2025 (7) TMI 244 - AT - Income Tax

Disallowance of the claims while issuing the intimation u/s 143(1) - entire gross receipts have been considered as income without giving any benefit of expenditures incurred towards earning of such gross receipts - HELD THAT - The basic cardinal principle for charging income tax on the income tax proceedings is on the net income calculated as per the income tax Act 1961 after considering eligible deductions/exemptions/ set off of loss if any as per the provisions of the income tax Act. The income should be considered in commercial theory and real income theory should be considered for the income tax purpose. As per the provisions of the Income Tax Act the income has been defined u/s 2(24) of the Act. The income should be calculated after deducting the allowable expenditures as per the Income Tax Act from the gross receipts. However in the case of the assessee no benefit of expenditures has been examined by any of the authorities below. Therefore for the verification of the genuineness of the expenditure claimed by the assessee as per section 37 or 57 of the income tax Act the issue is remitted back to the JAO (Jurisdictional Assessing Officer) for examination in terms of above and JAO is directed to give reasonable opportunity of being heard to the assessee and assessee is directed to substantiate its case and not seek unnecessary adjournments for early disposal of the case. Appeal filed by the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

- Whether the intimation issued under section 143(1) of the Income Tax Act, 1961, confirming the disallowance of expenditure claims, was valid and within jurisdiction.

- Whether the disallowance of expenditure claimed by the assessee in the processing of the return was legally sustainable, particularly when the entire gross receipts were treated as income without allowing any deduction for expenditure.

- Whether the assessee's claims were in accordance with law and supported by jurisdictional precedents.

- Whether the assessee was required to file Form 10B or 10AB for claiming exemption under sections 11 and 12 of the Act, and the implications of non-filing thereof.

- Whether the income received by the assessee from tuition fees, bus fees, and other sources should be treated as taxable income or exempt income, considering the nature of the trust and its activities.

- Whether the interest levied under section 234 of the Act was justified.

- Whether the addition confirmed by the CIT(A) was excessive, arbitrary, and unreasonable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity and Jurisdiction of Intimation under Section 143(1)

Relevant Legal Framework and Precedents: Section 143(1) of the Income Tax Act provides for summary assessment or processing of returns filed by the assessee. It is well-established that the scope of assessment under section 143(1) is limited to arithmetical errors or incorrect claims apparent from the return and does not permit detailed scrutiny or disallowance of genuine expenditure claims without jurisdiction.

Court's Interpretation and Reasoning: The Tribunal observed that the intimation under section 143(1) treated the entire gross receipts as income without allowing any deduction for expenditure, which is contrary to the fundamental principle of taxation that income should be computed on net basis after allowing permissible deductions.

Key Evidence and Findings: The assessee declared gross receipts of Rs. 2,85,27,154/- and claimed expenditure of Rs. 3,18,38,743/-. The processing of return under section 143(1) did not allow any expenditure, resulting in a demand of Rs. 1,39,13,110/-. The CIT(A) confirmed this disallowance, but the Tribunal found that the disallowance was made without jurisdiction and was not in accordance with law.

Application of Law to Facts: The Tribunal emphasized that section 143(1) processing is not a substitute for detailed assessment and disallowance of expenditure claims without proper scrutiny and opportunity to the assessee is impermissible.

Treatment of Competing Arguments: The Revenue contended that the CIT(A) rightly confirmed the disallowance. The assessee argued that the entire receipts were wrongly treated as income without allowing expenditure. The Tribunal sided with the assessee, holding that the disallowance was without jurisdiction.

Conclusion: The intimation under section 143(1) confirming disallowance of expenditure claims was without jurisdiction and liable to be set aside.

Issue 2: Claim of Expenditure and Calculation of Income on Net Basis

Relevant Legal Framework and Precedents: Income is defined under section 2(24) of the Income Tax Act. The computation of income requires deduction of allowable expenditure under sections 37 and 57 of the Act from gross receipts. The commercial and real income theories apply to determine taxable income.

Court's Interpretation and Reasoning: The Tribunal reiterated the basic cardinal principle that income tax is charged on net income after allowing permissible deductions. It noted that the authorities below failed to consider the expenditure of Rs. 3,18,38,743/- claimed by the assessee, which exceeded the gross receipts, resulting in a loss.

Key Evidence and Findings: The assessee runs more than 10 educational institutions and incurs expenditure on salaries, bus drivers, and other operating expenses. The receipts are primarily from tuition fees and related sources. The Tribunal found that the expenditure claimed was genuine and necessary for earning the receipts.

Application of Law to Facts: The Tribunal directed the jurisdictional Assessing Officer to examine the genuineness of the expenditure claimed under sections 37 or 57, giving the assessee a reasonable opportunity to substantiate its claim, emphasizing that the net income should be considered for taxation.

Treatment of Competing Arguments: The Revenue relied on the CIT(A)'s order dismissing the claim due to non-filing of Form 10B. The assessee argued that it was not registered under the Income Tax provisions and therefore not required to file Form 10AB or 10B, and that the income was from charitable activities.

Conclusion: The Tribunal remitted the issue for fresh examination of expenditure claims by the Assessing Officer with due opportunity to the assessee, emphasizing the principle of net income computation.

Issue 3: Requirement of Filing Form 10B or 10AB for Claiming Exemption

Relevant Legal Framework and Precedents: Section 12A registration is a prerequisite for claiming exemption under sections 11 and 12 of the Income Tax Act. Form 10B is a report by a Chartered Accountant certifying the application of income for charitable purposes, required to be filed by certain trusts to claim exemption.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee was not registered under section 12A during the year under consideration and hence was not entitled to claim exemption under sections 11 and 12. Consequently, filing of Form 10B was not applicable.

Key Evidence and Findings: The CIT(A) dismissed the appeal partly on the ground of non-filing of Form 10B. The Tribunal clarified that since the assessee was not registered under section 12A, the exemption claim under sections 11 and 12 was not sustainable.

Application of Law to Facts: The Tribunal accepted the Revenue's position that exemption claims were not available due to lack of registration but emphasized that this did not justify treating gross receipts as taxable income without allowing expenditure deductions.

Treatment of Competing Arguments: The assessee contended that it was engaged in charitable activities and the income was from educational institutions, but acknowledged no registration under section 12A. The Tribunal accepted this but limited its effect to exemption claims only.

Conclusion: The assessee was not entitled to exemption under sections 11 and 12 for the impugned year due to lack of registration; however, this did not preclude the allowance of expenditure deductions in computing taxable income.

Issue 4: Treatment of Income from Tuition Fees and Other Sources

Relevant Legal Framework and Precedents: Income from educational activities by charitable trusts may be exempt under sections 11 and 12 if conditions are met, including registration under section 12A. Absent such registration, income is taxable after allowable deductions.

Court's Interpretation and Reasoning: The Tribunal observed that the income received by the assessee was from tuition fees, bus fees, and other operational sources. Since the assessee was not registered under section 12A, the income could not be exempted but should be computed after deduction of expenditure.

Key Evidence and Findings: The assessee's income was primarily from educational activities, but no exemption was claimed due to lack of registration. The Tribunal noted that expenditure incurred was towards salaries and operational costs, which should be allowed to be deducted.

Application of Law to Facts: The Tribunal applied the principle that income should be computed on net basis and directed re-examination of expenditure claims.

Treatment of Competing Arguments: The Revenue treated gross receipts as income without deductions. The assessee argued for net income computation. The Tribunal favored the latter approach.

Conclusion: Income from tuition fees and other sources is taxable income in absence of registration but should be computed net of allowable expenditures.

Issue 5: Levy of Interest under Section 234

Relevant Legal Framework and Precedents: Section 234 of the Income Tax Act provides for levy of interest in cases of delay in payment of tax.

Court's Interpretation and Reasoning: The Tribunal did not specifically analyze this issue in detail but included it as a ground of appeal by the assessee.

Key Evidence and Findings: The assessee challenged the levy of interest. However, the Tribunal's order does not contain a detailed discussion or ruling on this point.

Application of Law to Facts: Since the substantive income computation was remitted for fresh examination, the question of interest would depend on