The Income Tax Appellate Tribunal, Delhi, has clarified a long-standing ambiguity in the application of Section 57(iii) of the Income Tax Act, affirming that religious societies may claim full deduction for expenses incurred to generate voluntary contributions, irrespective of their registration status under Sections 12A or 80G. This ruling reinforces the principle that tax deductibility hinges on the purpose of expenditure, not the nature of the assessee or the form of income received.
Background & Facts
The Dispute
The appellant, Intazamiya Kameti Shri Hastinapur Teerth, is a 120-year-old religious society registered under the Societies Registration Act, 1860. It manages two prominent temple complexes in Hastinapur, Uttar Pradesh, along with a Dharamshala, and conducts religious activities including daily pujas, distribution of prasad, sale of holy books, and accommodation for pilgrims. These activities generate income through voluntary donations, payment coupons for meals, and fees for religious services. For Assessment Years 2022-23 and 2023-24, the society claimed expenses exceeding its income under Section 57(iii), resulting in nil taxable income.
Procedural History
- AY 2022-23: Assessing Officer disallowed 30% of claimed expenses under Section 57(iii), adding ₹1,44,62,230 to income.
- AY 2023-24: 100% of claimed expenses were disallowed, adding ₹5,27,71,177.
- Both assessments were upheld by the Commissioner of Income Tax (Appeals) on grounds that donations are not "earned income" and the society lacked registration under Sections 12A and 80G.
- The assessee appealed to the ITAT Delhi, challenging the legal basis of disallowance and the non-speaking nature of the appellate order.
Relief Sought
The assessee sought deletion of the disallowances, arguing that Section 57(iii) permits deduction for expenses incurred wholly and exclusively for earning income, regardless of whether the income is classified as "earned" or "voluntary." It also sought relief from the procedural irregularity of a consolidated order for two distinct assessment years.
The Legal Issue
The central question was whether Section 57(iii) of the Income Tax Act permits a religious society, not registered under Sections 12A or 80G, to claim full deduction for expenses incurred to generate voluntary contributions, and whether such contributions constitute taxable income under Section 2(24).
Arguments Presented
For the Petitioner
The petitioner relied on judicial precedents including CIT v. Rajendra Prasad Moody (SC), DDIT v. Petroleum Sports Promotion Board (Delhi HC), and Shri Sanatan Dharam Mandir Sabha v. ITO (ITAT Delhi). It argued that:
- Voluntary contributions are income under Section 2(24) and taxable under "Income from Other Sources."
- Section 57(iii) requires only that expenditure be incurred wholly and exclusively for earning income - actual realization of income is irrelevant.
- Registration under Sections 12A/80G governs exemption, not deduction, and cannot be read into Section 57(iii).
- The AO failed to reject books of account or point to specific deficiencies, rendering the ad hoc disallowance illegal.
For the Respondent
The Revenue contended that:
- Voluntary donations are not "earned income" and therefore expenses related to them are not deductible.
- The society, as an AOP, cannot claim deductions under Section 57(iii) without registration under Sections 12A/80G.
- The disallowance was reasonable given the scale of donations and lack of formal registration.
The Court's Analysis
The Tribunal examined the statutory language of Section 57(iii), which states that expenditure must be "laid out or expended wholly and exclusively for the purpose of making or earning any income." It emphasized that the provision does not require income to be "actually earned," only that the expenditure be incurred for that purpose.
"The Supreme Court in the case of CIT v. Rajendra Prasad Moody held that deduction under Section 57(iii) depends on the purpose of expenditure, not on whether income is actually earned. It is sufficient that the expenditure was incurred for earning income."
The Tribunal distinguished Sections 11 and 12, which provide exemptions for charitable trusts, from Section 57(iii), which is a general deduction provision available to all assessees. It held that denying deduction under Section 57(iii) merely because an entity is not registered under Sections 12A/80G would effectively impose a condition not found in the statute.
The Tribunal further noted that the Assessing Officer had neither rejected the books of account nor identified any specific expenditure as non-business or personal. The ad hoc disallowance of 30% without explanation violated the principles of natural justice and reasoned adjudication, as affirmed in PCIT v. R.G. Buildwell Engineers Ltd.
The Tribunal also relied on its own prior decision in Shri Sanatan Dharam Mandir Sabha v. ITO, which involved identical facts and held that voluntary contributions are taxable income and related expenses are deductible under Section 57(iii).
The Verdict
The assessee prevailed. The ITAT Delhi held that Section 57(iii) permits deduction for expenses incurred wholly and exclusively to generate voluntary contributions, irrespective of registration under Sections 12A or 80G. The disallowances were set aside, and the AO was directed to delete the additions in both assessment years.
What This Means For Similar Cases
Religious Societies Can Claim Section 57(iii) Deductions Without 12A/80G Registration
- Practitioners representing religious trusts or societies should now confidently claim full deductions under Section 57(iii) for expenses related to donations, even if registration under Sections 12A/80G is pending or denied.
- The burden shifts to the Revenue to prove that expenses were not incurred wholly and exclusively for income generation - not to prove registration status.
Voluntary Contributions Are Taxable Income Under Section 2(24)
- Donations received by religious institutions are taxable under "Income from Other Sources" and must be disclosed in ITR.
- Taxpayers must maintain robust documentation: donation registers, bank statements, receipt books, and expense vouchers to substantiate the link between income and expenditure.
Ad Hoc Disallowances Are Legally Invalid
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Assessing Officers cannot disallow expenses without rejecting books of account or specifying defects.
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Blanket or percentage-based disallowances without reasoning are unsustainable and must be challenged on appeal.
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Practitioners should cite PCIT v. R.G. Buildwell Engineers Ltd and Shri Sanatan Dharam Mandir Sabha to oppose arbitrary adjustments.
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Always file detailed replies with supporting documents at the AO stage
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Cite CIT v. Rajendra Prasad Moody and DDIT v. Petroleum Sports Promotion Board in appeals
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Do not concede deduction eligibility based on lack of 12A/80G registration
