2025 (11) TMI 407 - AT - Income Tax

Filing Form 10B mandatory to claim exemption under ss.11-12; noncompliance denied exemption but expenditures allowed under real-income principle, demand reduced.

ITAT held that filing Form 10B is mandatory for claiming exemption under ss.11-12 and rejected the assessee's contention that it was merely directory, ... Denial of exemption u/s 11 and 12 - not filing Form 10B within due date as specified in the Income Tax Act - Disallowance of the expenses claimed by the trust for carrying out the charitable activities - HELD THAT:- Since there is mandatory provision inserted in the Income Tax Act as per sections 11 and 12, assessee is required to file Form 10B as specified in Income Tax Act but the assessee has not complied with the same. Accordingly, we reject the arguments of the ld. counsel that the filling of Form 10B is directory in nature.. The case law relied by the DR supports our view. We also have gone through financial statements of the assessee. There is no doubt that the audit has been conducted on 20.08.2016 by CA and Form 10B is also signed on 20.08.2016, we noted from the Income and Expenditure A/c that total receipt shown by the assessee is Rs. 26,66,748.59/- and the total expenditure incurred by the assessee is Rs. 28,04,471.05/-. Accordingly, there is excess of expenditure over income i.e., assessee incurred loss during the year. However, CPC has determined entire receipts as income shown in the income tax return and raised tax demand which is also not correct. Fundamental principle of Income Tax Act is to bring into tax to the real income earned by the assessee during the impugned Assessment Year but while processing return of the assessee, The CPC has not computed the real income and did not grant any benefit of expenditure which are incurred by the assessee during the year. Hon’ble Apex Court has decided the issue in respect of taxation on real income theory in the case of Southern Technologies [2010 (1) TMI 5 - SUPREME COURT] Respectfully following the above judgment of Hon’ble Apex Court, we are allowing benefit of expenditure as incurred by the assessee from the income determined by the CPC - Appeal filed by the assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether non-submission/e-filing of audit report in Form 10B within the time prescribed by the Income-tax Act is a mandatory condition for claiming exemption under sections 11 and 12 or merely directory. 2. Whether delay in e-filing Form 10B where the audit was completed within the year (but the return and/or Form 10B were filed belatedly) can be excused as a technical/clerical defect and entitlement to exemption under sections 11/12 maintained. 3. Whether processing of return by CPC treating gross receipts as taxable income without allowing the expenditures shown in the assessee's Income & Expenditure account contravenes the principle of taxation of 'real income' and requires correction. 4. Remedy and direction: scope of appellate relief where Form 10B was uploaded after processing/rectification and where the computation by CPC ignored allowable expenditures (including depreciation). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Mandatory nature of timely e-filing of Form 10B for claims under sections 11/12 Legal framework: Sections 11/12 read with the statutory requirements for audit information and Form 10B prescribe documentary/audit compliance to claim exemption; return-filing timelines under section 139 apply. Precedent treatment: The Tribunal considered competing judicial views: (a) earlier decisions treating audit-filing requirements as directory in certain contexts, and (b) higher authority decisions interpreting the statutory insertion making timely filing a condition for exemption. The Tribunal analysed these lines of authority and coordinate bench rulings addressing similar facts. Interpretation and reasoning: The Court held that where the statute expressly requires filing of Form 10B within the time prescribed, that requirement is mandatory for claiming exemption under sections 11 and 12. The Tribunal rejected the contention that the requirement is merely directory when the return and/or Form 10B are filed belatedly. The Tribunal noted that the legislative insertion prescribing time-bound compliance cannot be read as directory in order to confer the statutory benefit; the assessee bears responsibility for compliance and cannot shift lapses to professionals. Ratio vs. Obiter: The finding that timely e-filing of Form 10B is a mandatory statutory condition for entitlement to exemption is ratio decidendi for disputes over exemption under sections 11/12 where Form 10B is not filed within the statutory time. Conclusion: Filing/e-filing of Form 10B within the time specified is mandatory to claim exemption under sections 11 and 12; late uploading of Form 10B, after due date and after return filing, disentitles the assessee to exemption unless other remedial statutory relief is obtained. Issue 2 - Whether a belatedly uploaded Form 10B can be excused where audit was completed earlier (technical/clerical mistake) Legal framework: Statutory requirement focuses on timing of audit information filing (Form 10B) and return filing under the Act; remedial provisions such as administrative powers to condone delay are available under the statute. Precedent treatment: The Tribunal noted earlier authorities where courts/tribunals excused procedural lapses on facts where audit was substantively complete and delay was technical, but it distinguished those authorities on the ground that in the present case both the return and the Form 10B were filed belatedly and the statutory timeline was not met. Interpretation and reasoning: Where the audit was completed on an earlier date but Form 10B was uploaded much later (and return itself was late), the Tribunal found the factual matrix distinguishable from cases excusing mere clerical delay. The Tribunal also observed that where delay exists, statutory remedies (e.g., administrative condonation) could have been invoked; absence of such steps undermines the excuse. Ratio vs. Obiter: The conclusion that factual distinction (return also belated) prevents treating the late filing as a mere technicality is part of the operative reasoning (ratio) for the denial of exemption on these facts; comments on available remedial steps are procedural guidance (obiter where not applied here). Conclusion: A technical/clerical mistake does not automatically validate belated filing of Form 10B when statutory time limits for return and audit filing are missed; facts showing both late return and late upload materially distinguish precedents that excused only the latter. Issue 3 - Incorrect processing by CPC treating gross receipts as taxable income without allowing expenditure and application of the 'real income' principle Legal framework: The Income-tax Act taxes 'real income' computed on commercial principles subject to the Act; permissible deductions and expenditures must be allowed to arrive at taxable income rather than taxing gross receipts. Precedent treatment: The Tribunal relied on higher court authority affirming the principle that taxable income must reflect real profits after allowable deductions; statutory disallowances are exceptions but the general rule requires computing income after deducting legitimate expenditure. Interpretation and reasoning: On examining the assessee's Income & Expenditure account, the Tribunal found expenditures exceeded receipts. CPC's processing that converted gross receipts into taxable income without considering expenditures was contrary to the real income principle. Even though exemption under sections 11/12 was found unavailable due to late Form 10B, the Tribunal concluded that the revenue cannot assess gross receipts as income where the assessee's accounts show an excess of expenditure over receipts and legitimate deductions (including depreciation) must be given effect. Ratio vs. Obiter: The direction to compute taxable income consistent with real income theory and to allow the expenditures shown in the accounts is ratio with respect to correcting the processing error; observations explaining the real income principle and its application are supportive precedent analysis. Conclusion: The CPC's approach of treating gross receipts as taxable income without allowing admitted and supported expenditures is incorrect; the assessment must be recomputed to give effect to the expenditures and arrive at the real income. Issue 4 - Relief, directions and scope of appellate interference Legal framework: Appellate tribunal powers to correct computation errors, grant relief on incorrect assessment computations, and remit to AO for recomputation consistent with law and evidence. Precedent treatment: The Tribunal applied established appellate principles that where primary fact (existence and quantum of expenditure) is supported by accounts and audit, the appellate authority may direct recomputation and allow appropriate deductions even if other claims (e.g., exemption under sections 11/12) are rejected on technical non-compliance. Interpretation and reasoning: The Tribunal allowed the expenditure claimed (including depreciation) against the income determined by CPC, relying on the real income principle and documentary support in the Income & Expenditure account. The Tribunal observed that the major expenditure head (depreciation) is not an out-of-pocket payment but is allowable as per commercial and tax accounting principles; it directed the assessing officer to recompute income accordingly. Ratio vs. Obiter: The direction to permit the expenditures and remit computation to the AO is part of the operative decision (ratio) granting partial relief; ancillary remarks about the nature of depreciation are explanatory. Conclusion: Although exemption under sections 11/12 was denied for non-compliance with time-bound filing of Form 10B, the Tribunal granted partial relief by directing adjustment of the expenditures (including depreciation) against receipts and remitting the matter to the assessing officer for recomputation to reflect real income; the appeal is partly allowed. Cross-references and practical implications 1. Issue 1 and Issue 2 are interlinked: the mandatory character of Form 10B filing (Issue 1) shapes the ability to excuse belated filing as a technical lapse (Issue 2); the Tribunal treated both together in reaching its conclusion. 2. Issue 3 affected the quantum irrespective of exemption outcome: even where exemption under sections 11/12 fails on technical grounds, assessment must still conform to the real income principle and allow bona fide expenditures; remedial recomputation was therefore warranted. Operational outcome: Denial of exemption for non-timely filing of Form 10B; grant of relief by directing allowance of expenditures shown in accounts and remand for recomputation of taxable income by the assessing authority.