An educational trust can claim exemption under section 10(23C) even if it files its ITR 5 instead of ITR 7

Exemption and Deduction Claims of Educational Trust Remanded for Fresh Consideration

Key Issues and Decisions:

I. Exemption under Section 10(23C) and Filing of Incorrect Form:

Issue: Whether the assessee, an educational trust, can be denied exemption under Section 10(23C) for filing its return in the incorrect form (ITR-5 instead of ITR-7), despite fulfilling all conditions for the exemption.
Decision: The court held that the assessee’s mistake in filing the wrong form was a bona fide error. The assessee had demonstrated its eligibility for exemption under Section 10(23C) and provided supporting evidence. The matter was remanded to the Assessing Officer (AO) for fresh consideration on merits, taking into account the assessee’s eligibility for the exemption. (Matter remanded)

II. Deduction of Salary Grant under Section 57:

Issue: Whether the assessee can claim a deduction under Section 57 for the salary grant received from the Government, which was used to pay salaries to teaching and non-teaching staff.
Decision: The court noted that the assessee had provided documentary evidence to support the claim and establish a nexus between the grant and the salary expenditure. However, the AO did not consider this evidence. The matter was remanded to the AO for fresh consideration, directing them to examine the evidence and determine the allowability of the deduction. (Matter remanded)

Key Takeaways:

Bona Fide Errors: This case highlights that bona fide errors in tax filings, such as using the incorrect form, should not automatically lead to the denial of legitimate claims. The AO should consider the substance of the claim and the assessee’s eligibility before making a decision.
Supporting Evidence: The decision emphasizes the importance of providing supporting documentation to substantiate claims for exemptions and deductions. The AO is obligated to consider the evidence presented by the assessee before making a decision.
Nexus between Income and Expenditure: For claiming deductions under Section 57, a clear nexus between the income and the related expenditure must be established. The AO should examine the evidence to determine if such a nexus exists.

This case provides valuable guidance on the interpretation of Sections 10(23C) and 57 of the Income-tax Act, 1961, emphasizing the need for a fair and reasonable approach by the AO in considering claims for exemptions and deductions, even when there are minor procedural errors or discrepancies in the initial filing.

IN THE ITAT PUNE BENCH ‘B’

Shahu Shikshan Prasarak Mandal

ACIT (Exmp.)

R.K. PANDA, Vice president
and Ms. Astha Chandra, Judicial Member

IT Appeal No. 951 (PUN) of 2024
[Assessment Year 2020-21]

JANUARY 15, 2025

Suhas P. Bora for the Appellant. Ajay Kumar Keshari for the Respondent.

ORDER

Astha Chandra, Judicial Member. – The appeal filed by the assessee is directed against the order dated 29.04.2024 of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi [“CIT(A)”] pertaining to Assessment Year (“AY”) 2020-21.

2. Briefly stated, the facts are that the assessee trust is registered under Bombay Public Trust Act as educational trust vide registration certificate dated 31.01.1991. It is also registered under the Societies Registration Act, 1860 vide registration dated 31.10.1990. The assessee trust is carrying on primary and high school at ten different places in District Latur, which have been approved by Directorate of Education, Maharashtra State. For AY 2020-21, the assessee e-filed its return of income on 30.12.2020 declaring total income at Rs.Nil. The case of the assessee was selected for limited scrutiny under CASS for the reason “large deduction claimed u/s 57 (Business ITR)”. Statutory notices u/s 142(1) and 143(2) of the Income Tax Act, 1961 (the “Act”) along with questionnaire were issued and served upon the assessee. In response thereto, the assessee vide its online submission dated 11-12-2021, inter alia stated that the main object of the trust is educational and social welfare and not for the purpose of profit, educational schools are run by the trust in Latur District at Udgir and Ahmedpur in rural areas and that the income from other sources includes salary grant received from Government against salary paid to teaching and non-teaching staff is claimed as deduction from other sources. The Ld. Assessing Officer (“AO”) noted that the assessee did not file any documents indicating grant of approval u/s 10(23C)(vi) or section 12AA of the Act and hence not eligible to claim its receipts/income as exempt from taxation. Vide notice u/s 142(1) of the Act dated 25.11.2021, the Ld. AO issued a detailed questionnaire asking the assessee to furnish and explain nature and source of income, computation of deduction claimed u/s 57 and also to explain how it qualifies for such deduction u/s 57, to furnish details of all cash expenses claimed as deduction u/s 57 and how receipt qualifies for income from other sources as per section 56 of the Act. In the absence of any explanation offered by the assessee, the Ld. AO observed that the assessee in its return in Schedule-OS has claimed expenses /deduction u/s 57 of the Act amounting to Rs.6,69,44,047/-. However, the assessee has failed to substantiate its claim of expenses with supporting evidence/documents. Moreover, the assessee has also not furnished Audit Report in Form 10B, copy of income expenditure statement, ledger copy of expenses, balance sheet etc. The Ld. AO observed that there is no direct nexus between the income from other sources earned and expenses incurred and claimed as deduction u/s 57 of the Act and therefore the amount of Rs.6,69,44,047/- claimed as expenses cannot be allowed as deduction u/s 57 of the Act. Thereafter, a show cause notice u/s 144B(xiv) of the Act was issued on 03.03.2022 to the assessee followed by another show cause notice issued on 26.08.2022 asking the assessee as to why the proposed variation should not be made in the total income in respect of the substantial deduction claimed u/s 57 of the Act to which the assessee submitted its reply on 10.03.2022 and 01.09.2022. The assessee’s submissions were not accepted by the Ld. AO for the reasons recorded in para 6 of the assessment order. The Ld. AO concluded that “in view of the above and on perusal of the details submitted, it can be construed that expenses which are not expended wholly and exclusively for the purpose of making or earning such income which qualifies as income from other sources u/s 56 is liable to be disallowed. Accordingly, the deduction of Rs.6.69,44,047/- claimed u/s 57 of the Act disallowed and added to the total income”. He, therefore, completed the assessment at assessed income of Rs.6,69,44,050/- u/s 143(3) r.w.s. 144B of the Act vide order dated 21.09.2022.

3. Aggrieved, the assessee carried the matter before the Ld. CIT(A) challenging the addition of Rs.6,69,44,050/- made by the Ld. AO on account of disallowance of expenses claimed u/s 57(iii) of the Act. Before the Ld. CIT(A), the assessee filed detailed written submission on 11.04.2024 which is incorporated by the Ld. CIT(A) in para 5 of his appellate order. The assessee, inter alia submitted its point wise rebuttal to the findings of the Ld. AO recorded by him in para 6 of the assessment order. The relevant portion of the submission before the Ld. CIT(A) is reproduced below :

“4.00 The learned AO in his assessment order dated 21/09/2022 has made variation/ addition of Rs 6,69,44,047/- by disallowing the claim of assessee u/s 57 of the Income Tax Act, 1961 mainly on following grounds (refer para 6 of assessment order dt. 21/09/2022) and our submission on grounds raised by learned AO for addition of Rs 6,69,44,047/-by disallowing the claim of assessee u/s 57 of the Income Tax Act, 1961 is as under: –

1) Though assessee has stated in his letter many times that the Institution is covered u/s 10(23C)(iiiab) of the IT. Act. 1961 However, no documents to substantiate its claim has been provided. No document showing the grant allowed to the Institution by the government has been produced. Except for enclosing the Paysheet prepared by each School of the Trust. In reply to SCN issued on 26/08/2022 assessee submitted copy of grant dating back to the year 1997 and 2000 and that in respect of 6 schools out of 10 schools of the assessee. (Para No. 6. 1 of Assessment Order dt. 21.09.2022)

The institutions, which are covered u/s. 10(23C)(iiiab) are not required to obtain the approval from CCIT / PCIT. Whereas, all other trusts, which are covered u/s. 10(23C)(iv), (v), (vi) and (via) are required to obtain the approval of CCIT / PCIT. The trust is running schools which are mostly granted by Government in the year between 1990-2000.

Certificates from School Education Department, Government of Maharashtra confirming the amount of grants distributed to schools run by trust is enclosed herewith as Annexure “E”.

2) Perusal of the Pay sheets as claimed by the assessee to have been submitted before the pay unit of Education department and verified and sanctioned by the said Govt department, it is seen that Paysheets enclosed by the assessee is a mere Proforma paysheet prepared by the respective schools of the Assessee, signed by the respective School heads. Nowhere it is clear that grant is being received from the government for the school. The paysheet is signed at the end by the Secretary Pay and Employees Provident Fund. It only implies that the same is being submitted to the EFF department for PF purpose. (Pars No. 6.2 Assessment Order dt. 21.12.2022).

In this regard it is submitted that Profarma No. 2 (in marathi प्रपत्र २३ is the form prescribed by School Education Department, Government of Maharashtra for claiming salary grants by Granted Schools. It is not the profarma sheet as understood by the id. AO but the nomenclature of the form is Profarma No. 2 in marathi प्रपत्र – २३.

As stated above the monthly pay sheet in form Profarma No. 2 (in marathi प्रपत्र – २) is being prepared by respective schools and same is submitted to Education officer, Pay and Provident Fund Unit, Zilha Parishad, Latur (and not the Provident Fund Department). After verification of pay sheets submitted by schools the amount of salary grant is credited by Education officer, Pay and Provident Fund Unit, Zilha Parishad, Latur in the bank account of the School maintained with the Latur District Central Co Operative Bank Ltd. with the instruction to make direct payment (by debiting the bank account of school in which salary grant is credited) to the bank account of respective teaching/non teaching staff.

The pay sheet as prepared and signed by respective schools heads are being submitted to Pay and Provident Fund Unit, Zilha Parishad, Latur (not to the EPF Department), After verification of pay sheets submitted by schools the same is signed by Superintendent, Pay and Provident Fund Unit, Zilha Parishad, Latur (and not the Secretary Pay and Employees Provident Fund)).

The name of department looking after the salary grants is “Pay and Provident Fund Unit” and not Provident Fund Department. It seems that the word “Pay” is remained to be observed by learned AO and has concluded that the pay sheets are submitted to EPF Department for Provident Fund purpose.

3) If assessee is claiming exemption u/s 10(23Ciabl, it was required to file return of income in ITR-7. However, the ROI for the relevant assessment year has been filed in ITR-5. When assessee was confronted, he has merely submitted a copy of condonation filed u/s 119(2)(b) before CIT(E), Pune. The outcome of the said application in silent. Further, on verification of E filing portal as on date, it is seen that no return has been filed by the assessee in ITR-7. (Para No. 6.3 of Assessment Order dt. 21.09.2022).

As a procedural matter and with the intention to rectify the genuine mistake, we ourselves have filed delay condonation application with Hon’ble Commissioner of Income Tax (Exemption), Pune.

Technical Mistake in submission of ITR:

Assessee trust is a charitable trust exclusively engaged in imparting of recognized educational courses. Moreover, the institution is substantially financed by the Government, therefore, whole of the income of the trust is exempted u/s. 10(23C) (iiiab) of the Act. Therefore, the assessee trust was required to submit its return in ITR-7. Whereas, by mistake, ITR 5 is submitted.

Your honour, in order to rectify the irregularity, assessee trust has made an application u/s. 119(2)(b) to the Hon. Commissioner of Income Tax, Exemptions, Pune and requested to grant the permission to submit ITR-7. A copy of the letter is enclosed herewith as Annexure “F”.

The assessee trust inadvertently submitted ITR-5 instead of correct ITR-7. It is a procedural technical mistake. It is pertinent to note that, as a result of this mistake neither assessee trust is benefitted nor there was any loss of revenue to the Government. It is purely a technical mistake resulted by the Tax Practitioner. He has confessed his mistake and accordingly submitted an Affidavit. A copy of the letter is enclosed herewith as Annexure “G”.

Your honour, the assessee trust pray that, on account of wrong submission of ITR, return should not be treated as invalid and nonest. A return of income submitted in ITR-7 and enclosed herewith as Annexure “H” may please be admitted and it is to be treated as valid return in the eyes of law.

In the above context, assessee trust would like to rely on the following judicial precedents, wherein Hon. High Courts and ITAT Benches, have taken lenient views and considered the mistake of the assessee can be regularized.

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Mohindra Mohan Sirkar v. ITO [1983] 139 ITR 386 (Calcutta)

Facts of the case are briefly enumerated here-in-below:

(a)

In this case, the assessee had filed his returns for three assessment years within time. The assessment proceedings were initiated thereafter on the returns filed, but no assessment was, however, made. Later, the assessee was served with three notices under Section 148 of the Income-tax Act, 1961, calling upon him to file returns for the said assessment years.

(b)

Being aggrieved, the assessee initiated proceedings under Article 226 of the Constitution for quashing the said notices. The defense of the Revenue was that the particulars of profits and gains of business had not been submitted with the returns and that, further, one of the returns was not properly verified. Therefore, all the returns were invalid in law.

(c)

On the aforesaid facts, it was held by a Division Bench of this court that the returns could not be held to be invalid and non-existent. It was held further that there was a distinction between non-filing of a return and filing of an incorrect and incomplete return.

(d)

The Income-tax Act did not provide for rejection of an invalid return but under Section 143, a duty was cast on the Income-tax Officer to assess the total income after notice to the assessee and considering the evidence that might be produced. It was observed that there could be cases where the returns were incomplete to such an extent that they could not be regarded as returns in law, for example, where the return was not signed by the assessee at all or where a blank return was filed. But where returns had been signed and verified by the assessee and the only defect in the returns was that the particulars of the profits and gains of the business had not been stated, the returns could not be treated as invalid and non-existent.

(e)

writ was issued commanding the respondents not to love any effect to the impugned notices under Section 148 of the Act.

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Nicholas Applegate South East Asia Fund Ltd. v. ADIT (2009) 117 ITD 0299 (Mum)

“Assessee company having filed four returns in respect of its four units correctly disclosing all relevant information without causing any prejudice to Revenue, such mistake or defect stood removed by operation of s. 292B and consolidated revised return filed by assessee will relate back to the date of filing of original returns entitling assessee to claim carry forward and set off of loss as claimed in original returns and consolidated in revised return.”

In our case, the assessee trust has submitted a return of income in ITR-5, instead of ITR-7, but all the material data in ITR-5 was correct, which converted into ITR-7 subsequently and now ITR-7 is submitted.

Considering the observations of Hon. ITAT, Mumbai in the aforesaid case, your assessee requests that, irregularity may please be considered as rectified.

CIT v. Royal Textiles 120 ITR 0506 (Mad)

Brief facts of the case are as under:

(a)

In this case, the assessee had filed its return of income in a wrong form. Subsequently, as required by the Income-tax Officer, the assessee filed the return in the correct form.

(b)

On the completion of the assessment, the Income-tax Officer charged interest under Section 139(1) up to the date of the filing of the original return.

(c)

The Commissioner of Income-tax initiated proceedings under Section 263 of the Income-tax Act, 1961, and directed the Income-tax Officer to levy interest up to the date of the filing of the return in the correct form.

(d)

On appeal, the Tribunal set aside the order of the Commissioner. On a reference, it was held by a Division Bench of the Madras High Court that though the assessee had used a wrong form, it did not mean that the return filed in the wrong form was nonest and that the return filed subsequently in the correct form could be treated as the only return filed by the assessee. The mistake of the assessee was innocuous and the return filed could not be treated as a mere scrap of paper resulting in penalty to the assessee. The court noted that the Income-tax Officer had accepted the original return for making a provisional assessment under Section 141 and had levied interest on the basis that the return was actually filed earlier. The court answered the reference in favour of the assessee.

Sir, considering the aforesaid decision of the Hon. Madras High Court, your assessee trust would like to state that, the correct form of return i.e. ITR-7 may please be accepted. Since the ITR-5 submitted has been processed already u/s 143(1) by the CPC vide intimation, dt.: 29.03.2021 and CPC DIN CPC/2021/A5/159114926.

Your honour, your assessee trust would like to state that;

(a)

The correct ITR-7 was required to be submitted, but inadvertently ITR-5 was submitted. It is only a technical or procedural mistake.

(b)

A return of income submitted under ITR-5 is processed and intimation u/s. 143(1) is issued on 29.03.2021 and DIN is CPC/2021/A5/159114926.

(c)

As a result of the said mistake, neither the assessee trust is benefitted nor there was loss of revenue to the Government.

(d)

All the particulars in ITR-5 have been filled in ITR-7. No new material or data is furnished in ITR-7. This shows that, there is a technical mistake in submission of ITR-5.

(e)

The aforesaid mistake was resulted by the tax consultant an Affidavit enclosed herewith. Sir for the mistake of an Advocate or tax consultant, the assessee trust should not be penalized.

Considering the case laws referred above, we request before your honour to please accept the ITR-7 filled by us during assessment proceeding.

4) On verification of the E filing Portal it is seen that assessee has filed Form No. 10A on 07/ 01/2020 for A. Y. 2020-21. Filing of Form No. 10A for A.Y. 2020-21 by the assessee is contradictory to the submissions made by the assessee vide his letter dated 18/03/2022 that Since it is covered u/s 10(23)(C) (iliab) and hence It is not required to obtain Certificate of Registration u/s 12A of the Act. (Para No. 6.4 of Assessment Order dt 21.09.2022).

Your honour, we had applied for registration u/s 12AA in Form 10A on 07/01/2020 on E filing Portal but same could not be completed due to pandemic Covid 19, nationwide lock down specifically schools and colleges which remained closed for considerably longer period and other reasons. Hence, the application filed by us got rejected and trust remained to be registered u/s 12AA.

Your honour, with due respect to the authorities, the assessee would like to clarify that, there is no contradictory statement, because the assessee has applied for registration of the trust u/s. 12AA by filing Form No.: 10 is a true fact. But this does not amounts to the contrary act of section 10(23C) (iiiab) of the Act.

Even though the assessee trust has committed the mistake or omission, but the Income Tax Department is not entitled to take the benefit of such mistake. In this context, we draw your kind attention to the CBDT Circular given below:

CBDT Circular No. 14 (XL-35) dated 11/04/1955-Department must not take advantage of ignorance of assessee to collect more tax than what is legitimately due Central Board of Direct Taxes

Circular No. 14 (XL-35)

Miscellaneous-Refund and reliefs due to assessees Departmental attitude towards

Dated: 11/04/1955

ASSESSMENT SECTIONS 143.

The Board have issued instructions from time to time in regard to the attitude which the Officers of the Department should adopt in dealing with assessees in matters affecting their interest and convenience. It appears that these instructions are not being uniformly followed.

Complaints are still being received that while 110’s are prompt in making assessments likely to result into demands and in effecting their recovery, they are lethargic and indifferent in granting refunds and giving reliefs due to assessees under the Act. Dilatoriness or indifference in dealing with refund claims (either under s. 48 or due to appellate, revisional, etc., orders) must be completely avoided so that the public may feel that the Government are actually prompt and careful in the matter of collecting taxes and granting refunds and giving reliefs.

Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpaver in every reasonable way. particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run. benefit the Department for it would inspire confidence in him that he may be sure of getting a square deal from the Department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessees on whom it is imposed by law, officers should-

(a)

draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claun for some reason or other;

(b)

freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.

Public Relations Officers have been appointed at important centres, but by the very nature of their duties, their field of activity is bound to be limited. Thus, from the above CBDT Directives, your honour, we request you, any mistake in submission of form or failure to obtain the registration etc., will not change the original constitution and character of the assessee trust. Basically, it is a trust, which has been substantially financed by the Government, therefore, there are no conditions for obtaining registration etc., and submission of Form No.: 10A etc., Therefore, your assessee requests that, the exemption claimed u/s. 10(23C)(iiiab) may please be allowed.

In view of the above facts, the claim of the assessee that Trust is covered u/s 10(23C)(ab) and hence the total income is exempted from tax is not acceptable. It is proved that assessee s case is not covered u/s 10(23C)(iiiab). Assessee has applied for registration u/s 12A by submitting for No.10A (as evident from efiling portal). However, it appears that the same has not been granted to the assessee since no related documents have been putforth by the assessee during the course of assessment proceedings. (Para No. 6.5 of Assessment Order dt. 21.09.2022).

Your honour, the basic requirement for availing the benefit of exemption u/s. 10(23C)(iiiab) are as under:

It must be a trust.

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The trust should have carried out, the object of education etc.,

The trust must have received more than 51% of its collection from the Government in the form of grant.

Accordingly, our trust has satisfied all the conditions stated here-in-above. Your honour, the trust has 99.66% of its collection is from the Government Grant, which is obvious from the audited statements of accounts i.e. Income and Expenditure Account. We put before you, grant received by each section of the trust is as under:

Name of Unit / School	Grant for payment of salary by the Education Department	Grant for payment of arrears of salary by the Education Department	Total Grant received

Dnyaneshwar Vidyalaya Kopra	88,18,568	3,49,173	91,67,741
Abdul Hamid Urdu Prathmik Ahmedpur	62,23,614	5,36,528	67,60,142
Keshavrao Patil Vidyalaya Bothi	98,22,346	1,22,207	99,44,553
Mahatma Phule Prathmik Keshavrao Patil Vidyalaya Bothi Andhori	32,58,697	28,325	32,87,022
Sant Sadghuru Prathmik Ujana	29,11,560	37,321	29,48,881
Sant Sadghuru Vidyalaya Ujana	1,04,13,812	1,55,520	1,05,69,332
Rokdoba Vidyalaya Takalgaon	68,93,372	72,581	69,65,953
Balkjrushna Vidyalaya Ujalamb Chatrapati Shahu Vidyalaya Nitur	60,27,896	3,91,738	64,19,634
Chatrapati Shahu Vidyalaya	1,01,18,510	5,13,767	1,06,32,277

TOTAL RS.	6,44,88,375	22,07,160	6,66,95,535

Thus, during the Fin. Yr.: 2019-20, the total grant received from the Government was Rs. 6,66,95,535. The grant received is already proved by submission of sanction letters and certificates of the Education Department.

Kindly note that, the credit side of the Income and Expenditure Account for the year ended 31.03.2020 shows credit Rs. 6,69,05,746, which includes grant received from Government Rs. 6,66,95,535, which works out to 99.68% of the total collection. The break up of the same is as under:

Sr. No.	Particulars of Credit to the Inc. & Exp. Acc.	Amount of Credit
1	2	3
01	State Department of received from Grant Government Education for the purpose of payment of salary to the teaching and non teaching staff	6,66,95,535
02	Donations received	69,200
03	Interest from bank	1,007
04	Sundry Collection	1,40,004
	Total (01 to 04):	6,69,05,746

We have also submitted the Income and Expenditure Account of all the sections, wherein the aforesaid grant is credited and certified by a Chartered Accountant as a Trust Auditor. Therefore, it is beyond doubt that, the institution is clearly covered by the provisions of sec. 10(23C) (iiiab) of the Act.

Considering the facts and circumstances of the case we humbly pray before your honour to please accept our claim of exemption u/s 10(23C)(iiab) and delete the variance/addition of Rs 6,69,44,047/-made by learned AO.

6) Thus in view of the above and on perusal of the details submitted, it can be construed that expenses which are not expended wholly and exclusively for the purpose of making or earning such income which qualifies as income from other sources u/s 56 is liable to be disallowed. Accordingly, the deduction of Rs.6,69,44,047/-claimed u/s 57 of the Act disallowed and added to the total income. Since the assessee has made wrong claim of deduction and thereby underreported his income to that extent, therefore penalty u/s 270A(2) is separately initiated.. (Para No. 6.6 of Assessment Order dt. 21.09.2022)

Sir, on the aforesaid issue, the assessee trust respectfully states as under:

In order to claim the expenditure u/s. 57(iii), assessee must satisfy the following conditions.

(a)

It should not be a capital expenditure,

(b)

Expenditure incurred should be wholly and exclusively for its earnings or making profit,

(c)

It should not be a personal expenses of the assessee,

(d)

It must be laid out or expended in the relevant previous year and not in any prior or subsequent years.

On examining the provisions of sec. 57(iii) as enumerated above, the assessee trust has fully complied the conditions prescribed u/s. 57(iii) of the Act.

Your honour, on examining the financial statements and details submitted herewith, it is obvious that, it is not a capital expenditure, because, the Government Grant, which was received specifically for payment of salary has been used for the same purpose. As a result, it is beyond doubt that, payment of salary, which works out to Rs. 6,44,88,372 Le. 96% of the total expenditure. The remaining expenditures, which are incidental to the object. The brief details of the amounts expended during the Fin. Yr.: 2019-2020.

Sr. No.	Particulars	Amount
1	2	3
01	Payment salaries of the to teaching and non teaching staff of ten institutions.	6,44,88,372
02	Audit Fees	59,800
03	Depreciation on assets	76,614
04	Expenditure other on purposes, but incidental to the main purpose, such as building rent etc.,	23,19,261
05	Total (01 to 04):	6,69,44,047

Your honour, from the aforesaid details, it is very clear that, none of the aforesaid expenditure is “capital expenditure”, “personal expenses of the assessee trust”. Moreover, it is beyond doubt that, the entire expenditure is incurred wholly and exclusively for the purpose for which the income or earnings were made. Further, whole of the expenditure is incurred in the Fin. Yr.: 2019-20 relevant to the asst. year: 2020-21. Hence, the assessee trust would like to state that, the said expenditure is neither prior period or after period expenditure. In short, the assessee trust has fully satisfied the conditions lay down u/s. 57(iii) of the Act.

Your honour, for second issue that, there is no nexus between the income and earnings as observed by learned AO in Para No.: 4 and 5 of Assessment Order, the assessee trust would like to state that, the observation made by learned AO is vague without any material basis on the record. Because, the assessee trust would like to state that, during the Fin. Yr.: 2019-20, the assessee trust received grant from the Government, specifically for payment of salary and other recurring expenses amounted to Rs. 6,66,95,535, out of which salaries paid to the teaching and non teaching staff amounted to Rs. 6,44,88,372, which works out to 96% of the total expenditure. The system followed for payment of salary grant and its utilization specifically for payment of teaching and non-teaching staff as per the Education Department of the State Government (i.e. Pay Unit of Education Department)

(a)

Every month, the school / high school shall prepare the pay sheet of all the teaching and non teaching staff providing details such as name of the staff member, his basic pay, all other allowances and deductions therefrom.

(b)

After verification of such pay sheet by pay unit of the Education Department, salary grant will be directly credited to the account of institution by online banking system.

(c)

The pay sheet, which is sanctioned by the Education Department, will be submitted to the bank and the bank shall transfer the net amount payable to each teaching and non teaching staff to their savings account on the same day.

Your honour, it is obvious that, there is a direct nexus of income and expenditure specifically relatable to salary grant and salary expenditure.

In support of this claim, the assessee trust is submitting following documents.

(a)

A copy of the pay sheet submitted to pay unit of Education Department and verified and sanctioned by the said Government Department. (As a sample for the month of April 2019 is enclosed as Annexure “I”.

(b)

A copy of sanction of grant by the pay unit (Refer Annexure “J”.

(c)

A copy of the passbook, from which the salary grant received is transferred to the teaching and non teaching staff. (Refer Annexure “K”)

Your honour, the aforesaid documents proves that, there is a direct nexus of income as well as expenditure, without leaving any scope for doubt.

Sir, in the above context, we draw your kind attention to the following judicial precedents:

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Eastern Investment Ltd., v. CIT (1951) 20 ITR 0001 (SC)

Relevant Para No.: 9 and 10 are reproduced below:

. On a full review of the facts it is clear that this transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the company and was made on the ground of commercial expediency. It therefore falls within the purview of s. 12(2) of the IT Act, 1922, before its amendment.

. This being an investment company, if it borrowed money and utilised the same for its investments on which it earned income, the interest paid by it on the loans will clearly be a permissible deduction under s. 12(2) of the IT Act.

. Whether the loan is taken on an overdraft, or is a fixed deposit or on a debenture makes no difference in law. The only argument urged against allowing this deduction to be made is that the person who took the debentures was the party who sold the ordinary shares. It cannot be disputed that if the debentures were held be a third party, the interest payable on the same would be an allowable deduction in calculating the total income of the assessee company. What difference does it make if the holder of the debentures is a shareholder ? There appears to be none in principle in view of the fact that no suggestion of fraud is made in respect of the transaction which is carried out between the company and the administrator and which has been sanctioned by the Court. If the debentures had been paid for in cash by the same party, no objection could have been taken to allowing the interest amount to be deducted. In principle, there appears to us no difference, if instead of paying in cash the payment of the price is in the shape of giving over shares of the company, when the transaction is not challenged on the ground of fraud and is approved by the Court in the reorganisation of the capital of the company. In our opinion, therefore, the ground on which the Tribunal and the High Court disallowed the claim of the assessee is not sound.

10. In our opinion, the High Court has failed to appreciate the true position and the question submitted for its opinion should be answered in the affirmative. The appeal therefore allowed. in The respondent will pay the costs of the appeal in this Court and of the reference in the High Court.

Following the aforesaid principles of Hon. Supreme Court in the case of Eastern Investment Ltd., your assessee would like to state that, the assessee trust has gross receipts (including Government Grant), Rs. 6,69,05,746, only for the purpose of imparting of education and accordingly, the assessee trust has incurred expenditure on imparting of education is Rs. 6,67,55,757 and there was surplus of Rs. 1,49,989. Hence, as per the observations of the Hon. Supreme Court, assessee is entitled to an expenditure u/s. 57(iii) to the extent of Rs. 6,69,44,047. Because there is a direct nexus and expenditure incurred was wholly and exclusively for the purpose of its main moto.

CIT v. Rajendra Prasad Moody 1978) 115 ITR 0519 (SC)

In this case, company had made investment in the shares by raising the funds on which interest was paid. But investment in the shares did not yield in the form of dividend. The question arose is that, as per section 57(iii) of the Act, such expenditure is allowable, even though investment yields NIL income. The principles laid down by the Hon. Supreme Court are as under:

❖

By virtue of the provisions of sec. 57(iii), there must be a purpose for making investment.

❖

Section 57(iii) does not require this purpose must be fulfilled in order to qualify the expenditure for deduction.

❖

It does not say that, expenditure shall be deductible only, if any income is made or earned. There is in fact nothing in the language u/s. 57(iii) to suggest that, the purpose for which the expenditure is made should fructify (make fruitful or productive) into any benefit by way of return in the shape of income.

❖

Based on the aforesaid principles, it was decided by the Hon. Supreme Court that, interest paid on money borrowed for investment in shares is deductible under s. 57 (iii) even though the shares did not yield any dividend.

Sir, on the basis of the aforesaid principles of Hon. Supreme Court in the case of Rajendra Prasad Moody, the assessee trust would like to state that, it has earned income by way of Government Grant and other source and also incurred the expenditure for the purpose for which income was earned. Therefore, whole of the expenditure incurred is allowable deduction u/s. 57(iii) of the Act.

In view of the facts stated above, your appellant pray that, all the grounds of appeal may please be allowed and appellant may please be granted relief.”

4. After considering the above written submission of the assessee, the Ld. CIT(A) confirmed the addition made by the Ld. AO and dismissed the appeal of the assessee by observing as under : “6.2 I have perused the assessment order, grounds of appeal and written submission filed by the appellant. The appellant is Trust registered under Bombay Public Trust Act, 1950. The case was selected for limited scrutiny complete scrutiny under CASS for the reason that large deduction claimed u/s 57′. During the course of assessment proceedings the appellant had submitted the details from which AO noted that the appellant has not granted approval u/s 12AA or u/s 10(23C) of the IT Act. It was further noted that the appellant had claimed deduction u/s 57 of the Act of Rs.6,69,44,047/- but considering the nature of these expenses, the AO found that the same was not allowable as deduction u/s 57 of the Act. Therefore a show cause notice was issued to the appellant u/s 144B(xiv) of the Act. In response the appellant had submitted the detailed reply on 01/09/2022. However after considering the reply of the appellant, AO concluded that the expenses which are not wholly and exclusively incurred for the purpose of earning income from other source are liable to be disallowed. Accordingly the AO made addition of Rs.6,69,44,047/- and completed the assessment.

During appellant proceedings, the appellant contended it is eligible for exemption u/s 10(23)(c)(iiiab) of the IT Act. The appellant submitted that it had wrongly filed the return of income in Form No.5 instead of Form No.7 due to mistake of the consultant and submitted that for filing return of income in Form No.7, petition u/s 119(2)(b) filed before CIT(E), Pune is pending. Further appellant contended that the salary expenses and other related expenses are allowable expenses u/s 57(iii) of the Act, therefore the appellant requested to allow the same.

I have considered the facts of the case and submission filed by the appellant. I find that the appellant has failed to file return of income in correct form without any valid reasons. Further I find that the gross receipts of the appellant are exceeding 5 crores, hence the appellant is not eligible for exemption u/s 10(23)(c)(iiiab) of the IT Act. Regarding the claim of expenses u/s 57(ii) of the Act, the reply submitted before the AO during assessment proceedings in response to the show cause notice, the AO had noted that the claim of receipt of income and expenses incurred for earning the said income was not supported by any documentary evidences and the even the submission filed was found incomplete as far as the expenses are concerned like salary and wages and other expenses incurred for running the schools. Even during appellant proceedings also the appellant failed to demonstrate its claim with proper supporting evidences. Therefore the addition made by the AO is confirmed and the grounds of appeal raised by the appellant are dismissed.”

5. Dissatisfied, the assessee is in appeal before the Tribunal raising the following grounds of appeal :

“1.

The learned CIT (Appeals), NFAC, Delhi erred in law and on facts in confirming the additions made by the A.O. U/Sec. 143(3) r.w.s. 144B of the Income Tax Act, 1961.

The learned CIT (Appeals), NFAC, Delhi has erred in not appreciating the contention of the Appellant that Appellant is eligible for exemption u/s 10(23C)(iiiab) of the Act and confirming the addition of Rs. 6,69,44,047/- made by the AO by disallowing the deduction claimed u/sec. 57 of the Act by the Appellant, on the ground that Appellant has failed to file the Return of Income in correct form without any valid reason and the gross receipts of the Appellant are exceeding five crores.

The learned CIT (Appeals), NFAC, Delhi has failed to appreciate the submissions made by the Appellant claiming the Appellant Trust is covered u/sec. 10(23C) (iiiab) of Income Tax Act, 1961 disregarding the submissions and evidences furnished by the Appellant.

While confirming the action of the AO, the learned CIT (Appeals), NFAC, Delhi has failed to appreciate that:

The Appellant Trust has incorrectly filed the Return of Income in ITR Form No. 5 instead of ITR Form No. 7 due to mistake of the consultant.

The Appellant Trust is substantially financed by the Government.

The learned CIT (Appeals), NFAC, Delhi has erred in confirming the action of the AO of not appreciating the contention of the Appellant for allowing the expenditure amounting to Rs.6,69,44,047/- u/sec. 57 of the Act on the ground that Appellant failed to demonstrate its claim with proper supporting evidences disregarding the submissions made by the Appellant Trust.

The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”

6. The Ld. AR submitted that the assessee is an educational trust and is substantially financed by the Government which fact has not been appreciated by the Ld. AO/CIT(A). Referring to the Income and Expenditure Account of the trust for the year ended 31.03.2020 placed at page 130 of the paper book, the Ld. AR submitted that the gross collection of the trust includes grant from Government for the educational purpose which is 99.68% and the total expenditure includes expenses exclusively incurred for imparting of the education which works out to 99.75% and other expenses incidental to the main object is only 0.25% of the total expenditure incurred by the assessee during the relevant AY. He, therefore, submitted that the assessee trust is squarely covered u/s 10(23C)(iiiab) of the Act for claim of exemption.

6.1 The Ld. AR further submitted that the assessee trust inadvertently submitted the return of income in ITR-5 instead of correct ITR-7 due to mistake of the Tax Consultant of the assessee trust and an affidavit of the said Tax Consultant confessing his mistake was filed before the Ld. CIT(A). He argued that filing of ITR-5 in place of ITR-7 is a procedural technical mistake and as a result of this mistake neither the assessee trust is benefitted nor there was any loss of revenue to the Government.

6.2 The Ld. AR then referred to the details of income u/s 56 of the Act and the amount claimed as deduction u/s 57 of the Act as per ITR-5 placed at page 131 of the paper book filed before the Ld. CIT(A) which is reproduced below :

6.3 Reiterating the submissions made before the Ld. CIT(A), the Ld. AR submitted that from the details reproduced above that none of the expenditure is in the nature of capital expenditure because the Government grant which was received specifically for payment of salary has been used for the same purpose which works out to Rs.6,44,88,372/-i.e. 96% of the total expenditure includes payment of salaries to the teaching and non-teaching staff of ten institutions. The remaining expenditure, which are incidental to the object includes audit fees of Rs.59,800/-, depreciation on assets of Rs.76,612/- and expenditure on other purposes, but incidental to the main propose, such as salary arrears bills, nutritious food expenses, exam expenses, building rent and other expenses etc. amounts Rs.23,19,261/- which are incurred wholly and exclusively for the purpose for which the income or earnings are made. He, therefore, prayed that the exemption of Rs.6,69,44,047/- claimed by the assessee under the provisions of section 10(23C)(iiiab) of the Act should be allowed to the assessee declaring taxable income of the trust at Rs. Nil.

6.4 He further submitted that both the Ld. AO and the Ld. CIT(A) has erred in disallowing the claim of the assessee u/s 57 of the Act for expenditure incurred by the assessee trust on the ground that the assessee failed to demonstrate its claim with proper supporting evidence. He brought to our notice the submissions/documents/evidences filed by the assessee trust during the assessment as well as appellate proceedings placed at pages 21 to 128 of the paper book.

6.5 In support of his above contentions, the Ld. AR of the assessee placed reliance on the following case laws contended in the legal compilation filed before us :

7. The Ld. DR, on the other hand, submitted that the delay in filing the revised return of income for the relevant AY has not been condoned u/s 119(2)(b) of the Act by the Ld. CIT(Exemption), Pune vide order dated 05.08.2022 in response to the assessee’s application filed on 23.03.2022 for condonation of delay. He submitted that the return filed by the assessee in Form-5 is not a valid return and therefore the assessee is not entitled to claim exemption under such invalid return.

8. We have heard the Ld. Representatives of the parties and perused the material on records and various judicial precedents cited by the Ld. AR. It is an undisputed fact that the assessee is an educational institution carrying on primary and high school at ten locations approved by the Directorate of Education of Maharashtra State in Lature District and is substantially financed by the Government to the extent of 99.68% of its gross receipts for the relevant AY. From the perusal of the paper book filed before us along with the copy of submissions filed before the Ld. CIT(A), it is seen that the assessee has evidently demonstrated that it is eligible for claim of exemption u/s 10(23C) of the Act and all the conditions laid therein has been duly satisfied by the assessee trust (pages 135 and 136 of the paper book refers). The claim of the assessee is also supported by the audited Income and Expenditure Account of the assessee trust. The grant received by the assessee has been substantiated by the sanction letters and certificates of the School Education Department, Government of Maharashtra (pages 21 to 26 of the paper book refers). These documents were available with the Ld. AO/CIT(A). However, the same have not been considered while adjudicating upon the impugned issue. We observe that the Ld. CIT(A) as well as Ld. AO has rejected the claim of the assessee for the reason that it was claimed under incorrect Form i.e. ITR-5 instead of the correct Form i.e. ITR-7. The Ld. Counsel for the assessee has submitted that the said error has occurred inadvertently due to mistake of the assessee’s Tax Consultant which has been accepted by him in his affidavit (page 27 of the paper book refers) which was filed before the Ld. CIT(A) giving the month end pressure of work as the reason for the said mistake. The Ld. CIT(A) instead observed in his appellate order that the assessee failed to file the return in the correct Form without any valid reason. The assessee in order to rectify this irregularity, made an application u/s 119 of the Act to the Ld. CIT (Exemption), Pune requesting for granting permission to file revised Form-7. However, the Ld. CIT(Exemption) vide his order dated 05.08.2022 rejected the request of the assessee observing that “condonation u/s 119(2)(b) for delay in filing of income tax return for any assessment year is applicable in those cases wherein the return of income has not been filed or the return filed is invalid return. Since in your case, the return filed by you for A.Y. 2020-21 on 30/12/2020 is a valid return and the same has already been processed by the CPC, the question of condonation u/s 119(2)(b) of the Act for filing revised return of income does not arise.”

9. It is the contention of the Ld. AR that this is a procedural technical mistake that could have been rectified by filing the correct ITR in Form-7. He submitted that though Form-5 has been processed by CPC vide intimation u/s 143(1) of the Act dated 29.03.2021, it has neither cause any loss to the Revenue nor resulted in any undue benefit to the assessee. All the particulars filed in ITR-5 have been filed in ITR-7 without any differentiation therein. No new data has been furnished in Form-7 which demonstrated that there is only a technical mistake that has occurred in filing Form-5. The Ld. AR referred to various judicial precedents in support of his above arguments which have been duly considered by us. We find force in the arguments advanced by the Ld. AR and in our view there was a bonafide mistake on the part of the assessee in filing Form-5 in place of Form-7. Therefore, the assessee should not be penalized for the same.

10. Having said the above, we observe that the Ld. CIT(A) has disallowed the claim of the assessee u/s 57 of the Act and confirmed the addition made by the Ld. AO for the reason that the assessee failed to demonstrate its claim with proper supporting evidence (para 6.2 of the Ld. CIT(A)’s order reproduced above refers). From the perusal of paper book filed before us, it is however noticed that the assessee has furnished the relevant documentary evidence in support of its claim of exemption u/s 10(23C)/57 of the Act to substantiate receipt of grant from the Government and also to establish the nexus between the Income and Expenditure specifically related to salary grant and salary expenditure (pages 9 to 128 of the paper book refers) but these documentary evidences seems to have not been considered by the Ld. CIT(A)/AO or else not found satisfactory by them. Considering the totality of the facts and in the circumstances of the case and also in light of various judicial precedents cited by the assessee, we deem it fit and proper and in the interest of justice and fair play to restore the matter to the file of Ld. AO with a direction to verify the claim of the assessee afresh after due verification of the documents/evidence already available on record before him as well as such other documents / evidence that may be called upon and filed by the assessee during fresh proceedings before him and decide the matter afresh on merits as per facts and law. Needless to say, the assessee shall be granted adequate opportunity of hearing to present its case before the Ld. AO and the assessee shall offer full support to the Ld. AO in terms of filing the requisite details/documents/evidence as may be called upon by the Ld. AO. We order accordingly. Thus, ground Nos. 1 to 5 raised by the assessee are allowed for statistical purposes.

11. In the result, the appeal of the assessee is allowed for statistical purposes.