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 during the relevant year. The tribunal held that without exercising the option to accumulate income, the trust must apply 85% of property income for charitable purposes, limiting taxable income to 85% of total income (Rs. 87,430). Additionally, the tribunal ruled that section 167B (maximum marginal tax rate) was wrongly applied, as it only applies when beneficiary shares are unknown. For charitable trusts as public bodies, normal Association of Persons tax rates apply, not maximum marginal rates.

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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.

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