Accumulated Income in Sixth Year Not Taxable: ITAT Allows Exemption, Rules Section 11(3) Amendment Prospective [Read Order]

The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) held that accumulated income of ₹2,00,000/- pertaining to FY 2016-17, utilized in FY 2022-23, could not be taxed.

The Tribunal held that 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 about the previous year starting from 1st April, 2022 onwards.

The assessee, Sarangpur Talia’s Pole Punch Trust, was denied exemption under section 11 of the Income Tax Act (Act) in respect of ₹2,00,000/- of accumulated income. In the order passed, the CPC disallowed this amount on the ground that it remained unutilized at the end of the fifth financial year from the year of accumulation (i.e., FY 2021-22, being the fifth year from FY 2016-17), and added the same to the total income of the trust, resulting in a demand of ₹78,660/-.

The CPC added this amount on the basis that since the assessee trust had not utilised the accumulated income within the statutorily prescribed period of five years, the exemption under section 11(2) of the Act could not be granted, even though the amount was in fact admittedly spent in the sixth year (i.e. FY 2022–23).

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The CIT(A) upheld the disallowance and dismissed the appeal. It was contended before the CIT(A) that the amendment to section 11(3), which imposed a strict requirement for the utilization of accumulated income within five years, only came into effect on 01.04.2022, just one day before the end of the fifth year (i.e., on 31.03.2022).

The assessee submitted that trusts couldn't comply with this new requirement on such a

short notice. The assessee further highlighted that this issue was not unique to them, but affected thousands of trusts across the country, prompting widespread representations and requests for relief from CBDT under section 119(2)(b).

However, the CIT(A), while acknowledging the above facts, held that the amendment was already part of the statute applicable to A.Y. 2022–23 and that Taxing Statutes must be interpreted strictly, regardless of any hardship or administrative difficulty. Relying on a series of judicial precedents, the CIT(A) held that there was no room for liberal or equitable interpretation in the application of a taxing statute. Since the amount of ₹2,00,000/- was admittedly utilised in the sixth year, the requirement of section 11(3) of the Act, as amended, was not fulfilled, and thus the exemption could not be allowed. The appeal was therefore dismissed, and the addition by the CPC was sustained.

The Tribunal observed that the present issue is directly covered in favour of the assessee by the Ahmedabad ITAT decision in the case of Meshri Mahajan Vanda vs. Income-tax Officer [2025] in which the ITAT held that where the assessee's trust accumulated income for financial years 2016-17, the assessee had a time window till 31-3-2023 by which it could utilise the accumulated income.

The amendment brought in by the Finance Act, 2022, did not debar the assessee from availing said time window in respect of existing accumulations, and the amendment had to be read prospectively in respect of fresh accumulations for the period pertaining to the previous year starting from 1-4-2022 onwards.

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The two-member bench comprising Dr BRR Kumar( Vice President) and Siddhartha Nautiyal ( Judicial Member) held that there is merit in the contentions advanced by the assessee regarding the accumulation relating to the period of F.Y. 2016-17. The assessee had the time window till 31-03-2023 by which it could utilise accumulated income, and in view of the matter.

It held that 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 about the previous year starting from 1st April, 2022 onwards.

Further, as far as the impugned assessment year is concerned, no addition can be made for the accumulation of income of the financial year 2016-17 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.

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