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Judgment
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER :
This captioned appeal has been filed by the assessee against the order of the learned Commissioner of Income Tax, Appeal Addl./JCIT(A)-1, Visakhapatnam [‘CIT(A)’ in short] dated 26.06.2025 arising from the assessment order dated 27.12.2017, passed by the Income Tax Officer (Exemptions) Ward-2(2), New Delhi under Section 143(3) of the Income Tax Act, 1961 (‘the Act’) concerning Assessment Year (A.Y.) 2015-16.
The grounds raised by the assessee are as under :
“1.That the CIT(A) grossly erred in law and on the facts and circumstances of the case in dismissing the appeal of the Assessee by confirming the order dated 27.12.2017 passed by the respondent without considering that the respondent erred in making additions of Rs. 2,09,61,212/- to the income of the Assessee under section 13 read with section 11 and 12 of the Act.
2.That the CIT(A) grossly erred in law and on the facts and circumstances of the case in dismissing the appeal of the Assessee by confirming the order dated 27.12.2017 passed by the respondent without considering that the respondent erred in making additions of Rs.47,05,925/- to the income of the Assessee under section 13 read with section 11 and 12 of the Act.
3.That the CIT(A) grossly erred in law and on the facts and circumstances of the case in dismissing the appeal of the Assessee by confirming the order dated 27.12.2017 passed by the respondent without considering that the respondent erred in not granting the exemption in violation of the provisions of section 11, 12 and 13 of the Act.
4.That the CIT(A) on facts and in law erred in not deleting the interest levied by the respondent under section 234A, 234B and 234C of the Act and in not deleting the penalty levied by the respondent under section 271(1)(c) of the Act.
5.The Assessee craves for leave to add, amend, vary, omit 0R substitute any of the aforesaid grounds of appeal at any time before 0R at the time of hearing of the appeal.
6.That all the grounds are without prejudice to each other.
7.That the CIT(A) grossly erred in law and on the facts and circumstances of the case in dismissing the appeal of the Assessee by confirming the order dated 27.12.2017 passed by the respondent without considering that the same was erroneous and bad in law and without jurisdiction.
8.That the CIT(A) grossly erred in law and on the facts and circumstances of the case in dismissing the appeal of the Assessee by confirming the order dated 27.12.2017 passed by the respondent without considering that the same was without jurisdiction and thus void ab initio.
9.That the CIT(A) grossly erred in law and on the facts and circumstances of the case in dismissing the appeal of the Assessee by confirming the order dated 27.12.2017 passed by the respondent without considering that the additions of Rs. 2,56,67,137/- to the income of the Assessee was made without considering the material on record and in denial of the principals of natural justice.”
Brief facts of the case is that the assessee is a charitable trust registered u/s 12A of the Income Tax Act vide order dated 07/01/2010. Assessee has filed ITR on 31/08/2015 declaring NIL income (loss of Rs. 3,38,63,296/-). The assessee declared a gross receipt of Rs 7,40,83,647/- and claimed exemption u/s 11(1)(a) to the extent of 15% of gross receipts amounting to Rs 1,11,12,547/- as having applied for charitable purposes. From the balance amount of Rs 6,29,71,100/-, the assessee claimed Revenue expenditure of Rs 7,58,73,184/- and Capital expenditure of Rs 2,09,61,212/- arriving at a total loss of Rs 3,38,63,296/-.
The AO completed the assessment u/s 143(3) on 27.12.2017 at an income of Rs. 38,55,004/- wherein the AO disallowed 15% of the gross receipts of Rs. 7,40,83,647/- amounting to Rs. 1,11,12,547/- on account of deemed application of income under section 11; disallowed Rs. 47,05,925/- (revenue expense) on the ground that the company to whom payment was made i.e. M/s Educomp Infrastructure and School Management Ltd. (EISML), is a specified concern under section 13(3)(e) of the Act; and disallowed Rs. 2,09,61,212/- (capital expense) on the ground that the company to whom payment was made i.e. M/s Edusmart Services Pvt. Ltd. is a specified concern under section 13(3)(e) of the Act. On appeal, the CIT(A) upheld the disallowances, hence the assessee is in appeal before us.
The ld AR submitted that disallowance of Rs. 1,11,12,547/- under section 11 (being 15%) as well as simultaneous disallowance of application of income under section 11 of Rs. 47,05,925/-and Rs. 2,09,61,212/-cannot be made and even if it is assumed that application of income under section 11 of Rs. 47,05,925/- and Rs. 2,09,61,212/- are not allowed due to section 13, still the amount of Rs. 1,11,12,547/- under section 11 cannot be disallowed as the denial under section 11 has to be restricted only to Rs. 47,05,925/- and Rs. 2,09,61,212/- and not any other amount i.e, of Rs. 1,11,12,547/-.
The ld AR stated that the Ld. AO in Para 6 of the order relied on judgment of the Apex Court in DIT v. Bharat Diamond Bourse to deny Rs. 1,11,12,547/-, however, the said judgment has been considered in CIT (E), Pune Vs. Audyogik Shikshan Mandal, [2019] 261 TAXMAN 12 (Bom) (Para 7); Navajbhai Ratan Tata Trust Vs. ADIT (E), [2022] 140 taxmann.com 157 (MumTrib.) (Para 6.6-6.8); DCIT, Exemption Circle Vs. Jay Singh Shikshan Sanstan, ITA No.3013/DEL/2024 (Para 10-11);CIT Exemption, Delhi vs. IILM Foundation ITA 179/2023 (Para 21).
The ld AR further submitted that even if the disallowance under section 11 is restricted only to Rs. 47,05,925/- and Rs. 2,09,61,212/-, still the assessee had admittedly applied the remaining income for charitable purposes and claims of Rs. 47,05,925/- and Rs. 2,09,61,212/- will only create losses and such losses are inconsequential as they have not been carried forward by the assessee.
The ld AR, without prejudice to the above, submitted that the application of income under section 11 for payment of Rs. 47,05,925/-(revenue expense) was disallowed on the ground that the company to whom payment was made i.e. M/s Educomp Infrastructure and School Management Ltd. (EISML) is a specified concern under section 13(3)(e) of the Act however, only one trustee namely Sh. Shantanu Prakash held 11.71% of the voting power in EISML and accordingly said concern cannot be a specified concern under section 13 as Explanation 3 to section 13 applies only when voting power in a concern is more than 20%. It is further stated that Rs. 1,85,70,000/- paid as rent and Rs. 18,77,233/- paid as interest to EISML was duly allowed. (Interest by Ld. CIT(A)). The ld AR relied on Navajbhai Ratan Tata Trust Vs. ADIT (E), [2022] 140 taxmann.com 157 (Mum Trib.) (Para 5.2); Jan Kalyan Samiti Vs. ITO, [2026] 183 taxmann.com 409 (Delhi Trib.) (Para 17-18). Also merely because EISML is mentioned in Form 10B due to mistake of auditor is inconsequential as the said form is procedural and contrary to the ITR filed.
The ld AR further stated without prejudice to the above, that the application of income under section 11 for expenses of Rs. 2,09,61,212/- (capital expense) was disallowed on the ground that the company to whom payment was made i.e. M/s Edusmart Services Pvt. Ltd. is a specified concern under section 13(3)(e) of the Act and the payment was not substantiated. The findings in Para 4.6 of the AO order at Page 36 are dealt hereunder: Regarding point 4.6(a), documents like invoices, purchase order, consignment note, JJ Form are attached at Page 62-75 of the paperbook and further school is located at Amritsar and not Panipat as stated; Regarding point 4.6(b), payment of application of income is not necessary prior to insertion of explanation 7 to section 11 of the Act which as inserted only on 01.04.2022 (accrual sufficient). (M.P. Birla Institute of Fundamental Research Vs. DCIT, ITA 478 & 479/KOL/2023); Regarding point 4.6(c), transaction was not reported in Form 10B by the auditor and the same form is only procedural (assessee duly reported the purchase of Rs. 2,09,61,212/- in balance sheet at Page 57 of the paperbook); Regarding point 4.6(d), that no open tender was there, the assessee had submitted invoices issued by the said party to other schools Page 78-81 of the paperbook; Regarding point 4.6(e), that reply to 133(6) notice was not made, the said reply was duly submitted and attached at Page 61 of the paperbook; Assessee did not claim any depreciation (added in computation on page 51 of the paperbook).
Per contra, the ld DR relied on the orders of authorities below.
We have heard the rival submission and have perused the materials on record. We agree with the assessee that the denial, if any, under section 11, has to be restricted only to the amounts covered u/s section 13(1)(c) read with section 13(3) of the Act. The jurisprudence evolved on the issue is that violation by way of extending benefit to the persons referred u/s 13(3) of the Act cannot be the reason to deny the whole exemptions u/s 11/12 of the Act but it should be restricted to the extent of violation.
As far as the decision of the Apex Court in DIT v. Bharat Diamond Bourse (supra), relied upon by the AO is concerned, we find that the hon’ble Bombay High Court in the case of CIT(E) V Audyogik Shikshan Mandal (supra), has distinguished the same and has held that it is not clear whether it is only to the extent of income diverted or the entire income. The said issue has been settled by the hon’ble Delhi High Court in the case of CIT vs. IILM Foundation (supra) which held as under:-
"21.A plain reading of sub-section (1) of Section 13 of the Act indicates that exemptions under Section 11/12 of the Act would not operate so as to exclude from the total income of the previous year any income, which is directly or indirectly, for the benefit of the person referred to in sub-section (3) of Section 13 of the Act. It is, thus, clear that if any part of the income of a trust for charitable or religious purposes is diverted for the direct or indirect benefit of a person referred to in sub-section (3) of that Act, that part of the income would not be excluded from the total income of the Assessee by virtue of Section 11/12 of the Act. In other words, the exemption under those Sections would not be available to the extent that the said income of a charitable or religious purposes is applied for the benefit of a person specified in sub-section (3) of Section 13."
In view of the same, the disallowance of Rs. 1,11,12,547/- under section 11 (being 15% of the gross receipt), is directed to be deleted.
In so far as the disallowance of revenue expense of Rs. 47,05,925/-, is concerned, we find that the company to whom payment was made i.e. M/s Educomp Infrastructure and School Management Ltd. (EISML) is not a specified concern under section 13(3)(e) of the Act, as the trustee namely Sh. Shantanu Prakash held only 11.71% of the voting power in EISML, much less than the threshold prescribed of 20% under Explanation 3 to section 13 of the Act. We further note that Rs. 1,85,70,000/- paid as rent was already allowed by the AO himself while Rs. 18,77,233/- paid as interest to EISML was duly allowed by Ld. CIT(A). We further find that mistake in Form 10B cannot be considered as fatal to the claim of exemption as the said form is procedural and contrary to the ITR filed. In view of the above, we direct the AO to allow the said amount. Ground 2 is allowed.
Similarly, the disallowance of capital expense of Rs. 2,09,61,212/- on the ground that the company to whom payment was made i.e. M/s Edusmart Services Pvt. Ltd. is a specified concern under section 13(3)(e) of the Act and the payment was not substantiated is not justified. The assessee had submitted documents like invoices, purchase order, consignment note, JJ Form as evidence of payment. Further, we agree with assessee that payment of application of income is not necessary prior to insertion of explanation 7 to section 11 of the Act which as inserted only on 01.04.2022. Prior to the amendment, accrual of expense has been considered as sufficient for application of income as held in M.P. Birla Institute of Fundamental Research Vs. DCIT, ITA 478 & 479/KOL/2023. We further find that We find that the assessee duly reported the purchase of Rs. 2,09,61,212/- in balance sheet and therefore non-reporting in Form 10B by the Auditor cannot be considered as fatal to the claim of exemption as the said form is procedural and contrary to the ITR filed. We also note that there is no requirement of issuing an open tender when we find that the assessee had submitted invoices issued by the said party to other schools. We also find that the parties to whom notice u/s 133(6) was issued have furnished their replies. Moreover, as is evident from the computation of income, the Assessee did not claim any depreciation but added in computation. Ground 1 is allowed.
In the result, the appeal in ITA 5003/Del/2025 is allowed.