Audit Alone Not Enough for Section 11 Claim – ITAT Restores Matter for Evidence Verification

ITO Vs Market Halai Memon Jamat (ITAT Mumbai)

Audit Alone Not Enough for Section 11 Claim – ITAT Restores Matter for Evidence Verification

Mumbai ITAT held that mere reliance on audited books and Form 10BB is insufficient to substantiate application of income by a charitable trust.

The assessee-trust had claimed application of income of ₹1.55 crore towards its objects, but failed to produce supporting evidence (invoices, bills, vendor details, etc.) during assessment. The AO, therefore, made an addition by denying the claim.

The CIT(A) deleted the addition solely on the ground that the books were audited, terming the AO’s action arbitrary.

The Tribunal disagreed, observing that:

• Audit does not replace the requirement of verification of actual application of income
• Claims under Section 11 must be backed by documentary evidence
• No supporting proof was produced even at appellate stage

However, considering the long-standing charitable nature of the trust, the ITAT granted one more opportunity.

Accordingly, the issue was restored to the AO for fresh adjudication, directing the assessee to substantiate the application of income with proper evidence. The Revenue’s appeal was allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The Revenue has filed the present appeal against the impugned order dated 07.11.2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned CIT(A)”], for the assessment year 2023-24.

2. In this appeal, the Revenue has raised the following grounds: –

“1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 1,55,41,470 made under section 13(8) read with section 2(15) of the Income-tax Act, 1961, without verifying the genuineness and allowability of the expenses claimed by the assessee.

2. On the facts and circumstances of the case and in law, the learned CIT(A) failed to appreciate that the assessment was completed under section 144 r.w.s 144B due to non-compliance by the assessee and, therefore, the matter ought to have been remitted back to the Assessing Officer for verification of the expenses claimed.

3. On the facts and circumstances of the case and in law, the learned CIT(A) erred in granting outright relief without calling for a 3 remand report OR affording an opportunity to the Assessing Officer to examine the documentary evidence, thereby violating the settled principles of appellate procedure.

4. On the facts and circumstances of the case and in law, the learned CIT(A) erred in holding the addition to be arbitrary solely on the basis that the books of account were audited, without appreciating that audit of accounts does not dispense with the requirement of verification of expenses OR compliance with statutory conditions.

5. On the facts and circumstances of the case and in law, the order of the learned CIT(A) is erroneous, unsustainable in law and liable to be set aside, and the matter deserves to be restored to the file of the Assessing Officer for fresh verification and adjudication.

6. The appellant craves leave to add, alter, amend OR withdraw any of the above grounds at the time of hearing of the appeal.”

3. The solitary grievance of the Revenue is against the deletion of the addition made on account of the amount claimed to have been applied by the assessee towards the objects of the trust.

4. We have considered the submissions of both sides and perused the material available on record. The assessee is a charitable trust registered under the Bombay Public Trust Act. Vide Form No.10AC dated 26.10.2022, the assessee was also granted provisional registration from the assessment year 2023-2024 to 2025-2026. For the year under consideration, the assessee filed its return of income on 28.10.2023, declaring a total income of Rs.64,460/-after claiming exemption u/s 11 of the Act. The return filed by the assessee was selected for compulsory scrutiny, and statutory notices u/ss 143(2) and section 142(1) of the Act were issued and duly served on the assessee.

5. During the assessment proceedings, it was noticed that the assessee claimed an amount of Rs.1,55,44,470/-, had been applied towards its objects. Accordingly, the assessee was asked to submit the documentary evidence to justify that its income, to an extent of the aforesaid amount, was actually applied towards the objects of the institution. In the absence of any substantive evidence being produced by the assessee to support the application of income to an extent of Rs.1,55,45,470/- towards the objects of the trust, the Assessing Officer (“AO”), vide order dated 21.02.2025 passed u/s 144 r.w.s 144B of the Act, made an addition of Rs.1,55,41,470/- to the total income of the assessee.

6. The learned CIT(A), vide impugned order, deleted the addition made by the AO on the basis that the AO had overlooked that the books of account of the assessee were duly audited. The relevant findings of the learned CIT(A) are reproduced as follows: –

“6. The AO has accepted the income declared by the appellant in the ITR. The AO also accepted the various accumulations from the income. However the AO completely rejected the claim of capital and Revenue application (Rs. 1,55,41,470) made in the ITR. This approach lacks logic. Even if the appellant did not file any submission in support of the application claimed in the ITR, the AO was not correct in rejecting the claim fully without any evidence to suggest that the claim was not genuine. The AO overlooked that the books of the appellant are duly audited. In my view the addition is arbitrary and farfetched. The addition made is deleted. Grounds 1 to 3 are allowed. Grounds 4 to 8 are general/consequential. These grounds are not separately adjudicated.”

Being aggrieved, the Revenue is in appeal before us.

7. During the hearing, the learned Departmental Representative (“learned DR”) submitted that neither before the AO nor before the learned CIT(A) did the assessee produce any evidence to substantiate its claim of applying its income to an extent of Rs. 1,55,41,470/- towards the object of the trust. The learned DR further submitted that the books of account cannot be the sole basis for supporting the assessee’s contention that its income is applied towards its objects.

8. On the contrary, the learned Authorised Representative (“learned AR”) submitted that the assessee was established in 1927 and it caters to the poor and needy and distributes medicine, incurs educational expenses, and provides food to the poor and needy. It was further submitted that since its inspection, the trust has been working towards its objects, and the income earned has been applied towards those objects. During the hearing, the learned AR submitted that the audit report in Form No. 10BB sufficiently substantiates the incurring of expenditure towards the objects of the trust.

9. Having considered the submissions of both sides and perused the material available on record. We find that, apart from merely placing reliance on the audit report, which forms part of the paper book from pages 7 to 15, in Form No.10BB, the assessee has still not produced any evidence of incurring expenditure and applying its income towards the object of the trust. It is pertinent to note that the assessee has claimed to have applied income to an extent of Rs.1,55,45,470/- towards the objects of the trust. However, did not bring any evidence, even on a sample basis, to substantiate its claim of application of income towards the objects of the trust. We are of the considered view that, merely on the basis of the audit report, the extent to which the assessee incurred expenditure towards the objects of the trust cannot be determined, and the same needs to be substantiated with invoices, vendor details, etc. Therefore, we did not find any merit in the mere reliance placed on the audited books of account of the assessee by the learned CIT(A) to delete the impugned addition.

10. In view of the fact that, the assessee has been in existence since 1927, for the charitable purpose and had enjoyed the registration u/s 12A of the erstwhile regime and even in the new regime was granted provisional registration vide Form No.10AC, we are of the considered view that in the interest of justice and fair play, one more opportunity be granted to the assessee to substantiate its claim of applying its income towards the objects of the trust. Therefore, we restore this issue to the file of the Jurisdictional AO for de novo adjudication, with a direction to the assessee to substantiate its claim with evidence that during the year under consideration, an amount of Rs. 1,55,41,470/- was applied towards the objects of the trust. Needless to mention, no order shall be passed without affording a reasonable and adequate opportunity of hearing to the assessee. With the above directions, the impugned order deleting the addition made by the AO is set aside, and the grounds raised by the Revenue are allowed for statistical purposes.

11. In the result, the appeal filed by the Revenue is allowed for statistical purposes.

Order pronounced in the open Court on 23/04/2026