2025 (10) TMI 1004 - AT - Income Tax

Exemption under s.11(1)(c) upheld for AY 2019-20 after s.12AA registration; s.270A penalty dismissed as no misreporting found

ITAT AHMEDABAD upheld CIT(A)'s direction that the AO grant exemption under s.11(1)(c) for AY 2019-20, since registration under s.12AA was granted per the ... Non grant of exemption u/s. 11(1)(c) - HELD THAT:- Since the assessee has been granted registration u/s. 12AA as per the directions of the Hon’ble Tribunal in assessee’s own case for assessment year 2019-20 [2024 (7) TMI 492 - ITAT AHMEDABAD], the CIT(A) was right in directing the AO to grant exemption u/s. 11(1)(c) of the Income Tax Act for assessment year 2019-20. Penalty u/s. 270A for under reporting of income which is in consequence of misreporting of income - This ground does not sustain as it is an appeal to that of denial of the section 11(1)(c) of the Act which was challenged before us [SUPRA] and since the registration u/s. 12AA has been granted, there is no mis-reporting of income. ISSUES PRESENTED AND CONSIDERED 1. Whether expenditure claimed as application of income for charitable purposes can be disallowed where registration under section 12AA was not granted by the Assessing Officer for the assessment year in question but registration was subsequently granted by the Tribunal/directions leading to retrospective recognition. 2. Whether penalty under section 270A for under-reporting of income (attributable to mis-reporting) can be sustained where the underlying disallowance/mis-reporting is negated by subsequent grant of registration under section 12AA and consequent allowance of exemption under section 11(1)(c). ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of disallowance of expenditure claimed under section 11(1)(c) due to absence of section 12AA registration Legal framework: Exemption under section 11(1)(c) is available to entities which qualify as charitable/religious institutions and are entitled to exemption; registration under section 12AA is a relevant administrative prerequisite for recognition of such status, and absence of registration is a ground on which Assessing Officer may treat the entity as not entitled to exemption for the year. Precedent treatment: The Tribunal's earlier order granting registration under section 12AA for the assessment year at issue was recognized and applied by the appellate authority; the current Bench followed that Tribunal direction rather than the Assessing Officer's contemporaneous rejection. Interpretation and reasoning: The Court/Tribunal examined the chronology: initial application for registration, communications from the Assessing Officer, rejection for the earlier year, subsequent application and later grant of registration effective from the assessment year in question pursuant to the Tribunal's earlier order. The Assessing Officer's disallowance of Rs. 2,45,00,281 as expenditure on the ground of absence of valid registration was overturned because the registration was later found to have been rightly granted. The appellate authority's direction to allow exemption under section 11(1)(c) was supported by the fact that the entity had been held entitled to registration by the Tribunal, thereby validating the claim that the expenditure constituted application of income for charitable purposes. Ratio vs. Obiter: Ratio - where registration under section 12AA is subsequently granted (pursuant to Tribunal direction) for the assessment year in question, denial of exemption under section 11(1)(c) by the Assessing Officer for that year, solely on grounds of non-possession of certificate, cannot be sustained. Obiter - procedural nuances of the initial AO communication timeline are explanatory but not necessary to the holding. Conclusion: The disallowance of the claimed expenditure was not justified in view of the subsequent grant of registration under section 12AA; the appellate decision directing allowance of exemption under section 11(1)(c) is affirmed and the Assessing Officer's disallowance is set aside. Issue 2: Sustainment of penalty under section 270A for under-reporting/mis-reporting where underlying tax adjustment is negated Legal framework: Section 270A imposes penalty for under-reporting and mis-reporting of income. Penal liability under section 270A is contingent on the existence of under-reported income or mis-reporting - if the underlying tax adjustment is reversed or found not to constitute mis-reporting, penalty justification must be reassessed. Precedent treatment: The decision treats the penalty question as derivative of the substantive disallowance issue; when the substantive disallowance was reversed by application of the section 12AA grant, the basis for penalty evaporates. No attempt was made to distinguish or follow contrary authorities imposing penalty despite later reversal; rather the Tribunal applied the logical consequence of reversal. Interpretation and reasoning: The penalty contention was premised on the same facts as the substantive denial of exemption (i.e., that the claimant had mis-reported income). Once the Tribunal/appeal process established that registration under section 12AA existed for the year and that the expenditure was properly allowable as application of income, there was no mis-reporting or under-reporting arising from that issue. Therefore, the foundation for imposing section 270A penalty (under-reporting due to mis-reporting) did not survive; the Court found no separate basis to sustain penalty. Ratio vs. Obiter: Ratio - where a penalty under section 270A is predicated solely on an adjustment that is subsequently negated (e.g., by grant of required registration validating the claimed exemption), the penalty cannot be sustained. Obiter - the decision does not engage with circumstances where both mis-reporting and other culpable conduct independent of the reversed adjustment might justify penalty. Conclusion: The penalty under section 270A for under-reporting/mis-reporting, being derivative of the denial of exemption, is not sustainable once the registration under section 12AA is recognized; the penalty deletion was correctly upheld and must be dismissed when sought to be revived by Revenue. Cross-references and interrelation The resolution of Issue 2 flows directly from Issue 1: the invalidation of the substantive addition (denial of exemption under section 11(1)(c) due to absence of section 12AA registration) removes the factual predicate for imposing penalty under section 270A. The Tribunal's acceptance of the prior order granting registration is dispositive of both issues.