ITAT Rules CPC Cannot Deny Charitable Trust Exemptions Without Prior Intimation and Proper Assessment

Introduction

The Income Tax Appellate Tribunal (ITAT), Jodhpur Bench, has delivered a significant ruling emphasizing the procedural limitations imposed on the Centralised Processing Centre (CPC) while processing returns under Section 143(1) of the Income Tax Act. In the matter of Shree Tarak Guru Jain Vs DCIT, CPC, Bengaluru/ITO (Exemption), the Tribunal addressed critical issues concerning the denial of exemptions claimed by charitable trusts and the mandatory requirement of issuing prior intimation before making adverse adjustments.

The case involved two separate appeals filed by a charitable institution for Assessment Years 2017–18 and 2019–20. The core dispute centered around the rejection of exemption benefits claimed under Section 11(2) of the Income Tax Act, which was denied during the processing of returns by the CPC and subsequently confirmed by the National Faceless Appeal Centre (NFAC).

Background and Facts of the Case

The appellant, a charitable trust, had filed belated returns for the respective assessment years and claimed exemption under the provisions applicable to charitable and religious trusts. During the processing stage under Section 143(1), the CPC denied the exemption benefits claimed by the trust. This denial was later upheld by the NFAC, which acted as the first appellate authority.

The primary ground for rejection cited by the appellate authority was the application of Section 13(9) of the Income Tax Act. This provision, which became effective from Assessment Year 2016–17, stipulates restrictions on the availability of exemption under Section 11 when the return of income is filed after the prescribed due date. The NFAC held that since the trust had filed belated returns, it was automatically disentitled from claiming exemption benefits under the charitable trust provisions.

The trust challenged this denial before the ITAT, raising fundamental questions about the scope of powers available to the CPC under Section 143(1)(a) and the procedural safeguards that must be followed before denying statutory benefits.

Contentions Raised by the Assessee

Limited Scope of CPC Powers

The authorized representative for the trust argued forcefully that the CPC possesses limited authority under Section 143(1)(a) of the Income Tax Act. The provisions of this section permit only prima facie adjustments based on apparent errors or discrepancies visible on the face of the return. The denial of exemptions under Sections 11, 12A, and 13, however, involves detailed interpretation of legal provisions and examination of facts, which falls outside the narrow ambit of CPC's jurisdiction.

It was contended that matters requiring appreciation of evidence, application of legal principles, and interpretation of complex provisions relating to charitable trusts cannot be decided at the processing stage. Such determinations require a proper assessment proceeding where the assessee has full opportunity to present evidence, make submissions, and respond to the revenue's concerns.

Violation of Natural Justice Principles

A critical argument advanced by the trust was the complete absence of prior intimation before making the adverse adjustment. The first proviso to Section 143(1)(a) mandates that before making any adjustment that has the effect of enhancing the assessed income or reducing the refund, the assessing authority must issue an intimation to the assessee and provide an opportunity to respond.

The appellant submitted that no such intimation was issued in this case, and the exemption was denied without affording any opportunity of hearing. This constituted a serious procedural irregularity and violated the principles of natural justice enshrined in the statute itself.

Acceptance of Return as Valid

The trust emphasized that the belated return filed by it was accepted by the department and processed as a valid return. The return was not treated as defective under Section 139(9) of the Income Tax Act, nor was any notice issued asking the assessee to rectify defects or provide clarifications. Furthermore, the revenue expenditure and capital expenditure claimed in the return were accepted by the CPC, and only the exemption under Section 11 was denied.

This selective acceptance and denial, it was argued, demonstrated inconsistency in the department's approach and indicated that the return was treated as validly filed for all purposes except for the exemption claim.

Legislative Intent and CBDT Circulars

The authorized representative submitted that a strict interpretation of Section 13(9) would render Section 139(5) redundant. Section 139(5) explicitly permits the filing of belated returns, and if such returns were to be automatically denied the benefit of charitable exemptions, the very purpose of allowing belated filing would be defeated.