ITAT Upholds Tax Exemption for Trust, Citing Consistency in Previous Assessments [Read Order]

The Income Tax Appellate Tribunal ( ITAT ) Bangalore Bench dismissed the appeals filed by the Income Tax Department, ruling that the Commissioner of Income Tax (Appeals) CIT(A) correctly allowed tax exemption under Section 11 of the Income Tax Act, 1961. The tribunal held that the department failed to show any material change in circumstances compared to previous assessments and could not take a contradictory stance without valid justification.

The case involved CMR Jnanadhara Trust, a registered charitable trust engaged in educational activities, which filed its income tax returns for Assessment Years (AYs) 2017-18, 2018-19, and 2021-22, claiming exemption under Section 11.

The Income Tax Department conducted a scrutiny assessment and alleged that the trust made excessive payments to specified persons and related entities, violating Section 13(1)(c) and Section 13(2)(g) of the Income Tax Act. The Assessing Officer (AO) denied the exemption, stating that the trust siphoned off funds for the benefit of trustees and related entities. The AO disallowed a portion of the payments made to Edufice Education Services Pvt. Ltd., CMR Education & Consultancy Services, and Jaista Developers & Constructions Pvt. Ltd., arguing that these payments were excessive and not commensurate with the services provided.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

As a result, the AO computed the taxable income at around Rs.58crore and imposed tax at the maximum marginal rate.

The CIT(A) overturned the AO’s decision and ruled that the entire tax exemption under Section 11 could not be denied solely due to alleged excessive payments. The Income Tax Department appealed before the ITAT Bangalore against this decision.

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The ITAT Bangalore upheld the CIT(A)’s ruling, emphasizing the principle of consistency in tax assessments. It noted that for Assessment Years 2014-15 to 2016-17, the Revenue had allowed exemptions under Section 11 without any objections. Since the facts and circumstances had not changed, the department could not take a contradictory stand in the later years without valid justification.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

Two Member Bench of George George K (Judicial Member) and Waseem Ahmed(Accountant Member) observed that the AO did not provide sufficient evidence to prove that the payments to related entities were excessive. Instead, the AO relied on profit margin estimations without conducting a proper comparative analysis.

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The ITAT found that using Section 44AD’s presumptive profit rate to determine reasonableness was incorrect, as this provision applies only to small businesses and cannot be used to benchmark professional services.

The tribunal also noted that the AO failed to prove any diversion of income for personal gain and did not demonstrate how the trust’s activities violated its charitable objectives.

It emphasized that the burden of proving a violation of Section 13 lies with the Revenue, and mere allegations were not sufficient to deny exemption under Section 11.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

Based on these findings, the ITAT dismissed the Revenue’s appeals for AYs 2017-18, 2018-19, and 2021-22, confirming that the trust remained eligible for tax exemption under Section 11.

To Read the full text of the Order CLICK HERE

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