ASSISTANT COMMISSIONER OF INCOMETAX, EXEMPTIONS, CIRCLE,PUNE, PUNE vs. SHREE WARANA VIBHAG SHIKSHAN MANDAL , WARNANAGAR

3. Briefly stated, the facts are that the assessee is trust established under the Bombay Trust Act, 1950 since 13.07.1964. It is also registered under the Societies Registration Act, 1860 and has been granted registration certificate u/s 12A of the Income Tax Act, 1961 (the “Act”) by the Commissioner of Income Tax, Kolhapur on 01.04.2003. It is also holds an exemption certificate u/s 80G of the Act w.e.f. 01.04.2011. The main object of the assessee trust is to provide education to people from all strata of the society. For AY 2017-18, the assessee filed its return of income on 13.11.2017 declaring total income at Rs. Nil. The assessee’s case was selected for scrutiny under CASS. In response to the first notice issued by the Office of Exemptions-Ward, Kolhapur dated 13.08.2018, the assessee duly furnished its response by submitting all the documents before the Assessing Officer, Kolhapur, Exemption-Ward. Initially, the return of the assessee was processed u/s 143(1) on 11.03.2019 accepting the exemption u/s 11 claimed by the assessee with refund. Meanwhile, there was a change in the incumbent office and the assessee was transferred to Exemption Circle, Pune and accordingly subsequent notice u/s 142(1) r.w.s. 129 of the Act along with annexures were issued by the Office of the Exemption Circle, Pune requiring the assessee to furnish certain details/ information contained therein. The notice was duly served on the assessee. However, the assessee failed to file its response to the said notice. Since, the assessee remained non-compliant and the case was getting time barred, the Ld. Assessing Officer (“AO”) proceeded to complete the assessment ex-parte u/s 144 of the Act on the basis of material available on record. As per the return of income filed by the assessee, the Ld. AO observed that the assessee has shown gross receipts of Rs.41,83,82,043/- against which it has claimed application of income to charitable purposes (expenditure) of Rs.43,72,87,949/-. The Ld. AO observed that the assessee has not submitted any documents to substantiate it claim of expenditure and even audited financial statements have not been filed by the assessee. Since, the genuineness of the expenditure remained unproved and unestablished for which burden of proof lied on the assessee, the Ld. AO at his best judgment disallowed 20% of the expenditure i.e. Rs.8,74,57,590/- (20% of Rs.43,72,87,949/-) claimed by the assessee and added the same back to the total income of the assessee. Further, in the absence of any explanation by the assessee regarding the charitable activity carried out by it or any evidence being furnished to prove the genuineness of the activity of the assessee trust during the relevant AY, the Ld. AO denied the exemption claimed by the assessee u/s 10(20) or section 11 of the Act. He, also observed that as per the available office record, the assessee’s case was not scrutinized by the Department in the past and therefore it could not be ascertained whether trust is actually registered u/s 12AA of the Act or not. In view of this, the Ld. AO denied the benefit of exemption u/s 11 and 12 of the Act to the assessee and assessed the income of the assessee trust in the status of AOP at Rs.6,85,51,684/- vide his order dated 14.12.2019 passed u/s 144 of the Act.

4. Aggrieved, the assessee challenged the ex-parte order of the Ld. AO before the Ld. CIT(A) wherein the Ld. AO had made impugned addition of Rs.8,74,57,590/- in respect of disallowance of exemption u/s 11 and section 12 of the Act. Before the Ld. CIT(A), the assessee vehemently objected to the observations made by the Ld. AO alleging that the entire assessment has been based on incorrect facts and circumstances. The assessee claimed that all the necessary documents were submitted within time by the assessee and were available with the Ld. AO at the time of assessment. It was further submitted that the assessee had duly furnished its reply in response to the notice(s) issued by the Ld. AO. The assessee also submitted that it had filed submission before the predecessor of the Ld. AO who has passed the impugned assessment order. The predecessor AO has passed an order u/s 143(1) of the Act wherein the assessee’s return of income was accepted by allowing the claim of exemption u/s 11 based on the submission made by the assessee before him. However, the Ld. AO failed to consider the same and disallowed the exemption u/s 11 claimed by the assessee. It was also brought to the notice of the Ld. CIT(A) that the assessee held a valid certificate of registration u/s 12AA of the Act during the relevant AY under consideration. The assessee had applied 104.51% of its income received during the year towards the objects of the trust and there is a deficit of Rs.1,89,05,905/-. The accounts of the assessee have been audited u/s 33 of the Bombay Public Trust Act and the audit report has been duly furnished by the assessee within the stipulated time. Hence, the ad hoc disallowance of Rs.8,74,57,590/- @ 20% of the expenditure incurred by the assessee is completely unwarranted.

4.1 The Ld. CIT(A) incorporated the above written submissions of the assessee in para 5 of his appellate order and after considering the same allowed the appeal of the assessee by recording his findings and observations in para 6 of his order which is reproduced below : “6. The appellant is a charitable institution approved under section 12AA. The appellant claims its income as exempt u/s 11. In the previous year, the appellant claimed application in excess of its income. The AO held that the appellant had not produced evidence in support of the exemption claimed. Therefore the AO completed the assessment u/s 144 and disallowed 20% of the expenditure and also disallowed deduction u/s 11(1). 6.1 According to the appellant there was compliance to the notices issued but the replies went to the wrong officer. The appellant has argued that (1) it had filed replies with ITO, Exemption Kolhapur who had issued notice u/s 143(2). It is also argued that transfer of case to ACIT (exemption), Pune had not come to the attention of the assessee. (2) It is also argued by the appellant that he did not get any notice u/s 129, when the officer changed. I find that there is merit in this argument of the appellant as 143(2) notice is issued by the ITO, Exemptions, Kolhapur and assessment order has been framed by the ACIT, Exemption Circle, Pune. 6.2 During appellate proceedings the appellant submitted various details including order of approval u/s 12AA and 80G and written submission. Since these were not submitted during assessment stage, a remand report was called for from the AO under Rule 46A of the IT Rules vide order dated 22.02.2024. The remand report was due by 04.03.2024. However the report has not been received. 6.3 When an appellant does not respond to notices calling for information, the AO is entitled to make best judgment assessment. However an assessment under section 144 cannot be arbitrary. It has to be reasonable and wellinformed. An adhoc disallowance of expenses is not justified even under a best judgment assessment. Such a disallowance is a spiteful act and not a fair assessment of income. Therefore disallowance of Rs.8,74,57,590, being ad hoc disallowance of 20% of the revenue expenses, is deleted, Reliance is placed on the decision of the Hon. Supreme Court of India in PCIT vs R.G. Build well Engineers Ltd [2018] 99 taxmann.com 284 (SC). 6.4 Since the appellant is approved u/s 12AA, as evidenced by the copy of approval furnished, it is entitled to exemption u/s 11.

7. The Ld. AR, on the other hand, supported the order of the Ld. CIT(A) and reiterated the submissions made by the assessee before him. The Ld. AR submitted that the assessee holds a valid certificate of registration u/s 12 of the Act since the year 2003. The assessee is also having a valid registration certificate u/s 80G of the Act. Referring to page 7 of the paper book filed on behalf of the assessee, the Ld. AR submitted that the notice issued by the Ld. AO u/s 143(2) on 13.08.2018 had a detailed questionnaire to which the assessee submitted its reply on 12.09.2018 which is placed on page 11 of the paper book. He, further submitted that the assessee’s claim of exemption u/s 12A of the Act has been allowed in the preceding AY and also in the succeeding AY. He also submitted that even during the relevant AY under consideration, the assessee’s claim of exemption was earlier allowed u/s 143(1) of the Act. The Ld. AR submitted that no additional evidence has been filed before the Ld. CIT(A) by the assessee. All the documents/details /evidence filed by the assessee were already available on record with the Ld. AO. The Ld. CIT(A) had called for the remand report from the Ld. AO however the same remained un- responded by him. He submitted that all the relevant documents such as section 12A and 80G registration certificate, return of income, balance sheet etc. were all available on the records of the Department (Kolhapur AO) and therefore the Ld. AO was completely unjustified in making an ad hoc disallowance of 20% of the expenditure incurred by the assessee amounting to Rs.8,74,57,590/-. He submitted that the case laws relied upon by the Ld. DR are all distinguishable on facts as in these cases the Assessing Officer were present but no specific remand report were called for.

AO to decide the issue afresh on merits in accordance with the facts and law after giving due opportunity of hearing to the assessee. The assessee is also hereby directed to substantiate its case before the Ld. AO by filing the requisite documents/evidence in support of its claim on the appointed date without seeking any adjournment under any pretext unless there is a reasonable cause, failing which the Ld. AO shall be at liberty to pass appropriate order as per law. We hold and direct accordingly. The grounds raised by the Revenue are accordingly allowed for statistical purposes.

Order pronounced in the open court on 21st April, 2025.