Friday, July 8, 2016

No disallowance u/s 40(a)(ia) when taxpayer is claiming exemption under sec. 11

The issue before the ITAT was

Whether the provisions of section 40(a)(ia) are applicable when income is computed under sections 11, 12 and 13?

The ITAT held as under:

1) Sections 11, 12 and 13 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. Section 40(a)(ia) falls under chapter IV-D which deals with computation of profits and gains from business or profession.

2) Therefore, the provisions of section 40(a)(ia) are relevant if income is computed under the head 'profits and gains of business or profession". 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.


3) 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 section 40(a)(ia), it leads to a situation where assessee's income available for application is enhanced without there being any real income for application for charitable purpose, which leads to an absurd situation where the trust/society enjoying exemption under section 11 has to pay taxes. Therefore, when income is computed under section 11, the provisions of section 40(a)(ia) are not applicable. - SRI KOUNDINYA EDUCATIONAL SOCIETY V. ADDITIONAL CIT [2016] 71 taxmann.com 6 (Visakhapatnam - Trib.)

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