2025 (5) TMI 1553 - AT - Income Tax

Exemption u/s 11 - amount accumulated or set apart for charitable or religious purpose - HELD THAT - Assessee has filed the audit report which suggest that the assessee is trust. Even the assessee in the past and subsequent year allowed the benefit of section 12A even the trust still enjoy that benefit. Merely an error in the ITR which was Bonafide the deduction which are otherwise allowable cannot be denied. Since the issue is related to the provision of section 11(1)(a) of the Act. Claim of the assessee is very much within the law. Not only that the issue which the revenue raised has already been settled in the case of Krishi Upaj Mandi Samiti 2016 (7) TMI 707 - RAJASTHAN HIGH COURT wherein held that where assessee a charitable trust incurred expenditure in excess of income in previous year relevant to assessment year for charitable purposes out of accumulated charity fund it could not be denied benefit of exemption u/s 11(1)(a) in respect of income of previous year relevant to assessment year which had been admittedly applied for charitable purposes Respectfully following the binding precedent and the provision of the law we consider the claim of the assessee as claimed in the ITR is allowable. Since we have considered that the assessee trust is registered u/s. 12A necessary benefit of charging the income be given to the assessee and accordingly AO is directed to give the effect as directed in this order. Appeal of the assessee is allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the disallowance of Rs. 43,272 under section 11(1)(a) of the Income Tax Act, on account of amount accumulated or set apart for charitable or religious purposes, was justified despite the amount being accumulated in accordance with section 11(5) read with Rule 17 of the Income Tax Rules?

2. Whether the charging of tax at the maximum marginal rate (30%) instead of the applicable tax rate under section 2 of the Finance Act, 2013 (10%) was legally valid, especially given the error in the filing of Form ITR-7 regarding registration details under section 12A/12AA?

3. Whether the income should have been computed under the normal provisions of the Act, or under the special provisions applicable to charitable trusts?

4. Whether the delay of 1672 days in filing the appeal before the Commissioner of Income Tax (Appeals) was justified and whether the appeal should be admitted despite the delay?

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 43,272 under Section 11(1)(a) on Amount Accumulated or Set Apart for Charitable Purposes

Legal Framework and Precedents: Section 11(1)(a) exempts income derived from property held under trust wholly for charitable or religious purposes to the extent such income is applied to those purposes in India. It also allows accumulation or setting apart of income up to 15% of such income under section 11(5) read with Rule 17 of the Income Tax Rules. Section 12A registration is essential for claiming exemption under section 11. The Hon'ble Rajasthan High Court in Commissioner of Income-tax, Bikaner v. Krishi Upaj Mandi Samiti held that a charitable trust cannot be denied exemption under section 11(1)(a) when income is applied for charitable purposes, even if expenditure exceeds income in the previous year.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee was a registered trust under section 12A since 1995 and had claimed exemption under section 11(1)(a) for Rs. 43,272 as amount accumulated or set apart for charitable purposes, which did not exceed 15% of the income. The return of income was e-filed along with Form No. 10B (audit report) and other statutory documents evidencing the claim. The disallowance arose solely because of an inadvertent error in the Form ITR-7, where the registration under section 12A was incorrectly indicated as "No."

The Tribunal emphasized that the disallowance was made without giving the assessee an opportunity of hearing, which is contrary to settled principles laid down by the Hon'ble Bombay High Court in Khatau Junkar Ltd. v. K.S. Pathania and Bajaj Auto Finance Ltd. v. CIT, where it was held that debatable issues cannot be disallowed merely on the basis of information apparent from the return without further inquiry.

Key Evidence and Findings: The assessee's 12A registration certificate, Form No. 10B audit report, and consistent claims in preceding years supported the legitimacy of the exemption claim. The error in the ITR was bonafide and did not negate the assessee's entitlement.

Application of Law to Facts: Since the amount accumulated was within the permissible 15% limit and supported by statutory documents, the disallowance under section 11(1)(a) was not justified. The Tribunal relied on the binding precedent from the Rajasthan High Court to uphold the exemption.

Treatment of Competing Arguments: The Revenue argued that since the registration details were not mentioned in the ITR, the trust was not entitled to exemption. The Tribunal rejected this, holding that a mere error in the ITR cannot override substantive compliance and statutory entitlement.

Conclusion: The disallowance of Rs. 43,272 under section 11(1)(a) was erroneous and is set aside. The exemption claim is allowed.

2. Charging Tax at Maximum Marginal Rate (30%) Instead of Applicable 10% Rate under Section 2 of Finance Act, 2013

Legal Framework and Precedents: Section 2 of the Finance Act, 2013 prescribes income tax rates applicable to trusts and other entities. For income not exceeding Rs. 2,00,000, the rate is nil; for income exceeding Rs. 2,00,000 but not exceeding Rs. 5,00,000, the rate is 10%. The applicable tax rate for the assessee's income of Rs. 2,45,210 was thus nil on Rs. 2,00,000 and 10% on Rs. 45,210.

Court's Interpretation and Reasoning: The Tribunal observed that the AO (CPC) charged tax at 30% on the entire income due to the incorrect entry in the ITR indicating that the trust was not registered under section 12A/12AA. The Tribunal held that the error in punching information was bonafide and did not justify charging tax at the maximum marginal rate. The assessee had filed all relevant documents, including Form No. 10B and the 12A registration certificate, evidencing entitlement to lower tax rates.

Key Evidence and Findings: The ITR showed the incorrect entry under "Whether Registered u/s 12A/12AA" as "No." However, the return was filed under section 12, and statutory auditor's reports confirmed the trust's registration. The assessee computed tax correctly at 10% on the balance income.

Application of Law to Facts: The Tribunal held that the AO's action of charging tax at 30% was contrary to law and facts, as the assessee was eligible for the concessional rate. The error in the ITR should not prejudice the assessee's substantive rights.

Treatment of Competing Arguments: The Revenue contended that the absence of registration details in the ITR justified the tax treatment. The Tribunal rejected this, emphasizing that substantive compliance and documentary evidence must prevail over procedural errors.

Conclusion: The tax charged at 30% is set aside and the tax computation is to be done as per section 2 of the Finance Act, 2013, i.e., nil up to Rs. 2,00,000 and 10% on the balance Rs. 45,210.

3. Computation of Income under Normal Provisions Versus Special Provisions for Charitable Trusts

Legal Framework: Section 11 provides exemption for income derived from property held under trust for charitable or religious purposes, subject to conditions including registration under section 12A. The income should be computed after allowing such exemption and not under normal provisions applicable to other entities.

Court's Interpretation and Reasoning: The Tribunal found that the AO computed income under normal provisions due to the incorrect ITR filing, ignoring the trust's registration and the exemption claim. This was erroneous as the assessee was entitled to exemption under section 11.

Application of Law to Facts: Given the trust's registration and compliance with statutory conditions, income computation should have been after allowing exemption under section 11, not under normal provisions.

Conclusion: The income computation under normal provisions is set aside; the AO is directed to compute income after allowing exemption under section 11.

4. Delay in Filing Appeal before Commissioner of Income Tax (Appeals) and its Condonation

Legal Framework and Precedents: The Limitation Act governs the time limits for filing appeals. Section 5 allows condonation of delay if sufficient cause is shown. The Supreme Court in Pathapati Subba Reddy v. Special Deputy Collector laid down principles emphasizing that delay condonation is discretionary and must be exercised judiciously, balancing public policy and substantial justice.

Court's Interpretation and Reasoning: The Tribunal noted the delay of 1672 days in filing the appeal before CIT(A). The assessee explained that the delay was due to non-receipt of information about disallowance and incorrect advice from counsel. The Tribunal held that the lis between the parties must be decided on merits and condoned the delay in the interest of equity and justice.

Application of Law to Facts: The Tribunal applied the principles from the Supreme Court decision and found the reasons sufficient to condone the delay.

Conclusion: The delay in filing the appeal before CIT(A) is condoned, and the appeal is admitted for adjudication on merits.

Significant Holdings:

"No disallowance could be made u/s. 11 by the CPC in an intimation issued u/s. 143(1) of the Act."

"Merely an error in the ITR which was bonafide the deduction which are otherwise allowable cannot be denied."

"Where assessee, a charitable trust, incurred expenditure in excess of income in previous year relevant to assessment year for charitable purposes, out of accumulated charity fund, it could not be denied benefit of exemption under section 11(1)(a) in respect of income of previous year relevant to assessment year, which had been admittedly applied for charitable purposes."

"The error in punching information in the ITR-7 being bonafide cannot be a ground for charging tax at maximum marginal rate."

"The lis between the parties has to be decided on merits so that nobody's rights could be scuttled down without providing opportunity of being heard to the assessee on merits."

Core principles established include that substantive compliance and entitlement to exemption under section 11 cannot be denied on mere procedural or clerical errors in filing returns, especially when supported by statutory documents and consistent past practice. The tax authorities must not impose maximum marginal rates merely due to such errors. Delay in filing appeals can be condoned if sufficient cause is shown, ensuring justice on merits.

Final determinations are:

• The disallowance of Rs. 43,272 under section 11(1)(a) is set aside and exemption allowed.
• The tax charged at 30% is quashed; tax is to be computed as per section 2 of the Finance Act, 2013 at applicable rates.
• The income computation under normal provisions is set aside in favor of computation after exemption under section 11.
• The delay in filing appeal before CIT(A) is condoned and appeal admitted for adjudication on merits.