Disallowance of entire expenditure on school was arbitrary and unreasonable – ITAT

Disallowance of entire expenditure on school running was arbitrary and unreasonable. AO was directed to estimate  income @20% of gross receipts

ABCAUS Case Law Citation:
ABCAUS 2996 (2019) (06) ITAT

Important Case Laws Cited/relied upon by the parties:
Dhakeswari Cotton Mills Ltd. Vs. CIT (1954) 26 ITR 775 (SC)
Vidyodaya Educational Society

The appellant was a society which was non-operative. During the relevant assessment year, the Society was running a school.

The dispute was related to the addition of expenses incurred towards expenses relating to maintenance of the school which was disallowed by the Assessing Officer (AO).

During the assessment proceedings, the AO observed that the assessee out had claimed more than 90% of the expenses of Rs. 25,27,425/- under the various heads to run the school.

Since the assessee society was non-operative and did not produce any documentary evidence to support the expenses incurred. Therefore, AO disallowed the entire expenses claimed by the assessee and taxed the total receipts.

Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) but the CIT(A) confirmed the addition made by the AO. The CIT(A) also found that the assessee had failed to produce any evidence to show that the educational society was operating during the A.Y. and hence held that the claim for expenses was unsubstantiated.

During the appeal hearing, the assessee submitted that the assessee was a society running the school. For the relevant financial year the assessee had received school fee receipts of Rs. 26,96,000/- and incurred the expenses of Rs. 25,27,425/- for running the school. However, the  school was closed during the next year. Since the school was closed, none of the responsible persons were available, hence no proper explanation could be filed by the assessee.

It was submitted that both the AO as well as the CIT(A) had disallowed the entire expenditure, which was unjustified. The assessee had run the school during the relevant year and major part of expenditure was staff salaries, building receipt and advertisement expenses.

The Tribunal noted that during the relevant financial year the assessee had run the school and earned fee receipts. The fact that the assessee had received the fee receipts was not disputed by the AO and the AO assessed same under the head ‘business income’.

The Tribunal ovserved that the AO did not give any finding that fee earned was not related to the educational activity of the assessee and the income was neither assessed u/s 68 nor under the head ‘income from other sources. The AO disallowed the expenditure for want of evidence. The fact that the assessee was society running the school was supported by the certified copy of the deed and Memorandum of Association registered by society.

The Tribunal noted that the documents placed and the assessment order evidenced that the nature of receipts were fee receipts relating to educational activity carried on by the assessee. The AO had disallowed the entire expenditure.

The Tribunal opined that though the AO made the assessment u/s 144 of the Act, it is settled issue that even in the ex-parte assessment the income should reasonably be estimated but should not be determined arbitrarily as laid by  the Hon’ble Apex Court. The AO disallowed the entire expenditure which shows the action of the AO was arbitrary and unreasonable.

Considering the facts and circumstances of the case, the Tribunal opined that since, the assessee failed to produce any evidence to support the expenses, the reasonable estimation of income would meet the ends of justice.

It was noted that on similar facts the Tribunal held that the estimation of income @20% of gross receipts was reasonable. Accordingly, the AO was directed to estimate the income @20% and recomputed the income accordingly.

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