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Facts
The assessee, a charitable trust, had accumulated surplus income in AY 2014-15 and AY 2016-17, purportedly for enhancing student facilities and acquiring properties. The AO disallowed the exemption, citing improper utilization of funds not aligned with the trust's stated objectives. Additionally, a dispute arose concerning the reversal of interest income and a mismatch in reported rental income.
Held
The Tribunal held that the funds accumulated were consistent with the trust's stated objectives and not solely for infrastructure development. The reversal of interest income was considered an accounting entry to rectify a past error and should not be taxed. The rental income mismatch issue was remanded to the AO for verification.
Key Issues
Whether the accumulated funds of a charitable trust were utilized for stated objectives, and whether the reversal of previously offered interest income is taxable.
Sections Cited
11(2), 11(3), 11(3)(a)
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Income Tax Appellate Tribunal, ‘B’ BENCH: BANGALORE
Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the NFAC dated 18/12/2024 in DIN No. ITBA/NFAC/S/250/2024- 25/1071316286(1) for the assessment year 2018-19.
The interconnected issue raised by the assessee in Ground Nos. 1 to 11 is that the learned CIT(A) erred in denying exemption under section 11 of the Income Tax Act amounting to ₹3,08,37,605/- only.
The relevant facts are that the assessee in the present case is a public charitable trust established in 1908 with the objects of providing facilities to students. In earlier years, the assessee had accumulated or set apart its surplus income under the provisions of section 11(2) of the Act, as detailed below: Serial Assessment Amount Purpose Number Year To increase facilities for 1. 2014-15 ₹3,29,85,376 students To acquire/construct 2. 2016-17 ₹5,40,00,000 immovable properties
During the year under consideration, the assessee utilized the accumulated funds to the extent of ₹2,74,90,419 (out of AY 2014-15 accumulation) and ₹36,78,744 (out of AY 2016-17 accumulation) towards the day-to-day running of the trust, excluding ₹3,31,611 which was invested in fixed assets.
According to the Assessing Officer (AO), the assessee was required to utilize the accumulated funds for creating infrastructure facilities for students by acquiring or constructing immovable properties, as indicated in Form No. 10 filed along with the return of income for the relevant assessment years. Instead, the funds were used for the routine functioning of the trust. Hence, the AO held that the assessee had violated the provisions of section 11(3)(a) of the Act and accordingly, . the amount of ₹3,08,37,605 (i.e., ₹2,74,90,419 + ₹36,78,744 - ₹3,31,611) was liable to tax under section 11(3) of the Act.
The AO also observed that a similar issue had arisen in the assessee’s own case for AY 2017-18, wherein a similar addition was made. Accordingly, the AO disallowed the exemption claimed to the extent of ₹3,08,37,605, citing improper utilization of accumulated funds contrary to the purposes stated in Form 10 filed along with the return of income.
Aggrieved by the assessment order, the assessee appealed before the learned CIT(A), who upheld the findings of the AO.
Being further aggrieved by the ld. CIT(A)’s order, the assessee is now in appeal before us.
The learned Authorized Representative (AR) before us filed a paper book (pages 1 to 332) and argued that the funds set apart in AY 2014-15 were intended to increase student facilities in alignment with the trust’s objectives. This intention can be corroborated from Form No. 10 and the trustee’s resolution placed on pages 230 and 231 of the paper books.
Similarly, the ld. AR submitted that the sum of ₹5.40 crores set apart in AY 2016-17 were earmarked for acquiring or constructing immovable property and making investments in movable property as well as creating additional student facilities in line with the trust’s . objectives. Support for this claim is found in Form No. 10 and the trustee’s resolution, available on pages 232–234 of the paper book.
The AR contended that the AO misunderstood the purpose for which the funds were accumulated. The funds were utilized in accordance with the trust’s declared objectives and therefore, exemption under section 11(2)/(3) should not be denied.
On the other hand, the learned Departmental Representative (DR) strongly supported the orders of the lower authorities.
We have heard the rival contentions and examined the materials on record. Upon review of the trustee resolutions and the purposes stated in Form No. 10 for the earlier years, we observe that for AY 2014- 15, the funds were indeed accumulated for enhancing facilities for students as per the trust’s stated objectives. Contrary to the AO’s findings, there is no evidence that the accumulation was solely for infrastructure development.
13.1 Similarly, the funds accumulated in AY 2016-17 were meant not only for infrastructure development but also for enhancing student facilities. Thus, the fund’s utilization was consistent with the declared purpose and not restricted merely to infrastructure creation. Therefore, we find that the AO’s conclusion is based on a misinterpretation of facts. Consequently, we hold that there was no violation of section 11(3)(a) of the Act, and hence the provisions of section 11(3) of the Act do not apply in this case. During the hearing, the learned DR also failed to controvert the arguments advanced by the AR. Accordingly, we reverse . the order of the learned CIT(A) and direct the AO to allow the exemption under section 11(2)/(3) of the Act to the assessee. Hence, the grounds of appeal of the assessee are, therefore, allowed.
14. The second issue raised by the assessee in ground No. 12 is that the ld.CIT(A) erred in confirming the addition of Rs. 32,23,788/- representing the interest income already offered in the earlier year.
15. The AO during the asst. proceedings found that the assessee has claimed interest expenses in the profit and loss account, which was claimed as income in the earlier year. As per the assessee, the trust in the earlier year inadvertently has offered more interest income of Rs. 32,23,788/- which was reversed in the year under consideration. However, the AO denied the impugned reversal of interest income in the year under consideration on the reasoning that this reversal of excess income does not represents the income applied for charitable purposes. Thus, the AO added the reversal of interest income amounting to Rs. 32,23,788/- and added to the total income of the assessee. On appeal, the ld. CIT(A) confirmed the finding of the AO.
16. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
The ld.AR before us submitted that if the reversal of interest income is not allowed as deduction, then it will lead to double addition which is unwarranted under the provisions of law. As per the ld. AR, the impugned amount representing the reversal of interest income cannot be equated with the application of income for charitable purposes. However, the ld. AR for quantification purpose of the impugned amount . on reversal of interest income requested to set aside issue to the file of the AO for verification as per the provisions of law.
On the other hand, the ld. DR vehemently supported the order of the authorities below.
We have carefully considered the assessment order, the order of the learned CIT(A), and the submissions made by both sides. From the preceding discussion, we note that the reversal of excess interest income, offered to tax in the earlier year, under consideration cannot be made subject to tax on account of non-application of charitable purposes. The reversal of interest income represents accounting entries so as to compensate the effect of the error committed by the assessee in the earlier year. Accordingly, we hold that the reversal of interest income as revenue expenditure cannot be denied to the assessee in the given facts and circumstances. Hence, the ground of appeal of the assessee is hereby allowed.
20. The next issue raised by the assessee in ground No. 13 is that the ld. CIT(A) erred in confirming the addition of Rs. 4,92,955/- on account of mismatch in the rental income offered to tax by the assessee vis-à-vis rent reported in Form No. 26AS.
The AO during the asst. proceedings found certain mismatch with respect to the rental shown by the assessee vis-à-vis the rent reported in Form 26AS with respect to the party viz. M/s Upadhay and Company. such difference was worked out at Rs. 4,92,955/-, which was not explained by the assessee and, therefore, the same was added to the total income of the assessee.
Aggrieved, assessee preferred an appeal to the ld. CIT(A) who has confirmed the order of the AO.
Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
The ld. AR before us filed Form 26AS and contended that there is no mismatch in the amount of rent as alleged by the revenue. The ld. AR further prayed to restore the issue to the file of the AO for necessary verification as per the provisions of law.
On the other hand, the ld. DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. In our considered view, the dispute on hand is factual in nature which requires verification at the level of the AO. Accordingly, we set aside the issue to the file of the AO to verify the exact amount of rent received by the assessee from M/s Upadhyay and Company vis-à-vis the rent reported in Form 26AS as per the provisions of law. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes.
27. Ground Nos. 14, 15 and 16 are general in nature and do not require any adjudication. Hence, these grounds are dismissed.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.