Charitable Trust’s Exemption Allowed Despite ITR Filing Error, Given Proper Application of Funds and 12A Registration.
Issue:
Whether a charitable trust, registered under Section 12A for imparting education, should be denied exemption under Section 11 of the Income-tax Act, 1961, solely because it incorrectly filled or omitted to fill a specific column in its Income Tax Return (ITR) regarding the amount applied to charitable purposes, even if its Form 10B (audit report) correctly reflects the application of funds and the trust otherwise fulfills all eligibility conditions.
Facts:
For Assessment Year 2013-14, the assessee-trust filed its return of income, showing a certain amount as “income from other sources” and claiming full exemption for this amount under Section 11. However, in the column relating to “amount applied to charitable purposes during the year,” the assessee entered “0.” Consequently, the assessee was denied exemption under Section 11, and an addition was made to its income.
The assessee submitted that the actual percentage of income applied towards charitable purposes during the year was 96.44 percent of total receipts. They asserted that the application of funds, as per the provisions of Section 11, was correctly reflected in Form 10B (the audit report), which had been filed electronically by the auditor before the filing of the income tax return. It was further noted by the court that while the assessee had correctly filled the amount of exempt income claimed and the amount accumulated or set apart for application (up to 15% of receipts), the column relating to the amount applied to charitable purposes was left blank.
Decision:
In favor of the assessee: The court held that the mere fact that the assessee had filled wrongly or omitted to fill a column in its income tax return would not take away its eligibility for exemption, if it was otherwise eligible under law. Since it was clear that the assessee trust was registered under Section 12A for the purpose of imparting education to students, and it was not pointed out that any expenditure made by the society was on matters outside the objects of the assessee trust or for non-charitable purposes, there was no occasion to sustain the disallowance of exemption. Therefore, the impugned addition was to be deleted.
Key Takeaways:
- Substance Over Form: This judgment strongly emphasizes the principle of “substance over form” in tax matters. A minor or bona fide error in filling out a specific column in the ITR should not override the underlying eligibility for an exemption if the assessee has otherwise substantially complied with the law.
- Importance of Audit Report (Form 10B): The electronically filed Form 10B, which is the audit report for charitable trusts, plays a crucial role. If the Form 10B correctly details the application of funds and is filed timely, it serves as primary evidence of compliance with Section 11 conditions, even if there are inconsistencies in the ITR form itself.
- Eligibility for Exemption Under Section 11: For a trust to claim exemption under Section 11, it must be registered under Section 12A (or 12AB, as per current law) and apply at least 85% of its income for charitable or religious purposes. If these core conditions are met and proven by proper documentation (like audited accounts and Form 10B), a mere ITR error should not lead to denial.
- No Deviation from Charitable Objects: The court specifically noted that no expenditure was pointed out as being outside the trust’s objects or for non-charitable purposes, reinforcing that the trust genuinely functioned for its registered educational objective.
- Focus on Actual Application of Funds: The decision highlights that the actual application of funds for charitable purposes, as per the trust’s accounts and audit, is paramount, rather than a single entry in an ITR form.
IN THE ITAT LUCKNOW BENCH ‘B’
Bright Land College
v.
Income-tax Officer (Exemption)
Sudhanshu Srivastava, Judicial member
and Nikhil Choudhary, Accountant member
and Nikhil Choudhary, Accountant member
IT Appeal No.227 (LKW) of 2022
[Assessment Year 2013-14]
[Assessment Year 2013-14]
APRIL 25, 2025
Ms. Shweta Mittal, C.A. for the Appellant. Sanjeev Krishna Sharma, Addl. CIT (DR) for the Respondent.
ORDER
Nikhil Choudhary, Accountant Member.- This is an appeal filed by the assessee against the order of the ld. CIT(A), NFAC passed on 17.10.2022 under section 250 of the Income Tax Act, 1961. The grounds of appeal preferred by the assessee are as under:-
“1. The Ld. Commissioner of Income-tax (Appeal) has erred in law and on facts in passing the order, which is unlawful, unjustified and against the principles of natural justice.
2. The Ld. Commissioner of Income-tax (Appeal) has erred in law and on facts in passing the order without giving adequate opportunity of being heard.
3. The Ld. Commissioner of Income-tax (Appeal) has erred in law and on facts in upholding ad hoc disallowance of expense of Rs. 1,54,57,795/- against the order passed u/s 143(1) of Income-tax Act without following the procedure laid down in sub-section (1) of section 143 of Income-tax Act, 1961.
4. The Ld. Commissioner of Income-tax (Appeal) has erred in law and on facts in not granting exemption u/s 11 and 12 of the I. T. Act, 1961.
5. The Ld. Commissioner of Income-tax (Appeals) has erred in law and on facts in passing assessment order which is contrary to the facts and law.
6. The appellant craves leave to add, amend, alter or withdraw any ground of appeal or raise any new ground of appeal during the pendency of appeal.”
2. The facts of the case are that the assessee filed a return of income in which it showed a total income of Rs.2,25,59,058/- as income from other sources in Column 4 of Part-B-TI of the statement of income. In the column 6(i) of Part-B-TI relating to the amount applied to charitable purposes in India during the previous year, the assessee showed the figure of, “0”. Subsequently in column 10, the total amount shown as accumulated or set apart for charitable or religious purposes, to the extent it did not exceed 15% of the income derived from property held in trust, wholly or in part only for such purposes, under section 11(i)(a) was reflected in column 6(iv) as Rs.8,02,779/- and the total amount of deduction claimed in column 6(x) was Rs.2,25,59,058/-. The return was processed by the CPC and the income was computed at Rs.2,17,56,280/-. After computing the tax and adding of interest under section 234A, 234B and 234C, a total demand of Rs.84,92,230/- was raised against the assessee.
3. Aggrieved with this assessment, the assessee went in appeal before the ld. CIT(A). It was submitted that because it had incorrectly filled the fields in the income tax return for claiming the application of funds due to an inadvertent mistakes or ignorance of law of the tax counsel, who had been engaged to file the said return, the aforementioned addition had been made. It was submitted that the assessee society was not well versed with Income Tax provisions and hence it had engaged a tax counsel for filing the income tax returns electronically. However, while filing the returns, the tax counsel had inadvertently shown the amount applied to charitable purposes in India as Nil when it should actually have been Rs.2,17,56,279/-. It was submitted that the application of funds amounting to Rs.2,17,56,279/-, as per the provisions of section 11 of the Income Tax Act, was correctly reflected in Form 10 B, which had been filed electronically by the auditor before the filing of the income tax return by the tax consultant. Therefore, since there was a mismatch between the audit report and the income tax return, the assessee should have been granted an opportunity for clarification before disallowing this application of income and adding the same to the income of the assessee. It was submitted that the assessee society maintains proper books of accounts, which were audited by a Chartered Accountant as per the provisions of section 12(1)(b) of the Income Tax Act. The correct computation of income under section 11 that ought to have been submitted by the assessee in his return on the basis of the income and expenditure account that was contained in its audited report which was as under:-
| Sr. No. | Particulars | Amount in Rs. |
| 1. | Income from other sources (Fee from Students) | Rs.2,25,59,058/- |
| 2. | Income applied for charitable purposes | |
| 2(a) | Revenue Expenditure (Excluding depreciation) | Rs.2,07,59,173/- |
| 2(b) | Capital Expenditure | Rs.9,97,106/- |
| Total | 2,17,56,279/- |
Therefore, the percentage of income applied towards charitable purposes during the year was Rs.2,17,56,279/- which was 96.44% of total receipts of Rs.2,25,59,058/-. Copies of the audited balance sheet, income and expenditure account and receipt and payment account and receipt and payment account alongwith the audit report in Form 10-B, computation of income and complete income tax return were submitted to the ld. CIT(A) and it was prayed that in view of the aforementioned facts and circumstances of the case, the addition of Rs.2,17,56,280/- deserve to be deleted. The ld. CIT(A) after considering the arguments of the assessee, opined that the issue for consideration was whether income, expenditure can be set off under income derived from charitable trust, which is a fee collected from a student falling under the head, “income from other sources” i.e. whether capital expenditure could be set off against income from other sources under which the receipts on account of fees had been shown in the income tax return. The ld. CIT(A) opined that when the income is not from business but from other sources, expenses have to have a direct nexus with the income earned. There has to be a one to one co-relation between the income earned and the expenditure earned to earn such income. Reproducing the provisions relating to income from property held for charitable or religious purposes and income from other sources in his appeal order, the ld. CIT(A) proceeded to analyze the expenditures which are allowed as deductions from income chargeable to tax under the head, “income from other sources. He came to the conclusion, that capital expenditure incurred by the assessee trust was clearly disallowable as per the provisions of section 57(iii). Therefore, he upheld the addition on account of capital expenditure @ Rs.9,97,106/-. With regard to the application of funds @ Rs.2,17,56,278/- as per the provisions of section 11 as contained in the audit report prepared as per the provisions of section 12(1)(b) of the Act, he pointed out that the expenditure involved had to be relatable to collection of student fee. When income falls under other sources, there has to be a clear nexus between income and business expenditure. Since, there were no details about the expenditure directly co-relatable to earning student fee, which he had observed to be income from other sources, he disallowed 10% of the expenditure other than the amount permissible for accumulation @ 15%, and also excess of income over expenditure to arrive to a total disallowance of Rs. 1,54,57,795/-. The appeal was thus partly allowed.
4. Aggrieved with this addition, the assessee has come in appeal before us. Smt. Shweta Mittal, C.A. (hereinafter referred to as the ‘ld. AR’) appearing on behalf of the assessee pointed out that the assessee society enjoyed exemption under section 12AA of the Income Tax Act, 1961 which had been granted to by the Commissioner on 15.09.1999. She invited our attention to the copy of the audited balance-sheet and income and expenditure account alongwith with its annexures and the original Form 10-B that were placed in the paper book and submitted that the audited report, which had been duly filed showed that the assessee had applied all but Rs.4,77,354/-of its receipts towards charitable purposes during the year as per the duly audited income and expenditure account. Therefore, it was entitled for the exemption. However, the society had not been well-versed in income tax matters and had engaged a tax practitioner for the filing of the income tax return and the tax practitioner had made some mistakes in that he had treated the gross fee as income from other sources and he had not claimed the expenditure incurred in pursuance of the objectives of the society as income applied for the charitable purposes. As a result of this, an addition had been made in the hands of the assessee during the course of processing by the CPC. Thereafter, the matter had been taken to the ld. CIT(A) but the ld. CIT(A) had failed to appreciate the fact that the society was registered under section 12A of the Act and therefore, it was to be assessed under the regime laid down in sections 11, 12 and 13. Rather he had adopted a pedantic approach and held that the expenditures claimed were not admissible against income from other sources and therefore, he had sustained part of the addition. The ld. AR submitted that in view of the fact that the society continued to enjoy exempt status under section 12A and there was no violation of any of the provisions as laid down in sections 11, 12 or 13, the exemption was allowable to it the ld. CIT(A) should not have taken advantage of the mistakes committed by the counsel in the preparation of the return, to deny the exemption to the assessee that were due to it.
5. On the other hand, Sh. Sanjeev Krishna Sharma, Sr. DR (hereinafter referred to as the ‘ld. Sr. DR) submitted that the matter could be sent back to the ld. AO to examine the issue on the basis of the totality of facts.
6. We have duly considered the facts and circumstances of the case. It appears that while filing the return of income, the said counsel did not fill in the column 6(i) relating to the amount applied to charitable purposes in India during the previous year. While he had correctly filled the amount of exempt income claimed and the amount that have been accumulated or set apart for application to charitable or religious purposes to the extent it did not exceed 15% of the receipts, he had left the column relating the amount applied to charitable purposes as blank. Therefore, the addition had been made during the course of assessment and the ld. CIT(A) instead of appreciating that the exemption could not be denied only on account of a missing entry in the income tax return, had adopted a pedantic approach in considering what expenditures were allowable under income from sources and what were not. In our opinion, the ld. CIT(A) should have paused to consider that the society was a registered trust under section 12A of the Income Tax Act and therefore, it was to be assessed under the tax regime prescribed for societies under section 11, 12 and 13 of the Income Tax Act, 1961. What had to be seen in such cases was whether the income of the society had been applied towards charitable purposes enshrined within the objects of the society, for which the ld. CIT had granted the registration under section 12A. The mere fact that the assessee may have filled wrongly or omitted to fill a column in its income tax return, would not take away its eligibility for exemption, if it was otherwise eligible under the law. Since, it is clear that the assessee trust had been registered under section 12A for the purposes of imparting education to students and it has not been pointed out that any expenditure made by the society has been made on matters outside the objects of the assessee trust or for noncharitable purposes, there was no occasion to sustain the disallowances of the nature that the ld. CIT(A) has, on account of his understanding of what was deductible against income from other sources. We have also perused the computation filed by the assessee society and after going through the same, we delete the addition sustained by the ld. CIT(A). In making this decision, we rely upon the orders of the Hon’ble Gujarat High Court in Sh. Gujarat Bhavsar Samaj v. CIT(Exemptions) (Gujarat), which has been placed by the ld. AR in her paper book, which lays down that where the assessee trust filed its return claiming application of income for charitable purposes, but due to a technical glitch, the income applied by the assessee was not reflected in the return and consequently revision application filed under section 264 was rejected, the Hon’ble High Court held that since the assessee had incurred expenditure and applied income / donation received by it for charitable purposes, the assessee was entitled to benefit of the same. We find that the facts in the aforesaid case are quite similar to the facts of the assessee’s case and therefore, relying upon the said order, we delete the addition sustained by the ld. CIT(A) and allow the appeal of the assessee.
7. In the result, the appeal of the assessee is allowed.