TaxTMI 
TaxTMI 
2015 (6) TMI 764
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....e Tax Act vide order dated 4.3.1976. The Society is also approved under section 10(23C) by the Chief Commissioner of Income Tax. During the course of assessment proceedings, the Assessing Officer noted that the gross receipts declared by the assessee were Rs. 9,85,33,522/-. As provided under section 11(1)(b) of the Income Tax Act, 85% of this amount was required to be applied for charitable purposes during the year. Thus the assessee was required to apply an a mount of Rs. 8,37,53,494/- for charitable purposes towards the objects of the society. As against this the assessee had applied an amount of Rs. 7,39,11,839/-. The Assessing Officer further noted that an amount of Rs. 60,14,3 98/- was debited to the Profit & Loss Account on account of depreciation. After excluding this amount of depreciation from the amount shown as expenditure, the total amount applied during the year was only Rs. 6,78,97,441/- . There was thus a short fall of Rs. 1,58,56,053/- towards the application of income as required under the Income Tax Act. The Assessing Officer further observed that no intimation in Form No. 10 was given by the assessee to the Assessing Officer before the due date of filing of retur....
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....f Mewar Charitable Foundation were more than the receipts i.e. there was actual loss. The Assessing Officer observed that the facts in the assessee's case are different in as much as the assessee had claimed carry forward of expenses in excess of 85% of receipts which is not provided in the Act. The Assessing Officer thereafter discussed in detail the quantum of receipts and expenses incurred by the assessee over the years and pointed out that actually there was no set off available with the assessee if the working was made in accordance with the case of CIT Vs. Maharana of Mewar Charitable Foundation (Supra). The Assessing Officer did the working in this case and established that there was no loss available to the assessee for set off in the current year. This working has been done in Para 4.4 of the assessment order. The Assessing Officer also referred to the case of Pushpawati Singhania Research Institute for Liver, Renal & Digestive Disease Vs. DDIT (Exemption) by Delhi Bench of ITAT-29 SOT 316 on this issue. In view of these facts and case laws, the Assessing Officer once again issued a show cause notice to the assessee on 20.12.2012, wherein, the total income not applied ....
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....nditure incurred by 85% of the income of a particular year and the returns were being filed accordingly. The assessments for all the years from A/Y 2006-07 have been framed under section 143(3) of the Income Tax Act, 1961. Copies of computation charts of income alongwith copies of assessment orders for A/ys 06-07 to 09-10 are enclosed. The returned income filed by the appellant in all the respective years, have been accepted by the Department. As on the first day of the previous year, the appellant has excess utilization of expenditure in earlier years amounting to Rs. 2,57,90,420/-. Out of which, a sum of Rs. 98,41,655/- was adjusted against the short utilization of income for the year under appeal and the balance has been taken/carried to next year. For the purpose of the adjustment of excess utilization of income in earlier years against the surplus for the current year, various Hon'ble Courts have decided/held the issue in favour of the appellant. Your Honour's kind attention is invited to the ratio of CIT vs Maharana Mewar Charitable Foundation reported in 164 ITR page 439 (Raj.) wherein Their Lordships have held that the anomaly which has arisen that if the Trust t....
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....f income of the Trust for charitable or religious purposes in subsequent year in which adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the Trust u/s 11(1) (a) of the Act. Further, Your Honour's kind attention is drawn to the ratio of CIT vs Trustee of Seth Merwarjee Framji Pandey Charitable Trust [2003] 177 Taxman p. 19 (Bom) wherein Their Lordship have held that if a Trust has incurred a deficit during a particular year, the surplus made by it in a subsequent year to make up for the past deficit should be set off against such deficit. Similar view was also taken in the case of CIT vs Maharana of Mewar Charitable Foundation [1987) 164 ITR p. 439 (Raj) and also in the case CIT vs Institute of Banking Personnel Selection 264 ITR p. 110 (Bom) wherein the AO has disallowed the claim for carry forward of deficit of earlier years for adjustment against the surplus of the subsequent years, on the ground that such carry forward was applicable only in the case of income under the head Business or Profession and was not permissible in the case of income assessabl....
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....ed. The assessee also placed reliance on the judgment of the Hon'ble Mumbai High Court in the case of CIT vs Institute of Banking reported in 264 ITR p.110 (Bom.). The facts of this case are also different from that the present case of the assessee. In the present case the assessee is claiming excess of 85% of income application in previous year against the income of the subsequent year whereas in the case cited above the assessee has incurred debt in carrying out charitable objects in earlier years. 8.1 Copy of the Assessing Officer's report was provided to the assessee. The learned counsel for assessee once again placed reliance upon the submissions dated 18.06.2013. 9. The learned CIT (Appeals) considering the submissions of the assessee in the light of the material on record confirmed the addition and dismissed this ground of appeal of the assessee. The findings of the learned CIT (Appeals) in paras 4.5 to 4.9 of the appellate order are reproduced as under : "4.5 I have carefully considered the rival submissions. The appellant had claimed that there was excess utilization during the earlier years over and above the amount applied upto 85% of the income in th....
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....ble for carry forward even though the total expenditure was less than the total income in each year. 4.6 The actual excess amount applied in these years works out as under:- Income Expenditure % Excess A.Y. 01-02 28728418 22197779 77.27 Nil A.Y. 02-03 36850001 40351003 109.5 3501002 A.Y. 03-04 46552799 44821832 96.28 Nil A.Y. 04-05 55789036 49101523 88.01 Nil A.Y. 05-06 62925625 54785893 87.06 Nil A.Y. 06-07 69119941 72972492 105.46 3780551 A.Y. 07-08 71646870 63035045 87.98 Nil A.Y. 08-09 85439902 66264816 77.56 (-) 6359101 A.Y. 09-10 92001695 68146246 74.07 (-) 10055195 A.Y. 10-11 98533522 73911839 75.01 (-) 9841655 From the aforesaid details it is evident that during the assessment year under reference, the appellant had no excess application of income or expenditure which could have been carried forward from the earlier years and which could have been adjusted against the short fall in application of income of the current year. Even if the claim of carry forward of excess application of income....
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....r on the ground that such carry forward was applicable only to income assessable under the head "Profits and gains of business" and such carry forward and adjustment was not permissible in case of income assessable under section 11 to section 13 of the Income-tax Act as the income of the charitable trust was not assessable under the head "Profits and gains of business". Hon'ble High Court held as under: "Now coming to question No. 3, the point which arises for consideration is : whether excess of expenditure in the earlier years can be adjusted against the income of the subsequent year and whether such adjustment should be treated as application of income in the subsequent year for charitable purposes? It was argued on behalf of the Department that expenditure incurred in the earlier years cannot be met out of the income of the subsequent year and that utilisation of such income for meeting the expenditure of earlier years would not amount to application of income for charitable or religious purposes. In the present case, the Assessing Officer did not allow carry forward of the excess of expenditure to be set off against the surplus of the subsequent years on the ground t....
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....rd to the subsequent years. The assessee further claimed that the short fall in the application of income in the current year is adjustable against carry forward of expenses from the earlier years. The learned CIT (Appeals) directed the assessee to file evidence of excess utilization brought forward which was claimed to be set off against short fall during the year. The details from assessment year 2001-02 to 2010-11 are reproduced above. The learned CIT (Appeals) on perusal of these details noted that except for the assessment years 2002-03 and 2006-07, the income of the assessee in each of the other years was more than the amount applied by the assessee in that year on charitable purposes. Therefore, there was no deficit of income over application in any of the years except these two years. The actual excess amount applied was also worked out and it was found that the assessee had no excess application of income or expenditure which could have been carried forward from the earlier years and which could have been adjusted against the short fall in application of income of the current year. The learned CIT (Appeals) taking the total of excess application of income for these two ass....
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....isposing of the Cross Objection of the assessee. It was submitted that as per the provisions of section 11 of the Act, "if a charitable trust incurred 85% of its income for the objectives of the trust, the balance 15% is free to be set apart/accumulated without any conditions and nothing is taxable". The assessee explained that as per section 11 of the Act, a charitable institution is not charged to tax to the extent of 15% of its income and relied upon the decision of the Hon'ble Apex Court in the case of Addl.CIT Vs. A.L.N. Rao Charitable Trust, 216 ITR 697. It was submitted that from the above judgment, it is clear that an amount upto 15% of the income is exempt from income tax and can be accumulated. The Assessing Officer reiterated the facts stated in the assessment order. The learned CIT (Appeals) following the provisions of section 11 of the Act and the judgment of the Hon'ble Supreme Court in the case of A.L.N. Rao Charitable Trust (supra) directed that the assessee is eligible for exemption of 15% of the gross receipts and allowed this ground of appeal of the assessee. The finding of the learned CIT (Appeals) in paras 5.5 to 5.12 of the impugned order are reproduce....
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....ause (a) of section 11(2) being followed by the assessee-trust. To highlight this point we may take an illustration. If Rs. 1,00,000 are earned as the total income of the previous year by the trust from property held by it wholly for charitable and religious purposes and if Rs. 20,000 are actually applied during the previous year by the said trust to such charitable or religious purposes the income of Rs. 20,000 will get exempted from being considered for the purpose of income-tax under the first part of section 11(1). So far as the remaining Rs. 80,000 are concerned if they could not be actually applied for such religious or charitable purposes during the previous year then as per section 11(1)(a) at least 25 per cent, of such total income from property or Rs. 10,000, whichever is higher, will also earn exemption from being considered as income for the purpose of income-tax, that is, Rs. 25,000 will thus get excluded from the tax net. Thus out of the total income of Rs. 1,00,000 which has accrued to the trust Rs. 25,000 will earn exemption from payment of income-tax as per section 11(1)(a), second part. Then follows sub-section (2) which states that the ceiling or the limit or the....
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....t of exemption of accumulated income from income-tax as imposed by subsection (1)(a) of section 11 would get lifted if additional accumulated income beyond 25 per cent, or Rs. 10,000, whichever is higher, as the case may be, is invested as laid down by section 11(2) after following the procedure laid down therein. Therefore, sub-section (2) only will have to operate qua the balance of 75 per cent, of the total income of the previous year or income beyond Rs. 10,000, whichever is higher, which has not got the benefit of tax exemption under subsection (1)(a) of section 11. If learned counsel for the Revenue is right and if 100 per cent, of the accumulated income of the previous year is to be invested under sub-section (2) of section 11 to get exemption from income-tax, then the ceiling of 25 per cent, or Rs. 10,000, whichever is higher, which is available for accumulation of income of the previous year for the trust to earn exemption from income-tax as laid down by section 11(1) (a) would be rendered redundant and the said exemption provision would become otiose. It has to be kept in view that out of the accumulated income of the previous year an amount of Rs. 10,000 or 25 per cent, ....
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....me. Section 11(2) quoted above further liberalizes and enlarges the exemption. A combined reading of both the provisions quoted above would clearly show that section 11(2), while enlarging the scope of exemption, removes the restriction imposed by section 11(1)(a), but it does not take away the exemption allowed by section 11(1)(a). On the express language of sections 11(1) and 11(2) as they stood on the statute book at the relevant time, no other view is possible. In the light of the aforesaid discussion and keeping in view the illustration which we have given earlier, the combined operation of section 11(1) (a) and section 11(2) as applicable at the relevant time would yield the following result: (i) If the income derived from property held under trust wholly for charitable or religious purposes during the previous year is Rs. 1,00,000 and if Rs. 20,000 therefrom are actually applied to such purposes in India then those Rs. 20,000 will get exempted from payment of income-tax as per the first part of section 11(1)(a). (ii) Out of the remaining accumulated income of Rs. 80,000 for the previous year, a further sum of Rs. 25,000 will get exempted from payment of income-tax a....
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....wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India ; and, where any such income is accumulated for application to such purposes in India, to the extent to which the income so accumulated is not in excess of twenty-five per cent, of the income from the property or rupees ten thousand, whichever is higher,... (2) Where the persons in receipt of the income have complied with the following conditions, the restriction specified in clause (a) or clause (b) of sub-section (1) as respects accumulation or setting apart shall not apply for the period during which the said conditions remain complied with- (a) such persons have, by notice in writing given to the Income-tax Officer in the 'prescribed manner, specified the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years. (b) the money so accumulated or set apart is invested in any Government security as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944), or in any other security which may be approved by the Central G....
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.... apparent from the reading of provisions referred to above that section11 (a) was almost identical during the AY 69-70 and during AY 20010-11. As regards the provisions of section 11(2) are concerned, even the amended sub section (2) operates qua the balance of 85 per cent, of the total income of the previous year which has not got the benefit of tax exemption under sub-section(1)(a) of section 11. Section 11(2), as amended, does not operate to whittle down or to cut across the exemption provisions contained in section 11(1)(a)so far as such accumulated income of the previous year is concerned. As held by the Hon'ble Supreme Court in the case of A.L.N. Rao Charitable Trust (supra), it has to be appreciated that sub-section (2) of section 11 does not contain any non obstante clause like "notwithstanding the provisions of sub-section(1)". Consequently, it must be held that after section 11(1)(a) has full play and if still any accumulated income of the previous year is left to be dealt with, and to be considered for the purpose of income-1 tax exemption, sub-section (2) of section 11 can be pressed into service and if it is complied with then such additional accumulated income bey....
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....accordance with rule 17 and income so accumulated accumulation permitted under (b), below] is invested in the Government securities or other approved securities or is deposited in Post Office Savings Bank accounts or under the Post Officer (Time Deposits) Rules, 1970, or in a banking company to which the Banking Regulation Act, 1949, applies or cooperative land mortgage bank or a cooperative land development bank, or deposited in an account with an approved financial corporation, the accumulation up to a period of ten years is exempt [s. 11(2)]. [(b) No such exemption]. Conditionally exempt - (a) same as in col. (3), for assessment years 1976-77 to 1982- 83. For and from assessment year 1983-84, investment or deposit is to be made in the forms or modes specified in section 11(5). (b) if conditions at (a) are not fulfilled, accumulation to the extent of 25% only is exempt. In computing....