ITAT Pune: Procedural Error in Return Cannot Override Substantive Exemption Rights of a Local Authority Under Section 10(20)

Overview of the Ruling

The Pune bench of the Income Tax Appellate Tribunal delivered a noteworthy decision in the matter of Nandurbar Nagar Parishad Vs ITO, holding that a local authority's entitlement to exemption under Section 10(20) of the Income Tax Act, 1961 cannot be extinguished merely on the ground that the wrong provision was invoked while filing the original return of income. The Tribunal directed deletion of an addition amounting to ₹56,32,62,698/-, providing significant relief to the municipal body.

This ruling carries broader implications for local authorities across India that may, due to inadvertent filing errors, find their statutory exemptions rejected by Revenue authorities on purely procedural grounds.

Background and Facts of the Case

Nandurbar Nagar Parishad is a local authority constituted and governed under the Maharashtra Municipal Councils, Nagar Panchayats and Industrial Township Act, 1965. For the Assessment Year 2022-23, the assessee filed its return of income under Section 139(4) of the Income Tax Act, 1961, declaring NIL income. However, instead of claiming exemption under Section 10(20), the assessee erroneously claimed a deduction of ₹56,32,62,698/- under Section 57 of the Act.

The case was picked up for scrutiny, and notices were duly issued under Section 143(2), Section 142(1), and show cause notices were also served upon the assessee. During the course of assessment proceedings, the assessee realized the error and brought it to the Assessing Officer's attention. A revised computation of income was submitted, explicitly claiming exemption under Section 10(20) and explaining that the original claim under Section 57 was purely the result of a clerical or inadvertent mistake at the time of filing.

Despite this clarification and the submission of the revised computation, the Assessing Officer was not persuaded. Vide order dated 21.03.2024, the assessment was completed under Section 143(3) read with Section 144B of the Income Tax Act, 1961, determining the total income at ₹56,32,62,698/- as against the NIL income returned by the assessee. The entire addition represented the disallowance of the expenses claimed under Section 57, effectively treating the assessee's receipts as fully taxable income.

Proceedings Before the First Appellate Authority

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A)/NFAC. The assessee reiterated its position that the claim under Section 57 was an inadvertent error and that as a recognised local authority, it was undeniably entitled to exemption under Section 10(20) of the Income Tax Act, 1961.