The Finance Act, 2017 has inserted a new provision sec. 12A(1)(ba) w.e.f. 01/04/2018 (applicable from A.Y. 2018-19 and onwards as follows:
“Conditions for applicability of sections 11 and 12.
12A. (1) The provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely:-
(ba) the person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section.”
While processing of the ITR-7 for the A.Y. 2018-19 u/s 143(1) by the CPC, in respect of the returns filed belated u/s 139(4) of the Income Tax Act, 1961, the following proposed adjustment is being communicated u/s 143(1)(a) of the Income Tax Act, 1961 –
‘As per section 12A(1)(ba) income tax act 1961 the person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section. otherwise The exemption u/s-11 i.e. sr. no. 4(i) and 4 viii in schedule Part BTI is not allowed.‘
The CPC is proposing to disallow the entire application of Income made by the Trust and add the same to the Income of the Trust. Copy of the adjustment description is produced below for ready reference:
But this action by the CPC is completely unjustified and against the provisions of the Act, for the reasons mentioned below:
Sec. 12A(1)(ba) states as under-
‘the person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section.’
It is pertinent to note that the words used in sec. 12A(1)(ba) are ‘under that section’ referring to sec. 139 of the Income Tax Act, 1961. The words used are not ‘under that sub-section’ referring to sub-section (4A). In any case, sub-section (4A) to sec. 139 does not prescribe any due-date / time-limit for filing of ITR.
The above interpretation of the wordings used in sec. 12A(1)(ba) can be further concluded from the Intention of the Legislature while amending sec. 12A(1)(ba) duly explained and communicated in the Budget Memorandum of Finance Bill, 2017, which clearly states that the provisions of sec. 11 and 12 shall be allowed to trusts filing ITR within time allowed u/s 139. Quoting excerpts from the Budget Memorandum of Finance Bill, 2017 (page 31) –
‘Further, as per the existing provisions of said section, the entities registered under section 12AA are required to file return of income under sub-section (4A) of section 139, if the total income without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount which is not chargeable to income-tax. However, there is no clarity as to whether the said return of income is to be filed within time allowed u/s 139 of the Act or otherwise.
In order to provide clarity in this regard, it is proposed to further amend section 12A so as to provide for further condition that the person in receipt of the income chargeable to income-tax shall furnish the return of income within the time allowed under section 139 of the Act.
These amendments are clarificatory in nature‘
Neither in sec. 12A(1)(ba) nor in the Budget Memorandum to Finance Bill, 2017, the words sec. 139(1) or within due date u/s 139(1) has been mentioned. Therefore, the provisions of sec. 11 and 12 ought to be allowed to the Returns filed u/s 139, i.e., u/s 139(1) as well as 139(4) of the Income Tax Act, 1961.
Further, the memorandum itself states that the amendments are clarificatory in nature which clearly means that there should be no change in the position of law. For all the previous years too, the exemption u/s 11 [except for exemption u/s 11(2) w.e.f. A.Y. 2016-17 in view of addition of proviso to sec. 11(2)] was allowed for returns in Form ITR-7 filed belated. Hence, there should be no change in the position of law.
Kindly note that the above provisions are clear and not ambiguous. However, there is misinterpretation by the CPC of the above stated law. It is important to realise that most of the trusts are spending more than 85 percent of the income earned by them. If such application of income (expense by the Trust) is not allowed, it will create an anomalous & absurd situation where the expense actually made by the Trust is not allowed under the garb of misinterpretation of law and tax at the rate of 30% is levied on the total income of the Trust creating huge demands, where in fact all the income has been applied for objects of the Trust. The same is going to increase the litigation and costs attached thereto, to the assesse as well as the Department.
It is also emphasized here that the intimation u/s 143(1)(a) communicating the above have been issued in some cases on 30/03/2019 and in most cases after 31/03/2019. Hence, the option to revise the Return u/s 139(5) is not available to the assessee and the assessee is only dependent on the mercy of the Department. This certainly does not fit within the principles of natural justice. As you all must be aware, more than 95% of the Returns filed by the Trusts (within time as well as belated) in ITR-7 have not been processed till 31/03/2019 which takes away the important right of Revision of the Income Tax Return, in case any omission is detected after receipt of Intimation u/s 143(1) by the CPC.
It is hoped that the Income Tax Department takes active note of the situation and adopt proper interpretation of the law within the spirit of justice and suitable clarifications / instructions be issued to the CPC for processing of the ITRs accordingly.
About the Author:
The Author, CA Rohan Navin Dedhia, is a practicing member of the ICAI and can be reached on firstname.lastname@example.org or +91 – 98926 78133