Bombay High Court Stays Tax Demand Against Government-Funded Educational Trust

Court Rules Gross Receipts Cannot Be Taxed Without Deducting Expenditure for State-Funded Trust

In a significant judgment, the Bombay High Court has provided relief to the Godavari Shikshan Prasarak Mandal Sindhi, an educational trust fully funded by the state government, by staying the entire tax demand against it. The court found that the Assessing Officer improperly taxed the gross receipts of the trust without considering the expenditure incurred, which contravenes the principles of taxing only the net income.

The trust had approached the court challenging an order from the Commissioner of Income Tax (Exemption), Pune, which required the trust to deposit 15% of the tax demand as a condition for granting a stay on the demand pending an appeal. The trust argued that its income was exempt under Section 10(23C)(iiiab) of the Income Tax Act, 1961, as it is wholly funded by the state government. Additionally, it contended that even if it were not entitled to the exemption, only its income, not the gross receipts, should be taxed, allowing for deductions of the expenses it incurred.

Upon reviewing the case, the bench comprising Justices B.P. Colabawalla and Amit S. Jamsandekar noted that the trust was not registered under Section 12A and had not filled the required Income and Expenditure statement in its tax return. Despite this, the court found fault with the authorities for taxing the gross receipts without accounting for the expenditure. The trust had declared an income of Rs. 1,83,33,150 and expenditures amounting to Rs. 1,84,34,140, indicating no taxable income.

The court's decision to stay the entire demand until the resolution of the ongoing appeal highlights the importance of correctly assessing taxable income, particularly for entities like educational trusts that are significantly supported by government funds. This ruling underscores the necessity of differentiating between gross receipts and taxable income, aligning with the principles of fairness in tax assessments.

The court's order is expected to provide substantial relief to the trust, allowing it to continue its operations without the immediate financial burden of the tax demand. The case will now proceed to be resolved through the pending appeal, with the stay providing a temporary reprieve from the tax obligations imposed by the initial order.

Bottom Line:

Educational Trust fully funded by State Government - Entitlement to income tax exemption under Section 10(23C)(iiiab) of the Income Tax Act - Gross receipts cannot be taxed without considering the expenditure incurred by the Trust.

Statutory provision(s): Income Tax Act, 1961 Section 10(23C)(iiiab)

Godavari Shikshan Prasarak Mandal Sindhi v. Commissioner of Income Tax (Exemption), Pune, (Bombay)(DB) : Law Finder Doc Id # 2821888