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Issues in Income Tax Return Filing by Trust: Confusions & Clarifications
Before we discuss, one must read the observation of the High Court of Karnataka in the case of M/S. Kammavari Credit Co-Operative Society Ltd. Rep. By Its President, T. Bhadrachalam vs. ACIT & ORS. (2019) 416 ITR 0180 (Karn HC) which made following remark:
It is well settled that when substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay. It must be grasped that the judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so.
There are various issues with regard to trust taxations and its return filing process and error. The most common question asked is which is the ITR form that needs to be filed in case of trust? Will it make any difference whether the trust is registered or unregistered? Whether the return could be rectified by filing revised return in different ITR form if there is an error by filing wrong ITR forms? Which are the mistakes which can be considered as mistakes apparent from record for the purpose of rectification u/s 154? What if the return is filed using the wrong ITR? One silent question also arises as to whether the form can override the Act if there are divergent and differential calculations done while filing the ITR.
There are various trust & institutions which are facing similar issues and queries. The first and foremost question is with regard to applicability of ITR forms for trust. It may be noted that the trust are required to file the return in ITR-7. Rather, following categories of persons are required to file the return in ITR – 7
- Return under section 139(4A) is required to be filed by every person in receipt of income derived from property held under trust or other legal obligation wholly for charitable or religious purposes or in part only for such purposes.
- Return under section 139(4B) is required to be filed by a political party if the total income without giving effect to the provisions of section 139A exceeds the maximum amount which is not chargeable to income-tax.
- Return under section 139(4C) is required to be filed by every
- scientific research association ;
- news agency ;
- association or institution referred to in section 10(23A);
- institution referred to in section 10(23B);
- fund or institution or university or other educational institution or any hospital or other medical institution.
- Return under section 139(4D) is required to be filed by every university, college or other institution, which is not required to furnish return of income or loss under any other provision of this section.
- Return under section 139(4E) must be filed by every business trust which is not required to furnish return of income or loss under any other provisions of this section.
- Return under section 139(4F) must be filed by any investment fund referred to in section 115UB. It is not required to furnish return of income or loss under any other provisions of this section.
It may be noted section 139(4A) covers the return filing by all trust whether registered or not. It means if any person has income from a property held under a trust, then the return filing is mandatory in ITR 7 and not ITR 5.
There are occasions when the trust may have filed the ITR in the wrong form. As a regular practice, CPC invariably processes the return and the demand is raised in such cases. There is No specific remedy provided in the Act in such cases. It may be noted that CPC allows rectification u/s 154 but doesn’t allow to change it from one form to the other right form. Effectively, there is no remedy which is provided as such to take care of this situation. The question arises whether return could be treated as defective in such cases? The provisions with regard to the defective returns are contained in Section 139 (9) which reads as under:
(9) Where the Assessing Officer considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of fifteen days from the date of such intimation or within such further period which, on an application made in this behalf, the Assessing Officer may, in his discretion, allow; and if the defect is not rectified within the said period of fifteen days or, as the case may be, the further period so allowed, then, notwithstanding anything contained in any other provision of this Act, the return shall be treated as an invalid return and the provisions of this Act shall apply as if the assessee had failed to furnish the return :
Provided that where the assessee rectifies the defect after the expiry of the said period of fifteen days or the further period allowed, but before the assessment is made, the Assessing Officer may condone the delay and treat the return as a valid return.
Explanation — For the purposes of this sub-section, a return of income shall be regarded as defective unless all the following conditions are fulfilled, namely: —
(a) the annexures, statements and columns in the return of income relating to computation of income chargeable under each head of income, computation of gross total income and total income have been duly filled in;
(b) the return is accompanied by a statement showing the computation of the tax payable on the basis of the return;
(bb) the return is accompanied by the report of the audit referred to in section 44AB, or, where the report has been furnished prior to the furnishing of the return, by a copy of such report together with proof of furnishing the report;
(c) the return is accompanied by proof of—
(i) the tax, if any, claimed to have been deducted or collected at source and the advance tax and tax on self-assessment, if any, claimed to have been paid:
Provided that where the return is not accompanied by proof of the tax, if any, claimed to have been deducted or collected at source, the return of income shall not be regarded as defective if—
(a) a certificate for tax deducted or collected was not furnished under section 203 or section 206C to the person furnishing his return of income;
(b) such certificate is produced within a period of two years specified under sub-section (14) of section 155;
(ii) the amount of compulsory deposit, if any, claimed to have been made under the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974 (38 of 1974);
(d) where regular books of account are maintained by the assessee, the return is accompanied by copies of—
(i) manufacturing account, trading account, profit and loss account or, as the case may be, income and expenditure account or any other similar account and balance sheet;
(ii) in the case of a proprietary business or profession, the personal account of the proprietor; in the case of a firm, association of persons or body of individuals, personal accounts of the partners or members; and in the case of a partner or member of a firm, association of persons or body of individuals, also his personal account in the firm, association of persons or body of individuals;
(e) where the accounts of the assessee have been audited, the return is accompanied by copies of the audited profit and loss account and balance sheet and the auditor’s report and, where an audit of cost accounts of the assessee has been conducted, under section 233B of the Companies Act, 1956 (1 of 1956), also the report under that section;
(f) where regular books of account are not maintained by the assessee, the return is accompanied by a statement indicating the amounts of turnover or, as the case may be, gross receipts, gross profit, expenses and net profit of the business or profession and the basis on which such amounts have been computed, and also disclosing the amounts of total sundry debtors, sundry creditors, stock-in-trade and cash balance as at the end of the previous year.
Section 139(9) offers power as well as duty on the AO to give an opportunity to rectify the defects within a prescribed period. Section 139(9) provides that the defects can be cured and that if the defects are cured the return will be treated as valid. If defects remain unrectified, the return shall be regarded as invalid.
The Para 27 of the CBDT Circular No. 281 Dt. 22-09-1980 briefs the logic behind section 139 and 143 as inserted or amended by the Finance Act, 1980. It may further be noted that new section 139C inserted by Finance Act 2007 w. e. f. 1-6-2006 provides as under-
Power of Board to dispense with furnishing documents, etc., with return.
139C. (1) The Board may make rules providing for a class or classes of persons who may not be required to furnish documents, statements, receipts, certificates, reports of audit or any other documents, which are otherwise under any other provisions of this Act, except section 139D, required to be furnished, along with the return but on demand to be produced before the Assessing Officer.
(2) Any rule made under the proviso to sub-section (9) of section 139 as it stood immediately before its omission by the Finance Act, 2007 shall be deemed to have been made under the provisions of this section.
It is further backed by substitution of Rule 12 (2) by IT (Third Amendment) Rules 2011, w. e. f. 1-4-2011 which reads as under:
(2) The return of income required to be furnished in Form SAHAJ (ITR-1) or Form No. ITR-2 or Form No. ITR-3 or Form SUGAM (ITR-4) or Form No. ITR-5 or Form No. ITR-6 or Form No. ITR-7 shall not be accompanied by a statement showing the computation of the tax payable on the basis of the return, or proof of the tax, if any, claimed to have been deducted or collected at source or the advance tax or tax on self-assessment, if any, claimed to have been paid or any document or copy of any account or form or report of audit required to be attached with the return of income under any of the provisions of the Act:
In short, the requirements of attaching the documents with the ITR form were done away with above two amendments.
Filing the return in wrong ITR form is not a defect that is specified in section 139(9).
Calcutta High Court in the case of CIT vs. Rai Bahadur Bissesswarlal Motilal Malwasie Trust, (1992) 195 ITR 0825 (Cal.) dt. 12-4-1991- AY 1984-85 has made few interesting observations from where one can draw the conclusions that filing the return in Wrong ITR form is curable defect and the AO has the necessary power to do it, although not clearly mentioned in the section. Explanation to s. 139(9), as it stood at that time, inter alia, did not contain cl. (bb) providing for return to be accompanied by an audit report. The assessee was a trust and filed its return for AY 1984-85 not accompanied by the audit report in Form 10B prescribed by Sec. 12A. The audit report dt. 12th Nov. 1984 was filed on 6th March 1987 before the assessment was completed. AO refused to allow exemption u/s 11, with the reason that the audit report was not filed “along with the return”.
Assessee challenged before CIT(A) contending that the return was defective and that the AO should have allowed an opportunity to rectify the same. However, CIT(A) did not accept and confirmed AO’s order on the ground of violation of Sec.12A(b).
On appeal with ITAT, it observed as under:
“the lower authorities took a highly technical view of the matter. The assessee, by filing the audit report on 6th March, 1987, purporting to act under s. 139(5) of the Act, removed the omission or defect which existed in the return furnished on 17th Sept., 1984. No mala fides were alleged and no case was made out to show that the delay in getting the accounts audited and in filing the report in Form No. 10B defeated the object of the Act. Thus, in the circumstances of the case, the Tribunal concluded that the authorities below were not correct in denying exemption under s. 11 of the Act to the assessee.”
Revenue preferred an appeal before the Calcutta High Court with following main ground:
“Whether, on the facts and in the circumstances of the case and having regard to the provisions of ss. 12A, 139(5), 139(9), 292B and the scheme of the IT Act as a whole, the Tribunal was right in law in holding that the lower authorities were not correct in denying exemption under s. 11 to the assessee for the asst. yr. 1984-85?”
Calcutta Hon. High Court at different para observed as under:
- …………..the assessee made an application dt. 18th June, 1984, seeking extension of time up to 30th Sept., 1984, as audit of relevant papers and statements was not completed and was likely to take more time. The said application was not rejected and it can safely be presumed that extension sought up to 30th Sept., 1984, was granted. The return submitted on 27th Sept., 1984, has to be treated as a return under s. 139(1). On completion of audit, the assessee furnished the report in Form No. 10B on 6th March, 1987, purporting to act under s. 139(5) of the Act. By filing the said report, the assessee definitely removed an omission or defect existing in the return furnished on 27th Sept., 1984. No mala fides have been alleged. No case has been made out that the delay in getting the accounts audited and in filing of the report in Form No. 10B defeated any object of the Act or the assessee’s action was in substance not in conformity with the intent and purpose of the Act.
- As we have said, the only ground on which the exemption was denied to the assessee-trust under s. 11 of the Act is that the return was not accompanied by the audit report. Sec. 139(5) of the Act provides that, if any person, having furnished a return, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. The assessee in this case could have filed a revised return annexing a copy of the audit report. Had the assessee-trust done so, the exemption under s. 11 of the Act could not have been denied to it by the ITO.
- It was contended that the provisions of sub-s. (5) were not applicable as the assessee did not furnish the report in Form No. 10B on 6th March, 1987, with a revised return and non-filing of the above audit report was not a defect covered under the categories specified in the Explanation to s. 139(9). This approach again disregarded the intent and purpose of the provisions and the scheme of the enactment as a whole. In our opinion, the defects specified in s. 139(9) are only illustrative and not exhaustive. This fact will be apparent from the amendment made by the Finance Act, 1988, w. e. f. 1st April, 1989, whereby cl. (bb) was inserted which reads as follows:
“the return is accompanied by the report of the audit obtained under s. 44AB.”
- Of course, the Assessing Officer cannot ignore the specified defects and must get them rectified but to contend that only the defects specified can be rectified and no other defects would be putting unnecessary restrictions on the power of the Assessing Officer leading to inconvenient consequences and absurd results not intended by the legislature. We do not see any such fetters on the powers of the Assessing Officer under s. 143. The Assessing Officer has power to ask the assessee to remove all defects in the return other than the defects making the return invalid.
- The view of the lower authorities that the audit report submitted on 6th March, 1987, not being filed with the revised return did not satisfy the condition in s. 12A and that the provisions of sub-s. (5) and (9) of s. 139 were not applicable and couldnot be sustained. The object of both the sub-sections, in our view, is to get removed and rectified all defects and omissions in the return filed, whether discovered by the assessee or by the Assessing Officer. Both the provisions are enabling provisions inserted to facilitate reflection of correct income in the return and assessment thereof. These provisions can be simultaneously applied. Take for illustration the case of an assessee submitting a valid return but without proof of tax deducted at source which, for several reasons, was not available at the time of submission of the return. The said proof is later given to the Assessing Officer and is placed on record. It would be absurd to contend that credit for tax deducted would be given if the proof was asked for by the Assessing Officer in terms of s. 139(9) but not in a case where the assessee had placed the proof without filing a revised return under s. 139(9). This would defeat the intent and purpose of the enactment. If the object of sub-s. (5) of s. 139 is to rectify a wrong or omission in the return, then any act through which such rectification is carried can be treated as revising the return if, in substance and in effect, the purpose of the Act is achieved and is not defeated. Thus, documents placed on record with or without covering letters with the intention to remove any omission or wrong in the return or record cannot be ignored simply because the revised return was not furnished unless it is shown that the purpose of the Act is not satisfied.
- In our view, therefore, the Assessing Officer ought to have given the assessee an opportunity to submit the audit report as the return was defective inasmuch as the audit report was not filed along with the return. In this case, as we have already noticed, the said defect was rectified by the assessee by filing an audit report in the prescribed form before the completion of the assessment. The IT authorities took a hyper technical view of this matter. Where the assessee has complied with the provisions of the Act in the course of the assessment proceedings by curing the defect in the return by filing an audit report, the ITO cannot ignore such audit report or the return in completing the assessment.
Delhi High Court in the case of Shakti Bhog Foods Limited vs. DCIT (2016) 388 ITR 0280 (Delhi HC) 21-9-2016 AY 2013-14 categorically observed as under:
“11. This court is of opinion that the reliance on the Karnataka High Court ruling in K. Nagesh, [(376) ITR 473 (Kart)] is inapt. That court, with respect, appears to have overlooked the salient aspect underscored by the Supreme Court, i.e., the levy of tax is under Section 4 (1); the rates may vary. Likewise, filing of return, self-assessment tax, advance tax, etc. and provisions which flesh out the mechanisms under the Act for collection cannot be construed literally. Even Section 240 presupposes an order, leading to refund. Now, it is moot whether the nullification on ground of non-compliance due- not due to denial of liability – but other reasons, automatically leads to a situation contended by the assessee. Facially, the contention is insubstantial, because Section 139, even while obliging the officer to a course of action, i.e., declaring the return invalid, also says significantly that “and the provisions of this Act shall apply as if the assessee had failed to furnish the return.” Furthermore, as clarified by the Supreme Court, Section 240 itself is premised upon some authority of the revenue officials to decide whether the entire amount deposited, or part of it, or none at all, is to be refunded”.
Allahabad High Court in the case of Dhampur Sugar Mills Ltd. vs. CIT, (1973) 90 ITR 0236 (All HC), dt.9-3-1972-AY 1961-62 has also made almost similar observations. It has held that –
I am unable to hold that the return filed by the assessee in June, 1961, was a nullity or suffered from such invalidity as to make it equal to no return within the meaning of s. 297(2)(a) of the 1961 Act. The defect that the return was in Form A which was not meant for the company will not vitiate the return. No error in the particulars supplied has been pointed out. Similarly, the mention in the verification clause of a “firm” instead of “company” will not make the return invalid as the signatures in the verifying clause did mention the name of the assessee as Dhampur Sugar Mills Ltd. The circumstance that the return was not accompanied by the profit and loss account or the balance-sheet will no doubt render the return incomplete, but will not make it invalid so as to be treated as non-est, for purposes of s. 297(2)(a) of the 1961 Act.
Another option to rectify the defect could be by filing the revised return which is possible only if the defect is noticed within the same assessment year. On this issue, Kerala High Court in the case of CIT vs. Alappat Consumer Electronics India (P) Ltd. (2014) 88 CCH 0302 KerHC, dt. 02-01-2014 – AY 2004-05 has held as under:
…….instead of curing the defects, the assessee filed revised return under Section 139(5) of the Act. Apparently, there was no substantial change in the two returns filed by the assessee. The only defect noticed was to submit the auditor’s report along with the return. It was submitted that the revised return was filed within the time prescribed by the Assessing Officer for curing the defects. If a hyper technical approach is taken in the matter, the assessee could not have filed a revised return as there was no situation warranting a revised return. But in the revised return filed by the assessee under Section 139(5) of the Act, there is no substantial change in the return filed earlier other than produced along with it the necessary audit report. (Para-3)
Madras High Court in the case of Zeenath International Supplies vs. CIT (CENTRAL)-I, (2018) 103 CCH 0107 ChenHC, dt. 10-09-2018 – AY 1998-98 noted that the assessee filed revised return of income and reduced value of closing stock by Rs.5,83,275/- and also increased administrative cost by Rs.3,93,055/-. During assessment, AO found that change in figures was not supported by the tax audit report u/s 44AB. However, in support of revised return, assessee filed a certificate stating that stock of soft drinks worth Rs.5,83,275/- was destroyed by Port Authorities pursuant to order passed by Deputy Port Health Officer. AO opined that in tax audit report filed along with original returns, closing stock was given at Rs.1,10,12,384/-, and that figure should had been arrived at after considering time expired stock of Rs.5,83,275/- and that further claim of reduction was not admissible and accordingly, claim in that regard was rejected. With regard to claim for bad debt to tune of Rs.3.93 lakhs, AO held that debt was not written off in books as on 31.3.1998 and that assessee preferred that claim in revised returns, thus condition stipulated to write off the bad debts during the year was not fulfilled. On appeal, CIT(A), as well as Tribunal confirmed the decision of AO.
High Court has held as under:
S.S 139(5) permits an assessee to file a revised return and the said provision states that if any person, having furnished the returns under s.s. (1) or s.s. (4) of s. 139, discovers any omission or wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant AY or before the completion of the assessment, whichever is earlier. Admittedly, the assessee filed the revised return on 24.5.1999 well before the period stipulated u/s 139(5). This has not been disputed by the AO or the Appellate Authority or the Tribunal. However, after taking up the said revised return for scrutiny, the AO, while passing the order u/s 143(3), rejected the assessee’s claim, which was at the very threshold. (Paras 8&9)
If in the opinion of the AO, the return was defective, then the procedure contemplated under s.s. (9) of s. 139 ought to have been followed. This provision enables the AO to intimate the defect to the assessee and give an opportunity to rectify the defect within a period of 15 days from the date of such intimation or within such period, which, on an application made in this behalf, the AO, may, in his discretion, allow and if the defect is not rectified within the said period of fifteen days or as the case may be, the further period so allowed, then, notwithstanding anything contained in any other provision of this Act, the return shall be treated as an invalid return and the provisions of this Act shall apply as if the assessee had failed to furnish the return. The Proviso states that where the assessee rectifies the defect after the expiry of the said period of fifteen days or the further period allowed, but before the assessment is made, the AO may condone the delay and treat the return as a valid return. (Para 10)
S.S. (9) of s. 139 is a beneficial provision to the assessee, which provides them an opportunity to rectify the defects. Since the intention being that the assessment proceedings are an outcome of dialogue and discussion, the AO is entitled to clarify all issues by issuing notice to the assessee and calling upon them to produce documents and explain their books of accounts, etc. Unfortunately, in the instant case, such procedure was not adopted when the revised return was rejected at the very threshold, which ought not to have been done. (Para 11)
All above discussion can enable the taxpayers to draw the conclusions that section 139(9) is beneficial provisions and need to be given the benefit in the true spirit.
filing return in an incorrect form is a mistake u/s 154? If yes, is this a mistake apparent on record? Can this mistake be rectified u/s 154?
After 139(9) or revisions u/s 139(4), the question arises as to whether one can do its rectification u/s 154. Power of rectification under section 154 is to be exercised with reference to the records of the assessee available with the assessing officer, and not with particular reference to the assessment alone. ‘Record’ cannot be said to be the record of one particular assessment, but the entire record of the assessee relating to all the assessment years – Upasana Hospital & Nursing Home v. CIT (2002) 253 ITR 507 (Ker). It may be noted that the Supreme Court in the case of ACIT vs. Saurashtra Kutch Stock Exchange Ltd. (2008) 305 ITR 0227 (SC) dt. 15-9-2008 – AY 1996-97 on mistake apparent from record u/s 154 has held that-
“An error apparent on the face of the record means an error which strikes on mere looking and does not need a long drawn out process of reasoning on points where there may conceivably be two opinions. Such error should not require any extraneous matter to show its incorrectness. To put it differently, it should be so manifest and clear that no Court would permit it to remain on record”.
In Maharana Mills P. Ltd. v. ITO (1959) 36 ITR 350 (SC), the court observed that “The word ‘record’ does not mean only the order of assessment, but it comprises all proceedings on which the assessment order is based”.
Madras High Court in IT v. M.R.M. Plantations P. Ltd. (1999) 102 Taxmann 1 (Mad) has observed as under:
The ‘record’ for the purpose of section 154(1) (rectification) is the record available to the authorities at the time of initiation of proceedings for rectification and not merely the record of the original proceeding sought to be rectified– C3.4 If a return by a trust is not filed in correct form No.7, anybody can make out that the return is not filed in correct form.
In short, one can reasonably draw a conclusions that the mistake of filing return in wrong ITR form is just a technical error of procedure which can be corrected u/s 154. The issues arises as the CPC is not allowing the uploading the ITR u/s 154 in a correct ITR form. This may not be strictly in accordance with the legal issue settled by the court.
One can understand that Section 139 requires an assessee to file the return of income in the prescribed form and to verify the same in the prescribed manner setting forth the prescribed details in it. The rules give the prescribed form, manner and particulars to be filled in. Forms are prescribed in the Rules which cannot override the Act as rules are made by the prescribed authority under delegated authority whereas Act is what is enacted by the Legislature. The settled principle is that if there is conflict the Act & Rules, Act would prevail. Rules are subordinate legislation. Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect.
Madras High Court in the case of CIT vs. Chemplast Sanmar Ltd. & Ors. (2009) 314 ITR 0231 (Mad HC) 9-4-2009-AY 2002-03 has made following important observation:
It is a well accepted principle that the rule cannot affect, control, enlarge or detract or derogate from the full operative effect of the provision of section. If any rule purports to do so, it would be void and ultra vires and further the rule must be consistent or in conformity with the Act. If there is conflict between rule and the substantial provision of the Act, the rule must pave way to the provision of the Act. Further the delegating authority must exercise power strictly within the limit of the authority. Even though the rule making power is conferred on the said authority, and the rules made are in excess of such delegated power, the rules would be void even if the Act provides that they shall have effect as though enacted in the Act. The intention of the legislature is to give tax credit to tax and not to the tax and interest. Once the intention is clear, the Revenue cannot rely on Form No. 1 to say that the MAT credit under s. 115JAA should be given only after tax and interest. Further, it has already been held that the MAT credit under s. 115JAA should be given effect before charging the interest under ss. 234B and 234C. Rule 12(1)(a) and Form No. 1 cannot go beyond the provisions of the Act. Form No. 1 cannot lay down the order of priority of adjustment of TDS, advance tax, MAT credit under s. 115JAA which is contrary to the provisions of the Act. The order passed by the Tribunal is in accordance with law and there is no error or illegality in the order of the Tribunal so as to warrant interference.
One can reasonably opine that if a return of income is filed in the wrong ITR form, it can be rectified u/s 139(9), 154 OR 139(5) as the case maybe.