The Income Tax Appellate Tribunal Delhi has clarified a critical principle in charitable trust taxation: exemption under Section 11 of the Income Tax Act cannot be wholly denied merely because a portion of income was applied to a specified concern. The ruling reinforces that disallowances must be proportionate to the actual violation, not punitive in scope.
Background & Facts
The Dispute
The assessee, Shri Krishna Hare Educational Trust, is a charitable trust registered under Section 12A of the Income Tax Act, 1961, since 07.01.2010. For Assessment Year 2015-16, the Trust filed its return declaring a loss of Rs. 3,38,63,296/-, based on gross receipts of Rs. 7,40,83,647/-. It claimed exemption under Section 11(1)(a) for 15% of gross receipts, amounting to Rs. 1,11,12,547/-, as income applied for charitable purposes. The remaining Rs. 6,29,71,100/- was offset by revenue expenditures of Rs. 7,58,73,184/- and capital expenditures of Rs. 2,09,61,212/-. The Assessing Officer (AO) disallowed the entire exemption claim and added Rs. 38,55,004/- to the Trust’s income.
Key Facts
- The Trust’s gross receipts for A.Y. 2015-16: Rs. 7,40,83,647/-
- Claimed exemption under Section 11(1)(a): Rs. 1,11,12,547/- (15% of gross receipts)
- Revenue expenditure disallowed: Rs. 47,05,925/- paid to M/s Educomp Infrastructure and School Management Ltd. (EISML)
- Capital expenditure disallowed: Rs. 2,09,61,212/- paid to M/s Edusmart Services Pvt. Ltd.
- Both companies were alleged to be "specified concerns" under Section 13(3)(e)
- The Trust submitted invoices, purchase orders, consignment notes, and JJ Forms as evidence
- The Trust’s balance sheet disclosed the capital expenditure of Rs. 2,09,61,212/-
- The auditor’s Form 10B omitted these payments, but the Trust’s ITR included them
- Sh. Shantanu Prakash, a trustee, held 11.71% voting power in EISML, below the 20% threshold
Procedural History
- 31.08.2015: Assessee filed ITR for A.Y. 2015-16 declaring loss of Rs. 3,38,63,296/-
- 27.12.2017: AO passed assessment order under Section 143(3), disallowing Rs. 1,11,12,547/- (15% exemption), Rs. 47,05,925/- (revenue), and Rs. 2,09,61,212/- (capital)
- 26.06.2025: CIT(A) upheld the AO’s order
- 08.04.2026: Hearing before ITAT Delhi
- 02.07.2026: ITAT pronounced order
Relief Sought
The assessee sought deletion of:
- Rs. 1,11,12,547/- disallowed under Section 11
- Rs. 47,05,925/- disallowed as revenue expenditure
- Rs. 2,09,61,212/- disallowed as capital expenditure
- Interest under Sections 234A, 234B, 234C
- Penalty under Section 271(1)(c)
The Legal Issue
The central question was whether the denial of exemption under Section 11 for a charitable trust must be restricted to the amount of income diverted to a specified concern under Section 13(3), or whether the entire exemption claim can be disallowed as a consequence of any such diversion.
Arguments Presented
For the Appellant/Petitioner
The assessee’s counsel argued that the disallowance under Section 11 must be limited to the specific amounts paid to specified concerns, not the entire 15% exemption. Reliance was placed on CIT(E) v. Audyogik Shikshan Mandal [2019] 261 TAXMAN 12 (Bom), Navajbhai Ratan Tata Trust v. ADIT(E) [2022] 140 taxmann.com 157 (Mum Trib.), and CIT v. IILM Foundation (ITA 179/2023), which held that exemption denial must be proportionate. It was submitted that EISML was not a specified concern as the trustee’s voting interest was only 11.71%, below the 20% threshold under Explanation 3 to Section 13. For the capital expenditure, the Trust demonstrated that payments were substantiated with documents, and accrual was sufficient prior to the 2022 amendment to Section 11. Form 10B’s omission was argued to be procedural and not fatal.
For the Respondent/State
The Revenue relied on the AO and CIT(A) orders, which applied the DIT v. Bharat Diamond Bourse precedent to deny the entire exemption. It contended that any transaction with a specified concern invalidates the entire exemption claim. The Revenue also argued that non-reporting in Form 10B and absence of open tender rendered the expenditures non-compliant.
The Court's Analysis
The Tribunal examined the interplay between Sections 11 and 13 of the Income Tax Act. It held that Section 13 operates as a carve-out: exemption under Section 11 is denied only to the extent income is applied for the benefit of persons specified under Section 13(3). The Tribunal distinguished DIT v. Bharat Diamond Bourse, noting that the Supreme Court’s ruling did not contemplate blanket denial of exemption for partial violations.
"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 specified 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."
The Tribunal found that the 15% exemption of Rs. 1,11,12,547/- was wrongly disallowed in full. The disallowance, if any, must be restricted to the amounts paid to specified concerns - Rs. 47,05,925/- and Rs. 2,09,61,212/-. Since the Tribunal later held that neither payment qualified as a violation, the entire exemption must be restored.
Regarding EISML, the Tribunal accepted that the 11.71% voting interest fell below the 20% threshold under Explanation 3 to Section 13(3)(e), and therefore EISML was not a specified concern. The allowance of rent and interest payments to EISML further supported this conclusion. The omission in Form 10B was held to be procedural and not determinative, especially since the ITR disclosed the transactions.
For the capital expenditure to Edusmart Services, the Tribunal accepted the documentary evidence - invoices, purchase orders, and consignment notes - as sufficient proof of application of income. It held that prior to the 2022 amendment inserting Explanation 7 to Section 11, accrual of expenditure was sufficient for application of income, as confirmed in M.P. Birla Institute of Fundamental Research v. DCIT. The absence of an open tender was not mandated by law, and the submission of invoices to other schools demonstrated commercial legitimacy. The reply to the Section 133(6) notice was also found to be on record.
The Verdict
The appeal was allowed. The ITAT Delhi directed:
- Deletion of the disallowance of Rs. 1,11,12,547/- under Section 11
- Allowance of the revenue expenditure of Rs. 47,05,925/- paid to EISML
- Allowance of the capital expenditure of Rs. 2,09,61,212/- paid to Edusmart Services Pvt. Ltd.
- Deletion of interest under Sections 234A, 234B, and 234C
- Deletion of penalty under Section 271(1)(c)
The assessment order dated 27.12.2017 is set aside, and the case is remanded to the AO for recomputation of income in accordance with this order.
What This Means For Similar Cases
Exemption Denial Must Be Proportionate
- Practitioners must argue that disallowances under Section 11 cannot be total if only a portion of income benefits a specified concern
- The burden shifts to the Revenue to prove the exact quantum of diverted income
- Blanket denial of exemption based on DIT v. Bharat Diamond Bourse is no longer sustainable
Voting Interest Threshold Is Strictly Applied
- A trustee’s holding of less than 20% voting power in a concern does not render it a specified concern under Section 13(3)(e)
- Even if a concern appears in Form 10B due to auditor error, it does not automatically trigger disallowance
- Financial relationships must be assessed on actual control, not procedural misstatements
Documentary Evidence and Accrual Suffice Pre-2022
- For A.Y. 2015-16 and prior, payment need not be made to claim application of income under Section 11
- Accrual of expenditure, supported by invoices and accounting records, is sufficient
- Non-reporting in Form 10B is not fatal if the ITR and books of account disclose the transaction
- Open tender is not a statutory requirement for charitable trusts purchasing goods or services
