion is not justified in upholding the intimation of the CPC making adjustment of Rs.90,70,20,511/- u/s 11(3) as deemed income of the assessee which was accumulated in the financial year 2016-17 and when the provisions at the relevant time prescribed the utilization of the amount within a period of 5 years or in the year immediately following the prescribed period of 5 years. Even otherwise also we find merit in the argument of the Ld. Counsel for the assessee that the 5 year period ends on 31.03.2022 and therefore the unutilized amount could have been brought to tax in assessment year 2022-23 and not in assessment year 2023- 24. In the light of the above discussion, we set aside the order of the Ld. Addl / JCIT(A) on this issue and direct the Assessing Officer/CPC to delete the adjustment. The grounds raised by the assessee are accordingly allowed.

22. In the result, the appeal filed by the assessee is allowed.”

10. In light of the aforesaid discussion and decisions reproduced above, we are of the considered view that there is merit in the contentions advanced by the assessee that as far as the accumulation relating to the period of F.Y. 2016-17 is concerned, the assessee had the time window till 31-03-2023 by which it could utilize accumulated income and in view of the matter, the amendment brought in by the Finance Act, 2022 does not debar the assessee from availing the said time window in respect of existing accumulations and the amendment would have to be read prospectively in respect of fresh accumulations for the period pertaining to previous year starting from 1st April, 2022 onwards. Further, as far as the impugned assessment year is concerned, no addition can be made for accumulation of income pertaining to financial year 2017-18 as the assessee continues to be guided by the provisions as existed at the relevant point in time and the time window of six years as provided. The amendment made by the Finance Act, 2022 cannot curtail the said time window and has to be applied prospectively in respect of fresh accumulations.