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Facts
The assessee, a gratuity fund trust, did not file a return for AY 2015-16. The AO initiated reassessment proceedings, assessed interest income of Rs. 1,27,87,780/-, and disallowed expenses. The CIT(A) dismissed the assessee's appeal.
Held
The Tribunal held that the assessee is entitled to claim genuine expenses incurred for its activities against the interest income. The matter was restored to the AO to re-determine the taxable income after allowing deductions.
Key Issues
Whether the assessee trust is eligible to claim expenses against interest income during reassessment proceedings, and whether the concept of mutuality applies.
Sections Cited
142(1), 148, 144, 147, 144B, 10(25)(iv), 154, 57, 57(iii)
AI-generated summary — verify with the full judgment below
Before: SHRI BEENA PILLAI & SMT. RENU JAUHRI
Appellant by : Shri. Gautam Gokhale Respondent by : Mr. Virabhadra S. Mahajan, Sr. DR Date of Hearing 18.06.2025 Date of Pronouncement 24.06.2025 आदेश / O R D E R PER RENU JAUHRI [A.M.] :-
This appeal is filed by the assessee against the order of the Learned Commissioner of Income-tax (Appeals), Mumbai/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] dated 04.10.2024 passed u/s.
The assessee has raised following grounds of appeal:
1. The Learned Assessing Officer erred in completing Assessment at a Total Income of Rs.1,27,87,780, and the Learned CIT(Appeals) erred in confirming; against the Total Income of Rs.NIL accepted and e-filed by the Appellant in its Income Tax Return under Section 142(1) on 16.03.2022.
2. Both the Learned Assessing Officer & Learned CIT (Appeals) failed to agree and appreciate that no income arises in the first place at all after considering the corresponding impregnated expenditure; and hence, there is no question of any taxation.
3. We would now like to place the Concept of Mutuality and its impact for the kind consideration of the Honourable Tribunal. Both the Learned Assessing Officer & Learned CIT(Appeals) did not consider the concept of Mutuality which is applicable to the Appellant.
4. The Appellant begs to consider a 'Procedural Defect'; in terms of only applying formally late; in its application for Exemption u/s 10(25)(iv).
5. The Appellant craves leave to add, alter, amend or withdraw, all or any of the grounds before or during the adjudication proceedings.”
3. Brief facts of the case are that the assessee did not file any return for the year under consideration. It is a trust having the sole objective of making timely payment of gratuity to the employees of the Maharashtra State Co-operative Cotton Growers Marketing Federation Ltd. On verification of the NMS data, Ld. AO noticed that the assessee was in receipt of interest income of Rs. 1,27,87,780/- during the year under consideration. Accordingly, a notice u/s. 148 was issued on 30.03.2021 for reopening of the case. No reply was received to any of the notices issued by the Ld. AO u/s. 148 as well as u/s. 142(1) of the Act. Finally, a show cause notice proposing the addition of Rs. 1,27,87,780/- was issued on 10.03.2022 in response to which the assessee filed its reply along with computation of total income and balance sheet. Along with the reply, a copy of A.Y. 2015-16 the return filed in response to the notice u/s. 148 of the Act at nil income was also submitted. However, in the absence of further compliance and non- furnishing of documentary evidences with regard to loans and advances and other details, Ld. AO finalised the assessment u/s. 144 r.w.s 147 r.w.s 144B at an income of Rs. 1,27,87,780/- after treating the return in response to notice u/s. 148 as non-est. Thereafter, the assessee applied for registration as an approved Gratuity Fund before CIT (Exemption) vide application dated 17.04.2023, seeking registration from the date of incorporation, i.e. 31.03.1984. However, Ld. PCIT Mumbai-17 vide order dated 18.02.2025 granted the approval prospectively w.e.f. 17.04.2023, i.e the date of application.
4. Subsequently, a notice u/s. 154 was issued by the Ld. AO, after noticing that tax had been erroneously computed at nil on total assessed income at Rs. 1,27,87,780/-. As no compliance was made to this notice by the assessee, Ld. AO proceeded to pass the rectification order on 27.09.2022 at the same assessed income and charged tax at applicable rates. Aggrieved with the order of the AO, assessee preferred an appeal before the Ld. CIT(A). However, vide order dated 04.10.2024, the appeal of the assessee was dismissed by the Ld. CIT(A) after holding that there was no infirmity in the order u/s. 154 of the Act. Aggrieved with the order of Ld. CIT(A), assessee has filed an appeal before the Tribunal.
5. Before us, Ld. AR has submitted that while assessing the interest income, Ld. AO ought to have allowed legitimate expenses claimed by the assessee in view of the details filed during the assessment proceedings and should have assessed the income at nil as shown in the return filed in response to notice u/s. A.Y. 2015-16 148 of the Act. It has been explained by the Ld. AR that the assessee is a trust formed by the Maharashtra State Co-op Cotton Growers Marketing Federation Ltd., the sole purpose of which is to ensure timely payment of gratuity to the employees of the parent organisation. The expenses incurred for this purpose, which are claimed against interest income on investments, are, therefore, fully allowable. Since the expenditure incurred during the year under consideration is more than the interest income earned, there is no taxable income and accordingly Ld. AO should have assessed its income at Nil after allowing the expenses claimed u/s. 57 of the Act. Reliance has been placed by Ld. AR on the following decisions: I. DDIT (E) Inv., Circle-II Vs. Petroleum Sports Promotion Board [2014] 44 taxmann.com 322 (Delhi), wherein the Hon’ble Delhi High Court in similar facts and circumstances has held that expenditure incurred towards the purpose of such an entity is allowable u/s. 57 of the Act. II. DCIT (E) Bhopal Vs. Vaishnavi Polyclinic College Governor by VSK Market Tech Educational Society [2020] 122 taxmann.com 287 (Indore- Trib), wherein it has been held that even if revenue brought to tax receipt as income from other sources, it was not justified in denying the benefit of a genuine claim of incidental expenditure u/s. 57(iii) of the Act.
It has further been pointed out by Ld. AR that the assessee sought registration of the gratuity scheme under part C of the 4th Schedule of the Act for claiming exemption u/s. 10(25)(iv) w.e.f. 31.08.1984, being the date of incorporation, vide application filed soon after the impugned assessment was A.Y. 2015-16 completed. However, since the application had been filed on 17.04.2023, Ld. PCIT vide his order dated 18.02.2025 granted registration prospectively w.e.f. the date of application. In view of the above facts and circumstances, Ld. AR has requested that the Ld. AO be directed to allow the claim of genuine expenses u/s. 57(iii) of the Act against the interest income.
Ld. DR has, on the other hand, strongly relied on the orders of lower authorities and has pointed out that the assessee has not made any compliance with the notice u/s. 154 nor has furnished complete details during the assessment proceedings, and accordingly Ld. AO was justified in assessing the interest income of Rs. 1,27,87,780/-.
We have heard the rival submissions and carefully perused the material placed before us. Admittedly, the assessee trust has been incorporated with the sole purpose of ensuring timely disbursement of gratuity to the retiring employees of the Maharashtra State Co-op Cotton Growers Marketing Federation Ltd. Since there was no positive income in any year, the assessee trust did not consider it necessary to file the return of income or to apply for approval of the gratuity fund in order to claim exemption u/s. 10(25) of the Act. Subsequently, after proceedings were initiated for the assessment year under consideration, it applied for the registration. However, since the application was filed on 17.04.2023, jurisdictional PCIT granted approval/registration for the gratuity fund prospectively w.e.f. 17.04.2023 instead of the date of formation of the trust as requested by the assessee. Even though the exemption u/s. 10(25) is not allowable for the year under consideration, we are of the view that the A.Y. 2015-16 assessee is entitled to claim genuine expenses incurred for the purpose of its activities against the interest income which is assessable under the head ‘Income from Other Sources’. Accordingly, we hold that the assessee is entitled to claim genuine expenses u/s. 57 (iii) of the Act against interest income of Rs. 1,27,87,780/-, which has been assessed under the head ‘Income from Other Sources’. In the interest of justice, we deem it appropriate to restore the matter to the Ld. AO for determining the taxable income afresh after allowing deduction for the expenses after due verification against the interest income.
In the result, the appeal is allowed for statistical purposes.