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2025 (4) TMI 1563 - AT - Income TaxNon granting exemption u/s 11 and 12 - missing entry in the income tax return - charitable activity u/s 2(15) - HELD THAT - It appears that while filing the return of income the said counsel did not fill in the column 6(i) relating to the amount applied to charitable purposes in India during the previous year. While he had correctly filled the amount of exempt income claimed and the amount that have been accumulated or set apart for application to charitable or religious purposes to the extent it did not exceed 15% of the receipts he had left the column relating the amount applied to charitable purposes as blank. Therefore addition had been made during the course of assessment and CIT(A) instead of appreciating that the exemption could not be denied only on account of a missing entry in the income tax return had adopted a pedantic approach in considering what expenditures were allowable under income from sources and what were not. In our opinion CIT(A) should have paused to consider that the society was a registered trust u/s 12A and therefore it was to be assessed under the tax regime prescribed for societies u/s 11 12 and 13. What had to be seen in such cases was whether the income of the society had been applied towards charitable purposes enshrined within the objects of the society for which the CIT had granted the registration u/s 12A. The mere fact that the assessee may have filled wrongly or omitted to fill a column in its income tax return would not take away its eligibility for exemption if it was otherwise eligible under the law. Since it is clear that the assessee trust had been registered under section 12A for the purposes of imparting education to students and it has not been pointed out that any expenditure made by the society has been made on matters outside the objects of the assessee trust or for non-charitable purposes there was no occasion to sustain the disallowances of the nature that the CIT(A) has on account of his understanding of what was deductible against income from other sources. We have also perused the computation filed by the assessee society and after going through the same we delete the addition sustained by the ld. CIT(A). In making this decision we rely upon the orders of Sh. Gujarat Bhavsar Samaj 2024 (11) TMI 94 - GUJARAT HIGH COURT which has been placed by the ld. AR in her paper book which lays down that where the assessee trust filed its return claiming application of income for charitable purposes but due to a technical glitch the income applied by the assessee was not reflected in the return and consequently revision application filed u/s 264 was rejected the Hon ble High Court held that since the assessee had incurred expenditure and applied income / donation received by it for charitable purposes the assessee was entitled to benefit of the same. We find that the facts in the aforesaid case are quite similar to the facts of the assessee s case and therefore relying upon the said order we delete the addition sustained by the ld. CIT(A) and allow the appeal of the assessee.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal were:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Entitlement to exemption under sections 11 and 12 despite omission in income tax return Relevant legal framework and precedents: The Income Tax Act, 1961, under sections 11 and 12, grants exemption to income derived from property held for charitable or religious purposes, provided the income is applied to such purposes. Section 12AA confers registration status to charitable trusts or societies, enabling them to claim such exemptions. The Gujarat High Court decision in Gujarat Bhavsar Samaj vs. CIT(Exemptions) (2024) 168 taxman.com 125 was cited, which held that a technical omission in the return does not disentitle a registered charitable trust from claiming exemption if the income was actually applied for charitable purposes. Court's interpretation and reasoning: The Tribunal observed that the assessee was registered under section 12A and had maintained proper books of accounts audited under section 12(1)(b). The omission of the amount applied to charitable purposes in the income tax return was due to inadvertent error by the tax counsel. The Tribunal emphasized that such a clerical or technical error should not override the substantive fact that the income was applied for charitable purposes as per the audited accounts and Form 10-B filed electronically. Key evidence and findings: The assessee submitted audited balance sheets, income and expenditure accounts, receipt and payment accounts, and the audit report in Form 10-B. These documents showed that 96.44% of the income was applied towards charitable purposes, consistent with the objects of the society. Application of law to facts: The Tribunal applied the principles enshrined in sections 11, 12, and 13, focusing on the actual application of income rather than the form or format of the return. It held that the exemption cannot be denied merely due to a missing entry in the return if the society otherwise meets the conditions for exemption. Treatment of competing arguments: While the Revenue urged remand for further examination, the Tribunal found that the facts and documents on record were sufficient to conclude that the exemption was rightly claimed. The Tribunal rejected the CIT(A)'s pedantic approach that disallowed exemption based on the head under which income was shown and the absence of direct nexus between expenditure and income from other sources. Conclusion: The assessee was entitled to exemption under sections 11 and 12, notwithstanding the omission in the return, since the income was applied for charitable purposes as per the audited accounts and Form 10-B. Issue 2: Justification of disallowance of expenses, including capital expenditure, against income from other sources Relevant legal framework and precedents: Section 57(iii) of the Income Tax Act disallows capital expenditure against income from other sources. The principle of nexus requires that expenses claimed against income from other sources must have a direct and proximate relationship to the income earned. Court's interpretation and reasoning: The CIT(A) had held that capital expenditure was disallowable and that only expenditure directly relatable to the earning of income from other sources could be allowed. The Tribunal, however, distinguished the nature of the assessee as a charitable society registered under section 12A, which is assessed under sections 11, 12, and 13, not under normal heads of income. Therefore, the Tribunal found the CIT(A)'s approach of applying income-from-other-sources principles inappropriate in this context. Key evidence and findings: The audited accounts showed that the expenditures were incurred in furtherance of the charitable objectives of the society, including revenue and capital expenditures. There was no indication that expenditures were unrelated to the charitable purposes. Application of law to facts: The Tribunal applied the exemption regime for charitable trusts, which permits application of income towards charitable purposes, including capital expenditure, as long as it is within the objects of the trust. The Tribunal rejected the notion that the income must be treated strictly as income from other sources for disallowance purposes. Treatment of competing arguments: The Revenue's reliance on the classification of income as "income from other sources" and the consequent disallowance was rejected in light of the trust's registered status and the exemption provisions. Conclusion: The disallowance of capital expenditure and other expenses was not justified, and the addition on this ground was deleted. Issue 3: Adequacy of opportunity of hearing and procedural compliance under section 143(1) Relevant legal framework and precedents: Principles of natural justice require that an assessee be given adequate opportunity to explain or clarify before adverse orders are passed. Section 143(1) of the Income Tax Act lays down the procedure for processing of returns, including scrutiny and assessment. Court's interpretation and reasoning: The assessee contended that the addition was made without adequate opportunity for clarification, particularly given the mismatch between the audit report and the return. The Tribunal noted that the CIT(A) did not consider the assessee's explanation adequately and proceeded on a pedantic basis. Key evidence and findings: The assessee had submitted detailed documents and explanations regarding the application of income and expenditures. The Tribunal found that the procedural safeguards were not properly observed in sustaining the additions. Application of law to facts: The Tribunal held that the addition could not be sustained without giving the assessee a proper opportunity to explain the inadvertent omission and to reconcile the audit report with the return. Treatment of competing arguments: The Revenue did not dispute the procedural lapse but suggested remand, which the Tribunal did not find necessary given the clarity of facts. Conclusion: The procedural requirements were not properly followed, and the disallowances sustained on this basis were deleted. 3. SIGNIFICANT HOLDINGS "The mere fact that the assessee may have filled wrongly or omitted to fill a column in its income tax return, would not take away its eligibility for exemption, if it was otherwise eligible under the law." "Since it is clear that the assessee trust had been registered under section 12A for the purposes of imparting education to students and it has not been pointed out that any expenditure made by the society has been made on matters outside the objects of the assessee trust or for non-charitable purposes, there was no occasion to sustain the disallowances." "Where the assessee had incurred expenditure and applied income/donation received by it for charitable purposes, the assessee was entitled to the benefit of exemption, notwithstanding a technical glitch or omission in the return." The Tribunal established the principle that exemption under sections 11 and 12 cannot be denied solely on the basis of inadvertent or technical errors in the income tax return, especially where the assessee is a registered charitable trust and the income has been applied for charitable purposes as per audited accounts. Final determinations included deletion of the addition of Rs. 1,54,57,795/- sustained by the CIT(A), deletion of disallowance of capital expenditure of Rs. 9,97,106/-, and allowing the appeal of the assessee in entirety on the basis that the exemption was rightly claimed and procedural safeguards were not observed in sustaining the additions.
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