Donation By One Trust To Other Charitable Institution Out Of Accumulated Fund Is Hit By Explanation To Sec 11(2) R/w/s 11(3)(D) & Hence Taxable: Delhi ITAT

The Bench of Shamim Yahya (Accountant Member) and Yogesh Kumar Us (Judicial Member) observed that “as per Explanation to Section 11(2) of the Act, any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust of any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter”. (Para 4.3)

As per the brief facts of the case, the assessment was completed at NIL income. A proposal for revision u/s. 263 was received, as on careful examination of records, the CIT(E) noticed that the said order was erroneous and prejudicial to the interests of records revenue as the AO failed to make requisite verification and enquiries which should have done in the facts and circumstances of the case. The CIT(E) observed that AO failed to notice that out of income accumulated u/s 11(2), the assessee utilized Rs. 65,00,001/- as donation to two other trusts, which shall not be treated as application of income as per explanation to section 11(2), r.w.s. 11(3) of the Act. During the year under consideration, it was revealed that all the amounts have been accumulated for the purpose of “For Setting up an old age home/ educational institution.” Utilization of Rs. 65,00,000/- was explained by submitting that Rs. 65 lacs spent may look like donation / payment, but the real nature of the same is construction of educational facilities. The CIT(Exemption) held that as per Explanation to section 11(2) read with section 11(3)(d) of the Act, donations given out of accumulated funds u/s. 11(2) of the Act of earlier previous years are not allowable as application of income for charitable or religious purposes and the same shall be deemed to be income of the assessee of the previous year 2016-17.

As per CIT(E) the AO failed to examine this issue, which should have been done during the assessment u./s. 143(3), as a result, the assessment order was erroneous and prejudicial to the interests of the revenue. Accordingly, the CIT(Exemption) set aside the assessment order u/s. 263 of the Act to the file of the AO for making a de novo assessment after proper examination of the issue involved and due verification wherever required by providing reasonable opportunity of being heard to the assessee and pass a speaking and well-reasoned order.

The Bench observed that amount of Rs. 65 lacs has been paid as donation to other Trust / Charitable Organisations and such payment will be hit by Explanation to 11(2) r.w.s. 11(3)(d) of the Act.

In view thereof, the amount of Rs. 65 lacs, donated by the assessee to other institutions i.e. Hindu College and Shree Raghunath Balika Vidyalaya out of accumulated fund should have been brought to tax by the AO, added the Bench.

Hence, the Bench stated that the CIT(E) correctly observed that that as per Explanation to section 11(2) of the Act read with section 11(3)(d) of the Act, donations given out of accumulated funds u/s. 11(2) of the Act of earlier previous years are not allowable as application of income for charitable or religious purposes and the same shall be deemed to be income of the assessee of the previous year 2016-17.

Therefore, the Bench pointed that the AO failed to examine this issue, which should have been done during the assessment u/s. 143(3) of the Act and accordingly assessment order exhibits lack of proper inquiry / verification by the AO, which was required to be carried out in the instant case.

As a result thereof, the Bench concluded that the CIT(E) has rightly held that the assessment order to be erroneous in so far as it is prejudicial to the interest of the revenue as per provisions of section 263 of the Act and accordingly, the same was set aside u/s. 263 to the file of the AO for making a donovo assessment after proper examination of the issue involved and due verification wherever required by way of affording reasonable opportunity of being heard to the Asssessee Trust and pass a speaking and well-reasoned order.

Hence, the ITAT allowed the assessee's appeal.

Counsel for Appellant/ Assessee: Sumit Bansal

Counsel for Respondent/ Revenue: Dharamvir Singh

Case Title: Sanganeria Foundations For Health & Education verses CIT (Exemption)

Case Number: ITA NO. 703/Del/2022

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