2019 (2) TMI 1842 - AT - Income Tax

Ascertaining the taxable income of the assessee in absence of registration u/s.12A - Revenue taxing the entire amount of receipts without allowing claim of expenditure - determining the income by not giving the credit of the application of funds for charitable purposes - HELD THAT - In view the principles laid down by the Hyderabad Benches of the Tribunal in the case of Nirmal Agricultural Society 1998 (12) TMI 106 - ITAT HYDERABAD-B no hesitation to hold that even in absence of registration u/s.12A of the Act, the Assessing Officer could assess only net income of the assessee and not the entire receipts because in absence of registration u/s.12A the assessee should be assessed in the capacity of AOP on the commercial principles, wherein, the total gross receipts/income cannot be treated as income of the assessee without allowing revenue expenditure incurred by the assessee during the relevant same period and thus, I am inclined to hold that the authorities below were not right in disallowing the claim of expenditure of the assessee. However, AO has framed assessment u/s.143(1) without verifying the quantum of expenditure claimed by the assessee and the CIT(A) has not verified the same during the relevant appellate proceedings. Therefore, direct the Assessing Officer to allow the claim of expenditure of the assessee pertaining to the relevant financial period after due verification of purpose and quantum of expenditure. Hence, the case is restored to the file of the Jurisdictional Assessing Officer - Decided in favour of assessee for statistical purposes.

Summary

Issues:
Appeal against determination of income and credit of funds for charitable purposes.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax(Appeals)-1, Bhubaneswar for the assessment year 2014-15. The main issue raised was regarding the determination of income and the failure to credit funds for charitable purposes. The Assessing Officer and Commissioner were accused of committing a gross error of law in assessing the income and not allowing the credit for application of funds for charitable purposes, leading to an illegal and arbitrary determination of income.

The Assessee argued that the Assessing Officer and CIT(A) erred in not allowing income generating expenditures while determining the income of the society. They contended that without registration under section 12A of the Income Tax Act, only the net income should be assessed, not the entire gross receipts. Reference was made to a decision by the Hyderabad Benches of the Tribunal to support this argument. The Assessee emphasized that revenue expenditure incurred by the society should be considered before determining the taxable income.

On the contrary, the Revenue argued that since the Assessee was not registered under section 12A of the Act, the income applied for charitable purposes could not be exempt under section 11. The Revenue asserted that the entire income should be taxed, as done by the Assessing Officer. They claimed that the application of funds for charitable purposes cannot be factored in while processing the return under section 143(1) of the Act.

After considering the arguments, the Tribunal noted that without registration under section 12A, the Assessee should be assessed as an Association of Person (AOP), and only the net income should be taxed, not the entire gross receipts. The Tribunal highlighted that the purpose and activities of the society were charitable, and the expenditure incurred should be presumed to be for charitable activities. It was emphasized that revenue expenses should have been allowed to the Assessee from the total gross receipts.

The Tribunal found that the authorities below were incorrect in disallowing the claim of expenditure by the Assessee. They directed the Assessing Officer to verify and allow the claim of expenditure for the relevant financial period. The case was restored to the Jurisdictional Assessing Officer for this purpose. Consequently, the appeal of the Assessee was allowed for statistical purposes.