Case Commentary: Fees Regulating Authority vs. ACIT (Exemption) – ITAT Mumbai
Introduction: The Core Taxability Conundrum for Statutory Bodies
The Income Tax Appellate Tribunal (ITAT), Mumbai ‘F’ Bench, in its order dated 30/04/2026 for ITA No. 4865/Mum/2025, addressed a pivotal issue concerning the taxability of a statutory regulatory authority. The case of Fees Regulating Authority vs. Assistant Commissioner of Income Tax (Exemption) for Assessment Year (AY) 2017-18 highlights the procedural and substantive challenges faced by bodies constituted under State legislation when claiming exemptions under the Income Tax Act, 1961. The Tribunal’s decision to restore the matter to the Assessing Officer (AO) for de novo adjudication underscores the importance of pending notifications and the need for a holistic examination of alternative exemption claims. This commentary delves into the facts, legal reasoning, and implications of this significant order.
Facts of the Case: A Statutory Authority in Tax Limbo
The appellant, Fees Regulating Authority, is a body constituted under section 11 of the Maharashtra Unaided Private Professional Educational Institutions (Regulation of Admission and Fees) Act, 2015. Its primary function is to determine the reasonableness of fees levied by unaided private professional educational institutions. For AY 2017-18, the assessee filed its return of income on 28/03/2018, declaring Nil income and claiming exemption under section 10(46) of the Act. The assessee also held registration under section 12AA as a charitable organization.
During scrutiny, the AO, vide Assessment Order dated 02/12/2019 under section 143(3), rejected the exemption claim under section 10(46) on the ground that the assessee had not been notified by the Central Government for the purpose of clause (c) of that section. The AO also denied the alternative claim under section 11, citing non-fulfillment of conditions under section 11(2), including the absence of a specific resolution, Form No. 10, and prescribed investments under section 11(5). Consequently, the surplus was taxed as “business income.”
The Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre, Delhi, upheld the AO’s decision via order dated 04/06/2025. The CIT(A) noted that the Act creating the assessee had not been notified in the State Government Gazette, a prerequisite for section 10(46) exemption, and that the audit report in Form No. 10 was not filed within the prescribed time for section 11 exemption. Aggrieved, the assessee appealed to the ITAT.
Reasoning of the ITAT: A Pragmatic Approach to Pending Exemptions
The ITAT, comprising Judicial Member Sandeep Singh Karhail and Accountant Member Bijayananda Pruseth, delivered a nuanced order that balanced procedural fairness with legal rigor. The Tribunal’s reasoning can be dissected into three key pillars:
1. The Pending Notification Under Section 10(46): A Critical Procedural Hurdle
The ITAT meticulously examined the chronology of the assessee’s application for notification under section 10(46). The assessee had filed its application on 29/01/2018 with the Principal Commissioner of Income Tax-23, Mumbai, which was forwarded to the CBDT on 30/01/2018. Despite follow-ups, including a letter dated 20/11/2023, the application remained pending. Notably, on 20/10/2020, the CBDT sought the assessee’s option under section 11(7) to either continue with section 12AA registration or opt for section 10(46) notification. The assessee responded on 12/11/2020, expressing no objection to cancellation of section 12AA registration if section 10(46) exemption was granted.
Crucially, during the hearing on 15/04/2026, the assessee’s counsel, Shri Mihir Naniwadekar, informed the Tribunal that on 15/01/2026, the CBDT had again sought clarifications, which were duly responded to on 23/01/2026 and 06/03/2026. This demonstrated that the notification process was active and ongoing. The ITAT observed that section 10(46) exemption is contingent upon notification in the official Gazette. Since the assessee’s application was pending, the Tribunal deemed it premature to adjudicate the taxability issue without considering the outcome of this notification. The ITAT thus restored the matter to the AO for de novo adjudication, directing the AO to take into account the outcome of the assessee’s request for notification under section 10(46).
2. Alternative Claims Under Section 11 and Instrumentality of the State: Keeping All Doors Open
The ITAT acknowledged that the assessee had raised alternative claims, including exemption under section 11 and the argument that it is an instrumentality of the State under Article 289 of the Constitution, rendering its income exempt from tax. The CIT(A) had not rendered any specific finding on the instrumentality argument, focusing solely on sections 10(46) and 11. The ITAT, recognizing the complexity of these claims, allowed the assessee to bring on record necessary documents for the section 11 exemption claim during the de novo proceedings. Importantly, the Tribunal explicitly stated that “all the contentions of the assessee for non-taxability of its income are open, including, on the ground of being an instrumentality of the State.” This ensures that the AO must consider all legal avenues, not just the pending notification.
3. The Doctrine of De Novo Adjudication: A Fair Remand
The ITAT’s decision to restore the issue to the AO for fresh adjudication is a classic application of the de novo principle. The Tribunal did not express any opinion on the merits of the exemption claims but directed the AO to re-evaluate the entire taxability issue after the CBDT’s decision on the section 10(46) notification. This approach prevents piecemeal litigation and ensures that the AO has a complete factual and legal picture. The ITAT also allowed the assessee to raise all contentions, including the instrumentality argument, which had not been adequately addressed by the lower authorities. The appeal was allowed for statistical purposes, meaning the matter is remanded for fresh consideration.
Conclusion: A Blueprint for Statutory Bodies Seeking Tax Exemptions
The ITAT’s order in Fees Regulating Authority is a landmark for statutory bodies navigating the labyrinth of tax exemptions. The Tribunal’s pragmatic approach—restoring the matter pending the CBDT’s notification decision while keeping alternative claims alive—strikes a balance between procedural compliance and substantive justice. For practitioners, this case underscores the importance of diligently pursuing section 10(46) applications and documenting all correspondence with the CBDT. It also highlights that the instrumentality of the State argument under Article 289 remains a viable, albeit complex, ground for exemption. The AO’s de novo adjudication will now be closely watched, as it will set a precedent for similar regulatory bodies across India.