Trust donations from accumulated funds to educational institutions violate section 11(2) deemed taxable income

ITAT Delhi upheld CIT(E)'s revision order u/s 263 against a trust. The trust had donated accumulated funds from previous years to educational institutions, violating explanation to section 11(2) read with section 11(3)(d). Such donations from accumulated funds are not allowable as charitable application and deemed taxable income. AO failed to examine this issue during assessment u/s 143(3), making the order erroneous and prejudicial to revenue. CIT(E) correctly set aside assessment for de novo proceedings with proper verification and reasonable opportunity to the trust.

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Issues Involved:
The appeal against the Order of the Ld. CIT (Exemption), Delhi dated 24.3.2022 passed u/s. 263 of the Income Tax Act, 1961 for assessment year 2017-18.

Details of the Judgment:

Issue 1:
The Ld. CIT(Exemption) declared the assessment order passed under section 143(3) of the Act as erroneous and prejudicial to the interests of revenue.

The Ld. CIT(E) observed that the AO failed to make requisite verification and inquiries during the assessment proceedings, specifically regarding the utilization of funds as donations to other trusts. The Ld. CIT(E) issued a show cause notice to the assessee, highlighting the issue of funds accumulated under section 11(2) being utilized as donations to other trusts, which may not qualify as application of income for charitable purposes. The assessee explained that the funds were used for construction of educational facilities, not as donations. However, the Ld. CIT(E) held that as per the provisions of the Act, such donations from accumulated funds are not allowable as application of income for charitable purposes. Consequently, the assessment order was set aside for a de novo assessment by the AO.

Issue 2:
The Assessee challenged the Ld. CIT(Exemption)'s order as erroneous and not in line with the facts of the case.

During the appeal, the Ld. Counsel for the assessee argued that the funds were spent for the advancement of the trust's objects and not as donations. The assessee contended that the money was paid for construction purposes to the respective trusts and not given as donations. However, the Ld. CIT(Exemption) maintained that the donations made from accumulated funds are not allowable as per the Act's provisions. The Ld. CIT(Exemption) directed a fresh assessment by the AO, emphasizing the need for proper examination and verification of the issue involved.

Issue 3:
The assessment order was challenged on the grounds of lack of proper inquiry and verification by the AO.

The Ld. CIT-DR argued that the assessment order was erroneous and prejudicial to the interest of Revenue due to the improper application of funds by the assessee trust. The Ld. CIT-DR highlighted that the payments made to other trusts did not qualify as reimbursements for charitable work, as claimed by the assessee. The Ld. CIT-DR emphasized that the AO's lack of proper inquiry and verification led to the erroneous assessment order, justifying the need for a fresh assessment.

In conclusion, the Appellate Tribunal upheld the Ld. CIT(Exemption)'s order, dismissing the Assessee's appeal and affirming the need for a de novo assessment by the AO to address the issues raised regarding the utilization of funds from accumulated income.

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