Section 13 Violation Cannot Lead to Complete Denial of Section 11 Exemption: ITAT Delhi

Background and Overview

The Delhi Bench of the Income Tax Appellate Tribunal delivered a significant ruling in favour of a charitable trust, reinforcing the settled legal position that a violation under Section 13 of the Income Tax Act, 1961 does not automatically extinguish the entire exemption available under Section 11. The decision, pronounced on 02.07.2026, arose from an appeal filed by the assessee — a charitable trust registered under Section 12A — against a combined confirmation of disallowances by the Commissioner of Income Tax (Appeals), whose order was dated 26.06.2025. The underlying assessment had been framed on 27.12.2017 under Section 143(3) of the Income Tax Act, 1961, pertaining to Assessment Year 2015-16.

The ruling touches upon three distinct disallowances, each carrying independent legal significance, and collectively provides important guidance for charitable and educational trusts navigating the intersection of Section 11, Section 12, and Section 13 of the Act.

Facts of the Case

The Assessee's Filing Position

Krishna Hare Educational Trust, a charitable trust registered under Section 12A vide order dated 07.01.2010, filed its return of income on 31.08.2015 for Assessment Year 2015-16, declaring nil taxable income and reporting a loss of Rs. 3,38,63,296/-. The assessee disclosed gross receipts of Rs. 7,40,83,647/- and structured its exemption claim as follows:

  • Claimed exemption under Section 11(1)(a) at 15% of gross receipts amounting to Rs. 1,11,12,547/- as deemed application towards charitable purposes
  • Claimed revenue expenditure of Rs. 7,58,73,184/- as application of income
  • Claimed capital expenditure of Rs. 2,09,61,212/- as application of income for charitable purposes

The Assessing Officer's Action

The Assessing Officer concluded the scrutiny assessment under Section 143(3) and determined total income at Rs. 38,55,004/-, effecting three major disallowances:

  1. Disallowance of Rs. 1,11,12,547/- — representing the 15% deemed application under Section 11, refused on the basis of the Supreme Court's ruling in DIT v. Bharat Diamond Bourse
  2. Disallowance of Rs. 47,05,925/- — revenue expenditure paid to M/s Educomp Infrastructure and School Management Ltd. (EISML), treated as a specified concern under Section 13(3)(e)
  3. Disallowance of Rs. 2,09,61,212/- — capital expenditure paid to M/s Edusmart Services Pvt. Ltd., similarly treated as a specified concern under Section 13(3)(e), with the additional ground that the payment was not substantiated

The Commissioner (Appeals) affirmed all three disallowances, prompting the trust to approach the Tribunal.

Issues Before the Tribunal

The appeal raised several interconnected legal questions:

  • Whether a violation under Section 13 can justify denial of the full exemption under Section 11, including the 15% deemed application component
  • Whether EISML qualified as a "specified concern" under Section 13(3)(e) read with Explanation 3 to Section 13, given that the relevant trustee held only 11.71% voting power in the company
  • Whether the disallowance of capital expenditure of Rs. 2,09,61,212/- was sustainable when the assessee had furnished documentary evidence and actual payment was not a prerequisite for application of income prior to 01.04.2022

Tribunal's Analysis and Findings

Issue 1: Scope of Section 13 Denial — Can the Entire Section 11 Exemption Be Refused?