Taxation of AOP: ITAT Allows Normal Tax Rates for Charitable Trust, Sets Aside CIT(A)’s Order [Read Order]

The Pune Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that a charitable trust, classified as an Association of Persons ( AOP ), should be taxed at normal rates instead of the maximum marginal rate (MMR), setting aside the Commissioner of Income Tax(Appeals)[CIT(A)]’s order.

National Association of Interlocking Surgeons, appellant-assessee, filed its return for A.Y. 2010-11 as an AOP taxable under the normal rate. The Centralized Processing Center(CPC) processed it on March 26, 2012, applying the maximum marginal rate. The assessee sought rectification under section 154, requesting tax calculation at the normal rate, but the Assessing Officer(AO) rejected the request.

Hindu Undivided Family & Tax – The Untold Financial Advantages! - Click Here

The assessee appealed before the tribunal.

The revenue counsel supported the lower authorities, stating that the assessee's rectification application was delayed and showed no apparent mistake. It was argued that section 167B applied and no exceptions were available, justifying the CIT(A)'s decision to tax the income at the maximum marginal rate.

A single member bench comprising Manish Borad ( Accountant Member ) reviewed the case to determine whether the trust’s income was taxable at normal rates or the maximum marginal rate. The trust, registered in 2007, aimed to bring together orthopedic surgeons, promote knowledge, conduct seminars, provide fellowships, publish materials, and support research.

How to Audit Public Charitable Trusts under the Income Tax Act Click Here

The CPC processed the trust’s tax return at the maximum marginal rate, and a rectification application under Section 154 was rejected. The Revenue claimed the application was delayed, but the tribunal found it was filed on time.

Read More: Tax Liability of Charitable Trust Dismissed: ITAT Remands Matter back to CIT(A) for Reconsideration of Expenditure Claims

Referring to Central Board of Direct Taxes ( CBDT ) Circular No. 320, the tribunal noted that trusts where trustees had no individual shares were not taxed at the maximum marginal rate. While Section 167B, introduced in 1989, applied the maximum marginal rate to associations of persons with indeterminate shares, public charitable trusts fell under Section 164, which overrode this provision.

Clear all Your Doubts on RCM, TCS, GTA, OIDAR, SEZ, ISD Etc... Click Here

The appellate tribunal relied on past rulings, including Dr. Shalmali Khasbardar Foundation v. ITO and CIT v. Marsons Beneficiary Trust, which held that charitable trusts with indeterminate beneficiary shares were not taxed as associations of persons. It ruled that the trust could not be taxed at the maximum marginal rate solely because it filed ITR-7 instead of ITR-5. The appeal was allowed.

The ITAT also referred to similar cases where societies and trusts registered under the Societies Registration Act were taxed at normal rates. In Air Force Navy Farm Owners vs. ITO, the tribunal ruled that such societies were not subject to Section 167B. Other rulings, including Vidyodaya Educational Society vs. DCIT and KMR Educational Society vs. ACIT, supported this view.

Hindu Undivided Family & Tax – The Untold Financial Advantages! - Click Here

In Mahakavi Edasseri Smaraka Trust vs. ITO, the ITAT reaffirmed that charitable trusts should be taxed at normal rates unless a specific provision stated otherwise. Based on these precedents, it set aside the CIT(A)’s order and directed the Revenue to compute tax at normal rates.

In short,the appeal filed by the assessee was allowed.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates