EaseValueWhat Happened?
The Tribunal (ITAT Amritsar) recently ruled that a taxpayer can claim the benefit of Section 10(23C)(iiiad) of the Income Tax Act 2025 when their gross turnover falls below the ₹1 crore threshold after excluding contra entries (van rent received and van rent paid). The bench also deleted ad hoc expense disallowances made by the Assessing Officer, providing significant relief to the taxpayer. This ruling clarifies an important grey area: how to calculate turnover when determining eligibility for charitable exemption under this section.
Background & Legal Context
What is Section 10(23C)(iiiad)?
Section 10(23C)(iiiad) of the Income Tax Act 2025 provides exemption for charitable or educational institutions registered under the Income-tax Act 2025. However, this exemption comes with a critical condition: the gross turnover should not exceed ₹1 crore in the previous year for the assessment year in question.
This section applies to:
- Educational institutions (schools, colleges, universities)
- Charitable institutions (hospitals, relief organizations, temples, mosques, churches)
- Medical research institutions
- Organizations providing health and medical facilities
The Turnover Calculation Issue
The key issue in the ITAT Amritsar case was: What constitutes 'gross turnover'? Should contra entries (mutual exchange of services where money doesn't change hands) be included in calculating turnover?
In this case, the organization had received van rent and paid van rent to the same party (or related parties). The question was whether both amounts should be counted in turnover, inflating it above ₹1 crore, or whether the net amount (after excluding contra entries) should be considered.
The ITAT's Decision
The Tribunal held that contra entries should be excluded from gross turnover calculation. The logic is sound: contra entries represent mutual exchanges where actual monetary transactions don't occur. They don't represent real economic value received or given. Therefore, when calculating if the organization has crossed the ₹1 crore threshold, contra entries should be netted off.
This interpretation is aligned with the spirit of the taxation principle that "receipts" mean actual economic benefits received in cash or cash equivalent form.
The Ad Hoc Disallowance Deletion
The Assessing Officer had also made ad hoc (arbitrary, without basis) disallowances of certain expenses. The ITAT deleted these disallowances, stating that:
- Expenses must be disallowed with specific reasoning
- Ad hoc disallowances without documentary evidence are not sustainable
- The burden lies on the AO to prove expenses are not charitable in nature
What Does This Mean for You?
If You Run a Charitable/Educational Organization
Your turnover calculation just got easier. If you have been worried about crossing the ₹1 crore limit due to contra entries, this ruling provides relief. You can now:
- Exclude mutual exchange entries (contra items) from your gross turnover
- Calculate net turnover for Section 10(23C)(iiiad) eligibility
- Maintain Section 10(23C)(iiiad) exemption even if gross turnover appears over ₹1 crore on paper
For Assessment Years 2025-26 and 2026-27
If you are in the middle of assessment or planning your filing for AY 2025-26 and AY 2026-27, this ruling strengthens your position. When the AO questions your turnover, you can cite this judgment to justify excluding contra entries.
For Organizations Already Denied Exemption
If your exemption was previously denied because the AO included contra entries in your turnover, you have a strong ground to file a revised return (Section 139(5) of IT Act 2025) or appeal the assessment using this judgment as precedent.
Protection Against Arbitrary Disallowances
The deletion of ad hoc expense disallowances also protects you. The Tribunal's stance is clear: expenses cannot be arbitrarily disallowed without proper documentation and reasoning. This reduces the risk of survey harassment or assessment disallowances based on officer's whims.
What Should You Do Now?
Step 1: Review Your Turnover Calculation
If you are a charitable/educational body:
- Go through your last 3 years of income tax returns
- Identify all contra entries (mutual exchanges with same party or related parties)
- Calculate actual net turnover after excluding these
- Check if you were incorrectly classified above ₹1 crore threshold
Step 2: Document All Contra Entries Clearly
Going forward, maintain separate ledger entries for:
- Rent received (van/vehicle/property)
- Rent paid (van/vehicle/property)
- Include clear notes showing these are mutual exchanges
- Keep proof of mutual agreement/understanding
Step 3: If You Are Under Assessment
If your AO has raised queries on turnover or threatened to deny exemption:
- Provide a detailed reconciliation showing contra entries
- Reference this ITAT Amritsar judgment in your response
- Include the case citation and key findings
- Request exemption confirmation based on net turnover
Step 4: Maintain Expense Documentation
Following the ad hoc disallowance deletion:
- Keep bills, invoices, and vouchers for all expenses
- Maintain a detailed expense register with descriptions
- Link each expense to charitable/educational purpose
- Prepare explanatory notes for any unusual or large expense items
Step 5: File Revised Returns if Eligible
If this ruling helps your case:
- File a revised return within the stipulated period under Section 139(5)
- You have one year from the end of the original assessment year to file revised return
- For AY 2023-24, you could have filed until June 30, 2024 (deadline has passed)
- For AY 2024-25 and onwards, keep this option open if assessment reopens
Key Takeaways
- Contra Entries Excluded: Mutual exchanges of services (rent received vs. rent paid) should be netted off when calculating gross turnover for Section 10(23C)(iiiad) eligibility.
- ₹1 Crore Threshold Clarity: The ₹1 crore limit applies to actual economic transactions, not to gross receipts including contra entries. This ruling provides much-needed clarity for small charitable bodies.
- Ad Hoc Disallowances Not Allowed: The Assessing Officer cannot arbitrarily disallow expenses without proper documentary evidence and reasoning. This protects charitable organizations from harassment.
- Immediate Relevance for AY 2025-26 and AY 2026-27: This recent 2026 ruling is directly applicable to current and upcoming assessments. Organizations can cite this in their responses to AO queries.
- Revised Return Opportunity: If you were wrongly denied exemption in previous years based on turnover inflated by contra entries, you may have grounds to file a revised return or appeal with this judgment as precedent.
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