Charitable Trust as Pass-Through Entity: ITAT Deletes Interest Disallowance Rejects 8% Profit Estimation

Dnyaneshwar Trust Vs DCIT (ITAT Pune)

Charitable Trust as Pass-Through Entity: ITAT Deletes Interest Disallowance Rejects 8% Profit Estimation

The Income Tax Appellate Tribunal, Pune Bench, in the case of Shri Dnyaneshwar Trust vs DCIT, held that a charitable trust functioning as a pass-through entity cannot be taxed on notional profits or denied genuine expenditure, leading to deletion of major additions across multiple years.

The assessee trust, engaged in facilitating harvesting and transportation activities for labourers through a sugar factory, received supervision charges and routed bank loans to workers. The Assessing Officer treated the trust as a contractor, applied Section 44AD (8% profit) on gross receipts, and disallowed substantial interest expenses on the ground that loans were in the names of individual labourers.

The Tribunal noted that the trust operated on a “no profit, no loss” basis, merely facilitating funds and services for labour welfare, with all costs—including interest—being reimbursed by the sugar factory. Documentary evidence (including bank disbursements shown in records like those on pages 14–22) established that loans were effectively routed through the trust for its charitable objectives.

Rejecting the Revenue’s approach, the ITAT held that: disallowing interest while taxing reimbursements creates artificial income, contrary to real income principles; estimation of profit @ 8% is unsustainable where the entity is not carrying on business; and the trust’s role as a facilitator/pass-through entity must be respected.

Accordingly, the Tribunal deleted the entire interest disallowances across years, removed additions based on presumptive taxation, and in certain issues (like TDS-related disallowances) restored matters for fresh verification. The appeals were largely allowed in favour of the assessee

FULL TEXT OF THE ORDER OF ITAT PUNE0