Wednesday, May 4, 2016

No disallowance under sections 40(a)(ia) and 43B if assessee-trust was enjoying exemption under section 11

Issue
Whether disallowance under sections 40(a)(ia) and 43B could be made in a case of trust enjoying exemption under section 11 of the Income-tax Act (‘Act’)?
The tribunal held as under-
1)    Sections 11, 12 and13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax, if such conditions are fulfilled.

2)    Sections 40(a)(ia) and 43B fall under Chapter IV-D of the Act. The said Chapter deals with computation of profits and gains from business or profession. The profits and gains from business or profession are computed under section 28. Section 29 provides the manner of computation of income under the head "profits and gains of business or profession", which states that the income referred to in section 28 shall be computed in accordance with the provisions of sections28 to 43D.

3)    Therefore, the provisions of sections 40(a)(ia) and 43B are relevant, if income is computed under the head "profits and gains of business or profession". In the instant case, the income of the assessee-trust was eligible for exemption under section 11 by virtue of registration under section 12A.
4)    The concept of computation of income under section 11 is real income concept, which is computed on the principles of real income generated from property held under trust and not notional income under other provisions of the Act.
5)    Section 11(1)(a) provides for application of income for charitable purpose. The question of application of income arises only when income is available for application. If any expenditure is disallowed by invoking the provisions of sections 40(a)(ia) and 43B, it leads to a situation where assessee's income available for application is enhanced without being any real income for application for charitable purpose, which leads to an absurd situation where the trusts enjoying exemption under section 11 have to pay taxes.
6)    The Legislature in its wisdom has kept separate provisions which are independent of any other provisions of the Act for computation of income of trusts claiming exemption under section 11. Therefore, the provisions of sections 40(a)(ia) and 43B could not be applied when income of the trust was exempted under Section 11 of the Act- [2016] 68 taxmann.com 320 (Visakhapatnam - Trib.)
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