2025 (10) TMI 1001 - AT - Income Tax

Trust allowed exemption: s.10(34) and s.10(35) allowed; charitable deficits can be carried forward; limited 12A relinquishment from 20 Mar 2015

ITAT, Mumbai allowed the trust's claim of exemption under s.10(34) and s.10(35) for dividend and unit income, directing the AO to give effect following a ... Denial of claim of exemption u/s 10(34)/10(35) in respect of dividend income earned and income from units - assessee is a Charitable Trust registered u/s. 12A -Whether in case of a Charitable Trust registered u/s. 12A of the Act and eligible for claiming exemption u/s. 11 of the Act no exemption u/s. 10(34) and 10(35) of the Act is admissible? HELD THAT:- Respectfully following the decision of the Coordinate Bench in assessee’s case in AY 2012-13 [2022 (8) TMI 20 - ITAT MUMBAI] we hold that assessee’s claim of exemption u/s. 10(34) and 10(35) of the Act in respect of dividend income and income from units should be allowed. AO is directed to do so. This Ground is allowed. Whether the deficit arising due to excess expenditure/application of funds towards charitable purpose can be carried forward for adjustment/set off against the income of the subsequent years? - denial of assessee’s claim of exemption u/s. 10(34) and 10(35) of the Act in respect of dividend income and income from units, the AO treated it as income of the trust, which was required to be applied as per the limit set out u/s. 11 - Notably, while considering identical issue in Sorab Ji TATA Trust [2019 (7) TMI 2073 - ITAT MUMBAI] held that any excess expenditure Incurred by the trust/ charitable institution in earlier assessment year could be allowed to be set off against income of subsequent years by invoking section 11. Denial of claim of exemption u/s. 10(34) and 10(35) in respect of dividend income and income from units - Undisputedly, the assessee had filed the return of income in the impugned assessment year in the status of Association of Persons (AOP) and has not claimed any exemption u/s. 11 of the Act. It is also a fact that the assessee has voluntarily surrendered the registration granted u/s. 12A of the Act. However, the Departmental Authorities have proceeded against the assessee by treating it as a charitable trust registered u/s. 12A of the Act and for alleged violation in conditions of Sections 13(1)(d) and 13(2)(h) of the Act have not only denied exemption u/s. 11 of the Act but have also rejected assessee’s claim of exemption u/s. 10(34) and 10(35) of the Act. We find, while considering identical nature of dispute in case of Jamshetji Tata Trust [2021 (4) TMI 51 - ITAT MUMBAI] held that registration having been 'obtained' under section 12A was in the nature of a benefit to the assessee, and it was, therefore, entirely at the option of the assessee. In our considered view, an assessee unwilling to avail the 'benefit' of registration 'obtained' under section 12A cannot be, directly or indirectly and by actions or by inactions, compelled by the revenue authorities, to continue with the said registration 'obtained' by the assessee, particularly when it pertained to the registration obtained in a period prior to the insertion of section 12AA. The present cancellation of registration under section 12A must, therefore, be held to be effective from 20th March 2015. To this limited extent, we uphold the plea of the assessee. Deduction u/s. 80G has been partly accepted, deduction claimed u/s. 80G and 80GGA has been totally rejected since such claim was not made in the return of income - As relying on Nawajbhai Ratan Tata Trust [2025 (9) TMI 1694 - ITAT MUMBAI] we direct the AO to allow assessee’s claim of deduction u/s. 80G and 80GGA of the Act after factual verification. ISSUES PRESENTED AND CONSIDERED 1. Whether a charitable trust registered under section 12A and claiming benefits under section 11 can separately claim exemption under sections 10(34) and 10(35) for dividend income and income from units. 2. Whether excess application/expenditure (resultant deficit) arising in a year can be carried forward and set off against income of subsequent years under the framework of sections 11-13. 3. Whether alleged violations of section 13(1)(d) and section 13(2)(h) (prohibited mode of investment and trustee interest) bar alternative exemptions under sections 10(34)/10(35) or mandate taxation at maximum marginal rate. 4. Whether registration under section 12A, once surrendered/treated as ceased from a specified date, precludes application of sections 11-13 to the assessment year(s) in question. 5. Whether deductions claimed under sections 80G and 80GGA may be allowed where claimed in computation though not separately designated in the return (technical omission), and the effect of section 80G(4) limiting certain donations to 10% of gross total income. 6. Incidental/consequential issues: applicability of penal/interest provisions (sections 234A/234B/234C and computation at maximum marginal rate) where primary exemptions/deductions are disallowed. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Availability of sections 10(34)/10(35) to a trust registered under section 12A and claiming section 11 benefits Legal framework: Section 10 (including 10(34), 10(35)) lists incomes excluded from total income; section 11 deals with income derived from property held under trust for charitable or religious purposes. Chapter III groups non-includible incomes. Finance (No.2) Act, 2014 inserted section 11(7) (w.e.f. AY 2015-16) providing that section 10 benefits are not available to trusts claiming section 11 (temporal limitation noted). Precedent treatment: The Tribunal followed coordinate-bench and jurisdictional High Court authorities (including a cited decision holding that income already excluded under section 10 cannot simultaneously be brought into computation under section 11) in allowing section 10 exemptions for trusts for years prior to the 2014 amendment. The decision references prior coordinate-bench orders in the group's trust matters and relied upon jurisprudence upholding that section 10 exclusion operates independently of section 11 for the pre-amendment years. Interpretation and reasoning: The Tribunal reasoned that where an item of income (e.g., dividend or unit income) is excluded under section 10, it cannot be treated as income 'derived from property held under trust' and taxed under section 11; chapter structure and prior High Court ratio support independent operation of section 10. The Tribunal also noted temporal applicability of the 2014 amendment: since insertion of section 11(7) became effective from AY 2015-16, the pre-amendment assessment years must be adjudicated on pre-amendment law. Ratio vs. Obiter: Ratio - For assessment years prior to the effective date of section 11(7), a trust that would otherwise claim section 11 may, in respect of income that falls within section 10(34)/10(35), avail those section 10 exemptions; such income is not to be recharacterised under section 11 to deny section 10 benefits. Obiter - Observations regarding legislative change (section 11(7)) as explanatory of limited temporal effect. Conclusion: Exemption under section 10(34) and section 10(35) allowed for the relevant pre-amendment assessment years; AO directed to grant these exemptions. Issue 2 - Carry forward and set-off of deficit arising from excess application of funds under section 11 Legal framework: Section 11(1)(a) and related provisions govern application of income for charitable purposes and accumulation; the question concerns whether a deficit (owing to application exceeding the 85% threshold or allowable surplus) can be carried forward to subsequent years. Precedent treatment: Multiple coordinate-bench and High Court decisions were cited and followed, including affirmations by the Supreme Court (in procedural disposition dismissing misc. application) that permitted carry forward of such deficits; the Tribunal relied on those authorities (including Subros Educational Society and other coordinate-bench decisions) holding in favour of carry forward. Interpretation and reasoning: The Tribunal observed consistent judicial treatment in favour of permitting carry forward of deficits arising from excess charitable application; earlier High Court and Supreme Court dispositions had effectively settled the legal position. Where the facts are identical, the Tribunal followed the consistent precedent. Ratio vs. Obiter: Ratio - Excess application/expenditure resulting in a deficit may be carried forward and set off against income of subsequent years under the existing scheme of sections 11-13 as settled by higher and coordinate-bench authorities. Obiter - None material beyond reliance on binding precedents. Conclusion: Carry forward of the deficit allowed; AO directed to permit set-off in subsequent years. Issue 3 - Effect of alleged section 13(1)(d) and 13(2)(h) violations on entitlement to alternative exemptions and tax rate Legal framework: Section 13 sets out conditions which, if violated, may render the trust's income non-exempt under section 11; section 13(2)(h) addresses benefit to trustees/related persons; section 13(1)(d) addresses prohibited modes of investment. Taxation at maximum marginal rate was applied by lower authorities in the event exemptions were rejected. Precedent treatment: The Tribunal noted that lower authorities had found violations and that the First Appellate Authority had agreed in part. However, for the contested assessment years the Tribunal applied the coordinate-bench rulings on section 10 entitlement (and other issues), rendering the section 13 objections academic for those grounds; no new overruling of precedents on section 13 was undertaken. Interpretation and reasoning: Where section 10 exemptions are available (per Issue 1) the question of recharacterising such income under section 11 to deny section 10 does not arise for pre-amendment years; consequently, the Tribunal held the section 13 contention academic insofar as it would not affect the allowed section 10 exemptions. For other items of income not covered by section 13 findings, the appellate authorities adjusted tax rates (e.g., normal rates versus maximum marginal) as appropriate. Ratio vs. Obiter: Ratio - Finding of section 13 violations does not, by itself in the pre-amendment context, prevent application of section 10 exemptions for specifically covered income; where section 10 applies, section 13-based recharacterisation cannot be used to deny section 10. Obiter - Comments on factual findings of violation left open for other proceedings when relevant. Conclusion: Section 13 issues were held academic for the purposes of allowing section 10 exemptions for the years considered; rate consequences were confined to items outside the section 13 determination as already adjusted by the First Appellate Authority. Issue 4 - Effect of surrender/cessation of section 12A registration on applicability of sections 11-13 Legal framework: Registration under section 12A governs entitlement to section 11 benefits; question arises whether voluntary surrender or effective cessation as of a particular date excludes sections 11-13 for subsequent assessment years. Precedent treatment: The Tribunal followed coordinate-bench decisions holding that cancellation/surrender can be effective from the date the show-cause hearing concluded and the assessee acquiesced, thereby affecting the period for which sections 11-13 apply; the coordinate-bench holdings were applied mutatis mutandis. Interpretation and reasoning: Where an assessee surrendered registration (or where cancellation was effective from a particular date established in prior coordinate-bench rulings), the Tribunal treated sections 11-13 as not applying to periods after that effective date. The Tribunal declined to reopen peripheral questions and left unresolved aspects to be dealt with in appropriate proceedings. Ratio vs. Obiter: Ratio - If registration under section 12A is surrendered or treated as ceased from a specified effective date, sections 11-13 do not apply thereafter; appellate determination of the effective date governs applicability. Obiter - Peripheral conduct/compliance issues left open for assessment-stage adjudication. Conclusion: Where facts mirrored coordinate-bench precedents on surrender/cessation, the Tribunal applied those conclusions and held sections 11-13 inapplicable from the effective cessation date for the relevant years. Issue 5 - Allowability of deductions under sections 80G and 80GGA where claimed in computation but not separately in return; and application of section 80G(4) Legal framework: Section 80G permits deduction for certain donations, with section 80G(4) imposing limits (10% rule) except for donations to specified entities; section 80GGA relates to donations for scientific research/ rural development and requires appropriate claim; the form/ITR may lack a separate field for 80GGA in some years. Precedent treatment: Coordinate-bench decisions were followed allowing such deductions where supporting evidence was furnished and where the absence of a separate column in the ITR was a technical omission; AO directed to verify facts and grant deductions subject to statutory limits and verification. Interpretation and reasoning: The Tribunal emphasized substance over form: where evidence supporting deductions under 80G and 80GGA exists and the absence of a separate tab is merely a technicality, deductions may be allowed after verification. Section 80G(4) was applied to limit certain donations to 10% of gross total income except where statutory exceptions apply (specified entities eligible for full/50% rates). Ratio vs. Obiter: Ratio - Deductions under sections 80G/80GGA should not be defeated solely by lack of a separate column in the return if the claim is supported by evidence and is otherwise within statutory scheme; AO to verify and allow subject to section 80G(4) limits. Obiter - Administrative convenience of ITR format should not override substantive entitlement. Conclusion: AO directed to allow 80G and 80GGA deductions after factual verification and subject to statutory limits; partial disallowances that ignored submitted evidence were set aside. Issue 6 - Consequential interest and rate consequences Legal framework: Sections 234A/234B/234C govern interest for defaults; taxation at maximum marginal rate may follow where exemptions are denied. Precedent treatment and reasoning: The Tribunal treated interest and rate issues as consequential. Where primary appeals succeeded (e.g., allowance of section 10 exemptions or deductions), related interest demands and rate-based adjustments were rendered unnecessary or adjusted accordingly. The Tribunal declined to separately adjudicate consequential grounds where main issues disposed resolved them. Ratio vs. Obiter: Ratio - Interest and rate consequences are to be adjudicated only after primary entitlement questions are resolved; successful primary relief requires recalculation and possible withdrawal/adjustment of interest. Obiter - None beyond standard consequential approach. Conclusion: Consequential grounds dismissed as requiring no separate adjudication where primary entitlements were allowed; adjustments to interest/tax rates to follow on remand or recalculation by AO.