In a recent judgment, Delhi High Court has held that mere failure to file Audit Report along with application under section 10(23C) of the Income tax Act, 1961 would not result in rejection if the assessee furnishes the said report subsequently before the rejection. The Court also concurred that for purposes of granting approval under Section 10(23C)(vi) of the Act, the prescribed authority would not be concerned with the compliance of the provisos to Section 10(23C)(vi).

Case Details:
ITA-705/2008; ITA-924/2009 WP(C) 3797/2011
All India Personality Enhancement and Cultural Centre for Scholars AIPECCS Society vs Director/Director General of Income Tax (Exemption)
Date of Judgment: 07-10-2015
Coram: Justice Vibhu Bakhru and Justice S. Muralidhar

Facts of the Case(s):
In the instant case the assessee was a registered society managing and running the following schools for imparting education to children. The Director General of Income Tax-Exemptions DGIT(E) rejected the petitioner society’s application principally for the reasons that the Assessee had not filed an audit report in Form No.10BB along with its application; the Assessee had allegedly made investments which were in violation of Section 11(5) of the Act and in schemes, which were speculative in nature; and that the Assessee had advanced funds to its office bearers

The assessee contended that prescribed form for making an application for approval under Section 10(23C)(vi) (Form-56D) only required that the same be accompanied by audited accounts and it was not mandatory to enclose the audit report with the application; nonetheless, the Assessee had furnished the audit report when called upon to do so and, therefore, its application for approval under Section 10(23C)(vi) of the Act could not be rejected only on the ground that it was not accompanied with an audit report.

Important Excerpts from the Judgment:
We find considerable merit in the Assessee’s contention that for purposes of granting approval under Section 10(23C)(vi) of the Act, the prescribed authority, i.e. DGIT(E), would not be concerned with the compliance of the provisos to Section 10(23C)(vi) of the Act, which prescribe the manner and form in which the funds of the Assessee can be invested as well as the manner and extent to which application of income is necessary for availing the benefit of section 10(23C)(vi) of the Act. DGIT(E)’s primary function would be to satisfy himself that the threshold conditions for grant of exemption under section 10(23C) exist; that is, the educational institution exists solely for the purposes of education and not for profit. In this regard, the DGIT(E) has to examine the Charter of the Society/Trust including its objects as also the bye-laws, rules and regulations for conduct of affairs of the Society/Trust. The DGIT(E) also has to satisfy himself that an educational institution does, in fact, exist. The provisos to Section 10(23C) contain further requirements that need to be complied with - such as applying minimum of 75% of income in the relevant year and investing accumulated funds only in permissible securities - for availing the benefit under section 10(23C)(vi). However, the same can be examined by the AO only at the end of the relevant period and cannot be the subject matter of enquiry at the threshold while considering an Assessee’s application for the requisite approval.

Insofar as the sale and purchase of immovable properties is concerned, the Assessee had explained that the immovable properties were purchased for utilizing the same for educational purposes. A DDA Flat at Sheikh Sarai, New Delhi was purchased for commencing an admission centre, but was subsequently sold as it did not serve the purpose. Similarly, the property at Kalu Sarai, Sarvpriya Vihar was purchased as the Assessee intended to start an admission and information centre for convenience of the parents of students as the schools managed by the Assessee were situated at a considerable distance from the city. However, subsequently, the said venue was not found suitable and the property was sold. It was further explained that farm land at Malbaro, Gurgaon and at Nainwal were purchased for starting schools. The Assessee also pointed out that an application for grant of an NOC for starting an educational institute at Malbaro, Gurgaon was filed and a school building was also constructed. The property at Lado Sarai, Mehrauli was stated to be purchased for an admission centre once it was decided that the admission centre at the DDA Flat at Sheikh Sarai was not convenient. In view of the aforesaid explanations, it cannot be concluded that the aforesaid transactions were not for furthering the objects of the Assessee.

We find it difficult to accept that granting advances to persons involved in managing the schools and/or the affairs of the Assessee would disentitle the Assessee from the benefit of Section 10(22)/10(23C)(vi) of the Act.

Rule 2CA (2) of the Income Tax Rules, 1962 specifically mandates that an application for approval under Section 10(23C)(vi) of the Act would be made in Form-56D. The said form clearly requires the Assessee to “enclose copies of audited accounts and balance sheet for last three years along with a note on the examination of accounts and on the activities as reflected in the accounts and in the annual reports with special reference to the appropriation of income towards objects of the university or other educational institution or hospital or other medical institution …..”. In our view, the Assessee’s contention that an audit report is not required to accompany the audited accounts is meritless. The auditor’s report contains the auditor’s view on the accounts audited by the auditor and without such report, the accounts would only indicate the accounts as furnished by the Assessee to its auditor. Therefore, the expression “audited accounts” would necessarily have to include the auditor’s report. Reading the expression “audited accounts” as suggested by the Assessee would defeat the purpose for requiring submission of the audited accounts. Thus, in our view, it was necessary for the Assessee to furnish a copy of the audit report along with its application in Form-56D. However, we are unable to accept that non furnishing of audit report along with application is an incurable defect. It would be erroneous to ignore the report if the same was supplied, albeit belatedly, and was available with the prescribed authority at the time of considering the grant of approval as sought for by the Assessee.

There are several provisions under the Act, including under Chapter VI-A of the Act, that require the Assessee to file audit reports/certificates for claiming benefit under those provisions. In that context, the Courts have held that the exemption/allowance claimed by the Assessee could not be denied if the audit report/certificates is not filed along with returns but is provided subsequently. At this stage reference may be made to the decision of the Full Bench of Punjab & Haryana High Court in Commissioner Income Tax v. Punjab Financial Corporation: (2002) 254 ITR 6 (P&H). In that case the Court considered the question “Whether section 32AB(5) of the Income-tax Act, 1961, is mandatory or directory and delayed filing of audit report would disentitle an assessee from claiming the benefit of deduction under section 32AB(1) ?” and held as under:

“In view of the above discussion, we hold that section 32AB(5) is not mandatory and the Assessing Officer has the discretion to entertain the audit report even though the same has not been filed with the return and give benefit of the deduction to the assessee in terms of section 32AB(1).”

Mention may also be made of Circular No. 689 of 1994 issued by the Central Board of Direct Taxes in the context of section 143(1)(a) of the Act. The said circular, inter alia, provides that an adjustment under section 143(1)(a) could be made if there was an omission to furnish any information, which was required under a specific provision of the Act to be furnished along with the return, to substantiate any claim. The illustration provided in the circular is relevant and reads as under:

“If the audit report specified under section 80HHC(4), which is required to be filed along with the return of income, is not so filed, the deduction claimed under that section can be disallowed as a prima facie adjustment. Some more examples in this regard are the non-filing of audit reports or other evidence along with the return of income as required under section 12A(b), 33AB(2), 35E(6), 43B (first proviso), 54(2), 54B(2), 54D(2), 54F(4), 54G(2), 80HH(5), 80HHA(4), 80HHB(3), 80HHD(6), 80HHE(4), 80-I(7), 80-IA(8) and the like. But if evidence is subsequently furnished, rectification under section 154 should be carried out to the extent permitted by Board's Circular No. 669, dated 25-10-1993. No prima facie disallowance shall however be made if any evidence, required to be filed along with the return of income only in pursuance of the non-statutory guidance notes for filling in the return of income, is not so filed.”

It is apparent from the above that furnishing of report/certificate is necessary, if required under any provision of the Act; however, omission to furnish the same would not disentitle the Assessee to the benefit of the statutory provision, if the Assessee subsequently furnishes the report/certificate.

Taking a cue from the above, it is apparent that furnishing of audit report may be necessary for seeking approval under section 10(23C) of the Act; however, failure to file the same along with application would not be fatal to the application. And, in the event an Assessee furnishes the report/certificate, the approval as sought by the Assessee cannot be denied. Thus, in our view, DGIT(E) was not justified in denying the Assessee approval under Section 10(23C)(vi) on the ground that the audit report had not been furnished along with the application but had been furnished by the Assessee subsequently, prior to the rejection of the application.

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