2025 (5) TMI 1323 - AT - Income Tax

Tax Exemption for Charitable Trust Upheld: Full Fund Application Confirms Zero Taxable Income Under Section 11

The SC/Tribunal addressed a tax dispute involving a charitable trust. The key ruling determined that the Assessing Officer incorrectly computed the ... Exemption u/s 11 - application of funds for non charitable purposes - CIT (A) simply dismissed the appeal on the ground that the assessee has not furnished complete copy of the order u/s 143(1) HELD THAT:- The total receipts were spent on 143, the charitable purposes and thus, assessee was not having any net surplus during the year. From the perusal of order u/s 143(1) of the Act, we observed that though the assessee has disclosed all the facts qua the gross receipts as well as application of funds in the return of income, the ld. AO CPC failed to consider the application of funds to the tune of ₹ 1,41,27,960/-, resulting into assessment of income of the trust at gross receipts i.e. ₹ 1,41,27,960/-.The order of the ld. AO CPC is apparently wrong and against the facts and information disclosed by the assessee in the return of income. We note that the restoration of issue to the file of the ld. CIT (A) would not serve any meaningful purpose as this is a open and shut case before us. The assessee is running a educational institution and income is exempt u/s 11. We note that the gross receipts of the assessee was same as application of funds comprising revenue expenditure and capital expenditure. Considering these facts on record, we are inclined to set aside the order of ld. CIT (A) and direct the ld. AO to allow the application of funds accordingly. Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:(a) Whether the Assessing Officer (AO), Centralized Processing Centre (CPC), Bangalore, erred in computing the total income of the assessee trust at the gross receipts of Rs. 1,41,27,960/- without considering the application of income to the tune of the same amount, comprising revenue and capital expenditures, thereby resulting in an incorrect demand of Rs. 56,48,260/-;(b) Whether the Commissioner of Income-tax (Appeals) [CIT(A)] was justified in dismissing the assessee's appeal on the ground of non-filing of the complete copy of the order passed u/s 143(1) of the Income Tax Act, without addressing the substantive issue of non-consideration of application of income;(c) Whether the income of the assessee trust, engaged in charitable activities and registered u/s 12A and 80G(5) of the Act, should be assessed as nil, given that the total receipts were fully applied for charitable purposes during the year under consideration.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Incorrect computation of income by AO CPC by ignoring application of incomeRelevant legal framework and precedents: The Income Tax Act provides that income of a charitable trust registered u/s 12A is exempt from tax if the income is applied for charitable purposes. Section 11 of the Act exempts income of trusts if the income is applied for charitable or religious purposes. The application of income is a key factor in determining taxable income. The AO is required to consider the application of income in computing total income.Court's interpretation and reasoning: The Tribunal observed that the assessee trust had total receipts of Rs. 1,41,27,960/- and claimed to have applied the entire amount towards revenue expenditure of Rs. 1,35,17,723/- and capital expenditure of Rs. 6,10,177/-, aggregating to the total receipts. The AO CPC, while processing the return u/s 143(1), failed to consider this application of income and assessed the income at the gross receipts of Rs. 1,41,27,960/-, ignoring the application of funds.Key evidence and findings: The return of income along with audit report in Form 10BB was filed, declaring nil income. The trust was registered u/s 12A and granted provisional approval u/s 80G(5). The books of accounts were properly maintained and audited. The facts of total receipts and application of funds were disclosed in the return and were available in the order passed u/s 143(1).Application of law to facts: Since the entire receipts were applied for charitable purposes (both revenue and capital expenditure), the income should be computed as nil under Section 11. The AO's failure to consider this application of income led to an erroneous demand.Treatment of competing arguments: The Revenue argued that the assessee did not file the complete copy of the order u/s 143(1) before the CIT(A), hence the AO's order was upheld. However, the Tribunal found this to be a procedural lapse that did not justify ignoring the substantive facts and law regarding application of income.Conclusions: The AO CPC's order was held to be 'apparently wrong and against the facts and information disclosed by the assessee.' The failure to consider the application of income was a material error.Issue (b): Validity of CIT(A)'s dismissal of appeal on procedural groundsRelevant legal framework and precedents: The appellate authority is expected to adjudicate on merits where relevant facts and documents are available or can be furnished. Dismissing an appeal solely on procedural grounds without addressing substantive issues may not be justified, especially where facts are undisputed.Court's interpretation and reasoning: The CIT(A) dismissed the appeal on the ground that the assessee failed to furnish a complete copy of the order u/s 143(1). The Tribunal found that such dismissal did not serve any meaningful purpose as the facts were already on record and the issue was straightforward.Key evidence and findings: The appeal folder contained sufficient facts regarding receipts and application of funds. The Tribunal noted that the issue was 'an open and shut case' and that restoration to CIT(A) would only delay justice.Application of law to facts: The Tribunal exercised its appellate jurisdiction to decide the issue on merits rather than remanding the matter back for procedural compliance.Treatment of competing arguments: The Revenue's submission for restoration was rejected as it would not serve any useful purpose.Conclusions: The CIT(A)'s order was set aside, and the appeal was allowed on merits.Issue (c): Assessment of income of a registered charitable trust with full application of fundsRelevant legal framework and precedents: Section 11 of the Income Tax Act exempts income of a charitable trust if the income is applied for charitable purposes. The trust was registered u/s 12A and had provisional approval u/s 80G(5), which entitles donors to deduction and confirms the charitable nature of the trust.Court's interpretation and reasoning: The Tribunal noted that since the total receipts were fully applied towards charitable purposes (both revenue and capital expenditure), the income of the trust for the year should be assessed at nil.Key evidence and findings: The trust runs an educational institution, maintains audited accounts, and declared nil income in the return. The total receipts and application of funds matched exactly.Application of law to facts: The Tribunal directed that the AO should allow the application of funds of Rs. 1,41,27,960/- and assess the income at nil.Treatment of competing arguments: No substantive argument was presented against this position except procedural objections.Conclusions: The income of the trust was correctly declared as nil and should be accepted as such.3. SIGNIFICANT HOLDINGS'The order of the ld. AO CPC is apparently wrong and against the facts and information disclosed by the assessee in the return of income.''Considering these facts on record, we are inclined to set aside the order of ld. CIT (A) and direct the ld. AO to allow the application of funds to the tune of Rs. 1,41,27,960/-. Needless to say that the income of the assessee is to be assessed as Rs. nil.'Core principles established include:- The application of income by a charitable trust registered u/s 12A and 80G(5) must be considered in computing taxable income under Section 11;- Failure by the AO to consider application of income disclosed in the return results in erroneous assessment;- The appellate authority should not dismiss appeals on mere procedural grounds where substantive facts are undisputed and available;- Income of a charitable trust fully applied for charitable purposes is to be assessed as nil.Final determinations:The appeal of the assessee is allowed; the order of the CIT(A) is set aside; the AO is directed to consider the application of funds of Rs. 1,41,27,960/- and assess the income at nil for the AY 2022-23.