TaxTMI 
TaxTMI 
2017 (3) TMI 1318
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....leted u/s 143(3) (dated 28.2.2014) is erroneous in so far as it is prejudicial to the interests of revenue since a sum of Rs. 44,96,547/- claimed by the assessee, as provision for gratuity, was allowed as deduction. According to the Commissioner, as per section 40A(7) of the I T Act, the provision for gratuity is not an allowable expenditure. Further, the Commissioner was of the view that as per section 11(4) of the I T Act, the provision for gratuity amounting to Rs. 44,96,547/- should be taxed at the maximum marginal rate. 2.2 In response to the notice issued u/s 263 of the Act, the assessee filed its written submissions dated 22.10.2015. The CIT, however, rejected the contentions raised in the written submissions and held that the provision for gratuity amounting to Rs. 44,96,547/- is not an allowable expenditure as per section 47A(7) of the I T Act and since the Assessing Officer had omitted to disallow this amount, in the assessment, it had resulted in under assessment income. Further, as regards applicability of section 11(4) of the Act, the CIT held that any income determined in excess of the income as shown in the account should be deemed to be applied for the purpose othe....
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.... 11(4), 2 (13) and 2(15) needs to be analyzed. For ready reference the relevant provisions are reproduced below: Sub section (4) of section 11 reads as follows:- "For the purpose of this section, ''property held under trust" includes a business Undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the Assessing Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes". The term "Business" is defined in section 2 (13) of the Income Tax Act,1961 reads as follows: "business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture"; Further, the term "charitable purpose" is defined in section 2 (15) of the Income Tax Act, 1961 which reads as follows:- "charitable purpose" includes relief of the poor, education, med....
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....siness activity but merely by holding that the undertaking is a "business undertaking" whether the profits arising therefrom can be subjected to tax by invoking section 11(4) of the Income-tax Act. This section says that in respect of such an undertaking where a claim is made that the income arising therefrom not to be included in the total income, then this section must not be applied. This section can be applied where the Assessing Officer invokes the power to determine the income of such an undertaking and thereupon determined an income which is in excess of the income as shown in the accounts of the undertaking, then such excess income shall be deemed to be the income not applied for the purposes of the trust. What this term "excess" connotes is also to be examined. In our opinion, if on examination of income and expenditure account, it is found that some part of the receipts are not utilized or expended towards the object of the trust, then only that part can be held as an excess income and naturally subject to tax. It means that the Assessing Officer has to examine the nature of receipts and the nature of expenditure and if on the basis of that examination, it is found that a....
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....e books of accounts. In assessee's case, issue in question is disallowance of provision for gratuity. The provision for gratuity has already disclosed in the books of account. The total income to be determined even after disallowance of provision for gratuity is Nil. Disallowance of provision for gratuity will not result in a situation where income determined by the Assessing Officer is in excess of the income as shown in the accounts of the assessee. The Hon. High Court of Calcutta in Commissioner of Income Tax Vs. Birla Education Trust reported in (1985) 153 ITR 0579 has clearly dealt with the issue. The relevant observations and the findings of the Hon'ble High Court reads as follows: "6 Let us consider the scheme of s. 11 of the I.T. Act (as it stood prior to its amendment in 1970). It is headed " Income from property held for charitable or religious purposes ". Sub-s. (4) of s. 11 provides that for the purpose of this section " property held under trust " includes a business undertaking so held. Thus, the entire s. 11 including its various sub-sections, apply to income derived from, inter alia, a business undertaking. Sub-s. (2) of s. 11 says that income derived from prop....
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.... that it was intended to be in derogation of or to supersede or supplant any other provision of s.11. For instance, any income which is applied to purposes other than charitable or religious purposes for which the trust has been established, is by virtue of sub-s. (3) of s. 11, deemed to be income of the person receiving it. It is not entitled to exclusion under sub-s. (1) of s. 11. Thus, an expenditure for purposes other than charitable or religious purposes is liable to be dealt with by sub-s. (3), and by reason of its operation, it is not entitled to exclusion under sub-s. (1). Will such a case be also covered by sub-s. (4) and under it such expenditure be " deemed " to be applied to purposes other than charitable or religious purposes ? If so, it will mean that a situation directly and specifically dealt with by s. 11(3), is also provided for by sub-s. (4) of s.11 indirectly by employing a fiction. Such a construction will make sub-s. (4) a clumsy repetition of the effect of sub-s. (3). There is no indication of any compelling reason for which Parliament may have intended such a situation. It appears to us that sub-s. (4) was intended for a different contingency. It was mean....
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....ble. " 121 Smt. Tarakeswari Sinha participating in the debate on September 1, 1961, stated in relation to sub-s. (4) of s.11: " Suppose a factory has got a capacity for an annual income of Rs. 15 lakhs but for avoiding a particular portion of the tax, sometimes the trustees or the donors have manipulated the accounts. They say that the income of the factory is only Rs. 10 lakhs and not Rs. 15 lakhs, thus avoiding tax payment on Rs. 5 lakhs which goes to their own pocket. For plugging this hole, actually powers were taken by the income-tax authorities to scrutinise the accounts to find out that the income shown in the books is the correct and has not been more. That was the only safeguard that has been provided by the subclause." Thus, sub-s. (4) was intended to uncover tax evasion by manipulation of the account books. It was not intended to apply to application or expenditure of income by the business undertaking. As already seen, the non-application of income for purposes of the trust was dealt with by sub- s. (3) of s.11. 13 It was submitted by the learned counsel for the Revenue that out of Rs. 9,547 in question, a sum of Rs. 1,000 was given as donation to the Congre....