2025 (5) TMI 390 - AT - Income Tax

Rejecting the application for granting approval u/s 10(23C)(iii) - technical mistake in choosing an incorrect sub-clause for provisional registration - CIT (E) refused to grant the registration since it was noticed that the provisional approval could not have been granted to the assessee as the appellant has already commenced its activities in 2015 and thus it was stated by the CIT (Exemptions) that provisional approval being bad in law and thus rejected the application of the assessee - HELD THAT - The facts are not disputed that the appellant is an Institute of National Importance and no doubt have been raised about the aims and objects of the said Institute. We find that it was only on account of choosing wrong sub-section for claiming approval under clause (iii) of first proviso to clause (23C) of section 10 the mistake has been committed. Even the CIT (Exemptions) while denying the said approval has given a finding that since on account of wrong sub- clause under which the provisional approval was granted is bad in law therefore the application as filed by the assessee for grant of approval under clause (iii) of first proviso to clause (23C) of section 10 is rejected. The appellant Institute is existing since 2015 and as such the approval was refused only on account of technical mistake on the part of the counsel of the assessee who inadvertently had choosen wrong subsection while moving the application for approval under clause (iii) of first proviso to clause (23C) of section 10. ITAT in similar facts and circumstances in the case of The Harbrol Cooperative Agricultural Service Society Ltd. 2024 (9) TMI 1696 - ITAT CHANDIGARH where a similar issue was there has taken a view that if there is mistake by the assessee for claiming legitimate deduction the AO is duty bound to consider such legitimate deduction to the assessee even if it was not claimed or claimed under wrong section. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

- Whether the rejection of the application for registration under clause (iii) of the first proviso to clause (23C) of section 10 of the Income Tax Act, 1961, was justified where the provisional registration was earlier granted under sub-clause (A) of clause (iv) of the first proviso to clause (23C) but the assessee had already commenced activities prior to the application;

- Whether a technical mistake in choosing an incorrect sub-clause for provisional registration, committed inadvertently by the assessee's counsel, can justify denial of final registration under the correct clause;

- Whether the Income Tax authorities are obliged to consider legitimate claims for exemption or approval even if such claims are made under an incorrect section or sub-clause;

- The applicability of precedents relating to relief against procedural or technical errors in claiming exemptions or registrations under the Income Tax Act;

- The extent to which the assessee's status as an Institute of National Importance and its activities impact eligibility for exemption under section 10(23C)(iii).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of rejection of registration application under clause (iii) of first proviso to clause (23C) of section 10 due to prior commencement of activities and incorrect provisional registration under sub-clause (A) of clause (iv)

Relevant Legal Framework and Precedents:

Section 10(23C) of the Income Tax Act provides exemption to certain educational and charitable institutions subject to registration under prescribed clauses. The provisos and sub-clauses specify conditions for provisional and final registration depending on whether the institution has commenced activities before application.

The proviso to clause (23C) distinguishes between applicants who apply before commencement of activities (eligible for provisional registration under sub-clause (A) of clause (iv)) and those already in existence (required to apply under clause (iii)).

Court's Interpretation and Reasoning:

The CIT (Exemptions) rejected the final registration application on the ground that provisional registration granted under sub-clause (A) of clause (iv) was invalid because the appellant had commenced activities in 2015, prior to the application in 2024. Hence, the provisional registration was "bad in law" and the final registration under clause (iii) was refused.

Key Evidence and Findings:

The appellant was established in 2015 and is a Centrally Funded Institution of National Importance governed by the Indian Institutes of Management Act, 2017. The provisional registration was applied for and granted under the wrong sub-clause due to inadvertent error by the counsel.

Application of Law to Facts:

The Tribunal noted that the rejection was based solely on a technical error in the choice of sub-clause for provisional registration, not on any defect in the institution's activities or eligibility.

Treatment of Competing Arguments:

The Revenue argued that the application was rightly rejected because the provisional registration was granted under the wrong sub-clause and hence invalid. The assessee contended that the error was inadvertent, caused by counsel, and should not prejudice the institution's legitimate claim for exemption.

Conclusions:

The Tribunal found that the rejection on this technical ground was not justified given the facts and the nature of the institution.

Issue 2: Whether technical or inadvertent mistakes by the assessee's counsel in filing applications should prejudice the assessee's entitlement to exemption/registration

Relevant Legal Framework and Precedents:

The Tribunal relied on several precedents including:

• The Harbrol Cooperative Agricultural Service Society Ltd. case, where it was held that if a legitimate deduction is claimed under the wrong section, the Assessing Officer is duty bound to consider the claim correctly;
• Punjab Agricultural University case, where similar relief was granted for mistakes by counsel in claiming exemptions;
• Heidrick and Struggles Inc. (Delhi High Court), which held that placing income under a wrong head does not make it taxable if it is otherwise exempt;
• Other ITAT decisions emphasizing substance over form and protecting bona fide claims from procedural errors.

Court's Interpretation and Reasoning:

The Tribunal emphasized that the assessee's members lacked expertise in tax matters and relied entirely on counsel for filing applications. The inadvertent mistake in selecting the incorrect sub-clause should not be visited with harsh consequences, especially when the institution's eligibility and activities were undisputed.

Key Evidence and Findings:

The institution's bona fide status as an Institute of National Importance, audited accounts by the C&AG, and undisputed objectives of imparting management education were established.

Application of Law to Facts:

The Tribunal applied the principle that procedural or technical mistakes by counsel should not deprive an eligible institution of exemption, especially when the mistake was acknowledged and no malafide was alleged.

Treatment of Competing Arguments:

The Revenue's reliance on strict interpretation of the procedural provisions was rejected in light of the precedents and the facts.

Conclusions:

The Tribunal held that the assessee should not suffer due to counsel's inadvertent error and directed grant of approval under the correct clause.

Issue 3: Obligation of Income Tax Authorities to consider legitimate claims even if made under incorrect sections or sub-clauses

Relevant Legal Framework and Precedents:

Section 80A(5) and related provisions, along with judicial pronouncements, establish that legitimate claims for exemption or deduction must be considered on merits, even if claimed under wrong provisions.

Court's Interpretation and Reasoning:

Tribunal reiterated that the Income Tax authorities have a duty to give effect to the substantive rights of the assessee and not to defeat them on technical grounds.

Key Evidence and Findings:

The cited judgments demonstrate a consistent judicial approach favoring substance over form and protecting genuine claims.

Application of Law to Facts:

The Tribunal applied this principle to the facts, noting that the appellant's claim was legitimate and should be allowed despite the procedural misstep.

Treatment of Competing Arguments:

The Revenue's technical objection was countered by the principle of protecting bona fide claims.

Conclusions:

The Tribunal concluded that the CIT (Exemptions) was obligated to grant approval under the correct clause.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"It was only on account of choosing wrong sub-section for claiming approval under clause (iii) of first proviso to clause (23C) of section 10, the mistake has been committed... the approval was refused only on account of technical mistake on the part of the counsel of the assessee, who inadvertently had chosen wrong subsection while moving the application for approval."

"If there is mistake by the assessee for claiming legitimate deduction, the Assessing Officer is duty bound to consider such legitimate deduction to the assessee even if it was not claimed or claimed under wrong sections."

"Merely because the respondent/assessee placed the income under a wrong head, cannot possibly make it amendable to imposition of tax."

Core principles established include:

• Substance of the claim and eligibility of the institution must prevail over procedural or technical errors in filing applications;
• Inadvertent mistakes by counsel should not prejudice the assessee's legitimate rights;
• Income Tax authorities are duty bound to consider and grant legitimate exemptions or registrations despite procedural defects;
• Institutions of National Importance with undisputed objectives and activities should not be denied exemption on technical grounds.

Final determinations:

The Tribunal allowed the appeal and directed the CIT (Exemptions) to grant registration and approval under clause (iii) of the first proviso to clause (23C) of section 10 of the Income Tax Act to the appellant Institute, treating it as an existing institution prior to 01.04.2021, notwithstanding the earlier technical error in provisional registration application.