ITAT Clarifies: Charitable Trusts Eligible for Dividend Exemption Pre-2015; Deficit Can Be Carried Forward

The appeals in this consolidated case were preferred by a charitable trust against various orders of the lower authorities for numerous assessment years. The main issues raised pertained to, the rejection of exemption on income from dividend and income from units of a mutual fund under Sections 10(34) and 10(35); and violation of Sections 13(1)(d) and 13(2)(h) on account of investment in Tata Sons Ltd. shares; (iii) the claim for carry forward of deficit arising from excess application of funds; and (iv) disallowance of deductions under Sections 80G and 80GGA.

In the course of assessment, the AO noted that the trust had invested Rs. 21,96,667 in 15,075 equity shares of Tata Sons Ltd., which was viewed as a violation of Section 13(1)(d) read with Section 13(2)(h). On this ground, the Assessing Officer denied exemption under Section 11 and brought to tax the dividend income of Rs. 12.06 crore and mutual fund income of Rs. 33,659 at the maximum marginal rate. CIT(A) affirmed the rejection, following the ratio that as the investments were against Section 13, the trust could not be entitled to relief under Section 11 and therefore could not invoke exemption under Section 10(34) or 10(35).

Issue Raised: Whether a charitable trust registered under Section 12A is entitled to exemption under Sections 10(34) and 10(35) for dividend and mutual fund income, and whether excess application of income resulting in a deficit can be carried forward to subsequent years.

Tribunal’s Ruling: The Tribunal, considering the legislative history and precedents, held that Section 11(7) introduced w.e.f. AY 2015–16 cannot be retrospectively applied. Hence, for the assessment years 2013-14 and 2014-15, the trust was eligible for exemption under Sections 10(34) and 10(35). It ordered the AO to grant an exemption on dividend and mutual fund income accordingly. Further, following the principle laid down in Subros Educational Society and Sir Dorabji Tata Trust, the Tribunal held that the excess of expenditure over income, i.e., the deficit, can be carried forward and set off against future income, as such an adjustment is an integral part of the income application under the scheme of charitable taxation.

In respect of deductions under Sections 80G and 80GGA, the Tribunal noted that a technical default in the ITR form should not deprive genuine claims. The AO was ordered to check the claim and grant it as per law. Therefore, all appeals made by the trust were granted or partially granted, and departmental appeals were rejected. The combined order once again stated that exemptions u/s 10(34) and 10(35) continue to be available to charitable trusts for pre-AY 2015–16 years, and carry forward of deficit can be done for future set-off.

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