Vague Purpose in Income Tax Form 10 Leads to Section 11(2) Denial; ITAT Remands for Verification of Fund Utilization

A charitable trust’s claim under Section 11(2) was rejected because it vaguely stated “Social” as the purpose of fund accumulation in Form 10. The ITAT held that a clear purpose is mandatory but still remanded the case to the AO to verify actual utilization and allow the assessee a fair chance to submit evidence.

Facts of the case

LeapforWord  is a trust organized for charitable purposes that is engaged in activities that are intended to increase the English-language proficiency of students attending schools where the primary method of instruction is regional language schools. For AY 2017–18, it filed a return making a declaration of nil income based on the fact that it claimed exemption under Section 11(1) on one hand and also under Section 11(2) on the other. The trust had accumulated Rs 2,500,000 u/s 11(2) of the Income Tax Act (hereinafter referred to as “the Act”) by filing Form No. 10, where it had mentioned only the word “Social” for the purpose of accumulation and did not specify any particular purpose. The AO disallowed the claim on the ground that the purpose of accumulation stated by the trust in Form 10 was not specified. Hence, an amount of Rs. 1,971,770 was added to the income of the trust. The CIT(A) also upheld the addition. Thereafter, the assessee filed an appeal before the ITAT.

Issue:

Whether the exemption available u/s 11(2) could be granted in the case where the purposes of accumulation in form 10 remained ambiguous and did not have a definite purpose in their application

Tribunal Findings:

Section 11(2) requires an applicant to provide a clear and definite purpose regarding fund accumulation; the applicant has not done so, and the term “Social” is too vague and general for this tribunal to determine the uses of the accumulated funds; therefore, there was no appropriate resolution by the trust with respect to the use of these funds.

On the other hand, the applicant claimed to have employed the funds for charitable purposes under the permitted time; however, the applicants could not establish this claim in front of the lower authorities.

JUDGEMENT

Justice mandates that such a claim should be investigated prior to its outright denial. The ITAT held that the assessee’s claim of utilization did not meet their expectations in providing clarity about the purpose for which such utilizations were made; therefore, the ITAT had decided against the assessee’s claim. But in granting the claim of assessees’ utilization & based on the judicial precedents, ITAT sent back the matter to the AO for fresh determination, with directions to:

(a) Check if the amount of Rs. 2,500,000/- was utilized.

(b) permit the assessee to provide details and proof of utilization; (c) allow adequate time for the AO and assessee to produce all relevant supporting documentation regarding the amount of Rs. 25,00,000/-; and (d) allow the AO and assessee to present any other evidence relating to the specified period of utilization of Rs. 25,00,000/- beyond the stipulated time limit of one year.

Give a fair chance for everyone to voice their opinions before making a decision.

Outcome: Appeal granted just for record-keeping.

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