2015 (12) TMI 105 - AT - Income Tax

Tribunal rules accumulation under Income Tax Act based on gross receipts, not net income

The Jyothi Seva Society of Bangalore Versus The Deputy Director of Income Tax (Exemption), Circle 17 (2), Bangalore

The Tribunal held that the accumulation under section 11(1)(a) of the Income Tax Act should be based on gross receipts, not net income. The assessee's ... Accumulation of income - 15% accumulation for application in future has to be calculated on gross receipts or net receipts after deduction of revenue expenditure? - Held that:- As per the statutory language of section 11(1)(a) the income which is to be taken for purpose of accumulation is the income derived by the trust from property any expenditure which is in the shape of application of income is not to be taken into account. Having found that trust is entitled to exemption under s. 11(1), we are to go to the stage of income before application thereof. The gross income earned by the assessee is relevant. See Jyothy Charitable Trust Versus The Deputy Commissioner of Income Tax (Exemptions) , Circle 17 (1) , Bangalore [2015 (11) TMI 1295 - ITAT BANGALORE] - Decided in favour of assessee. Issues Involved:1. Calculation of the deduction of 15% under section 11(1)(a) of the Income Tax Act on net receipts versus gross receipts.Issue-wise Detailed Analysis:1. Calculation of Deduction under Section 11(1)(a):The primary issue in this appeal is the method of calculating the 15% deduction under section 11(1)(a) of the Income Tax Act. The Assessing Officer (AO) computed the accumulation at 15% of the net income of the assessee trust, contending that the gross receipts of an educational institution are not fully available for application to charitable purposes due to necessary operational expenditures. The assessee, however, claimed the accumulation at 15% of the gross receipts.The assessee argued that the term 'income' in section 11 refers to gross income/receipts, not the net income after expenses. They cited the Supreme Court's decision in CIT vs. Programme for Community Organization, which supports the view that accumulation should be calculated based on gross income. However, the CIT(Appeals) disagreed, noting that the Supreme Court's decision applied to cases involving only voluntary contributions, not income-generating activities.The CIT(Appeals) also referred to earlier Supreme Court rulings in S.R.M. M.C.T.M. Tiruppani Trust vs. Commissioner of Income Tax and Commissioner of Income Tax vs. ALN Rao Charitable Trust, which supported the assessee's view but were deemed inapplicable due to different facts and legal issues.The CIT(Appeals) further cited the Central Board of Direct Taxes (CBDT) Circular No.5-P(LXX-6) dated 19.06.1968, which clarified that the income of charitable or religious trusts should be computed using general commercial principles rather than the regular provisions of the Income Tax Act. The circular emphasized that the term 'income' in section 11(1)(a) should not be equated with 'Total Income' under section 2(45).In conclusion, the CIT(Appeals) directed the AO to bifurcate the receipts into those from activities with consideration (like tuition fees) and those without (like donations). The accumulation for the former should be based on net receipts, while for the latter, it should be on gross receipts.2. Assessee's Appeal:The assessee appealed against the CIT(Appeals)'s decision, arguing that the computation of income accumulation under section 11(1)(a) should be based on gross income, not net income. They contended that the CIT(Appeals) erred in reducing the claim of accumulation and in upholding the AO's computation of the amount accumulated under section 11(2).3. Tribunal's Decision:The Tribunal referred to a Co-ordinate Bench decision in the case of Jyothy Charitable Trust, which held that the accumulation for future application should be calculated on gross receipts. The Special Bench of the ITAT in Bai Sonabai Hirji Agiary Trust vs. ITO also supported this view, emphasizing that the 25% (now 15%) accumulation should be based on gross income before any application or expenditure.The Tribunal concluded that the accumulation under section 11(1)(a) should be allowed as claimed by the assessee, based on gross receipts. Consequently, the order of the CIT(Appeals) was set aside.Final Judgment:The appeal of the assessee was allowed, and the order was pronounced in the open court on 9th October 2015.