The Income Tax Appellate Tribunal (ITAT), Chennai , has set aside a tax order that denied exemptions to a charitable trust based on an allegedly erroneous salary disclosure in its audit report . The tribunal ruled that the mere inclusion of a payment in an audit form does not automatically establish a violation of tax provisions , directing the Assessing Officer (AO) to conduct a comprehensive verification of the underlying books of account. The dispute involved the Akara Foundation for Education and Research , which faced a substantial tax demand after authorities identified an entry in its original Form 10B audit report that appeared to indicate a salary payment of ₹33,00,000 to the trust’s founder.

Evidence Reconciliation and the Scope of Audit Reporting

The case originated from the scrutiny of the trust’s income tax return for the Assessment Year 2018-19 , during which the AO noted the reported ₹33,00,000 payment to the founder trustee. Under the provisions of the Income Tax Act, 1961 , particularly Sections 13(1)(c) and 13(2)(c), any application of trust income for the benefit of a specified person—such as a founder or trustee—can lead to the forfeiture of tax exemptions under Sections 11 and 12. The AO treated the reported sum as a direct violation, subsequently denying the exemption and raising a tax demand of approximately ₹11.40 lakh.

The foundation contested this assessment, arguing that the inclusion of the payment in the initial Form 10B was an inadvertent clerical error made by its auditors. The trust maintained that no such salary had been disbursed to the founder and that all payments reflected in its accounts were exclusively for staff members engaged in the operation of its educational institutions. Following the discovery of the reporting error, the trust filed a revised Form 10B in March 2021 to rectify the disclosure. However, the Commissioner of Income Tax (Appeals) at the National Faceless Appeal Centre in Delhi sustained the addition, characterizing the revised filing as an "afterthought" and noting the absence of sufficient corroborative evidence such as bank statements and salary ledgers produced during the initial assessment.

Tribunal Observations on Statutory Interpretation

In its order, the tribunal emphasized that the determination of a violation under Section 13 requires a more rigorous evidentiary standard than a superficial reliance on tax forms. The bench, comprising Judicial Member Manu Kumar Giri and Accountant Member Inturi Rama Rao, clarified the legal position regarding trustee remuneration , noting that the law does not set an arbitrary limit on salaries for those connected with a trust.

“Section 13(3) does not prescribe a general salary ceiling of Rs.50,000/-. The mere fact that a person is a founder or trustee does not, by itself, establish a violation of section 13(2)(c). The relevant facts and statutory conditions must be examined before the consequences u/s. 13 are determined,” the tribunal noted. This observation highlights the need for tax authorities to look beyond the literal text of an audit report and engage with the substantive reality of the trust's financial transactions.

The tribunal further observed that neither the original nor the revised audit report should be treated as absolute. The validity of the information provided must be reconciled with primary accounting records, such as salary ledgers, vouchers, and TDS filings . The bench remarked, “The original Form No. 10B is a relevant piece of evidence and cannot be disregarded merely because a revised report was subsequently filed. At the same time, the revised report cannot be rejected solely on the ground that it was filed after the commencement of scrutiny proceedings.” By adopting this balanced approach, the ITAT affirmed that truth and factual accuracy must take precedence over procedural formalities when determining a charitable trust ’s tax status.

Procedural Directives for Fresh Adjudication

To ensure that the matter is decided based on merit, the ITAT has restored the case to the file of the AO for a fresh, de novo assessment . The tribunal provided clear, structured instructions to guide the reassessment process. The AO is required to examine the original and revised audit reports alongside the trust's actual financial statements and books of account. This includes a mandatory review of salary matrices, bank statements, and payment vouchers to confirm whether the ₹33,00,000 was ever truly credited or paid to the founder trustee.

The tribunal also explicitly directed the AO to consider the auditor’s explanation regarding the circumstances surrounding the reporting error. If the officer finds that a payment was indeed made to the founder, they must then evaluate the reasonableness of that remuneration in relation to the actual services performed by the trustee. The decision emphasizes that a payment’s classification as "salary" does not inherently prove that it was excessive or unreasonable; this must be substantiated through an objective analysis of the individual’s role, responsibilities, and the market rate for such services.

Ensuring Substantial Justice in Tax Scrutiny

This ruling underscores the judiciary’s commitment to preventing the mechanical denial of tax exemptions based solely on reporting discrepancies. By allowing the foundation a second opportunity to substantiate its claims, the ITAT has reinforced the principle that taxpayers should not be penalized for clerical oversights if the underlying financial reality supports their case.

The AO has been instructed to provide the trust with a reasonable opportunity to present its evidence, including the relevant salary registers and supporting financial records. The final determination of the trust’s eligibility for exemption under Sections 11 and 12 will depend on the outcome of this fresh examination. Until the AO concludes this verification, the legal status of the disputed income remains pending, and the foundation must now move to compile and submit the primary evidence required to resolve the discrepancy once and for all. This development represents a significant step in ensuring that the tax assessment process remains tethered to the actual conduct of charitable organizations rather than potential clerical errors in documentation.