ITAT Rules in Favour of Education Society; Says Missing Form 10B Is a Curable Defect

The case had been filed by a taxpayer named Goswami Bhagwan Lal before the ITAT Delhi, challenging an order passed by the Income Tax Department on January 10, 2025. The key issue in the case was regarding the denial of tax exemption under Section 10(23C)(via) of the Income Tax Act, 1961 (‘Act’) and treatment of the entire gross receipts as income instead of taxing the surplus as per the Income and Expenditure Account.

Bhagwan Lal declared his income as NIL when he filed his income tax return (ITR) after claiming tax exemption under section 10(23C)(via) of the Income Tax Act. When the return was processed by the tax authority, the department denied the claim of exemption made under section 10(23C) because he is not eligible for the prescribed tax exemption under section 10(23C). The tax audit report was also missing in Form No. 10B of the Income Tax Rules for making an exemption claim under section 11 of the Act; hence, the department denied this claim too. In the end, the tax department treated the entire gross receipt of Rs. 1.18 crore as income instead of a surplus of Rs. 23.47 lakh as per the Income & Expenditure Account and treated his return as defective under section 139(9) of the Act.

The dissatisfied Bhagwan Lal thereafter filed an appeal before CIT(A); however, the appeal was dismissed. Then Bhagwan Lal approached the ITAT Delhi. Where Bhagwan Lal stated that furnishing an audit report in Form No. 10B is optional in nature and not compulsory under CBDT Circular No. 10/2019 dated 22.05.2019. Therefore, this denial of exemption made under section 11 of the Act is not justified and should not be condoned. Further said that tax authorities did not give them the opportunity of being heard under section 139(9) of the Act, and also were not justified in rejecting the alternate claim of exemption under section

11 of the Act. Further, the department was wrong in disallowing the expenditure (revenue & capital expenditure) completely. At the very least, income should be taxed under “Income from Other Sources”, and normal expenses should be allowed under Section 57, not disallowed completely.

When the tribunal heard the arguments of both sides, it noted that the non-filing of an audit report is a rectifiable mistake and an audit report in Form 10B can be filed late. CPC should have given time under Section 139(9) to correct the defect, and denying the Section 11 claim without giving that chance is wrong. Further stated, even if the exemption under Section 10/11 is denied, only real income (surplus) can be taxed and taxing the entire receipts is against income-tax principles. At most, income should be taxed under Section 56, and expenses must be allowed under Section 57. Disallowing exemption and all expenses is not a simple, apparent error, and CPC’s adjustment under 143(1) was not valid.

In the final order, ITAT set aside the CIT(A)’s order and remanded the case to the income tax department, directing them to give Goswami Bhagwan Lal a fair chance of hearing under Section 139(9) and allow him to file Form 10B and seek condonation of delay. Additionally, directed to re-examine eligibility under Section 11 and not to tax gross receipts, only income after allowing proper expenses. The appeal has been allowed for statistical purposes.