Mere deduction of TDS u/s 194C and 194J not disentitle benefit of exemption u/s 11 & 12

Merely because deductor under misconception deducted TDS u/s 194C and 194J, it would not disentitle assessee, benefit under Sections 11 and 12 of the Act.

In a recent judgment, The Hon’ble Supreme Court has dismissed the SLP of the Revenue against the the decision of the Delhi High Court upholding that deduction of TDS by donor would not be the determinative factor for denial of exemption u/s 11 and 12 of the Act.

Earlier, the Delhi ITAT has held that merely because the deductor under misconception deducted TDS u/s 194C and 194J of the Income Tax Act, 1961 (the Act) the same would not disentitle the assessee, benefit of exemption under Sections 11 and 12 of the Act. The Proviso to Section 2(15) of the Act would not get attracted merely on the basis of deduction of TDS by the donor under a particular head.

ABCAUS Case Law Citation:
4419 (2025) (02) abcaus.in ITAT

AY: 2020-21

The assessee was a registered society registered as a charitable institution under Sections 12A read with 12AA and 80G of the Act. The assessee had been working for the upliftment of the poor, underprivileged children and women, health, preservation of the environment and other social causes. In order to fulfil its charitable objectives, the assessee received various grants from the Government as well as the private sector which were exempted from tax under Sections 11 and 12 of the Act.

The assessee society had earned consultancy fees, contractual receipts etc., in relation to the activities of providing services to the corporate sector. TDS had been deducted on those fees/receipts by the respective entities under Sections 194C/194J of the Act by treating them as professional/contractual fees paid to the assessee.

The assessment for AY 2020-21 was completed u/s. 143 (3) of the Act r.w.s. 144B of the Act wherein the Assessing Officer (AO) disallowed the benefit of exemption u/s 11 of the Act on the ground that there were receipt in the nature of Consultancy Receipts and Contractual Receipts which were more than twenty percent of the gross receipts as per the provision of section 2(15) of the Act.

The CIT(A) relying the decision of the Hon’ble Delhi High Court in assessee’s own case deleted the addition made by the AO.

The CIT(A) noted that the Hon’ble High Court had observed that merely deduction of tax alone cannot be the basis to conclude the aforesaid receipt to be considered under the category of consultancy fees and contractual income. Secondly, there was no element of activity in the nature of trade, commerce or business, or any activity or rendering any service in relation to any trade, commerce or business. Thirdly, in absence of any cogent reason, receipts in question cannot be ‘advancement of any other object of general public utility.

The High Court had held that if the deductor under misconception, deducts TDS under Sections 1940 and 194J of the Act, the same would not disentitle the assessee to claim benefit under Sections 11 and 12 of the Act unless the case of assessee is specifically hit by the Proviso of Section 2(15) of the Act, which was not the case. The Proviso to Section 2(15) of the Act would not get attracted merely on the basis of deduction of TDS by the donor under a particular head.

The Tribunal held that the CIT(A) had rightly held that the instant case is squarely covered by the judgment of the High Court of the assessee’s own case. The CIT(A) had rightly deleted the addition made by the AO. Accordingly, the appeal of the Revenue was dismissed.

ABCAUS Case Law Citation:
4500 (2025) (04) abcaus.in SC

AY: 2017-18

For yet another year AY 2017-18, the Revenue denied the exemption to the assessee on the same ground i.e. donor had deducted TDS  u/s 194C and 194J of the Act.

The assessee filed an application u/s 264 for revision of the assessment order which was rejected leading to assessee filing a Writ Petition before the High Court.

The High Court held that deduction of TDS by donor would not be the determinative factor for denial of exemption u/s 11 and 12 of the Act. It was held that the Revenue under almost similar circumstances had accepted the exemption claimed by the assessee and therefore should not deviate from the consistent approach in denying benefit to assessee.

Not satisfied with the order of the High Court, the Revenue filed a SLP before the Hon’ble Supreme Court which dismissed the SLP with the following remark, “We are not inclined to interfere with the impugned judgment; hence, the present special leave petition is dismissed.”

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