AO Must Tax Only Net Income Even If Section 11 Exemption Is Denied | ITAT

Case Details: Adhi Ganesh Mandir Charitable Trust vs. Income-tax Department [2026] 182 taxmann.com 796 (Mumbai-Trib.)

Judiciary and Counsel Details

• Amit Shukla, Judicial Member & Arun Khodpia, Accountant Member
• Bhupendra Shah for the Appellant.
• Ujjawal Kumar, Sr. DR for the Respondent.

Facts of the Case

The assessee-trust filed its return, claiming exemption under Section 11. Assessing Officer (AO) denied exemption on the ground that the assessee did not hold a valid registration under section 12A/12AB for the relevant assessment year. Accordingly, he brought to tax the assessee’s entire receipts without allowing any deduction for expenditure.

On appeal, CIT(A) affirmed the action of AO. Aggrieved-assessee filed the instant appeal before the Tribunal.

ITAT Held

The Tribunal held that the assessee did not hold a valid registration under section 12A/12AB for the relevant assessment year. The claim of exemption under section 11 could not have been allowed for the said year. To this limited extent, the action of AO in denying exemption under section 11 does not call for any interference and stands on a firm statutory footing. However, the controversy does not rest merely on the denial of exemption under section 11, but extends to the manner in which the assessee’s income was computed thereafter.

Even where an assessee-trust is not entitled to exemption under section 11 for a particular assessment year, the computation of income has to be made in accordance with ordinary principles of commercial accounting, subject, of course, to the provisions of the Act. The denial of exemption does not confer an unfettered right upon the Revenue to assess gross receipts as income. The AO is duty-bound to examine the expenditure incurred wholly and exclusively for the purposes of earning such receipts and to determine the real income chargeable to tax. Any computation that proceeds to tax receipts without undertaking this exercise is fundamentally flawed.

In the instant case, the AO brought the entire receipts to tax without examining or verifying the expenditure reflected in the assessee’s income and expenditure account. Such an approach is clearly unsustainable in law. The denial of exemption under section 11 does not automatically authorise the revenue to tax a trust’s gross receipts. The computation must necessarily be confined to the net income, arrived at after allowing legitimate expenditure incurred in furtherance of the objects of the trust, unless such expenditure is specifically disallowable under the Act.

Accordingly, the matter was restored to the AO with a limited direction to recompute the income of the assessee after duly examining and verifying the expenditure claimed in the income and expenditure account and thereafter bringing only the net income, if any, to tax in accordance with the law.

List of Cases Referred to

• Godavari Shikshan Prasarak Mandal (Sindhi) v. Union of India [W.P. No.16464 of 2025, dated 9-12-2025] (para 8).