2022 (4) TMI 1065 - AT - Income Tax

Assessment of trust - Computation of income and income as computed by CPC - excess application of income - additions were on account on non-compliance of the provisions of the Act and therefore, the exemption as applicable to Trust on this income would not be available to the assessee - CIT(A) noted that the assessee itself filled Column 5(vi) amount disallowable u/s 11(1) r.w.s. 40(a)(ia) and then failed to disallow the same - HELD THAT - To compute the application of income, the disallowance as mentioned in Sec.40(a)(ia) or Sec.40A(3) / (3A) shall be added back and not considered as application of income. After perusal of Form No.10B as placed on record, it could be seen that the assessee has applied an amount for the purpose of charitable trust. However, as per Explanation-3 to Sec.11(1), the disallowance u/s 40(a)(ia) would not be considered as application of income. Thus, the amount which has been applied for charitable purposes would be differential amount. The assessee has earned income of ₹ 5,17,39,216 out of which an amount of ₹ 5,06,87,511/- (as computed above) has been applied for charitable purpose. The balance i.e., ₹ 10,51,705/- would be the income of the assessee since as per Form No.10B, the assessee has not set-apart any amount for application is subsequent years. This income is the same which has been computed by the assessee in its computation of income and paid taxes thereon. Therefore, correctly applying the provisions of law, the assessee s income is to be computed as ₹ 10,51,705/-. Merely because there is mistake in filing the corresponding columns in the return of income, the same would not result into enhancement of the assessee s income. Therefore, we direct CPC to rectify the intimation and compute the income as ₹ 10,51,705/- as offered by the assessee to tax. We order so.

Summary

Issues:
1. Correct application of Explanation 3 to Sec.11(1) in computing income for a charitable trust for AY 2019-20.
2. Disallowance under Sec.40(a)(ia) and its impact on income computation.
3. Rectification of demand raised by CPC based on noncompliance of provisions.

Issue 1: Correct application of Explanation 3 to Sec.11(1)
The appeal involved the correct application of Explanation 3 to Sec.11(1) in computing the income of a charitable trust for AY 2019-20. The trust, registered under Sec.12AA, claimed deduction as applicable to a charitable trust. The dispute arose from the disallowance under Sec.40(a)(ia) and its impact on the trust's income computation for exemption purposes. The trust earned income of &8377; 517.39 Lacs and incurred expenditure of &8377; 555.57 Lacs, resulting in an excess application of income of &8377; 38.17 Lacs. However, a disallowance of &8377; 48.69 Lacs under Sec.40(a)(ia) was made, leading to a net income of &8377; 10.51 Lacs offered for tax. The CPC proposed an adjustment of &8377; 38.17 Lacs, as the disallowance affected the trust's eligibility for exemption under Sec.11(1). The trust contended that Explanation 3 to Sec.11(1) was not correctly applied, challenging the demand raised by the CPC.

Issue 2: Disallowance under Sec.40(a)(ia) and income computation
The dispute further delved into the disallowance under Sec.40(a)(ia) and its impact on income computation for the trust. The trust's appeal before the CIT(A) highlighted discrepancies in the computation of income, particularly the disallowance under Sec.40(a)(ia). The CIT(A) noted that the trust itself reported the disallowable amount under Sec.11(1) but failed to disallow it, leading to the CPC correcting the mistake. The trust's plea that Explanation-3 to Sec.11(1) was not considered correctly was dismissed, as the assessment was based on the trust's return of income and accompanying documents. The CIT(A) upheld the assessment based on the trust's own reporting, leading to the trust's further appeal before the ITAT.

Issue 3: Rectification of demand based on noncompliance
The final issue revolved around the rectification of the demand raised by the CPC due to noncompliance with provisions affecting the trust's eligibility for exemption. The ITAT analyzed the trust's application of income and the impact of the disallowance under Sec.40(a)(ia) as per Explanation 3 to Sec.11(1. After scrutinizing the trust's Form No.10B, the ITAT determined the correct income computation for the trust, directing the CPC to rectify the intimation and compute the income as &8377; 10,51,705/-, as offered by the trust for taxation. The ITAT allowed the appeal, emphasizing the correct application of the law in computing the trust's income for exemption purposes.

This detailed analysis of the judgment highlights the key issues surrounding the correct application of Explanation 3 to Sec.11(1), the impact of disallowance under Sec.40(a)(ia) on income computation, and the rectification of demand based on noncompliance with provisions affecting the trust's eligibility for exemption.