KRANTHI EDUCATIONAL SOCIETY,BHADRACHALLAM vs. DCIT., EXEMPTION CIRCLE-1(1), HYDERABAD

1. 4 Kranthi Educational Society he had no jurisdiction to condone such delay and therefore, upheld the disallowance of Rs.10,72,66,472/- and dismissed the appeal.

Aggrieved by the order of Ld. CIT(A), the assessee is now in appeal before us.

The learned counsel for the assessee Shri DLS Narasimha Rao, CA, submitted that, the denial of exemption under Section 11 of the Income Tax Act, 1961 only because Form No.10B was filed belatedly is not correct in law. He argued that, the delay in filing the audit report is a procedural defect and cannot override the substantive compliance of Sections 11 and 12 of the Income Tax Act, 1961. He submitted that, the assessee had applied more than 85% of its income for charitable purposes and the financial statements showed excess application of income, which satisfies the primary requirement of the Act. He submitted that the filing of Form No.10B is directory in nature and not mandatory, and such report can be filed at any stage of assessment or appellate proceedings. In support of his contentions, the learned counsel for the assessee relied on certain judicial precedents, including the decision of Hon'ble Jurisdictional High Court in the case of CIT Vs. A.P.S.R.T.C. (2006) 285 ITR 147 (A.P. High Court). He further contended that, the issue relating to the belated filing of Form No.10B is debatable, and therefore, it cannot be adjusted under Section 143(1)(a) of the Act,

5 Kranthi Educational Society which permits only prima facie and arithmetical adjustments. He stated that if the department considered Form No.10B as not filed in time, the correct procedure was to issue a notice under Section 139(9) of the Act, pointing out the defect and providing an opportunity to remove such defect. He argued that, failure to follow Section 139(9) renders the adjustment under Section 143(1)(a) unsustainable.

The learned counsel for the assessee further pointed out that, Section 80AC of the Income Tax Act, 1961 has no application to exemptions under Sections 11 and 12 of the Income Tax Act, 1961, as Section 80AC of the Act, covers only deductions under Chapter VIA and not exemptions for charitable institutions. He submitted that, the Ld. CIT(A) had accepted, in para 5.4.3 of the appellate order, that the assessee had excess expenditure of Rs.5,57,229/- and had applied its entire receipts for charitable purposes. He argued that, once this factual position is accepted, the exemption under Section 11 of the Act, could not be denied merely due to belated filing of Form No.10B.

Dr. Narendra Kumar Naik, Ld. CIT-DR, on the other hand, relied on the orders of lower authorities. He submitted that, the A.O./CPC had rightly denied the exemption under Section 11 of the Income Tax Act, because, Form No.10B was not filed within the prescribed time. He stated that the requirement of filing the audit report on time is 6 Kranthi Educational Society mandatory under Section 12A(1)(b) of the Act, and that the delay was not condoned by the Ld. CIT(E). He submitted that, the Ld. CIT(A) has correctly upheld the adjustment made under Section 143(1)(a) of the Act, as he has no power to condone such delay and as such, the order of the lower authorities does not call for any interference.

We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. The A.O./CPC processed the return of income filed by the assessee on 28.03.2023 and issued intimation under Section 143(1) of the Income Tax Act, 1961 dated 29.12.2023, and determined total income at Rs. 10,72,66,472/- and tax payable at Rs. 7,46,74,360/- by denying exemption claimed under Section 11 of the Income Tax Act, 1961 by the assessee for the reason that, the audit report in Form 10B, has been filed beyond the due date provided under Section 139(1) of the Act r.w.s. 80AC of the Income Tax Act, 1961. The A.O. has denied exemption claimed under Section 11 of the Income Tax Act, 1961 and assessed the gross receipts as income of the assessee without allowing deductions for various expenditures claimed towards application of income and determined total income at Rs. 10,72,66,472/-. There is no dispute with regard to the fact that, the assessee has filed return of income belatedly on 28.03.2023 and along with the return of income, has filed audit

So far as the arguments of the learned counsel for the assessee that filing of audit report in Form 10B is directory in nature and not mandatory in light of certain judicial pronouncements, including the decision of the Hon’ble Jurisdictional High Court of Andhra Pradesh in the case of CIT Vs. A.P.S.R.T.C. (2006) 285 ITR 147, in our considered

Having said so, let us come back to the determination of total income by the A.O./CPC. The A.O. denied exemption u/s 11 of the Act, and computed income by considering the gross receipts as income of the assessee without allowing any deduction for various expenditure which is evident from the income and expenditure account furnished by the assessee where the assessee has reported gross receipts of Rs.10,72,66,472/- with an excess of expenditure over income of Rs. 5,57,229/-. It is an admitted position of law that once the exemption is 10 Kranthi Educational Society denied for any trust or institution or society, then the income of the said society must be computed in accordance with commercial principles by considering the gross receipts and also after allowing relevant expenditure incurred for earning the income. In the present case, the A.O. considered gross receipts without allowing any deductions for expenditures. Therefore, in our considered view, the method followed by the A.O. for determination of total income is contrary to law and cannot be accepted.

In this view of the matter, and considering the facts of the case, we are of the considered view that, for the discussions given hereinabove, the matter needs to be restored to the file of the A.O. for reconsideration of the issue in light of above discussion given hereinabove. Thus, we set aside the order of the Ld. CIT(A) and restore the issue back to the file of the A.O. The A.O. is directed to reconsider the assessment of income of the assessee after allowing an opportunity to the assessee to file an application before the Ld. CIT (Exemptions) for condonation of the delay in filing of audit report in Form 10B and assess the income after the outcome of the application filed by the assessee before the authority for condonation of delay. In case, the assessee is unable to succeed in getting the delay condoned in filing the audit report in Form 10B, then the A.O. is directed to assess the income under normal

In the result, the appeal filed by the assessee is allowed for statistical purposes in terms of our observations given hereinabove.