ADMINISTRATIVE STAFF COLLEGE OF INDIA,HYDERABAD vs. DCIT, EXEMPTIONS, CIRCLE-1(1), HYDERABAD

This appeal is filed by Administrative Staff College of India, Hyderabad (“the assessee”), feeling aggrieved by the order passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”), dated 19.02.2024 for the A.Y. 2021-22.

The facts of the case, in brief, are that the assessee is a society which was started jointly by the Government of India and the representatives of industry as an autonomous institute in the year 1956 to impart training in the field of Civil Services development and is engaged in providing education, management training, research and advisory services to the Government, multilateral organisations and industry. The assessee filed the Return of Income for the Assessment Year 2021-22 on 29.12.2021, admitting total income at Rs. NIL after claiming exemption u/s.10(23C)(iv) of the Income Tax Act, 1961 (“the Act”). The return was selected for complete scrutiny under the CASS. Finally the Learned Assessing Officer (“Ld. AO") passed the order u/s.143(3) read with section 144B of the Act on 29.12.2022 making an addition of Rs.16,70,155/- on account of foreign contribution received by the assessee, Rs.93,82,089/- on account of disallowance of provision for gratuity to employees and Rs.1,87,32,580/- on account of disallowance of provision for other terminal benefits, assessed the total income at Rs.2,97,84,824/-.

The assessee raised as many as 9 grounds in this appeal. However, mainly two issues are involved out of the grounds raised

Aggrieved by the order of Ld. AO, the assessee filed an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee submitted that there was an inadvertent mistake in filling the amount of foreign contribution received in form ITR-7. The difference of Rs.16,70,155/- had been inadvertently included in “receipt from main object”. However, the Ld. CIT(A) confirmed the addition made by the Ld. AO and dismissed the claim of the assessee. The reason given by the Ld. CIT(A) for dismissing the claim of the assessee is contained in para 4.3 of his order, which is to the following effect : “ 4.3 I have considered the above and reply of the assessee as regards the addition of Foreign contribution of Rs.16,70,155 is concerned the appellant has explained that this amount is the interest on foreign contribution received and has given accounting explanation for the same. The appellant submitted the discrepancy in foreign contribution reporting was due to an inadvertent error in reporting the figures in the Income Tax Return. The correct amount of foreign contribution should be Rs.9,85,73,287/-, as stated in the audited accounts and the consolidated income statement. The mistake resulted in Rs.16,70,155/- being included under “Receipts from Main Objects” instead of “Foreign Contribution.” This error did not affect the gross receipts of the organisation. Therefore, the appellant requests dropping the proposed addition of Rs.16,70,155/-. However, the appellant has failed to show this amount through the bank documents that this amount actually represents the interest on foreign contribution. In absence of the same and agreeing with the discussion by the AO on page 2,3,4 of the assessment order, on the issue I uphold the addition of Rs.16,70,155/-. As a result, the grounds No.1, 2 and 3 taken by assessee are dismissed.”

Aggrieved by the order of Ld. CIT(A), the assessee is in appeal before the us. The Ld. AR submitted that the total receipts of the assessee during the year under consideration are Rs.40,41,33,127/-.

Per contra, the Ld.DR placed heavy reliance on the order of authorities below and requested to uphold the order of revenue authorities.

We have heard the rival submission and also gone through the record in the light of submission made by either side. As per the submissions of the assessee, during the year under consideration the assessee is having a total receipts of Rs.40,41,33,127/- and the same total receipts have been shown in Form ITR-7 also and hence it is not a case of escapement of income. The only mistake which had happened was that, the amount of Rs.16,70,155/- has been offered as income under the head “receipt from main object” instead of “foreign contribution received”. There was no difference in total receipts of assessee. The submissions made by the Ld. AR needs verification from the records, whether taking the receipt under “receipt from main object” instead of “Foreign Contribution received” will effect the taxability of receipt of assessee or not ? Hence we are of the view that it would be proper to remand the matter to the file of the Ld. AO with a direction to verify the difference of Rs.16,70,155/- with the records of the assessee and to confirm whether there is any genuine mistake on the part of the assessee in showing Rs.16,70,155/- under the head “receipt from main object” instead of “foreign contribution received” and whether by wrongly treating it as “receipt from main object” will decrease / increase the taxability or not. In case, if on verification it is found that the mistake will not effect the taxability, then the Ld. AO shall delete the additions. Needless to say the Ld. AO shall provide an opportunity of being heard to the assessee before making the assessment. Accordingly, the ground of the appeal is allowed for statistical purposes.

The next issue is related to disallowance of Rs.93,82,089/- towards provision for gratuity to employees and disallowance of Rs.1,87,32,580/- towards provision for other terminal benefits. Hence the total disallowance is amounting to Rs.2,81,14,669/- on account of provision of expenses. The Ld. AO disallowed the provision of expenses amounting to Rs.2,81,14,669/- contending that it is not a present liability and added the same to the total income of the assessee. The observation of the Ld.AO while disallowing the provision of Rs.2,81,14,669/- is contained in page No.19 of his order, which is to the following effect : “ Further, the expense in the nature of provision, as has been claimed by the assessee has not actually been incurred by the assessee, neither has it been paid by the assessee. Expenses for contribution to Provisions are not allowable as per Income Tax Act, 1961 because it is only a reserve for a purpose or a future liability. Provisions are contingent liability. It is not an expense actually incurred by the assessee. It is not an application of income by the assessee.”

Aggrieved by the order of the Ld.AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) also contending that the provisions made by the assessee is not towards the present liability and dismissed the appeal of the assessee.

Aggrieved by the order of Ld. CIT(A), the assessee is in appeal before the Tribunal. The Ld. AR submitted that the assessee has made the total provision for expenses of Rs.2,81,14,669/- i.e. on account of provision for gratuity to employees amounting to Rs.93,82,089 and provision for other terminal benefits of Rs.1,87,32,580. He further submitted that Finance Act, 2022 has inserted Explanation 3 to section 10(23C) w.e.f. 1.4.2022 and as per the inserted Explanation 3, the amount which has actually paid, is to be considered as application of income for the purpose of section 10(23C). As the said Explanation-3 have been inserted w.e.f. 01.04.2022 which is prospective in nature, the same shall not be applicable to the assessee being the relevant assessment year for the assessee is 2021- 22. Hence the Ld. AR submitted that the provisions for expenses of Rs.2,81,14,669/- should be allowed to the assessee.

The Ld. AR also submitted an alternative argument that, even if the provision of Rs.2,81,14,669/- is not allowed as an application of income, the assessee has already applied more than 85% of his total receipt (excluding the addition made by the Ld. AO). Hence Ld. AR requested the Bench that instead of making an addition to the total income, it should not be considered as an application of income.

Per contra, the Ld.DR placed heavy reliance on the order of authorities below and requested to uphold the order of revenue authorities.

We have heard the rival submission and also gone through the record in the light of submission made by either side. The first contention of the assessee is that by Finance Act, 2022, Explanation 3 has been inserted to section 10(23C) of the Act w.e.f. 1.4.2022 and the same should have prospective effect and therefore the application of income claimed on account of provision of Rs.2,81,14,669 is to be allowed to him. However without going to the prospective/retrospective applicability of Explanation 3 to section 10(23C) of the Act, it is to be seen that, whether the provisions were made by the assessee on reasonable and scientific basis and further, whether it reflect an ascertained liability or not. In our opinion, if the provisions are made in a reasonable and scientific manner and if it reflect an ascertained liability, then only it can be treated as an application of income u/s 10(23C) of the Act. However no such demonstration has been made by the assessee before us. Therefore, the provision made by the assessee without reasonable and scientific basis, can not be considered as application of income for the purpose of section 10(23C) of the Act. Hence, the provision of Rs. 2,81,14,669/- claimed by the assessee as application of income is not allowed to the assessee. Hence, we dismiss the claim of the assessee on this count.

The alternate argument submitted by the Ld. AR is that, even if provision of Rs.2,81,14,669/- is excluded from the total application of income, still the assessee has applied more than 85% of the total receipts. With regard to his claim the assessee has also submitted the revised working of application of funds (as per page 6 of paper book submitted by the assessee on 10.06.2024) which is to the following effect :