2022 (10) TMI 945 - AT - Income Tax

Trust's Exemption Denied, Income Recalculated as AOP, Appeal Allowed

Shree Vimaljin Religious Charitable Trust Versus The AC IT, CPC, Bangaluru

The tribunal upheld the denial of exemption under Section 11 due to non-registration under Section 12AA and the adjustment under Section 143(1). However, ... Denial of exemption u/s 11 for want of registration u/s 12A/12AA - Whether CIT(A) has erred in confirming the action of assessing officer in not allowing the exemption claimed by the assessee u/s 11 by wrongly considering the assessee as not registered u/s 12AA of the I.T. Act.? - HELD THAT:- From the third proviso of sub-section (2) of section 12A, it is vivid that when trust is refused for registration then in that situation the trust cannot claim benefit of first proviso to sub-section (2) of section 12A - In the assessee`s case under consideration, the assessee was refused for registration in the year 2012-13 hence assessee is not entitled to claim benefit of first proviso to subsection (2) of section 12A therefore the plea taken by the ld Counsel is not acceptable. Also argued before us that if exemption is not granted under section 11 of the Act, then in that event the income of the assessee-trust should be computed on commercial principles bases, that is net profit should be taxable. We find merit in the contention of the assessee and noted that net profit of the assessee should be taxable, as if the assessee is doing business in the capacity of association of person (AOP). The said lis should be remitted back to the file of the assessing officer to examine income and expenditure of assessee. Hence, we set aside the order of ld CIT(A) and remit this issue back to the file of the assessing officer with the direction to examine the Profit and loss account/or income and expenditure account of the assessee and compute the net taxable profit by applying the commercial principles. The assessee is also directed to submit before the assessing officer the Profit and loss account/or income and expenditure account, with supporting evidences and documents. Appeal of the assessee is treated to be allowed for statistical purposes. Issues Involved:1. Denial of exemption under Section 11 due to non-registration under Section 12AA.2. Non-granting of deduction of expenses incurred towards the objects of the trust.3. Adjustment under Section 143(1) treating the claim of exemption under Section 11 as incorrect.4. Consideration of the trust's income and expenses as an Association of Persons (AOP) if exemption is denied.Issue-wise Detailed Analysis:1. Denial of exemption under Section 11 due to non-registration under Section 12AA:The primary issue revolves around the denial of exemption under Section 11 of the Income Tax Act, 1961, due to the trust's non-registration under Section 12AA. The trust contended that it had applied for registration on 11.03.2013, but the application was rejected due to non-submission of required documents. The trust argued that it should be entitled to exemption as it had been in existence and had applied for registration. However, the tribunal upheld the denial of exemption, stating that the basic condition for claiming exemption under Section 11 is the registration under Section 12A/12AA, which the trust did not fulfill. The tribunal referenced the Supreme Court's decision in UP Forest Corporation vs. DCIT, which emphasized the necessity of registration for claiming such exemptions.2. Non-granting of deduction of expenses incurred towards the objects of the trust:The assessee argued that the expenses incurred towards the objects of the trust should be deductible. The tribunal noted that the application of income for charitable purposes is allowed as an exemption under Section 11 only if the trust is registered under Section 12A/12AA. Since the trust was not registered, it was not entitled to claim deductions for expenses under Section 11. The tribunal upheld the Assessing Officer's decision to deny the deduction of expenses.3. Adjustment under Section 143(1) treating the claim of exemption under Section 11 as incorrect:The assessee contended that the adjustment under Section 143(1) by treating the claim of exemption under Section 11 as incorrect was unjustified. The tribunal noted that the return was processed under Section 143(1), and the exemption under Section 11 was rightly denied by the CPC, Bangalore, as the trust was not registered under Section 12A/12AA. The tribunal upheld the adjustment made by the Assessing Officer under Section 143(1).4. Consideration of the trust's income and expenses as an Association of Persons (AOP) if exemption is denied:The assessee argued that if the exemption under Section 11 is denied, the trust's income and expenses should be assessed as an AOP, and the basic exemption limit applicable to an AOP should be granted. The tribunal found merit in this argument and directed the Assessing Officer to examine the profit and loss account or income and expenditure account of the trust and compute the net taxable profit by applying commercial principles. The tribunal remitted the issue back to the Assessing Officer for fresh consideration, directing the assessee to provide supporting evidence and documents.Conclusion:The tribunal upheld the denial of exemption under Section 11 due to non-registration under Section 12AA and the adjustment under Section 143(1). However, it directed the Assessing Officer to assess the trust's income and expenses as an AOP and compute the net taxable profit accordingly. The appeal was allowed for statistical purposes.