2024 (6) TMI 1049 - AT - Income Tax

Charitable trust must apply 85% property income for charitable purposes under section 11 without accumulation option

ITAT Cochin allowed the appeal of a charitable trust regarding exemption under section 11. The trust failed to apply any income for charitable purposes ... Exemption u/s 11 - assessment of Income from property held for charitable or religious purposes - income of such an Institution is to be computed in the absence of any application of income, i.e., if the allowance for 15% of the income from property held under trust is to be allowed u/s. 11(1)(a) of the Act or not? - HELD THAT:- Applicability of section 11(1)(a) of the Act in the absence of any application of its income for it’s objects by the assessee, a charitable trust, during the relevant year. We see no reason for it being not so, and neither has any been stated by the Revenue at any stage. The language of the provision is unambiguously clear, so that an assessee is not entitled to, save where an option is specifically exercised in its respect, and before expiry of the time allowed for furnishing the return of income u/s. 139(1) of the Act, accumulate or set aside for application in excess of 15% of it’s income from the property held under trust. That is to say, it is necessarily to, save where an option is specifically exercised in its respect – which is not so in the instant case, apply 85% of it’s income for charitable purposed during the relevant year. The assessee, as afore-said, having not done so, it’s income is accordingly to be limited thereto, i.e., 85% of it’s total income. A reading of Explanation 1 to section 11(1), reproduced hereunder, makes it abundantly clear that in the absence of option being exercised, the deeming qua application of income, which extends to the shortfall w.r.t. eighty-five percent of income derived from property held under trust, shall not apply. The application in the instant case being nil, the shortfall extends to the entire 85% We are conscious that the assessee did not file an appeal against the Intimation u/s. 143(1)(a) of the Act raising the impugned demand, preferring instead rectification thereof, scope of which is severely limited. This, to our mind, would not constrain us inasmuch as the Revenue itself has made the impugned adjustment under summary proceedings u/s. 143(1)(a), the scope of which is, again, limited to apparently incorrect claims, which is not the case. The assessee shall accordingly be assessed at the returned income of Rs. 87,430. Even as observed by the Bench during hearing, the principal issue arising in the instant case, inasmuch as it is this that leads to the impugned demand, is the tax rate applied, which has been by the Revenue at the maximum marginal rate, duly raised by the assessee per its grounds of appeal before us. The assessee surely did not raise this issue before the ld. CIT(A), whose adjudication accordingly does not include the same. We, nevertheless, consider the same, being a legal issue, with the relevant facts available on record, adjudicating the same in disposal of the appeal. Application of section 167B - prescribing the maximum marginal rate - Section 167B, as a reading of the provision would show, is only where the shares of the beneficiaries of the trust are not known. The assessee, registered as a charitable trust, is a public body and, accordingly, there is no question of it’s beneficiaries being individual members, whose shares have therefore to be defined. The application thereof in the instant case is wholly misconceived. The matter in fact stands clarified by the Board per it’s Circular No. 320, dated 11/01/1982, also binding on the Revenue. The tax rate accordingly is to be computed as per the normal rates as applicable to Association of Persons. The same, in our view, is again an apparent mistake and, where contested, outside the ambit of s. 143(1)((a) in the first instance, so that it could not have been effected there-under. Assessee’s appeal is allowed. Issues:1. Appeal against the Order of Commissioner of Income Tax (Appeals) regarding rectification of processing under section 143(1)(a) of the Income Tax Act, 1961.2. Computation of income for a charitable trust under section 11(1)(a) of the Act.3. Applicability of tax rate for a charitable trust.Analysis:Issue 1:The appeal was filed by the Assessee against the Order of the Commissioner of Income Tax (Appeals) dismissing the appeal contesting the rectification of processing under section 143(1)(a) of the Income Tax Act, 1961. The Assessee did not appear during the appeal proceedings despite multiple opportunities granted.Issue 2:The main issue was the computation of income for a charitable trust under section 11(1)(a) of the Act. The Assessee, a charitable trust, had filed a return of income disclosing income at Rs. 87,430 after deducting 15% of its gross income of Rs. 1,02,862. The Commissioner denied this deduction as the Assessee did not reflect any application of funds for its purposes in respect of the remaining 85% of the gross receipts. The Tribunal held that the Assessee must apply 85% of its income for charitable purposes during the relevant year as per the unambiguous language of the provision.Issue 3:Regarding the tax rate applied to the Assessee, the Tribunal noted that the Revenue had applied the maximum marginal rate, which the Assessee contested. The Tribunal found that the application of section 167B prescribing the maximum marginal rate was misconceived as the Assessee, being a charitable trust, did not have individual beneficiaries. The tax rate was to be computed as per the normal rates applicable to Associations of Persons, as clarified by the Board's Circular No. 320. The Tribunal allowed the Assessee's appeal, directing assessment at the returned income of Rs. 87,430.In conclusion, the Tribunal allowed the Assessee's appeal, emphasizing the correct computation of income for a charitable trust under section 11(1)(a) and the proper application of tax rates as per the relevant provisions. The decision was pronounced on February 29, 2024, under Rule 34 of The Income Tax (Appellate Tribunal) Rules, 1963.