VICTORIA EDUCATIONAL TRUST,KRISHNAGIRI vs. ITO, EXEMPTION WARD,, SALEM

The brief facts emanating from the records are that the assessee is an educational trust engaged in running an educational institution under the name and style of Victoria Matriculation School. The assessee has been regularly filing its return of income in Form ITR-7 in the status of Association of Persons / Body of Individuals (AOP/BOI). For the Assessment Year 2018-19, the assessee filed its return of income on 26.10.2018 claiming exemption u/s.11 of the Act. The said return was processed u/s.143(1) of the Act and an intimation dated 31.01.2020 was issued by the Centralized Processing Centre (“CPC”). However, while processing the return, credit was not granted in respect of the amounts claimed towards expenditure, application of income, and accumulation of income by the assessee. The entries furnished by the assessee in the return were allegedly treated as “Nil”, resulting in a consequential demand of Rs.59,22,354/-.

Aggrieved by the aforesaid adjustment, the assessee filed an application for rectification u/s.154 of the Act on 21.02.2020 seeking rectification of the intimation issued u/s.143(1) for the Assessment Year 2018-19. However, according to the assessee, the said rectification application was not disposed of by the Department. In the interregnum, the assessee contended that the income-tax portal did not provide any functional option enabling the assessee to prefer an appeal against the intimation issued u/s.143(1) of the Act. Subsequently, the assessee filed the audit report in Form No.10B on 17.02.2024 and also preferred a condonation petition before the Central Board of Direct Taxes on 20.02.2024 seeking condonation of delay in filing the audit report and Form No.10B. The said condonation petition is stated to be pending consideration.

Subsequently, the assessee once again preferred a rectification application on 03.05.2024 seeking correction of the intimation issued u/s.143(1) of the Act. The said rectification application was disposed of by the CPC vide order dated 02.07.2024, wherein the claim of the assessee was rejected on the :-3-:

Aggrieved by the said rectification order dated 02.07.2024, the assessee preferred an appeal before the ld.CIT(A). Before the ld.CIT(A), the assessee submitted the written submission by explaining the nature of activities and filing of return of income and belated filing of audit report and Form 10B. On perusal of the submission, the ld.CIT(A) dismissed the appeal of the assessee by holding as under:- “6. Discussion & Decision:

1 The appellant was issued notice u/s. 250 of the IT Act. On the basis of statements of facts, written submission and the documents furnished along with the Form 35, the appeal is decided on merit.

2 I have considered the submissions made by the appellant and the material available on record. It is observed that the appellant, a trust running "Victoria Matriculation School" with about 800 students, claims to provide education at subsidized rates and offers free transport to 25% of its students. For the Assessment Year 2018-19, the appellant filed its original return of income in Form ITR-7 on 26.10.2018 under Section 139(1), declaring a total income of Rs. 2,58,920/- and claiming exemption under Sections 11 and 12. Form 10B was filed on 17.02.2024. However, since the trust did not hold registration under Section 12A for the relevant year, the return was processed under Section 143(1) without allowing the exemption claimed under Sections 11 and 12 of the Income Tax Act, resulting in a tax demand of Rs.59,22,354/-. The appellant trust filed a rectification application on 21.02.2020 for A.Y. 2018-19, requesting rectification of the assessment and reworking of the demand, which was not considered. In the meantime, three bank accounts of the appellant were attached by the Department. Further, the appellant filed another rectification application under Section 154 on 03.05.2024, which was subsequently rejected by the Assessing Officer (CPC) vide order dated 02.07.2024 on the ground that no registration under Section 12A existed during the relevant year and, hence, the appellant was not entitled to exemption.

3 It is pertinent to note that the appellant was not registered under Section 12A of the Income-tax Act, 1961, during the relevant Assessment Year 2018-19. On perusal of the order for registration under Section 12AA of the Income Tax Act, 1961, issued by the CIT (Exemption), Chennai, dated 03.08.2020, it is observed that the provisions of Sections 11 and 12 shall apply to the appellant from the relevant assessment year. The law is well settled that exemption under Sections 11 and 12 is available only to trusts or institutions which are duly registered under Section 12A/12AA, as per the provisions of the Income-tax Act. In the absence of such registration, the trust cannot claim exemption under these sections,

Aggrieved by the order of the ld.CIT(A), the assessee preferred an appeal before us by raising the following grounds of appeal:-

Though the assessee had raised multiple grounds of appeal, during the course of hearing, the ld.AR appearing for the assessee did not press all the grounds except Alternate Ground No. H. Accordingly, the other grounds raised by the assessee were treated as withdrawn. In Alternate Ground No. H, the assessee prayed that, without prejudice to its primary claim for exemption under section 11 of the Income-tax Act, 1961, the assessee-trust may alternatively be assessed in the status of an Association of Persons (“AOP”) and the AO be directed to allow deduction of the corresponding expenditure incurred wholly and exclusively for the purpose of carrying on the activities of the trust, while computing the total income for the Assessment Year 2018-19. 8. Per contra, the ld.DR fairly conceded that, in the event the assessee is not held to be eligible for exemption u/s.11 of the Act for the impugned assessment year, the income of the assessee may be computed by treating the assessee as an Association of Persons (“AOP”) and only the net income, after allowing deduction of the eligible expenditure incurred wholly and exclusively for the purposes of its activities, may be brought to tax in accordance with law.

We have heard the rival submissions advanced by the rival parties, perused the materials available on record, and carefully gone through the orders passed by the lower authorities. The undisputed facts borne out from the records are that the assessee is an educational trust engaged in running

We further find that the rectification application preferred by the assessee u/s.154 of the Act came to be rejected by the CPC on the ground that the assessee was not holding registration u/s.12A of the Act for the impugned assessment year and, therefore, was not entitled to claim exemption u/s.11 and 12 of the Act. The said action of the CPC was subsequently affirmed by the ld.CIT(A). During the course of hearing before us, the ld.AR fairly did not press the various grounds challenging the denial of exemption u/s.11 and 12 of the Act and restricted the arguments only to Alternate Ground No.H seeking allowance of eligible expenditure by treating the assessee as an Association of Persons (“AOP”) and taxing only the resultant net income.

In this regard, we find considerable merit in the alternate contention advanced on behalf of the assessee. It is a settled proposition of law that, even where exemption u/s.11 and 12 of the Act is denied for want of registration u/s.12A/12AA, the gross receipts of a trust or institution cannot automatically be brought to tax without allowing deduction of the expenditure incurred wholly and exclusively for carrying on the activities of the institution. The scheme of the Act contemplates taxation only of the real income and not the gross receipts. Therefore, where the status of exemption is denied, the assessee has necessarily to be assessed in the normal course under the appropriate status and only the surplus remaining after allowing legitimate expenditure can be subjected to tax.

On perusal of the intimation issued u/s.143(1) of the Act and the materials placed on record, we find that the assessee had disclosed gross receipts of Rs.1,31,10,312/- during the relevant assessment year. Against the said receipts, the assessee had claimed revenue expenditure of Rs.1,25,60,243/- and capital expenditure of Rs.2,91,150/-. However, while processing the return, the CPC rejected the entire claim of expenditure aggregating to Rs.1,28,51,393/- and proceeded to bring the entire gross receipts to tax. In our considered view, such an approach adopted by the CPC is contrary to the settled principles governing computation of taxable income under the Act.

We also take note of the fair concession made by the ld.DR that, in the event exemption u/s.11 of the Act is not available to the assessee, only the net income after allowing eligible expenditure is liable to be taxed. Once the Revenue itself accepts the principle that the assessee is entitled to deduction of legitimate expenditure incurred for carrying on its activities, there remains no justification for sustaining the taxation of the entire gross receipts.

At the same time, we are conscious of the fact that the allowability and quantification of expenditure requires factual verification of the books of account and supporting records. Since the lower authorities have not examined the claim of expenditure on merits in the context of computation of taxable income under the status of an AOP, we deem it appropriate, in the interest of justice, to restore the issue to the file of the jurisdictional Assessing Officer (“JAO”). The JAO shall verify the books of account, supporting vouchers, and other relevant evidences and allow such expenditure as is found to be incurred wholly and exclusively for the purposes of carrying on the activities of the assessee-trust, in accordance with law. Thereafter, only the resultant net income shall be brought to tax for the impugned assessment year.

Accordingly, the order passed by the ld.CIT(A) is set aside to the limited extent indicated above and the issue is remitted back to the file of the JAO for fresh adjudication in terms of our observations hereinabove. The assessee is directed to extend full cooperation and furnish all requisite details and supporting evidences before the AO.

In the result, the appeal filed by the assessee is partly allowed for statistical purposes.