KOSHAMBH CHARITABLE TRUST,VADODARA vs. THE ITO, WARD-EXEMPTION, VADODARA

Your Appellant reserves the right to add, alter, amend or withdraw any of the above grounds of appeal.”

On hearing the arguments of the Counsel for the assessee and the Ld. DR, we observe that the present appeal by the assessee arises from the order passed by the Ld. CIT(A) who upheld the disallowance made by the Assessing Officer in respect of a sum of ₹1,17,80,300/- claimed as application of income under Section 11 of the Act. The facts of the case are that the assessee, a trust registered under Section 12AA of the Act, engaged in charitable activities including education, healthcare, food distribution, and other welfare activities, filed its return of income for AY 2017-18 declaring NIL income after claiming application of income including donations made to other charitable trusts. The AO disallowed the donation of ₹1,17,80,300/- made to six other charitable trusts on the ground that such a donation was not authorized under the trust deed, since the “object clause” allowing donation to other similar charitable institutions was struck off. The Commissioner (Appeals) concurred with this view, holding that such expenditure was not in line with the objects of the trust and therefore could not qualify as application of income under Section 11 of the Act. Having considered the rival submissions and on examination of the assessment record, we are unable to sustain the view taken by the lower authorities. The crux of the dispute lies in whether the donation made by the appellant to other charitable institutions, which are also registered under Section 12AA, constitutes valid application of income under Section 11(1)(a) of the Act. We note that the Hon’ble Delhi High Court in DIT (Exemption) v. Bagri Foundation [(2012) 344 ITR 193 (Delhi)] has held that a donation made by a registered charitable trust to another registered charitable trust constitutes application of income for charitable purposes. The Hon’ble Court clarified that the restriction introduced by way of Explanation to Section 11(2) applies only to accumulated income governed by Section 11(2), and not to the 15% Koshambh Charitable Trust vs. ITO Asst.Year –2017-18 - 4– accumulation permitted under Section 11(1)(a) of the Act. Further, CBDT Instruction No. 1132 dated 05.01.1978 has clarified that a donation made by one charitable trust to another will amount to application of income and the exemption under Section 11 of the Act cannot be denied merely because the donee trust did not utilize the funds in the same year. This position is further clarified in CBDT Circular No. 8/2002 which, while introducing the Explanation to Section 11(2) of the Act, maintained the position that inter- charity donations out of income of the year would continue to be treated as application of income. We would like to mention that the restriction in Explanation to Section 11(2) of the Act only governs accumulated income under that specific provision and cannot override the broader application allowed under Section 11(1)(a) of the Act. A significant change was introduced by the Finance Act, 2002, through the insertion of an Explanation to section 11(2), which specifically prohibits charitable trusts from making donations out of accumulated income to other trusts or institutions. This Explanation makes it clear that any amount which is accumulated or set apart under section 11(2) of the Act cannot be paid or credited to another trust or institution registered under section 12AA (now 12AB) or to other specified entities under section 10(23C) of the Act. If such a payment is made, it will not be considered as application of income for charitable or religious purposes, whether during the period of accumulation or after it. However, there is no such prohibition on inter-charity donations made from the current year’s income or from accumulations up to 15% under section 11(1)(a) of the Act. It is also well settled that a charitable trust is entitled to apply its income by way of donation to other trusts carrying on similar charitable activities, so long as the receiving trust is duly registered under Section 12AA of the Act. Even assuming that the specific object of donation to other institutions was omitted from the trust deed, the law under Section 11(1)(a) of the Act does not require a specific clause enabling inter-trust donations, provided the overall application is for charitable purposes. The main test under the Act is whether the income has been applied towards charitable purposes, not whether a specific mode of application is explicitly mentioned in the trust deed. In this context, we are of the view that a technical reading of the trust deed cannot defeat the statutory allowance under Section 11(1)(a) of the Act. In view of the judicial precedents referred to above, and Departmental Circulars, we hold that the donation made by the assessee trust to other registered charitable institutions out of the current year's income qualifies as application of income under Section 11(1)(a) of the Act. The disallowance of ₹1,17,80,300/-, therefore, is hereby directed to be deleted.

In the result, the appeal filed by the assessee is allowed. This Order pronounced in Open Court on 28/07/2025