Wednesday, March 5, 2014

Charitable trust can’t avail of Sec. 24(a) relief

A charitable trust, claiming exemption under section 11(1)(a), could only claim deduction of expenditure actually incurred to earn rental income. However, its claim for standard deduction under section 24(a) could not be allowed.

a)  The assessee, a charitable trust, was engaged in various objects such as promotion of education, medical relief, etc. It filed return claiming exemption under section 11(1)(a). ;
b)  It also claimed deduction under section 24(a). The Assessing Officer (‘AO’) held that the net income of trust was to be considered for exemption under section 11 and no separate deduction under section 24 would be available;
c)  The CIT (A) upheld the order of AO. Aggrieved-assessee filed the instant appeal.

The Tribunal held as under:
1)  The income of a charitable trust, subject to its application for charitable purposes, is exempt from tax under Chapter III (sections10 to13B). The said income does not form part of the total income of the entity to which it arises or accrues or is received;
2)  It is only the income forming part of the total income which would be subject to the computational provisions of Chapter IV (sections 14 to 59) of the Act;
3)  An income exempt under Chapter III of the Act, not forming part of the total income, would not enter the computation process to determine the quantum of income under the relevant head of income, each of which has its own computational provisions;
4)  Only the income as reflected in the accounts of the trust, is to be applied or deemed to have been applied for charitable purposes, and which, therefore, has to be computed in the commercial sense;
5)  This was even otherwise patent inasmuch as a trust could only apply the income as available with it, i.e., as arrived at following the accepted principles of commercial accounting. The computational provisions of the Act do not come into play, so that the said computation of the income would be de hors the same;

6)  Thus, accordingly, the assessee-trust could not claim standard deduction under section 24. – ACIT v. Nandlal Tolani Charitable Trust [2014] 42 154 (Mumbai - Trib.)