2025 (6) TMI 483 - AT - Income Tax

Exemption u/s.11 - addition of the entire gross receipts - DR submitted that there is no registration available with the assessee u/s.12A - HELD THAT - Admittedly it is a fact on record that assessee does not have the renewed registration u/s.12A of the Act for the year under consideration. Assessee admitted that in absence of such registration for the year under consideration claim of exemption u/s.11 is not available but at the same time what can be brought to tax is the net income for the year after allowing expenditure and depreciation for caring out its activities during the year. Taking into account the facts of the case we hold that gross collection for the year cannot be taxed as income as done by CPC while processing the return of the assessee. Commercial prudence requires to allow deduction for matching expenditure incurred by the assessee in caring out its activities during the year. Accordingly we find it appropriate to remit the matter back to the file of JAO for the purpose of verification of records and details of the assessee to allow claim of expenditure and deprecation made by it so as to bring to tax the net surplus for the year. Appeal of the assessee is allowed for the statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

• Whether the Commissioner of Income-tax (Appeal) erred in disposing of the appeal without affording the assessee an opportunity of hearing.
• Whether the Centralized Processing Centre (CPC) was justified in disallowing the claim of exemption under section 11 of the Income-tax Act, 1961, solely on the ground that the assessee used an old registration number under section 12AA instead of a renewed registration under section 12AB.
• Whether the entire gross receipts of Rs. 3,041,163 should be brought to tax, or only the net surplus of Rs. 186,512 after allowing expenditure and depreciation should be taxed.
• Whether the absence of renewed registration under section 12AB for the relevant assessment year precludes exemption under section 11.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the CIT(A) erred in disposing of the appeal without hearing the assessee

Relevant legal framework and precedents: Principles of natural justice and statutory provisions require that an appellant be given a reasonable opportunity of being heard before disposal of appeal. The Income-tax Act mandates that appeals be decided on merits after hearing parties.

Court's interpretation and reasoning: The Tribunal noted that the CIT(A) passed an ex-parte order without dealing with the merits or affording hearing to the assessee. This procedural lapse was acknowledged as an error.

Application of law to facts: Since the CIT(A) did not provide an opportunity to the assessee, the appeal was disposed of without proper adjudication.

Conclusion: The Tribunal found that the CIT(A) erred in disposing of the appeal without hearing and thus the matter requires reconsideration.

Issue 2: Disallowance of exemption under section 11 due to non-renewal of registration under section 12AB

Relevant legal framework and precedents: Section 11 of the Income-tax Act provides exemption to income of charitable trusts subject to registration under section 12AA or renewed registration under section 12AB as per amendments introduced by the Finance Act, 2021. The renewed registration under section 12AB is mandatory for claiming exemption for assessment years commencing after the amendment.

Court's interpretation and reasoning: The Tribunal observed that the assessee was originally registered under section 12AA in 2010 but failed to obtain fresh registration under section 12AB for the year under consideration (AY 2022-23). The assessee admitted that exemption under section 11 is not available in absence of valid registration under section 12AB for the relevant year.

Key evidence and findings: The assessee filed its return claiming exemption under section 11 using the old registration number. Subsequently, provisional registration under section 12A and 80G was granted for AY 2024-25 onwards, but not for AY 2022-23.

Application of law to facts: As per the statutory mandate, exemption under section 11 is contingent upon valid registration under section 12AB for the relevant year. The absence of such registration precludes exemption for AY 2022-23.

Treatment of competing arguments: The assessee argued for exemption despite lack of renewed registration, relying on old registration and commercial prudence. The Revenue contended that no registration means no exemption.

Conclusion: The Tribunal upheld the principle that exemption under section 11 cannot be allowed without valid registration under section 12AB for the relevant year.

Issue 3: Whether gross receipts or net surplus should be brought to tax in absence of valid registration

Relevant legal framework and precedents: Generally, income of a charitable trust without valid registration is taxable. However, the question arises whether the entire gross receipts or only net surplus after allowable expenditure and depreciation should be taxed.

Court's interpretation and reasoning: The Tribunal held that taxing the entire gross receipts without allowing deduction of expenditure incurred for charitable activities and depreciation is neither just nor commercially prudent. The principle of matching income and expenditure applies.

Key evidence and findings: The assessee submitted detailed computation showing gross receipts of Rs. 3,041,163 and expenditure plus depreciation leading to net surplus of Rs. 186,512. The Tribunal accepted this computation as prima facie correct.

Application of law to facts: Even in absence of exemption, only net surplus (income minus expenditure and depreciation) should be subject to tax, not gross receipts.

Treatment of competing arguments: Revenue argued for taxing entire gross receipts due to absence of registration. The Tribunal rejected this, emphasizing commercial prudence and fairness.

Conclusion: The Tribunal directed that the matter be remitted to the Jurisdictional Assessing Officer (JAO) to verify records and allow expenditure and depreciation, so that only net surplus is brought to tax.

Issue 4: Remand for verification and opportunity to assessee

Court's reasoning: The Tribunal noted that the CIT(A) did not deal with merits and that the JAO must verify the details of expenditure and depreciation claimed by the assessee. The assessee must be given reasonable opportunity to substantiate claims.

Conclusion: The matter was remanded to the JAO for fresh adjudication with opportunity to the assessee.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"It is a fact on record that assessee does not have the renewed registration u/s.12A of the Act for the year under consideration. Ld. Counsel for the assessee admitted that in absence of such registration for the year under consideration, claim of exemption u/s.11 of the Act, is not available, but at the same time what can be brought to tax is the net income for the year after allowing expenditure and depreciation for carrying out its activities during the year."

"Gross collection for the year cannot be taxed as income as done by CPC while processing the return of the assessee. Commercial prudence requires to allow deduction for matching expenditure incurred by the assessee in carrying out its activities during the year."

"Accordingly, we find it appropriate to remit the matter back to the file of ld. Jurisdictional Assessing Officer (JAO) for the purpose of verification of records and details of the assessee to allow claim of expenditure and depreciation made by it so as to bring to tax the net surplus for the year."

Core principles established include:

• Exemption under section 11 is conditional on valid registration under section 12AB for the relevant year.
• In absence of valid registration, exemption is not available, but taxing gross receipts without allowing expenditure is not justified.
• Only net surplus after deducting expenditure and depreciation should be brought to tax.
• Natural justice requires opportunity of hearing before disposal of appeal.
• Remand to assessing authority is appropriate where facts and claims require detailed verification.

Final determinations on each issue:

• The CIT(A) erred in disposing appeal without hearing; hence, grounds on this are allowed for statistical purposes.
• Exemption under section 11 is not available without renewed registration under section 12AB for AY 2022-23.
• Only net surplus, not gross receipts, should be taxed in absence of registration.
• The matter is remitted to the JAO for verification of expenditure and depreciation and to give reasonable opportunity to the assessee.