In this ruling, the Income Tax Appellate Tribunal, Delhi Bench in Goswami Bhagwan Lal Education Society Vs ITO, examined whether exemption under section 11 could be denied at the processing stage under section 143(1) solely due to non-filing of audit report in Form No. 10B, and whether entire gross receipts could be taxed in such a case. The Tribunal held that non-filing of Form No. 10B is a curable defect and denial of exemption without granting an opportunity under section 139(9) involves a debatable issue beyond the scope of section 143(1). It further ruled that even if exemption fails, income-tax can be levied only on the net income or surplus, not on gross receipts, as tax is on income and not turnover. Where section 11 exemption is denied, income must be assessed under “Income from Other Sources” after allowing legitimate revenue expenditure and depreciation under section 57. Accordingly, the impugned order was set aside and the matter remanded for fresh consideration.
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Core Issues
- Whether denial of alternate exemption under Section 11 of the Income-tax Act, 1961, at the stage of processing under Section 143(1), merely due to non-filing of the audit report in Form No. 10B, is permissible in law.
- Whether entire gross receipts can be taxed when exemption is denied, without allowing revenue expenditure, or whether only the income/surplus embedded in the receipts can be brought to tax.
Material Facts
The assessee, an educational society, filed its return declaring NIL income, claiming exemption under Section 10(23C)(via).
The audit report was uploaded in Form No. 10BB (relevant for Section 10(23C)), but Form No. 10B (required for Section 11) was not filed.
CPC, while processing the return under Section 143(1):
- Denied exemption under Section 10(23C)(via);
- Denied the alternate claim under Section 11 due to absence of Form No. 10B; and
- Taxed entire gross receipts of ₹1.18 crore instead of the surplus of ₹23.47 lakh.
The Addl. CIT(A) upheld the CPC action.
Key Findings of ITAT Delhi
1. Non-filing of Form No. 10B is a Curable Defect
The Tribunal held that failure to file the audit report in Form No. 10B is a curable defect, not a fatal one.
Denial of alternate exemption under Section 11 without granting opportunity under Section 139(9) is a debatable issue and cannot be adjusted under Section 143(1).
Reliance placed on:
- Rai Bahadur Bissesswarlal Motilal Malwasie Trust (195 ITR 825 – Cal)
- Calcutta Management Association (42 ITD 62)
- Sankulp Welfare Society (303 ITR 64)
- National Horticulture Board (176 Taxman 167)
- Sahjanand Charity Trust (228 ITR 292)
2. Adjustment under Section 143(1) Not Permissible
Disallowance of exemption under Section 11 without invoking Section 139(9) and without granting opportunity is beyond the scope of prima facie adjustment.
Such denial involves interpretation and adjudication, and hence is outside Section 143(1).
3. Entire Gross Receipts Cannot Be Taxed
The Tribunal categorically rejected the view of the Addl. CIT(A) that once exemption fails, entire receipts become taxable.
Income-tax is a tax on income, not on gross receipts.
Even if exemption under Section 11 is denied:
- Only the income embedded in gross receipts can be taxed.
- Entire receipts cannot be assessed as income.
4. Allowability of Expenditure under Sections 56 & 57
If exemption under Section 11 is denied, income is assessable under “Income from Other Sources”.
Consequently:
- Revenue expenditure incurred wholly and exclusively to earn income, and
- Depreciation on assets,
must be allowed under Section 57.
Disallowance of entire expenditure at the Section 143(1) stage is against accounting principles and statutory provisions.
Reliance placed on the Delhi High Court ruling in Petroleum Sports Promotion Board (362 ITR 235).
Final Decision
The impugned order was set aside.
The matter was remanded to the Assessing Officer with directions to:
- Treat non-filing of Form No. 10B as a curable defect;
- Grant opportunity under Section 139(9);
- Permit filing of Form No. 10B and consider condonation of delay;
- Re-examine allowability of exemption under Section 11; and
- Tax only net income/surplus, after allowing eligible expenditure.
Appeal allowed for statistical purposes.
Legal Significance
- Reaffirms that Section 143(1) cannot be used as a tool for adjudication.
- Clarifies that failure to file Form No. 10B does not automatically extinguish Section 11 exemption.
- Settles that even where exemption fails, taxation must be on income and not on gross receipts.
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