ADHI GANESH MANDIR CHARITABLE TRUST,BORIVALI WEST vs. INCOME TAX DEPARTMENT, MUMBAI

Adhi Ganesh Mandir Charitable Trust the trust amounting to ₹6,94,592/-, without allowing deduction for the expenditure admittedly incurred in the course of its charitable activities.

The factual matrix, as emanating from the record, reveals that the assessee-trust filed its return of income for the assessment year under consideration on 31.10.2023 declaring nil income, having claimed exemption under section 11 of the Act. The return was selected for scrutiny primarily on the premise that the assessee did not possess a valid registration under section 12A/12AB for the relevant assessment year and, therefore, the claim of exemption under section 11 was allegedly not in accordance with law. This foundational aspect forms the backdrop against which the impugned assessment has been framed and sustained.

During the course of assessment proceedings, the Assessing Officer noted that although the assessee had been granted provisional registration under section 12A in Form No.10AC, such registration was operative only from assessment year 2024-25 onwards and did not cover the assessment year 2023-24. It was further noticed that the assessee’s application for regular registration under section 12AB had been rejected by the learned Commissioner of Income Tax (Exemptions), Mumbai, vide order dated 10.12.2023. On the basis of these facts, the Assessing Officer concluded that the assessee was not entitled to the benefit of Adhi Ganesh Mandir Charitable Trust exemption under section 11 of the Act for the year under appeal and accordingly proceeded to treat the assessee as an Association of Persons for the purposes of taxation.

Having so concluded, the Assessing Officer brought to tax the entire receipts of the assessee-trust amounting to ₹6,94,592/- as income of the current year, without allowing deduction of any expenditure claimed to have been incurred by the assessee in carrying out its charitable activities. The learned Commissioner (Appeals) affirmed the action of the Assessing Officer, observing that in the absence of registration under section 12A/12AB for the relevant year, the assessee was not eligible for exemption under section 11, and therefore the assessment as framed did not warrant interference. Aggrieved by the said confirmation, the assessee is in appeal before us.

We have carefully considered the rival submissions, perused the material available on record, and examined the impugned orders in the light of the statutory provisions and the settled legal position governing the issue. At the outset, it is an admitted and undisputed position that the assessee did not hold a valid registration under section 12A/12AB for the assessment year 2023-24 and, consequently, the claim of exemption under section 11 of the Act could not have been allowed for the said year. To this limited extent, the action of the Assessing Officer in denying exemption under section 11 Adhi Ganesh Mandir Charitable Trust does not call for any interference and stands on a firm statutory footing.

However, the controversy before us does not rest merely on the denial of exemption under section 11, but extends to the manner in which the income of the assessee has been computed thereafter. The core issue that arises for our adjudication is whether, upon denial of exemption under section 11, the Assessing Officer was justified in bringing the entire gross receipts of the assessee to tax without granting deduction for the expenditure incurred in the course of its activities. This issue goes to the very root of the scheme of taxation under the Act, which taxes income and not gross receipts.

It is trite law that even where an assessee-trust is not entitled to exemption under section 11 for a particular assessment year, the computation of income has to be made in accordance with ordinary principles of commercial accounting, subject of course to the provisions of the Act. The denial of exemption does not confer an unfettered right upon the Revenue to assess gross receipts as income. The Assessing Officer is duty-bound to examine the expenditure incurred wholly and exclusively for the purposes of earning such receipts and to determine the real income chargeable to tax. Any computation which proceeds to tax receipts without undertaking this exercise is fundamentally flawed.

The aforesaid principle has also been consistently recognised by various co-ordinate Benches of the Tribunal, which have held that denial of exemption under section 11 does not automatically authorise the Revenue to tax the gross receipts of a trust. The computation must necessarily be confined to the net income, arrived at after allowing legitimate expenditure incurred in furtherance of the objects of the trust, unless such expenditure is specifically disallowable under the Act. The impugned assessment, insofar as it seeks to tax the entire receipts without such exercise, is therefore contrary to settled legal principles.

In view of the foregoing discussion, we are of the considered opinion that while the Assessing Officer was justified in denying exemption under section 11 of the Act for the assessment year 2023-24, he erred in law in taxing the entire receipts of the assessee without allowing deduction for the expenditure incurred. The assessment, to that extent, cannot be sustained. In the interest of justice, we deem it appropriate to restore the matter to the file of the Assessing Officer with a limited direction to recompute the income of the assessee after duly examining and verifying the expenditure claimed in the income and expenditure account and thereafter bringing only the net income, if any, to tax in accordance with law.

The Assessing Officer shall afford the assessee a reasonable opportunity of being heard and to place on record all relevant material in support of its claim of expenditure. With these directions, the appeal of the assessee is partly allowed for statistical purposes.

In the result, the appeal filed by the assessee stands partly allowed for statistical purposes.