2025 (5) TMI 1645 - AT - Income Tax

Demand made u/s 143(1) - Commissioner (Appeals) jurisdiction to pass such an order u/s 143(1) - as submitted that the authorities ought to have considered the operation of the assessee and seen that there is no taxable income. Merely because the assessee club chosen to file ITR 7 the same should not be taken as a ground to treat the entire receipts as taxable. HELD THAT - On perusal of the income and expenditure statement it is clear that the assessee had not received any taxable income. The assessee was dealing with its members and on account of principle of mutuality any profits out of dealings with the members would not be liable to tax. The assessee had wrongly filed return in ITR 7. Inspite of return being wrongly filed in ITR 7 the Income Tax Authorities ought to have considered the operation of the assessee-club and ought to have brought to tax only the net income. CPC has erred in bringing to tax the entire gross receipts as taxable income. On identical facts for earlier assessment year viz. A.Y. 2013-2014 CIT(A) had directed the AO to consider the income as per the income and expenditure account. In the instant case the assessee had filed the rectification application through e-filing portal showing no income from operation as per income and expenditure statement. Accordingly AO is directed to consider the income and expenditure account of the assessee and bring to tax only the net income and not the gross receipts as it was done in the intimation issued u/s.143(1).

Summary

The core legal questions considered by the Tribunal in this appeal include:

(i) Whether the Assessing Officer had jurisdiction to pass the intimation under Section 143(1) of the Income-tax Act, 1961, particularly when the return was filed in ITR 7 and no prior notice was given.

(ii) Whether the entire gross receipts of the assessee, a club, should be treated as taxable income, or whether the principle of mutuality applies to exclude receipts from dealings with members from taxability.

(iii) Whether the filing of return in ITR 7, typically applicable to charitable institutions under Section 12A, was appropriate and whether such filing should determine the taxability of receipts.

(iv) Whether the Commissioner of Income-tax (Appeals) erred in not following the precedent and orders passed in the immediately preceding assessment year (AY 2013-14) concerning the treatment of income and expenditure of the assessee.

(v) Whether the Assessing Officer and the CIT(A) erred in rejecting the rectification application and the request for revising the return beyond the statutory time limit, and whether the Tribunal can entertain additional grounds not raised before the AO.

(vi) The applicability of the principle of consistency in tax assessments and whether the Assessing Officer was bound to follow the view accepted in earlier years.

Issue-wise detailed analysis:

Jurisdiction and validity of intimation under Section 143(1):

The appellant contended that the intimation under Section 143(1) was issued without jurisdiction and violated principles of natural justice, as no prior notice was given before treating the entire receipts as taxable income. The Tribunal noted that Section 143(1) intimation is a summary assessment based on the return filed and does not require prior notice. The CIT(A) had confirmed the demand, and the Tribunal did not find any procedural infirmity in issuance of the intimation per the statutory scheme. However, the Tribunal emphasized that the intimation should be based on correct application of law and facts, which leads to the next issue.

Taxability of the entire gross receipts vs. application of the principle of mutuality:

The assessee, a club, filed its return in ITR 7 showing total receipts of Rs. 84,98,403 and corresponding application of income (expenses), resulting in nil taxable income. The Assessing Officer, however, treated the entire gross receipts as taxable income and issued an intimation demanding tax accordingly.

The Tribunal examined the income and expenditure statement and found that the assessee was dealing exclusively with its members. Applying the principle of mutuality, which excludes from taxable income any profits arising from dealings among members of a mutual association, the Tribunal held that the receipts did not constitute taxable income. The Tribunal relied on the precedent that such mutual dealings do not create taxable income, and the mere filing in ITR 7 should not dictate taxability.

The Tribunal further observed that the Assessing Officer erred in taxing the gross receipts without considering the net income or loss as per the income and expenditure account.

Appropriateness of filing ITR 7 and its implications:

The appellant submitted that filing the return in ITR 7 was based on a bonafide belief that its activities and property were held in trust for its members and that ITR 7 is not exclusively applicable to charitable institutions registered under Section 12A. The CIT(A) rejected this contention, holding that the appellant had to file true particulars of income as per the Act within prescribed due dates and that the time limits for filing returns cannot be extended due to the appellant's mistake.

The Tribunal did not expressly overrule the CIT(A)'s view on the applicability of ITR 7 but emphasized that the taxability must be determined based on the nature of income and the principle of mutuality rather than the form of return filed. Thus, the Tribunal implicitly accepted that the form of return should not be determinative of taxability.

Failure to follow precedent and principle of consistency:

The appellant argued that the CIT(A) failed to follow the order passed for AY 2013-14, where the Assessing Officer was directed to consider the net income as per the income and expenditure account. The Tribunal noted that for AY 2013-14, the CIT(A) had allowed rectification to consider net loss of Rs. 39,70,620/- and directed the AO accordingly.

In the instant case for AY 2014-15, the Tribunal held that the Assessing Officer ought to have taken a similar approach and considered the income and expenditure account instead of taxing the gross receipts. The Tribunal directed the AO to consider the net income and not the gross receipts, thereby enforcing the principle of consistency in assessment.

Rejection of rectification application and filing of revised return beyond statutory time limit:

The appellant had filed a rectification application and sought to revise the return to reflect the correct income and expenditure, but the AO and CIT(A) rejected it on the ground that the statutory limit for filing revised returns as per Section 139(5) had lapsed. The CIT(A) relied on the Supreme Court decision in Goetze (India) Ltd. v. CIT, which holds that an assessee cannot amend a return for making a claim for deduction other than by filing a revised return within the prescribed time.

The Tribunal acknowledged the settled law that revised returns cannot be filed beyond the due date. However, it also noted the appellant's contention based on the Supreme Court's decision in National Thermal Power Corporation Ltd., which permits the Tribunal to entertain additional grounds not raised before the AO in certain circumstances.

Despite these contentions, the Tribunal did not overturn the statutory limitation but mitigated the consequence by directing the AO to consider the income and expenditure account for assessment, thus effectively granting relief without requiring a revised return.

Application of law to facts and treatment of competing arguments:

The Tribunal carefully weighed the appellant's submissions regarding the principle of mutuality and the nature of the receipts against the statutory provisions and precedents cited by the revenue. It found that the revenue's approach of taxing gross receipts ignored the fundamental principle that mutual dealings among members do not generate taxable income. The Tribunal also balanced the procedural constraints regarding revised returns with the practical realities of the appellant's filing and the prior year's accepted treatment.

The Tribunal rejected the revenue's strict adherence to form over substance and emphasized the need to consider the true nature of income and the appellant's operations.

Conclusions:

The Tribunal concluded that the Assessing Officer erred in bringing to tax the entire gross receipts without considering the net income or loss as per the income and expenditure account. It held that the principle of mutuality applies, exempting the receipts from tax. The Tribunal directed the AO to consider the income and expenditure account and bring to tax only the net income. It allowed the appeal for statistical purposes, thereby setting aside the CIT(A)'s order confirming the demand under Section 143(1).

Significant holdings:

The Tribunal preserved the following crucial legal reasoning verbatim from the CIT(A)'s order:

"It is settled law that the appellant-assessee has to file the true particulars of the income as per the provisions of the Act within the due dates prescribed as per the Act. It is pertinent to mention that the due dates are same to the appellant-assessees as per the respective status. The time limits for filing the Income Tax Returns cannot be changed for the mistake of each appellant-assessee."

However, the Tribunal itself held:

"On perusal of the income and expenditure statement, it is clear that the assessee had not received any taxable income. The assessee was dealing with its members, and on account of principle of mutuality, any profits out of dealings with the members would not be liable to tax. The assessee had wrongly filed return in ITR 7. Inspite of return being wrongly filed in ITR 7, the Income Tax Authorities ought to have considered the operation of the assessee-club and ought to have brought to tax only the net income."

Further, the Tribunal emphasized the principle of consistency by referring to the prior year's order:

"I hold that rectification application filed by the appellant on 17.06.2015 through e-filing portal showing net loss of Rs. 39,70,620/- as per income and expenditure account should be considered. The Assessing Officer is therefore directed to consider the revised income filed by the appellant in rectification application."

Finally, the Tribunal's direction:

"The AO is directed to consider the income and expenditure account of the assessee and bring to tax only the net income and not the gross receipts as it was done in the intimation issued u/s.143(1) of the Act."

The core principles established include:

- The principle of mutuality excludes receipts from dealings among members of a club from taxable income.

- The form of return filed (ITR 7) should not be determinative of taxability; substance of transactions must be considered.

- The Assessing Officer and appellate authorities must consider net income or loss as per income and expenditure accounts rather than gross receipts.

- The principle of consistency requires following accepted treatment in preceding assessment years unless there is a valid reason to depart.

- While statutory time limits for filing revised returns are binding, the authorities should consider rectification applications and the true nature of income to avoid miscarriage of justice.

On the issues raised, the Tribunal finally determined that the entire gross receipts should not be taxed; only net income or loss as per the income and expenditure account is relevant. The intimation under Section 143(1) was set aside to the extent it taxed gross receipts, and the Assessing Officer was directed to reassess accordingly. The appeal was allowed for statistical purposes.