Furnishing return of income is not mandatory for claiming exemption u/s 10(23C)(iiiad) if gross receipts less than 1 crore

Brief of the case:

The ITAT Chandigarh in the case of Mahabir Educational Welfare Society vs. DCIT held that for claiming exemption u/s 10)(23C)(iiiad) filling of return of income as per the law applicable for AY 2005-06 and 2006-07 was not mandatory as the gross receipts not exceeded Rs. 1 crore and therefore, reopening the assessment alleging the non-furnishing of return as a reason to believe that income has escaped assessment is not valid in law.

Facts of the case:

• The assessee an educational society applied for registration u/s 12AA. The Assessing Officer noted from the financial statements filed along with application for registration that the assessee was earning profit consistently but never filed return of income.
• AO thus, reopened the case u/s 148 after obtaining approval of Addl. CIT. In response to the notice under section 148, the assessee filed its return of income for assessment year under appeals on 07.02.2013 and 19.09.2012 declaring ‘Nil’ income.
• The AO required books of accounts and other necessary information relied on by the assessee in preparation of return of income, but the assessee failed to submit the same. Therefore, on the basis of information available on the record AO completed the assessment to the best of his judgement and assessed the income of various years from AY 2005-06 and AY 2006-07.
• But assessee claimed that it was not liable to file return because of exemption available u/s 10(23C) (iiiad).Thus, reopening was not valid. Aggrieved, by the order of AO, it filed an appeal before CIT (A).
• The CIT(A) also rejected the claim and held that since no books of account have been produced along with vouchers and justified the action of the Assessing Officer in denying exempt ion under sect ion 10(23C) (iiiad) of the Act .
• Aggrieved by the order of CIT(A) , assessee is in appeal before ITAT.
  

Contention of the Assessee:

• The learned counsel for the assessee submitted that AO himself accepted that the total income of the assessee for AY 2005-06 and AY 2006-07 did not exceed Rs. 1 crores. Thus, assessee was entitled to claim exemption u/s 10(23C)(iiiad) and the non-filling of return being the only reason to reopen the assessment was ,therefore, not a valid one.
• Further, the exemption cannot be denied on the ground that the books of accounts were not submitted due to unavoidable circumstances as submission of books is not a pre-requisite for claiming exemption u/s 10(23C)(iiiad).

Contention of the Revenue:

• Revenue supported the findings of CIT(A) and AO and stated that benefit of exemption u/s 10(23C)(iiiad) is available only when the assessee submits the books & supporting vouchers to prove that it is carrying out the activities of an educational institute. And in the presence case it has failed to provide the information as such.
• Further, the assessee was not entitled to exemption as educational institute if it fails to file return of income as required by Sec 139(4C). In such circumstances, AO was justified to assume the assessee as AOP and assess its income @35% of its gross receipts.
  

Issue before the ITAT:

Whether AO was right in law to reopen the assessment taking the ground of assessee’s failure to furnish return of AY 2005-06 and 2006-07?

Held by ITAT Chandigarh:

• The tribunal observed that the copies of income & expenditure account and balance sheets filed with the application for registration u/s 12AA clearly show that the assessee is an educational institution having its receipts less than Rs. 1 crore.
• The CIT also granted registration u/s 12AA w.e.f 01.04.2011 by accepting the assessee’s status as Educational Institute. The pre-amended section (i.e. before April 1, 2006) does not require assessee to file return provided its gross receipts not exceeded Rs. 1 crores .
• As such the reasons recorded do not found any legal backing, because the filling of return was not mandatory for the assessment years for which notices issued.
• Therefore, the best judgment assessment made by AO assessing its income under the status of Association of Persons (AOP) was totally set aside because of the illegality of reopening proceedings itself.
• In result the appeal filed by the assessee was allowed.

Author’s Comment:

The judgment won’t hold good from the AY 2007-08 and onwards because by Finance Act 2006 it was specifically required by Sec 139(4C) to Education institution to file return of income if claiming exemption u/s 10(23C)(iiiad) irrespective of its receipts for the previous year.