Inter-trust transfers out of accumulated funds are strictly taxable

Inter-trust transfers out of accumulated funds are strictly taxable as deemed income regardless of project nomenclature.

Issue

Whether payments made out of accumulated income under Section 11(2) by a charitable trust to other Section 12AA-registered institutions for project implementation are hit by the restriction in Section 11(3)(d) and taxable as deemed income.

Facts

Income Accumulation: The assessee-trust had accumulated its income for specific charitable purposes under the provisions of Section 11(2) of the Income-tax Act.
Inter-Trust Payments: During the assessment years 2013-14 and 2015-16, the assessee paid certain amounts out of these accumulated funds to two other separate institutions registered under Section 12AA.
Assessee’s Stand: The assessee argued that these payments were not anonymous donations, but rather project implementation costs, research fees, and consultancy charges for services rendered under its direct control.
Revenue’s Action: The Assessing Officer rejected the explanation, invoked Section 11(3)(d), and treated the distributed amounts as the taxable deemed income of the assessee-trust.

Decision

Recipient-Centric Mandate: The High Court held that Section 11(3)(d) is strictly recipient-centric, meaning the legal status of the entity receiving the money matters, not the purpose of the payment.
Nomenclature is Irrelevant: The court ruled that labeling the payment as project expenditure, a grant, consultancy charges, or implementation costs is legally irrelevant.
Deemed Income Confirmed: Any accumulated funds “paid or credited” to another registered trust automatically trigger the statutory bar, making the amounts fully taxable as deemed income in the hands of the donor trust.

Key Takeaways

No Outsourcing of Accumulated Funds: A trust accumulating income under Section 11(2) must deploy those specific funds directly for its own activities rather than routing them to another charitable entity.
Labels Cannot Alter Taxability: Changing the nomenclature of a fund transfer to “service fees” or “contractual costs” will not bypass the strict statutory embargo on inter-trust transfers of accumulated wealth.
Strict Statutory Interpretation: In tax exemptions for charitable institutions, courts will strictly apply literal interpretation to anti-abuse provisions like Section 11(3)(d) to ensure accumulated funds are not perpetually cycled between trusts.

IN THE ITAT DELHI BENCH ‘SMC’

Anil Madaan

Income-tax Officer

SATBEER SINGH GODARA, Judicial Member

IT Appeal No.3781 (Delhi) of 2026
[Assessment year 2017-18]

JUNE 1, 2026

Piyush Kaushik, Adv. for the Appellant. Manoj Kumar, Sr. DR for the Respondent.

ORDER

1. This assessee’s appeal for assessment year 2017-18, arises against the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [in short, the “CIT(A)/NFAC”], Delhi’s DIN and order no. ITBA/NFAC/S/250/2025-26/1085988931(1), dated 13.02.2026 involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).

Heard both the parties. Case file perused.

2. Coming to the assessee’s sole substantive ground raised herein, I notice that it seeks to reverse both the learned lower authorities’ respective findings assessing its cash deposits during demonetization period amounting to Rs.35,66,768/- as unexplained under section 68 of the Act; in assessment order dated 21.05.2019 as upheld in the lower appellate discussion.

3. I have given my thoughtful consideration to the assessee’s and the Revenue’s respective vehement submissions. I wish to make it clear that there has been no dispute all along that the assessee is engaged in the business of purchases and sales of footwear etc., possibility of cash turnover in such an unorganized sector could not be altogether ruled out. And that it had all along filed all the relevant details of the business turnover during demonetization, whose credit could not be denied in entirety, although it appears to have not successfully discharged its onus of pleading and proving its explanation to the very effect. Be that as it may, I thus deem it appropriate in this factual backdrop that a lumpsum addition of Rs.2 lakhs in the assessee’s hands would be just and proper with a rider that the same shall not be treated as a precedent. The assessee gets relief of Rs.33,66,768/- in other words. Necessary computation shall follow as per law.

4. So far as assessee’s assessment under section 115BBE is concerned, I quote S.M.I.L.E Microfinance Ltd. v. Asstt. CIT [2025] 479 ITR 172 (Madras)/ W.P. (MD) No.2078 of 2020 & 1742 of 2020, dated 19.11.2024 (Madras) that the impugned statutory provision would come into effect on the transaction done on or after 01.04.2017 only. The assessee is accordingly directed to be assessed under the normal provision as per law.

No other ground or argument has been pressed before us.

5. This assessee’s appeal is partly allowed.