Subhasri Charitable Trust Vs ITO (ITAT Ahmedabad)
Denial of Section 11 Exemption Does Not Justify Taxing Gross Receipts: ITAT
Case Analysis
The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that denial of exemption under section 11 does not automatically justify taxing a charitable trust’s entire gross receipts without considering its expenditure.
In Subhasri Charitable Trust’s case, the Tribunal restored the matter to the Assessing Officer to verify expenditure of Rs. 26,90,225 against receipts of Rs. 27 lakh. It directed allowance of expenditure to the extent admissible under the Income-tax Act, 1961, and assessment of the remaining income in the status of an Association of Persons (AOP) at the legally applicable rates.
Background of the Trust’s Return
The assessee, a charitable trust, filed its return for assessment year 2018-19 declaring income of Rs. 9,780.
It reported total receipts of Rs. 27,00,000 and claimed Rs. 26,90,225 as application towards charitable purposes.
While processing the return under section 143(1), the Centralised Processing Centre disallowed the claim and determined total income at Rs. 27 lakh.
The adjustment therefore brought the entire receipts to tax without allowing the expenditure claimed by the trust.
The assessee challenged the adjustment before the CIT(A), seeking recognition of its claim and relief against taxation of gross receipts.
Registration Was Granted Only Subsequently
The CIT(A) upheld the disallowance because the trust had obtained registration under section 12AA only with effect from May 6, 2019.
Accordingly, the appellate authority held that the trust was not eligible for section 11 exemption for the assessment year under consideration.
Before the Tribunal, it was undisputed that the assessee did not hold section 12AA registration for the relevant year.
The Tribunal’s relief consequently did not rest on treating the later registration as automatically applicable to assessment year 2018-19.
Instead, the dispute required a distinction between eligibility for exemption and the proper computation of taxable income after exemption was denied.
Additional Grounds Raised Before Tribunal
Apart from challenging denial of exemption, the assessee raised additional grounds concerning tax rates, the processing adjustment and deduction of expenditure.
It argued that the rates available to an AOP should be considered and that the adjustment of Rs. 26,90,225 under section 143(1)(a) was incorrect.
Without prejudice, it contended that even if exemption was unavailable, gross receipts could not be treated as total income without considering the expenditure incurred.
The Tribunal admitted the additional grounds because they arose from material already available on record and were relevant to deciding the appeal.
It referred to the Supreme Court decisions in Jute Corporation of India Ltd. Vs CIT and CIT Vs Nirbheram Daluram.
Exemption Denial and Income Computation Are Distinct
The Tribunal accepted that the trust lacked registration for the relevant assessment year.
However, it held that this did not automatically permit taxation of every rupee received.
The trust had claimed substantial expenditure against its receipts, and the CIT(A) had not examined whether that expenditure could be allowed under the Act.
The Tribunal therefore identified a separate computational question surviving the denial of section 11 relief: what expenditure was otherwise admissible when determining taxable income?
The authorities could not resolve that question merely by referring to the absence of registration.
Expenditure Must Be Verified Under the Act
The Tribunal restored the matter to the Assessing Officer with directions to verify the expenditure claimed.
The officer must allow it to the extent admissible under the Act.
This qualification is material. The Tribunal did not direct automatic deduction of the entire Rs. 26,90,225 merely because the trust described it as charitable application.
Nor did it finally establish that the declared income was the correct taxable figure.
The expenditure requires examination, and only the amount meeting the applicable legal requirements may be allowed in the fresh computation.
The relief therefore replaces blanket taxation of gross receipts with verification-based determination of income.
Remaining Income to Be Assessed as AOP
After considering allowable expenditure, the officer must assess the balance in the status of an Association of Persons.
The Tribunal directed application of the rates of tax applicable in accordance with law.
It did not separately prescribe a particular slab or direct that every trust denied exemption must necessarily receive an identical rate treatment irrespective of its circumstances.
The Assessing Officer was also required to provide the trust a reasonable opportunity of being heard, enabling it to substantiate the expenditure and address the resulting computation.
Final Decision
The appeal was allowed for statistical purposes, with the matter restored for fresh examination.
The Tribunal did not grant section 11 exemption for the year or conclusively allow every item of expenditure.
Its ruling establishes the narrower principle that absence of charitable exemption does not, by itself, convert gross receipts into taxable income. The expenditure claim must still be examined, permissible deductions allowed and the remaining income assessed under the applicable statutory framework.
Cases Discussed
- Jute Corporation of India Ltd. v. CIT; (1991) 187 ITR 688 (SC)
- CIT v. Nirbheram Daluram; (1997) 224 ITR 610 (SC)
FULL TEXT OF THE ORIGINAL ORDER OF ITAT AHMEDABAD
1. Delay condoned.
2. This appeal has been filed by the assessee against the order passed by the Addl/JCIT (A)-7, Delhi (hereinafter referred to as “CIT(A)” for short), dated 29.01.2024 passed under Section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act” for short], for Assessment Year (AY) 2018-19.
2. The assessee has raised following grounds of appeal:-
“Whether, on facts and in circumstances of the case and in law, Ld. CIT(A) has erred in confirming disallowance of exemption amounting to Rs.26,90,225/- u/s 11 of the Act.”
3. The assessee has also raised following additional grounds:-
“1. Whether, on facts and in circumstances of the case and in law, Ld. CIT(A) erred in confirming the non-application of slab rate of tax, available to AOP, on Income of charitable trust?
2. Whether, on facts and in circumstances of the case and in law, Ld. AO erred in making adjustment u/s. 143(1)(a) of the act amounting to Rs.26,90,225/-?
3. Without prejudice to above ground of appeals whether, otherwise also Ld. CIT(A) has erred in confirming the gross receipts as total income of trust and not allowing expenditure of Rs.26,90,225/- as business expenditure?”
4. Since these grounds arise from the material already available on record and are relevant for adjudication of the appeal, the same are admitted. Reliance was placed on the decisions of the Hon’ble Supreme Court in the cases of Jute Corporation of India Ltd. v. CIT, 187 ITR 688 (SC) and CIT v. Nirbheram Daluram 224 ITR 610 (SC).
5. The brief facts of the case are that the assessee is a charitable trust which filed its return of income declaring income of Rs.9,780/- after claiming application of Rs.26,90,225/- towards charitable purposes out of total receipts of Rs.27,00,000/-. The CPC, while processing the return under section 143(1), disallowed the claim and determined the total income at Rs.27,00,000/-. The Ld. CIT(A) upheld the disallowance on the ground that the assessee was granted registration u/s 12AA only with effect from 06.05.2019 and was therefore not eligible for exemption u/s 11 for the year under consideration.
6. The submissions of both sides and the material available on record have been considered. Admittedly, the assessee was not holding registration u/s 12AA for the relevant assessment year. However, denial of exemption u/s 11 does not automatically justify taxation of the entire gross receipts without considering the expenditure incurred. The assessee has claimed expenditure of Rs.26,90,225/- against total receipts of Rs.27,00,000/-, which has not been examined by the Ld. CIT(A).
Accordingly, the matter is restored to the file of the Assessing Officer with a direction to verify the expenditure claimed and allow the same to the extent admissible under the Act. The remaining income shall be assessed in the status of an Association of Persons (AOP), applying the rates of tax applicable in accordance with law. The Assessing Officer shall afford reasonable opportunity of being heard to the assessee.
7. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 23.10.20206.
