The Income Tax Appellate Tribunal, Delhi, has clarified that charitable trusts registered under the Charitable and Religious Trust Act, 1920, and operating as Associations of Persons (AOPs) without determinate member shares, are not liable to be taxed at the Maximum Marginal Rate (MMR) under Section 167A of the Income-tax Act. This ruling reaffirms the binding effect of CBDT Circular No. 320 of 1982 and aligns with prior tribunal decisions, offering critical relief to non-exempt charitable entities.
Background & Facts
The Dispute
The two appeals involve Pawai Trust (AY 2023-24) and Dal Trust (AY 2024-25), both registered charitable trusts under the Charitable and Religious Trust Act, 1920. The trusts engaged in charitable activities by disbursing donations to other eligible institutions. Neither trust claimed exemption under Section 11 of the Income-tax Act, and both filed their returns in the status of Association of Persons (AOP). The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) applied the Maximum Marginal Rate (MMR) of 30% and a surcharge of 30.90% on the total income, including dividend income, under Section 167A, treating the trusts as having indeterminate member shares.
Key Facts
- Pawai Trust’s total income for AY 2023-24: Rs. 5,76,32,670 (including dividend income of Rs. 5,51,09,160)
- Net income excluding dividend: Rs. 25,23,509
- Dal Trust’s income structure for AY 2024-25 was identical in nature
- Both trusts were registered under the Charitable and Religious Trust Act, 1920
- Neither trust had identifiable beneficiaries with fixed shares in income
- Both trusts had consistently filed returns as AOPs without claiming Section 11 exemption
- Pawai Trust had previously succeeded in ITA No. 5106/Del/2025 (AY 2021-22) on identical grounds, with order dated 06.02.2026
- The Commissioner of Income-tax (Appeals) for Agra and Surat confirmed the MMR and surcharge in their respective orders dated 30.07.2025 and 26.06.2025
Procedural History
- 01.04.2023: Assessment Year 2023-24 commenced
- 31.07.2023: Pawai Trust filed return of income as AOP
- 31.07.2024: Dal Trust filed return of income as AOP
- 2023-24: AO processed return under Section 143(1), applied MMR (30%) and surcharge (30.90%)
- 2024-25: Same treatment applied by AO to Dal Trust
- 15.06.2025: Pawai Trust filed appeal before CIT(A), Agra
- 10.06.2025: Dal Trust filed appeal before CIT(A)-1, Surat
- 30.07.2025: CIT(A), Agra, dismissed appeal, upheld MMR
- 26.06.2025: CIT(A)-1, Surat, dismissed appeal, upheld MMR
- 15.09.2025: ITA No. 7740/Del/2025 filed before ITAT Delhi
- 18.09.2025: ITA No. 7750/Del/2025 filed before ITAT Delhi
- 25.06.2026: Joint hearing held before ITAT Delhi
- 29.06.2026: Order passed allowing both appeals
The Parties' Positions
For the Assessees
- Argued that as charitable trusts, they have no members with determinate shares in income
- Contended that Section 167A applies only where shares are unknown or indeterminate, which is inapplicable to public charitable trusts
- Relied on CBDT Circular No. 320 dated 11.01.1982, which explicitly excludes charitable trusts from MMR
- Cited prior favorable order in ITA No. 5106/Del/2025 (AY 2021-22) dated 06.02.2026
- Referenced ITAT Cochin decision in Mahakavi Edasseri Smarka Trust affirming normal slab rates for charitable trusts
For the Revenue
- Relied on the AO’s application of Section 167A(1) and (2), arguing that the trusts were AOPs with indeterminate shares
- Maintained that dividend income pushed total income beyond Rs. 5 crores, triggering higher surcharge
- Did not dispute the charitable nature but insisted on mechanical application of MMR
Relief Sought
The assessees sought:
- Deletion of tax computed at MMR (30%) and reinstatement of normal slab rates applicable to AOPs
- Cancellation of surcharge levied at 30.90% and application of 15% surcharge (on income excluding dividend)
- Deletion of interest under Section 234C amounting to Rs. 4,517/-
- Rectification of adjustments made under Section 143(1) without opportunity of hearing
The Legal Issue
The central question was whether Section 167A of the Income-tax Act applies to a registered charitable trust operating as an Association of Persons (AOP), where the income is held for public charitable purposes and no member has a determinate or indeterminate share in the income.
Arguments Presented
For the Appellant/Petitioner
The assessees relied on CBDT Circular No. 320 dated 11.01.1982, which explicitly states that charitable trusts, religious trusts, and registered societies where members or trustees are not entitled to any share in income are not subject to taxation at the Maximum Marginal Rate. They argued that Section 167A is triggered only when the shares of members are unknown or indeterminate, which is not the case with public charitable trusts, as there are no beneficiaries with proprietary rights. They cited Mahakavi Edasseri Smarka Trust (ITAT Cochin) and their own prior decision in ITA No. 5106/Del/2025 to establish consistency and binding precedent. They further contended that applying MMR under Section 143(1) without notice violated principles of natural justice.
For the Respondent/State
The Revenue did not dispute the charitable nature of the trusts but maintained that the trusts, being AOPs, fell within the ambit of Section 167A. They argued that since the trusts received income from multiple sources including dividends, and no explicit declaration of beneficiary shares was filed, the default position under Section 167A(1) applied. They did not address the applicability of CBDT Circular No. 320 or the distinction between private and public trusts.
The Court's Analysis
The Tribunal emphasized that Section 167A is designed to prevent tax avoidance by entities where the beneficial ownership of income is obscured. However, it clarified that this provision does not extend to public charitable trusts, which are statutorily constituted for public benefit and have no members entitled to income distribution.
"The appellant being a public charitable trust, there profit ratio shares can't be allocated among the members and once right is not allocated, the question whether the shares are determinate or indeterminate doesn't arise."
The Tribunal noted that the CBDT Circular No. 320 of 1982, though not a statutory provision, is a binding administrative clarification issued under Section 119 of the Act, and has been consistently followed by tribunals and courts. The circular explicitly excludes charitable trusts from the scope of MMR.
The Tribunal further distinguished Section 167A(1), which applies to associations where shares are unknown, and Section 167A(2), which applies where shares are determinate but not known to the AO. In both cases, the underlying assumption is the existence of identifiable beneficiaries with proprietary rights. In a public charitable trust, beneficiaries are the general public, not individuals with fixed shares. Therefore, neither sub-section applies.
The Tribunal also held that the adjustment of tax under Section 143(1) without affording the assessee an opportunity of hearing was procedurally invalid, as the issue involved a substantial question of law requiring adjudication, not mechanical computation.
The Verdict
The appeals were allowed. The Tribunal set aside the orders of the CIT(A) and the AO, directing that the income of both trusts be taxed at the normal slab rates applicable to Associations of Persons, not at the Maximum Marginal Rate. The surcharge of 30.90% was deleted, and the applicable rate of 15% on income excluding dividend (Rs. 25,23,509) was to be applied. Interest under Section 234C of Rs. 4,517/- was deleted. The AO was directed to recompute the tax liability for AY 2023-24 and AY 2024-25 within 60 days of the order, with interest payable at 1% per month from the due date of filing until payment.
What This Means For Similar Cases
Charitable Trusts Are Exempt from MMR Under Section 167A
- Practitioners must now argue that any registered charitable trust, regardless of income size, is not subject to MMR if it operates for public benefit and has no identifiable beneficiaries with fixed shares
- The CBDT Circular No. 320 of 1982 is binding and must be cited in all such assessments
- MMR cannot be applied merely because the trust receives dividend income or exceeds Rs. 5 crores
Procedural Violations Under Section 143(1) Are Grounds for Relief
- Adjustments involving substantial legal questions (e.g., tax rate applicability) cannot be made under Section 143(1) without notice
- Any such adjustment is void ab initio and must be challenged on grounds of natural justice
- Taxpayers should demand a proper assessment under Section 143(3) if the AO proposes a change in tax rate
Precedent Can Be Invoked Across Assessment Years
- A favorable order in one assessment year (e.g., AY 2021-22) can be cited to support identical claims in subsequent years
- Tribunals are bound by their own coordinate benches’ decisions on identical facts
- Assessees should maintain and submit prior orders as part of their appeal record
