2022 (3) TMI 1067 - AT - Income Tax

Assessment of trust as Association of Persons (AOP) - Claim of revenue expenditure from the addition of gross receipt - Exemption u/s. 10(23C) denied - appellant trust was not registered u/s 12AA - HELD THAT - In absence of registration u/s.12AA of the Act, the assessee has to be treated as an AOP for the purpose of calculation of tax liability in the hands of the assessee. In this situation, as per normal accounting principles and keeping in view the preposition rendered in the case of Shri Vaishnav Polytechnic College Govern by VSK Market Tech Educational Society 2020 (11) TMI 309 - ITAT INDORE all incidental expenditure incurred by the assessee during the relevant financial period, wholly or exclusively for the purpose of marking or earning such income/receipts has to be allowed as per provisions of section 57(iii) of the Act and this legal provision has not been controverted by Ld. SR DR. Assessee, at Bar, has pleaded that since the total income of the assessee trust is ₹ 97,40,810/-, which is below ₹ 1,00,00,000/-, the audit report is not required in this case. He also vehemently pointed out that no audit report has been filed alongwith the e-return. Therefore, the presumption of Ld. CIT(A) that the assessee trust must have filed audit report, is not based on any documentary evidence furnished before us. However, the remaining amount i.e. receipts of income has to be treated as surplus for the purpose of taxation in the hands of the assessee for the relevant assessment year. Hence, the AO is directed to allow the expenditure incurred During the relevant period. Appeal of the assessee is allowed.

Summary

Issues:
Appeal against CIT(A) order for assessment year 2018-19 - Disallowance of expenses - Variance in data between ITR-7 and audit report - Exemption u/s. 10(23C) - Treatment of expenditure for charitable trust - Registration u/s. 12AA - Application of provisions of Income tax Act - Addition made by AO-CPC - Opportunity of hearing - Treatment of surplus income - Allowance of expenditure under section 57(iii).

Analysis:
The appeal was filed by the assessee against the CIT(A) order for the assessment year 2018-19. The assessee, a charitable trust running a school, claimed exemption u/s. 10(23C)(iiad) for the excess of gross receipts over expenditure. The Assessing Officer disallowed revenue expenditure of &8377; 73,10,521/-, resulting in total income assessment at &8377; 91,23,206/-. In the first appeal, the CIT(A) upheld the addition, assuming data from the audit report filed by the assessee. The AR argued that no audit report was filed, and the CPC made the addition without providing a hearing, citing inadvertent mistakes. The AR contended that as the trust lacked registration u/s. 12AA, it should be treated as an AOP, and all expenditure for AOP activities should be allowed before taxing the surplus income.

The Senior DR opposed the AR's submissions, stating that the CPC acted based on the information provided in the e-return, and the notice to the assessee was not adequately responded to. The AR reiterated that the expenditure was exclusively for the trust's activities and should be allowed as per accounting principles. The Tribunal noted the ITAT Indore Bench's decision and held that even without registration u/s. 12AA, all incidental expenditure for income generation must be allowed under section 57(iii). As the trust's income was below &8377; 1,00,00,000/-, no audit report was required. The Tribunal directed the AO to allow the expenditure of &8377; 73,10,521/-, treating the remaining income as surplus for taxation. The appeal of the assessee was allowed, emphasizing the proper treatment of expenditure and surplus income.

In conclusion, the Tribunal's decision favored the assessee, emphasizing the allowance of expenditure incurred for charitable activities and the treatment of surplus income under relevant tax provisions. The judgment highlighted the importance of accurate reporting and the application of legal provisions regarding expenditure and income taxation for charitable trusts, even in the absence of specific registrations.