2011 (5) TMI 640 - AT - Income Tax

ITAT clarifies tax treatment for trust income under Sec. 11(1)(a) with Form 10 filing

The ITAT clarified that income used for trust objectives under Sec. 11(1)(a) is not taxable, with a 25% deduction if Form No. 10 is filed timely. The ITAT ... Trust registered u/s 12A - exemption u/s 11(2) - allowance of deduction over and above 25% of the income - whether 25% of income is a flat deduction or, whether Form No.10 and other formalities are required - Held that:-Firstly, claim of the assessee cannot be rejected merely on the ground that Form No.10 was filed at the time. Secondly, as per section 11(1)(a) the assessee is entitled for flat deduction without any condition or formality of filing form No.10, if income is accumulated or set apart for application of the objects of the trust in India to the extend, it does not exceed 25% of the income. Allowance of deduction over and above 25% of the income, for which the assessee is to satisfy the conditions laid down in section 11(2) - Held that:- The requirement of section 11(2) is that if such income is accumulated or set apart, then such income shall not be included in the total income of the previous year if such person specifies by notice in writing given to the assessing officer in prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall, in no case exceed 10 years. However, matter is send to AO to verify whether money so accumulated or set apart is invested or deposited in the form or mode specified in sub-section (5) of section 11 - Decided partly in favor of assessee for statistical purpose Issues Involved:1. Differentiation between provisions of Sec. 11(1)(a) and 11(2) of the Income Tax Act.2. Consideration of exemption under Sec. 11(2) for income not spent, despite filing Form No. 10 with a resolution before the Assessing Officer (A.O.) prior to the assessment order.Detailed Analysis:Issue 1: Differentiation between provisions of Sec. 11(1)(a) and 11(2) of the Income Tax Act.The assessee, a statutory body under the Dock Workers Act, 1948, functioning under the Ministry of Surface Transport, Government of India, appealed against the C.I.T.(A)'s decision dated 12-12-2008. The core issue was the differentiation between Sec. 11(1)(a) and Sec. 11(2) of the Income Tax Act. The A.O. initially found non-compliance with Sec. 11, leading to an assessment on 21-02-2000. The C.I.T.(A) partly allowed the appeal but held that income accumulated beyond 25% would form part of the total income. The ITAT restored the issue to the A.O. with directions to consider if Form No. 10 was filed with the return of income.The ITAT clarified that as per Sec. 11(1)(a), income used towards the trust's objectives is not taxable, and 25% of accumulated income is deductible if Form No. 10 is filed within the prescribed time. The ITAT referenced cases like C.I.T. v. G.R. Govindarajulu & Sons Charities and C.I.T. v. Nagpur Hotel Owners Association, emphasizing that Form No. 10 must be filed to claim exemptions.Issue 2: Consideration of exemption under Sec. 11(2) for income not spent, despite filing Form No. 10 with a resolution before the A.O. prior to the assessment order.Upon reassessment, the A.O. concluded that the assessee did not meet the conditions under Sec. 11(2) and Rule 17 of the IT Rules, as Form No. 10 was not filed with the return of income. Consequently, a surplus of Rs. 1,46,43,350 was taxed. The computation included interest, dividend, rent, levy, and other receipts, totaling Rs. 5,30,77,705, with Rs. 3,84,34,356 spent towards the trust's objectives and Rs. 1,32,69,429 accumulated, leaving a taxable surplus.The assessee argued before the C.I.T.(A) that Form No. 10 was submitted during the original assessment proceedings. However, the C.I.T.(A) upheld the A.O.'s decision, noting that Form No. 10 was not filed with the return of income and that the return was filed late. The C.I.T.(A) distinguished the cited judgments, noting that the assessee did not file the return within the prescribed time limits and did not fulfill the conditions for exemption under Sec. 11(2).The assessee contended that the ITAT's direction was misinterpreted by the A.O., arguing that Sec. 11(1)(a) allows for automatic accumulation of income up to 25% without the need for Form No. 10. The assessee cited judgments like A.L.N. Rao Charitable Trust and Programme for Community Organisation, emphasizing that Sec. 11(2) does not restrict Sec. 11(1)(a) and that additional accumulated income can be exempt if invested as per Sec. 11(2).The ITAT held that the A.O. misinterpreted its directions and that Form No. 10 filed during assessment proceedings should be considered. The ITAT referenced the jurisdictional High Court's decision in Mayur Foundation, stating that assessment proceedings are complete only when the appeal is decided by the Tribunal. The ITAT concluded that the assessee is entitled to a flat deduction of 25% under Sec. 11(1)(a) without filing Form No. 10, provided the income is accumulated or set apart for the trust's objectives.The ITAT directed the A.O. to verify if the assessee met the conditions under Sec. 11(2) for the additional exemption and to reframe the assessment accordingly. The appeal was partly allowed for statistical purposes.