2023 (8) TMI 1627 - AT - Income Tax

Tribunal Rules Tax Must Be on Net Income, Not Gross Receipts; Case Sent Back for Reassessment

Dr. Sukumar J. Magdum Foundation Versus ITO, Exemption Ward, Kolhapur.

The Tribunal determined that the Assessing Officer's (AO) method of taxing the gross receipts of the assessee was incorrect. The Tribunal emphasized that ... Denial of benefit of exemption u/s. 11 - assessee did not file audit report in Form No. 10B - HELD THAT:- The assessee’s Income and Expenditure Account shows that “Surplus of Income over Expenditure”. In addition, there is “Amount transferred to Reserve or Specific Funds”. The assessee has claimed deduction for various expenses. It goes without saying that income tax is charged on the income and not the gross receipts. Income is determined by reducing the expenses incurred, described under various sections in Chapter IV-D of the Act. If the benefit of exemption u/s.11 is not available, the total income needs to be computed in accordance with the regular provisions of the Act. Thus where the AO has charged tax on gross receipts, we cannot countenance the same. The resultant impugned order also deserves to be set aside. We order accordingly and remit the matter to the file of the AO for deducing the total income in accordance with the law after considering the deductibility of various expenses noted in the Income and Expenditure Account. Appeal is allowed for statistical purpose. ISSUES PRESENTED and CONSIDEREDThe primary issue considered by the Tribunal was whether the assessment of the assessee's income by the Assessing Officer (AO) was correct, given that the assessee did not qualify for exemption under Section 11 of the Income-tax Act, 1961 due to the late filing of the audit report in Form No. 10B. A secondary issue was whether the total income of the assessee should be determined on commercial principles rather than by taxing the gross receipts.ISSUE-WISE DETAILED ANALYSIS1. Exemption under Section 11 and Filing of Form No. 10BThe relevant legal framework involves Section 11 of the Income-tax Act, which provides exemptions for income derived from property held for charitable or religious purposes, contingent upon the timely filing of an audit report in Form No. 10B. The Tribunal noted that the assessee failed to file the audit report within the stipulated time, which is a prerequisite for claiming the exemption. The Tribunal did not entertain serious arguments regarding the late filing of the audit report and the subsequent denial of exemption, indicating a consensus on the procedural default.2. Determination of Total Income on Commercial PrinciplesThe Tribunal considered whether the AO's method of assessing the total income by taxing gross receipts was appropriate. The Tribunal emphasized that income tax should be levied on the income, not on gross receipts. It referred to the Income and Expenditure account, which showed a 'Surplus of Income over Expenditure' and other deductions claimed by the assessee. The Tribunal highlighted that if the exemption under Section 11 is not applicable, the income should be computed following the regular provisions of the Act, which involves deducting expenses from gross receipts.The Tribunal found that the AO's approach of charging tax on gross receipts was incorrect. The AO had calculated the gross receipts and added a percentage to compute total expenditure, which did not align with the actual figures in the Income and Expenditure account. This miscalculation led to an incorrect determination of the taxable income.SIGNIFICANT HOLDINGSThe Tribunal held that the AO's assessment of the assessee's income by taxing the gross receipts was not justified. The Tribunal ordered that the matter be remitted back to the AO for a reassessment of the total income in accordance with the law, taking into account the deductibility of various expenses as reflected in the Income and Expenditure account.Core Principles Established:The Tribunal reinforced the principle that income tax is to be charged on the net income after deducting allowable expenses, not on gross receipts. This principle is crucial for ensuring that the taxable income reflects the true financial position of the assessee.Final Determinations:The appeal was allowed for statistical purposes, with the Tribunal directing the AO to reassess the income by considering the deductibility of expenses and providing the assessee with a reasonable opportunity of hearing.