Rana Educational Trust Vs ITO (ITAT Chennai)
Losing Section 11 Exemption Does Not Turn Every Receipt Into Income-Trust Taxable Only on Real Net Income After Allowable Expenses: Chennai ITAT
The Chennai ITAT has held that denial of exemption u/s 11 does not authorise the Department to mechanically treat the entire gross receipts of a trust as taxable income.
Denial of exemption & computation of taxable income are two distinct exercises. Even where the trust does not possess registration u/s 12A or fails to file the prescribed audit report within time, its taxable income must still be determined under the applicable provisions of the Act after examining legitimate & admissible expenditure.
The Tribunal therefore restored the matter to the jurisdictional AO to compute the trust’s real net income instead of taxing its gross receipts of ₹1,04,01,040.
Facts of the Case
Rana Educational Trust was running Kaveri College of Engineering and Technology in the Trichy District.
For AY 2024-25, the trust filed its return in ITR-7 on 13.11.2024 & claimed exemption u/s 11.
While processing the return u/s 143(1), CPC denied the exemption on the ground that the prescribed audit report had not been furnished within the statutory time. It then brought the trust’s entire gross receipts of ₹1,04,01,040 to tax without allowing any expenditure.
The trust challenged the intimation before the CIT(A).
CIT(A) Confirms Denial
The CIT(A) noted that the audit report had not been furnished at least one month before the due date for filing the return u/s 139(1).
Although the audit report was subsequently filed on 13.11.2024, the trust had not obtained condonation of delay from the competent authority u/s 119(2)(b).
In the absence of a condonation order, the CIT(A) held that the belated audit report could not be acted upon for granting exemption. He accordingly upheld CPC’s action of denying exemption u/s 11 & taxing the entire receipts.
The trust thereafter approached the Tribunal.
Limited Controversy Before the Tribunal
Before the ITAT, the trust fairly admitted that, for the assessment year under consideration, it did not possess registration u/s 12A & had not furnished the prescribed audit report within the stipulated time.
Therefore, it did not principally contest the denial of exemption u/s 11.
Its limited grievance was that even after denying exemption, CPC could not treat the entire collections as taxable income without allowing any expenditure incurred in operating the educational institution.
The financial statements disclosed gross collections of approximately ₹1,04,01,043 & corresponding expenditure of ₹15,21,493. The excess of income over expenditure was only ₹88,79,550.
The trust contended that, at the highest, its net income could be taxed after verification of the expenditure. The gross collections could not themselves be equated with taxable income.
Denial of Exemption & Computation Are Different Exercises
The Tribunal found considerable merit in the trust’s contention.
It drew a clear distinction between the question whether an assessee qualifies for exemption u/ss 11 & 12 and the separate question of what income is chargeable to tax after such exemption is denied.
The consequence of losing exemption is that the trust cannot claim the special benefits provided to registered charitable or religious institutions. But it does not follow that every receipt credited in its books automatically becomes taxable income.
Once exemption is unavailable, income must be computed under the other applicable provisions of the Act. That exercise necessarily requires examination of the nature of the receipts & the expenditure incurred for carrying on the activities from which those receipts arose.
Gross receipts & taxable income are conceptually different. Unless a specific provision expressly requires taxation on a gross basis, the Revenue must identify the income component embedded in the receipts after considering otherwise allowable expenses.
CPC Taxed Collections Without Computing Income
The CPC had treated ₹1.04 crore as taxable income immediately upon rejecting the exemption claim. It had not examined the books, income & expenditure account or supporting records to determine whether expenses incurred for running the educational institution were genuine and deductible.
The CIT(A) also confined his examination to the delayed audit report & absence of condonation u/s 119(2)(b). He did not separately adjudicate the trust’s plea that taxation of the entire gross receipts, without considering expenditure, was legally impermissible.
The Tribunal held that the failure to comply with the conditions for exemption could not dispense with the statutory requirement to compute taxable income.
Supporting Judicial Precedents
The Tribunal considered the Madras High Court’s decision in Sree Venkateswara Educational Trust v. Exemptions Ward, Salem.
It also considered the Chennai ITAT decisions in Victoria Educational Trust v. ITO, Keystone Foundation v. ACIT & G.C.T. Alumni Association v. ACIT.
The principle emerging from these decisions was that where exemption u/s 11 is unavailable, the trust’s taxable income must nevertheless be determined under the Act. The entire gross receipts cannot be assessed without considering corresponding expenditure.
The Tribunal applied this principle subject to verification of the nature, genuineness & admissibility of the expenses claimed.
Not Every Expense Is Automatically Deductible
While accepting the legal proposition, the Tribunal did not straightaway direct deduction of the entire ₹15.21 lakh claimed by the trust.
The expenditure still required examination to determine whether it was genuine, connected with the trust’s activities & otherwise allowable under the relevant provisions.
Since neither CPC nor the CIT(A) had undertaken this exercise, the appellate record was insufficient for the Tribunal to finally quantify the taxable income.
ITAT’s Decision
The CIT(A)’s order was set aside on the limited issue of computation & the matter was restored to the jurisdictional AO.
The AO was directed to examine the books, financial statements, income & expenditure account, bills, vouchers & supporting documents. He must determine the net taxable income after allowing expenditure found genuine & legally admissible.
The trust was directed to produce the necessary evidence & cooperate with the proceedings. A reasonable opportunity of hearing must be provided.
The appeal was partly allowed for statistical purposes.
Author’s Comments
The decision correctly prevents a procedural default from becoming a computational windfall for the Revenue.
Failure to obtain registration or file the audit report may disentitle a trust from exemption u/s 11. But it does not convert collections used for running an institution into pure profit. The Department must still distinguish receipts from income & allow expenditure satisfying the ordinary statutory tests.
Importantly, the ruling does not permit charitable “application of income” as such. Only expenditure otherwise deductible under the applicable computation provisions may be allowed after verification.
In short, Section 11 exemption may disappear—but arithmetic does not: tax must still fall on income, not on every rupee that entered the trust’s collection box.
Cases Discussed
- Sree Venkateswara Educational Trust v. Exemptions Ward, Salem
- Victoria Educational Trust v. ITO, Exemptions Ward-3, Chennai
- Keystone Foundation v. The ACIT, Exemptions Ward, Coimbatore
- G.C.T. Alumni Association v. The ACIT (Exemptions), Coimbatore
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT CHENNAI
The present appeal is filed by the assessee against the order dated 25.02.2026 passed by the learned Commissioner of Income Tax (Appeals) 1, Hyderabad (hereinafter referred to as “ld.CIT(A)”), dismissing the appeal filed by the assessee against the intimation u/s.143(1) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) passed by the CPC / Assessing Officer, Bangalore (hereinafter referred to as “the CPC, Bangalore”) dated 29.01.2025, pertaining to Assessment Year (A.Y.) 2024-25.
2. The brief facts of the case emanating from the records are that the assessee is a Trust, filed its return of income for the AY 2024-25 on 13.11.2024 in ITR-7 by claiming exemption u/s.11 of the Act. The return of income was processed by the CPC, Bangalore u/s.143(1) of the Act on 20.09.2025 by rejecting the exemption claimed u/s.11 of the Act, as the assessee had not filed Form No.10BB along with the return of income and brought to tax the entire receipts of Rs.1,04,01,040/- to tax without allowing any of the expenditure as deduction.
3. Aggrieved by the order of the CPC, Bangalore, the assessee preferred an appeal before the ld.CIT(A). On perusal of the statement of facts, grounds of appeal, written submissions and material available on record, the ld.CIT(A) dismissed the appeal of the assessee by passing an order dated 25.02.2026, holding that the assessee has not furnished Form No.10B within the due date prescribed under the Act. Further, the ld.CIT(A) observed that the belated Form No.10B was filed on 13.11.2024 and the assessee has failed to seek the condonation of delay u/s.119(2)(b) of the Act. The ld.CIT(A) passed the order as detailed below:-
“The Pr. Commissioners of Income Tax (Pr. CsIT)/Commissioners of Income Tax (CsIT) to admit and deal with applications for condonation of delay in filing Form No. 9A/10/10B/10BB for Assessment Year 2018-19 and subsequent assessment years where there is a delay of upto 365 days.
The Pr. Chief Commissioners of Income Tax (Pr. CCsIT)/Chief Commissioner of Income Tax (CCSIT)/Director Generals of Income Tax (DGsIT) to admit and deal with applications for condonation of delay in filing Form No. 9A/10/10B/10BB for Assessment Year 2018-19 and subsequent assessment years where there is a delay of more than 365 days.
The Pr. CCsIT/CCsIT/CsIT while entertaining such applications for condonation of delay in filing Form No. 9A/10/10B/10BB shall satisfy themselves that the applicant was prevented by reasonable cause from filing of such forms before the expiry of time allowed and the case is genuine hardship on merits.
In the present case, it is evident from the record that Form No. 10B was furnished on 13.11.2024. The return of income was also filed on 13.11.2024. However, as per the statutory requirement, the audit report was required to be furnished at least one month prior to the due date prescribed under section 139(1). Thus, the audit report was not filed within the time stipulated under the Act. Further, no order condoning the delay under section 119(2)(b) passed by the competent authority has been produced or is available on record. In the absence of such condonation, the belated furnishing of Form No. 10B cannot be given effect to for the purpose of allowing exemption. In the absence of such condonation, the appellate authority cannot ignore the explicit statutory requirement or treat the condition as substantially complied with. DEPART
In view of the above factual and legal position, the denial of exemption under section 11 at the stage of processing under section 143(1) is found to be in accordance with law. The computation of total income at 1,04,01,040/- by CPC and the consequential demand do not suffer from any infirmity.
The grounds raised by the appellant are accordingly rejected and the appeal stands dismissed.”
4. Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us. The ld.AR for the assessee assailing the action of the ld.CIT(A), submitted that the ld.CIT(A) has erred in confirming the order of the CPC, Bangalore in denying the exemption claimed u/s.11 of the Act. The ld.AR filed a paper book containing 171 pages consisting of return of income, audit report, financials and the judicial precedents relied on. The ld.AR submitted that the assessee is running an educational institution, namely, Kaveri College of Engineering and Technology at Trichy district. During the impugned assessment year, the assessee did not have filed registration u/s.12A of the Act, however, claimed exemption u/s.11 of the Act. Admittedly, the assessee had not filed the audit report in Form 10B within the prescribed due date u/s.139(1) of the Act. However, the ld.AR contended that the CPC, Bangalore has erred in bringing the entire receipts of Rs.1,04,01,040/- to the tax net without allowing any deduction. Therefore, the action of the CPC, Bangalore cannot be sustained, and hence, the ld.CIT(A) has erred in confirming the additions stating that the assessee has failed to obtain a condonation approval from the concerned authorities. The ld.AR drew our attention to page Nos.105 and 106 of the paper book and submitted that the assessee’s gross collection was Rs.1,04,01,043/- and the corresponding expenditure spent during the year was Rs.15,21,493/- and has retained the excess of income over expenditure to the tune of Rs.88,79,550/-. Therefore, the ld.AR submitted that the only net income alone need to be taxed and not the gross income. Therefore, the ld.AR prayed for directing the AO to restrict the addition only to the net income. In support of the same the ld.AR relied on the decision of the Tribunal in the following cases:-
(i) Sree Venkateswara Educational Trust v. Exemptions Ward, Salem TCA No(s). 168 and 169 of 2020 (Madras HC)
(ii) Victoria Educational Trust v. ITO, Exemptions Ward-3, Chennai ITA No.946/Chny/2025 (Chennai Tribunal)
(iii) Keystone Foundation v. The ACIT, Exemptions Ward, Coimbatore ITA No.1680/Chny/2025 (Chennai Tribunal)
(iv) G.C.T. Alumni Association v. The ACIT (Exemptions), Coimbatore ITA No.3673/Chny/2025 (Chennai Tribunal)
5. Per contra, the ld.DR for the Revenue supported the orders of the authorities and stated that the assessee has not obtained the registration u/s.12A of the Act and hence there is no error in confirming the intimation by the ld.CIT(A).
6. We have heard the rival submissions, perused the material available on record and carefully gone through the orders of the authorities below as well as the paper book and judicial precedents relied upon by the ld.AR. The controversy before us lies in a narrow compass. The assessee, a Trust running an educational institution, namely Kaveri College of Engineering and Technology, had claimed exemption u/s.11 of the Act. The CPC, while processing the return u/s.143(1) of the Act, denied the exemption and consequently brought the entire gross receipts of Rs.1,04,01,040/- to tax without allowing deduction towards the expenditure incurred by the assessee. The said action was affirmed by the ld.CIT(A).
7. Before us, the ld.AR fairly submitted that, for the assessment year under consideration, the assessee did not possess registration u/s.12A of the Act and had also not furnished the prescribed audit report within the stipulated time. In these circumstances, the limited grievance canvassed before us is not essentially against the denial of exemption u/s.11 of the Act, but against the action of the CPC in treating the entire gross receipts of Rs.1,04,01,040/- as taxable income without considering the expenditure incurred for earning such receipts and for carrying on the activities of the assessee. On perusal of the financial statements placed at pages 105 and 106 of the paper book, we find that the assessee has disclosed gross receipts/collection of Rs.1,04,01,043/- and expenditure of Rs.15,21,493/- during the relevant previous year, resulting in excess of income over expenditure of Rs.88,79,550/-. The contention of the assessee is that even assuming that exemption u/s.11 of the Act is unavailable, the gross receipts cannot ipso facto be regarded as the taxable income of the assessee. According to the assessee, what could at best be brought to tax is the real/net income after allowing expenditure incurred wholly and exclusively for carrying on its activities, subject, of course, to verification and admissibility under the applicable provisions of the Act.
8. We find considerable force in the aforesaid contention. There is a distinction between denial of exemption u/s.11 of the Act and determination of the income chargeable to tax after such denial. The consequence of denial of exemption cannot, by itself, be that every receipt credited in the books automatically assumes the character of taxable income without examining the expenditure incurred in connection with earning such receipts. Once exemption u/s.11 and 12 is unavailable, the income of the assessee is required to be determined in accordance with the other applicable provisions of the Act and on the basis of its real income, after considering such expenditure as is otherwise allowable in law. In other words, denial of the benefit available to a charitable or religious trust does not dispense with the exercise of computation of taxable income. Gross receipts and taxable income are conceptually distinct. Unless there is a specific statutory provision requiring a particular receipt to be taxed on a gross basis, the tax authorities are required to determine the income embedded in the receipts after considering legitimate and admissible expenditure incurred for the purposes of the activities from which such receipts have arisen.
9. We have also considered the decisions relied upon by the ld.AR, including the decision of the Hon’ble Madras High Court in Sree Venkateswara Educational Trust v. Exemptions Ward, Salem and the decisions of the Chennai Benches of the Tribunal in Victoria Educational Trust v. ITO, Keystone Foundation v. ACIT and G.C.T. Alumni Association v. ACIT. The principle canvassed by the assessee on the strength of the aforesaid decisions is that where exemption u/s.11 is not available, it would nevertheless be necessary to determine the taxable income in accordance with the provisions of the Act rather than treating the entire gross receipts as income without considering the corresponding expenditure. The said principle, in our considered view, deserves to be applied to the facts of the present case, subject to verification of the expenditure claimed by the assessee.
10. In the present case, the CPC, while processing the return u/s.143(1) of the Act, has brought the entire receipts of Rs.1,04,01,040/- to tax consequent upon denial of exemption u/s.11 of the Act. The ld.CIT(A), while confirming the action of the CPC, has primarily proceeded on the failure of the assessee to furnish the prescribed audit report within the stipulated period and the absence of an order condoning such delay u/s.119(2)(b) of the Act. However, the ld.CIT(A) has not separately examined the assessee’s contention that, notwithstanding the denial of exemption u/s.11 of the Act, the entire gross receipts could not be assessed as taxable income without allowing admissible expenditure incurred in carrying on the educational activities. In our considered opinion, the issue regarding the eligibility of the assessee for exemption u/s.11 of the Act and the issue regarding the computation of taxable income consequent upon denial of such exemption operate in different fields. Even where the assessee is not entitled to exemption u/s.11 of the Act, the Revenue is required to determine the taxable income in accordance with law. The denial of exemption cannot result in conversion of gross receipts into taxable income without undertaking the necessary computation.
11. At the same time, we are conscious of the fact that the expenditure claimed by the assessee and reflected in the income and expenditure account requires examination as to its nature, genuineness and admissibility under the relevant provisions of the Act. The appellate record before us does not indicate that such an exercise was undertaken either by the CPC or by the ld.CIT(A), apparently because the entire gross receipts were brought to tax consequent upon the denial of exemption. Therefore, in the interest of justice and having regard to the facts and circumstances of the case, we deem it appropriate to set aside the impugned order of the ld.CIT(A) on the limited issue of computation of taxable income and restore the matter to the file of the Jurisdictional Assessing Officer (JAO) for fresh examination.
12. The JAO is directed to examine the books of account, income and expenditure account, financial statements and other supporting documents of the assessee and determine the net taxable income, instead of subjecting the entire gross receipts to tax merely on account of denial of exemption u/s.11 of the Act. While doing so, the JAO shall verify the expenditure claimed by the assessee and allow such expenditure as is found to be genuine and otherwise admissible in accordance with the applicable provisions of the Act. Our direction is confined to the proposition that the gross receipts of Rs.1,04,01,040/- cannot, merely because exemption u/s.11 of the Act is unavailable, be mechanically treated in their entirety as taxable income without examining the corresponding admissible expenditure. Needless to state, the assessee shall furnish all the necessary books of account, bills, vouchers and other documentary evidence in support of the expenditure claimed and shall fully cooperate with the proceedings before the JAO. The JAO shall afford reasonable opportunity of being heard to the assessee before determining the taxable income in accordance with law. In view of the above, the order of the ld.CIT(A) is set aside to the limited extent of computation of taxable income, and the issue is restored to the file of the JAO with the aforesaid directions. Accordingly, the grounds raised by the assessee are treated as partly allowed for statistical purposes.
13. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 10th September, 2026 at Chennai.
