Transfer of Accumulated Funds To Another Charitable Institution Attracts Tax Consequences: ITAT

Case: D.L. Shah Trust for Applied Science & Technology v. Deputy CIT (Exemptions)

ITA Nos.: Mumbai

ITAT: 8/Mum/2026 & 446/Mum/2026

Assessment Year: 2013-14 and 2015-16

Date of Order: 11 June 2026

Brief Facts:

• The assessee is a charitable trust registered under section 12AA and engaged in promoting scientific research and public welfare projects. 

• During the relevant assessment years, the trust utilised income accumulated under section 11(2) by making payments to institutions such as the Quality Council of India (QCI) and The Energy and Resources Institute (TERI) for execution of specific charitable projects.

• The assessee contended that these organisations merely acted as implementing agencies for projects conceived, supervised and monitored by the trust and, therefore, the payments constituted direct application of accumulated income rather than transfer of funds to another charitable institution.

• The Assessing Officer held that the payments amounted to transfer of accumulated income to institutions registered under section 12AA and accordingly invoked section 11(3)(d), treating the accumulated income as taxable. 

• The Commissioner (Appeals) upheld the addition. Aggrieved, the assessee preferred appeals before the ITAT. 

Observations:

The Tribunal observed that:

• The Income-tax Act draws a clear distinction between application of current income under section 11(1)(a) and utilisation of accumulated income under section 11(2). 

• While payments made to another charitable institution may, in certain circumstances, qualify as application of current income, Parliament has consciously imposed stricter conditions for utilisation of income accumulated under section 11(2). 

• The Tribunal held that section 11(3)(d) employs the broad expression "paid or credited" to another trust or institution registered under section 12AA and does not carve out any exception where the recipient acts merely as an implementing agency, consultant or project executor. 

• Consequently, the nomenclature or contractual arrangement between the parties cannot alter the statutory consequence. 

• Rejecting the assessee's contention, the Tribunal held that accepting such an interpretation would defeat the legislative intent behind section 11(3)(d), which seeks to prevent charitable trusts from discharging their obligation of applying accumulated income simply by routing funds through another exempt institution. 

• The Tribunal emphasised that the relevant consideration is whether accumulated income has been paid or credited to another registered institution, and not whether the recipient ultimately utilises the funds for charitable purposes. 

• The Tribunal further relied upon the decision of the Punjab & Haryana High Court in Maharaja Ranjit Singh War Museum Society v. CIT, which held that transfer of accumulated income to another charitable institution after insertion of section 11(3)(d) attracts the statutory deeming fiction irrespective of the charitable nature of the recipient's activities. 

• It also distinguished earlier decisions rendered prior to the insertion of section 11(3)(d), observing that they no longer govern the amended statutory framework.
  

Accordingly, the ITAT held that payments made out of income accumulated under section 11(2) to another charitable institution registered under section 12AA, even where such institution functions as an implementing agency for the assessee's projects, constitute payments covered by section 11(3)(d). Accordingly, such utilisation amounts to a violation of the statutory conditions governing accumulated income and the accumulated amount becomes taxable in the hands of the transferor trust. The Tribunal therefore upheld the additions made by the Assessing Officer and dismissed both the appeals filed by the assessee.