Delhi High Court Allows Exemption to Charitable Trust Despite Technical Error in Return

The appellant, International Buddhist Confederation, is a charitable trust registered under Sections 12A and 80G of the Income Tax Act since 02.11.2012. For AY 2017-18, it filed its return declaring interest income from fixed deposits and bank accounts under the head “income from other sources”, resulting in a returned income of Rs. 13.02 lakh. The return was initially processed under Section 143(1), where the income was assessed at NIL, and a refund of TDS was granted.

The Assessing Officer accepted the returned figure as taxable income and passed an assessment order under Section 143(3), despite the trust having applied more than 85% of its total receipts, including voluntary contributions and interest income, towards charitable purposes.

The assessment was affirmed by the CIT(A) and later by the ITAT, leading the assessee to approach the High Court under Section 260A.

Main Issue: Whether exemption under Sections 11 and 12 could be denied to a charitable trust merely because interest income from trust funds was inadvertently disclosed under the head “income from other sources”, despite full application of income towards charitable purposes.

HC’s Decision: The Hon’ble High Court allowed the appeal and held that the approach adopted by the Assessing Officer, as well as by the appellate authorities, was wholly mechanical and contrary to law. The Court observed that while processing the return under Section 143(1), the Revenue had correctly assessed the income at NIL, yet during scrutiny, the AO chose to take advantage of an inadvertent disclosure by the assessee and raised a tax demand without applying a judicious mind.

The Court emphasised that appellate proceedings are a continuation of assessment proceedings and that authorities are duty-bound to grant legitimate reliefs, even if such claims were not properly articulated in the return. Reliance was placed on CIT v. Jai Parabolic Springs Ltd. and NTPC Ltd. v. CIT, confirming that exemptions and deductions cannot be denied on mere technicalities. Thus the Court quashed the assessment order, the CIT(A)’s order, and the ITAT’s order. Costs of Rs. 25,000 were imposed on the Income Tax Department, with a direction to refund amounts recovered along with interest.

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