Merchant Association Vs ITO (ITAT Pune)
The Income Tax Appellate Tribunal (ITAT), Pune Bench (SMC), decided an appeal filed by The Merchant Association against the order of the Addl./JCIT(A), Faridabad passed under Section 250 of the Income-tax Act for Assessment Year 2024-25. The principal issue was whether the assessee’s total income should be taxed at the Maximum Marginal Rate (MMR) or at the normal rates applicable under the Income-tax Act.
The assessee is a society registered under the Societies Registration Act, 1860. It filed its return of income on 12.07.2024 declaring total income of Rs. 5,33,260. The return was processed under Section 143(1) on 28.12.2024, applying the Maximum Marginal Rate and raising a tax demand of Rs. 1,86,290. The assessee thereafter filed a rectification application under Section 154, which was rejected on 27.02.2025.
The assessee challenged the rectification order before the Commissioner (Appeals). The Commissioner (Appeals) considered the grounds of appeal and statement of facts but confirmed the application of the Maximum Marginal Rate and dismissed the appeal. Aggrieved by that order, the assessee preferred the present appeal before the Tribunal.
Before the Tribunal, the assessee submitted that the Commissioner (Appeals) had erred in confirming the Assessing Officer’s action. According to the assessee, Section 167B was wrongly applied despite the assessee being a society registered under the Societies Registration Act, 1860. The assessee relied on the return of income filed in ITR-5, its registration certificate under Section 3 of the Societies Registration Act, 1860, and several judicial decisions. The Departmental Representative supported the order of the Commissioner (Appeals).
The Tribunal noted that the sole issue was the applicability of the Maximum Marginal Rate instead of the normal rate of tax. It observed that the assessee had filed its return declaring total income of Rs. 5,33,260, that the return had been processed under Section 143(1) by applying MMR, and that the rectification application under Section 154 had been rejected.
The Tribunal referred extensively to the decision in National Association of Interlocking Surgeons vs. Income Tax Officer (Exemption), where a similar issue had been considered. The reproduced portions of that decision discussed CBDT Circular No. 320 dated 11.01.1982, which states that in the case of registered societies, trade and professional associations, social and sports clubs, charitable or religious trusts, where members or trustees are not entitled to any share in the income, the provisions relating to charging tax at the Maximum Marginal Rate are not attracted and tax is payable at the rate ordinarily applicable to the total income of an Association of Persons.
The Tribunal also reproduced Section 167B of the Income-tax Act. It noted that Section 167B excludes, among others, societies registered under the Societies Registration Act, 1860 from the scope of sub-section (1), which otherwise provides for taxation at the Maximum Marginal Rate where the individual shares of members of an association of persons or body of individuals are indeterminate or unknown.
The reproduced decisions further considered the distinction between registered charitable trusts and associations of persons, the applicability of Section 167B, and the effect of filing returns in different forms. They also referred to decisions of the Bombay High Court and Rajasthan High Court on the scope of Section 143(1)(a), observing that issues requiring examination or involving debatable questions cannot be adjusted while processing returns under that provision.
The Tribunal further referred to the Delhi Bench decision in Air Force Navy Farm Owners vs. ITO, which in turn relied upon decisions such as M/s Anand Educational Society vs. ITO, Vidyodaya Educational Society vs. DCIT, and Sri Lakshmiganapathi Seva Samithi vs. CIT. Those decisions held that where an assessee is registered under the Societies Registration Act, 1860, the applicability of the Maximum Marginal Rate under Section 167B does not arise and the income is liable to be taxed at the normal rates. The Tribunal also noted that the Hyderabad Bench in KMR Educational Society vs. ACIT had taken a similar view.
The Tribunal also reproduced portions of the decision in Mahakavi Edasseri Smaraka Trust vs. ITO, which discussed the computation of income of a charitable trust under Section 11(1)(a), the scope of adjustments under Section 143(1)(a), and observed that the application of Section 167B to a charitable trust was misconceived. That decision also referred to CBDT Circular No. 320 dated 11.01.1982 and stated that the applicable tax rate should be the normal rate applicable to an Association of Persons rather than the Maximum Marginal Rate.
After considering the facts of the present case, the statutory provisions, the CBDT Circular, and the judicial precedents reproduced in the order, the Tribunal held that the ratio of the Coordinate Bench decisions squarely applied. It followed the judicial precedents and concluded that the assessee’s income was not chargeable at the Maximum Marginal Rate but was liable to be taxed at the normal rates.
Accordingly, the Tribunal set aside the order of the Commissioner (Appeals) and directed the Assessing Officer to apply the normal rates of tax on the total income of the assessee. The grounds of appeal were allowed, and the appeal was allowed in favour of the assessee. The order was pronounced on 22 July 2026.
