Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI B.M. BIYANI & SHRI PARESH M. JOSHI
आदेश/O R D E R
Per B.M. Biyani, A.M.:
Feeling aggrieved by order of first appeal dated 19.12.2017 passed by learned Commissioner of Income-Tax (Appeals)-3, Bhopal [“CIT(A)”] in Appeal No. CIT(A)-2/BPL/IT-638/16-17, which in turn arises out of assessment-order dated 30.12.2016 passed by learned DCIT (Exemption), Bhopal [“AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment- Year [“AY”] 2014-15, the assessee has filed this appeal raising effective ground as under:
Board of Secondary Education – AY 2014-15 “1. On the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals-II), Bhopal was not justified in holding that the payment of Income Tax of Rs. 2,16,50,650/- paid on deemed income u/s 11(3) for AY 2013-14 should not be allowed as a deduction or application of the income of the current year (AY 2014-15) & is hence also wrong in upholding the following:- a) Tax demand of Rs 84,72,830/- b) Interest payable U/s 234A, 234B & 234C.”
The background facts leading to present appeal before us are as under:
(i) The assessee, a Board of Secondary Education formed by State Govt. of Madhya Pradesh, filed its return of income of AY 2014-15 declaring a total income of Rs. 4,51,53,000/- after claiming exemption u/s 11/12 of the Act. The case was selected under scrutiny and the AO issued notices u/s 143(2)/142(1) which were complied by assessee.
Ultimately, the AO assessed total income at Rs. 6,68,03,650/- after making a disallowance of 2,16,50,650/- out of “application of income” claimed by assessee u/s 11(1)(a). Aggrieved, the assessee carried matter in first-appeal before CIT(A) but did not get any success.
(ii) Thereafter, the assessee filed present appeal before ITAT, Indore. The ITAT, vide order dated 10.07.2019, dismissed assessee’s appeal in limine on account of non-prosecution by assessee.
(iii) Thereafter, the assessee filed M/A No. 65/Ind/2019 seeking re-call of aforesaid order dated 10.07.2019 of ITAT. The ITAT, vide order dated
07.01.2020, allowed assessee’s M/A; re-called its earlier order and re- stored assessee’s appeal.
Board of Secondary Education – AY 2014-15 (iv) Thereafter, the ITAT re-heard assessee’s appeal and vide order dated dated 06.11.2020, again dismissed assessee’s appeal upholding CIT(A)’s order. (v) Thereafter, the assessee carried matter in next appeal before Hon’ble High Court of Madhya Pradesh in ITA No. 10/2021. Before Hon’ble
High Court, the assessee assailed ITAT’s order dated 06.11.2020 on the ground that the ITAT had passed a “non-speaking” order. The Hon’ble High Court, vide its Judgement & Order dated 17.11.2021, disposed of assessee’s appeal and was pleased to direct the ITAT to pass a “speaking” order. The concluding para of Hon’ble High Court’s order reads as under:
“12. In the conspectus of above discussion, the present appeal on the aforesaid short substantial question of law is allowed. (i) The impugned order dated 06.11.2020 passed by the Income Tax Appellate Tribunal, Indore Bench in is set aside. (ii) The Income Tax Appellate Authority, Indore Bench is expected to decide pertaining to the assessment year 2014-2015 by passing a fresh speaking order.
It is made clear that in case the composition of the Appellate Tribunal has since changed, then prior to passing speaking order, the rival parties ought to be given a hearing in accordance with the Income Tax Act.
It is also made clear that we have not commented upon merits of the claim before the Tribunal.” (vi) Accordingly, in pursuance of above judgement & order of Hon’ble High
Court, the present appeal has again come before ITAT, Indore bench for passing a “speaking” order.
Board of Secondary Education – AY 2014-15 3. We have heard the learned representatives of both sides and carefully perused the case record including the orders of lower authorities and the applicable provisions of law in the light of decided judicial rulings.
The limited controversy which calls for our adjudication is qua the “application” of Rs. 2,16,50,650/- claimed by assessee u/s 11(1)(a) but disallowed by Ld. AO and upheld by Ld. CIT(A).
Admittedly, the assessee has claimed impugned “application” u/s 11(1)(a) in respect of Income-tax related to immediately preceding AY 2013- 14, paid during current year (i.e. paid during previous year 2013-14 relevant to AY 2014-15 under consideration) by utilizing income of current year.
At first, we re-produce below the applicable provision of section 11(1)(a) reading as under:
“(1) Subject to the provisions of section 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income – (a) Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; ………” [emphasis supplied] 7. Thus, the section 11(1)(a) grants exemption to “Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; ………”. The controversy before us is very specific and limited i.e.
Whether the Income-tax paid by assessee during current year by utilizing
Board of Secondary Education – AY 2014-15 income derived from property held under trust for charitable purpose, can be said to have been applied to charitable purpose of assessee-trust?
Ld. AR for assessee submitted that the payment of income-tax is necessary for existence of trust and preserving trust. Therefore, it is definitely an application for charitable purpose. He submitted that this very issue has already come before different appellate forums for adjudication and the courts have held in favour of assessee. Ld. AR placed reliance on certain decisions holding such a proposition, as under:
(a) Hon’ble Gujrat High Court in CIT Vs. Ganga Charity Trust Fund
(1986) 29 Taxman 413 (Guj):
“6. In CIT v. Trustee of ILLH. The Nizam's Supplemental Religious Endowment Trust (1981) 127 ITR 378, the Andhra Pradesh High Court held that the payments of income-tax and wealth-tax made during the relevant year related to the previous assessment year, were incidental to the carrying out of charitable purposes of the trust. Such payments were outgoings in that particular year and were, therefore, incidental to the carrying out of the objects of the trust and had, therefore, to be excluded from the income of the trust. In CIT v. Rao Bohadur Calavalu Cunnan Chetty Charities [1982] 135 ITR 485, the Madras High Court held that the income from the properties of the trust would have to be arrived at in the normal commercial manner without classification under the various heads set out in section 14 of the Act. The same High Court in CIT v. Estate of VL. Ethiraj [1982] 136 ITR 12 held that income from the property held under trust would have to be arrived at in the normal commercial manner without reference ad as to the provisions of section 14. In CIT v. Janaki Ammal Ayya Nadar Trust [1985] 153 ITR 159, the Madras High Court held that where the entire Income of the trust during the relevant assessment year had been applied for payment of tax, it had to be treated as having been applied for charitable purposes and the assessee would be entitled to exemption. it further held that in such a fact situation there would be no income in the relevant assessment year for being spent for charitable purposes, the amount of income-tax paid be taken into account for the determination of the commercial profits and available surplus in the hands of the trustees for application for the purposes of the trust. The said payment must, therefore, be taken to be an outgoing of the year in which it was paid and as such Page 5 of 13
Board of Secondary Education – AY 2014-15 treated as actual expenditure to be deducted before calculating the surplus income.
The view taken by the Courts in the above referred cases is that before determining the income which could be actually applied or accumulated for the purposes of the trust under section 11(1)(a), all outgoings, including, the outgoing in the nature of payment of income-tax must be deducted. It is only from the surplus income that remains in the hands of the trustees that actual application or accumulation for the purposes of the trust can be expected. If there is an income which could be actually applied or accumulated by the trustees for the purposes of the trust, the trustees would be incapable of actually applying or accumulating the income for taking benefit of section 11(1)(a). Therefore, even in the case of an assessce following the mercantile system of accounting, there can be no doubt that for the purposes of actual application or accumulation or setting apart of income from trust property for the purposes of the trust, the trustees must have on hand income which could be so utilised and what is outgoing towards payment of income-tax must be deducted for working out such surplus Income. If a notional income calculated on the basis of accrual under the mercantile system of accounting is conceived as income for the purposes under section 11(1)(a), it must be conceded that such notional income can never be actually applied or accumulated or set apart for the purposes of the trust and the assessee-trust would while being liable to pay income-tax on accrual basis not be able to derive the benefit conferred by the said provision. We are, therefore, of the view that the Tribunal was right in coming to the conclusion that the income derived from trust property must be determined on commercial principles and in doing so all outgoings, including outgoing by way of income-tax paid by the assessee-trust must be deducted and it is only from the surplus income in the hands of the trustees that the question of application or accumulation or setting apart of income can arise. In this view that we take, we do not feel called upon to examine the second contention based on the decisions referred to above, whether the expenditure incurred by the, trust for the payment of income-tax can be said to be actual application of income for the charitable purposes of the trust in India.” (b) Hon’ble Delhi High Court in Director of Income-tax (Exemption)
Vs. National Association of Software and Services Companies
(2012) 21 taxmann.com 213 (Delhi):
“11. The question before us, however, is not a simple question as to whether taxes on income are deductible in computing the taxable income of the assessee. The question before us is whether, while applying Section 11(1)(a) and determining the income available to the trust for application to charitable purposes, the availability of the income should be considered in the light of the commercial principles or whether such income is also to be arrived at or determined as ordained in the Act. This question has come up
Board of Secondary Education – AY 2014-15 for consideration before several High Courts. We may briefly notice some of them. In Commissioner of Income Tax v. Ganga Charity Trust Fund, (1986) 162 ITR 612, the question arose as to whether the income tax liability of Rs. 77,972/- should be allowed as a deduction while computing the income available for application to charitable purposes in accordance with Section 11(1)(a) of the Act. The Gujarat High Court held that "income derived from trust property" for the purposes of Section 11(1)(a), must be determined on commercial principles and in doing so, all outgoings including outgoing by way of income tax paid by the assessee-trust must be deducted and it is only from the surplus income in the hands of the trustees that the question of application or accumulation or setting apart of income can arise. The question was examined by the Madras High Court in Commissioner of Income Tax v. Janaki Ammal Ayya Nadar Trust, (1985) 153 ITR 159. In this judgment, the Court placed reliance on Circular No. 5 dated 19.06.1968 issued by the CBDT. The relevant portion of the circular is extracted below: -
"2. Section 11(1) provides that subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year......”. The reference in sub-section (1)(a) is invariably to “income” and not to “total income”. The expression “total income” has been specifically defined in section 2(45) of the Act as “the total amount of income computed in the manner laid down in this Act”. It would, accordingly be incorrect to assign to the word “income‟, used in section 11(1)(a), the same meaning as has been specifically assigned to the expression “total income”, vide section 2(45).
In the case of a business undertaking held under trust, its “income‟ will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the Income-tax Officer, in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed by the account will be eligible for exemption under section 11(1), the permitted accumulation of 25% will also be calculated with reference to this income."
Relying on the Circular, it was held by the Madras High Court that the expenditure incurred by a charitable trust by way of payment of tax out of the current year's income has to be considered as application for charitable purposes because such payment has to be made to preserve the corpus, the existence of which is absolutely necessary for the trust. In Commissioner of Income Tax v. Trustee of H.E.H. (1981) 127 ITR 378, the Andhra Pradesh High Court had expressed the view that only such income which is left after deducting the expenditure or such of the monies which are left with the trust after meeting all expenditure, that the surplus income can be arrived at and that such surplus income has to be computed on the basis of Page 7 of 13
Board of Secondary Education – AY 2014-15 commercial principles. In that case, wealth tax and income tax had been paid by the trust during the relevant years though they related to the preceding assessment years. Nevertheless, the High Court held that the payments should be deducted from the income of the trust for the purposes of arriving at the income available for application to charitable purposes. Similar view has been taken by the Calcutta High Court in Commissioner of Income Tax v. Birla Janahit Trust, (1994) 208 ITR 372 and by the Madhya Pradesh High Court in Commissioner of Income Tax v. Raipur Pallottine Society, (1989) 180 ITR 579.
12. Thus, it appears that there is a consensus of judicial view on the question whether payment of taxes can be considered as a proper deduction while determining the income available to a trust for application to charitable purposes as required by Section 11(1)(a) of the Act. The question is not whether taxes are allowable while computing the business income of an assessee under the provisions of the Act. The question is whether the word "income" used in Section 11(1)(a) of the Act must be assigned the same meaning as the words "total income" as defined in Section 2(45) of the Act. The CBDT itself has opined in the circular cited above that it would be incorrect to assign to the word "income" used in Section 11(1)(a) the same meaning as has been statutorily assigned to the expression "total income" under Section 2(45) of the Act. Having regard to the authorities noticed above and keeping in view the fact that the long- settled position, which has also been accepted by the CBDT, should not be upset, particularly where the statute which we are dealing with is an all-India statute, we express our agreement with the judicial trend and hold that the payment of taxes under the VDIS is to be deducted before arriving at the commercial income of the assessee- trust that is available for application to charitable purposes. We are thus in agreement with the view taken by the Tribunal on this point.”
(c) ITAT, Hyderabad bench in Institute for Development and Research in Banking Technology (IDRBT), Hyderabad Vs.
Assistant Director of Income-tax (E)-1, Hyderabad (2015) 63 taxmann.com 297 (Hyderabad – Trib.):
“22. Similarly, the provisions for payment of tax should be allowed as application of income for charitable purposes. Expenditure by way of payment of tax out of current year's income has to be considered as 'application' for charitable purposes because the payment has been made to preserve the corpus, the existence whereof is essential for the appellant society itself. Please refer to CIT v. Janaki Animal Ayya Nadar Trust [1985] 153 ITR 159/23 Taxman 416 (Mad). Also see, CIT v. Ganga Charity Trust Fund [1986] 162 ITR 612/29 Taxman 413 (Guj); CIT v. Ganga Charity Trust Fund [1993] 115 CTR (Guj) 325; CIT v. Apostolos Raptakos Trust [1995] 83 Taxman 422 (Bom.), CIT v. Trustee of H.E.H.
Board of Secondary Education – AY 2014-15 the Nizam's Supplemental Religious Endowment Trust [1981] 127 ITR 378 (AP). However, we note from the assessment-order that the appellant society had debited the above provision for taxation to income and expenditure account. The Assessing Officer had adopted the excess of income over expenditure for taxation and further addition of provision for income tax was made. For the purpose of computation of income available for application for charitable purposes, it is only the actual receipts and payments which are all alone to be considered. Therefore, we direct the Assessing Officer to allow the provision for taxation only in the year in which actual payment is made.”
Ld. AR submitted that the issue whether the payment of income-tax is an application for charitable purpose for section 11(1)(a), is very clearly settled in favour of assessee in above decisions of Hon’ble High Courts and ITAT, Benches and in view of same, the claim of assessee must be allowed.
Ld. AR also submitted that the lower authorities have made a mis- conceived observation that the impugned income-tax was paid by assessee on the amount of “deemed income” assessed u/s 11(1B) in AY 2013-14 and therefore the same should not be considered as ‘application of income’. Ld. AR submitted that the entire discussion made by lower authorities qua the “deemed income” and thereafter making a heighted observation that if the income-tax relatable thereto is allowed as application of income, it would incentivize the assessee to make defaults, is absolutely unnecessary, irrelevant and out of place. He submitted that it is a correct fact that the impugned payment of income-tax amounting to Rs. 2,16,50,650/- was relatable to the sum of Rs. 6,44,38,000/- “deemed as income of AY 2013-14 u/s 11(1B)”, the assessee does not deny this fact [the assessment-order of AY 2013-14 passed by AO is placed in Paper-Book at Pages 30-31]. But one has to see what is provision of section 11(1B) rather than making a self-
Board of Secondary Education – AY 2014-15 made, heighted observation of blaming assessee. He submitted that section 11(1B) is just a “deeming provision” for taxing the income for which a trust claims extended period by exercising option under Clause (2) of the Explanation to section 11(1) but subsequently unable to utilize income in extended period. Thus, the section 11(1B) essentially charges a normal tax on the income which remains unutilized with the trust, otherwise there is no default or diversion of funds or non-charitable use by a trust. Therefore, the observation made by lower authorities that the assessee has committed any default or serious default, is grossly wrong. He submitted that in the judicial rulings cited by him, the Hon’ble Courts have accepted the payment of income-tax relatable to earlier/preceding AY, as an application of current year’s income u/s 11(1)(a).
Replying to same, Ld. DR referred orders of lower-authorities and made arguments primarily on the same lines as made by those authorities.
Firstly, he submitted that the section 11(1)(a) allows exemption for application to charitable/religious purpose only and payment of income-tax cannot be accepted as application to charitable/religious purpose. Secondly, he submitted that in AY 2013-14, the AO has taxed “deemed income” of Rs. 6,44,38,000/- u/s 11(1B) and the impugned tax liability of Rs. 2,16,50,650/- being claimed by assessee as “application”, was a liability in relation to the said “deemed income” assessed by AO. He submitted that there is a subtle difference in ‘income’ and ‘deemed income’. He submitted
Board of Secondary Education – AY 2014-15 that the AO has assessed ‘deemed income’ in AY 2013-14 for the default made by assessee. Therefore, giving the benefit of ‘application’ to assessee, would certainly incentivize the assessee to make default. With these submissions, Ld. AR contended that the lower authorities have rightly disallowed assessee’s claim and the disallowance must be upheld by this bench.
We have considered rival contentions of both sides and perused the orders of lower-authorities as well as the material held on record to which our attention has been drawn. The issue before us is whether the income- tax of Rs. 2,16,50,650/- relatable to preceding assessment year but paid by assessee during current year by utilizing income of current year, is an application to charitable purpose entitled for exemption u/s 11(1)(a)? So far as this issue is concerned, there are direct decisions of Hon’ble High Courts and ITAT, as cited above, in favour of assessee. The Hon’ble Courts have held that the “income-tax” payment is very necessary for the existence of a trust and for preserving trust. The Hon’ble Courts have vehemently dealt the observations made by AO in Para 4.8 of assessment-order. The Ld. DR for revenue has not cited any decision contrary to above decisions cited by Ld. AR for assessee. Respectfully following the pre-existing view of Hon’ble Courts, we are inclined to accept that the “income-tax” paid by assessee in present case is entitled to be treated as application to charitable purpose for the purpose of section 11(1)(a).
Board of Secondary Education – AY 2014-15 13. In so far as the adverse observation made by lower-authorities that the impugned income-tax was paid by assessee on the amount of “deemed income” assessed u/s 11(1B) in AY 2013-14 and therefore the same should not be considered as ‘application of income’ and further observation that if the income-tax relatable thereto is allowed as application of income, it would incentivize the assessee to make defaults, we find a strong merit in the submission of Ld. AR that such an observation is mis-conceived. We agree that before jumping to make any such adverse observation, one must understand the provision of section 11(1B). We find that the section 11(1B) is a mere “deeming provision” for taxing the income for which a trust claims extended period by exercising option under Clause (2) of the Explanation to section 11(1) but subsequently unable to utilize income in extended period.
Thus, the section 11(1B) essentially charges a normal tax on the income which remains unutilized with the trust. There is no default committed by assessee in the nature of diversion of funds or non-charitable use, etc. We also find that the CIT(A) has, in Paras 8 to 11 of impugned order, given a discussion of section 11(3) of the Act and stated that section 11(3) is punitive in nature but the consideration of section 11(3) by CIT(A) is itself un-related to present case of assessee. In conclusion, we do not agree with the observations made by lower-authorities which are directed only to deny the benefit of application to assessee, the same are rejected.
Board of Secondary Education – AY 2014-15 14. In view of above, we arrive at a conclusion to allow the claim of assessee and accordingly, we direct the AO to allow the same.
Resultantly, this appeal is allowed.
Order pronounced in open court on 03/12/2025