2025 (10) TMI 141 - AT - Income Tax

Order set aside; matter remanded to AO for de novo adjudication, examine s.10(23C)(iiiad) eligibility and verify expenditures

ITAT set aside the CIT(A) order and remanded the matter to the AO for de novo adjudication. The tribunal held the wrong selection of ITR form was a ... Best-judgment assessment u/s 144 - addition by invoking section 69C mainly because no Form 10B was filed and no details being provided in response to the notices issued during the assessment - claim to exemption u/s 10(23C)(iiiad) - HELD THAT:- Assessee before us asserted that the assessee exists solely for educational purposes and not for profit, and that its annual receipts are below the statutory threshold applicable to the relevant year. This plea is a matter of substance. In our considered view the wrong selection of ITR form (ITR-7 instead of ITR-5), though an error, is a procedural lapse and cannot defeat a substantive exemption if otherwise available. We are also conscious to the facts that whether the institution is “solely” for education, the nature of its activities, fee structure, use of funds, and the quantum of annual receipts are all verifiable matters. The Authorities below has not got the opportunity to examine these facts. Assessment was framed u/s 144 of the Act due to non-compliance. The assessee has explained that the managing trustee is a senior citizen and that a tax-practitioner’s inadvertent error led to the wrong form being used. A detailed paper- book has now been filed. In the totality of circumstances, and to uphold natural justice, one more opportunity is warranted so that the correct head of exemption/computation is tested on facts. We set aside the order of the learned CIT(A) and restore the matter to the file of the AO for de novo adjudication with the following directions: (i) examine the assessee’s eligibility u/s 10(23C)(iiiad) of the Act for the year under appeal and decide the claim on merits; (ii) if exemption is not available, compute the income in the status of AOP/BOI as returned, allowing only those expenditures that are verifiable and otherwise admissible under law; (iii) do not invoke section 69C of the Act unless there is a clear finding, with reasons, that the impugned expenditure is unrecorded or unexplained in the statutory sense; (iv) verify the deficit, if any, and its carry-forward in accordance with law; and (v) grant adequate opportunity to the assessee and pass a speaking order. Appeal of the assessee hereby partly allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether framing a best-judgment assessment under section 144 of the Act was valid where the assessee failed to respond to notices and did not file Form 10B. 2. Whether addition of the entire recorded expenditure as 'unexplained expenditure' under section 69C of the Act is permissible where the expenditure is part of the books of account and payments are recorded. 3. Whether a substantive claim to exemption under section 10(23C)(iiiad) can be decided against the assessee by treating a procedural filing error (use of ITR-7 instead of ITR-5) as fatal, without affording an opportunity to examine substantive facts. 4. Whether, in the alternative, the assessee should be treated and assessed in the status of an AOP/BOI and income computed accordingly, including the treatment of deficit and carry-forward. 5. Whether natural justice required setting aside the impugned orders and remitting the matter to the Assessing Officer for de novo adjudication with specified directions. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of assessment under section 144 of the Act Legal framework: Section 144 empowers the AO to make best-judgment assessments where an assessee fails to comply with statutory notices; however, fundamental principles of natural justice and reasoned assessment remain relevant in exercise of that power. Precedent Treatment: No specific precedent is cited in the judgment for this point; the Court applies statutory principle and natural justice norms to the facts. Interpretation and reasoning: The Tribunal notes that the AO framed assessment under section 144 due to non-compliance. While non-compliance can justify resort to section 144, the Tribunal emphasized that exercise of the provision must not be arbitrary and must allow the assessee opportunity to have substantive claims examined. The Tribunal considered the managing trustee's credible explanation (senior citizen, tax-practitioner error) and existence of papers now filed, concluding that the circumstances warranted another opportunity. Ratio vs. Obiter: Ratio - Section 144 can be invoked for non-compliance but must be exercised so as to preserve principles of natural justice and permit adjudication of substantive claims where credible explanations and material are available. No broader obiter pronouncement made. Conclusion: The assessment under section 144 was not sustained in the given facts; the matter is remitted for de novo adjudication with directions to afford adequate opportunity and to pass speaking orders. Issue 2 - Legality of invoking section 69C to disallow recorded expenditure Legal framework: Section 69C applies to 'unexplained expenditure' - expenditure not recorded or whose nature and source are not satisfactorily explained; ordinary computation provisions (e.g., section 37 read with sections 28-43) govern allowability of recorded business/charitable expenditure. Precedent Treatment: Judgment contains no citation of prior decisions applying or distinguishing section 69C; analysis is statutory and purposive. Interpretation and reasoning: The Tribunal held that where expenditure is part of the books and payments are recorded, the proper course is to assess allowability under ordinary computation provisions rather than to treat all recorded expenditure as unexplained under section 69C. Invoking section 69C in such circumstances is arbitrary and unjustified unless the expenditure is truly unrecorded or unexplained in the statutory sense. The AO's blanket addition by invoking section 69C without a clear finding that the expenses were unrecorded/unexplained was impermissible. Ratio vs. Obiter: Ratio - Recorded payments reflected in books cannot be summarily treated as 'unexplained expenditure' under section 69C; AO must first test admissibility under ordinary computation rules and record specific findings before invoking section 69C. Obiter - Emphasis on testing allowability under sections 28-43 and section 37 is explanatory of proper procedure. Conclusion: Addition under section 69C set aside; AO directed not to invoke section 69C unless there is a clear, reasoned finding that expenditure is unrecorded or unexplained in the statutory sense. Issue 3 - Effect of procedural error in choice of ITR form on substantive exemption under section 10(23C)(iiiad) Legal framework: Substantive entitlement to exemption under section 10(23C)(iiiad) depends on whether the institution exists solely for educational purposes, the nature of activities, use of funds, and meeting applicable threshold of receipts; procedural filing errors do not ipso facto defeat substantive claims. Precedent Treatment: No precedents are referenced in the judgment; Tribunal applies principles distinguishing procedural lapses from substantive disqualification. Interpretation and reasoning: The Tribunal regarded the wrong selection of ITR form (ITR-7 instead of ITR-5) as a procedural lapse caused by the tax practitioner and not a substantive bar to claiming exemption if facts otherwise establish eligibility. The Tribunal noted that eligibility under section 10(23C)(iiiad) involves verifiable factual enquiries (solely for education, fee structure, use of funds, annual receipts) which the authorities below did not have the opportunity to examine. Consequently, the Tribunal concluded that the exemption claim must be adjudicated on merits by the AO after verifying factual matrix. Ratio vs. Obiter: Ratio - Procedural mistakes in filing cannot be allowed to defeat substantive exemption claims; substantive entitlement under section 10(23C)(iiiad) must be determined on factual verification. Obiter - Procedural explanations about senior trustee and reliance on tax practitioner are contextual but not authoritative beyond the case facts. Conclusion: The exemption plea under section 10(23C)(iiiad) was remitted to the AO for substantive examination; the procedural filing error does not preclude such consideration. Issue 4 - Assessment in status of AOP/BOI and treatment of deficit/carry-forward Legal framework: Where an entity is not registered under sections 12AA/12AB or 10(23C), sections 11 and 12 do not apply and, if correctly treated as AOP/BOI, income should be computed in that status with allowable expenditures and carry-forward rules applied as per law. Precedent Treatment: No precedent discussed; Tribunal relies on statutory classification and correctness of returned status. Interpretation and reasoning: The Tribunal accepted the assessee's submission that, despite selection of wrong ITR form, the status in the return was correctly shown as AOP/BOI and in subsequent years returns were filed as ITR-5. On the merits, if exemption under section 10(23C)(iiiad) is not available, the AO is directed to compute income in the status of AOP/BOI, allowing only verifiable and admissible expenditures and verifying any deficit and its carry-forward in accordance with law. Ratio vs. Obiter: Ratio - In absence of registration under charitable provisions, the AO must compute income as AOP/BOI permitting admissible expenditures and lawful carry-forward; reclassification is to be done on verifiable evidence. Obiter - None significant. Conclusion: Matter remitted for computation in AOP/BOI status if exemption is not allowed, with directions to verify deficit/carry-forward and permit only admissible expenditures. Issue 5 - Natural justice, opportunity to file documents and requirement for speaking order Legal framework: Principles of natural justice require opportunity to be heard and reasoned decisions; AO must pass speaking orders and record reasons for disallowance or invocation of penal provisions like section 69C. Precedent Treatment: No precedent cited; Tribunal applies general administrative law principles. Interpretation and reasoning: The Tribunal found that the assessee's failure to furnish details was in part due to a genuine procedural error and the existence of a now-filed paper-book. In the totality of circumstances the Tribunal held that natural justice required remand so that substantive claims (exemption, admissibility of expenditures, AOP status) can be examined and a speaking order passed. The Tribunal specifically directed the AO to grant adequate opportunity and to pass a speaking order addressing each contention. Ratio vs. Obiter: Ratio - Where credible explanations and material are available, principles of natural justice mandate fresh adjudication rather than final best-judgment additions; AO must record reasons and pass speaking orders. Obiter - Directions concerning the exact sequence of verification steps are procedural guidance tailored to the case. Conclusion: Orders set aside and matter remitted with explicit directions to grant opportunity, examine exemption claim, compute income correctly if exemption denied, refrain from invoking section 69C without reasons, verify carry-forward, and pass a speaking order.