Exemption u/s 10(25)(ii) Denied for Filing Return in Wrong Form: ITAT says it’s Procedural Lapse, Restores Matter to AO [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal ( ITAT ) restored matter to the Assessing Officer (AO) after holding that denial of exemption under Section 10(25)(ii) merely due to filing the return in the wrong Income Tax Returns ( ITR ) form was a procedural lapse.

Tata International Limited Provident Fund,appellant-assessee, whose income was exempt under Section 10(25)(ii) of the Act, had filed its return of income in Form ITR-7 instead of the correct Form ITR-5. As a result, the CPC, while processing the return under Section 143(1), denied the claimed exemption.

The assessee argued before the Commissioner of Income Tax (Appeals)[CIT(A)] that the taxability could not be determined based on the form of return and that filing in the wrong form was a bona fide mistake. However, the CIT(A) observed that the return form was crucial for correct disclosure of income and for proper assessment. He also noted that the assessee had filed returns in Form ITR-7 not only for AY 2022–23 but also in earlier years, which weakened the claim of a bona fide error.

The CIT(A) further held that reliance on relief granted in AY 2017-18 was misplaced since the issue of filing the return in the wrong form was not examined in that year. Concluding so, he upheld the CPC’s order and dismissed the appeal.

The departmental counsel supported the orders of the lower authorities, while the assessee counsel argued that the CIT(A) was not fair in treating the filing of the wrong form as a serious lapse instead of a genuine procedural mistake. It was stated that the error was unintentional and that the trust, registered since 1980, had always followed the law.

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The two member bench comprising Anikesh Banerjee (Judicial Member) and Prabhash Shanakar (Accountant Member) carefully examined the relevant facts and observed that filing the incorrect form could not be treated as an intentional or deliberate act, given the assessee’s consistent record of compliance. It held that the lapse was, at most, a procedural and inadvertent mistake. The tribunal noted that the authorities were not justified in denying the genuine claim of exemption merely due to this error.

Referring to the Supreme Court’s decision in Dilip Kumar (2018) 9 SCC, the appellate tribunal stated the doctrine of substantial compliance, which recognises that procedural lapses should not defeat a substantive and rightful claim when the essential requirements have been met.

The bench held that denying a legitimate exemption would cause undue hardship and run contrary to the legislative intent. It further observed that procedural requirements should not override substantive benefits, especially when the assessee’s eligibility under Section 10(25)(ii) was not in dispute.

Accordingly, in the interest of justice, the tribunal remitted the matter to the AO with directions to redo the assessment after obtaining a corrected return of income from the assessee and to pass a fresh order in accordance with law. The assessee was also directed to cooperate in the proceedings. Consequently, the appeal was allowed for statistical purposes.

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