2015 (9) TMI 1248 - SC - Income Tax

Supreme Court: Trust can set aside up to 25% income for charity without investment.

Commissioner of Income Tax-I, Coimbatore Versus M/s. G.R. Govindarajulu & Sons

The Supreme Court allowed the appeal by a Public Charitable Trust, directing the Assessing Officer to recompute the taxable income. The court held that ... Exemption u/s 11 - accumulation of income upto 25% - Held that:- where CIT (Appeals) has gone wrong is that he ignored the provision which entitled the assessee to exercise such an option only to the extent of 25%. In the instant case, the assessee had exercised the option of setting apart an amount of ₹ 32 lacs which was more than 25%. The total income was ₹ 99,41,221/- and 25% thereof would be ₹ 24,85,305/-. Thus, the entire amount of ₹ 32 lacs could not have been allowed as directed. This aspect has not been noticed by the High Court as well. No further amount could be allowed as deduction and we do not understand as to how the entire income is treated as exempted from income tax. We, accordingly, allow this appeal by setting aside the order of the High Court and direct the Assessing Officer to recompute the taxable income in accordance with this judgment. Issues Involved:1. Deduction of income actually spent for charitable purposes.2. Validity of setting apart income for future charitable purposes.3. Compliance with the conditions for deduction under Section 11 of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Deduction of Income Actually Spent for Charitable Purposes:The respondent-assessee, a Public Charitable Trust, filed its return for the Assessment Year 1994-95 declaring 'nil' taxable income. The gross income for the year was Rs. 99,41,221/-, which included interest receipts, rental income, bus collections, miscellaneous receipts, and surplus in GRS hotel. The assessee claimed it had applied and spent Rs. 47,27,533/- for the objects of the Trust. According to Section 11(1)(a) of the Income Tax Act, 1961, income derived from property held under trust wholly for charitable or religious purposes is exempt from tax to the extent it is applied for such purposes in India. The Assessing Officer allowed this deduction, and there was no dispute regarding this amount.2. Validity of Setting Apart Income for Future Charitable Purposes:The assessee set apart Rs. 32 Lacs to be spent for charitable purposes in the following year. The Assessing Officer denied this deduction on the ground that no option for this purpose was exercised by the assessee before filing the return. Although the assessee mentioned this in the return, it was not considered a valid exercise of the option. The CIT (Appeals), ITAT, and the High Court accepted the assessee's contention that stating the option in the return itself should be treated as a valid exercise of the option. The Supreme Court upheld this view, stating that the law does not specify a particular mode for exercising the option, and doing so in the return complies with Section 11.3. Compliance with Conditions for Deduction under Section 11:The Assessing Officer found that the assessee did not invest any amount in Government securities, as required by Section 11(2) for the remaining income to be exempt. The CIT (Appeals) allowed the deduction of Rs. 32 Lacs, but this was incorrect as per Section 11(1)(a), which permits setting apart only up to 25% of the total income. In this case, 25% of Rs. 99,41,221/- is Rs. 24,85,305/-, so the entire amount of Rs. 32 Lacs could not be allowed. The High Court also failed to notice this limitation. The Supreme Court clarified that only up to 25% of the income could be set apart for future charitable purposes without being invested in Government securities.Conclusion:The Supreme Court allowed the appeal, setting aside the High Court's order and directing the Assessing Officer to recompute the taxable income. The judgment emphasized that while the assessee can set apart income for future charitable purposes, it must comply with the 25% limit specified in Section 11(1)(a) unless the income is invested as per Section 11(2).