2024 (8) TMI 747 - AT - Income Tax

Eligibility to claim revenue expenditure incurred exclusively to earn income - appellant/ assessee is not eligible to claim exemption u/s 11 or expenses of capital nature - HELD THAT - The finding it is not eligible to claim exemption under section 11 of the Act does not mean that the appellant/assessee is not eligible to claim revenue expenditure incurred exclusively to earn income. We are of the firm view that at most, in this case, the income embedded in the gross receipts can be taxed and not the entire gross receipts as such. AO has to assess the income of the appellant/assessee under the head Income from Other Sources in accordance with the provisions of Sections 56 and 57 of the Act. Therefore, the revenue expenditure incurred exclusively to earn income along with the depreciation on assets has to be allowed as expenditure in accordance with the provisions of Section 57. Thus, the AO is directed to allow all expenses/deductions in accordance with the provisions of Section 57 against the receipts taxable under section 56 of the Act. Accordingly, we order so. The matter is therefore, restored back to the AO for doing needful as above. Appeal of assessee is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of expenses claimed by the appellant in the return of income.
2. Eligibility of the appellant to claim exemption under section 11 of the Income Tax Act.
3. Assessment of income under the head "Income from Other Sources" in absence of trust registration.
4. Validity of disallowance of entire expenses in processing under section 143(1) of the Act.

Analysis:

Issue 1: Disallowance of expenses claimed by the appellant
The Assessing Officer (AO) disallowed all expenses claimed by the appellant in the Income & Expenditure Account, taxing the entire gross receipts as income. The appellant contended that the disallowance was unwarranted as the expenses were incurred to earn income. The Tribunal agreed, stating that disputable disallowances should not be made under section 143(1) of the Act. The appellant's income was directed to be assessed under "Income from Other Sources," allowing deductions as per Section 57 of the Act.

Issue 2: Eligibility for exemption under section 11
The First Appellate Authority dismissed the appeal, stating that the appellant was not entitled to exemption under section 11 as it was not a registered trust under section 12AA or notified under section 10(23C) of the Act. The Tribunal held that while the appellant was not eligible for exemption under section 11, it could claim revenue expenditure incurred to earn income. The AO was directed to assess the income under "Income from Other Sources" and allow deductions as per Section 57.

Issue 3: Assessment of income under "Income from Other Sources"
The Tribunal found that the appellant, not being a registered trust under section 12AA, should have its income assessed under "Income from Other Sources." The disallowance of entire expenses in processing under section 143(1) was deemed against accounting principles and the provisions of the Act. The Tribunal ordered the AO to allow all expenses and deductions in accordance with Section 57 against the taxable receipts.

Issue 4: Validity of disallowance of entire expenses
The Tribunal emphasized that the appellant should be taxed on the income embedded in gross receipts, not the entire receipts. It was held that the appellant could claim revenue expenditure incurred to earn income, directing the AO to allow expenses and deductions in accordance with Section 57. The appeal was allowed for statistical purposes, and the matter was remanded back to the AO for necessary action.