2019 (11) TMI 1839 - AT - Income Tax

Rectification petition u/s. 154 - rectification to be undertaken by allowing the expenditure incurred to earn income which was rejected by the AO - In the present case, though the assessee does not enjoy exemption u/s. 12AA of the Act, he filed return in ITR 7, he offered to tax net income earned from running of school. AO treated gross receipts as taxable income and levied tax at maximum marginal rate of tax. HELD THAT - As in the present case, when the AO considered the gross receipts as income, he should also have considered the expenditure claimed to be incurred in connection with earning of gross receipts. In the event, he feels that it requires verification whether or not, the expenditure was incurred for earning gross receipts then the only option available to the AO is to convert the case into scrutiny assessment. AO cannot ignore the information contained in other part of return of income which is against him. The taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax which is legitimately due from the assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that scales are weighted against the assessee. It is impossible to subscribe to the view that unless those authorities exercise the power in a manner most beneficial to the revenue and consequently most adverse to the assessee, they should be deemed to have exercised it in a proper and judicious manner. In any event the AO should have acted fairly in disposing the petition filed u/s. 154 which he failed to do so and we highly deprecate the practice adopted by the AO and the CIT(A) had also not applied his mind and upheld the order of the AO. We reverse the orders of the lower authorities and allow the appeal of the assessee. Appeal filed by the assessee stands allowed.

Summary

Issues:
- Appeal against order of Commissioner of Income Tax (Appeals) for AY 2015-2016.
- Disallowance of expenditure claimed by the Assessee.
- Consideration of gross receipts as taxable income without allowing for expenditure.
- Rejection of petition for rectification u/s. 154 of the Act.
- Allegation of Assessing Officer acting outside the domain of Section 143(1) of the Act.
- Failure of lower authorities to consider expenditure incurred to earn income.
- Proper exercise of quasi-judicial powers by taxing authorities.

Detailed Analysis:
1. The appeal was filed by the Assessee against the order of the Commissioner of Income Tax (Appeals) for the Assessment Year 2015-2016. The Assessee contended that the order was arbitrary, contradictory, and lacked application of mind. The grounds of appeal included the failure to allow deduction of expenditure claimed for running a school, especially in the context of exemption under sections 11 and 12 of the Income Tax Act, 1961.

2. The case involved the Kingston Educational Trust, operating a school, which initially filed its return of income without claiming any expenditure. Subsequently, the trust claimed expenditure against gross receipts, resulting in excess income on which tax was paid. The Assessing Officer processed the assessment without allowing the claimed expenditure due to the trust not being registered under section 12AA of the Act.

3. The Assessee's petition for rectification under section 154 of the Act, seeking allowance of the expenditure, was rejected by the Assessing Officer. The Commissioner of Income Tax (Appeals) upheld the AO's decision, leading to the Assessee's appeal before the Appellate Tribunal.

4. The Appellate Tribunal, after considering the submissions, highlighted that the Assessing Officer should have considered the expenditure incurred to earn income. The Tribunal emphasized that the term "taxable income" does not equate to gross income, citing judicial precedents to support the view that income should be arrived at after accounting for legitimate deductions and exemptions.

5. The Tribunal criticized the Assessing Officer for treating gross receipts as taxable income without considering the expenditure claimed to be incurred in connection with earning those receipts. It was emphasized that if verification of expenditure was necessary, the case should have been converted into a scrutiny assessment rather than outright disallowance.

6. The Tribunal underscored the quasi-judicial powers of taxing authorities, stating that they must act fairly and not in a biased manner. It was noted that while ensuring legitimate tax recovery is crucial, authorities should not appear prejudiced against the assessee. The Tribunal reversed the decisions of the lower authorities and allowed the Assessee's appeal, criticizing the Assessing Officer's and CIT(A)'s failure to consider the expenditure and act fairly.

7. Ultimately, the Tribunal allowed the appeal of the Assessee, highlighting the importance of fair and judicious exercise of powers by taxing authorities and the need to consider all relevant aspects, including expenditure, in determining taxable income.