Special Care School Vs Exemption Ward (ITAT Hyderabad)
Denial of Section 11 Exemption Does Not Justify Taxing Gross Receipts: ITAT Orders Recomputation
Summary: The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) held that denial of Section 11 exemption does not justify taxing an institution’s entire gross receipts without considering allowable expenditure. It directed the Assessing Officer to compute income under normal commercial principles, after examining the expenditure and its admissibility under law.
In Special Care School vs. Exemption Ward-1(2), ITA Nos. 2116/HYD/2025 and 501/HYD/2026, concerning Assessment Years 2019-20 and 2020-21, the Tribunal restored the computation issues to the Assessing Officer.
Vice President Vijay Pal Rao and Accountant Member Manjunatha G pronounced the common order on 14 October 2026.
School’s Exemption Denied Over Filing Delay
Special Care School, an association of persons registered under Section 12A, provides educational and support services to underprivileged children with mental or physical disabilities.
For AY 2019-20, it filed its return on 31 October 2019, claiming exemption under Section 11. The audit report in Form 10B was filed on 26 September 2020, with the order recording a delay of 242 days.
The Centralised Processing Centre processed the return under Section 143(1) and denied exemption on filing-related grounds. It assessed income at ₹1,00,82,212.
The institution’s subsequent rectification application was rejected through an order under Section 154 dated 24 March 2023.
First Appeal Dismissed After 869-Day Delay
The school appealed against the rectification order, but its first appeal was delayed by 869 days.
It explained that the accountant handling its tax matters had suffered a Cerebro Vascular Accident (CVA) and had been advised bed rest. Supporting medical records were furnished.
The CIT(A) nevertheless dismissed the appeal on limitation without examining the substantive grounds.
Before the Tribunal, the institution also pointed out that a delay exceeding 800 days for AY 2020-21 had been condoned on the same medical grounds, whereas its explanation for AY 2019-20 had been rejected.
Medical Evidence Establishes Sufficient Cause
The Tribunal accepted that the accountant’s medical condition and supporting records provided a bona fide explanation constituting sufficient cause.
It relied on N. Balakrishnan vs. M. Krishnamurthy, [1998] 7 SCC 123, and the Andhra Pradesh High Court’s decision in Meridian Promoters (P) Ltd. vs. DCIT, ITTA No. 157 of 2019.
The Tribunal emphasised a liberal approach advancing substantial justice where the circumstances justify condonation. It also noted the different treatment of the same explanation in the institution’s appeal for the following year.
Accordingly, it condoned the 869-day delay before the CIT(A).
Gross Receipts Taxed Despite Reported Deficit
On merits, the institution argued that even if exemption was unavailable, the Department could not tax gross receipts without allowing relevant expenditure.
For AY 2019-20, it stated that expenditure exceeded income by ₹6,68,658, resulting in nil taxable income reported in the return. Nevertheless, CPC treated gross receipts of ₹1,00,82,212 as income.
The institution relied on Vagdevi Educational Society vs. ITO, ITA No. 1576/HYD/2025.
The Revenue opposed this position, contending that loss of Section 11 exemption justified taxation of gross receipts without deduction of expenditure.
The Tribunal rejected that approach.
Normal Commercial Principles Must Apply
Following Vagdevi Educational Society, the Tribunal held that where Section 11 exemption is denied, the institution’s income must be computed under normal commercial principles by considering relevant expenditure.
It distinguished the denial of exemption from the separate task of determining taxable income. The former did not permit the Department to disregard expenditure automatically.
Although the CIT(A) had not considered merits for AY 2019-20, the Tribunal addressed the computation principle because the issue was covered by the coordinate bench decision.
It noted that CPC’s processing order itself recorded the institution’s nil-income return arising from excess expenditure.
Assessing Officer Must Verify Expenditure
For AY 2019-20, the Tribunal set aside the CIT(A)’s order and restored the computation issue to the Assessing Officer.
The officer must consider the return and relevant financial statements, examine the expenditure claimed and determine its allowability according to law.
The direction therefore requires scrutiny of the expenses; it does not grant unconditional deduction of every amount described as charitable application.
The institution’s reported deficit must be considered within that exercise rather than replaced by taxation of gross receipts without examining costs.
Same Relief Extended to AY 2020-21
For AY 2020-21, the CIT(A) had already condoned the appeal delay but upheld taxation of gross receipts after denial of exemption for belated Form 10B filing.
Applying the same reasoning, the Tribunal restored that year’s computation to the Assessing Officer as well.
It directed taxation of only the excess of income over expenditure, after verification of the claimed expenditure and its legal admissibility.
Both appeals were allowed for statistical purposes. The Tribunal did not expressly condone the Form 10B delay or restore Section 11 exemption; its operative relief concerned appeal-delay condonation for AY 2019-20 and lawful recomputation of income for both years.
List of Cases Discussed
- Vagdevi Educational Society vs. ITO — ITA No. 1576/HYD/2025; ITAT Hyderabad — Followed for the principle that, even where Section 11 exemption is denied, income must be computed on normal commercial principles after considering relevant expenditure.
- N. Balakrishnan vs. M. Krishnamurthy — [1998] 7 SCC 123; Supreme Court — Relied upon for adopting a liberal approach to condonation of delay where sufficient cause is established and substantial justice warrants consideration on merits.
- Meridian Promoters (P) Ltd. vs. DCIT — ITTA No. 157 of 2019; Andhra Pradesh High Court — Relied upon for the approach to condonation of delay and the importance of deciding matters on merits rather than dismissing them solely on technical grounds.
FULL TEXT OF THE ITAT JUDGMENT/ORDER
These two appeals filed by the assessee are directed against the orders of the Commissioner of Income Tax (Appeals)/Addl/JCIT(A)-1, Jaipur, dated 26.09.2025, and pertains to assessment year 2019-20 & the Commissioner of Income Tax (Appeals)/Addl/JCIT(A), Kochi dated 22.01.2026, and pertains to assessment year 2020-21.
ITA No.2116/Hyd/2025 for AY 2019-20:
2. The assessee has raised the following grounds of appeal in ITA No.2116/Hyd/2025 for AY 2019-20:
1. The order of Ld. CIT(A) is erroneous in in law as well as facts of the case.
2. The Ld. CIT(A) should have considered that the AO(CPC) cannot deny the exemption claimed by the appellant
3. The Ld. CIT(A) should have condone the delay in filing the audit report in Form 10B
4. The Ld. CIT(A) has erred in appreciating the fact that the appellant has filed his audit report with a delay occurred due to medical emergency and covid-19 pandemic disruptions, arose from circumstances beyond the appellants control.
5. The Ld. CIT(A) should have considered that entire gross receipts should not have been brought to tax at a higher rate.
6. The Ld. CIT(A) ought to have observe that CPC has erred in disallowing the expenditure claimed which is applied towards the objectives of the trust and amounting to Rs.1,02,11,902, which is liable to be deleted
7. The Ld. CIT(A) has dismissed the appeal solely on the ground of delay, without going into the facts and circumstances of the case
8. The Ld. CIT(A) ought to have observe that CPC has erred in understanding the fact that hat the return of income was a loss return and the appellant derived no benefit from any procedural lapse caused in filing the audit report
9. The Appellant craves to add, alter, modify, leave any grounds at the time of hearing
3. The brief facts of the case are that the assessee is an AOP who is providing educational & support services to under privileged children with disabilities like suffering from mental or physical challenges, is registered u/s.12A of the Income Tax Act, 1961 [in short “the Act”]. The assessee filed its Return of Income for AY 2019-20 on 31.10.2019 and claimed exemption u/s.11 of the Act. The assessee had also filed Audit Report in Form No.10B on 26.09.2020 with a delay of ‘242’ days from the date of filing of the Audit Report. The AO, CPC processed Return of Income filed by the assessee u/s.143(1) of the Act and assessed total income of Rs.1,00,82,212/- by denying exemption u/s.11 of the Act for delay in filing of Return of Income and Audit Report in Form No.10B. Subsequently, the AO, CPC has passed order u/s.154 on 24.03.2023 and rejected application filed by the assessee.
4. Aggrieved by the assessment order passed by the AO, CPC u/s.154 of the Act, the assessee preferred an appeal before the Ld.CIT(A) with a delay of ‘869’ days. The assessee explained the reasons for delay in filing of appeal, however, the Ld.CIT(A) dismissed the appeal filed by the assessee for delay in filing of appeal, but not considered the issue on merits.
5. Aggrieved by the order of the Ld.CIT(A), the assessee is now in appeal before this Tribunal.
6. The Ld. Counsel for the assessee, Mr.C. Maheswar Reddy, CA, submitted that the Ld.CIT(A) erred in rejecting the appeal filed by the assessee without condoning the delay, even though, the assessee has explained the reasons with a medical grounds of the Accountant who was suffering from Cerebro Vascular Accident (CVA) and has been advised to bed-rest and due to this reason, the appeal couldn’t be filed within the time allowed under the Act. The Ld. Counsel for the assessee further referring to the order of the Ld.CIT(A) for AY 2020-2021 submitted that, the Ld.CIT(A) has condoned the delay in filing of appeal for AY 2020-21, even though, there is a delay of more than ‘800’ days on very same grounds, however, for the year under consideration, even though, the assessee has explained the medical reasons but failed to condone the delay. Therefore, he submitted that the delay in filing of appeal before the Ld.CIT(A) should be condoned and the issues in the appeal to be decided on merits.
7. The Ld. Counsel for the assessee further referring to the order of the AO, CPC u/s.143(1)(a) of the Act submitted that the AO denied exemption u/s.11 of the Act solely on the ground of not filing Audit Report in Form No.10B on or before due date. However, taxed gross-receipts of the assessee, AOP without considering relevant expenditure incurred to earn income. The Ld. Counsel for the assessee further submitted that the assessee has filed its Return of Income with a loss i.e. excess of expenditure over income of Rs.6,68,658/- whereas the AO, CPC has taxed gross-receipts of Rs.1,00,82,212/-. Therefore, he submitted that if at all the assessee is not eligible for exemption u/s.11 of the Act and income need to be assessed as per normal commercial principles, then only surplus/deficit may be taxed and not gross-receipts. In this regard, he relied upon the decision of the ITAT Hyderabad Bench in the case of Vagdevi Educational Society v. ITO in ITA No.1576/Hyd/2025.
8. The Ld.Sr.AR for the Revenue, on the other hand, supporting the order of the Ld.CIT(A) submitted that the assessee has not explained any reasons for not filing the appeal within the time allowed under the Act and further reasons explained by the assessee doesn’t come under ‘sufficient cause’ and therefore, the Ld.CIT(A) has rightly rejected the appeal filed by the assessee. Therefore, he submitted that the order of the Ld.CIT(A) should be upheld.
9. The Ld.Sr.AR further submitted that, once the assessee lose the benefit of exemption u/s.11 of the Act, gross-receipts of assessee, AOP should be taxed without allowing any deduction for expenditure. The AO, CPC after considering relevant facts has rightly taxed gross-receipts and therefore, he submitted that the order of the AO, CPC should be upheld.
10. We have heard both the parties, perused the materials available on record and had gone through orders of the authorities below. In so far as dismissal of appeal filed by the assessee by the Ld.CIT(A) without condoning the delay of ‘869’ days in filing of appeal, we find that the assessee has explained the reasons with medical ground and also filed supporting medical records to prove that the Accountant who was handling the tax matters was diagnosed with Cerebro Vascular Accident (CVA) and has been advised to bed-rest during the relevant period. Therefore, in our considered view, the reasons given by the assessee before the Ld.CIT(A) for explaining the delay seems to be bona fide and does come under ‘sufficient cause’ for condoning the delay in filing of appeal. Therefore, in our considered view, the Ld.CIT(A) ought to have condoned the delay of ‘869’ days in filing of appeal for advancement of substantial justice as held by various Courts including the decision of the Hon’ble Supreme Court in the case of N. Balakrishnan v. M. Krishnamurthy reported in [1998] 7 SCC 123 and also the decision of the Hon’ble Andhra Pradesh High Court in the case of M/s. Meridian Promoters (P) Ltd. v. DCIT in ITTA No.157 of 2019, where the Courts have clearly held that the Tribunal should have taken a lenient and liberal approach while condoning the delay for advancement of substantial justice. The Courts further held that if technicalities and merits of the case are pitted against each other, then merits of the case alone deserve to be considered if the other party doesn’t gain by lodging appeal late. Further, if an appeal is heard on merits, at best, case may be considered on merits without dismissing on technical grounds. The sum and substances of the ratio laid down by the Courts while condoning the delay in filing of appeal, if any, a liberal approach should be followed if other party makes out a case on merits, because, if at all a case is heard on merits, the case will undergo the judicial scrutiny and at the same time, a case has been thrown out on technical grounds, a meritorious case may be gone out of judicial scrutiny. Therefore, in our considered view, the Ld.CIT(A) having noticed the fact that the assessee has explained the reasons with medical grounds ought to have condoned the delay in filing of appeal. We further noted that the Ld.CIT(A) have condoned the delay of more than ‘800’ days in filing of appeal by the assessee for AY 2020-21 on very same grounds, whereas in the present case, has dismissed the appeal without assigning any reasons. Therefore, we condoned the delay of ‘869’ days in filing of appeal before the Ld.CIT(A).
11. Having said so, let us come back to the issues on merits. Admittedly, the Ld.CIT(A) has not discussed the issues on merits and therefore, in the ordinary course, we should have restored the issues back to the file of the Ld.CIT(A) to consider the issues involved in appeal on merits. However, Ld. Counsel for the assessee has made out a case, that the issue involved in the present appeal is very simple and covered by the decision of the ITAT Hyderabad Bench in the case of Vagdevi Educational Society (supra) and argued that if at all exemption u/s.11 of the Act is denied for any reason including for non-filing of Audit Report in Form No.10B, then the income of the assessee, AOP should be computed under normal commercial principles after allowing expenditure incurred to earn income. We find that the Coordinate Bench of this the Tribunal on identical issue in the case of Vagdevi Educational Society (supra) held that once exemption u/s.11 of the Act, has been denied, then income of the assessee, AOP should be computed on normal commercial principles by allowing relevant expenditure claimed by the assessee. In the present case, the assessee claims to have reported ‘nil’ income because of excess of expenditure over income of Rs.6,68,658/- and this fact has been confirmed by the AO, CPC, in their order passed u/s.143(1)(a) of the Act where the assessee has reported ‘nil’ income. Since, the assessee has reported ‘nil’ income because excess of expenditure over income, in our considered view, the income/loss declared by the assessee as per their financial statement filed along with Return of Income should be accepted and income, if any, should be computed under normal commercial principles. Therefore, we set aside the order of the Ld.CIT(A) and restore the issue back to the file of the AO. The AO is directed to reconsider the issue of computation of income as per our discussions hereinabove and compute income under normal commercial principles by considering the Return of Income filed by the assessee along with relevant financial statement and in case, the assessee has reported ‘nil’ income because of excess of expenditure over income, then the AO is directed to compute the income after allowing the relevant expenditure claimed by the assessee and its allowability as per law.
12. In the result, appeal filed by the assessee in ITA No.2116/Hyd/2025 for AY 2019-20 is allowed for statistical purposes.
ITA No.501/Hyd/2026 for AY 2020-21:
13. The assessee has raised the following grounds of appeal in ITA No.501/Hyd/2026 for AY 2020-21:
1. On the facts and in the circumstances of the case, and in law, the order passed by the Learned Commissioner of Income-tax (Appeals) [CIT(A)] is erroneous both on facts and in law.
2. The Applicant craves to add, alter leave any ground of appeal at the time of hearing.
3. The Ld. CIT(A) ought to have observed that CPC has erred in understanding the fact that the return of income was a NIL income return and the appellant derived no benefit from any procedural lapse caused in filing the audit report.
4. The Ld. CIT(A) should have considered that the AO (CPC) cannot deny the exemption claimed by the appellant.
5. The Ld. CIT(A) should have condoned the delay in filing the audit report in Form 10B.
6. The Ld. CIT(A) has erred in appreciating the fact that the appellant has filed the audit report with a delay which occurred due to medical emergency and COVID-19 pandemic disruptions, arising from circumstances beyond the appellant control.
7. The Ld. CIT(A) should have considered that the entire gross receipts should not have been brought to tax at a higher rate.
8. The Ld. CIT(A) ought to have observed the fact that CPC has erred in disallowing the expenditure claimed, which was applied towards the objectives of the trust and amounting to Rs. 98,63,977 which is liable to be deleted.
14. In this appeal filed by the assessee for AY 2020-21, the issues are exactly identical which we had considered for AY 2019-20. In this case, delay in filing of appeal before the Ld.CIT(A) has been condoned and decided the issues on merits and upheld the addition made by the AO towards gross-receipts as income of the assessee for not allowing exemption u/s.11 of the Act for belated filing of Audit Report in Form No.10B. We have considered an identical issue in the assessee’s own case for AY 2019-20, in ITA No.2116/Hyd/2025 and after considering relevant facts held that, in case, exemption u/s.11 of the Act has been denied for any reason including for non-filing of Audit Report in Form No.10B on or before due date, then income of the assessee should be computed under normal commercial principles and only profit or loss, if any, should be considered for the purpose of taxation but not gross-receipts of the assessee. The reasons given by us in preceding paragraph Nos.10 & 11 shall equally applicable to this appeal as well. Therefore, for similar reasons, we set aside the order of the Ld.CIT(A) and restore the issue back to the file of the AO. The AO is directed to recompute income of the assessee by taking into relevant ITR filed by the assessee along with financial statement and tax only excess of income over expenditure as reported by the assessee after verifying relevant expenditure and their allowability as per law.
15. In the result, appeal filed by the assessee in ITA No.501/Hyd/2026 for AY 2020-21 is allowed for statistical purposes.
16. In the result, appeals filed by the assessee in ITA No.2116/Hyd/2025 for AY 2019-20 & in ITA No.501/Hyd/2026 for AY 2020-21 are allowed for statistical purposes.
Order pronounced in the open court on 14th October, 2026
