2025 (6) TMI 1056 - AT - Income Tax

Disallowing the exemption u/s 10(23C)(iiiad) - Assessment of trust - not allowing the expenditure incurred for running of educational activities out of the gross receipts - HELD THAT - The assessee has filed unaudited annual financial statement for the year ended 31.03.2017. Since these documents were not filed before the Ld. AO the orders of the Ld. CIT(A) as well as the Ld. AO are hereby set aside and the matter is remitted to the Ld. AO to frame the assessment de novo after granting an opportunity of being heard to the assessee and after considering the evidence filed by the assessee in support of the claim of expenditure incurred for earning the income and only the excess of income over expenditure should be subjected to tax as has been done in AYs 2017-18 2018-19 and 2019-20 vide orders passed by the Ld. AO himself in the rectification proceedings. Appeal filed by the assessee is allowed for statistical purposes.

Summary

The core legal questions considered in this appeal include:

1. Whether the expenditure of Rs. 2,38,55,184 incurred for running educational activities is allowable as a deduction under section 57 of the Income Tax Act, 1961, against the gross receipts of Rs. 2,52,02,720, or whether the entire gross receipts should be treated as income.

2. Whether the dismissal of the appeal by the Commissioner of Income Tax (Appeals) on the ground of non-participation or non-submission of documents during remand proceedings was factually correct, given the assessee's claim of submission through the e-proceedings portal within the prescribed time.

3. Whether exemption under section 10(23C)(iiiad) of the Act is allowable to the assessee, particularly when the gross receipts of individual educational institutions run by the assessee are below Rs. 1 crore.

4. Ancillary issues relating to procedural compliance, evidentiary considerations, and the applicability of the principle of consistency in taxation across assessment years.

Issue-wise Detailed Analysis:

1. Allowability of Expenditure under Section 57 of the Act

Legal Framework and Precedents: Section 57 of the Income Tax Act allows deduction of expenditure incurred wholly and exclusively for earning income under the head "Income from Other Sources." The assessee, being an Association of Persons (AOP) and not registered under sections 12A/10(23C), filed its return disclosing a surplus after deducting expenses. The principle that expenditure incurred for earning income is deductible is well established.

Court's Interpretation and Reasoning: The Assessing Officer (AO) disallowed the expenditure on the ground of non-compliance with notices and non-submission of audit reports (Forms 10B/10BB), and treated gross receipts as income under section 144. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld this disallowance, noting the lack of substantiation and absence of vouchers or audited accounts, describing the accounts as sketchy and unsubstantiated.

Key Evidence and Findings: The assessee submitted unaudited financial statements and contended that in subsequent assessment years (2017-18 to 2019-20), rectification orders allowed expenditure deductions, taxing only the surplus. The assessee also filed consolidated audited accounts and evidence of separate audited accounts for individual institutions.

Application of Law to Facts: The Tribunal noted that the evidence was not filed before the AO but was submitted during appellate proceedings. The Tribunal observed that the entire gross receipts could not be taxed as income without allowing expenditure incurred for earning that income. It emphasized the principle of consistency, referring to rectification orders in subsequent years where expenditure was allowed.

Treatment of Competing Arguments: The Revenue argued that the documents were not part of the record before the AO and hence inadmissible without formal application under ITAT Rules. The assessee contended that the documents were forwarded to the AO under Rule 46A for examination. The Tribunal found merit in the assessee's submissions and set aside the orders of AO and CIT(A) for fresh assessment after considering the evidence.

Conclusion: The Tribunal held that the assessment order treating gross receipts as income without allowing expenditure was erroneous. The matter was remitted for de novo assessment after granting the assessee an opportunity to substantiate expenditure claims, with only the net surplus to be taxed.

2. Dismissal of Appeal on Grounds of Non-Participation and Non-Submission of Documents

Legal Framework: Procedural fairness requires that an assessee be given opportunity to present evidence and participate in proceedings. Notices under section 142(1) require compliance, but procedural lapses should be examined in context.

Court's Interpretation and Reasoning: The CIT(A) dismissed the appeal partly on the ground that the assessee did not participate or submit documents during remand proceedings. The assessee claimed submission of documents through the e-proceedings portal within time but was unaware of notices due to password issues.

Key Findings: The Tribunal noted that the assessee had submitted documents and that the CIT(A) had forwarded these to the AO for comments. The Tribunal found the dismissal on grounds of non-participation factually incorrect.

Application of Law to Facts: The Tribunal emphasized that procedural non-compliance should not result in denial of substantive rights, particularly when documents were submitted and forwarded for consideration.

Treatment of Competing Arguments: Revenue contended procedural non-compliance, but the Tribunal gave weight to the assessee's submission and the forwarding of documents to AO under Rule 46A.

Conclusion: The Tribunal found the dismissal on procedural grounds inappropriate and set aside the order for fresh consideration.

3. Allowability of Exemption under Section 10(23C)(iiiad)

Legal Framework and Precedents: Section 10(23C)(iiiad) exempts income of educational institutions existing solely for educational purposes, subject to conditions including gross receipts not exceeding Rs. 1 crore. The benefit is activity-specific, not person-specific. Rule 2BC clarifies the application of the exemption.

Court's Interpretation and Reasoning: The Tribunal relied extensively on the decision in Manas Sewa Samiti, which held that the exemption is to be considered on the basis of receipts of each individual institution, not aggregated receipts of the society or trust running the institutions. The Tribunal noted that the AO and CIT(A) erred in aggregating receipts and denying exemption on that basis.

Key Evidence and Findings: The assessee submitted that two of the three educational institutions had gross receipts below Rs. 1 crore, thus qualifying for exemption. The Tribunal found that the CIT(A) did not properly consider this evidence and treated accounts as sketchy.

Application of Law to Facts: The Tribunal applied the principle that exemption under section 10(23C)(iiiad) is activity-centric and must be determined institution-wise. It rejected the Revenue's approach of clubbing receipts of the institutions with other income of the trust.

Treatment of Competing Arguments: Revenue argued that absence of registration under section 12AA/10(23C) and non-filing of audit reports justified denial of exemption. The Tribunal distinguished registration issues from the substantive eligibility for exemption based on receipts and activities.

Conclusion: The Tribunal held that the exemption under section 10(23C)(iiiad) should be allowed for individual institutions with receipts below the prescribed limit, subject to verification during fresh assessment.

4. Consistency and Treatment of Subsequent Assessment Years

Legal Framework: While res judicata does not strictly apply to income tax proceedings, the principle of consistency in assessment is recognized to ensure fairness.

Court's Interpretation and Reasoning: The Tribunal noted that in AYs 2017-18, 2018-19, and 2019-20, the AO himself allowed expenditure deductions and taxed only the surplus. The Tribunal found that the same principle should apply to the impugned AY 2016-17.

Key Findings: Rectification orders for subsequent years were relied upon by the assessee to demonstrate consistency in tax treatment.

Application of Law to Facts: The Tribunal directed that the AO should follow the consistent approach of taxing only the surplus after allowing expenditure for the impugned year as well.

Conclusion: The Tribunal emphasized the rule of consistency and remanded the matter for fresh assessment accordingly.

Significant Holdings:

"The entire gross receipts being deposited in the bank account could not have been added to the income of the assessee and only the surplus after allowing all the expenditure for earning the income had to be treated as income."

"The benefit granted under section 10(23C)(iiiad) is only with reference to an activity of running a University or other educational institution, existing solely for educational purposes. By virtue of section 10(23C)(iiiad) such receipts are excluded from the income received by the 'person', who may have run such University or other educational institution."

"It is the receipt of each individual University or other educational institution that would be looked at to determine whether the receipt would qualify for the benefit conferred under section 10(23C)(iiiad), read with rule 2BC."

"The Assessing Authority to disallow the benefit, on account of excess of income over expenditure of the institution having been carried to the society, is extraneous to the issue involved in the instant case."

"Merely because the assessee-society was the person running the institution, it did not cause any legal effect of depriving the benefit of section 10(23C)(iiiad) which was activity specific and had nothing to do with the other income of the same assessee."

"The orders of the AO and CIT(A) are hereby set aside and the matter is remitted to the AO to frame the assessment de novo after granting an opportunity of being heard to the assessee and after considering the evidence filed by the assessee in support of the claim of expenditure incurred for earning the income."

In conclusion, the Tribunal allowed the appeal for statistical purposes, setting aside prior orders and directing fresh assessment proceedings to consider the expenditure claims and exemption eligibility, ensuring only the net surplus is taxed and the activity-centric exemption under section 10(23C)(iiiad) is properly applied institution-wise.