SHRI MAHAVIR GOPALAN CHARITABLE TRUST,KAPADVANJ vs. THE ITO(EXEMPTIONS) BHAVNAGAR PRESENTLY THE ITO (EXEMPTION), VADODARA

The grounds raised by the assessee are as under:

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:

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:

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 :

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:

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.