Rental income of charitable organization should be computed under section 11 after reducing repairs and maintenance expenses; however, no standard deduction under section 24 is permitted: ITAT

A charity cannot file a revised form for accumulation under section 11(2) to overcome

the addition made by the AO: ITAT

Citation- Nandlal Tolani Charitable Trust v. Income-tax Officer, Exemption

ITAT- Mumbai

ITA No: 113 & 650 (MUM.) OF 2024

Assessment Year: 2014-15 & 2015-16

Date of Order- July 23, 2024

Brief Facts:

• The assessee was a registered trust and earned rental income. It had filed a nil return for

  AY 2014-15 and 2015-16 after claiming standard deduction on rental income under section 24.

• The AO declined the claim of standard deduction and recomputed its income under section 11. The assessee contended that even if standard deduction could not be allowed, the benefit of actual expenditure of repairs and maintenance should be given to the assessee.

• The assessee also filed a revised form for accumulation under section 11(2) to overcome taxable income computed by the AO on account of disallowance of standard deduction claimed.

Observations of the Tribunal:

The Tribunal noted the following observations:

1. As already held by the Tribunal in its earlier order for AY 2012-13, the income of a charitable trust or institution, subject to its application for charitable purposes, was exempt from tax. The said income did not form part of the total income. It was only the income forming part of the total income u/s. 2(45) of the Act, which was to be classified under the various heads of the income u/s. 14.

2. In case of rental income, computation had to be done using normal provisions of the Act instead of commercial principles as mentioned by CBDT in its circular No. 5P(LXX6) dated 19.06.1968 without resorting to computation mechanism as provided under respective head of income while determining income available for application u/s 11 of the Act.

3. It was a settled position of law that once income of a trust / institution is computed under the provisions of section 11 of the Act, whatever income derived from the property held under trust is to be taken into account and against which actual expenditure incurred for the objects of the trust has to be considered as application of income.

4. W.r.t to the revised Form no. 10, the initial accumulation and subsequent accumulation under section 11(2) had been made after a gap of six years. However, such accumulation could only be allowed provided other formalities such as investment of accumulated funds in the forms and modes specified u/s 11(5) of the Act had been completed.

5. The benefit of accumulation of income u/s 11(2) had been provided to trusts / institutions claiming exemption considering the fact that where it was not possible to utilise the amount of income within the financial year due to various reasons including non-receipt of income for that year, although income was computed under mercantile principles and after fulfilling certain conditions. Therefore, such benefit could not be used to overturn taxable income computed by the AO as per provisions of the Act.

6. The assessee failed to file any details with regard to the availability of funds for making investments in the modes specified u/s 11(5).

Thus, it was held that while the standard deduction under section 24 was not applicable to the assessee, the actual expenses recorded for repairs and maintenance had to be considered when calculating the income available for application. Further, the assessee was not allowed to carry forward the revised amount under section 11(2).