ITAT Delhi Clarifies Section 11 Eligibility and Capital Spending on School Infrastructure

Background of the Dispute

The case of Spreading Smile Vs ITO (ITAT Delhi) concerns a charitable trust that was denied exemption under Sections 11 and 12 of the Income Tax Act 1961 for Assessment Year 2022-23, primarily on the ground that its final registration under Section 12AB had not been granted as on the date of assessment. The Revenue authorities also treated certain school infrastructure expenditure as capital outlay not qualifying as application of income, and taxed the assessee at the Maximum Marginal Rate by treating it as an AOP under Section 164(1).

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT), however, reversed these findings and allowed the appeal of the assessee, laying down important principles on:

  • How final Section 12AB registration relates back to the original application, and
  • Treatment of capital expenditure on education-related infrastructure as application of income for charitable purposes.

Factual Matrix and Procedural History

Return Filing and Selection for Scrutiny

  1. The assessee, a charitable trust engaged in educational and welfare activities in slum areas of Gurugram, filed its return of income on 25.09.2022 under Section 139, declaring nil income after claiming exemption under Section 11.
  2. The case was picked up for complete scrutiny. The Assessing Officer (AO) issued notice dated 28.06.2023 under Section 143(2) and followed it with notices under Section 142(1) along with a show-cause notice.
  3. One of the central reasons for scrutiny selection was that the assessee’s application for registration under Section 12A/12AB dated 05.05.2022 had earlier been rejected by the CIT(E) on 17.11.2022, whereas the assessee had nevertheless claimed exemption under Section 11.

Activities and Registration Status of the Assessee

During the assessment, the assessee explained that:

  • It is a charitable trust based in Nathupur, Gurugram, working since 2014 (formally registered as a trust in 2019).
  • Its focus is on approximately 600+ extremely poor families comprising garbage collectors, waste pickers, domestic workers, rickshaw pullers, and daily wage earners living in slum clusters.
  • It runs a school (“Gyan Kendra”) for children from these marginalised communities.

Regarding registration:

  • The assessee had already obtained provisional registration under Section 12A(1)(ac)(vi) vide order dated 27.05.2021, valid for Assessment Years 2021-22 to 2023-24.
  • Its application for final registration under Section 12A(1)(ac)(ii)/(iii) was rejected by the CIT(E) by order dated 17.11.2022 primarily on account of non-compliance / non-filing of requisite documents.
  • The assessee challenged this rejection before the ITAT in an earlier appeal. The Tribunal, by order dated 17.08.2023 in ITA No. 925/Del/2023, set aside the rejection and remanded the matter back to the CIT(E) with a direction to give reasonable opportunity and adjudicate the original application dated 05.05.2022 afresh.

Pursuant to these directions, the CIT(E) subsequently granted final registration under Section 12AB(1)(b) by order dated 22.02.2024, covering Assessment Years 2021-22 to 2025-26.

Assessment Order by AO

Denial of Section 11 Exemption

During assessment proceedings, the AO noted that:

  • As on the date of completing the assessment (13.02.2024), the earlier rejection of the assessee’s registration application under Section 12A/12AB dated 17.11.2022 stood, and
  • No order from CIT(E) granting final registration had been produced before him in consequence of the Tribunal’s remand.

On that basis, the AO concluded that there was no valid registration under Section 12AB in force for the relevant year, and therefore:

  • The excess of income over expenditure amounting to Rs. 1,70,635 claimed as exempt under Section 11 was disallowed and added to income.

Treatment of “Gyan Kendra Infrastructure Expenses”