Application of Funds by Charitable Trust, Including Revenue and Capital Expenditure, Leads to Nil Assessable Income Under Section 11.

Issue:

Whether the Assessing Officer erred in not considering the application of funds (both revenue and capital expenditure) by a charitable trust, resulting in the assessment of its income at gross receipts, even though the total application of funds matched the gross receipts, thereby entitling the trust to nil assessable income under Section 11 of the Income-tax Act, 1961.

Facts:

The assessee trust operated an educational institution, and its income was exempt under Section 11 of the Income-tax Act, 1961.
For the assessment year 2022-23, the assessee filed its return of income declaring nil income.
The gross receipts of the assessee were ₹ 1.41 crores.
The assessee had applied funds to the tune of ₹ 1.41 crores, which comprised revenue expenditure of ₹ 1.35 crores and capital expenditure of ₹ 6.10 lakhs.
The Assessing Officer failed to consider this application of funds and consequently assessed the income of the trust at its gross receipts.

Decision:

The income of the assessee was to be assessed as nil.

Key Takeaways:

For charitable or religious trusts claiming exemption under Section 11 of the Income-tax Act, 1961, both revenue and capital expenditures incurred for the charitable or religious purposes of the trust are considered as “application of funds” for the purpose of computing their assessable income.
If the total application of funds (including both revenue and capital expenditure) by a trust matches or exceeds its gross receipts, and the trust has otherwise complied with the conditions for exemption under Section 11 (e.g., registration under Section 12A/12AB, application of at least 85% of income, proper investment of accumulated funds), its assessable income should be nil.
The Assessing Officer is required to consider the legitimate application of income, whether it be for day-to-day running expenses (revenue) or for acquiring assets (capital), when determining the taxable income of a charitable trust. Failure to do so leads to an incorrect assessment.

IN THE ITAT KOLKATA BENCH ‘A’

Cossimbazar Social Welfare and Development Trust

Income – tax Officer

SONJOY SARMA, Judicial Member
and Rajesh Kumar, Accountant Member

IT Appeal No. 55 (KOL.) OF 2025
[Assessment year 2022-23]

MAY 15, 2025

S.K. Tulsiyan, AR for the Appellant. Puja Somani, DR for the Respondent.

ORDER

Rajesh Kumar, Accountant Member. – This is the appeal preferred by the assessee against the order of the Commissioner of Income-tax (Appeals) ADDL/ JCIT(A) Mysore, (hereinafter referred to as the “Ld. CIT(A)”] dated 11.12.2024 for the AY 2022-23.

2. At the time of hearing, the assessee has raised additional ground which is extracted below:-

“(1) That, on the facts and circumstances of the case and in law, the ld. AO, CPC, Bangalore made a mistake in as much as it Computed the Revenue Expenditure at Rs. 1,35,17,723/- and Capital Expenditure at Rs. 6,10,177/- aggregating to Rs. 1,41,27,960/-in Annexure-Schedule ER in the Intimation of Income but failed to consider the said application of income at Point no.6 while computing the total income at Rs. 1,41,27,960/ and raised a demand of Rs. 56,48,260/- on the assessee.”

3. The ld. Counsel for the assessee submitted before the Bench that the issue raised in the additional ground qua the failure on the part of the ld. AO CPC to take into account the application of income while passing the intimation u/s 143(1) of the Act dated 31.03.2023.

4. The facts in brief are that the assessee is a social welfare and development trust and runs a educational institution. The trust is registered with the Additional District Sub-Registrar, Berhampore. The books of accounts were properly maintained and duly audited by the chartered accountant. The return of income was filed along with audit report in form 10BB, declaring nil income. The trust is also granted provisional registration u/s 12A of the Act on 27.05.2021 from A.Y. 2021-22 to 2023-24, vide order dated 27.05.2021, by Pr. Commissioner of Income Tax. Besides, the assessee was granted a provisional approval u/s 80G(5) of the Act. During the year the assessee incurred revenue expenditure of Rs. 1,35,17,723/- and capital expenditure of Rs. 6,10,177/- aggregating to Rs.1,41,27,960/- which was claimed by the assessee as application of income against the total receipts of Rs.1,41,27,960/-. All these facts were available in the order passed u/s 143(1) of the Act dated 31.03.2023. Therefore, the issue raised by the assessee does not require any further clarification on facts and all the facts are available in the appeal folder itself. Therefore, we are inclined to admit the additional ground raised by the assessee.

5. The ld. AR vehemently submitted before us that while passing the order u/s 143(1), the total receipt of the trust was shown at Rs. 1,41,27,960/-, which was claimed to be spent for incurring the revenue expenditure to the tune of Rs.1,35,17,723/- and capital expenditure of Rs. 6,10,177/-. However, the ld. AO / CPC while processing the return of income failed to consider the application of income of Rs.1,41,27,960/- out of the total receipts thereby assessing the income at Rs.1,41,27,960/- resulting into raising of income tax demand of Rs. 56,48,260/-.

6. In the appellate proceedings, the ld. CIT (A) simply dismissed the appeal of the assessee by observing that assessee has failed to furnish the complete copy of the order passed u/s 143(1) of the Act dated 31.03.2023 and thus, upheld the order u/s 143(1) passed by AO CPC.

7. The ld. AR vehemently submitted before us that the order passed by the ld. AO as well as ld. CIT (A) are not maintainable on the ground of not considering the application of income and therefore, may kindly be reversed.

8. The ld. DR on the other hand submitted that the assessee has not filed the complete copy of the order u/s 143(1) of the Act before the ld. CIT (A) and therefore, the ld. CIT (A) could not take cognizance of the fact that the application of funds by the trust were completely ignored while passing the order u/s 143(1). Therefore, prayed that the issue may be restored to the file of the ld. CIT (A).

9. After hearing the rival contentions and perusing the materials available on record, we find that in this case, the assessee is a registered trust u/s 12A of the Act and have been granted registration u/s 80G(5) of the Act too. During the year the assessee’s total receipts were 1,41,27,960/- out of which assessee incurred revenue expenditure of Rs.1,35,17,723/- and capital expenditure of Rs. 6,10,177/-aggregating to Rs.1,41,27,960/-. In other words, the total receipts were spent on 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 Rs.1,41,27,960/-, resulting into assessment of income of the trust at gross receipts i.e. Rs. 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. In the appellate proceedings, the ld. CIT (A) simply dismissed the appeal on the ground that the assessee has not furnished complete copy of the order u/s 143(1) of the Act. 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 of the Act. We note that the gross receipts of the assessee was Rs.1,41,27,960/- and the application of funds were also to the tune of Rs.1,41,27,960/-comprising revenue expenditure of Rs.1,35,17,723/- and capital expenditure of Rs. 6,10,177/-. 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. The appeal of the assessee is allowed.

10. In the result, the appeal of the assessee is allowed.