TaxTMI 
TaxTMI 
2024 (6) TMI 80
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....y noticed, and which also stand recorded in the Assessment Order dated 19 December 2011 are as follows: "Return showing nil income accompanied with audit report in Form No. 10B was filed on 30.09.2009 which was duly processed u/s 143 (1) of the IT Act, 1961. Subsequently, the case was picked up for scrutiny assessment under the Action Plan Guidelines. Statutory notice u/s 143 (2) dated 17.09.2010 was issued to regularize the assessment proceeding. On 24.03.2011 Revised Return was filed with fresh computation of income along with reasons of the same. This Return was also selected for scrutiny under CASS and accordingly notice u/s 143 (2) of the 'Act' was issued. Notice u/s 142 (1) along with questionnaire was issued. In compliance thereto Mr. M.A. Gohel, FCA and Mr. Parag Bhatia, Honorary Accountant, Authorized Representatives, attended the assessment proceeding from time to time. Filed information/document as called for. Books of accounts along with bills/vouchers regarding expenditures incurred sand evidence for having earned the income form different heads, have been produced which have been test checked w.r.t. information/document produced/filed. Case discussed with ....
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....noted that our client has also paid the tax of Rs. 8,14,21,094/- (including refund received under section 143 (1) of the Act Rs. 8,25,580) payable as per the said Revised Statement of Computation of Total Income. 5. It may kindly be noted that our client has already received a sum of Rs. 19 Crores towards its Corpus before 31st March 2009 itself i.e. within a very short span of time after giving donations to other trusts. In spite of this, this Revised return of Income is being filed out of abundant precaution and without prejudice to the claim of our client that the said sum of Rs. 20 crores is not taxable as deemed income under section 11 (3) of the Act. 6. It may kindly be noted that our client is filing-herewith the Revised Return of Income for the above year, as explained above, on its own accord and voluntarily before receiving any notice in this behalf." 3. Undisputedly the respondent assessee is registered under Section 12-A of the Income Tax Act, 1961 [Act] and has also been extended benefit of Section 80G (5) (vi) of the Act. It had claimed exemption under Sections 11 and 12 of the Act. Although a return for the Assessment Year [AY] in question, namely, AY 2009-10, h....
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.... of the Income-tax Act, 1961. The Income-tax Officer was of the opinion that the assessee was not entitled to accumulate 25% of this deemed income because permitting it to do so would amount to a double benefit to the assessee. He, therefore, assessed the entire deemed income. 3. The Tribunal in agreeing with the decision of the Appellate Assistant Commissioner observed: The legal fiction contained in section 11 (3) of the Income-tax Act, 1961, should be allowed to play to the fullest extent and there, is no warrant to take a restricted view for denying the exemption which is specifically allowed by the statute. In fact, as per the law as stood from April 1, 1976, charitable trusts are permitted to accumulate up to 25% of their income without complying with any formalities or condition and such accumulation is not included in the total income. Therefore, we uphold the order of the Appellate Assistant Commissioner as it is quite justified in law and the assessee would be entitled to accumulate 25% of the total income of the previous year relevant to the assessment year 1978-79 inclusive of the deemed income under section 11 (3) of the Income-tax Act, 1961. 4. Mr. Moitra, appea....
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....ng deployed for a purpose other than that specified and set apart in terms of Section 11 (2) be treated as eligible for appropriate deductions. The assessee consequently prayed for being permitted to allow accumulation to the extent of 15% of the deemed income. 10. It was this plea which came to be allowed by the CIT(A) following the judgment of the Calcutta High Court in Natwarlal Chowdhury Charity Trust. In Natwarlal Chowdhury Charity Trust, the Calcutta High Court, while dealing with an identical situation had held that the accumulation under Section 11 (1) (a) would extend to the deemed income which may arise in terms of Section 11 (3). 11. As we view the provisions contained in Section 11, it becomes apparent that in terms of sub-section (1) (a) thereof, the income derived from trust property is firstly liable to be applied for charitable or religious purposes and to the extent of that application is liable to be removed from the total income of the charity. Section 11 (1) (a) then proceeds to accord a facility to a charity which may have failed to apply the income derived from property for charitable or religious purposes to accumulate a part thereof, subject to the conditi....
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....pecified in sub-section (5) or if it is not utilized for purposes for which it is so accumulated or set apart during the period referred to in clause (a) of Section 11 (2). A similar contingency is then spoken of if the accumulated income under Section 11 (2) is credited or paid to institutions registered under Sections 12-AA and 12-AB and other institutions spoken of in those provisions. 14. The interplay between Section 11 (1) and Section 11 (2) was succinctly explained by the Supreme Court in Additional Commissioner of Income Tax Vs. A.L.N. Rao Charitable Trust (1995) 6 SCC 625 when it observed thus:- "11. A mere look at Section 11 (1) (a) as it stood at the relevant time clearly shows that out of total income accruing to a trust in the previous year from property held by it wholly for charitable or religious purpose, to the extent the income is applied for such religious or charitable purpose, the same will get out of the tax net but so far as the income which is not so applied during the previous year is concerned at least 25% of such income or Rs 10,000 whichever is higher, will be permitted to be accumulated for charitable or religious purpose and it will also get exempte....
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....d by the tax net. Learned counsel for the Revenue submitted that the investment as contemplated by sub-section (2) (b) of Section 11 must be investment of all accumulated income in government securities etc., namely, 100% of the accumulated income and not only 75% thereof. And if that is not done then only the invested accumulated income to the extent of 75% will get excluded from income tax assessment. But so far the remaining 25% of the accumulated income is concerned it will not earn such exemption. It is difficult to appreciate this contention. The reason is obvious. Section 11, sub-section (1) (a) operates on its own. By its operation two types of income earned by the Trust during the previous year from its properties are given exemption from income tax, (i) that part of the income of previous year which is actually spent for charitable or religious purposes in that year; and (ii) out of the unspent accumulated income of the previous year 25% of such total property income or Rs 10,000 whichever is higher can be permitted to be accumulated by the Trust, earmarked for such charitable or religious purposes. Such 25% of the income or Rs 10,000 whichever is higher will also....
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....". 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 tax exemption, sub-section (2) of Section 11 can be pressed into service and if it is complied with then such additional accumulated income beyond 25% or Rs 10,000, whichever is higher, can also earn exemption from income tax in compliance with the conditions laid down by sub-section (2) of Section 11. It is true that sub-section (2) of Section 11 has not clearly mentioned the extent of the accumulated income which is to be invested. But on a conjoint reading of the aforesaid two provisions of Sections 11 (1) and 11 (2) this is the only result which can follow. It is also to be kept in view that under the earlier Income Tax Act of 1922 exemption was available to charitable trusts without any restriction upon the accumulated income. There was a change in this respect under the present Act of 1961. Under the present Act, any income accumulated in excess of 25% or Rs 10,000 whichever is higher, is taxable under Section 11 (1) (a) of the Act, unless the special conditions regarding....
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....00, that is, Rs 35,000 if not invested as per sub-section (2) of Section 11 will be added to the taxable income of the trust and will not get exempted from the tax net. (v) If on the other hand the entire remaining accumulated income of Rs 55,000 is wholly invested as per Section 11 (2) the said entire amount of Rs 55,000 will get exempted from the tax net." 15. As the Supreme Court lucidly explains, sub-section (2) of Section 11 extends the limit which would otherwise be applicable to income which could be possibly accumulated under Section 11 (1) (a) or Section 11 (1) (b). The Supreme Court pertinently observes that both Section 11 (1) (a) and Section 11 (2) operate independently. It was observed that while a trust may set apart 15% of the income derived from trust property in terms of Section 11 (1) (a), sub-section (2) extends to the balance of the income of that year and which may not have been imbued with the exemption in terms of Section 11 (1) (a). It then explains the scheme underlying sub-section (2) as contemplating the balance of accumulated income also not being liable to be taxed provided the charitable institutions were to abide by the conditions prescribed in cla....
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....e part of the trustees in applying the income for purposes other than a charitable purpose or ceasing to hold or converting the Government security or deposit. On the other hand, clause (c) of section 11 (3) deals with both positive and negative acts of the trustees, namely, (i) the inaction on the part of the trustees to utilise the accumulated income for the purposes for which it was accumulated during the period referred to in section 11 (2) or in the immediately following years, and (ii) a positive act on the part of the trustees in applying the income for a purpose other than the purposes for which the income was accumulated. It is, no doubt, true that the accumulated income should be utilised for the purposes for which it was accumulated and the words, and the expression, "not utilised" in section 11 (3) (c) have to be read in conjunction with the words that follow the expression, namely, "for the purpose for which it was so accumulated". Though the word, "utilised" has different shades of meaning, in the context of section 11 (3) (c) of the Act, in our opinion, it means application of income, that is, where the trustees had not applied the income for the purposes for which i....
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....t be said that there is a violation of section 11 (3) (c) of the Act. The emphasis given under the provisions of sections 11 (1) and 11 (2) is "application of income" for charitable or religious purposes and it is only in this context, the courts have taken the view that the handing over of the money by one trust to another trust having similar objects would amount to application of income. There are no weighty reasons to give a different meaning to the expression "utilised" as "spent" in section 11 (3) (c) of the Act and it cannot be assumed that the Legislature has postulated a different test for utilisation of the accumulated income. As observed by the Gujarat High Court in the case of CIT v. Sarladevi Sarabhai Trust (No. 2), [1988] 172 ITR 698, the expression, "utilisation" does not mean that the entire amount has to be spent forthwith. We agree with the above observation of the Gujarat High Court. 22. That apart, the assessee-trust by handing over the money to M. Ct. M. Chidambaram Foundation has completely lost its title and dominion over the accumulated money in question. Further, the donee trust is also a public trust and it also under the judicial supervision of the High....
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....was accumulated. The Supreme Court in the case of S. RM. M. Ct. M. Tiruppani Trust v. CIT, [1998] 230 ITR 636, held that the amount spent for purchase of a property by the trust would amount to application of income as the building was used for charitable purposes. Applying the same ratio, the assessee-trust by handing over the money to the donee trust has directed the donee trust to apply the accumulated income for the purposes for which the income was accumulated. As a matter of fact, the purposes mentioned include establishment, maintenance and management of hospitals, educational institutions, etc. It also includes rendering financial aid to any existing institution or educational institutions. It is seen that on the facts of the case, the educational institutions are existing institutions. The site for the hospital had been purchased by one of the assessee-trusts. Similarly, one of the purposes is to give substantial donation to any relief fund by way of charity and by handing over the accumulated money to the newly created trust, it cannot be said that the assessee has not utilised the accumulated income for a purpose other than the one for which the income was accumulated. I....
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....itable purpose may be served in more than one way. One is to directly contribute for the promotion of that cause; the other Ls to contribute money to another charitable organisation, which advances that cause. In the absence of allegations of device and/or mala fides, the amount contributed to other charitable institutions out of the income accumulated under sub-sec. (2) is outside the mischief of sub-sec. (3) of S. 11. In other words, such contribution does not amount to application of the income for purposes other than charitable or religious. 23. A good amount of controversy, however, raged as to the position where such contributions are made, not out of the income accumulated under sub-sec. (2), but out of contributions received by the assessee-trust. We have already set out S. 12 as it obtained prior to 1-4-1973 and also as it obtained with effect from the said date. Out of the two assessment years, A.Y. 1972-73 is governed by the unamended S. 12, whereas AY. 1973-74 is governed by the amended S. 12. The change in S. 12, however, makes no difference in so far as the facts of the present case are concerned. Under S. 12 (1), as it stood prior to 1st April, 1973, the income of ....
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....eing contribution with a specific direction that it shall form part of the corpus], shall not be treated as application of income for charitable or religious purposes." 23. Explanation 2 came to be inserted by Finance Act, 2017 with effect from 01 April 2018. Although the said provision would have no application to the facts of the present case and which is concerned with AY 2009-10, we thought it fit to take due notice of the same for the purposes of completeness. 24. The donations which are stated to have been made by the respondent assessee in the present case however, would not be hit by Explanation 2, since the same applies only to amounts credited or paid to certain categories of institutions and those being in the nature of a contribution accompanied by a direction that the amounts extended would form part of the corpus of those entities. As was noticed by us in the preceding parts of this decision, although the donations were made out of the accumulated income, the money was retrieved within two months. 25. In terms of Finance Act, 2002, an Explanation also came to be appended to Section 11 (2). The said provision reads as follows:- "Explanation.-Any amount credited or....
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....returned is also significant. In view of the order passed by the Commissioner of Income-tax (Appeals) in the case of Nav Bharati Educational Society, Ms. Bansal's allegation with regard to "entry scam" also does not survive. Consequently, there is no substantial question of law involved in the present appeal and accordingly, the appeal is dismissed but with no order as to costs." 28. The Allahabad High Court in CIT Vs. Kanpur Subhash Shiksha Samiti 2013 SCC OnLine All 14708 while affirming the view expressed in Acme pertinently observed:- "13. In the present case, we find that the excess of income over expenditure in the relevant year was less than 15 per cent. of the gross receipts. The loan was not given in the period relevant to the assessment year. It was given between February 20 and February 24, 2003, and was repaid in the year 2009 and further the amount was given by way of loan to a society, which was later on registered under section 12A, with effect from April 1, 2004, to May 25, 2005, with the same objects and purpose as that of the assessee. xxxx xxxx xxxx 15. We are in agreement with the reasoning given by the Delhi High Court in Director of Income-tax (Exem....