Mehta Charitable Trust case: ITAT disallows expenses not related to taxable income 

ITO Vs Mehta Charitable Prajanalaya Trust (ITAT Delhi)

In the case of ITO Vs Mehta Charitable Prajanalaya Trust before ITAT Delhi, the tribunal upheld the order of the CIT(E), which followed the Delhi High Court’s direction to deny exemption under Section 11 of the Income Tax Act. The income of the trust was assessed under the head “Income from Other Sources,” with deductions allowed only for non-capital expenses incurred specifically to earn such income, as per Section 57(iii). Expenditures unrelated to earning income, such as those listed under Sl. Nos. 7 to 15 in the CIT(E)’s analysis, were disallowed. Additionally, expenses for agricultural activity were also not allowed, as agricultural income is exempt from tax. The trust’s reported donation expenses of ₹20,15,171 against a donation income of ₹89,528 were partially deductible under Section 80G, subject to verification that the donations were made to approved entities. Furthermore, the set-off of business income with losses computed under “Income from Other Sources” was allowed in accordance with the Income Tax Act. The revenue authorities ensured compliance with the High Court’s rulings by allowing depreciation and relevant expenses while disallowing those unrelated to income generation. Concluding the matter, the ITAT dismissed the revenue’s appeal, affirming the CIT(E)’s adjudication and leaving the assessment framework unaltered.

The Tribunal found that the CIT(A) had correctly adhered to the High Court’s judgment, which allowed the examination of expenses and depreciation, as long as they were admissible under the law. Despite the Revenue’s objections, the Tribunal upheld the CIT(A)’s decision, which allowed certain expenses, such as depreciation, related to business income and directed that expenses not related to taxable income should not be allowed. Additionally, it ruled that donations paid by the trust should be eligible for deductions under section 80G, subject to verification of the recipients’ eligibility. In conclusion, the Tribunal dismissed the Revenue’s appeal, affirming the CIT(A)’s handling of the case and the allowance of deductions in line with the Income Tax Act provisions.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal has been filed by the Revenue against the order of ld. CIT(A)-40, New Delhi dated 13.07.2018.

2. Following grounds have been raised by the Revenue:

“(i) On the facts and in the circumstances of the case and in law, Whether the Ld. CIT(A) has erred in directing the AO to asses and allow expenditure under the different heads whereas Hon’ble High Court in this case while denying benefit of section 11 & 12 did not detail anything about different heads of income & expenditure. The High Court had simply restored the matter to the file of AO to examine the aspect of granting allowability of expenditure and depreciation if admissible, in accordance with law.

(ii) On the facts and in the circumstances of the case, whether the Ld CIT(A) erred in directing the A.O to allow deduction under section B0G of the Act after verification though the issue of allowing B0G has not been specifically directed by the High Court.

(iii) On the facts and in the circumstances of the case and in law, whether the Ld CIT(A) erred in appreciating the direction of Hon’ble High Courte specially with respect to allowance of all the expenditure narrowing its scope to only few heads.”

3. The facts of the case are return of income was filed on 01.10.2013 declaring Nil income. The case was selected for scrutiny under compulsory category through CASS and notice u/s 143(2) of the Income Tax Act, 1961 was issued on 22.09.2014. The assessee is a trust which was created on 08.09.1971 and is registered u/s 12A vide order dated 28.11.1975.

4. The Assessing Officer based on the history of the case wherein for assessment years 2001-02, 2005-06 to 2012-13, exemption u/s 11 was denied and gross income was assessed to tax as income of the trust. It was a fact on record that for assessment years 1992-93 to 1994-95, 2001-02, 2005-06 to 2007-08, the Revenue filed appeals before Hon’ble Delhi High Court against the decision of the ITAT granting exemption to the trust. Based on the decision of the Delhi High Court in Judgment dated 20.11.2010, it was held that exemption cannot be allowed to the assessee. Further, it was also noted that vide order dated 02.12.2013 for assessment year 2009-10, the Hon’ble Delhi High Court had directed that “if claim of the assessee regarding expenses and depreciation on taxable income is found to be allowable, the same should be allowed”. Later, as per the directions of the Addl. CIT(E), Range-1 issued consequent to the application moved by the assessee for seeking directions in the case for non inclusion of income from charitable activities in taxable income and allowing expenditure and depreciation out of business income in view of the decision of the Hon’ble Delhi High Court vide order dated 02.12.2013, income was computed wherein gross income from lease rental and interest was considered to be business income on which admissible deductions, including depreciation, were allowed and certain inadmissible expenses disallowed and net business income was computed at Rs.2,12,67,640/-.

5. Income from charitable activities was computed separately since the assessee continued to be registered under section 12A and continued to do charitable activities. Accordingly, income from the charitable activities was considered separately. The assessee had shown gross receipts for the said activities amounting to Rs.94,81,505/- as against which expenses amounting to Rs.3,91,94,612/- were claimed. The AO thus determined an amount of Rs.2,12,67,640/- as taxable income.

6. Before the ld. CIT(E), the assessee filed details of income and expenses from the “charitable activities”:

7. The ld. CIT(E) held that “since exemption under section 11 is not to be allowed to the assessee as per the decision of the Hon’ble Delhi High Court in appellant’s own case, the said income has to be taxed under the head “Income from other sources”. Further, while computing income under the head “Income from other sources” any expenditure (not been in the nature of capital expenditure) laid out or expended for the purpose of making or earning such income is to be allowed as deduction as per the provisions of section 57(iii). From the details as reproduced above, it is seen that no income has been earned for some of the expenses incurred Sl. Nos. 7 to 15 of the table in para 6.2.4. Hence, expenditure incurred on these counts cannot be allowed in computing income from other sources. Further, since income from agricultural activity is exempt from tax, expenditure incurred on such activity is also not be allowed as expenditure From the details it is also seen that the appellant has received donation of Rs. 89,528/- against which expenses amounting to Rs. 20,15,171/- on account of donation paid have been shown. Since donation is a voluntary contribution, no expenditure can be allowed for earning such income. However, in case of donations paid, the said amount is to be allowed as deduction u/s 80G in case donations paid are to entities which are approved for the purpose of section 80G. Accordingly, the Assessing Officer is directed to-

i. assess the income of the assessee with respect to activities categorized as charitable activities in the assessment order as income from other sources after verifying the expenditure incurred against SI. No. 1 to 4;

ii. no expenditure is to be allowed with respect to items at Sl. No. 7 to 15 since no income has been earned as per of section 57(iii);

iii. allow deduction tinder section 80G for donations paid amounting to Rs. 20,15,171/- after verifying that the entities to whom donations have been given are approved for the purpose of section 80G and to the extent of donations paid to entities approved under section 80G as per the relevant provisions of the Income Tax Act.

iv. not allow expenditure on agricultural activity since the said income is exempt from tax; and

v. allow set off of business income with loss computed under the held “Income from sources” after examining the applicability of the same as per the provisions of the Income Tax Act.

8. From the adjudication of the ld. CIT(E), we find that the revenue authorities have duly allowed the depreciation and other expenses as directed to be considered by the Hon’ble High Court. The revenue authorities have also allowed to set off of the business income with loss computed under the head “income from other sources” which is in tune with the provisions of the Income Tax Act. Since, exemption u/s 11 is not to be allowed as per the orders of the Hon’ble High Court, the expenditure on which is unrelated to the earning of the income only has been disallowed.

9. Hence, we decline to interfere with the order of the ld. CIT(E). The appeal of the revenue stands dismissed.

10. With regard to the application for admission of additional ground under Rule 27, the same has been allowed. The assessee has taken up the grounds to treat the income earned by the assessee to be assessed under the head “business income”. We find that the revenue authorities have duly allowed the expenditure and depreciation incurred in connection with the earning of the income. The income from business activities was also allowed to be set off against the loss from income from other sources. The assessee has filed return claiming exemption u/s 11. As the exemption is not allowed by the revenue, the income is treated as the business income of “AOP”.

11. In the result, the appeal of the Revenue is dismissed.

Order Pronounced in the Open Court on 23/02/2023.