ITAT Hyderabad: Section 13(1)(b) Cannot Be Invoked Against Society Whose Charitable Activities Revenue Itself Accepted

ITAT Hyderabad deletes Rs 4.10 crore in additions and sets aside retrospective cancellation of registration for Jamia Osman Bin Affan Education Society, holding that section 13(1)(b) cannot apply where the Revenue has itself accepted substantial charitable activity.

The Hyderabad DB-B Bench of the Income Tax Appellate Tribunal has allowed both appeals filed by Jamia Osman Bin Affan Education Society, a Telangana-registered society, for Assessment Years 2017-18 and 2024-25. In the first appeal, the Bench deleted additions of Rs 4,02,74,950 on account of construction of a school building and Rs 7,34,673 on account of auto distribution expenses, both of which had been disallowed by invoking section 13(1)(b) of the Income Tax Act, 1961. In the second appeal, the Bench set aside an order passed by the Commissioner of Income Tax (Exemptions), Hyderabad, which had cancelled the society's registration under section 12A/12AB of the Act with retrospective effect from 29 July 2016. The Bench held that once the Assessing Officer himself had accepted substantial expenditure as charitable, section 13(1)(b) could not be applied merely because certain expenditures were alleged to have benefited a particular religious community.

The Dispute Before the Tribunal

Jamia Osman Bin Affan Education Society filed its return of income for Assessment Year 2017-18 declaring total income at nil. Its gross receipts for the year stood at Rs 8,32,98,754. After expenditure of Rs 7,24,89,390, the society showed a surplus of Rs 1,08,09,364, which it claimed as exempt under section 11(1)(a) of the Act on the ground that income had been applied for charitable purposes.

The case was selected for complete scrutiny. The Assessing Officer examined the nature of expenditure and allowed only Rs 2,50,02,763 as application of income towards charitable purposes. The balance was disallowed, and taxable income was computed at Rs 5,82,95,991. Assessment was completed under section 143(3) of the Act on 30 December 2019.

Before the Commissioner of Income Tax (Appeals), NFAC, Delhi, the society challenged four specific additions: construction of school building (Rs 4,02,74,950), auto distribution expenses (Rs 7,34,673), sewing machine distribution expenses (Rs 3,54,239), and depreciation on computer (Rs 62,705). The CIT(A) granted partial relief by deleting the sewing machine and depreciation additions but sustained the two larger additions. The society then appealed to the Tribunal.

Separately, the CIT (Exemptions), Hyderabad, passed an order dated 6 June 2024 under section 12AB(4) of the Act cancelling the society's registration under section 12A/12AB with retrospective effect from 29 July 2016. That order formed the subject of the second appeal.

Arguments on Section 13(1)(b)

The society's Authorised Representative, Advocate S. Rama Rao, drew the Bench's attention to the aims and objects of the society as reproduced in the assessment order. He submitted that the objects were framed for education and social welfare without restricting benefits to any particular religious community or caste, and that section 13(1)(b) is triggered only where a trust or institution is created or established for the benefit of a particular religious community or caste.

On the school building addition, the AR submitted that the Assessing Officer had allowed Rs 1,04,49,440 out of total construction expenditure of Rs 5,07,24,390 and disallowed the balance. Of the disallowed amount, Rs 75,79,088 was rejected on the ground that it related to Financial Year 2015-16. The remaining disallowance rested on the allegation that the society had constructed a Masjid rather than a school building. The AR contended this finding was factually wrong: the construction was of a Madrasa, which imparts education of the Quran and falls within the meaning of “education” under section 2(15) of the Act. He also relied on CIT v. Social Service Centre (250 ITR 39) and CIT v. Dawoodi Bohra Jamat (364 ITR 31) to argue that merely because beneficiaries belong to a particular religious community, it cannot be inferred that the trust was created for the benefit of that community.

On the auto distribution expenses, the AR submitted that the society had distributed auto-rickshaws to economically weaker sections in furtherance of its object of providing relief to the poor, and that the expenditure fell within the ambit of charitable purpose.

The Departmental Representative, Dr. Narendra Kumar Naik, supported the lower authorities. He submitted that the Assessing Officer had recorded statements of persons to whom the buildings were handed over, and that the buildings had not been retained as the society's own assets but transferred to third parties belonging to a particular religious community. He argued that whether the construction was of a Masjid or a Madrasa, the activity was religious in nature and confined to a particular community. He relied on CIT v. Palghat Shadi Mahal Trust (254 ITR 212) and Ghulam Mohidin Trust v. CIT (248 ITR 587), and distinguished the Andhra Pradesh High Court decision on the ground that in that case the religious activity was incidental and supported by the object clause, whereas here it was substantive.

How the Tribunal Reasoned on the Tax Addition

The Bench identified the precise question: whether the additions could be sustained by invoking section 13(1)(b). It observed that neither the Assessing Officer nor the CIT(A) had disputed that the expenditure was towards the objects of the society. The sole basis for disallowance was the allegation that the amounts had been applied for the benefit of a particular religious community.

The Bench examined section 13(1)(b) closely. The provision denies exemption under section 11 only where a charitable trust or institution is created or established for the benefit of any particular religious community or caste. The Bench then analysed paragraphs 41 to 50 of the Supreme Court's decision in CIT v. Dawoodi Bohra Jamat, which addressed composite trusts with both charitable and religious objects.

From that decision, the Bench drew the principle that where a trust is engaged in charitable activities also, section 13(1)(b) cannot be invoked merely because certain activities may incidentally benefit a particular religious community. The test is whether the charitable purpose benefits a particular community exclusively or serves society at large.

The Bench then turned to the assessment order itself. The Assessing Officer had allowed Rs 2,50,02,763 as expenditure towards charitable activities. The Bench held that this acceptance by the Revenue was decisive: “once the assessee society is found to be substantially engaged in charitable activities, the provisions of section 13(1)(b) of the Act cannot be attracted.” On that basis, the Bench declined to enter the factual controversy over whether the construction was of a Madrasa or a Masjid, and directed the Assessing Officer to delete both additions.

The Registration Cancellation Appeal

The second appeal arose from the CIT (Exemptions) order dated 6 June 2024, which cancelled the society's registration under section 12A/12AB with retrospective effect from 29 July 2016. The cancellation was grounded on the assessment order for Assessment Year 2017-18 and the findings invoking section 13(1)(b).

The Bench disposed of this appeal on two independent grounds.

First, having set aside the section 13(1)(b) findings in the quantum appeal, the Bench held that the very foundation of the cancellation order no longer survived. The CIT (Exemptions) had relied on the Assessing Officer's findings, which the Tribunal had now reversed.

Second, the Bench addressed the retrospective character of the cancellation. It followed the coordinate bench decision in Hyderabad Science Society v. DCIT (Exemption) (ITA No. 1128/Hyd/2024, dated 11 March 2026), which had in turn relied on the ITAT Bangalore decision in Amala Jyothi Vidya Kendra Trust v. PCIT and the Madras High Court decision in Auro Lab Ltd. v. ITO (411 ITR 308).

The coordinate bench had held that section 12AB(4) as amended by the Finance Act, 2022 with effect from 1 April 2022 does not operate retrospectively. The amended provision permits cancellation for “such previous year and all subsequent previous years” but does not expressly provide for retrospective operation. Applying the settled principle that income tax law applies as it stands on the first day of April of the relevant financial year, the coordinate bench had held that cancellation cannot be made effective from years prior to the amended provision coming into force.

The Hyderabad Bench followed that reasoning and held that retrospective cancellation of registration with effect from 29 July 2016 was not sustainable in law.

Outcome

Both appeals were allowed. In ITA No. 477/Hyd/2024 (Assessment Year 2017-18), the Bench directed the Assessing Officer to delete the addition of Rs 4,02,74,950 on account of construction of school building and the addition of Rs 7,34,673 on account of auto distribution expenses. In ITA No. 631/Hyd/2024, the Bench set aside the order passed by the CIT (Exemptions), Hyderabad, under section 12AB(4) of the Act cancelling the society's registration with retrospective effect from 29 July 2016. The order was pronounced in open court on 13 May 2026 by the Hyderabad DB-B Bench comprising Shri Vijay Pal Rao, Vice-President, and Shri Madhusudan Sawdia, Accountant Member.