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Facts
The assessee, a not-for-profit company, had accumulated certain funds under Section 11(2) of the Income Tax Act for purchasing office premises. These funds were later utilized for the main objects of the trust. The Assessing Officer treated the unutilized accumulation as deemed income under Section 11(3) of the Act for the relevant assessment year, leading to an addition.
Held
The Tribunal held that if accumulated income was utilized for main objects in preceding years, it should be brought to tax in those years under Section 11(3)(a) read with Section 11(3)(i) of the Act, rather than being deemed income for the current assessment year. The Tribunal relied on the Delhi High Court judgment in Escorts Heart Institute & Research Centre.
Key Issues
Whether unutilized accumulated income under Section 11(2) of the Income Tax Act, subsequently used for main objects, is taxable as deemed income in the assessment year of non-utilization or in the years of application for main objects, as per Section 11(3)(a) and 11(3)(i).
Sections Cited
11, 11(2), 11(3), 11(3)(a), 11(3)(c), 11(3)(i), 11(3)(iii), 11(3A), 143(3), 147, 148, 250, 10(21), 35(1)(ii), 12A, 12AA, 12AB, 23C
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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER Asia Society India Centre 1021-22, 10th Floor, Maker Chamber V, Nariman Point, Mumbai - 400021, Maharashtra. [PAN:AAFCA6817M] …………. Appellant Income Tax Officer (Exemptions) 1(1), Vs Mumbai Pratishtha Bhawan, Churchgate, Maharshi Karve Road, Dhobi Talao, New Marines Lines, Mumbai – 400020, Maharashtra. …………. Respondent Appearance For the Appellant/Assessee : Shri Rakesh Joshi For the Respondent/Department : Shri Ram Krishn Kedia Date Conclusion of hearing : 24.10.2024 Pronouncement of order : 22.01.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member:
1. 1. The present appeal preferred by the Assessee is directed against the order, dated 10/06/2024, passed by the National Faceless Appeal Centre (NFAC), New Delhi [hereinafter referred to as ‘the CIT(A)’] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘ the Act’] whereby the Ld. CIT(A) had dismissed the appeal against the Assessment Order, dated 26/03/2015, passed under Section 143(3) of the Act for the Assessment Year 2012-13.
2. The Assessee has raised following revised grounds of appeal filed on 16/09/2024: Assessment Year 2012-2013 “1. The Learned Commissioner of Income Tax (Appeals)- National Faceless Appellate Centre [Ld. CIT(A)] has erred in law and in facts and circumstances of the case in upholding the Assessment Order dated 26/03/2015 passed u/s. 143(3) of the Act in determining the assessed income at Rs.54,27,305/- as against the returned income of Rs.NIL.
The Ld. CIT(A) has erred in law and in facts in passing the order without observing the principles of natural justice.
3. The Ld. CIT(A) has erred in confirming the action of the Ld. Assessing Officer [Ld. Assessing Officer] in making addition and disallowance of unspent accumulation made u/s. 11(2) of the Income Tax Act in the Financial Year 2006-07 Rs.23,62,687/- and Financial Year 2007-08 Rs.30,64,418/- a total of Rs.54,27,105/- which was since reversed and spent in the financial year 2011-12 being alleged deemed Income under section 11(3) of the Income Tax Act.
4. The Ld. CIT(A) has erred in confirming the action of the Ld. Assessing Officer in invoking the provision of section 11(3) of the Act in A.Y.2012-13, without considering the relevant provision of law.”
3. The Appellant is a not-for-profit company incorporated under Section 25 of the Companies Act and holding valid registration under Section 12A of the Act. For the Assessment Year 2012-2013, the Appellant filed return of income on declaring a deficit of INR.17,76,768/-. The aforesaid return was selected for regular scrutiny assessment. During the of the assessment proceedings, the Appellant was asked to submit the computation of Income for past 5 years [i.e. Assessment Year 2007-2008 to Assessment Year 2011-2012]. On perusal of the same, the Assessing Officer that the Appellant was allowed accumulation of INR.23,62,678/- and INR.30,64,418/- for the Assessment Year 2007-2008 and 2008-2009, respectively, under Section 11(2) of the Act which were to be utilized within the next five years for the purposes of buying office premises. The Assessing Officer noted that the aforesaid amount were not utilized for the said purpose and were used for the main objects. Invoking provisions 2 Assessment Year 2012-2013 contained in Section 11(3) of the Act, the Assessing Officer treated the accumulation of INR.23,62,687/- and INR.30,62,418/- made for Assessment Year 2007-2008 and Assessment Year 2008-09, respectively, as deemed income of the Appellant for the Assessment Year 2012-2013. Thus, the Assessing Officer made an addition of INR.54,27,105/- in the hands of the Appellant vide Assessment Order, dated 26/03/2015, passed under Section 143(3) of the Act.
Being aggrieved the Appellant preferred appeal before the CIT(A) which was dismissed vide order dated 10/06/2024.
The Appellant has now preferred the present appeal challenging the order passed by the CIT(A) before the Tribunal on the grounds reproduced in paragraph 2 above.
6. We have given thoughtful consideration to the rival submissions, perused the material on record and examine the position in law in light to the submission advanced by both the sides.
Section 11(1) of the Act provides for exemption of income derived from property held for charitable purpose to the extent such income is either applied or accumulated for charitable objects. Section 11(2) of the Act provides that subject to certain conditions the income accumulated or set-apart for specified purpose shall not be included in the total income of the previous year of receipt provided the person receiving such income furnishes a statement in the prescribed form and in the prescribed manner to the Assessing Officer stating the purpose for which receipt is being accumulated or set-apart along with the period of such accumulation or setting-apart [which was in no case can exceed 5 years]. Section 11(2) of the Act also provides that money accumulated or set apart as aforesaid should be invested or deposited in the specified forms/modes. Section 11(3) of the Act deals with the consequence of default of the 3 Assessment Year 2012-2013 aforesaid specified conditions subject to which the receipt was accumulated or set-apart and reads as under: “11(3) Any income referred to in sub-section (2) which— (a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or (b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or (c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section [or in the year immediately following the expiry thereof]*, (d) is credited or paid to any trust or institution registered under section 12AA [or section 12AB] or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, [shall be deemed to be the income of such person of the previous year- (i) which it is so applied or ceases to be so accumulated or set apart under clause (a); or (ii) In which it eases to remain so invested or deposited under clause(b); or (iii) Being the last previous year of the period for which the income is accumulated or set apart but not utilised for the purpose for which it is so accumulated or set apart under clause (c); or (iv) In which it is credited or paid to any fund or institution or trust or any university or other educational institutions or any hospital or other medical institution under clause(d)] (3A) Notwithstanding anything contained in sub-section (3), where due to circumstances beyond the control of the person in receipt of the income, any income invested or deposited in accordance with the provisions of clause (b) of sub-section (2) cannot be applied for the purpose for which it was 4 Assessment Year 2012-2013 accumulated or set apart, the [Assessing] Officer may, on an application made to him in this behalf, allow such person to apply such income for such other charitable or religious purpose in India as is specified in the application by such person and as is in conformity with the objects of the trust; and thereupon the provisions of sub-section (3) shall apply as if the purpose specified by such person in the application under this sub-section were a purpose specified in the notice given to the [Assessing] Officer under clause (a) of sub- section (2):] [Provided that the Assessing Officer shall not allow application of such income by way of payment or credit made for the purposes referred to in clause (d) of sub-section (3) of section 11:] [Provided further that in case the trust or institution, which has invested or deposited its income in accordance with the provisions of clause (b) of sub-section (2), is dissolved, the Assessing Officer may allow application of such income for the purposes referred to in clause (d) of sub-section (3) in the year in which such trust or institution was dissolved.]”
A perusal of Section 11(3) of the Act shows it is divided into 2 parts. The first part of Section 11(3) of the Act contains Clause (a), (b) (c), and (d) each dealing with a particular default; while the second part of Section 11(3) contains Clause (i), (ii), (iii) and (iv) dealing with consequences corresponding to the default listed in Clause (a) to Clause (d). For the issues arising for consideration in the present appeal, only the default listed in Clause (a) and Clause (c) as well as their corresponding consequences contained in Clause (i) and Clause (iii), respectively, are relevant.
The provisions contained in Clause (a) read with Clause (i) of Section 11(3) of the Act provide that in case the income accumulated in terms of Section 11(2) of the Act is applied for a purpose other than chartable purpose for which such income was accumulated or ceased to be accumulated, the same shall be deemed to be income of the previous year in which such income has been so applied or ceases to be accumulated. The contention of the Appellant is that the case of the Appellant falls under this category.
5 Assessment Year 2012-2013 According to the Appellant the income accumulated/set-apart was utilised for mains objects [but not for the purpose for which the income was accumulated/set-apart] during the preceding previous years, and therefore, the same could have been brought to tax in those years only and not as deemed income for the relevant previous year.
On the other hand, the provisions contained in Clause (c) read with Clause (iii) of Section 11(3) of Act provide that in case the income is accumulated/set-apart in terms of Section 11(2) of the Act for a specified period [not exceeding 5 years] and the same is not utilized in the aforesaid period, then such income shall be deemed to be income of the previous year being the last previous year of the period for which the income was accumulated or set apart. It was vehemently contended by the Learned Departmental Representative that the Assessing Officer was correct making addition of income accumulated for the Assessment Year 2007-2008 and 2008-2009 since the income was not utilised for the stated purpose. It was also contended by the Learned Departmental Representative that the Appellant had, admittedly, not moved application under Section 11(3A) of the Act for modification of purpose of accumulation. Therefore, the Appellant could not be indirectly allowed to claim benefit of Section 11(3A) of the Act.
3 During the course of hearing the Learned Authorised Representative for the Appellant had placed reliance upon the judgment of Hon’ble Delhi High Court in the case of Escorts Heart Institute & Research Centre Vs. Commissioner of Income Tax, Centre: [2013] 30 taxmann.com 4 (Delhi) wherein identical issue of interpretation of provisions contained in Section 11(3) of the Act had come up for consideration before the Hon’ble Delhi High Court in a writ petition challenging the initiation of re-assessment proceedings under Section 147 of the Act. While quashing the reassessment 6 Assessment Year 2012-2013 proceedings, the Hon’ble Delhi High Court held that the provisions contained in Section 11(3) of the Act clearly provided that accumulated income shall be deemed to the income of the Assessee of the previous year in which the breach of the condition or contingency had occurred. Since, the statute had fixed the assessment year in which the income was to be brought to tax, it was impressible in law for the Assessing Officer to entertain the belief that such income was liable to tax in a different assessment year. The relevant extract of the aforesaid judgments of the Hon’ble Delhi High Court reads as under:
2. Section 10(21) provides for exemption of any income of a scientific research association which is approved under section 35(1)(ii) The first proviso, however, makes the exemption subject to the provisions of sub-sections (2) and (3) of section 11 of the Act. Section 11(3) provides for certain contingencies in which the accumulated income of the scientific research association which was granted exemption over a period of years would become taxable. On the happening of any of the contingencies provided for, the accumulated income which earlier enjoyed exemption shall be deemed to be the income of the scientific research association of the previous year in which the contingency happened. It does not matter that the accumulated income in respect of the earlier years which had hitherto enjoyed exemption from tax, does not relate to the previous year in which the contingency took place. This, in short, is the substance of section 10(21) read with section 11(2) and (3) of the Act.
The petitioner is a scientific research society approved by the competent authority under section 35(1)(ii) for research activity in the field of coronary diseases and other connected fields. In this writ petition we are concerned with the validity of the notices issued by the assessing officer under section 148 of the Act seeking to reopen the assessments for the assessment years 1998-99, 1999-00 and 2000-01. ………… 4. It would appear that the petitioner filed its objections to the notices, but these objections were rejected by the assessing officer who proceeded to complete the reassessments. In the re- assessments the assessing officer has added the balances of the accumulated income at the end of each year i.e. 31.03.1998. 7 Assessment Year 2012-2013 31.03.1999 and 31.03.2000 which came to the following: - Assessment year Amount 1998-99 17,55,71,699/- 1999-2000 22,33,74,723/ 2000-01 28,62,10,092/- 5. Elaborate arguments were addressed before us on the question of jurisdiction of the assessing officer to reopen the assessments. These have been considered. The precise question that arises for our consideration has been formulated in the beginning of our order. Even assuming that there was breach of any statutory conditions under which the exemption was granted to the petitioner under section 10(21), the entire accumulated income of the earlier years cannot be taxed in those years by reopening the assessments for those years. Section 11(3), which is made applicable to section 10(21), itself provides that the entire accumulated income shall be deemed to be the income of the assessee of the previous year in which the breach of the conditions or the contingency occurs. The statute having thus fixed the assessment year in which the entire past accumulated income falls to be taxed, it is impermissible in law for the assessing officer to entertain a reason to believe that income chargeable to tax for the assessment years 1998-99 to 2000-01 had escaped assessment. The statute has imposed a fetter on the power of the assessing officer to consider the accumulated income, as the income of the respective earlier years and has mandated it to be the income of the previous year commencing on 01.04.2000 and ending on 31.03.2001 relating to the assessment year 2001-02 which is the year in which the petitioner was amalgamated with Escorts Hospital. Chandigarh and transferred all its assets to the Chandigarh Hospital which is looked upon as a breach of the statutory provisions subject to which the exemption under section 10(21) was allowed. The consequences of the breach having been provided by the statute itself, it is not open to the assessing officer to consider the accumulated income as having escaped assessment in the past assessment years. He has to perforce bring to tax the accumulated income only in the year in which the breach occurred: that is the mandate of section 11(3).
Two important conditions for the applicability of section 147 are (a) income chargeable to tax must have escaped assessment and (6) assessing officer must have reason to believe so. When 8 Assessment Year 2012-2013 section 11(3) treats the accumulated income of the past year of the petitioner as income of the assessment year 2001-02, there can be no question of any income escaping assessment in the past assessment years i.e. the assessment years 1998-99 to 2000-01. It follows that the assessing officer cannot entertain any reason to believe that income chargeable to tax for those years had escaped assessment. For these reasons we quash the notice issued under section 148 of the Act for all three years Le, assessment years 1998-99 to 2000-01 and allow the writ petition with no order as to costs.” (emphasis supplied) 4 It was contended by the Learned Departmental Representative that Assessing Officer has invoked provisions contained in Section 11(3)(c) read with Section 11(3)(iii) of the Act. However, we are of the view that in the facts of the present case the provisions contained in Section 11(3)(a) read with Section 11(3)(i) of the Act would get attracted since the accumulated amounts were ‘utilised’ for the mains objects [during the preceding previous years]. We note that in paragraph 6.1 of the Assessment Order, the Assessing Officer tabulated year-wise accumulation and application out of accumulations. From the same it can be seen that INR.23,62,687/- and INR.30,64,418/- were accumulated during the Assessment Year 2007-08 and 2008-09, respectively. On the other hand accumulation of INR.31,68,250/- and INR.21,60,433/- were applied during the Assessment Year 2009-10 and 2011-12, respectively and therefore, the aforesaid amounts could have been brought to tax in the hands of the Appellant during the Assessment Year 2009-10 and 2011-12, respectively, as per the provisions contained in Section 11(3)(a) read with Section 11(3)(i) of the Act as interpreted by the Hon’ble Delhi High Court in the above judgment.
5 Accordingly, in view of the above, we set aside the order, dated 10/06/2024, passed by the CIT(A) and direct the Assessing Officer to reduce the addition of INR.54,27,105/- [INR.31,68,250/- 9 Assessment Year 2012-2013 (Assessment Year 2007-08) Plus INR.21,60,433/- (Assessment Year 2008- 09)] by the aggregate amount of accumulated income utilized in the Assessment Years 2009-2010 and 2011-2012 after carrying out necessary verification of the assessment records for the Assessment Years 2009-10 and 2011-12. In terms of aforesaid Ground No.4 raised by the Assessee is allowed, Ground No.1 raised by the Assessee is partly allowed, Ground No.2 and 3 raised by the Assessee are dismissed as having being rendered infructuous.
6 In result, the appeal preferred by the Assessee is partly allowed.