Trust Deed's Enabling Clause to Hold Property Cannot be an Independent Object; Rental Income Applied for Charity Remains Exempt Under Sections 11/12: ITAT

Case: Joint CIT (OSD) v. S.M. Sehgal Foundation

ITA Nos.: 45 (Chd) of 2019

ITAT: Chandigarh

Assessment Year: 2013-14

Date of Order: 20 July 2026

Brief Facts:

• The assessee was a charitable trust registered under the Income-tax Act, claimed exemption under sections 11 and 12 for Assessment Year 2013-14.

• The Assessing Officer denied the exemption and assessed the assessee as an Association of Persons (AOP), primarily on the grounds that: 

(i) the trust had earned substantial rental income by leasing its immovable properties, which amounted to a commercial activity inconsistent with its charitable character;

(ii) the remuneration paid to the Chief Executive Officer, was exorbitant; 

(iii) a sum received from Sehgal Family Foundation; USA was unexplained cash; and 

(iv) there were discrepancies between the FCRA returns, books of account and financial statements in respect of foreign contributions received by the trust.

• The Assessing Officer further restricted the allowable expenditure to 85% of the total receipts and taxed the balance 15% at the Maximum Marginal Rate.

• On appeal, the Commissioner (Appeals) called for remand reports, and after considering the reconciliations and explanations furnished by the assessee, held that the Assessing Officer had failed to bring cogent material to establish that the trust's activities had ceased to be charitable, and allowed the assessee's claim in full.

• Aggrieved, the Revenue preferred an appeal before the ITAT, additionally raising the ground that the proviso to section 2(15) applied since the assessee's activities were commercial in nature and fell within the category of "advancement of general public utility"

Observations:

The Tribunal observed that:

• On rental income: The Commissioner (Appeals) had erred in observing that leasing of property was itself one of the objects of the trust. On examining the trust deed and the Addendum/Rectification Deed, it found that the trust's charitable objects were confined to genetic research, agricultural education, conservation of resources, sustainable agriculture, family planning, women's welfare, relief to the poor and education, and did not include leasing as an independent object.

• The enabling clause empowering the trustees to acquire, hold and manage immovable properties was only incidental to effective administration of the trust and could not be elevated to an independent charitable or commercial object.

• Since the Income and Expenditure Account showed that all receipts, including rental income, were applied solely towards the trust's charitable objects, and since the Revenue had not shown any diversion of funds, the decisive test remained the dominant object of the institution and not the source of its income. Rental income, being merely incidental to augmenting resources for charitable purposes, did not disentitle the trust to exemption.

• On CEO remuneration: The Tribunal found that neither the Assessing Officer nor the Commissioner (Appeals) had brought any comparable material to show that the remuneration paid to the CEO was excessive or disproportionate to her qualifications and responsibilities. The disallowance rested on mere surmise, without any objective benchmark.

• There was no finding that the CEO was a specified/related person, or that the remuneration was a device for diversion of income for private benefit, or that her services were unnecessary. The remuneration was also consistent with figures accepted in earlier and later years, supporting the principle of consistency.

• The Tribunal noted that the amount paid was directly paid by Sehgal Family Foundation, USA to CIMMYT, Mexico, (an autonomous, nonprofit, International research organization for science based agricultural development) as a donation, and was never received by the assessee trust nor booked as its liability. Accordingly, there was no basis to treat it as unexplained income of the assessee.

• On FCRA receipts and accounting of grants: The Tribunal observed that during remand proceedings, the assessee furnished a complete reconciliation of foreign contributions reflected in the FCRA returns vis-à-vis the books of account, which the Assessing Officer accepted in the remand report itself, thereby diluting the very foundation of the assessment order.

• It further held that the assessee's consistent accounting policy of recognising tied/specific grants as income only to the extent utilised for designated purposes, while carrying forward the unutilised balance as a liability, was in consonance with recognised accounting principles for charitable institutions, and no material was shown to establish suppression or illegality. 
  

Accordingly, the ITAT held that the trust deed's enabling clause permitting trustees to acquire and manage property did not constitute leasing as an independent object, and rental income applied wholly towards charitable purposes remained eligible for exemption under sections 11 and 12, the leasing being only incidental to the trust's charitable objects. It further held that in the absence of any comparable evidence, remuneration paid to the CEO could not be treated as excessive, and that the payment received from Sehgal Family Foundation, USA to CIMMYT, Mexico was correctly explained as a direct donation to a third party not forming part of the assessee's income. On the question of foreign contributions, the Tribunal upheld the deletion of additions since the reconciliation furnished by the assessee had been accepted by the Assessing Officer in remand, and its accounting treatment of tied grants was consistent with settled accounting principles. Accordingly, the Tribunal dismissed the Revenue's appeal in its entirety and upheld the order of the Commissioner (Appeals) allowing the assessee's claim of exemption under sections 11 and 12.