Gujarat High Court Sets Aside Reassessment of Educational Trust Despite Alleged Escapement of Income

Background of the Dispute

The Gujarat High Court in Ahmedabad South Indian Association Charitable Trust Vs DCIT examined whether reassessment proceedings under Section 147 and Section 148 of the Income Tax Act 1961 could be sustained where an educational trust, eligible under Section 10(23C)(vi), had already applied more than 85% of its income for charitable purposes, even after considering all disputed disallowances.

The writ petition challenged the following for AY 2017-18:

  • The notice dated 08.04.2024 issued under Section 148
  • The order dated **08.04.2024underSection 148A(d)`
  • The reassessment order dated 06.03.2026 passed under Section 147 read with Section 144B, along with the consequential demand

The assessee was a charitable trust running educational institutions and claiming exemption under Section 10(23C)(vi) as a university/educational institution existing solely for educational purposes and not for profit.

Original Scrutiny Assessment Proceedings

Return and Exemption Claim

  • The assessee filed its return of income for AY 2017-18 on 31.10.2017, declaring Nil income.
  • It claimed exemption under Section 10(23C)(vi) and reported gross receipts and application of income towards its educational objects.

Scrutiny under Section 143(3)

The case was selected for scrutiny, and the Assessing Officer (AO) issued notices under Section 142(1) on 01.10.2019 and subsequently on **29.11.2019`. In particular, the AO sought:

  • Details of transactions with persons covered under Section 13(3)
  • Clarifications regarding remuneration of Rs.42,00,000/- paid to Mr. M.P. Chandran, an Executive Director and Trustee

The assessee furnished detailed explanations and supporting documents regarding:

  • Nature and justification of remuneration
  • Role and responsibilities of Mr. Chandran
  • Compliance with charitable and regulatory norms

After considering the submissions, the AO framed an assessment under Section 143(3) by order dated **10.12.2019`. Notably:

  • The exemption under Section 10(23C)(vi) was accepted
  • No addition was made in respect of the remuneration or other examined issues

Initiation of Reassessment Proceedings

Notice under Section 148A(b)

Subsequently, the Deputy Commissioner of Income Tax, Circle 1 (Exemption) issued a show cause notice dated 28.03.2024 under Section 148A(b).

In this notice, the AO questioned:

  • Allowability of remuneration of Rs.42,00,000/- to Mr. Chandran in view of an order dated 13.05.2019 passed by the Fee Regulatory Committee
  • Details of:
    • Cash system of accounting
    • Common expenses on staff and staff welfare
    • Sponsorship in relation to J.G. University
    • Auditor’s remarks on different divisions, fees, and accounting entries
    • An entry of Rs.58,07,622/-

The assessee responded on 03.04.2024 with a comprehensive reply, addressing each objection in detail and enclosing supporting documents.

Order under Section 148A(d) and Notice under Section 148

Despite the reply, the AO passed an order dated 08.04.2024 under Section 148A(d), holding that there was escapement of income to the extent of Rs.3,01,56,352/- and treated the case as fit for reopening.

Consequently, a notice under Section 148 dated 08.04.2024 was issued, reopening the completed assessment.

Assessee’s Core Contentions Before the High Court

1. No Escapement of Income Because 85% Application Still Met

The assessee argued that it continued to satisfy the 85% application requirement under Section 10(23C)(vi) even if the entire disputed amount of Rs.3,01,56,352/- was disallowed.

The figures were as follows:

  • Gross receipts: Rs.33,16,43,048/-
  • Total application claimed: Rs.31,84,16,553/-
  • Disputed items (aggregate): Rs.3,01,56,352/-

Even if the disputed sum is excluded:

  • Revised application: Rs.28,82,60,201/- (as per computation adopted in the order)
  • Percentage of utilization:
    • As per assessee: 96.01%
    • As per Revenue: 86.92%

In both scenarios, the application exceeded the statutory 85% threshold under the proviso to Section 10(23C)(vi).

Therefore, according to the assessee:

  • No income became chargeable to tax even after proposed disallowances
  • There was no escapement of taxable income, rendering Section 147 inapplicable

2.