2025 (6) TMI 1522 - AT - Income Tax

Exemption u/s. 11(1)(d) - intimation issued u/s.143(1) denying exemption - allegation of income as contemplated u/s. 2(24) as funds received by the assessee society under the various government schemes from Government of India - HELD THAT - Assessee society is an implementing agency set up by the State Government of Chhattisgarh i.e a simpliciter pass-through entity wherein the funds received by it from the Government of India are to be utilized as per the stipulations in the sanction letters in accordance with broad guidelines of the scheme of Rashtriya Gokul Mission and thus it has neither any control over the funds nor any right to retain the unutilized amounts or the interest accrued on the same if any therefore the factual position supporting the said claim would require necessary verification. If the aforesaid claim of the assessee society is found to be in order then the funds claimed by the assesse society to have been received as an implementing agency i.e a pass-through entity from the Government of India under the Rashtriya Gokul Mission cannot be brought with the meaning of Income u/s 2(24) of the Act and subjected to tax in its hands. Accordingly we restore the matter to the file of the CIT(Appeals) with a direction to verify the factual position and redecide the appeal. Also the CIT(Appeals) is directed to verify in the course of the set-aside proceedings that as to whether or not the AO/CPC Bengaluru while making the adjustments vide his intimation issued u/s 143(1) had complied with the statutory obligation that was cast upon him as regards putting the assessee society to notice about the proposed adjustment and called for his objections as is required per the mandate of 1st proviso and 2nd proviso of Section 143(1) of the Act. - grounds of appeal raised by the assessee society are allowed for statistical purposes.

Summary

The core legal questions considered in this appeal involve: (i) the validity of the Assessing Officer's (AO) rejection of the assessee society's claim for exemption under Section 11(1)(d) of the Income Tax Act, 1961 (the Act); (ii) whether the AO was justified in treating the funds received by the assessee society, which functions as an implementing agency for government schemes, as its taxable income; and (iii) whether the AO complied with the procedural safeguards mandated under the provisos to Section 143(1) of the Act regarding intimation and opportunity to object before making adjustments to the returned income.

Regarding the first issue, the legal framework centers on Section 11(1)(d) which provides exemption for income derived from property held for charitable or religious purposes, subject to registration under Sections 12A/12AA of the Act. The AO declined exemption as the assessee society was not registered under these sections. The Court recognized that registration is a precondition for claiming exemption under Section 11(1)(d), and thus upheld the AO's denial of exemption on this ground, concurring with the Department's stand.

The second issue required examination of whether the funds received by the assessee society from the Government of India under the "Rashtriya Gokul Mission" scheme constituted its "income" under Section 2(24) of the Act. The assessee society was established by the State Government of Chhattisgarh as a pass-through implementing agency to channel government grants for cattle and buffalo breeding projects. The funds were subject to strict utilization guidelines and any unspent amounts, including interest accrued thereon, were mandatorily refundable to the Government of India. The legal question was whether such funds, held and disbursed as per government directions without any right of retention or control by the society, could be treated as its taxable income.

In interpreting the law, the Court acknowledged precedents where funds received by entities acting as mere conduits or trustees for government grants, without control or entitlement to retain unspent funds, were not treated as income. The Court referred to judgments of ITAT Pune and Mumbai supporting the principle that capital receipts or funds held in trust with conditions for refund do not constitute income under Section 2(24). The Court accepted the assessee's contention that the society's role was purely as a pass-through entity and that the funds did not belong to it as income. However, it noted that this factual claim was not adjudicated by the AO or the first appellate authority (CIT(A)) and required verification.

On the third issue, the legal framework involves the first and second provisos to Section 143(1) of the Act, which mandate that before making any adjustments to the returned income during processing, the AO must give the assessee notice of the proposed adjustments and consider any response received within 30 days. The AO processed the return and made adjustments within five days without issuing such notice or seeking the assessee's objections, thereby allegedly violating the statutory procedure.

The Court concurred with the assessee's submission that the AO failed to comply with these procedural requirements, which are designed to ensure fairness and natural justice. It directed the appellate authority to verify whether the AO had given proper notice and opportunity to the assessee before making the adjustments.

In applying the law to facts, the Court emphasized that while the AO was correct in denying exemption under Section 11(1)(d) due to lack of registration, the substantive question of whether the funds received were income required factual inquiry. The Court held that if the society was indeed a pass-through entity with no control or right to retain the funds or interest earned, then the amounts could not be treated as its income. This factual determination was remanded to the CIT(A) for fresh adjudication with opportunity to the assessee to present evidence.

The Court also underscored that the CIT(A) was duty-bound to consider the assessee's claim regarding the nature of the funds, as appellate authorities have powers to examine income computation afresh to do substantial justice. The Court relied on the Supreme Court's ruling that appellate officers can exercise powers to ensure correct income determination even if the AO had not done so.

Regarding the procedural lapse under Section 143(1), the Court directed the appellate authority to verify compliance with statutory notice requirements and ensure the assessee was given a fair chance to object to the adjustments. This was held to be a mandatory procedural safeguard that could not be bypassed.

The Court dismissed the assessee's other contentions related to adjournments, video conferencing requests, and technical grounds as either lacking merit or being hyper-technical, emphasizing the primacy of substantial justice over procedural technicalities.

In conclusion, the Court held that:

• The AO was justified in denying exemption under Section 11(1)(d) due to absence of registration under Sections 12A/12AA.
• The question whether the funds received by the assessee society constitute its income under Section 2(24) requires factual verification, given the society's role as a pass-through implementing agency with no control or entitlement over unutilized funds or interest.
• The AO failed to comply with the mandatory procedural requirements under the provisos to Section 143(1) before making adjustments, necessitating re-examination.
• The CIT(A) is directed to re-adjudicate the appeal considering the factual nature of the funds and verifying procedural compliance, affording the assessee a reasonable opportunity to be heard and produce evidence.

The Court's significant legal reasoning includes the following verbatim excerpt:

"If the aforesaid claim of the assessee society is found to be in order, then, the funds of Rs. 32.34 crore claimed by the assessee society to have been received as an implementing agency i.e a pass-through entity from the Government of India under the 'Rashtriya Gokul Mission' cannot be brought within the meaning of 'Income' u/s 2(24) of the Act and subjected to tax in its hands."

Further, the Court emphasized that:

"The AO/CPC, Bengaluru remained under a statutory obligation to have put the assessee society to notice about the proposed adjustments and called for its objections, if any, prior to carrying out the adjustments to its returned income."

Core principles established include the recognition that entities acting purely as implementing agencies or pass-through conduits for government grants, without control or entitlement to retain unspent funds, do not earn taxable income in respect of such funds. Additionally, procedural safeguards under Section 143(1) provisos are mandatory and violations thereof vitiate the assessment process.

Accordingly, the appeal is allowed for statistical purposes and remanded to the CIT(A) for fresh adjudication consistent with these observations and directions.