The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that the gross receipts cannot be taxed when expenditure is incurred for achieving society’s objectives.

The bench of Yogesh Kumar U.S. (Judicial Member) and Manish Agarwal (Accountant Member) has observed that even where a charitable society fails to file the mandatory audit report in Form 10B and consequently loses the benefit of exemption under Sections 11 and 12 of the Income Tax Act, the Revenue cannot tax the society’s entire gross receipts without allowing deduction for expenditure incurred towards its charitable objects.

The assessee society is registered under Section 12AA of the Income Tax Act and is engaged in imparting education. For Assessment Year 2020-21, it filed its return of income in Form ITR-7 declaring a deficit of ₹13.76 lakh, reflecting that expenditure exceeded income during the year. 

However, the Centralized Processing Centre (CPC), while processing the return under Section 143(1), denied the benefit of exemption available to charitable entities on the ground that the society had not filed the mandatory audit report in Form 10B along with the return. Consequently, CPC raised a tax demand by treating the society’s gross receipts as taxable income. 

A rectification application filed by the assessee was also rejected, as the power to condone delay in filing Form 10B rests with the competent Principal Commissioner/Commissioner under Section 119(2)(b) of the Act. 

On appeal, the Commissioner of Income Tax (Appeals) observed that the assessee was duly registered under Section 12A and had reported a deficit rather than any surplus income. The appellate authority held that taxing the entire gross receipts of a charitable institution merely because Form 10B was not filed would be unjustified, particularly when there was no positive income. Accordingly, the addition made by CPC was deleted. 

The department challenged the appellate order before the Tribunal, arguing that the assessee had failed to comply with the mandatory requirement of filing the audit report in Form 10B. Therefore, according to the Department, the society was not entitled to any exemption under Sections 11 and 12 and its gross receipts should be subjected to tax. 

The Department sought restoration of the CPC order.

The assessee contended that although Form 10B had not been filed, it had not claimed any exemption because the institution had incurred a deficit during the year. It argued that the failure to file the audit report could not justify taxation of the entire gross receipts without considering the expenditure incurred for carrying out its charitable and educational activities. 

The society relied upon the Delhi High Court judgment in Petroleum Sports Promotion Board and the ITAT Delhi ruling in Sanatan Dharam Mandir Sabha v. ITO. 

The Tribunal noted that there was no dispute regarding the fact that the assessee had failed to file Form 10B, a mandatory requirement for claiming exemption under Sections 11 and 12. Therefore, the society could not claim the statutory exemption available to charitable entities. 

However, the Bench emphasized that the law is equally settled that the Revenue cannot tax the entire gross receipts of a charitable institution where the expenditure has been incurred for achieving the objects of the society. The Tribunal observed that there was no dispute regarding the application of funds for charitable purposes. 

Relying on the Delhi High Court’s decision in Petroleum Sports Promotion Board, the Tribunal held that deduction for expenditure incurred in furtherance of the society’s objectives must be allowed even if the exemption under Sections 11 and 12 is unavailable due to procedural non-compliance. 

The ITAT upheld the CIT(A)’s decision to allow deduction of expenditure against gross receipts and rejected the Revenue’s attempt to tax the entire receipts of the society.

At the same time, the Tribunal clarified that because Form 10B had not been filed, the assessee was not entitled to exemption under Sections 11 and 12 of the Income Tax Act. Accordingly, while dismissing the Revenue’s challenge to the allowance of expenditure, it accepted the Revenue’s contention on the issue of exemption eligibility. 

As a result, the department’s appeal was partly allowed.

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Read More: JURISHOUR | TAX LAW DAILY BULLETIN : 20 June, 2026