2025 (4) TMI 1427 - AT - Income Tax

Denial of benefit of section 11 on no registration u/s 12AA/12AB - chargeability of tax on the income computed by AO at MMR instead of calculating tax as if it were an individual assessee - HELD THAT - AO has levied tax on an income of Rs. 1, 92, 751/- whereas the appellant out of said income has claimed deduction u/s 11 of the Income tax Act 1961 for 15% of the gross income calculated at Rs. 1, 04, 581/-. Considering the fact that the assessee trust was not registered u/s 12AA of the Income Tax Act, 1961 we are of the opinion that correct assessable income is Rs. 1, 92, 751/- and hence we dismiss this ground of the appellant. Chargeability of tax on the income computed by Assessing Officer at MMR - We agree to the same but here we are dealing with the issue of rate of tax chargeable in case of a trust which is not registered u/s 12AA/12AB whether it is to be charged at MMR or at normal rate as applicable to individual. We find that in case of charitable trust wherein there is no provision of share of any surplus and there is no provision of distribution of assets provisions of section 164(2) can only be applied and we therefore following the decision of Shri Digambar Jain Mandir Trust 2024 (4) TMI 661 - ITAT JODHPUR allow ground of the appeal of the assessee and hold that the tax rate as applicable to section 164(2) will apply to the rate of the AOP/Individual and the initial exemption is also available to such assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether the assessee trust, which was not registered under section 12AA/12AB of the Income Tax Act, 1961, is entitled to claim exemption under section 11 of the Act for the assessment year 2017-18;
• Whether the income of the trust, being the excess of income over expenditure, should be taxed at the Maximum Marginal Rate (MMR) as per section 13(8) of the Act or at the normal rates applicable to individuals or association of persons (AOP) under section 164(2) of the Act;
• Whether the trust was formed for the benefit of a particular community or caste, thereby invoking the provisions of section 13(1)(b) and justifying taxation at MMR;
• Whether the principles of natural justice were violated by the CIT (Appeals) in the appellate proceedings;
• Whether the quantum of assessable income as determined by the Assessing Officer (AO) and upheld by the CIT (Appeals) is correct.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility to claim exemption under section 11 without registration under section 12AA/12AB

Relevant legal framework and precedents: Sections 11 and 12AA of the Income Tax Act provide that exemption for income of charitable or religious trusts is contingent upon registration under section 12AA. The Supreme Court in U.P. Forest Corporation v. Dy. CIT (2007) 165 Taxman 533 held that registration under section 12AA is a condition precedent to claiming exemption under section 11(1)(a). The Tribunal in Bhagawan Sree Mahayogi Lakshmamma Educational Society (2022) 134 taxmann.com 310 held that in absence of registration under section 12A/12AA, exemption under section 11 cannot be allowed.

Court's interpretation and reasoning: The AO rejected the exemption claim on the ground that the trust was not registered under section 12AA. The CIT (Appeals) upheld this view, relying on the above precedents and the statutory mandate that registration is mandatory for exemption. The Tribunal affirmed this position, agreeing that without registration under section 12AA/12AB, the trust is not entitled to exemption under section 11.

Key evidence and findings: The assessee had applied for registration under section 12AA, but the application was rejected by the CIT (Exemption) and appeal was pending before the Tribunal. The trust was, however, registered under the Rajasthan Public Trust Act, 1950, which was not sufficient for exemption under the Income Tax Act.

Application of law to facts: Since registration under section 12AA is a statutory requirement for exemption under section 11, the absence of such registration precludes exemption. The trust's registration under a state act does not satisfy this requirement.

Treatment of competing arguments: The assessee argued that the trust was duly registered under the Rajasthan Public Trust Act and that the rejection of registration under section 12AA was under appeal. However, the Tribunal held that the statutory condition of registration under section 12AA is mandatory and cannot be bypassed by registration under other laws or pending appeals.

Conclusion: The trust is not entitled to exemption under section 11 for the assessment year 2017-18 due to lack of registration under section 12AA/12AB.

Issue 2: Rate of tax applicable to income of the trust - MMR under section 13(8) or normal rates under section 164(2)

Relevant legal framework and precedents: Section 13(8) provides that income not exempt under section 11 or 12 due to violation of certain clauses in section 13(1) is taxable at the Maximum Marginal Rate (MMR). Section 164(2) specifies that income of a trust deriving income from property held for charitable or religious purposes, which is not exempt under section 11 or 12, shall be taxed as if it were income of an association of persons (AOP), unless the conditions in section 13(1)(c) or (d) apply, in which case MMR applies. The Tribunal's recent decision in Shri Digambar Jain Mandir Trust vs. AO (ITA Nos. 121 to 124/Jodh/2021 and 237/Jodh/2023) clarified that where no share of beneficiaries is provided and the trust is not registered under section 12AA/12AB, tax should be charged under section 164(2) at normal rates applicable to individuals or AOPs, not MMR.

Court's interpretation and reasoning: The AO taxed the income at MMR on the ground that the trust was for the benefit of a particular community and was not registered. The CIT (Appeals) upheld this. The Tribunal, applying the reasoning in the cited decision, held that the trust's income should be taxed under section 164(2) at normal rates applicable to individuals or AOPs, since the trust had no provision for distribution of income to beneficiaries and was subsequently registered under section 12A with effect from 22.03.2022.

Key evidence and findings: The trust's deed did not provide for any share of income to beneficiaries, indicating it is a charitable trust. The trust was initially unregistered under section 12AA but later obtained registration effective 22.03.2022. The AO's finding that the trust was for a particular community was challenged by the assessee.

Application of law to facts: Since the trust is a charitable trust without beneficiary shares, section 164(2) applies. The MMR applies only if the trust violates clauses (c) or (d) of section 13(1), i.e., if income is spent on related parties or for non-charitable purposes. The trust's registration after the assessment year supports application of normal rates.

Treatment of competing arguments: The revenue argued for MMR based on lack of registration and alleged community-specific benefit. The assessee contended the trust benefits the public at large and thus should be taxed at normal rates. The Tribunal found the revenue's community-specific benefit finding to be incorrect and arbitrary.

Conclusion: Taxation of the trust's income should be at normal rates applicable to individuals or AOPs under section 164(2), not at MMR under section 13(8).

Issue 3: Whether the trust is for the benefit of a particular community or caste

Relevant legal framework: Section 13(1)(b) disallows exemption if the trust is for the benefit of a particular religious community or caste. This triggers taxation at MMR under section 13(8).

Court's interpretation and reasoning: The AO and CIT (Appeals) held that the trust was for the benefit of the Vishwakarma Sutradhar Samaj, a particular community, and thus disallowed exemption and applied MMR. The assessee argued that Vishwakarma represents a vocational group cutting across communities and castes and does not constitute a particular community or caste for the purposes of section 13(1)(b). The Tribunal accepted the assessee's submission, noting that the word encompasses multiple communities and religions engaged in various crafts and occupations, representing the public at large.

Key evidence and findings: The trust deed mentioned Vishwakarma Sutradhar Samaj in two objectives. No evidence was produced by the AO to substantiate that the trust was exclusively for a particular community or caste.

Application of law to facts: The absence of evidence and the nature of the group as vocational rather than a single community or caste led the Tribunal to reject the AO's finding.

Treatment of competing arguments: The revenue relied on the trust deed language; the assessee provided contextual explanation and referenced Supreme Court decisions recognizing the public nature of such groups.

Conclusion: The trust is not for the benefit of a particular community or caste and hence section 13(1)(b) is not attracted.

Issue 4: Adherence to principles of natural justice by CIT (Appeals)

Relevant legal framework: Principles of natural justice require that an assessee be given proper opportunity of hearing before adverse orders are passed.

Court's interpretation and reasoning: The assessee alleged that the CIT (Appeals) decided the appeal ex parte without proper hearing due to non-service of notices on registered email. The Tribunal noted that the CIT (Appeals) had enabled a communication window and issued notices, but the assessee failed to comply with the first notice. No further evidence was provided to substantiate violation of natural justice.

Key evidence and findings: Notices were issued and proceedings conducted electronically. The assessee's inability to comply was due to non-service on registered email but the notices were available on the government portal.

Application of law to facts: The Tribunal found no violation of natural justice as the assessee had opportunity to participate and failed to respond timely.

Treatment of competing arguments: The assessee claimed procedural lapse; the revenue demonstrated compliance with procedural requirements.

Conclusion: No breach of natural justice was established; this ground was rejected.

Issue 5: Quantum of assessable income

Relevant legal framework: Income is computed as gross receipts minus allowable revenue expenditure and accumulation under section 11(1)(a).

Court's interpretation and reasoning: The AO computed income at Rs. 1,92,751/- after allowing revenue expenditure of Rs. 5,04,453/- out of gross receipts of Rs. 6,97,204/-. The assessee contended that income should be computed at Rs. 1,04,581/- considering 15% accumulation under section 11(1)(a). The Tribunal held that since exemption under section 11 is not available without registration, the entire excess income is taxable and the AO's computation is correct.

Key evidence and findings: Audit reports, books of account, and financial statements were produced and examined on test check basis.

Application of law to facts: Without exemption, accumulation under section 11(1)(a) is not relevant for reduction of taxable income.

Treatment of competing arguments: The assessee sought to apply exemption benefits; the Tribunal held that statutory conditions were not met.

Conclusion: The income assessed by the AO at Rs. 1,92,751/- is correct and upheld.

3. SIGNIFICANT HOLDINGS

The Tribunal made the following crucial legal determinations:

"As per the provisions of Section 11 and 12AA of the Income-tax Act, the registration of the trust under Section 12AA is mandatory in order to claim the exemption under Section 11 of the Act. In the absence of the registration u/s 12AA of the Income Tax Act, the assessee is not eligible to claim exemption under Section11 of the Act."

"When there is specific provision for charging the tax the general provision cannot be made applicable. Thus, we hold that when the provision of section 164(2) specially deals to charge the tax of those trust where the whole or any part of the relevant income is not exempt under section 11 and 12, the relevant provision of the Act is reiterated herein below..."

"The Maximum Marginal Rate (MMR) is applicable if the clause (c) or clause (d) of sub-section (1) of section 13. Thus, 13(1)(c) deals where the money spent for the related party and 13(1)(d) deals religious trust or institution. The ld. AR of the assessee submitted that the assessee subsequently already registered u/s. 12A with effect from 22.03.2022 and thus it does not come under the provision of section 13(1)(c) and (d) of the Act and therefore, based on that set of facts the assessee trust shall be charged to tax u/s. 164(2) at the rate as applicable to Individual and AOP."

"The word cannot be dubbed as belonging to a particular community or caste therefore the entire finding dehors the material available on record."

"The first schedule to the Finance Act reads: 'In the case of every individual other than the individual referred to in items (II) and (III) of this Paragraph or Hindu undivided family or association of persons or body of individuals, whether incorporated or not...'"

"No breach of natural justice was established."

Final determinations:

• The trust is not entitled to exemption under section 11 for AY 2017-18 due to lack of registration under section 12AA/12AB;
• The income of the trust should be taxed under section 164(2) at rates applicable to individuals or AOPs, not at MMR under section 13(8), as the trust is not covered by clauses (c) or (d) of section 13(1);
• The trust is not for the benefit of a particular community or caste and hence section 13(1)(b) is not attracted;
• The quantum of income assessed by the AO is correct and upheld;
• No violation of principles of natural justice by the CIT (Appeals) was found;
• The appeal is partly allowed to the extent of tax rate applicable, and otherwise dismissed.