2025 (3) TMI 1078 - AT - Income Tax

Assessment of trust - Disallowing the donation and other expenses - AO disallowed the donation made by the assessee to another trust on the ground that the recipient trust was not registered u/s 12A - HELD THAT - The provision of section 11(1)(a) allows a charitable trust to claim an exemption if at least 85% of its income is applied for charitable or religious purposes. Benefit of application is available only if the recipient entity is a registered charitable trust under Section 12A as clarified in Explanation 2 to section 11(1). Moreover the assessee failed to provide any documentary evidence proving that the amounts were spent for charitable purposes. The burden of proof lies with the assessee to demonstrate that the expenditure qualifies for exemption u/s 11 of the Act. In the absence of such proof the AO was justified in making the disallowance. Accordingly we concur with the decision of the lower authorities. The assessee has neither substantiated that the payments were made for charitable purposes nor demonstrated that the recipient entity fulfilled the requirements of section 12A of the Act. Accordingly the ground of appeal of the assessee is dismissed. Addition by treating certain expenses as not allowable as an application of income - whether the disputed expenditures qualify as an application of income for the purposes of section 11? - Role of the AO regarding the determination of income of a trust is limited to the provision of section 11 of the Act. In the present case the authority below has not doubted regarding payment of expenses but only had a doubt regarding the expenses incurred in connection to charitable purposes or not. In this regard we referred the judgment of CIT Vs. Trustee of H.E.H. the Nizam s Supplemental Religious Endowment Trust 1978 (2) TMI 7 - ANDHRA PRADESH HIGH COURT where it was held that expenses which are incidental to carrying out the charitable purpose cannot be excluded from the exemption. As in view of above it clear that any incidental expenses incurred in carrying out the activity of charitable purpose it should be excluded from the income of a trust. Now we need to determine that such expenses are of incidental nature of the trust or not. Interest on TDS - Expenses on which TDS was deducted has not been doubted by the authorities therefore it is clear that such expenses incurred in connection of charitable purpose but the delay in compliance the assessee paid an extra cost. Thus it does not mean that such excess cost is not allowable. Penalty - ESI and Professional Tax - Penalties levied for delayed statutory payments should not be treated as personal in nature but as incidental to business operations. Since these payments relate to employer obligations they are incidental to the charitable objectives of the assessee. Gifts - It is well settled that expenses incurred for social and charitable activities aligned with the trust s objects and therefore the same is qualified as an application of income. In CIT Vs. Surat Art Silk Cloth Manufacturers Association 1979 (11) TMI 1 - SUPREME COURT it was held that any expenditure contributing towards achieving the trust s objectives must be considered an application of income. DKA Statue Expenses - The expenditure on the statue pertains to promoting the cultural and educational objectives of the trust. Input Tax Credit Write-off - The assessee had to write off unutilized Input Tax Credit (ITC) which is a recognized accounting expense. As decided in CIT Vs. Munjal Showa Ltd. 2008 (2) TMI 19 - SUPREME COURT has held that any write-off required due to legal and operational reasons must be considered a valid deduction. Accumulation of income u/s 11(2) - assessee claimed having made an investment under the provisions of section 11(2) - whether the assessee has made the investment in the manner provided under the provisions of section 11(5) of the Act to claim the benefit of the application of income as provided under section 11(2)? - HELD THAT - We are of the opinion that the amount lying in the bank account of the assessee can be treated as an investment as per the provisions of section 11(5) of the Act. Thus in view of the above it transpires that there was sufficient compliance by the assessee in keeping the money set apart as invested in the mode specified under section 11(5) of the Act. As existing FDRs which is free from any lien can also be treated as investments or deposit as per the provision of section 11(2)(b) of the Act. Hence the ground of appeal of the assessee is allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the disallowance of donations and other expenses by the Assessing Officer (AO) under Section 11 of the Income Tax Act was justified.

2. Whether certain expenses treated as non-allowable as an application of income under Section 11 were correctly disallowed.

3. Whether the accumulation of income under Section 11(2) was correctly disallowed due to non-compliance with the investment requirements under Section 11(5).

ISSUE-WISE DETAILED ANALYSIS

1. Disallowance of Donations and Other Expenses

- Relevant Legal Framework and Precedents: Section 11(1)(a) of the Income Tax Act provides that income derived from property held under trust for charitable purposes is exempt if applied for such purposes. Explanation 2 to Section 11(1) requires that donations to another trust are considered an application of income only if the recipient trust is registered under Section 12A.

- Court's Interpretation and Reasoning: The Tribunal noted that the payments made by the assessee were to individuals without sufficient proof of charitable purpose, and the recipient trust was not registered under Section 12A, justifying the AO's disallowance.

- Key Evidence and Findings: The assessee failed to provide documentary evidence linking the expenses to charitable purposes.

- Conclusion: The Tribunal upheld the disallowance, agreeing with the lower authorities that the burden of proof was on the assessee to demonstrate the charitable nature of the expenses.

2. Disallowance of Certain Expenses as Non-Allowable Application of Income

- Relevant Legal Framework and Precedents: Section 11 outlines how a trust's income is determined for tax purposes. The Tribunal referenced CIT Vs. Trustee of H.E.H. the Nizam's Supplemental Religious Endowment Trust, which emphasizes that the income of a trust is based on its accounts, not the total income assessed by the AO.

- Court's Interpretation and Reasoning: The Tribunal considered whether the expenses were incidental to the charitable purposes of the trust. It concluded that statutory dues and penalties related to statutory obligations are compensatory and incidental, thus allowable.

- Key Evidence and Findings: The Tribunal found that expenses like interest on TDS, penalties for ESI and professional tax, and gifts were incidental to the trust's charitable objectives.

- Conclusion: The Tribunal directed the AO to delete the disallowance of these expenses, recognizing them as an application of income under Section 11.

3. Disallowance of Accumulation of Income under Section 11(2)

- Relevant Legal Framework and Precedents: Section 11(2) allows deferred spending if funds are invested in compliance with Section 11(5). The Tribunal considered precedents like ACIT(Exemption) Vs. Marugappa Chettiar Trust, which treats bank balances as investments under Section 11(5).

- Court's Interpretation and Reasoning: The Tribunal examined whether the assessee's bank balances and fixed deposits complied with Section 11(5). It concluded that the balance in the bank account could be treated as an investment.

- Key Evidence and Findings: The Tribunal noted an increase in fixed deposits and current bank account balances, supporting the assessee's claim of compliance with Section 11(5).

- Conclusion: The Tribunal allowed the appeal, finding that the assessee had sufficiently complied with the investment requirements under Section 11(5).

SIGNIFICANT HOLDINGS

- Core Principles Established: The Tribunal emphasized that the burden of proof lies with the assessee to demonstrate the charitable nature of expenses. It also clarified that statutory dues and penalties related to statutory obligations are compensatory and allowable as an application of income.

- Final Determinations on Each Issue: The Tribunal upheld the disallowance of donations due to lack of evidence but allowed the appeal concerning other expenses and accumulation of income, recognizing them as applications of income under Section 11.