Dr. Shalmali Khasbardar Foundation Vs ITO (Exemption) (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT), Mumbai allowed the appeal filed by the assessee, a registered public charitable trust under the Bombay Public Trusts Act, against the order of the Commissioner of Income Tax (Appeals) for AY 2021-22.
The assessee was not registered under Section 12A of the Income-tax Act during the relevant assessment year. It filed its return of income declaring taxable income of ₹1,66,700 without claiming exemption under Section 11. Since the declared income did not exceed ₹2.5 lakh, the assessee believed that Section 139(4A) and Rule 12(1)(g) were not applicable and, accordingly, filed its return in Form ITR-5 instead of Form ITR-7. In the return, it declared its status as an AOP with sub-status as Trust.
The Centralized Processing Centre (CPC), while processing the return under Section 143(1), accepted the returned income but computed tax at the maximum marginal rate (MMR), raising a demand of approximately ₹64,000.
Before the Commissioner (Appeals), the assessee contended that no prior intimation of the proposed adjustment had been issued as required under the first proviso to Section 143(1). It also argued that the application of the maximum marginal rate was incorrect because its taxable income was below the basic exemption limit and it had not claimed exemption under Section 11.
The Commissioner (Appeals) rejected both contentions. It held that the CPC had not made any adjustment falling within Section 143(1)(a)(i) to (vi), but had merely computed tax at the applicable rate. Therefore, the requirement of prior communication under the first proviso to Section 143(1) was held to be inapplicable.
On the issue of tax rate, the Commissioner (Appeals) observed that the assessee had voluntarily filed its return as an AOP in Form ITR-5 instead of filing Form ITR-7 applicable to charitable trusts. It further noted that the assessee had not selected any option in the return regarding whether the beneficiaries’ shares were determinate or known. On that basis, it held that the CPC correctly applied Section 167B and taxed the income at the maximum marginal rate. The appeal was accordingly dismissed.
Before the Tribunal, the assessee submitted that Section 167B was inapplicable. It argued that the authorities had applied the maximum marginal rate solely because the return had been filed in Form ITR-5. The assessee explained that this was done under a bona fide belief arising from the absence of Section 12A registration and the applicable return filing requirements. It contended that there could be no estoppel against law and that the return form chosen could not determine the applicable rate of tax.
The assessee further submitted that a public charitable trust could not be treated as an AOP merely because it had declared its status as such in the return. It argued that Section 167B applies to AOPs where members have determinate or indeterminate shares, whereas a public charitable trust has no members entitled to share its income. According to the assessee, all members of the public are beneficiaries and no individual beneficiary has a defined share. It also relied upon CBDT Circular No. 320 dated 11.01.1982 and submitted that Section 164(2), being the special provision governing charitable trusts, was applicable. It further argued that the maximum marginal rate would apply only to relevant income where exemption under Sections 11 and 12 is denied by virtue of Section 13(1)(c) or Section 13(1)(d), which was not the case since no exemption had been claimed.
The Revenue relied upon the orders of the lower authorities.
The Tribunal first considered the validity of the intimation under Section 143(1). Referring to the decisions of the Rajasthan High Court in JKs Employees Welfare Fund and the Bombay High Court in Bajaj Auto Finance Ltd. and Khatau Junkar Ltd., it observed that only prima facie adjustments can be made under Section 143(1). It noted that the expression “prima facie inadmissible” refers to claims which are inadmissible on their face without requiring further enquiry. The Tribunal observed that where an issue is arguable or debatable, it cannot be adjusted while processing the return under Section 143(1) without giving the assessee an opportunity of being heard.
Applying those principles, the Tribunal held that the issue regarding the applicability of the maximum marginal rate was a debatable issue and, therefore, could not be decided through an intimation under Section 143(1). Ground No. 1 was accordingly allowed.
On the substantive issue, the Tribunal observed that the assessee was admittedly a public charitable trust. It held that Section 164 is a special provision prevailing over the general provision contained in Section 167B. The Tribunal distinguished the Bombay High Court decision in CIT v. Marsons Beneficiary Trust, observing that it related to a trust where the beneficiaries’ shares were determinate.
The Tribunal held that, in the present case, the beneficiaries’ shares were not known and that merely describing itself as an AOP in the return did not attract Section 167B. It further observed that the assessee had not claimed exemption under Sections 11 and 12 and, therefore, there was no occasion for denial of exemption under Section 13(1)(c) or Section 13(1)(d) so as to subject any portion of the income to the maximum marginal rate. It concluded that the assessee could not be subjected to the maximum marginal rate merely because it had filed its return in Form ITR-5 instead of Form ITR-7.
Accordingly, the Tribunal allowed Ground Nos. 1 and 2, held that the maximum marginal rate was not applicable in the facts of the case, treated Ground No. 3 as general in nature requiring no adjudication, and allowed the appeal.
Cases Discussed
- MahaKavi Edasseri Smaraka Trust vs. ITO (ITAT Cochin), (2024) 162 taxmann.com 44 (Cochin – Trib.)
- Bajaj Auto Finance Ltd. vs. CIT Pune (Bombay High Court), (2018) 404 ITR 564 (Bom)
- CIT v. Marsons Beneficiary Trust (Bombay High Court), [1991] 188 ITR 224 (Bom)
- JKs Employees Welfare Fund vs. ITO (Rajasthan High Court), (1993) 199 ITR 765 (Raj)
- Khatau Junkar Ltd. And Another vs K.S. Pathania (Bombay High Court), (1992) 196 ITR 157 (Bom)
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal arises out of the order dated 07.06.2024 passed by the Ld. Commissioner of Income Tax (Appeals), Addl./JCIT(A)-I, Gurugram for A.Y. 2021-21 on following grounds of appeal.
“Being aggrieved by the order dated 07.06.2024 passed by the learned Additional/Joint Commissioner of Income Tax (Appeals) – 1, Gurugram [“Ld. Addl/JCIT(A)”] u/s 250 of the Income-tax Act, 1961 (“Act”), your appellant prefers this appeal, among others, on the following grounds of appeal, each of which is without prejudice to, and independent of, the other:
1. On the facts and in the circumstances of the case, and in law, the Ld. Addl/JCIT(A) erred in holding that the Ld. ADIT, CPC was not required to provide any opportunity to the assessee before varying the rate of tax in the Intimation u/s.143(1). Your appellant submits that the issue as to what is the correct rate of tax, being a debatable issue, the Ld. ADIT, CPC had no jurisdiction to apply the maximum marginal rate (MMR) of tax to the appellant’s total income in the Intimation u/s.143(1). Your appellant, therefore, prays that the appellant’s total income be taxed at the normal rate of tax.
2. Without prejudice, the appellant submits that the Ld. Addl. /JCIT(A) erred in upholding the application of MMR of tax to the appellant’s total income. Your appellant submits that, on the facts and in the circumstances of the case, and in law, MMR of tax is not attracted in its case. Your appellant, therefore, prays that the appellant’s total income be taxed at the normal rate of tax.
3. Your appellant craves leave to alter, modify, amend or delete any of the above grounds of appeal, or to add one or more new grounds), as may be necessary.”
Brief facts of the case are as under:
2. The assessee is stated to be a registered public charitable trust under the Bombay Public Trusts Act. It is also submitted that the assessee was not registered under Section 12A of the Income Tax Act for A.Y. 2021-22. For the year under consideration, the assessee without claiming any exemption under Section 11 declared its return of income at Rs.1,66,700/- that do not exceed the maximum amount of Rs.2.5 Lakh. The assessee was therefore of the opinion that, it did not get covered under sub Section (4A) of Section 139 of the Act. As a consequence, the assessee was of the bona fide believe that, it was also not covered Rule 12A(g). Thus, the assessee did not file its return of income in Form ITR-7, instead it filed its return of income in Form ITR-5 which was as per Rule 12(e) of Income Tax Rules.
2.1 It is submitted that, the assessee mentioned its status to be AOP and sub-status as Trust in the ITR Form-5. Subsequently, the assessee received intimation order under sub-Section 143(1) of the Act, passed by the CPC on 23.09.2022, wherein the assessee was taxed at maximum marginal rate, thereby raising a demand of Rs.64,000/-.
Aggrieved by the order of the CPC, the assessee preferred appeal before the Ld. CIT(A).
3.1 Before the Ld. CIT(A), the assessee contended that, no prior intimation regarding the proposed adjustment was sent by the CPC to the assessee, being a precondition, as stipulated in the 1st proviso to Section 143(1) of the Act.
3.2 The assessee also contended that, it is wrongly subjected to maximum marginal rate of 30%, even though, the assessee’s taxable income without claiming exemption under Section 11 was less than 2.5 Lakh and that benefit was available to the assessee, which was denied. The Ld. CIT(A) after considering the submissions of the assessee, observed and held as under:
“5.1 Ground of appeal no. 1- In this ground, the appellant has challenged the validity of the intimation under section 143(1) as no prior communication was made by the CPC before making adjustment of charging tax as per the provision of MMR.
5.1.1 I have considered the submission made by the appellant and have also gone through the material available and also the case law relied upon by the appellant. In the intimation, no adjustment as provided under sub-clauses (i) to (vi) of clause (a) of sub-section (1) of Section 143 of the Act has been made and only tax is calculated at MMR and cess has been levied on the tax payable on total income. Therefore, the 1st proviso to section 143(1)(a) is not applicable to the appellant’s case and accordingly, the prior communication was not required to be made with the appellant. Therefore, there is no legal infirmity in the action of the CPC. Accordingly, the Ground No. 1 is dismissed.
5.2 Ground of appeal no. 2- In this ground, the appellant has contended that the AO, CPC has erred in calculating tax liability of the appellant at MMR.
5.2.1 A perusal of the documents available on record reveals that the appellant had filed its return of income 22.12.2021 declaring an income of Rs. 1,66,700/-. The AO, CPC has processed the ITR of the appellant u/s 143(1) on 23.09.2022 accepting the income reported by the appellant. However, the AO, CPC has computed the tax liability of the appellant at MMR.
5.2.2 The appellant in its statement of facts submitted with Form 35 stated that it is a public charitable trust but it is not registered for the purpose of Income Tax for the year under consideration. It is pertinent to mention here that it has chosen to file its return of income in Form 5 (applicable for AOP) and declared its status as AOP while filing the ITR rather than ITR 7 which is applicable to the case of charitable trusts, hence the appellant is admittedly liable to be taxed as an AOP instead of a Trust. Accordingly, the provisions governing the taxability of AOPs would get attracted and AO, CPC has also calculated the tax liability considering the appellant as an AOP while passing the intimation order u/s 143(1). Now the only point of contention is whether the appellant is liable to be charged at MMR or not?
5.2.3 In this context, it is pertinent to mention here that in “column F(1)” of * Partner’s or Member’s or Trust Information” where it was specifically asked to furnish “Whether shares of the beneficiary are determinate or known?”, it did not opt any option. The relevant part of the ITR is reproduced here as under:
5.2.4 In absence of t e selection of any option by the appe llant, the AO, CPC has calculated the ax liability of the appellant as if the shares of the beneficiaries were not determinate or unknown and t e appellant was charged to tax at M R as per the provisions of section 1 67B of the IT Act and hence the AO, CPC is correct in computing the t x liability of the appellant. Hence, this ground of appeal taken by the appe lant is dismissed.
5.2.5 The appellant vide its reply dated 16.05.2024 opportunity of being heard by video conference and state Your Honour to grant us the opportunity of being heard conferencing if, at all, Your Honour finds that information/explana ions are required for granting the r this Appeal. In this connection, it is pertinent to mention here that this office has already provide d ample opportunity to the appellan vide notices u/s 250. All the submissions made by the appellant in respon e to these notices have been considered. From all its replies the appellant fails to establish within the paramet rs of applicable law as to why t x should not be charged at MMR keeping in view the facts of the case an thus the request made by the appellant for video conferencing has no bearing on the decision in the case.
5.3 Grounds of appeal no. 3 and 4:- These groun d of appeal are consequential in natu re and need no adjudication.
5.4 Ground of appeal no 5:- This ground of appeal is gen ral in nature and need no adjudication.
6.As a result, the appeal of the appellant is dismissed.”
Aggrieved by the order of the CIT(A), the assessee preferred appeal before this Tribunal.
4. The Ld. AR submitted that, the provision of Section 167B of the Act is not applicable to the present facts of the case in order to charge the assessee with a maximum marginal rate.
4.1 It is submitted that the authorities below applied the maximum marginal rate merely because, the assessee filed its return of income in Form ITR – 5, which is applicable to AOP and not in Form ITR – 5, which is applicable to charitable trust. It is submitted by the Ld. AR that, the assessee was under a bona fide belief that it was not required to file its return of income under Section 139(4A) of the Act, as it was not covered by Rule 12(1)(g) of the Income Tax Rules, and that assessee’s case fell under Rule 12(1)(e). He submitted that these submissions of the assessee were ignored by the authorities below. The Ld. AR also submitted that, there is no estoppels against law and merely because the return was filed in Form ITR – 5, cannot decide the rate of tax to be the maximum marginal rate. Referring to the decision of Hon’ble Bombay High Court in the case of CIT v. Marsons Beneficiary Trust [1991] 188 ITR 224 (Bom).
4.2 The Ld. AR submitted that a Trust cannot otherwise also be treated as an AOP. He submitted that assessee in the return of income mentioned itself to be an AOP and sub-status as Trust for the reason that, during the year under consideration it had not obtained 12A registration. He submitted that Section 167B covers those AOP’s, where the shares of the members are indeterminate being an essential precondition. The Ld. AR further submitted that in an AOP the members are known.
4.3 However, in a public charitable trust which is a status of the present assessee, there are no members who are entitled to share any income and hence a question of determining their share in the income does not arise. It is submitted that all the members of the public are beneficiaries and there is no individual members whose shares could be defined. He relied on the decision of Cochin Bench of the Tribunal in the case of MahaKavi Edasseri Smaraka Trust vs. ITO reported in (2024) 162 taxmann.com 44 (Cochin – Trib.) in support. The ld. AR also relied on the Circular No.320 dated 11.01.1982 issued by the CBDT, which was issued in the context of Section 167A that was omitted by Direct Tax Laws (Amendment) Act, 1989 and Section 167B was inserted replacing it, which is materially similar to the erstwhile Section 167A, in its scope.
4.4 The Ld. AR thus submitted that, provisions of Section 164(2) of the Act governs the case of a registered charitable trust which is the case of the present assessee and the tax should be charged accordingly to Section 164(2). He also submitted that, the maximum marginal rate is applicable only to the relevant income which is not exempt under Sections 11 and 12, by virtue of Section 13(1)(c)/(d) of the Act.
4.5 On the contrary, the Ld. DR relied on the orders passed by the authorities below.
We have perused the submissions advanced by both the sides in the light of the records placed before us.
5. The assessee has raised a preliminary issue challenging the validity of intimation under Section 143(1) of the Act passed without granting opportunity to the assessee, wherein an adjustment was made that was debatable in nature. The Ld. AR placed reliance on the decision of Hon’ble Bombay High Court in the case of Bajaj Auto Finance Ltd. vs. CIT Pune reported in (2018) 404 ITR 564 (Bom) and the decision of Hon’ble Rajasthan High Court in the case of JKs Employees Welfare Fund vs. ITO reported in (1993) 199 ITR 765 (Raj).
5.1 It is noted that, Hon’ble Rajasthan High Court in case of JKs Employees Welfare Fund (supra) considered what amounts to a prima facie adjustment by observing as under:
“A bare perusal of section 143(1)(a) contemplate that the ITO has to accept the return as it is and in the proviso, three exceptions have been given, which confer the jurisdiction on him for making adjustment. The action under this section cannot be taken beyond the power permitted by these three exceptions. The third exception provides that where any loss carried forward, deduction, allowance or relief claimed in the return, which, on the basis of the information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed. The question is whether the application of rate of tax can be covered by the term ‘relief claimed in the return because application of a different rate of tar will not fall under the category of loss carried forward, deduction, allowance. There is another provision in clause (i) regarding arithmetical errors in the return. There may be a case where the rate of tax is not disputed but while calculating the tax there is an error which could be corrected under this clause, i.e., while calculating the tax on the normal rate or maximum marginal rate there is a mistake which could be corrected and will fall in the category of arithmetical mistake, but whether maximum marginal rate is to be applied or the normal rate is applicable is not covered by any of the too clauses of the proviso to section 143(1)(a). The matter has also to be considered from another angle that the word prima facie which has been used therein means on the face of and refers to the items, on which there cannot be two opinions. If the matter is arguable one or debatable then the same cannot be disallowed under the proviso.”
5.2 It is noted that Hon’ble Bombay High Court while considering the issue of what amounts to a prima facie adjustment that could be made under Section 143(1)(a), relied on Instruction No.1814 dated 04.041989. Hon’ble Bombay High Court also referred to the decision of its Co-ordinate Bench in Khatau Junkar Ltd. And Another vs K.S. Pathania reported in (1992) 196 ITR 157 (Bom) and held that the word “prima facie inadmissible” in clause (iii) of Section 143(1)(a)’ means, ‘on the face of it the claim is not admissible’. Hon’ble High Court observed that, it means the claim does not require any further inquiry before deemed disallowed.
5.2 Hon’ble Court further observed that where a claim was made which require further inquiry, it cannot be disallowed without hearing the parties and / or giving the opportunity to submit proof in support of its claim. Hon’ble Bombay High Court thus observed that, debatable issues cannot be adjusted by way of intimation under Section 143(1)(a), which would lead to an arbitrary and unreasonable intimation being issued leading to chaos. In our view the above proposition by Hon’ble Bombay High Court as well as Hon’ble Rajasthan High Court squarely is applicable to the present facts of the case.
Accordingly ground no.1 of the assessee stands allowed.
(B) Ground No.2 raised by the assessee, is on the applicability of the maximum marginal rate, for which reliance was placed on the decision of Hon’ble Bombay High Court in the case of CIT vs. Marsons Beneficiary Trust (supra). It is noted that present assessee before us is admittedly a public charitable trust, where the shares of the beneficiaries are in determinate are not known, unlike an AOP, where the beneficiaries have a defined share in the income. It is noted that Section 164 is a special provision that prevails over the general provision of Section 167B. The decision of Hon’ble Bombay High Court in case of CIT vs. Marsons Beneficiary Trust (supra) has considered the fact in a case of a Trust, where the beneficiaries in the share was determinate and therefore, Hon’ble Court held that the earnings on behalf of such Trust would be taxed as an AOP. As a corollary in the present facts, the share of the beneficiaries are not known though the assessee in the return of income mentioned itself to be an AOP and therefore provisions of Section 167B are not applicable. If we analyze the alternative plea raised that the assessee had not claimed any exemption under Sections 11 and 12 for the year under consideration therefore, there not being a situation of denial of exemption under Sections 13(1)(c) or 13(1)(d) the assessee come within the ambit to subject that portion of income to the maximum marginal rate. Accordingly, in our view assessee cannot be subjected to maximum marginal rate for the year under consideration merely because it filed its return of income in form ITR – 7 as against ITR – 5.
Accordingly, Ground No.2 raised by the assessee stands allowed.
Ground No.3 is general in nature and therefore does not require any adjudication.
In the result, the appeal filed by the assessee stands allowed.
Order pronounced in the open court on 30.09.2024
