In Income Tax Officer (Exemption), Ward-2(4), New Delhi v. Prakash Sewa Trust, the Delhi Bench of the Income Tax Appellate Tribunal examined whether exemption under Sections 11 and 12 of the Income-tax Act, 1961 could be denied to a charitable trust registered under Section 12A merely because the trust sold its immovable property and donated the entire sale proceeds to another charitable institution.

The Assessing Officer denied exemption on the grounds that the assessee had not carried out charitable activities for several years and that the sale proceeds of land were donated to other trusts, allegedly raising doubts about the genuineness of application of income. The CIT(A) reversed the assessment, holding that the trust continued to hold valid registration under Section 12A and that there was no violation of Sections 11 to 13 of the Act.

The Tribunal upheld the order of the CIT(A), observing that once registration under Section 12A remains valid and has not been cancelled, the Assessing Officer cannot indirectly withdraw such registration while framing assessment proceedings. The Tribunal further held that a temporary break in charitable activities cannot be a ground for denial of exemption under Section 11.

Placing reliance on the judgment of the Hon’ble Karnataka High Court in PCIT v. St. Joseph’s Monastery, the Tribunal held that donation of sale proceeds of a capital asset by one charitable trust to another registered charitable trust constitutes valid application of income for charitable purposes. Mere allegations regarding accommodation entries, without any cogent evidence or adverse finding against the recipient trust, were held insufficient to deny exemption.

Accordingly, the Tribunal concluded that the assessee was rightly held eligible for exemption under Sections 11 and 12 of the Act and dismissed the Revenue’s appeal in entirety.

Source Link- https://itat.gov.in/public/files/upload/1767788514-ZGFSGG-1-TO.pdf

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