The Income Tax Appellate Tribunal's ruling in this case establishes a critical clarification on the interaction between capital gains computation and charitable trust exemptions, resolving long-standing ambiguity over whether indexation benefits can be claimed alongside Section 11 exemptions. This decision reinforces statutory harmony and curbs arbitrary disallowances by revenue authorities.
Background & Facts
The Dispute
The appellant, a charitable trust registered under Section 12A of the Income Tax Act, sold an immovable property during the assessment year 2012-13 for Rs. 50 crores. It claimed long-term capital gain (LTCG) exemption under Section 11 by applying the proceeds toward acquisition of fixed deposits. The trust also claimed indexation benefit on the cost of acquisition under Section 48, reducing its taxable capital gain. The Assessing Officer disallowed the indexation benefit, relying on a 1968 CBDT circular and judicial precedents that he interpreted as barring such benefits for charitable trusts.
Procedural History
- 2012: Assessee filed return declaring nil income, claiming exemption under Section 11 and indexation under Section 48
- 2013: Assessing Officer disallowed indexation benefit, citing CBDT Circular No. 5P(LXX-6) dated 19.06.1968
- 2025: First appellate authority (CIT(A)) reversed the order, allowing indexation benefit
- 2026: Department appealed to ITAT Mumbai, challenging three issues: indexation, double deduction under Section 11(1A), and remand on donation claim
Relief Sought
The department sought to disallow the indexation benefit, deny dual deductions under Sections 11(1)(a) and 11(1A), and set aside the remand order directing verification of donations made under Section 11(2).
The Legal Issue
The central question was whether a charitable trust claiming exemption under Section 11 can also claim indexation benefit under Section 48 when computing long-term capital gains, and whether such a claim constitutes impermissible double deduction under Section 11(1A).
Arguments Presented
For the Appellant (Revenue)
The department contended that:
- CBDT Circular No. 5P(LXX-6) of 1968 mandates that income of charitable trusts must be understood in its commercial sense, excluding indexation benefits
- Judicial precedents like Apex Court Ltd. v. Union of India prohibit double deduction for the same income
- Section 11(1A) allows only 15% accumulation, and claiming indexation benefit on capital gains already exempted under Section 11(1)(a) amounts to double benefit
- Donations made under Section 11(2) to unregistered entities are statutorily barred, and the CIT(A) erred in remanding for verification
For the Respondent (Assessee)
The trust argued that:
- Section 48 is a statutory provision for computing LTCG and applies universally, including to charitable trusts
- Explanation 2 to Section 11(1A) explicitly incorporates the cost of acquisition as determined under Section 48, thereby incorporating indexation
- There is no express prohibition in Sections 11 or 11(1A) against claiming both exemption and indexation
- The CIT(A)’s remand was procedurally sound to verify factual claims about donee entities under Section 10(23C)
The Court's Analysis
The Tribunal conducted a rigorous statutory interpretation, emphasizing that Section 48 and Section 11 operate in distinct but complementary domains. Section 48 governs the computation of capital gains, while Section 11 governs the application of income for charitable purposes. The Tribunal held that indexation is not an exemption but a statutory adjustment to cost, essential for fair computation of real gain.
"Section 48 of the Act speaks of deduction to be allowed while computing LTCG. One of such deductions being on account of indexation of cost of acquisition. Thus, when the statutory provisions allow deduction on account of indexation benefit for computing capital gain, even u/s. 11 of the Act, the A.O. could not have disallowed the claim of the assessee overriding the statutory provisions."
The Tribunal distinguished Apex Court Ltd. as a case concerning double deduction of actual expenditures, not statutory cost adjustments. It further noted that Section 11(1A) permits accumulation of 15% of total income, and Section 11(1)(a) permits application of income for charitable purposes - these are mutually exclusive heads of income, not overlapping deductions. The Tribunal emphasized that the legislature’s silence on barring dual claims is not an omission but an intentional design.
Regarding the remand under Section 11(2), the Tribunal upheld the CIT(A)’s direction to verify whether the donees were registered under Section 12AA or covered under Section 10(23C), noting that the burden of proof lies with the assessee and the A.O. must conduct a factual inquiry before disallowance.
The Verdict
The assessee won. The ITAT held that indexation benefit under Section 48 is fully permissible for charitable trusts claiming exemption under Section 11, and no double deduction arises between Sections 11(1)(a) and 11(1A). The remand order on donation verification was also upheld. The appeal was dismissed in its entirety.
What This Means For Similar Cases
Indexation Cannot Be Denied on Grounds of Charitable Status
- Practitioners must now assert that Section 48 applies mandatorily to all taxpayers, including trusts, regardless of exemption claims
- Revenue authorities cannot invoke outdated circulars to override statutory provisions
- Any disallowance of indexation must be challenged on grounds of statutory supremacy
Dual Claims Under Section 11 Are Not Per Se Invalid
- Trusts may claim both exemption under Section 11(1)(a) and accumulation under Section 11(1A) on the same capital gain
- The 15% accumulation limit applies to total income, not separately to capital gains
- Tax planning for trusts must now account for this dual benefit without fear of disallowance
Verification of Donees Is Mandatory Before Disallowance
- Donations under Section 11(2) to unregistered entities are not automatically disallowed
- The A.O. must verify whether donees qualify under Section 10(23C)(iv)-(vii) before rejecting the claim
- Assessees should proactively maintain documentation on donee registration status to avoid litigation
