Under s.11(1)(a) income tax is deductible as outgoing when computing charitable trust surplus; bona fide cash accounting allowed.

GUJARAT HC held that for deduction under s.11(1)(a) the tax liability must be treated as an outgoing when determining surplus available for application or accumulation by a charitable trust; surplus is to be assessed on commercial principles, deducting outgoings including income-tax, otherwise notional accruals under mercantile accounting cannot be applied by trustees. The court also held a bona fide change of accounting system is permissible; on the facts the trust was entitled to switch to cash accounting given its circumstances, so both questions for the assessment year 1971-72 were answered in the affirmative.

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Issues Involved:

1. Deduction of income-tax liability u/s 11(1)(a) of the Income-tax Act, 1961.
2. Justification for changing the method of accounting from mercantile to cash system.

Summary:

Issue 1: Deduction of Income-tax Liability u/s 11(1)(a)

The assessee, a charitable trust, claimed a deduction of Rs. 76,972 as an amount applied for charitable purposes u/s 11(1)(a) for the assessment year 1971-72. The Income-tax Officer denied the deduction, considering the payment of income-tax as an appropriation of income. The Appellate Assistant Commissioner upheld this decision. However, the Tribunal allowed the deduction, stating that the payment of income-tax was a necessary outgoing to be considered before determining the net income for application under section 11(1)(a). The High Court agreed with the Tribunal, emphasizing that income must be determined on commercial principles, and all outgoings, including income-tax, must be deducted to ascertain the surplus income available for application or accumulation for the trust's purposes.

Issue 2: Change of Accounting Method

For the assessment year 1972-73, the assessee switched to the cash system of accounting due to non-receipt of interest income from financially troubled companies. The Income-tax Officer objected, but the Appellate Assistant Commissioner allowed the change, noting the financial difficulties faced by the deposit companies. The Tribunal upheld this decision, stating that income should be computed on general commercial principles and not on a notional basis. The High Court supported the Tribunal's view, stating that the change in the method of accounting was bona fide and necessary due to the peculiar circumstances faced by the trust. The Court emphasized that there is no prohibition in the Act against changing the method of accounting if done bona fide and regularly.

Conclusion:

The High Court answered both questions for the assessment year 1971-72 and the first question for the assessment year 1972-73 in the affirmative, favoring the assessee and against the Revenue. The reference was disposed of with no order as to costs.

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