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Facts
The appellant, an educational society, declared nil income for AY 2018-19. The AO assessed income by taxing gross receipts without allowing claimed expenditures, citing no direct nexus. The CIT(A) upheld this due to the appellant's lack of registration under sections 12AA or 10(23C), despite the appellant's claim of a technical glitch causing income to be miscategorized as 'other sources'.
Held
The Tribunal held that irrespective of income classification or registration status, only real income can be taxed, making it mandatory for the AO to allow expenditures incurred to earn gross receipts. The matter was therefore remanded back to the AO to re-determine the taxable income by considering the expenditure, after giving the appellant a reasonable opportunity of being heard.
Key Issues
Whether the Assessing Officer is bound to allow expenditure incurred to earn gross receipts, even if the income is erroneously shown under 'other sources' and the assessee lacks registration under sections 12A/12AA or 10(23C) of the Income Tax Act.
Sections Cited
143(3), 144B, 57, 12A, 12AA, 10(23C)
AI-generated summary — verify with the full judgment below
O R D E R Per: Inturi Rama Rao, AM This appeal filed by the assessee is directed against the order of the National Faceless Appeal Centre, Delhi [CIT(A)] dated 12.08.2024 for Assessment Year (AY) 2018-19.
Brief facts of the case are that the appellant is a society running educational institution. The return of income for AY 2018- 19 was filed on 18.12.2018 declaring Nil income. Against the said return of income, the assessment was completed by the National e- Pathanamthitta SNDP Union Development and Welfare Society Assessment Centre, Delhi (hereinafter called "the AO") vide order dated 16.04.2021 passed u/s. 143(3) r.w.s. 144B of the Income Tax Act, 1961 (the Act) at total income of Rs. 2,16,04.141/-. While doing so, the AO had brought to tax the gross receipts of Rs. 2,16,04,141/- without allowing deduction claimed u/s. 57 of the Act of Rs. 2,42,71,461/- by holding that the expenditure claimed had no direct nexus with the income earned.
Being aggrieved, an appeal was filed before the CIT(A), contending that the expenses were directly incurred wholly and exclusively for the purpose of earning income. Because of some technical glitches, while uploading the return, the income was shown under the head ‘income from other sources’ and the expenditure was also claimed u/s. 57 of the Act. However, the CIT(A) upheld the action of the AO by holding that in absence of registration u/s. 12AA of the Act or u/s. 10(23C) the claim cannot be allowed.
Being aggrieved, the appellant is in appeal before this Tribunal in the present appeal.
When the appeal was called on, nobody appeared on behalf of the assessee despite due service of notice of hearing. Therefore, we proceeded to dispose of the appeal after hearing the learned Sr. DR. Pathanamthitta SNDP Union Development and Welfare Society 6. Through the grounds of appeal filed by the appellant it is submitted that the expenditure of Rs. 2,42,71,461/- was incurred wholly and exclusively for the purpose of earning income from running a school. The income and expenditure were wrongly claimed as income from ‘other sources’. It is further stated that without prejudice to this, even while computing the income under the head ‘other source’ the AO is bound to allow expenditure incurred to earn the income shown as ‘income from other sources’. Even the first appellate authority simply confirmed the action of the AO without appreciating the issue from proper perspective. Thus, it is stated that the order passed by the learned lower authorities were not sustainable in the eyes of law.
7. The appellant is admittedly running a school and not enjoying registration u/s. 12A of the Act or u/s. 10(23C) of the Act. It is claimed that the income earned from running the school was wrongly assessed under the head ‘income from other sources’ instead of ‘income from business’. Without going into the issue, whether the income is assessable under the head ‘income from other sources’ or not, suffice to hold that while assessing the gross receipts as taxable income of the assessee, it is incumbent on the AO to allow expenditure incurred to earn the gross receipts. It is settled position of law that what is to be taxed is real income, not notional income. Therefore, in the interest of justice, we remand the matter Pathanamthitta SNDP Union Development and Welfare Society back to the AO to determine the taxable income by allowing expenditure incurred to earn the gross receipts from running the school after affording reasonable opportunity of hearing to the appellant.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 31st July, 2025.