2025 (6) TMI 475 - AT - Income Tax

Exemption u/s 11 - deduction of expenditure incurred during the relevant assessment year as well as the claim for set-off of excess expenditure pertaining to earlier years as application of income under the provisions of the Act - CIT(A) admitting additional evidence without following the mandatory procedure under Rule 46A of the Income-tax Rules 1962 - HELD THAT - CIT(A) was duty-bound to comply with the procedural safeguards enshrined under Rule 46A before taking cognizance of the additional evidence. Upon receipt of such evidences in terms of rule 46A of Rules it was incumbent upon the Ld. CIT(A) to forward the same to the Ld. AO for his comments both on the admissibility as well as the merits of the said material. Secondly while the Ld. CIT(A) recorded certain defects or anomalies in the additional evidences no opportunity was granted to the assessee to furnish any explanation. Before us the learned counsel for the assessee has made certain submissions in an attempt to clarify the objections raised by the Ld. CIT(A). But it is noted that only sample invoices and rent agreements had been placed on record in additional evidences and comprehensive supporting material including vouchers and books of account substantiating the claim under Section 11 of the Act had not been filed. Thus we deem it appropriate to set aside the impugned order passed by the Ld. CIT(A) on this issue. The matter is accordingly remanded to the file of the Ld. CIT(A) for adjudication afresh in accordance with law after following due procedure laid down in Rule 46A of Rules. The assessee is directed to produce all relevant documentary evidence including vouchers and books of account in support of its claim before the ld CIT(A) as additional evidences. The Ld. CIT(A) shall ensure that both parties are granted a reasonable opportunity of being heard before the matter is finally adjudicated. Whether no notice u/s 143(2) of the Act was issued for selecting the case under scrutiny? - On perusal of records we note that the assessee duly attended the assessment proceedings and no objection was taken before the AO regarding either issue or service of said notice. AO has clearly recorded in the assessment order that notice u/s 143(2) of the Act was issued and duly served upon the assessee. Further no objection was raised on this issue before the CIT(A). The assessee has presumed that no notice was issued only on the basis of RTI reply by the Income-tax Department. We find that in said reply the assessing officer has merely mentioned that assessment record for the year under consideration was not traceable being matter more than 10 years old. No other information regarding non issue of the notice u/s 143 of the Act has been provided in the said reply. In our opinion said reply has no basis to presume that no notice u/s 143(2) of the Act was issued. The contention of the assessee are purely imaginary and on the basis of the presumption and surmises without any evidence that no notice u/s 143(2) of the Act was issued and accordingly we reject the contention of the ld. counsel for the assessee. The additional ground raised by the assessee is accordingly dismissed. Denial of exemption claim u/s 11 - assessee trust gave advance/deposit to two trustees - these two persons being in the category of specified persons as provided in section 13(3) of the Act part of income has been applied for the benefit of specified persons therefore the assessee a violated provisions of Sec. 13(1)(c) - HELD THAT - Disallowance under Section 11 of the Act ought to be restricted only to the amount diverted or applied in violation of Section 13(1)(c) or 13(2) as the case may be. Accordingly we deem it appropriate to restore the issue to the file of the AO with a direction to re-examine the matter in light of the observations made hereinabove and to restrict the disallowance under Section 11 of the Act strictly to the quantum of income diverted to or applied for the benefit of the specified persons referred to under Section 13(3) of the Act. Needless to state the assessee shall be afforded a reasonable opportunity of being heard in the course of the proceedings.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in the appeals for assessment years 2016-17 and 2010-11 are as follows:

For AY 2016-17:

• Whether the denial of all expenses claimed by the assessee, except those categorized as expenses incurred on objects of the trust, by the Assessing Officer (AO) and confirmed by the Commissioner of Income-tax (Appeals) (CIT(A)) was justified, especially when additional evidence was filed before the CIT(A).
• Whether the CIT(A) erred in admitting additional evidence without following the mandatory procedure under Rule 46A of the Income-tax Rules, 1962, and in not providing an opportunity to the assessee to explain anomalies observed in the additional evidence.
• Whether the disallowance of excess expenditure carried forward from earlier years and capital expenditure was appropriate.

For AY 2010-11:

• Whether the denial of exemption under section 11 of the Income-tax Act, 1961 (the Act) was justified despite no defects being pointed out by the AO on the activities carried out by the assessee trust.
• Whether the application of provisions of section 13(1)(c) of the Act, resulting in withdrawal of exemption under section 11 on account of deposits paid to trustees, was correct.
• Whether the denial of the entire exemption under section 11 instead of restricting it to the transaction covered by section 13 was proper.
• Whether the denial of exemption on the addition made to the Building Fund was valid.
• Whether the denial of claim of depreciation as application of income was justified when capital expenditure was not claimed as application.
• Whether the assessment order was validly passed without issuance of notice under section 143(2) of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

AY 2016-17: Denial of Expenses and Admission of Additional Evidence

Relevant Legal Framework and Precedents:
The provisions governing the admission of additional evidence before the CIT(A) are laid down in Rule 46A of the Income-tax Rules, 1962. The rule mandates that any additional evidence filed before the CIT(A) must be forwarded to the AO for comments on admissibility and merits, and the parties must be given an opportunity to be heard before a final decision is taken. The principle of natural justice requires that an assessee be given a fair opportunity to explain any anomalies or defects in the evidence.

Court's Interpretation and Reasoning:
The Tribunal observed that the assessee had filed a belated return and failed to comply with statutory notices issued by the AO. The AO allowed only expenses incurred on the objects of the trust and disallowed administrative expenses, set-off of excess expenditure from earlier years, and capital asset investments for want of supporting documentation. The assessee filed additional evidence before the CIT(A), including sample rent agreements and sample invoices. However, the CIT(A) admitted these additional documents without following the mandatory procedure under Rule 46A, did not forward the evidence to the AO for comments, and did not provide the assessee an opportunity to explain the anomalies noted in the sample invoices.

The CIT(A) pointed out defects such as invoices not matching the assessee's schools, unpaid invoices, telephone bills in the name of unrelated institutions, and doubtful salary register entries. The CIT(A) disallowed the expenses based on these observations. The Tribunal held that the CIT(A) was duty-bound to comply with Rule 46A, including forwarding the additional evidence to the AO and providing the assessee an opportunity to explain the alleged anomalies. The Tribunal noted that only sample invoices and rent agreements were filed, and comprehensive supporting documents such as vouchers, ledger extracts, bank statements, or cash books were not produced.

Key Evidence and Findings:
The AO's disallowance was based on the absence of supporting documents and non-compliance with notices. The CIT(A) admitted additional evidence but found defects in sample invoices and did not allow the assessee to explain. The assessee's explanation before the Tribunal clarified certain points, such as payment of previously unpaid bills and the nature of the trustees' schools, but these explanations were not considered by the CIT(A).

Application of Law to Facts:
The Tribunal applied Rule 46A strictly, emphasizing procedural fairness and the right to be heard. It concluded that the CIT(A)'s failure to follow the prescribed procedure and to provide an opportunity to the assessee to explain the defects vitiated the appellate order. The Tribunal remanded the matter to the CIT(A) for fresh adjudication after following due procedure, including forwarding additional evidence to the AO, obtaining comments, and hearing both parties.

Treatment of Competing Arguments:
The Revenue did not dispute the admission of additional evidence without following Rule 46A, and supported the CIT(A)'s findings on the merits. The assessee argued procedural lapses and sought restoration for fresh adjudication. The Tribunal sided with the assessee on procedural grounds.

Conclusions:
The Tribunal set aside the CIT(A)'s order on the issue of denial of expenses and remanded the matter for fresh adjudication in compliance with Rule 46A. The assessee was directed to produce full documentary evidence supporting the expenses claimed.

AY 2010-11: Denial of Exemption under Section 11 and Application of Section 13(1)(c)

Relevant Legal Framework and Precedents:
Section 11 of the Act provides exemption for income applied for charitable or religious purposes. Section 13(1)(c) stipulates that if any part of the income or property of a trust is applied for the benefit of specified persons (as defined in section 13(3)), the exemption under section 11 shall not operate in respect of that income. The amendment effective from AY 2023-24 restricts disallowance to only the part of income applied for the benefit of specified persons. Prior to this amendment, the entire exemption was liable to be denied in case of violation.

The Hon'ble Bombay High Court in Audyogika Shikshan Mandal held that denial of exemption should be restricted to the amount of income diverted to specified persons, and not the entire income of the trust, to avoid disproportionate hardship.

Court's Interpretation and Reasoning:
The AO observed that the assessee trust had given interest-free deposits to trustees, who are specified persons under section 13(3), and held that this amounted to application of income for the benefit of specified persons, thus violating section 13(1)(c). Accordingly, the AO denied exemption under section 11 for the entire income and disallowed addition to the building fund and depreciation claims.

The CIT(A) upheld the AO's decision, relying on the provisions of section 13 as they stood for AY 2010-11, before the amendment. The CIT(A) rejected the assessee's contention that only the portion of income applied for benefit of specified persons should be disallowed.

The Tribunal examined the legal position and noted the amendment to section 13(1)(c) effective from AY 2023-24, which limits disallowance to the amount of income applied for benefit of specified persons. However, for AY 2010-11, the earlier position applied. The Tribunal, however, followed the binding precedent of the Hon'ble Bombay High Court in Audyogika Shikshan Mandal, which held that denial of exemption should be restricted to the quantum of income diverted, to avoid injustice.

Key Evidence and Findings:
The AO's finding was based on the fact that deposits were made to trustees, and these trustees were specified persons under section 13(3). The AO treated the deposits as application of income for their benefit. The assessee contended that deposits were made for use of premises for charitable activities and were not application of income for personal benefit.

Application of Law to Facts:
The Tribunal applied the binding precedent to hold that the disallowance under section 11 should be restricted to the amount of income actually applied for the benefit of specified persons. The matter was remanded to the AO for re-examination of the quantum of income diverted and to restrict disallowance accordingly. The assessee was to be given a reasonable opportunity of being heard.

Treatment of Competing Arguments:
The assessee argued for restriction of disallowance to the amount of income applied for benefit of specified persons, relying on judicial pronouncements. The Revenue contended that the entire exemption was liable to be denied for AY 2010-11 as per the then-prevailing law. The Tribunal reconciled the conflict by following the binding High Court precedent favoring proportional disallowance.

Additional Ground: Validity of Assessment Without Notice under Section 143(2)
The assessee contended that the assessment order was bad for want of valid notice under section 143(2). The Revenue produced record of issuance and service of notice. The Tribunal found no evidence to support the assessee's claim, noting that no objection was raised before the AO or CIT(A) and that the RTI reply relied upon by the assessee did not establish non-issuance of notice. The Tribunal dismissed this ground.

Denial of Exemption on Addition to Building Fund and Depreciation Claims

The AO disallowed addition to the building fund and depreciation claims on the ground that the assessee had claimed capital expenditure instead of depreciation. The CIT(A) upheld this disallowance. The Tribunal did not elaborate further but disposed these grounds on merits based on available records.

3. SIGNIFICANT HOLDINGS

"The Ld. CIT(A) was duty-bound to comply with the procedural safeguards enshrined under Rule 46A before taking cognizance of the additional evidence. Upon receipt of such evidences, in terms of Rule 46A of 'Rules', it was incumbent upon the Ld. CIT(A) to forward the same to the Ld. AO for his comments, both on the admissibility as well as the merits of the said material. Secondly, while the Ld. CIT(A) recorded certain defects or anomalies in the additional evidences, no opportunity was granted to the assessee to furnish any explanation."

"On a plain reading of Sections 11 and 13 of the Act, it is clear that the legislature did not contemplate the denial of the benefit of Section 11 of the Act to the entire income of the Trust. If the interpretation sought to be advanced by the Revenue is accepted, it would lead to grave injustice as any mistake minor and/or misdemnour involving a small amount takes place by the Trust, the consequence would be denial of the benefit of exemption to the entire income otherwise admittedly used for charitable purposes."

"In view of the foregoing and respectfully following the binding precedent laid down by the Hon'ble jurisdictional High Court, we are of the considered opinion that the disallowance under Section 11 of the Act ought to be restricted only to the amount diverted or applied in violation of Section 13(1)(c) or 13(2), as the case may be."

"The additional ground raised by the assessee that no notice under section 143(2) was issued is purely imaginary and on the basis of presumption and surmises without any evidence and accordingly rejected."

Core principles established include:

• Strict adherence to procedural safeguards under Rule 46A is mandatory for admission and consideration of additional evidence before the CIT(A).
• Denial of exemption under section 11 on account of violation of section 13(1)(c) prior to AY 2023-24 should be restricted to the quantum of income applied for benefit of specified persons, following binding High Court precedent, to avoid disproportionate hardship.
• Assessment orders without valid issuance and service of notice under section 143(2) must be quashed; however, mere presumption without evidence is insufficient to invalidate assessment.

Final determinations on each issue:

• For AY 2016-17, the order of the CIT(A) denying expenses was set aside and remanded for fresh adjudication after following Rule 46A procedure and allowing the assessee to produce full evidence and explanations.
• For AY 2010-11, the denial of exemption under section 11 was to be restricted to the amount of income applied for benefit of specified persons, and the matter was remanded to the AO for re-examination accordingly.
• The claim of denial of assessment for want of notice under section 143(2) was rejected due to lack of evidence.
• Other grounds such as denial of depreciation and building fund additions were disposed on merits based on available records.