Explanation 3 to section 11(1) read with section 40(a)(ia)

A Trust has not deducted TDS for certain expenses. However these expenses are not treated as application. However Assessing Authority has proposed addition of 30% of such expenses based on Explanation 3 to section 11(1) read with section 40(a)(ia) treating 30% of such expenses as addition. Is this correct?Since the Trust has not considered such expense as application whether the proposed addition is tenable in law?

Replies (3)
Quick Summary
This discussion explores whether a trust is liable for a 30% disallowance on expenses where TDS was not deducted, even if these expenses weren't treated as application of income. While a previous ruling suggested Section 40(a)(ia) doesn't apply to charitable trusts for Section 11 purposes, the insertion of Explanation 3 to Section 11(1) raises new questions. The core debate is whether this disallowance is legally tenable and if it constitutes a double penalty for the trust.

In the case of Mahatma Gandhi Seva Mandir vs. DDIT(Exemp) reported in 21 com321 the Hon’ble ITAT has held that the exception in Section 40 is carved out, only for the purpose of Section 28 and not for computing the exemption of income of a charitable trust under Section 11. The disallowance made under Section 40(a) will only go to enhance the business profit of an assessee whose income is assessable under Section 28 and not otherwise. Hence, provisions of Section 40(a) are not applicable in case of charitable trust or institution where income and expenditure is computed in terms of Section 11

Sir, to my understanding this case law can be considered only prior to insertion of Explanation 3 to section 11(1) read with section 40(a)(ia).The Clarification required even if the the expenses for which TDS is not deducted are not considered as application,30% of such expenses will be added back to Total Income of the Assessee.Is it not an unjust provision since the assessee is being penalised twice not considering it as an application and adding it to total income?

The rule applies for any income u/h. PGBP. and not to any other income/s.

Do you have any taxable income under head PGBP?

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