Interest-free Advances to Charitable Entities and Donations to Registered CharitableInstitutions Qualify for Exemption under Sections 11 & 12: ITAT

Case: Society for Human Transformation and Research v. Income-tax Officer

ITA Nos.: 6718 (Del.) of 2025

ITAT: Delhi

Assessment Year: 2018-19

Date of Order: 7 August 2026

Brief Facts:

• Interest-free/Concessional Advances to Specified Persons

• The assessee was a charitable society claiming exemption under sections 11 and 12, had advanced funds to certain entities, including persons covered under section 13(3). 

• While the assessee had itself raised secured loans carrying interest at 12%-13%, certain advances were made interest-free or at a concessional rate. 

• The Assessing Officer considered the concessional rate unreasonable, adopted 12.5% based on the SBI lending rate and made an addition under section 40A(2)(a). 

• The AO further alleged that the transactions resulted in undue benefit to specified persons and consequently denied exemption under sections 11 and 12. 

• Donations and Scholarships Given to Other Charitable Institutions

• The assessee had claimed application of income in respect of donations and scholarships made to other entities. 

• The Assessing Officer disallowed the amount on the ground that the assessee had not furnished section 80G certificates of the recipient institutions. 

• The assessee submitted that the actual donations, while the balance represented scholarships, and furnished documents evidencing the recipients' registration under sections 12A and 80G along with donation receipts.

Observations:

The Tribunal noted that:

• Interest-free/Concessional Advances

• The Tribunal noted that one of the advances was given to Divine Realbuild Pvt. Ltd. pursuant to an agreement for construction of the DSPSR College building and was made in the ordinary course of the construction activity. 

• The project was subsequently completed, and there was no material to establish that any specified person had derived a personal benefit from the advance or that the underlying contract was overpriced or not at arm's length. 

• With respect to the other entities, the Tribunal observed that they were registered charitable institutions under sections 12A and 80G. Therefore, there was no justification to presume that the transactions resulted in diversion of charitable funds for private benefit merely because specified persons might have been connected with those institutions. 

• The Tribunal also relied upon the decisions in DIT v. Acme Educational Society and DIT v. Alarippu. 

• Importantly, the Tribunal held that section 40A(2)(a) applies to expenditure incurred in the course of business or profession where such expenditure is paid to related parties and is found to be excessive or unreasonable. In the present case, the interest expenditure was paid by the assessee to banks, which were admittedly not related parties. Accordingly, invocation of section 40A(2)(a) and consequential denial of exemption under sections 11 and 12 were held to be unsustainable. 

• Donations and Scholarships to Other Charitable Institutions- 

• The Tribunal observed that the assessee had furnished supporting documents establishing the 12A and 80G registration of the recipient institutions, together with copies of the donation receipts. 

• It held that there was no prohibition under the Act against application of charitable funds by one charitable institution to another, provided the recipient institution was itself engaged in charitable activities and duly registered. Both these conditions were found to have been satisfied in the present case. 

• The Tribunal accordingly relied upon CIT v. Sarladevi Sarabhai Trust and the coordinate Bench decision in DCIT (Exemption) v. Divya Yog Mandir Trust while allowing the assessee's claim.

Accordingly, the ITAT allowed the appeal of the assessee and directed the Assessing Officer to extend the benefit of sections 11 and 12. The Tribunal held that section 40A(2)(a) could not be invoked merely on the basis of concessional interest charged on advances where the corresponding interest expenditure was paid to unrelated banks, and there was no evidence of personal benefit or diversion of charitable funds. It further held that donations and scholarships given to other duly registered charitable institutions can constitute application of income where the requisite conditions are satisfied. Accordingly, the impugned disallowances were deleted and exemption under sections 11 and 12 was restored.