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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: SMT. ANNAPURNA GUPTA & SHRI T.R. SENTHIL KUMAR
The present appeal has been filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals), ADDL/JCIT(A)-8, Mumbai (hereinafter referred to as “CIT(A)”), dated 20.02.2025 passed under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) and relates to Assessment Year (A.Y.) 2013-14.
The grounds raised by the assessee are as under:
“1 The learned ADDL/JCIT(A) has erred in law and on facts of the case, in confirming the disallowance for Rs.14,45,860/- on the ground of belated filing of form 9A for exercise of option U/s 11(2) Explanation 2(i) of the act. 2 The learned ADDL/JCIT(A) has erred in law and on facts in confirming the disallowance without considering the merits of the case and without investigating the utilisation of surplus amount in subsequent years. 3 The appellant craves leave to add, amend or alter the grounds of appeal at the time of hearing, if need arise.”
The solitary issue in the present appeal pertains to not allowing the assessee the benefit of deemed application of its income in terms of the provisions of Section 11(1) Explanation (2) of the Act pertaining to the amount of said income accumulated by the assessee for utilization in the succeeding year.
The assessee is a charitable trust engaged in activities by maintaining panjara pole primarily providing fodder for animals and related activities. The source of income is from donations including corpus, interest income and other incomes that were applied for the activities of the Trust. The assessee trust has been granted registration u/s.12AA of the Act. During the impugned year, the assessee was unable to apply its income to the tune of Rs.14,45,863/- for its charitable activities and accordingly exercised the option provided in Section 11(1) Explanation (2) of the Act for utilizing it in the succeeding year and claiming the same as deemed application of its income in the impugned year. The same was denied by the AO noting that even in the succeeding year the assessee had not utilized the amount so accumulated. Accordingly, the amount so set aside by the assessee for utilization in the succeeding year in terms of Section 11(1) Explanation (2) of the Act amounting to Rs.14,45,863/- was not allowed as deemed application to its income and, therefore, treated as its income liable to tax in the impugned year. Thus, against Nil income returned by the assessee by utilization of its income for its stated charitable activities, in accordance with the provisions of Section 11(1) of the Act, the AO assessed the income of the assessee at Rs.14,45,863/- by denying assessee’s claim of deemed application of income as noted above. The Ld. CIT(A) confirmed the same.
We have gone through the order of the Ld. CIT(A) and with a deep sense of disappointment, we would like to state that it is the most incoherent order that we have come across. On going through the entire order of the CIT(A), the impression i.e. gathered is that it has been passed without any application of mind at all. The reason being that: necessary reproductions mentioned in the order of the Ld.CIT(A) are not reproduced. Moreover, perusal of the order of the Ld. CIT(A) reveals that he has not been able to comprehend the default committed by the assessee which has led to the disallowance of claim of deemed application of its income by the AO. And, the Ld.CIT(A) appears to have been passed order without understanding the underlying issue, which was there before it.
We shall explain the reasons for arriving at our above unfortunate conclusions as under:
While the order of the Ld. CIT(A) begins with reproduction of grounds of appeal raised by the assessee before it and the statement of facts wherein the assessee has explained its grievance before the Ld. CIT(A) regarding the denial of claim of deemed application of its income claimed in terms of the provisions of Section 11(1) Explanation (2) of the Act which is reproduced at para 3 & 4 of the order, the Ld. CIT(A) at para 5 mentions that: the assessee has also furnished written submissions on 07.11.2024 which is reproduced hereunder:
But, however, thereafter, there is no reproduction of the written submission of the assessee in the entire order. While para 5, mentioning the reproduction of written submission of the assessee, is contained page 3 of the order, the next page, i.e page 4 begins with para 6.1 and there is no reproduction of written submission of the assessee at all. Therefore, it is not clear as to what submissions were filed by the assessee before the Ld. CIT(A).
Be that so, in para 6.1, the Ld. CIT(A) notes that the assessee has filed a fresh application before the CIT(E) for condonation of delay in filing of application for exercise of option given in Section 11(1) of the act and, thereafter reproduces the said application of the assessee. What transpires, therefore, is that the case has now proceeded from the AO denying the assessee’s claim of deemed application in terms of Section 11(1) Explanation 2 of the Act for not having utilized amount accumulated by the assessee in the succeeding year, to the Ld.CIT(A) noting the fact that the option exercised by the assessee for accumulating its income for utilization in the succeeding year was not done within the time prescribed in law and noting that the assessee had filed an application to the Ld.CIT(E) for condoning the delay in filing of the said option. Therefore, the Ld. CIT(A) has progressed to the denial of the claim of the assessee for a completely different reason as that adopted by the AO for doing so without mentioning the reasons for rejecting the AO’s basis and adopting a different basis.
Surprisingly, thereafter, the Ld.CIT(A)’s order gives the decision on the issue before it at para 7 and in para 7.1. The CIT(A) notes the assessee’s claim of exemption of its income being denied for not having filed its audit reports within the due dates prescribed under the provisions of Section 12A(a)/(b) of the Act. At this stage, it is evident that while the Ld.CIT(A) had proceeded with the issue, noting the denial of claim of deemed application of the assessee’s income in terms of Section 11(1) Explanation 2 of the Act, in the decision portion of his order, he states and notes something completely different which is not even the issue in the present case i.e. denial of claim of exemption to the assessee u/s.11 of the Act for not having furnished its audit report within the specified time as required by section 12A(1)(b) of the Act. A classic case of complete non-application of mind by the Ld. CIT(A). The Ld.CIT(A)’s order has now moved from noting the case with the AO of denial of claim of deemed application of income to his noting the denial of exemption of entire income that too for a totally different reason without any connection between the two. His finding, that the Assessee was not eligible to exemption of its income at all u/s.11 (1) of the Act for not having furnished requisite documents within the time, was not even the case before the AO nor were there any facts noted in his order with regard to the same.
The flip flop does not end here.
Thereafter, in para 7.2, the CIT(A) again jumps back to the issue noted by him of the exercise of the option as per the provisions of Section 11(1) explanation 2 of the Act and, in turn, denies the assessee’s claim of exemption u/s.11(1) of the Act for not having complied with the basic condition for claiming exemption.
It is pertinent to understand first the provisions of law in this regard. Section 11(1) alongwith explanation (2) thereto is reproduced hereunder for clarity:
“Income from property held for charitable or religious purposes. 11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income— (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;
Explanation 1.—For the purposes of clauses (a) and (b),— (1) ………………………. …………………….... (2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount— (i) for the reason that the whole or any part of the income has not been received during that year, or (ii) for any other reason, then— (a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and (b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, may, at the option of the person in receipt of the income (such option to be exercised 77[at least two months prior to the due date specified] under sub-section (1) of section 139 for furnishing the return of income, in such form and manner as may be prescribed) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.”
As is evident from a bare perusal of the above, Section 11(1) provides that income of charitable trust are exempted from tax subject to their utilization for charitable purpose to the specified extent. Explanation (2) thereof states that if for any reason the assessee has not utilized income in the impugned year, either on account of the fact that the income is not received or for any other reason, then it can exercise the option of utilizing the amount so unutilized in the succeeding year by making an application in this regard to the concerned officer. The amount so set aside for utilization in the succeeding year, therefore, is to be treated as deemed application of the impugned year.
It is precisely by invoking this Section that the assessee has claimed deemed application of income to the extent of Rs. 14,45,863/- i.e. income which the assessee had accumulated for utilization in the succeeding year, and the AO had denied the same noting that the assessee had not utilized the same in the succeeding year also.
However, the Ld. CIT(A) has referred to Section 12A(a)/(b) of the Act which is being reproduced hereunder :
Conditions for applicability of sections 11 and 12. 12A. (1) The provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely:— (a) the person in receipt of the income has made an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Principal Commissioner or Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, [whichever is later and such trust or institution is registered under section 12AA] : Provided that where an application for registration of the trust or institution is made after the expiry of the period aforesaid, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution,— (i) from the date of the creation of the trust or the establishment of the institution if the[ Principal Commissioner or] Commissioner is, for reasons to be recorded in writing, satisfied that the person in receipt of the income was prevented from making the application before the expiry of the period aforesaid for sufficient reasons; (ii) from the 1st day of the financial year in which the application is made, if the Principal Commissioner or Commissioner is not so satisfied: [Provided further that the provisions of this clause shall not apply in relation to any application made on or after the 1st day of June, 2007;] (aa) the person in receipt of the income has made an application for registration of the trust or institution on or after the 1st day of June, 2007 in the prescribed form and manner to the [Principal Commissioner or] Commissioner and such trust or institution is registered under section 12AA; (b) where the total income of the trust or institution as computed under this Act without giving effect to [the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year], the accounts of the trust or institution for that year have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.]
Clearly the provisions of section 12A (a)/(b) require that for claiming exemption of income u/s.11 of the Act, the charitable entities are required to get their accounts audited and submit a report of the Accountant in the prescribed form by due date specified.
Clearly, the Ld. CIT(A)’s finding at para 7.1 of his order is that the assessee is not entitled to exemption of its income since it has not fulfilled the basic conditions for claiming the exemption provided in Section 12A and 12B of the Act. In fact, he has found the AO to have done so in his assessment order. Para 7.1 is reproduced hereunder:
“7.1 I have carefully considered the facts and circumstances of the case. The appellant is a charitable trust registered under section 12A. As per the provisions of section 12A(a)(b), the audit reports are to be filed two month before the due date for filing of return of income. In circumstance, the claim of the appellant under section11(1)(a) was rejected while passing order under section 143(3) dated 28.03.2016.”
But, this is clearly not the case of the AO nor is there any such fact regarding non compliance with conditions stipulated in section 12A (a)/(b) recorded in the CIT(A)’s order for holding so. The Ld.CIT(A) keeps referring to the assessee having defaulted in exercising its option u/s.11(1)(a) Explanation (2) of the Act, but, it appears that he has failed to understand the import and the implication of Section 11(1)(a) of the Act and Section 12A of the Act, both of which are completely different. While the first i.e. 11(1)(a) Explanation 2 deals with deemed application of income to the extent the income is accumulated for utilization in the succeeding year and for non-fulfillment of the condition the denial of the exemption is only limited to the deemed application claimed by the assessee. The other Section deals with the claim of the exemption u/s.11(1) of the Act of the entire income which is denied for not furnishing the requisite report of Accountant within the prescribed dates. The Ld. CIT(A) has confused both the conditions and it is not clear what section he has invoked. Therefore, it is clearly an order passed without any application of mind to the issue at hand.
Be that so, even if, we consider that the assessee had delayed in exercise of its option u/s.11(1) Explanation 2 of the Act for deemed application of its income, Ld. Counsel for the assessee pointed out several decisions of the Jurisdictional High Court and Co-ordinate Benches of the ITAT holding the delay in exercise of option to be mere procedural infirmity which would not affect the claim of the assessee. That as long as the option is exercised during assessment itself, the assessee is entitled to claim deemed application of its income. Reference in this regard was made to the following decisions: i. Brahmchari Wadi Trust vs. CIT(E)[2025] 173 taxmann.com 54 (Gujarat) ii. Shree Vardhman Sthanakvasi Jain Shravak Trust vs. TIO [2025] 172 taxmann.com 165 (Ahd) iii. Shree Jain Swetamber Murtipujak Tapagachha Sangh Vs CIT [2024] 161 taxmann.com 114 (bom) iv. ITO v. Ramji Mandir Religious and Charitable Trust [2024] 158 taxmann.com 114 (Ahd) v. Association of Indian Panelboard Manufacturer v. DCIT [2023] 157 taxmann.com 550(Guj)
Ld. DR was unable to distinguish the aforesaid decisions though he pointed out that the Ld. CIT(A) had noted that the assessee’s application seeking condonation of delay in exercising the option was still not approved by the concerned authority.
We do not find any merit in the contention of the Ld. DR that since the assessee’s application for condonation of delay in exercising the option u/s.11(1)(a) Explanation 2 has not been approved by the specified authority, the assessee is not entitled to benefit of deemed application of its income, in view of the consistent decisions of judicial authorities holding the exercise of this option to be merely directory in nature and not mandatory ,as pointed out by the Ld. Counsel for the assessee before us.
In view of the above, therefore, following the proposition of law laid down in the judicial decisions cited by the Ld.Counsel for the assessee before us, we hold that since the assessee has exercised the option for accumulation of its income though belatedly but during assessment proceedings itself, the assessee is entitled to claim deemed application of its income to the extent of income for which the option was exercised by it, being Rs.14,45,863/-. The denial of claim of the same by the Revenue authorities is, therefore, held to be not in consonance with law. The order of the Ld. CIT(A) is, therefore, set aside and the AO is directed to allow the assessee’s claim of deemed application of its income to the tune of Rs.14,45,863/-.
In the result, appeal filed by the assessee is allowed.
This Order pronounced on 20/05/2025 Sd/- Sd/- (T.R. SENTHIL KUMAR) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 20/05/2025 S. K. SINHA True Copy आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. 2. ��यथ� / The Respondent. संबं�धत आयकर आयु�त / Concerned CIT 3. आयकर आयु�त(अपील) / The CIT(A)- 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER,