Trust exemption under sections 11-12 cannot be denied for FCRA violations; only non-compliant expenses disallowed

ITAT Ranchi ruled that AO cannot deny exemption under sections 11-12 to a trust for alleged FCRA 2010 violations. The tribunal held that section 13 does not empower AO to deny exemption entirely; only proportionate expenses violating section 13(1) can be disallowed from application of income. Citing precedents from Karnataka HC, the tribunal emphasized that exemption benefits cannot be denied while section 12A certificate remains valid. The AO was directed to allow the trust's exemption claim and assess only non-compliant expenditure as taxable income. Appeal partly allowed.

---

---

Issues:
Violation of provisions of FCRA 2010 and IT Act, denial of exemption under sections 11 and 12, alleged violations of section 13 of the IT Act, denial of exemption by AO, appeal before CIT(A), appeal before ITAT, jurisdiction of AO to deny exemptions.

Analysis:
The appeal before the ITAT Ranchi involved the denial of exemption claimed under sections 11 and 12 of the Income Tax Act, 1961 due to alleged violations of the Foreign Contribution Regulation Act (FCRA) 2010 and sections 13(1) and 13(3) of the IT Act for the assessment year 2016-17. The AO found that the assessee transferred foreign contributions to an unauthorized bank account, leading to contravention of FCRA 2010. Additionally, the AO raised concerns about payments made by the society and the lack of supporting documents for donations received, resulting in the denial of exemptions and assessing the income at Rs. 3,55,53,212. The CIT(A) upheld the AO's decision, prompting the assessee to appeal to the ITAT.

The main contention raised by the assessee before the ITAT was that the AO exceeded jurisdiction by denying exemptions under sections 11 and 12 based on alleged violations of section 13 of the IT Act. The assessee argued that if any violation of section 13 occurred, only proportionate expenses should be disallowed, citing relevant case laws. The ITAT considered various decisions of the High Courts and Tribunals, emphasizing that the AO cannot deny exemptions under sections 11 and 12 unless the certificate under section 12A is not in force. The ITAT concluded that the AO's denial of benefits under section 11 was incorrect, directing the AO to allow the assessee's claim under sections 11 and 12 while assessing any expenditure violating section 13 as income.

Ultimately, the ITAT partially allowed the appeal, setting aside the CIT(A)'s decision and directing the AO to allow the assessee's claim under sections 11 and 12. The ITAT clarified that only expenditure violating section 13 should be assessed as income. The ITAT's decision highlighted the importance of jurisdictional limits of the AO in denying exemptions and the need to follow legal provisions while assessing income and expenditures in such cases.

In conclusion, the ITAT's judgment provided relief to the assessee by partially allowing the appeal and emphasizing the correct application of provisions under the IT Act regarding exemptions and violations. The case serves as a reminder of the importance of adhering to legal requirements and jurisdictional boundaries in tax assessments and exemptions.

---