The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that an alleged violation of Section 13 of the Income Tax Act, 1961 cannot result in the denial of the entire exemption available under Sections 11 and 12. The Tribunal ruled that any denial of exemption must be restricted only to the extent of the income that is alleged to have been applied for the benefit of specified persons under Section 13(3).
The bench of Satbeer Singh Godara (Judicial Member) and Naveen Chandra (Accountant Member) reiterated that the legal position is now well settled that where a charitable trust extends a benefit to persons specified under Section 13(3), exemption under Sections 11 and 12 cannot be denied in its entirety. Instead, the denial must remain confined to the amount representing such benefit.
The assessee, a charitable trust registered under Section 12A since January 2010, filed its return for Assessment Year 2015-16 declaring nil taxable income after claiming exemption under Sections 11 and 12. The trust reported gross receipts of ₹7.40 crore and claimed the statutory 15% accumulation under Section 11(1)(a), along with revenue and capital expenditure incurred for charitable purposes.
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During scrutiny assessment under Section 143(3), the Assessing Officer made three major disallowances: ₹1.11 crore representing the statutory 15% accumulation under Section 11; ₹47.05 lakh being revenue expenditure paid to Educomp Infrastructure and School Management Ltd. (EISML); ₹2.09 crore being capital expenditure incurred through Edusmart Services Pvt. Ltd.
According to the Revenue, the payments attracted Section 13 because they were allegedly made to concerns covered under Section 13(3), thereby disentitling the trust from exemption under Sections 11 and 12. The Commissioner (Appeals) affirmed the assessment, prompting the trust to approach the ITAT.
The trust contended that even if certain payments were assumed to violate Section 13, the Revenue could not deny the entire exemption under Section 11.
It argued that the statutory accumulation of 15% under Section 11(1)(a) could not be simultaneously disallowed merely because certain expenditure was questioned. According to the assessee, any denial of exemption should be confined only to the amount allegedly violating Section 13 and not extend to the entire exempt income.
Regarding the payment of ₹47.05 lakh to EISML, the trust submitted that the concern did not qualify as a “specified concern” under Section 13(3)(e), since the trustee, Shantanu Prakash, held only 11.71% voting power, which was well below the statutory threshold of more than 20% prescribed under Explanation 3 to Section 13. It also argued that any disclosure error in Form 10B was merely procedural and could not defeat a legitimate exemption claim.
For the capital expenditure of ₹2.09 crore paid to Edusmart Services Pvt. Ltd., the trust produced invoices, purchase orders, consignment notes and other documentary evidence. It further argued that prior to the insertion of Explanation 7 to Section 11 with effect from 1 April 2022, actual payment was not mandatory for claiming application of income and that accrual of expenditure itself constituted valid application.
Relying on the Delhi High Court’s judgment in CIT v. IILM Foundation, the Tribunal observed that only the portion of income directly or indirectly applied for the benefit of specified persons loses exemption, and not the trust’s entire income. Consequently, it directed deletion of the disallowance of ₹1.11 crore representing the statutory 15% accumulation under Section 11.
The Tribunal also deleted the disallowance of ₹47.05 lakh.
It held that EISML could not be treated as a specified concern because the trustee held only 11.71% voting rights, whereas Explanation 3 to Section 13 requires a holding exceeding 20% before a concern can be regarded as specified. The Tribunal further noted that substantial payments of rent and interest made to the same concern had already been accepted by the Revenue, and any mistake in Form 10B could not override the actual facts disclosed in the income tax return.
The Tribunal similarly deleted the disallowance of ₹2.09 crore relating to capital expenditure.
It found that the trust had produced adequate documentary evidence including invoices, purchase orders and consignment notes supporting the purchases. It also accepted the trust’s contention that before Explanation 7 to Section 11 came into force in 2022, accrual of expenditure itself constituted valid application of income.
The Bench further observed that non-reporting of the transaction in Form 10B was only a procedural lapse, especially when the purchases were duly reflected in the audited balance sheet. It also rejected the Revenue’s objection regarding the absence of an open tender, observing that there was no statutory requirement mandating such a process in the facts of the case. The Tribunal additionally noted that replies to notices issued under Section 133(6) had in fact been furnished by the concerned parties.
The Delhi ITAT held that exemption under Sections 11 and 12 cannot be denied in entirety merely because of an alleged violation of Section 13; denial of exemption, if any, must be restricted only to the amount representing benefit extended to specified persons; EISML did not qualify as a specified concern under Section 13(3)(e) because the trustee’s voting power was below the statutory threshold; procedural defects in Form 10B cannot defeat an otherwise valid exemption claim when the substantive facts are supported by the record; and the additions made by the Assessing Officer were unsustainable in law.
The Tribunal allowed the appeal of Shri Krishna Hare Educational Trust and directed deletion of the disputed additions.
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