Section 12A Exemption Cannot Be Denied Solely On Generation Of Surplus: ITAT

Case: ACIT (Exemptions) v. Palampur Rotary Eye Foundation

ITAT: Chandigarh

ITA No.: 390 (CHD) of 2024

Assessment Year: 2017–18

Date of Order: 30th April, 2025

Brief Facts:

• The assessee was a charitable society registered under Section 12A and operated eye hospitals across various states.

• For the Assessment Year 2017–18, it filed a return declaring nil income.

• During scrutiny, the Assessing Officer (AO) observed a surplus of 31.29% over gross receipts.

• AO was of the view that assessee was involved in commercial activities which was a clear violation of provisions of section 2(15) and, thus, he treated net surplus as taxable income for year under consideration, thus disqualifying it from exemption under Sections 11 and 12.

• Total addition of ₹6.01 crore was made to the income, and the AO denied exemption under Section 12AA, thereby initiating penalty proceedings.

Observations of the Court:

• The Tribunal noted that the assessee’s primary activity was providing eye care and related services which was clearly covered under "medical relief" as per the first limb of Section 2(15), and therefore inherently charitable.

• It held that mere surplus generation does not indicate commercial intent, especially when more than 85% of income is applied towards charitable purposes.

• Further, it was observed that AO while working out alleged surplus on gross receipts did not take into consideration capital expenditure.

• Also, there was no evidence of misuse of funds or undue benefit under Section 13(3).

• Furthermore, the Tribunal emphasized that the Income Tax Act does not bar surplus generation by a charitable institution as long as application norms are met.

Hence, the ITAT held that the assessee continued to qualify as a charitable institution. Since the 85% application requirement was fulfilled, exemption under Sections 11 and 12 was rightly allowed. The appeal by the Revenue was dismissed.