Case Law Details
Srimathi Laxmi Charities Vs ACIT (ITAT Chennai)
Introduction: The case of “Srimathi Laxmi Charities vs. ACIT” heard by the Income Tax Appellate Tribunal (ITAT) Chennai revolves around the taxation of donations made by a charitable trust to another trust. The central issue is whether non-corpus donations to charitable trusts registered under section 12A of the Income-tax Act, 1961, can be considered as income and subject to taxation. This article provides a detailed analysis of the case, including key facts, arguments, ITAT’s findings, and the ultimate conclusion.
1. Background of the Case: Srimathi Laxmi Charities is a charitable trust registered under section 12A of the Income-tax Act, 1961. The trust filed its income tax return for the assessment year 2018-19, claiming exemption under section 11 of the Act. During the assessment proceedings, the Assessing Officer disallowed a donation of Rs. 24 lakhs made by the trust to M/s. Sri Selvamuthu Kumar Trust, asserting that it did not qualify as the application of income under section 11.
2. Key Arguments:
- The trust argued that there is no prohibition in Explanation (2) to section 11(1) for donating to other charitable or religious trusts with similar objectives.
- The Assessing Officer imposed a condition of similarity between the objects of the donor and donee trusts, which is not a requirement under section 11.
- Even if the donation to another trust is not considered an application of income, it should not be taxed because the trust had already applied 85% of its gross receipts for charitable purposes.
3. ITAT Chennai’s Decision: ITAT Chennai considered the arguments and made the following observations:
- Explanation (2) to section 11(1) restricts corpus donations to other charitable trusts registered under section 12A.
- There is no restriction on providing financial assistance, including donations, to other charitable trusts with similar objectives and registration under section 12A, if the donations are non-corpus.
- Even if the objects of the donor and donee trusts differ, donations made to another charitable trust should not be treated as income if the trust has applied at least 85% of its gross receipts for charitable purposes.
- The receiving trust in this case was registered under section 12A and entitled to benefits under section 11.
4. Conclusion: ITAT Chennai concluded that the Assessing Officer and CIT(A) erred in treating donations made by the trust to another charitable trust as income. The donations were non-corpus and made to a trust registered under section 12A. Furthermore, the trust had already applied over 85% of its gross receipts for charitable purposes. Thus, ITAT directed the Assessing Officer to delete the additions made regarding these donations.
This article has provided a comprehensive analysis of the ITAT Chennai order in the case of Srimathi Laxmi Charities vs. ACIT, with a focus on non-corpus donations to charitable trusts and the deletion of additions. The ruling emphasizes the importance of understanding the provisions of section 11 of the Income-tax Act, especially when it comes to donations to other charitable trusts.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. This appeal filed by the assessee is directed against the order passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 03.06.2022 and pertains to assessment year 20 18-19.
2. The assessee has raised the following grounds of appeal:
“1. The order of the National Faceless Appeal Centre, Delhi dated 03.06.2022 vide DIN & Order No. ITBA/NFAC/S/250/2022-23/1 043313076(1) for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.
2. The NFAC erred in confirming the rejection of the claim of application of donation of Rs.24 Lakhs to Selvamuthukumar Trust within the scope of section 11 of the Act and consequently erred in confirming the computation in para 5 of the assessment order dated 25.02.2021 without assigning proper reasons and justification.
3. The NFAC failed to appreciate that the sustenance of the rejection of the claim of application of the disputed donation to another recognized charitable entity was wrong, incorrect, invalid, unjustified, erroneous and not sustainable both on facts and in law.
4. The NFAC failed to appreciate that the misreading of the approved objects of the other charitable entity by the original authority would vitiate the computation made in para 5 of the order dated 25.02.2021 and ought to have appreciated that the principles of substance over form was completely overlooked and brushed aside while preferring erroneously for adopting the interpretation of the understanding of the transaction on the face of it.
5. The NFAC failed to appreciate that the findings in para 5.2 of the impugned order were wrong, incorrect, invalid, unjustified, erroneous and not sustainable both on facts and in law.
6. The NFAC failed to appreciate that there was no proper opportunity given before passing of the impugned order as well as before passing the DRP’s order and any order passed in violation of the principles of natural justice would be nullity in law.
7. The Appellant craves leave to file additional grounds/arguments at the time of hearing.”
3. The brief facts of the case are that, the appellant is a charitable trust registered u/s. 12A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). The appellant had filed its return of income for the assessment year 2018-19 on 12.09.2018, by declaring Nil total income, after claiming exemption u/s. 11 of the Act. The case was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that the assessee has paid donation of Rs. 24 lakhs to M/s. Sri Selvamuthu Kumar Trust. According to the Assessing Officer, donation paid to M/s. Sri Selvamuthu Kumar Trust, is not application of income as per the provisions of section 11 of the Act, because the object of the appellant trust and objects of the donee trust are different. Therefore, the Assessing Officer has disallowed donation paid to M/s. Sri Selvamuthu Kumar Trust and treated as income of the assessee. The assessee carried the matter in appeal before the first appellate authority, but could not succeed. The ld. CIT(A), vide their order dated 03.06.2022, for the reasons stated therein, rejected arguments of the assessee and sustained additions made towards denial of exemption u/s. 11 of the Act to donation paid to another trust. Aggrieved by the CIT(A) order, the assessee is in appeal before us.
4. The Ld. Counsel for the assessee, submits that the ld. CIT(A) erred in not appreciating the fact that there is no prohibition in Explanation (2) to section 11(1) of the Act for giving donation to other charitable or religious trust, having objects similar to the appellant trust. The ld. Counsel for the assessee further submits that, the Assessing Officer has imposed artificial condition of receiving entity had to similar objects, thereby rejecting the claim of the application of income, even though there is no such restriction/condition in section 11 of the Act. He further submits that, in any event the objects of the receiving trust has similar objects to that of the objects of the appellant trust. Therefore, the assessee can claim application of income towards donation paid to other charitable trust. He, further referring to provisions of section 80G(5) of the Act, submitted that as per the provisions of section 80G(5), donor entity is entitled to make 5% of total income as donation to religious trust. He further submits that, even assuming for a moment donation paid to other trust is not application of income, but the same cannot be taxed because even after rejection of exemption for a sum of Rs. 24 lakhs, donation paid to other trust, still the assessee had applied 85% of gross receipts for charitable purpose and the remaining amount cannot be taxed, even if same is utilized for giving donation to other trust.
5. The ld. DR, on the other hand supporting the order of the CIT(A) submits that there is no dispute in the claim of the Ld. Counsel for the assessee that, even after rejection of application of income to donation paid to other trust, still the amount spent by the assessee for charitable purpose is more than 85% of gross receipts. But facts remains that, donation paid to other trust which is having different objects cannot be in any stretch of imagination to be considered as application of income for charitable purpose. Since, the assessee donated amount meant for charitable purpose contrary to its objects, the Assessing Officer has rightly taxed the same as income of the trust and same needs to be upheld.
6. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. As per Explanation (2) to section 11(1) of the Act, there is a restriction for application of income to corpus donation paid to other charitable trust registered u/s. 12A of the Act. In other words, there is no restriction to give any kind of financial assistance including donations to other charitable trust having similar objects and registered u/s. 12A of the Act, if said donations are non-corpus donations. Therefore, we are of the considered view, that when the assessee has paid non-corpus donation to other charitable trust, having similar objects that of the objects of the appellant trust and also registered u/s. 12A of the Act, then in our considered view, the Assessing Officer ought to have allowed donation paid to other charitable trust as application of income. Be that as it may, assuming for moment but not conceding that the objects of the appellant trust and objects of the receiving trust are altogether different and donations paid to other charitable trust is not application of income, but still donation paid by the assessee to another charitable trust cannot be treated as income of the appellant trust, because even after rejection of exemption under section 11 of the Act, to sum of Rs. 24 lakhs, the amount spent by the assessee for charitable purpose for the impugned assessment year is more than 85% of gross receipts and thus, the amount paid by the assessee out of remaining 15% income accumulated by the trust can be utilized for any purpose as per the objects of the trust. In the present case, the assessee has made out a case that its objects provides for giving financial assistance including donations to other trust registered u/s. 12A of the Act. In the present case, the receiving trust is also registered u/s. 12A of the Act and entitled for a benefit of section 11 of the Act. Therefore, we are of the considered view that the Assessing Officer and CIT(A) are erred in taxing donation paid to other charitable trust as income of the assessee. Thus, we direct the Assessing Officer to delete additions made towards donation paid to other charitable trust as income of the assessee.
7. In the result, appeal filed by the assessee is allowed.
Order pronounced in the court on 11th August, 2023 at Chennai.
