My trust gave interest-free or low-interest advances to entities connected with its trustees. The Assessing Officer has treated the interest not charged as a benefit to specified persons, disallowed it under s.40A(2)(a) and denied exemption on the whole income. Can he do that?
Not on this record. Where the counterparties are themselves institutions registered under s.12A and s.80G and there is no material showing that any specified person derived a personal benefit, the transactions do not establish diversion of charitable funds for private benefit, and s.13(1)(c) is not attracted. Section 40A(2)(a) cannot be used at all: it disallows excessive or unreasonable expenditure paid to a related party in the course of business or profession, and does not authorise an addition for interest the trust failed to charge.
Decided by the ITAT (Anubhav Sharma, Judicial Member and Manish Agarwal, Accountant Member) on 2026-08-07, reported as ITA No. 6718/Del/2025 (ITAT Delhi, 'B' Bench); Assessment Year 2018-19. It bears on section 13(1)(c), section 13(1)(d), section 13(2), section 13(3), section 11, section 11(1), section 12, section 40A(2)(a), section 164(2), section 37, section 80G, section 12A, section 143(3) of the Income Tax Act 1961, in Charitable Trusts & Exemption and Capital Gains Exemptions matters.
The s.40A(2)(a) point is the sharper of the two and it is being missed. Assessing Officers are computing a notional interest at a benchmark rate on advances to connected parties and adding it 'under s.40A(2)(a)', then denying ss.11 and 12 on the whole income by reading s.164(2) with s.13. That is a double error: the section is about deduction of expenditure incurred in business or profession, and the interest the trust actually paid here was paid to banks, which are not related parties. On the s.13 side the order follows the Delhi High Court line that an interest-free temporary loan by one society to another with similar objects is not an investment or deposit attracting s.13(1)(d) merely because some persons are common to the two institutions. Note the limits. First, this is AY 2018-19 and the Tribunal restored the exemption on the whole income; from AY 2023-24 the consequence of a s.13(1)(c) or s.13(1)(d) violation is confined to the offending income rather than the whole, so the stakes on the s.13 ground are different in later years. Second, and this matters more, the Tribunal's answer on the donations ground rests on CIT v. Sarladevi Sarabhai Trust (1988) and DCIT v. Divya Yog Mandir Trust, both of which predate Explanation 2 to s.11(1). That Explanation, inserted by the Finance Act 2017 with effect from AY 2018-19 — the very year in issue — provides that a contribution by a trust to another registered trust with a specific direction that it shall form part of the corpus of the recipient is NOT treated as application of income by the donor. The Tribunal's conclusion is defensible only if the payments here were ordinary donations and scholarships rather than corpus donations. The order does not say which they were: the only reference to a 'specific direction that it shall form part of corpus' anywhere in it is in the recital of Explanation 2 attributed to the Commissioner (Appeals), and the Tribunal makes no finding either way. That the payments were not corpus donations is an inference from the Assessing Officer having disallowed them under s.37 for want of the recipients' s.80G certificates, not from anything the Tribunal held. Read on any other footing the conclusion does not survive Explanation 2, and it must not be applied to a corpus donation. Do not cite this order for the proposition that a corpus donation to another registered trust is application of income.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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For AY 2018-19 the society's return was taken up for scrutiny. From Form 10B the Assessing Officer noted transactions with persons specified under s.13(3): Divine Realbuild Pvt. Ltd. Rs 37,36,900 at nil interest, Divine International Rs 20,65,00,515 at 8 per cent, Divine Education Trust Rs 4,84,26,233 at nil interest and Dr. B.P. Singh Public Charitable Trust Rs 7,04,804 at nil interest, all without security. The society had itself raised secured loans at 12 to 13 per cent and had charged net interest expenditure of Rs 80,34,371 to its income and expenditure account after setting off interest of Rs 1,59,31,000 received from Divine International at 8 per cent. The officer took the SBI lending rate of 12.5 per cent as the reasonable rate, computed shortfall interest of Rs 1,64,90,055, made an addition under s.40A(2)(a) and denied the benefit of ss.11 and 12 read with s.164(2) on the footing that specified persons had been given an undue advantage. He also disallowed donations of Rs 80,91,000 under s.37 for want of s.80G certificates of the recipients. The CIT(A) upheld both, holding that the benefit fell within s.13(1)(c) read with s.13(2) and was further hit by s.13(2)(g), and that Explanation 2 to s.11(1), inserted by the Finance Act 2017 with effect from AY 2018-19, barred treating a corpus contribution to another registered trust as application of income. Before the Tribunal the society produced an agreement dated 8 March 2013 under which Divine Realbuild Pvt. Ltd. was engaged to construct the DSPSR College building, with the project completed in FY 2018-19 and an occupation certificate received in 2020 from the North Delhi Municipal Corporation; the s.12A and s.80G certificates of the other three entities; and evidence that the donations were only Rs 72,90,000, the balance being scholarships.
The appeal was allowed. The impugned disallowances were deleted and the Assessing Officer was directed to extend the benefit of ss.11 and 12. Where the counterparties are institutions registered under s.12A and s.80G and there is no material showing that any specified person derived a personal benefit, the transactions do not lead to diversion of charitable funds for private benefit; and s.40A(2)(a), which disallows excessive or unreasonable expenditure paid to related parties in the course of business or profession, cannot be invoked where the interest expenditure was paid to banks that are admittedly not related parties, so neither the addition nor the consequent denial of ss.11 and 12 is sustainable (paras 5 to 9). The donation disallowance was also deleted, there being no prohibition on such application of funds where the recipient trust is itself engaged in charitable activities and duly registered (para 10).
On the construction advance the Tribunal found an agreement of 8 March 2013 on the record, the advance given in the ordinary course of the construction activity, the project completed and an occupation certificate obtained, and no allegation or material in the impugned order that any specified person derived a personal benefit or that the contract was overpriced or not at arm's length (para 5). On the other three counterparties it reasoned that where the alleged loans are with entities themselves registered under s.12A and s.80G it is questionable whether any direct or indirect benefit is extended to specified persons who may be members of such institutions, and there was no justification to allege diversion for private benefit; it applied DIT v. Acme Educational Society, in which the Delhi High Court held that an interest-free temporary loan by one society to another with similar objects is not an investment or deposit attracting s.13(1)(d) merely because some related persons are common, and DIT v. Alarippu (para 6). On s.40A(2)(a) the Tribunal held that the provision makes taxable, by way of disallowance, expenditure incurred in the course of business or profession paid to related parties and found excessive or unreasonable, whereas the expenditure here was interest paid to banks which were admittedly not related parties, so both the invocation of the section and the consequent denial of ss.11 and 12 were unsustainable (paras 7 and 8). On the donations the Tribunal noted that only Rs 72,90,000 was donation and the balance scholarships, that the recipients' s.12A and s.80G documents and the donation receipts were on the paper book, and that there is no prohibition under the Act against such application of funds provided the recipient trust is engaged in charitable activities and duly registered, relying on CIT v. Sarladevi Sarabhai Trust and DCIT v. Divya Yog Mandir Trust (para 10).
There appears to be no justification to allege that these transactions would lead to diversion of charitable fund for private benefit.
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Handle my notice → Ask a CA on WhatsAppNot on this record. Where the counterparties are themselves institutions registered under s.12A and s.80G and there is no material showing that any specified person derived a personal benefit, the transactions do not establish diversion of charitable funds for private benefit, and s.13(1)(c) is not attracted. Section 40A(2)(a) cannot be used at all: it disallows excessive or unreasonable expenditure paid to a related party in the course of business or profession, and does not authorise an addition for interest the trust failed to charge. This was decided by the ITAT (Anubhav Sharma, Judicial Member and Manish Agarwal, Accountant Member) and bears on section 13(1)(c), section 13(1)(d), section 13(2), section 13(3), section 11, section 11(1), section 12, section 40A(2)(a), section 164(2), section 37, section 80G, section 12A, section 143(3) of the Income Tax Act 1961. It is reported as ITA No. 6718/Del/2025 (ITAT Delhi, 'B' Bench); Assessment Year 2018-19. The s.40A(2)(a) point is the sharper of the two and it is being missed. Assessing Officers are computing a notional interest at a benchmark rate on advances to connected parties and adding it 'under s.40A(2)(a)', then denying ss.11 and 12 on the whole income by reading s.164(2) with s.13. That is a double error: the section is about deduction of expenditure incurred in business or profession, and the interest the trust actually paid here was paid to banks, which are not related parties. On the s.13 side the order follows the Delhi High Court line that an interest-free temporary loan by one society to another with similar objects is not an investment or deposit attracting s.13(1)(d) merely because some persons are common to the two institutions. Note the limits. First, this is AY 2018-19 and the Tribunal restored the exemption on the whole income; from AY 2023-24 the consequence of a s.13(1)(c) or s.13(1)(d) violation is confined to the offending income rather than the whole, so the stakes on the s.13 ground are different in later years. Second, and this matters more, the Tribunal's answer on the donations ground rests on CIT v. Sarladevi Sarabhai Trust (1988) and DCIT v. Divya Yog Mandir Trust, both of which predate Explanation 2 to s.11(1). That Explanation, inserted by the Finance Act 2017 with effect from AY 2018-19 — the very year in issue — provides that a contribution by a trust to another registered trust with a specific direction that it shall form part of the corpus of the recipient is NOT treated as application of income by the donor. The Tribunal's conclusion is defensible only if the payments here were ordinary donations and scholarships rather than corpus donations. The order does not say which they were: the only reference to a 'specific direction that it shall form part of corpus' anywhere in it is in the recital of Explanation 2 attributed to the Commissioner (Appeals), and the Tribunal makes no finding either way. That the payments were not corpus donations is an inference from the Assessing Officer having disallowed them under s.37 for want of the recipients' s.80G certificates, not from anything the Tribunal held. Read on any other footing the conclusion does not survive Explanation 2, and it must not be applied to a corpus donation. Do not cite this order for the proposition that a corpus donation to another registered trust is application of income. If it applies to you, the first step is this: Attack the s.40A(2)(a) invocation head-on: identify the expenditure the Assessing Officer says was excessive, and to whom it was paid. If the interest was paid to banks or other unrelated lenders, the section has no application and the consequential denial of ss.11 and 12 falls with it.
For AY 2018-19 the society's return was taken up for scrutiny. From Form 10B the Assessing Officer noted transactions with persons specified under s.13(3): Divine Realbuild Pvt. Ltd. Rs 37,36,900 at nil interest, Divine International Rs 20,65,00,515 at 8 per cent, Divine Education Trust Rs 4,84,26,233 at nil interest and Dr. B.P. Singh Public Charitable Trust Rs 7,04,804 at nil interest, all without security. The society had itself raised secured loans at 12 to 13 per cent and had charged net interest expenditure of Rs 80,34,371 to its income and expenditure account after setting off interest of Rs 1,59,31,000 received from Divine International at 8 per cent. The officer took the SBI lending rate of 12.5 per cent as the reasonable rate, computed shortfall interest of Rs 1,64,90,055, made an addition under s.40A(2)(a) and denied the benefit of ss.11 and 12 read with s.164(2) on the footing that specified persons had been given an undue advantage. He also disallowed donations of Rs 80,91,000 under s.37 for want of s.80G certificates of the recipients. The CIT(A) upheld both, holding that the benefit fell within s.13(1)(c) read with s.13(2) and was further hit by s.13(2)(g), and that Explanation 2 to s.11(1), inserted by the Finance Act 2017 with effect from AY 2018-19, barred treating a corpus contribution to another registered trust as application of income. Before the Tribunal the society produced an agreement dated 8 March 2013 under which Divine Realbuild Pvt. Ltd. was engaged to construct the DSPSR College building, with the project completed in FY 2018-19 and an occupation certificate received in 2020 from the North Delhi Municipal Corporation; the s.12A and s.80G certificates of the other three entities; and evidence that the donations were only Rs 72,90,000, the balance being scholarships. The matter was decided on 2026-08-07 by the ITAT (Anubhav Sharma, Judicial Member and Manish Agarwal, Accountant Member). On those facts the ITAT held as follows. The appeal was allowed. The impugned disallowances were deleted and the Assessing Officer was directed to extend the benefit of ss.11 and 12. Where the counterparties are institutions registered under s.12A and s.80G and there is no material showing that any specified person derived a personal benefit, the transactions do not lead to diversion of charitable funds for private benefit; and s.40A(2)(a), which disallows excessive or unreasonable expenditure paid to related parties in the course of business or profession, cannot be invoked where the interest expenditure was paid to banks that are admittedly not related parties, so neither the addition nor the consequent denial of ss.11 and 12 is sustainable (paras 5 to 9). The donation disallowance was also deleted, there being no prohibition on such application of funds where the recipient trust is itself engaged in charitable activities and duly registered (para 10).
On the construction advance the Tribunal found an agreement of 8 March 2013 on the record, the advance given in the ordinary course of the construction activity, the project completed and an occupation certificate obtained, and no allegation or material in the impugned order that any specified person derived a personal benefit or that the contract was overpriced or not at arm's length (para 5). On the other three counterparties it reasoned that where the alleged loans are with entities themselves registered under s.12A and s.80G it is questionable whether any direct or indirect benefit is extended to specified persons who may be members of such institutions, and there was no justification to allege diversion for private benefit; it applied DIT v. Acme Educational Society, in which the Delhi High Court held that an interest-free temporary loan by one society to another with similar objects is not an investment or deposit attracting s.13(1)(d) merely because some related persons are common, and DIT v. Alarippu (para 6). On s.40A(2)(a) the Tribunal held that the provision makes taxable, by way of disallowance, expenditure incurred in the course of business or profession paid to related parties and found excessive or unreasonable, whereas the expenditure here was interest paid to banks which were admittedly not related parties, so both the invocation of the section and the consequent denial of ss.11 and 12 were unsustainable (paras 7 and 8). On the donations the Tribunal noted that only Rs 72,90,000 was donation and the balance scholarships, that the recipients' s.12A and s.80G documents and the donation receipts were on the paper book, and that there is no prohibition under the Act against such application of funds provided the recipient trust is engaged in charitable activities and duly registered, relying on CIT v. Sarladevi Sarabhai Trust and DCIT v. Divya Yog Mandir Trust (para 10). In the words reproduced by the source cited on this page: "There appears to be no justification to allege that these transactions would lead to diversion of charitable fund for private benefit." The decision followed or applied Director of Income Tax v. Acme Educational Society (2010) 326 ITR 146 (Delhi) — applied on s.13(1)(d); Director of Income Tax v. Alarippu (2000) 111 Taxman 511 (Delhi) — applied; CIT v. Sarladevi Sarabhai Trust (1988) 172 ITR 698 (Guj) — relied upon on the donations ground; DCIT (Exemption Circle), Ghaziabad v. Divya Yog Mandir Trust, ITA No. 5612/Del/2015 (ITAT Delhi) — relied upon.
It was decided by the ITAT on 2026-08-07 and is reported as ITA No. 6718/Del/2025 (ITAT Delhi, 'B' Bench); Assessment Year 2018-19. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 13(1)(c), section 13(1)(d), section 13(2), section 13(3), section 11, section 11(1), section 12, section 40A(2)(a), section 164(2), section 37, section 80G, section 12A, section 143(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed. The impugned disallowances were deleted and the Assessing Officer was directed to extend the benefit of ss.11 and 12. Where the counterparties are institutions registered under s.12A and s.80G and there is no material showing that any specified person derived a personal benefit, the transactions do not lead to diversion of charitable funds for private benefit; and s.40A(2)(a), which disallows excessive or unreasonable expenditure paid to related parties in the course of business or profession, cannot be invoked where the interest expenditure was paid to banks that are admittedly not related parties, so neither the addition nor the consequent denial of ss.11 and 12 is sustainable (paras 5 to 9). The donation disallowance was also deleted, there being no prohibition on such application of funds where the recipient trust is itself engaged in charitable activities and duly registered (para 10). It arises in Charitable Trusts & Exemption and Capital Gains Exemptions matters, on section 13(1)(c), section 13(1)(d), section 13(2), section 13(3), section 11, section 11(1), section 12, section 40A(2)(a), section 164(2), section 37, section 80G, section 12A, section 143(3) of the Income Tax Act 1961, and was decided by Anubhav Sharma, Judicial Member and Manish Agarwal, Accountant Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Produce the s.12A and s.80G registration certificates of every counterparty. That was what turned the case: transactions with institutions that are themselves registered charities do not readily support an inference that a specified person benefited. Ask the officer to identify the specified person under s.13(3) and the benefit he actually derived. Here the Tribunal found no allegation or material that any specified person derived a personal benefit from the construction advance, and no finding that the contract was overpriced or not at arm's length. Where the advance is a genuine trade advance, document it: here a construction agreement dated 8 March 2013, completion of the project in FY 2018-19 and an occupation certificate from the municipal corporation carried the point. Distinguish an interest-free temporary loan to a like-object society from an investment or deposit under s.13(1)(d) read with s.11(5), following Acme Educational Society and Alarippu. Before relying on this order for a payment made to another trust, check whether the payment was directed to the recipient's corpus. If it was, Explanation 2 to s.11(1) applies from AY 2018-19 and the payment is not application of income, whatever the pre-2017 authorities say. For a violation in AY 2023-24 or later, argue in the alternative that only the offending income loses exemption, not the whole.
Validity check could not be completed. Validity check could not be completed. The order was pronounced on 7 August 2026 and no appeal, and no decision doubting it, was searched for or located. Two limits on its reach are known from the statute rather than from any later decision and are recorded here so the label is not read too widely: the exemption was restored on the whole income, which reflects the law for AY 2018-19, whereas from AY 2023-24 a violation of s.13(1)(c) or s.13(1)(d) costs the exemption only on the offending income; and the reasoning on the donations ground rests on authority predating Explanation 2 to s.11(1), which applies from AY 2018-19 and denies application status to a corpus contribution to another registered trust, an Explanation the Tribunal did not address although the CIT(A) had relied on it; and the order makes no finding whether the payments carried a corpus direction, so the entry's footing that they did not is an inference. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order is internally untidy in ways a reader should know about. The Tribunal's numbering of the grounds it decides does not match the grounds as reproduced in para 4: para 5 discusses the advances under the heading of 'ground No. 6', para 9 then sustains 'ground No. 6 along with 4 & 5', and para 10 deals with the donation disallowance as 'ground No. 7', whereas in the reproduced grounds the s.40A(2)(a) issue is ground 6 and the donation issue ground 7. The substance of what was decided is clear enough from paras 5 to 10. The order also spells the counterparty as both 'Divine Realbuild Pvt. Ltd.' and 'Devine Realbuild Pvt. Ltd.', gives the Dr. B.P. Singh Public Charitable Trust balance as Rs 7,04,804 in the table and Rs 7,04,874 in para 7, and reproduces the CIT(A)'s reference to 's.13(1)(c)(i)' with a stray character. The most important caution is substantive and is set out in why_it_matters: the reasoning on the donations ground relies on authority that predates Explanation 2 to s.11(1), which was inserted with effect from the very assessment year in issue, and the Tribunal does not address the Explanation although the CIT(A) had expressly relied on it in para 11.3 of the appellate order. That silence is a real gap in the order and the entry is written on the footing that the payments were not corpus donations. That footing is an inference and not a finding: the order records no specific direction that any payment form part of a recipient's corpus, and it records no finding that none did. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed. The impugned disallowances were deleted and the Assessing Officer was directed to extend the benefit of ss.11 and 12. Where the counterparties are institutions registered under s.12A and s.80G and there is no material showing that any specified person derived a personal benefit, the transactions do not lead to diversion of charitable funds for private benefit; and s.40A(2)(a), which disallows excessive or unreasonable expenditure paid to related parties in the course of business or profession, cannot be invoked where the interest expenditure was paid to banks that are admittedly not related parties, so neither the addition nor the consequent denial of ss.11 and 12 is sustainable (paras 5 to 9). The donation disallowance was also deleted, there being no prohibition on such application of funds where the recipient trust is itself engaged in charitable activities and duly registered (para 10).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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