SANDUR KUSHALA KALA KENDRA ,BELLARY vs. INCOME TAX OFFICER, WARD-1 EXEMPTIONS, GULBARGA

Per Prashant Maharishi, Vice President

“1. Eligibility of exemption under section 10(23B) of the Income Tax Act, 1961 (the Act) 1.1. On the facts and circumstances of the case, the learned National Faceless Appeal Center (NFAC) erred in not appreciating the fact that the appellant society has obtained requisite approval from the Khadi and Village Industries Commission and the Income Tax Officer (as a matter of abundant caution), thereby rendering it eligible for claiming exemption under section 10(23B) of the Act. 1.2. On the facts and in the circumstances of the case, the learned NFAC erred in declining exemption claimed under Section 10(23B) of the Act, on the ground that the Certificate of Registration dated March 28, 1988, issued by the Registrar of Societies and the approval certificate from the Income Tax Officer dated April 4, 1996, were issued in earlier years and are very old. The NFAC erred in not appreciating that the Certificate of Registration is issued on incorporation and not issued periodically. The NFAC erred in not appreciating that the section 10(23B) of the Act does not envisage any approvals from the Income Tax Officer, that such approval was sought as a matter of abundant caution and in any case, such approval specifically states that as long as our income falls under the category of institutions referred to in the said section, our income would be exempt and consequently, there is no time limit after which the approval from the Income Tax Officer lapses. 1.3. On the facts and circumstances of the case, the learned NFAC erred in denying exemption claimed under section 10(23B) of the Act on the ground that the Khadi and Village Industries Commission had granted approval for a period of 5 years instead of a period of 3 years specified in the said section. The NFAC erred in not appreciating the fact that the time period for which the certificate is granted is not within the control of the appellant and a beneficial exemption section intended to encourage growth of Khadi and Village Industries is to be interpreted liberally and not denying exemption based on technicalities.

2. Non-applicability of Form 10B/10BB of the Income Tax Rules, 1962 (the Rules) On the facts and circumstances of the case, the learned NFAC, erred in classifying the appellant society as a charitable trust without appreciating the fact that the relevant sections (11 to 13 of the Act) and the connected forms stipulated under the Rules relevant thereto have no application to a society engaged in development of Khadi and Village produce by employing economically backward people in a rural area and that Section 10(23B) of the Act and does not envisage obtaining of an audit report in Forms 10B/10BB of the Rules. Accordingly, the NFAC erred in confirming the denial of exemption on extraneous grounds.

3. Taxing expenditure incurred of Rs. 2,95,14,060/- as income On the facts and circumstances of the case, the learned NFAC erred in endorsing the action of the Centralized Processing Centre (CPC) in treating the application of income amounting to Rs. 2,95,14,060/- as taxable income of the appellant society, without duly appreciating the fact that the appellant society is entitled to exemption under Section 10(23B) of the Act, and in any case, the amount expended for earning income can never be taxed as it does not have the character of income. Amount (Rs.) Particulars Gross receipts of the society 4,00,53,090/- Less: Application of income/expenditure incurred during 2,95,14,060/- the year and erroneously taxed as income Surplus claimed as exemption under section 10(23B) of the 1,05,39,030/- Income Tax Act, 1961 and not granted

4. Development of Khadi and Village Industries vs Profit motive business On the facts and circumstances of the case, the learned NFAC erred in denying exemption under section 10(23B) of the Act, on the ground that the appellant society is engaged in a profit motive business, as purportedly evidenced by a substantial surplus over expenditure, without appreciating the nature and objectives of the assessee's activities. All the income of the society is applied towards meeting its working capital needs like inventory, receivables apart from funds invested in bank accounts for meeting future needs and contingencies. No part of the funds of the society have been utilized for an impermissible purpose.

5. On the facts and circumstances of the case, the learned NFAC has inadvertently erred in recording that a period exceeding seven years had elapsed since the filing of the appeal, without appreciating that, in reality, less than one year had transpired warranting appropriate reconsideration of the entire case, and in any case, prompt disposal of the appeal is not within the control of the appellant and that it can only provide all relevant information in a timely manner, when sought.

7. On the facts and circumstances of the case, there is no justification for the CPC to levy interest under sections 234B and 234C of the Act, amounting to Rs. 23,90,903/- and Rs. 6,35,477/- respectively. The appellant seeks leave to add to, to amend, alter or delete any of the foregoing grounds as and when considered necessary/at the time of hearing.”

6. The ld. CIT(A) issued notice on 21.1.2025 which was replied to by the assessee by submitting the written submission and ground-wise arguments. Once again a notice dated 3.3.2025 where a specific query was raised that date of filing of return was 30.10.2023 wherein it is found that there is an incorrect claim. The income due to disallowance of exemption is less than the difference on account of gross receipt and exemption claimed. Hence the exemption of Rs.2,95,14,061 is at variance. The ld. CIT(A) further referred to page 18 of Income Tax Return and held that there is accumulation of income claimed of Rs.1,05,39,029. It was further stated that as Form 10B and 10BB has not been filed, the claim of the appellant with respect to application of income of Rs.2,95,14,061 of expenditure made towards object of the institution is not allowed. The ld. CIT(A) further noted that though return of income is filed on 30.10.2023 where the due date of filing of return of income is 30.11.2023, Form 10B has not been filed. Thus, the ld. CIT(A) categorically raised a query whether the assessee has filed any Form 10B/10BB and any petition for condonation of delay is filed or not. Both these notices were served on the 2 email-ids furnished by the assessee, but no reply was given. Thereafter, this appeal was transferred to the office of the CIT in e-appeal scheme. As the assessee did not furnish any reply, he held that assessee has nothing more to furnish. Further since more than 7 years have passed, he proceeded to dispose of the appeal. It was further held that in terms of Circular No.10 of 2019, with respect to condonation of delay in filing of Form 10B for years prior to AY 2018-19 and came to the conclusion that he does not have any power to condone the delay and grant deduction. He further held that when specific authority is given such powers, the assessee should avail the same opportunity. Accordingly he confirmed the action of the CPC.

However, while processing the return of income, the CPC has taken a sum of Rs.2,95,14,061 as chargeable income. In fact the assessee has gross income of Rs.4 crores and expenditure of Rs.2.94 crores which resulted into exemption claim of Rs.1,05,39,029. Thus there is an error definitely at the time of filing of return of income wherein instead of mentioning the gross total income, the assessee mentioned the excess of income over expenditure. Due to this, the income to the extent of expenditure incurred by the assessee of Rs.2,95,14,061 was considered as taxable income of the assessee by the CPC. The ld. CIT(A) has decided the issue on altogether different point which was not there. The simple issue before him was that whether the assessee is entitled to deduction u/s. 10(23B) of the Act, on what amount. The correct amount of deduction is Rs.1,05,39,029 which is arrived at by reducing the expenditure of Rs.2,95,14,061 from the total receipt of Rs.4,00,53,090. The other findings of the ld. CIT(A) regarding the allowability of deduction u/s. 10(23B) are also unwarranted.

Pronounced in the open court on this 28th day of July, 2025.