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Facts
The assessee, a school registered under the Rajasthan Societies Registration Act, filed its return declaring NIL income, claiming exemption under Section 10(23C)(iiiad). Due to an inadvertent selection of ITR-5 instead of ITR-7, the exemption was not reflected, leading to the AO treating receipts as income from other sources and adding unsecured loans. The CIT(A) upheld these additions.
Held
The Tribunal held that the denial of exemption due to a procedural defect (incorrect ITR form selection) and the linkage of exemption to Section 12AA registration were erroneous. The assessee's eligibility for exemption under Section 10(23C)(iiiad) was to be examined afresh by the AO.
Key Issues
Whether a procedural error in filing the Income Tax Return form can lead to denial of substantive exemption, and whether exemption under Section 10(23C)(iiiad) is dependent on registration under Section 12AA.
Sections Cited
10(23C)(iiiad), 68, 270A, 271AAC, 12AA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, JAIPUR BENCHES,”SMC” JAIPUR
ORDER PER: DR. S. SEETHALAKSHMI, J.M. This appeal filed by the assessee is directed against the order of the ld. CIT(A) dated 31-12-2024, National Faceless Appeal Centre, Delhi [ hereinafter referred to as (NFAC) ] for the assessment year 2020-21 raising therein following grounds of appeal. ‘’1. Under the facts and circumstances of the case and in law the learned CIT(A) erred in upholding the denial of exemption under section 10(23C)(iiiad) the assessee being duly registered educational institution. existing solely for educational purposes and not for profit, with receipts below Rs. 1 crore.
1. PRIME ROSE CITY SCHOOL SAMITI VS ITO, WARD 1(1), JAIPUR 2. Under the facts and circumstances of the case and in law the learned CIT(A) failed to appreciate that that a mere clerical and inadvertent error in ITR form selection should not result in the denial of a substantive exemption.
3. Under the facts and circumstances of the case and in law the learned CIT(A) erred in confirming the addition of Rs. 36,79,012/- as income from other sources, despite the fact that the assessee's receipts were exclusively from educational activities and qualified for exemption under section 10(23C)(iiiad).
4. Under the facts and circumstances of the case and in law the learned CIT(A) erred in upholding the addition of Rs. 4,42,000/- under section 68 as unexplained cash credit, despite the fact that the assessee had provided relevant details and was willing to furnish additional documentation, which was not considered.
5. Under the facts and circumstances of the case and in law the learned CIT(A) erred in holding that the assessee's failure to obtain registration under section 12AA disqualifies it from exemption under section 10(23C)(iiiad), whereas the two provisions are independent and mutually exclusive.
6. Under the facts and circumstances of the case and in law the learned CIT(A) erred in ignoring the assessee's submission that similar institutions facing the same issue were granted relief in appeal, and that the principle of parity should be applied.
7. Under the facts and circumstances of the case and in law the order of the learned CIT(A) is bad in law and against the principles of natural justice as the assessee was not granted an adequate opportunity to present its case.
On facts and in the circumstance of the case the Id. CIT(A)-NFAC has grossly erred in sustaining the penalties proceedings initiated by Ld. AO u/s 270A and 271AAC.’’ 2.1 Apropos grounds of appeal, it is noticed that the ld.CIT(A) has not allowed the appeal of the assessee by observing as under:- ‘’In the light of above facts of the case at Point No. (i) to (xii), in absence of an application seeking proper condonation of delay in filing of this appeal, the non- submission of such cogent reasons for not submitting the details before the AO during the course of assessment proceedings and/ or any application under Rule 46A now seeking to introduce the additional evidence, this appellate authority has reason to believe that the additions made by the Assessing Officer (a) of Rs.36.79,012/- i.e. disallowance u/s 10(3C)(iiiad) of the Income Tax Act, 1961 and PRIME ROSE CITY SCHOOL SAMITI VS ITO, WARD 1(1), JAIPUR (b) of Rs.4,42,000/- unsecured loans, is found to be correct and thus upheld. The grounds of the appellant are not allowed. In the result, the appeal is not allowed.’’ 2.2 During the course of hearing, the ld.AR of the assessee mainly submitted that the assessee may be provided one more chance to contest the case before the AO. He further submitted that inadvertently the assesse filed ITR-5 instead of ITR-7 which is a technical and curable defect. The ld.AR further submitted that the assessee tried to file rectification of return of the assessment year 2020-21 but due to pending assessment proceedings, he was unable to rectify the return. To support his case, the ld. AR of the assessee has filed a synopsis of the case giving therein reasoning as under:- ‘’1 Exemption under Section 10(23C)(iiiad): It is submitted that Section 10(23C)(iiiad) of income tax act 1961 provides that the income earned by any university or educational institution existing solely for educational purposes and not for the purposes of profit shall be exempt from tax if the aggregate annual receipts of such university or educational institution do not exceed Rs. 1 crore. Therefore, the assessee, Prime Rose City School Samiti which is registered under the Rajasthan Societies Registration Act, 1958, and provides primary, secondary, and higher secondary education solely exists for education purpose and not for the purpose of profit. It claims to exist solely for educational purposes, with aggregate annual receipts of Rs. 36,79,012 for AY 2020-21, which is below the Rs. 1 crore threshold makes it prima facie eligible for exemption under Section 10(23C)(iiiad).
2. Procedural Error It is submitted that the return for AY 20-21 was the first ever filed by the assessee. Due to lack of knowledge and professional assistance, PRIME ROSE CITY SCHOOL SAMITI VS ITO, WARD 1(1), JAIPUR incorrectITR form was selected. The institution inadvertently filed its return in ITR-5 instead of ITR-7, which is prescribed for entities claiming exemptions under Section 10(23C)(iiiad). The Assessing Officer (AO) and CIT(A) denied the exemption partly due to this error. The assessee argues that this is a rectifiable procedural mistake and should not negate the substantive right to exemption.It is noteworthy to quote the decision in case of Shahu ShikshanPrasarak Mandal Vs ACIT (Exmp) (ITAT Pune) wherein ITAT Pune held that denial of exemption under section 10(23C) of the Income Tax Act for bonafide mistake of filing ITR-5 instead of correct ITR-7 not justifiable since the same is just a procedural technical mistake. Further, On page 6 of the Ld.CIT(A)'s order in point viii. Under the heading DECISION OF THE APPELLATE AUTHORITY Ld. CIT(A) have rejected the contention of the assessee that it filed its return in ITR-5 instead of ITR-7 on the basis that" ignorance of law is not an excuse". It is submitted that "While ignorance is not an excuse, Courts have repeatedly held that procedural defaults, when not intentional or malafide, should not override substantive entitlement" Courts frequently emphasize that procedural errors, especially those not deliberate or malicious, should not obstruct a party's legitimate claim or entitlement to a substantive right. This principle stems from the understanding that procedural rules are meant to facilitate the administration of justice and not to act as a barrier to substantive justice. Thus the only procedural lapse was filing ITR-5 instead of ITR-7, which is a technical and curable defect. It is further submitted that assessee in its reply before AO contended that it tried to file rectification of return for AY 2020-21 but due to pending proceedings was unable to rectify return.
3. Independence from Section 12AA: The learned CIT(A) erred in holding that the assessee's failure to obtain registration under section 12AA disqualifies it from exemption under section 10(23C)(iiiad), whereas the two provisions are independent and mutually exclusive. The CIT(A) has incorrectly linked the denial of exemption to the rejection of registration under Section 12AA. Section 10(23C) (iiiad) does not require such registration. Section 10(23C)(iiiad) operates independently of the registration provisions under Section 12AA. It confers automatic exemption upon satisfying two conditions: 1 Institution must exist solely for educational purposes and not for profit, 2. Gross receipts must not exceed 21 crore. Both conditions are evidently fulfilled in the assessee's case. The rejection of 12AA registration may disqualify an assessee from claiming PRIME ROSE CITY SCHOOL SAMITI VS ITO, WARD 1(1), JAIPUR exemption under Sections 11 & 12, but not under Section 10(23C)(iiiad). Linking the denial of exemption under 10(23C)(iiiad) to absence of 12AA registration is legally flawed and ultra vires the scheme of the Act.
No Income from other sources: The only source of assessee's income was school fees and no income from other activities or investments. Assessing such receipts as "income from other sources" contradicts the nature of activity and assessee's objectives.
Rejection of additional evidence: CIT(A) refused to consider school registration and financials for want of Rule 46A application. It is submitted that the documents were not new but reiterative of assessee's bona fide status as an educational institution. CIT(A) further ignored that submitted documents were not "New Evidence" Under Rule 46A. These were not "additional evidence, but rather explanatory or reiterative of facts already disclosed in the return and during the assessment proceedings. The evidence merely substantiated the nature of the institution as one existing solely for educational purposes.
Rebuttal to CIT(A)'s Conclusion: The learned CIT(A)'s final conclusion upholding the additions made by the AO under section 10(23C)(iiiad) and section 68 is factually incorrect and legally untenable On page 6 of the order, the CIT(A) explicitly condoned the 20-day delay, stating: "...in absence of any objection from the AO's side and purely on the grounds of natural justice, this delay is being condoned and appeal decided on merits." However, in the conclusion, the CIT(A) contradicts itself by again referring to the delay in filing appeal and lack of condonation application: "...in absence of even an application seeking proper condonation of delay..." Once delay is condoned, it is impermissible to subsequently rely on the same as a reason to discredit the appeal on merits. This constitutes procedural inconsistency and violation of principles of finality of interlocutory decisions within the same order. The order of Id. CIT(A) is flawed due to Contradictory treatment of delay, Misapplication of Rule 46A, denial of exemption on irrelevant grounds (12AA registration), Fails to appreciate that the assessee is squarely eligible under section 10(23C)(iliad).