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Facts
The assessee, a trust, accumulated Rs. 4,60,000/- in Financial Year 2016-17. It utilized Rs. 2,32,073/- in Financial Year 2022-23, which was the additional one-year period, and claimed this deduction in its return for Assessment Year 2023-24. The CPC, during processing, disallowed this amount, stating that the Finance Act 2022 amendment, effective from 01.04.2023, removed the additional one-year period for utilization, thus treating the funds as unutilized beyond the permissible five-year period.
Held
The Tribunal held that the amendment to Section 11(3)(c) by Finance Act 2022 cannot be applied retrospectively, as doing so would create an impossible situation for the assessee to utilize funds accumulated in previous years within the originally provided time. Applying the doctrine of *lex non cogit ad impossibilia*, the Tribunal concluded that the assessee had utilized the funds within the period available under the unamended law, and therefore, the adjustment made by the CPC was incorrect.
Key Issues
Whether the amendment to Section 11(3)(c) of the Income Tax Act, 1961, introduced by Finance Act 2022, which removed the additional one-year period for utilization of accumulated funds, applies retrospectively to funds accumulated in prior years, affecting deductions claimed for utilization during that extended period.
Sections Cited
143(1), 11, 11(1B), 11(2), 11(2)(a), 11(3), 11(3)(c), 11(3)(i), 11(3)(iii), 10, 12AA, 12AB, 115BBI, 23C
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Income Tax Appellate Tribunal, AHMEDABAD “SMC” BENCH, AHMEDABAD
Before: SHRI T.R. SENTHIL KUMAR & SHRI NARENDRA PRASAD SINHA
O R D E R PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:
This appeal is filed by the assessee against the order of National Faceless Appeal Centre (NFAC) [hereinafter referred as ‘CIT(A)’] dated 29.03.2025 for the Assessment Year (A.Y.) 2023-24 in the proceeding under Section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
The brief facts of the case are that the assessee had filed its return of income for the A.Y. 2023-24 on 09.10.2023 declaring income of Rs.5,38,930/-. The assessee is a Trust eligible for deduction under Section 11 of the Act. The assessee had accumulated an amount of (Assessment Year: 2023-24) Shri Krishnanagar Vaishnvsamaj vs. ITO Page 2 of 8 Rs.4,60,000/- in the Financial Year 2016-17 which was required to be utilised within a period of five years as provided under Section 11(2) of the Act. In the return of income for the A.Y. 2023-24, the assessee had shown utilisation of Rs.2,32,073/- out of the funds accumulated during the Financial Year (F.Y.) 2016-17 and the balance unutilised amount of Rs.2,27,927/- was offered for tax. The CPC while processing the return for the A.Y. 2023-24 had communicated an error in respect of the utilised amount of Rs.2,32,073/-. As per the communication of the CPC, the income accumulated under Section 11(2) of the Act during the F.Y. 2016- 17 was required to be utilised on or before 31.03.2022 (within 5 years). Since the amount of Rs.2,32,073/- was utilised by the assessee beyond the period of five years, the same was held as not eligible for deduction. Accordingly, adjustment of Rs.2,32,073/- was made while processing the return under Section 143(1) of the Act.
3. Aggrieved with the adjustment made while processing the return, the assessee had filed an appeal before the First Appellate Authority which was decided by the Ld. CIT(A) vide the impugned order and the appeal of the assessee was dismissed.
Now, the assessee is in second appeal before us. The following grounds have been taken in this appeal: -
“1. The learned CIT(Appeals) has erred in fact and in law by refusing to delete the addition u/s.115BBI made by the AO reg. disallowance of the utilisation of Rs.2,32,073/- for the specified purpose in FY 2002-23 out of the income accumulated under Section 11(2) in FY 2016-17 2. 2.1 The ld. CIT-Appeals has overlooked the fact that the amendment in Section 11(3)(c) omitting the words “or in the year immediately following the expiry thereof” is substantive in nature which affects the legally conferred rights of the assessee and is not intended to be retrospectively effective, and our claim for utilization made in FY 2022-23 is justified and within the law.
(Assessment Year: 2023-24) Shri Krishnanagar Vaishnvsamaj vs. ITO Page 3 of 8 2.2. The ld. CIT-A has wrongly held that the amendment in section 11(3)(c) made by Finance Act 2022 w.e.f.1-4-2023 in curtailing one year from the period of utilization of accumulation of income u/s.11(2) does not create a new obligation but merely strengthens the time limit for an existing obligation with an intent to ensure strict compliance with the time limit.
The ld. CTT-A erred in holding that the original provision U/s.11(2) r.w.s 11(3) mandated utilization within five years and additional one year was provided as a mere grace period which was only a concession and not a right. 4 The ld. CIT-A has completely overlooked our submission that the amended provision u/s.11(3)(c) was not in existence upto the end of FY 2021-22 and so it was impossible for the assessee to utilize the amount accumulated in FY 2016-17 by 31 March 2022 so as to avoid the rigors of Sec.11(3) and Sec.115BBI. Thus, the legal maxim lex non cogit ad impossibillia is squarely applicable in the present case.
5. The id. CIT-A has erred in law and in facts in rejecting our ground that even if taxable, the unutilized accumulation can be taxed only in AY 2022-23 as per sec.11(3)(iii) and not AY 2023-24 and has erroneously applied Sec.11(3)(i) and 11(1B) which have no relevance to the facts of the case.
The ld. CIT-A has ignored our plea that denying the opportunity to utilize the accumulated income would defeat the charitable objectives and harm the functioning of the trust, which is contrary to the intent of the Act, particularly Section 11.
7. The appellant craves leave to add, amend, alter, and vary any or all of the above submissions.
8. For these and other grounds which may be urged at the time of hearing, the appeal may be allowed, and justice may be rendered by deleting the addition of Rs.2,32,973 from the taxable income.”
Shri Manas Rindani, Ld. AR of the assessee explained that the time limit provided under Section 11(3) of the Act for utilisation of the accumulated fund was five years and one more additional year. He explained that the time limit of additional one year was omitted vide Finance Act 2022 w.e.f. 01.04.2023. However, as the fund was accumulated by the assessee in this case in the F.Y. 2016-17, the original five year period for utilisation of fund was till the end of F.Y.2021-22.
(Assessment Year: 2023-24) Shri Krishnanagar Vaishnvsamaj vs. ITO Page 4 of 8 Further, the assessee also had additional one year i.e. F.Y. 2022-23 for the utilization of the accumulated fund. Accordingly, the assessee had utilised the accumulated fund of Rs.2,32,073/- in the additional year i.e. in F.Y. 2022-23 and had claimed the deduction in the return for A.Y. 2023- 24. According to the Ld. AR, the amendment made in Section 11(3)(c) of the Act by withdrawing the additional one-year period for utilising the accumulated fund was not intended for the funds accumulated in the earlier years. He explained that originally when the assessee had time period till 31.03.2023 for utilisation of accumulated funds, the said time period could not have been suddenly curtailed by one year without allowing any opportunity to the assessee to exhaust the unutilised funds. He submitted that such interpretation of the amendment would make it impossible for the assessee to utilise the accumulated funds.
6. Per contra, Smt. Mamta Singh, Ld. Sr. DR submitted that the amendment made to Section 11(3) of the Act was applicable from A.Y. 2023-24 and accordingly the adjustment made by CPC was correct. She strongly supported the order for the ld. CIT(A).
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.
(Assessment Year: 2023-24) Shri Krishnanagar Vaishnvsamaj vs. ITO Page 5 of 8 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 sub- section (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.
(Assessment Year: 2023-24) Shri Krishnanagar Vaishnvsamaj vs. ITO Page 6 of 8 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.
In the result, appeal of the assessee is allowed.
Order pronounced in the open Court on this 3rd July, 2025.