Taxing Net Income, Not Gross Receipts: ITAT’s Clarification on Charitable Trust’s Taxation

Introduction

In Annadaneshwara Charitable Trust v. ITO[i]*, *the Income Tax Appellate Tribunal (‘Tribunal’) underscored the paramount importance of scrutinizing financial details and permitting deductions tied to income generation. This emphasizes the fundamental principle of taxing only the net income. Furthermore, the Tribunal’s decision, which partially granted relief in the appeal, stressed the importance of registration for charitable trusts in determining tax implications. By emphasizing the lack of registration under s. 12AA of the Income-tax Act, 1961 (‘IT Act’), the decision highlighted that the trust was not eligible for income application.

Brief Facts

• The assessee, a charitable trust, filed its income tax return for the assessment year (‘AY’) 2018-19, declaring nil income. The Central Processing Centre (‘CPC’) issued an intimation under s. 143(1) of the IT Act, adding Rs. 19,79,297 to the income and raising a demand of Rs. 7,58,694, ignoring revenue expenses of Rs. 20,61,140 incurred by the assessee.

• The assessee filed for rectification under s. 154 of the IT Act was rejected, and the entire receipts were treated as income and taxed. Aggrieved by this, the assessee appealed to the First Appellate Authority (‘FAA’), but the appeal was dismissed as the assessee failed to provide documentation of its registration under s. 12AA or s. 10(23C) of the IT Act.

• The assessee then filed the present appeal before the Tribunal, providing a paper book with relevant documents, including the acknowledgement of the return, computation of income, audited report, financial statement, and written submissions. The assessee argued that only the net income, not the gross receipts, should be subject to taxation.

Held

• The Tribunal partly allowed the appeal, with instructions to the assessing officer (‘AO’), to evaluate the financials and allow deductions for expenditures related to income generation. The Tribunal held that the gross receipts could not be taxed in the hands of the assessee trust; instead, the income earned and the expenditures related to earning such income should be allowed as a deduction.

• Referring to the precedent set in a similar case in M/s. H M V Educational Cultural and Social Trust v. ITO[ii], the Tribunal highlighted that only the net income should be taxed, following the fundamental principle under the IT Act.

• It was noted that the assessee did not register under s. 12AA or s. 10(23C) of the IT Act, precluding any application of income. Thus, the Tribunal emphasized that without such registrations under the said sections, there could be no application of income.

Our Analysis

The Tribunal’s instruction to the AO to meticulously examine the financial records and authorize deductions for expenditures associated with income generation is in harmony with the fundamental principle that only the net income should be subject to taxation. This directive underscores the idea that, in determining taxable income, the focus should be on the amount of income that remains after permissible deductions.

Furthermore, the Tribunal’s emphasis on the absence of registration under s. 12AA of the IT Act reinforces the notion that the charitable trust in question does not meet the eligibility criteria for income application. S. 12AA of the IT Act pertains to the registration of trusts seeking exemption under ss. 11 and 12 of the IT Act, which deals with income derived from property held for charitable or religious purposes.

In the absence of s. 12AA of the IT Act registration, a charitable trust may not be entitled to certain exemptions and benefits available to registered trusts. The Tribunal’s highlighting of this non-registration underscores the importance of complying with regulatory requirements for trusts to avail themselves of favourable tax treatment. It reinforces the idea that adherence to statutory provisions is essential for establishing eligibility for specific tax benefits.

End Notes

[i] [2023] 156 taxmann.com 270 (Bangalore – Trib.), [dated: 26.09.2023].

[ii] IT Appeal No 9 of 2023 (Bang.), Order dated 23.03.2023.

Authored by Shivam Mishra, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.