DREAM FOUNDATION,MUMBAI vs. ITO (2)(1), EXEM WARD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH MUMBAI BEFORE SHRI SAKTIJIT DEY, VICE PRESIDENT & SHRI MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER ITA No. 4006/Mum/2026 (Assessment Year: 2024-25) Dream Foundation ITO 2(1), Mumbai ITAT, Pratistha Municipal Industrial Vs. Bhavan, 101, Estate Off. Dr. E. Maharshi Karve Marg, Moses Road, Worli, Mumbai-400 020 Mumbai-400 018 PAN/GIR No. AAATM5013D (Applicant) (Respondent) Assessee by Shri Sarfaraz Haji Rafiq, Ld. AR Revenue by Shree Kumar C., Ld. DR Date of Hearing 23.06.2026 Date of Pronouncement 30.06.2026 आदेश / ORDER PER MAKARAND VASANT MAHADEOKAR, AM: This appeal by the assessee is directed against the order dated 19.02.2026 passed by the learned Additional/Joint Commissioner of Income-tax (Appeals)-1, Ahmedabad [hereinafter referred to as "CIT(A)"], under section 250 of the Income-tax Act, 1961, [hereinafter referred to as "the Act"], for the assessment year 2024-25. The impugned appellate order arises from the

2 ITA No. 4006/Mum/2026 Dream Foundation intimation dated 28.01.2025 issued by the Centralised Processing Centre (“CPC”) under section 143(1) of the Act.

3 ITA No. 4006/Mum/2026 Dream Foundation 7. That on the facts and in circumstances of the case, the Learned CIT(A) erred in ignoring and overlooking the expenses to the tune of Rs. 9,55,520/- without there being any corroborative evidence supporting that the expenses have not been incurred. 8. That on the facts and circumstances the Learned CIT(A) was not justified in overlooking/ignoring the expenses/amount applied towards the object of the trust to the tune of Rs 9,55,520/- without providing a valid justification/reasoning in the order passed u/s 250. 9. That on the facts and circumstances of the case and in law, the Learned CIT(A) taxed the gross receipts of the Appellant Trust. It is a settled principle that only “Income” can be taxed under the Act; by disallowing all expenses the authorities have erroneously treated the gross receipts as Income. 10. That the appellant prays that the order of the Learned CIT(A) be set aside and the appellant be given relief prayed for. 11. The appellant craves leave to add, alter, or vary the grounds of appeal before or at the time of hearing. Facts of the Case

4 ITA No. 4006/Mum/2026 Dream Foundation Rs.8,06,648/- towards its charitable objects and accumulation or setting apart of Rs.1,48,875/-, being an amount not exceeding 15 per cent of the income derived from property held under trust. The aggregate exemption claimed was Rs.9,55,523/-. After such claim, the assessee disclosed a balance income of Rs.36,977/- and income from other sources of Rs.17,179/-, resulting in returned income of Rs.54,156/-, rounded off in the appellate order to Rs.54,160/-. 5. The return was processed by the CPC under section 143(1) of the Act. A proposal for adjustment under section 143(1)(a) dated 27.11.2024 had been issued, to which, according to the CPC, either no response was furnished or the response was not acceptable. While processing the return, the CPC denied the exemption claimed on the grounds that the audit report in Form No. 10BB had not been electronically furnished within the prescribed time and that, although exemption under section 11 had been claimed, no valid registration was available as per the Departmental data. 6. Consequently, the CPC recomputed the exemption of Rs.9,55,523/- at nil and disallowed the application of income of Rs.8,06,648/- as well as the accumulation of Rs.1,48,875/-. The income was recomputed at Rs.9,92,500/- and, after including income from other sources of Rs.17,179/-, the total income was determined at Rs.10,09,680/- as against the returned income of Rs.54,160/-.

5 ITA No. 4006/Mum/2026 Dream Foundation 7. The CPC computed tax of Rs.1,15,404/- and health and education cess of Rs.4,616/-, aggregating to Rs.1,20,020/-. Interest of Rs.12,000/- under section 234B and Rs.6,060/- under section 234C was also charged. Since no prepaid taxes were available, a net demand of Rs.1,38,080/- was raised by the intimation dated 28.01.2025. 8. The assessee thereafter filed an application under section 154 on 13.03.2025, contending that non-consideration of the expenditure incurred or amount applied by the trust constituted a mistake apparent from the record. The CPC disposed of the rectification application by order dated 16.04.2025. According to the assessee, the expenditure was again not considered and the demand continued. 9. Aggrieved, the assessee preferred an appeal before the learned CIT(A) on 12.05.2025. The appeal was delayed. The assessee explained that its main trustee, Shri Khwaja Mohammed Aarif, was suffering from diabetes, high blood pressure and Parkinson’s disease and was unable to attend to the affairs of the trust. During his indisposition, Smt. Shaheen Aarif Khwaja took over the affairs of the trust and required time to familiarise herself with its income-tax matters. The learned CIT(A), after considering the explanation, condoned the delay and admitted the appeal. The appellate order also records that the appeal fee of Rs.1,000/- was deposited on 27.02.2025.

6 ITA No. 4006/Mum/2026 Dream Foundation 10. Before the learned CIT(A), the assessee contended that even if exemption under section 11 was unavailable, the entire gross receipts could not be assessed as income and that the corresponding expenditure incurred in carrying on the activities of the trust ought to be allowed, so that only the net income was brought to tax. 11. The learned CIT(A), by order dated 19.02.2026 passed under section 250 of the Act, held that no valid registration under section 12AB existed for the relevant assessment year, that the audit report in Form No. 10B/10BB had not been furnished within the prescribed time and that no order condoning the delay under section 119(2)(b) had been produced. The denial of exemption under sections 11 and 12 was accordingly upheld. 12. The learned CIT(A) further held that the adjustment under section 143(1) had been made on the basis of the particulars furnished in the return and the statutory non-compliances apparent from the record and was, therefore, legally valid and within jurisdiction. As regards the assessee’s grievance concerning non-consideration of expenditure of Rs.8,06,648/-, the learned CIT(A) held that, after denial of exemption under section 11, the assessee could not claim application of income on the footing of section 11. At the same time, it was observed that the allowability of expenditure under the normal provisions of the Act required factual verification and could not be examined within the limited scope of section 143(1).

7 ITA No. 4006/Mum/2026 Dream Foundation 13. The learned CIT(A), therefore, issued a without-prejudice direction to the Assessing Officer to treat the assessee as an Association of Persons and allow such expenditure as was otherwise admissible under the Act after due verification. Thus, although the appeal was formally dismissed, the Assessing Officer was specifically directed to assess the assessee under the normal provisions and allow eligible expenditure in accordance with law. 14. During the course of hearing, the learned Authorised Representative (AR) reiterated the facts and submitted that the adjustment made under section 143(1) involved debatable legal and factual issues and that the delay in filing the audit report occurred due to the serious illness of the managing trustee. He contended that, even if exemption under sections 11 and 12 was unavailable, the authorities could not tax the gross receipts without allowing the expenditure actually incurred in carrying on the activities of the assessee. He also submitted that the learned CIT(A), relying on the decision of the coordinate Bench in SCMS Maritime Training Institute v. ITO, ITA No. 6474/Mum/2024, dated 27.05.2025, had partly allowed the assessee’s appeal for assessment year 2023-24 on similar facts and, therefore, a contrary view for the year under consideration was not justified. 15. Per contra, the learned Departmental Representative relied upon the order of the learned CIT(A) and submitted that the denial of exemption was justified in the absence of a valid registration under section 12AB, timely filing of Form No. 10B/10BB and an order of condonation under section 119(2)(b).

8 ITA No. 4006/Mum/2026 Dream Foundation He further pointed out that the learned CIT(A) had already directed the Assessing Officer to treat the assessee as an Association of Persons and allow the expenditure otherwise admissible under the Act after due verification. He, therefore, submitted that no further interference with the impugned order was called for. 16. We have heard the rival submissions and perused the material available on record. We have also carefully considered the intimation under section 143(1), the order passed by the learned CIT(A), the written grounds raised by the assessee and the coordinate Bench decision relied upon by the learned Authorised Representative. 17. The controversy before us has two distinct aspects. The first concerns the entitlement of the assessee to exemption under sections 11 and 12. The second concerns the manner in which the taxable income is to be computed after denial of such exemption. 18. As regards the first aspect, the finding recorded by the learned CIT(A) is that the assessee did not possess a valid registration under section 12AB for the assessment year under consideration. The learned CIT(A) has also recorded that the audit report in Form No. 10B/10BB was not furnished within the prescribed time and that no order condoning the delay under section 119(2)(b) was produced.

9 ITA No. 4006/Mum/2026 Dream Foundation 19. No valid registration under section 12AB applicable to the assessment year 2024-25, or any order of the competent authority curing the statutory default, has been placed before us. In the absence of a valid registration for the relevant assessment year, the assessee cannot claim exemption under sections 11 and 12. We, therefore, find no reason to interfere with the conclusion of the learned CIT(A) to the extent that the exemption under sections 11 and 12 was not available to the assessee. 20. Insofar as the validity of the adjustment under section 143(1) is concerned, the claim for exemption under section 11 was made by the assessee in the return itself, whereas the system-verified particulars did not reflect a valid registration under section 12AB for the relevant year. The denial of exemption, to this limited extent, arose from the particulars contained in the return and the registration data available with the Department. We, therefore, do not find any infirmity in the denial of exemption while processing the return. 21. However, denial of exemption under sections 11 and 12 does not, by itself, result in the entire gross receipts becoming the taxable income of the assessee. Once the assessee is required to be assessed under the normal provisions of the Act, its taxable income has to be computed in accordance with those provisions. The expenditure actually incurred and otherwise admissible under the Act cannot be ignored merely because the exemption under section 11 is unavailable.

10 ITA No. 4006/Mum/2026 Dream Foundation 22. The learned CIT(A) has, in substance, accepted the aforesaid position. The learned CIT(A) has specifically directed the Assessing Officer to treat the assessee as an Association of Persons and to allow such expenditure as is otherwise admissible under the Act after due verification. Although the operative portion of the appellate order states that the appeal is dismissed, the aforesaid direction grants substantive relief to the assessee on the issue of computation of income. 23. The principle emerging from the decision of the coordinate Bench in SCMS Maritime Training Institute v. ITO is also that, even where exemption under section 11 is unavailable for want of renewed registration, the gross collection cannot be assessed as income without considering the matching expenditure incurred in carrying on the activities of the assessee. Only the net surplus, after allowance of expenditure admissible in law, can be brought to tax. 24. We are, therefore, in agreement with the direction issued by the learned CIT(A). However, in order to remove any ambiguity arising from the formal dismissal of the appeal and to ensure effective implementation of the direction, we consider it appropriate to restore the issue of computation of taxable income to the file of the Assessing Officer. 25. We also notice that the amount described in Grounds Nos. 6 to 8 as expenditure or amount applied is Rs.9,55,520/-. The return of income, however, shows application of income of

11 ITA No. 4006/Mum/2026 Dream Foundation Rs.8,06,648/- and accumulation or setting apart of income of Rs.1,48,875/-. The aggregate exemption claimed was Rs.9,55,523/-. The amount accumulated or set apart cannot, merely for that reason, be regarded as expenditure actually incurred. The exact amount of expenditure admissible under the normal provisions must, therefore, be determined on the basis of the books of account, audited financial statements and supporting evidence. 26. We accordingly direct the Assessing Officer to treat the assessee as an Association of Persons and recompute its taxable income under the normal provisions of the Act. For this purpose, the Assessing Officer shall examine the books of account, audited financial statements, vouchers, bank statements and such other evidence as may be produced by the assessee and allow the expenditure actually incurred to the extent it is admissible under the Act. The Assessing Officer shall not mechanically treat the gross receipts as the taxable income of the assessee. 27. The amount of Rs.1,48,875/- shown as accumulation or amount set apart shall not be treated as expenditure merely because it formed part of the exemption claimed in the return. Its treatment, as also the treatment of depreciation and any other claim made by the assessee, shall be determined independently in accordance with the applicable provisions of the Act and after verification of the relevant records.

12 ITA No. 4006/Mum/2026 Dream Foundation 28. The assessee shall be afforded a reasonable opportunity of being heard and shall be at liberty to furnish all documentary evidence necessary to substantiate the expenditure claimed. We make it clear that we have not expressed any opinion on the admissibility or quantum of any particular item of expenditure. 29. The plea concerning the illness of the managing trustee related substantially to the delay in filing the first appeal. Since the learned CIT(A) has already condoned such delay and admitted the appeal, Ground No. 5 does not survive for separate adjudication and is rendered academic. 30. As regards the plea of consistency with the assessment year 2023-24, the learned AR has stated that relief was granted by the learned CIT(A) on similar facts. We do not consider it necessary to rest our decision solely on the rule of consistency. The direction issued herein follows independently from the nature of income chargeable under the normal provisions, the direction already issued by the learned CIT(A) and the principle laid down by the coordinate Bench in SCMS Maritime Training Institute v. ITO. 31. In view of the foregoing discussion, the denial of exemption under sections 11 and 12 is upheld. However, the issue relating to computation of taxable income and allowance of expenditure is restored to the file of the Assessing Officer with the directions contained hereinabove. 32. Grounds Nos. 1 to 4 are partly allowed to the extent indicated above. Ground No. 5 is dismissed as academic.

13 ITA No. 4006/Mum/2026 Dream Foundation Grounds Nos. 6 to 9 are allowed for statistical purposes. Ground No. 10 is consequential, whereas Ground No. 11 is general in nature and does not require separate adjudication.

Order pronounced in the open court on 30.06.2026.

Sd/- Sd/- (SAKTIJIT DEY) (MAKARAND VASANT MAHADEOKAR) VICE PRESIDENT ACCOUNTANT MEMBER Mumbai, Dated 30/06/2026 Dhananjay, Sr.PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. संबंधधत आयकर आयुक्त / The CIT(A) 3. आयकर आयुक्त(अपील) / Concerned CIT 4. धिभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण, मुम्बई / DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. 6. आदेशानुसार/ BY ORDER, सत्याधपत प्रधत //True Copy// 1. उि/सहायक िंजीकार ( Asst. Registrar) आयकर अिीिीय अतिकरण, मुम्बई / ITAT, Mumbai