NATIONAL LAW INSTITUTE UNIVERSITY ,BHOPAL vs. DCIT(EXEMPTION), BHOPAL

आदेश/ O R D E R

Per B.M. Biyani, A.M.:

2. The registry has informed a delay of 78 days (the assessee has calculated 74 days) in filing this appeal. Ld. AR for assessee invited our attention to the condonation-application filed by assessee, supported by an affidavit on stamp, explaining the reason of delay as under:

“To The Hon'ble Members, Income Tax Appellate Tribunal, Indore Bench Subject: Application for Condonation of Delay in Filing Appeal in Case of National Law Institute university, Bhopal PAN No AAAJN0534C Respected Members, With reference to the subject cited above, it is respectfully submitted that the delay in filing the appeal was due to the following reasons: While filing the appeal before the Commissioner of Income Tax (Appeals) on 16.10.2017, the email ID of our consultant, CA Sanjay Srivastava, was provided. However, subsequently, finance officers and other officials were appointed on deputation/contract basis in NLIU. Consequently, the email ID of the Accountant, Mr. Alok Aggarwal, being the only regular employee in the Accounts Section at that time, was updated on the portal. When the appeal order was finalized on 21.12.2023. Mr. Alok Aggarwal had already proceeded on deputation to the Atal Bhujal Yojana. As a result, the final order could not come to the notice of the University. During the process of finalizing the accounts for the Financial Year 2023-24, the order came to our notice on 15th April 2024. Thereafter, with the due approval of the competent authority, the appeal was filed on 3rd May 2024. Thus, there is a delay of 74 days in filing the appeal. In light of the genuine and reasonable circumstances explained above, we respectfully request that the delay of 74 days be kindly condoned, and the appeal be admitted in the interest of justice. Thanking you, Yours faithfully, For National Law Institute University

(Vivek Baksi) Registrar Dated 11.04.2025

3. The reasoning given by assessee is discussed and the Ld. DR for revenue left this issue for the wisdom of bench without raising any objection against condonation of delay. After a careful consideration, the delay of 78/74 days is condoned taking into account the explanation given by assessee in above application in the light of Collector, Land Acquisition Vs Mst. Katiji and others 1987 AIR 1353, 1987 2 SCC 387 having settled the law long back that all such technical aspects must make a way for the cause of substantial justice.

Page 3 of 36 order]. Aggrieved, the assessee carried matter in first-appeal before CIT(A) and contested the adjustments made by AO but did not get any success.

Now, the assessee has come in next appeal before us.

5. The grounds raised by assessee are as under:

“1. The Ld. AO was not justified in passing the order, which is bad-in-law, void ab initio, barred by limitation, illegal, contrary to the facts and circumstances of the case, liable to be annulled.

2. The Ld. CIT(A) was not justified in confirming the order, which is bad-in- law, void ab initio, barred by limitation, illegal, contrary to the facts and circumstances of the case, liable to be annulled.

3. The Ld. CIT(A) was not justified in confirming the addition of Rs. 5,42,75,671/- on account of Reserves & Surplus of mess A/c without considering the facts and circumstances of the case.

4. The Ld. CIT(A) was not justified in confirming the addition of Rs. 20,21,992/- on account of treating income from mess u/s 11(4) without considering the facts and circumstances of the case.

5. The appellant carves leave to add, amend or modify any of the grounds of appeal.” Ground No. 1 & 2:

6. During hearing, these grounds are not pressed and accordingly dismissed at the request of Ld. AR for assessee.

Ground No. 3:

The assessee further submitted that the unutilized opening balance of Rs. 5,42,75,671/- was added to ‘Reserve & Surplus A/c” [Para 4.3 of Page 5 of 36 assessment-order]. Based on reply of assessee, the AO formed a view that the impugned amount was income of assessee which has to be offered as income. Accordingly, vide order-sheet entry dated 05.12.2017, the AO asked assessee to furnish year-wise break-up of the amount of Rs. 5,42,75,671/- [Para 4.5 of assessment-order]. The assessee filed reply dated 08.12.2017 intimating to AO that it is not possible to bifurcate year-wise break-up and the assessee offered the same as income for tax in the year under assessment (i.e. AY 2015-16) [Para 4.6 of assessment-order]. Taking into account submission of assessee, the AO made addition of Rs. 5,42,75,671/- as unexplained credit u/s 68 [Para 4.8 of assessment-order].

“6.1.1 I also find that the assessee during the appellate proceedings has submitted that though it could not give year wise bifurcation during the assessment proceedings but it can submit the same now and it does not pertain to the year under consideration. I am unable to agree with the assessee's proposition as the assessee itself during the assessment proceedings had itself vide a letter dated 08.12.2017 offered the accumulated profits surplus of Rs. 5,42,75,671/- from running of Hostel and Mess as taxable income for the year under consideration. In the circumstances, I do not see any reason to interfere with the well-reasoned and speaking order of the AO. Hence, the ground of appeal

No. 1 is Dismissed.”

10. During hearing before us, Ld. AR for assessee at first drew us to the following submission made by assessee to CIT(A) during first-appeal, which is re-produced by CIT(A) in impugned order on Page No. 6-7:

Page 6 of 36 “It is submitted here that Assessee is an Educational Institution. Its income up to A.Y. 2014-15 was exempted u/s 10(23C)(iiiab), however since A.Y. 2015-16 its income is exempted u/s 12AA of Income Tax act 1961. It is submitted that the Mess accounts were maintained by separate person and was kept separately from the university main accounts. There was no intention of the Assessee to hide it. It was simply due to mistake and this is the cause that as soon as Assessee came to know about it, they merged entire surplus of Rs. 5,42,75,671/- till 31.03.2014 year in Final account in the year Assessed though assessment years. Receipts and Expenditure have been taken to Income and expenditure account. It is submitted that the receipt on account of Mess services is given below: S.No. Year Op. Balance Receipt Expenditure Closing balance 1. 2007-08 11268735 8184000 5204949 14247786 2. 2008-09 14247786 11624823 6082726 19789883 3. 2009-10 19789883 11549711 7269503 24070091 4. 2010-11 24070091 13923736 8167016 29826811 5. 2011-12 29826811 16995760 9480334 37342237 6. 2012-13 37342237 16872473 9232865 44981845 7. 2013-14 44981845 22615216 13321390 54275671 From the above chart it is clear that the surplus of Rs. 5,42,75,671/- is not related to any one year, rather it is surplus of entire previous years since beginning. We are enclosing here certified copy of Mess account for above years as per Annexure "A". It is further submitted that had the surplus of the previous years routed through Income and expenditure account of the relevant year, there would had no tax as such occurred to the Assessee since institutions income in the previous years was exempted u/s 10(23C)(iiiab) of Income Tax Act, 1961. We are enclosing herewith copy of judgment of Tribunal for A.Y. 2014-15 in favour of the Assessee where it was accepted that the Appellant income was Exempted u/s 10(23C)(iiiab) of Income Tax Act 1961 (Annexure "B" enclosed). It is, therefore, not fair to presume it as unaccounted and unexplained u/s 68 of income Tax act 1961 in the hand of the Assessee simply on the basis of the fact that the entire surplus has been routed through Balance-Sheet in Assessed Year. We are enclosing herewith Annexure "C” which shows Govt Grant and fees without taking Mess fess and another chart in Annexure "D" which shows Govt grant and fees taken Mess fess which shows that if the said receipts would had added in previous years then also the Appellant income was exempted u/s 10(23C)(iiiab) of Income Tax Act 1961. It is, therefore, requested to kindly delete addition of Rs. 5,42,75,671/- on account of this issue.”

11. Thereafter, Ld. AR drew us to “Schedule-2” titled as “Reserve & Surplus” forming part of audited Balance-Sheet of assessee, available at Page 7 of 36 Page 10 of Paper-Book, wherein it is clearly mentioned: “Balance of Mess account unutilized of earlier year – Rs. 5,42,75,671.10”. Ld. AR submitted that the impugned amount was brought in assessee’s books through a journal entry recorded on 01.04.2024. He submitted that both of the lower- authorities, viz. AO and CIT(A), have accepted that the impugned balance of Rs. 5,42,75,671/- relates to earlier years and they are not against this factual aspect. However, during scrutiny-proceeding, when the AO asked assessee to supply year-wise breakup of earlier years, the then counsel of assessee filed a reply which has been taken into consideration by AO in Para 4.6 of assessment-order in these words: “In response to the above, vide written submission dated 08.12.2017, the assessee submitted that it is not possible to bifurcate the above unutilized amount year-wise and the assessee offered the same income for tax in the year under assessment.” Ld. AR drew us to the impugned letter dated 08.12.2017 filed by assessee’s then counsel, available at Page 31 of Paper-Book, the same is scanned and re-produced for an immediate reference:

“2. Surrender by the counsel is not binding a. It is a settled proposition of law that there cannot be any estoppel against the law. The law is settled that every year is a different unit of taxation, and income of one year cannot be taxed in another year. b. In a case where the assessee offered the dividend in its return, but later, challenged the validity of taxing the dividend income in the year in question, it was held that it must be taken that the assessee had resiled from the position which it had wrongly taken while filing the return. [CIT vs Bharat General Reinsurance Co Ltd. (1981) 81 ITR 303 (Del.)]. c. In CIT Vs Parakh & Co. (India) Ltd. (1956) 29 ITR 661 (SC), it was held that the taxability of any income, does not depend on the view taken by the assessee but as per the provisions of law. The taxpayer may not be estopped merely for the view he might have taken. d. It is always open to the assessee to withdraw his admission on facts. Murugesan & Bros (G) (1973) 88 ITR 432 (SC). Also Sohani Devi Jain 109 ITR 130 (Gau.) (FB). e. Further, it is a settled proposition of law that an admission by counsel is not binding on the assessee and can be withdrawn anytime, unless circumstances are such as to give rise to estoppel. Abdul Hameed Khan 63 ITR 738 (AP). f. In Esthuri Aswathiah Vs CIT 66 ITR 478 (SC), it was held that an offer or concession made by the counsel cannot confer jurisdiction on the Tribunal to dispose of an appeal before it in a manner not authorized by the statute. Similar principal applies to the AO. g. The law empowers the Income-tax Officer to assess the income of an assessee according to the law and determine the tax payable thereon. In doing so, he cannot assess an assessee on an amount, which is not taxable in law even if the same is shown by an assessee. There is no estoppel by conduct against law nor is there any waiver of the legal right as much as the legal liability to be assessed otherwise than according to the mandate of the law. It is always open to an assessee to take the plea that the figure, though shown in his return of total income, is not taxable in law. Mayank Poddar (HUF) 262 ITR 633 (Cal.); CIT vs Bhaskar Mitter 73 Taxmann 437 (Cal.).

Page 10 of 36 h. The doctrine of 'approbate and reprobate' is only a species of estoppels; it applies only to the conduct of parties. As in the case of estoppels, it cannot operate against the provisions of a statue. If a particular income is not taxable under the IT Act, it cannot be taxed on the basis of estoppels or any other equitable doctrine. Equity is out of place in tax law; a particular income is either exigible to tax under the taxing statue or it is not. If it is not, the ITO has no power to impose tax on the said income. CIT vs MR.P. Firm 56 ITR 67 (SC) CIT vs Keshavlala Lallubhai Patel 55 ITR 537 (SC); Smt. Mohini Thapar 1972 CTR 214 (SC); CIT vs C.P. Sarathy Mdaliar 83 ITR 170 (SC) Manish Maheshwari 289 ITR 341 (SC) Tapan Kumar Datta (2018) 92 taxmann.com 367 (SC) i. It is therefore submitted that the concession of the counsel, to offer the income, which was not at all taxable, being not related to current year; cannot be taxed in the current year.”

Therefore, the AO has violated the scheme/provisions of the Act by taxing the sum of Rs. 5,42,75,671/- which was the opening balance as on 01.04.2014 brought forward from 31.03.2014 out of incomes earned in earlier years.

16. With these submissions, Ld. AR made a straightforward prayer that the addition made by AO is against law and must be deleted instantly.

(i) During scrutiny-proceeding, the AO has given multiple opportunities to assessee to submit year-wise break up but the assessee took several adjournments. The assessee also submitted to AO that the necessary files and records were being worked out [Para 4.3 of assessment-order]. Still the assessee failed and finally expressed

Page 12 of 36 inability to submit any data and agreed before AO for taxation in current year [Para 4.6 of assessment-order]. Therefore, in such a situation when the assessee did not have the data required by AO, the credit entry of Rs. 5,42,75,671/- remained unexplained and the AO rightly invoked deeming provision of section 68 to tax the same.

Section 68 of the act is a deeming provision which automatically applies when an assessee is not able to explain the nature and source of any sum credited in books of account.

(ii) That, the assessee evaluated its position and with the support of counsel and filed a considered reply to AO giving offer for taxation in current year. The submission by assessee was after due consideration under the consultation of counsel and not in air.

(iii) Before CIT(A) also, the assessee has simply filed figures of year-wise data but could not provide any documentation. Even now before

Tribunal, the assessee has not given any document in support of year- wise break-up. In absence of documentation, the assessee’s claim of earlier years or year-wise break-up cannot be accepted.

18. We have considered rival submissions of both sides and carefully perused the orders of lower-authorities. The dispute here is with regard to the addition of Rs. 5,42,75,671/- made by AO and upheld by CIT(A). The addition is in respect of a credit entry to “Reserve & Surplus” recorded by assessee in books of account. While the assessee claimed before AO during

Page 13 of 36 assessment-proceeding that the said entry, recorded on 01.04.2014, was related to the income earned in earlier years but when the AO asked assessee to furnish details/year-wise break-up, initially the assessee sought adjournments with the reasoning that the necessary files and records relevant to the amount were being worked out but at last the assessee could not furnish details and offered the same for taxation in current year. This led the AO to make impugned addition u/s 68. At present, the assessee is claiming that the impugned addition could not have been made by AO in current year and must be excluded. The assessee is raising this claim precisely on the strength of three contentions/propositions, namely (i) the scheme of Income-tax Act, 1961 is very clear which creates charge of tax on total income of each year. Further, each year is a separate and distinct year, (ii) the provisions of section 68 cannot apply to a ‘journal entry’ recorded in books of account, and (iii) the admission/confession made by counsel to AO to tax the impugned sum of Rs. 5,42,75,671/- in current year is not binding upon assessee. On a careful consideration, we find a strong merit in the first contention raised by Ld. AR. We find that the section 4 of the Income-tax Act, 1961 creates charge of tax for ‘every assessment-year’ and the term ‘assessment-year’ is defined in section 2(9) according to which ‘assessment year’ is a period of twelve months commencing on the 1st day of April every year. Thus, under the scheme of Act, every assessment year is a separate and distinct year. Further, if the income of a year goes untaxed for any reason, whether such reason is attributable to assessee or to the tax

Page 14 of 36 authorities and whether the situation giving rise to untaxing is unintentional or a designed attempt of assessee, the only course available to authorities is to open/re-open assessee’s case of relevant assessment year and assess or re-assess such untaxed income in the concerned assessment- year only. There is no option, either to assessee or to tax authorities, to assess income of ‘X year’ in ‘X+1 year’ or ‘X-1’ year. This is the law of Income-tax Act, 1961 and nobody can dispute it. In present case, the assessee has passed a ‘journal entry’ in books of account on 01.04.2014 which was the first day of previous year relevant to AY 2015-16 under consideration giving credit of Rs. 5,42,75,671/- to “Reserve & Surplus” and simultaneously debiting/crediting corresponding/other elements of assets/ liabilities. During hearing, we asked the Ld. AR to file the details of ‘journal entry’ passed and in reply, the following letter is filed by assessee:

19. On a careful reading of above document filed by assessee, we find that there are significant amounts of Bank of Baroda A/c, Dena Bank A/c, Fixed Deposit with SBI and Fixed Deposit with HDFC Bank amongst other assets.

There can hardly be any doubt that these balances in Bank A/c and Fixed Deposits were existing as on 31.03.2014 being the last day of previous year 2013-14 relevant to AY 2014-15 immediately preceding the AY 2015-16 under consideration. Further, the transactions of hostel/mess activity have been done by assessee through those bank accounts. Thus, there is an undisputable position manifest from the elements of ‘journal entry’ to signify/establish that the assessee carried hostel/mess activity and earned income therefrom in earlier years and accumulated corpus upto 31.03.2014.

When it is so, we agree, in principle, that the taxation of the amount of Rs. 5,42,75,671/- in AY 2015-16 relevant to previous year 2014-15 is against the very scheme of Income-tax Act, 1961 and not sustainable.

20. However, in order to dig the issue further, we sought some more documents/clarifications from assessee and relisted this case for clarification hearings. On those dates, Ld. AR/assessee filed the documents required by bench, as under:

(i) At Pages 59-74 of Paper-Book, the assessee filed audited financial statements being audited Balance-Sheet, Income & Exp. A/c, Receipt

& Payment A/c, etc. of ‘National Law Institute University’ [i.e. the Page 17 of 36 assessee] for the financial year 2013-14 relevant to AY 2014-15. These audited financial statements bear the date of 04th October, 2014 and have been audited by M/s S.L. Chhajed & Co, Chartered

Accountants.

(ii) At Pages 40-43 of Paper-Book, the assessee filed audited financial statements being audited Balance-Sheet, Income & Exp. A/c, Receipt

& Payment A/c, etc. of ‘National Law University (Mess)’ [i.e.

Hostel/Mess Activity] for the very same financial year 2013-14 relevant to AY 2014-15. These audited financial statements also bear the date of 04th October, 2014 and have been audited by very same auditors M/s S.L. Chhajed & Co, Chartered Accountants.

Page 18 of 36 2014-15. The assessee has passed a journal entry in the books of financial year 2014-15 relevant to AY 2015-16 under consideration and routed the relevant transactions through Balance-Sheet with the idea that it would remain unnoticed by department. But by the way, the case of assessee came under the scanner of scrutiny and the AO was diligent enough to discover the journal entry made by assessee. Further, during assessment-proceeding, when the AO asked assessee to give details of hostel/mess activity, the assessee sought adjournments and at last filed a letter admitting for taxation of the amount of Rs. 5,42,75,671/- in current year but now the assessee is claiming that the admission made by counsel is not binding upon it. This approach of assessee, who is a renowned National Law University, is not appreciable. Is it so that the then counsel made a confession/admission on his own without consulting assessee? If it is so, the assessee is free to deal with counsel in his own manner. Be that as it may, we find a negligent or disobedient attitude on the part of assessee firstly, in not including year-to-year transactions/incomes of hostel/mess activity in its accounts/return; secondly, in not including transactions/ income of hostel/mess activity at least for the financial year 2013-14 in return of AY 2014-15 when the audited accounts of hostel/mess activity dated 04.10.2014 were very much available with assessee; thirdly, in filing a letter offering for taxation of entire sum of Rs. 5,42,75,671/- in AY 2015-16 but now pleading the provisions/scheme of the Act and requesting for exclusion from AY 2015-16 despite himself not following the provisions of Page 19 of 36 law for several years by not reporting transactions of hostel/mess activity to Income-tax Department and keep on building a large corpus. In this entire process, the assessee has wasted resourceful time and energy of all authorities of Income-tax Department, therefore we impose a cost of Rs.

50,000/- upon assessee to be paid to “Income-tax Department” by challan.

Therefore, we restore this issue again at the level of AO for a fresh examination. We keep AY 2015-16 alive so that the assessee could file all evidences/records/ documents of year-wise data for the full satisfaction of AO. The AO shall give sufficient opportunities to assessee and consider assessee’s submissions judicially without being influenced by his earlier order in any manner. Thereafter, the AO shall take appropriate decision and action(s) as permitted under the provisions of Income-tax Act, 1961 for taxation in correct assessment-year(s). Further, while undertaking this exercise, the AO shall also consider the exemption u/s 10(23C)(iiiab), if the assessee demands. We make it clear that the AO shall resume proceeding of fresh adjudication only after the assessee submits a paid challan of cost of Rs. 50,000/-. We also direct that the AO shall, if necessary, assist assessee in making payment of Rs. 50,000/- on departmental system. The Ground No. 3 is accordingly allowed for statistical purpose.

Ground No. 4:

The AO has treated this activity as ‘business’ incidental to the attainment of the objectives of assessee. The AO further noted that the gross receipts from this activity were Rs. 2,27,31,112/- and expenses were Rs. 1,34,79,944/-.

The AO found that the assessee has credited gross receipts and debited expenses on respective sides of Income & Exp. A/c and while computing exemption u/s 11, taken full amount of gross receipts of Rs. 2,27,31,112/- as income; deducted full amount of expenditure of Rs. 1,34,79,944/- as ‘application to charitable purpose’; and also deducted 15% ‘standard exemption’ u/s 11(1)(a) on full amount of Rs. 2,27,31,112/-. Basically, the AO’s understanding is that the activity of assessee is covered u/s 11(4)/(4A) being in the nature of ‘business’ incidental and therefore CBDT Circular No. 5-P (LXX-6) of 1968 dated 19.06.1968 applies. Accordingly, placing reliance on section 11(4)/(4A) and CBDT Circular, the AO viewed that the quantum of ‘standard exemption’ should be computed on ‘net income’ [i.e. gross receipts (-) expenses] of hostel/mess activity and not on ‘gross receipts’ as done by assessee. The AO show-caused assessee. In reply, the assessee claimed that it is a university not established with the intention of Page 21 of 36 earning profit and that the hostel/mess facility was provided only to its students and not to non-students. That the activity of providing hostel/mess is a part of assessee’s educational activity, it is not a ‘business’. The assessee claimed that the working of ‘standard exemption’ made by it on the basis of ‘gross receipts’ is correct. The AO, however, rejected assessee’s claim and re-computed the amount of exemption as per his understanding, which resulted in an addition of Rs. 20,21,992/- to assessee’ total income.

During first-appeal, the CIT(A) upheld AO’s order.

“74. In R.R.M Educational Society's appeal before this court, the charitable status of the appellant within Section 10(23C) was denied inter alia on the ground that the institution was not merely imparting education but also was running hostels. It is clarified that providing hostel facilities to pupils would be an activity incidental to imparting education. It is unclear from the record whether R.R.M Educational Society was providing hostel facility only to its students or to others as well. If the institution provided hostel and allied facilities (such as catering etc.) only to its students,

Page 22 of 36 that activity would clearly be ‘incidental’ to the objective of imparting education.” [emphasis supplied] 26. Thereafter, he referred CBDT Circular No. 5-P (LXX-6) of 1968 dated 19.06.1968 relied by AO:

“Circular: No. 5-P(LXX-6) of 1968, dated 19-6-1968 1. In Board’s Circular No. 2-P(LXX-5), dated 15-5-1963, it was explained that a religious or charitable trust, claiming exemption under section 11(1), must spend at least 75 per cent of its total income for religious or charitable purposes. In other words, it was not permitted to accumulate more than 25 per cent of its total income. The question has been reconsidered by the Board and the correct legal position is explained below.

4. Where the trust derives income from house property interest on securities, capital gains, or other sources, the word "income" should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the Page 23 of 36 aforesaid manner, should be not less than 75 per cent of the later, if the trust is to get the full benefit of the exemption under section 11(1).

(i) Programme for Community Organisation (2001) 116 Taxman 608

(SC):

“3. The question that really requires consideration is whether, for the purposes of section 11(1)(a) of the Income-tax Act, 1961 ('the Act'), the amount for the grant of exemption of twenty-five per cent should be the income of the trust or it should be its total income determined for the purposes of assessment to income-tax. This question has to be answered in the light of these facts: the assessee-trust received donations in the aggregate sum of Rs. 2,57,376. It applied thereout for its charitable purposes the aggregate sum of Rs. 1,70,369 leaving a balance of Rs. 87,010. The question is whether the assessee is entitled to accumulate twenty-five per cent of Rs. 2,57,376, as it contends, or twenty-five per cent of Rs. 87,010, as the revenue appeared to contend. Section 11(1)(a) reads thus : "11. Income from property held for charitable or religious purposes.— (1)(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 Page 24 of 36 purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property;"

4. Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent of its income derived from property held under trust. For the present purposes, the donations, the assessee received, in the sum of Rs. 2,57,376, would constitute its property and it is entitled to accumulate twenty-five per cent thereout. It is unclear on what basis the revenue contended that it was entitled to accumulate only twenty-five per cent of Rs. 87,010.

5. For the aforesaid reasons, the civil appeal is dismissed.” (ii) Artificial Limbs Manufacturing Corporation of India Vs. Additional

Commissioner of Income-tax (Exemption) (2025) 170 Taxman.com

743 (Delhi – Trib.):

“17. Considered the rival submissions and material placed on record. We observed from the record that the assessee a GOI undertaking established with the sole purpose of making the artificial limbs and its accessories to needy persons in particular to the disable persons at reasonable cost. In this process, it has established the charitable institution u/s 25 of the erstwhile Companies Act, 1956 and also grants substantial amounts as grants and also grants loans to modernize the facilities. With this background, we observed that the assessee has achieved manufacturing of artificial limbs and accessories to the extent of Rs. 162.15 crores and other income of Rs. 10.71 crores. As per the chart submitted by the assessee, the majority of the artificial limbs are sold under SSA scheme. For this main purpose of the institution, the assessee has incurred material consumptions and installed new fixed assets. The main issue raised by the AO with regard to application of revenue for the purpose of availing deduction u/s 11(1) of the Act, as per which the assessee is allowed to accumulate 15% of the income of the trust or its total income determined for the purpose of Income Tax. The AO has considered the net income generated by the assessee i.e., total revenue of the manufacturing activities less manufacturing expenditure and recomputed the eligible amount of 15% considering the Government Grants. It is relevant to notice that he has treated the manufacturing activities as incidental to main object of the entity. The question raised before us is whether the main revenue from activities of manufacturing carried on by the assessee has to be treated as eligible to be included for the purpose of determining the income of the entity or not. The revenue has relied on the various decisions in which the issue under consideration was considered by the various courts and held that the main revenue like donations, income from the assets held under the trust and any incidental activities carried on by the institution to generate additional revenue for the purpose of charitable

Page 25 of 36 purpose can be considered as gross income of the trust/institution. For the purpose of section 11(1) of the Act, the various courts have held that the direct revenue generated by the institution and net income from the incidental activities has to be considered for the purpose of applying provisions of section 11(1) of the Act. Therefore, from the various decisions rendered by the various courts, the controversy of determining the eligible income for the purpose of section 11(1) is settled. However, the same cannot be applied universally and it will change according to the relevant facts in the particular case.

Income from the property Rs. 1000 Page 26 of 36 Net income from the additional services: Gross sales Rs. 2000 Expenses Rs. 1500

Net income for the purpose of charity Rs. 500 The eligible income u/s 11(1) Rs. 1500

Revenue from operation (in place of net profit taken by Rs. 17285.39 Lakhs AO) Grants from ADIP Scheme Rs. 5150.77 Lakhs Grants from ADIP- SSA Scheme Rs. 2050.00 Lakhs Grants from SIPDA Scheme Rs. 24.85 Lakhs Grants from ADIP Awareness Camp Rs. 4.08 Lakhs Total Income as per Section 11(1) Rs. 24515.09 Lakhs 15% allowable accumulation Rs. 3677.26 Lakhs The Application of income: (extracted from Profit and loss Statement) Cost of material and establishment Rs. 14120.01 Lakhs Less: Depreciation Rs. 154.88 Lakhs Net cost of production Rs. 13965.13 Lakhs ADIP Scheme Rs. 5492.83 Lakhs ADIP-SSA Scheme Rs. 1878.73 Lakhs Addition of Fixed assets Rs. 193.98 Lakhs Addition in CWIP Rs. 47.04 Lakhs Total Application of Income Rs. 21577.71 Lakhs Net Accumulation for the year Rs. 2937.38 Lakhs

From the above it is clear that the assessee has actually utilized the income of trust more than the 85% of the income earned by the assessee during the year. The stand of the lower authorities on this issue is not as per the various judicial precedents. In our view, the above view was supported by the decision of ITAT Bangalore Bench in Dy CIT (Exemptions) v. BS&G Foundation [IT Appeal No. 884 (Bang) of 2016, dated 4-10-2017]. The relevant ratio is reproduced below: "4.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial

Page 27 of 36 pronouncements referred to. The issue for adjudication before us is whether the ld. CIT(A) was right in directing the AO to allow the assessee accumulation of income for application to the extent of 15% of gross receipts u/s. 11(1)(a) of the Act. 4.3.2 The assessee claimed accumulation of income for application for charitable purposes u/s, 11(1)(a) of the Act at 15% of gross receipts for the year under consideration. The Assessing Officer ('AO') however, was of the view that accumulation will be allowed only to the extent of 15% of the net receipts i.e.; gross receipts less revenue expenditure and not on the gross receipts as claimed by the assessee. On appeal, the Id. CIT(A) allowed the assessee's claim that it is to be allowed accumulation of income for application for charitable purposes to the extent of 15% of gross receipts u/s. 11(1)(a) of the Act and not 15% of net receipts as held by the AO. 4.3.3 The issue to be decided by us is as to whether for the purpose of accumulation of income for application for charitable purposes u/s. 11(1)(a) of the Act is to be allowed at 15% of gross receipts or net receipts i.e.; gross receipts less Revenue expenditure. We find that the issue in question was considered and adjudicated by a co-ordinate bench of the Tribunal in the case of Mary Immaculate Society and in its order in & 241/Bang/2015 dated 23.06.2015 held that the assessee is to be allowed accumulation of income for application for charitable purposes u/s. 11(1)(a) of the Act at 15% of gross receipts following the decision of the ITAT Special Bench in the case of Bai Sonabai Hirji Agiary Trust v ITO, 93 ITD 0070 (SB). In its order (supra), the co-ordinate bench has held as under at paras 15 and 16 thereof: "15. The issue to be decided is therefore as to whether for the purpose of computing accumulation of income of 15% under Sec. 11(1)((a) of the Act, one has to take the gross receipts or gross receipts after expenditure for charitable purpose i.e., the net receipts. This is issue is no longer res integra and has been decided by the Special Bench Mumbai in the case of Bai Sonabai Hirji Agiary Trust v. ITO 93 ITD 0070 (SB). The facts in the aforesaid case were that the assessee was a public charitable trust enjoying exemption under s. 11 of the IT Act. As per the requirement of s. 11(1) of the IT Act, as it prevailed at that point of time, the assessee had to apply 75 per cent of its income for the objects and purposes of the trust and the assessee was permitted to accumulate or set apart upto 25 per cent of its income, which was subject to fulfillment of other conditions. While calculating the aforesaid 25 per cent, the important question which arose was as to whether for this purpose, the gross income earned by the assessee is relevant or the income as computed in accordance with the provisions of IT Act. In other words, whether outgoings from out of gross income which are in the nature of application of income, should be first deducted from the gross income and 25 per cent of only the remaining amount should be allowed to be accumulated or set apart. The Special Bench of the ITAT on the issue held as follows:-

"9. Coming to the merits of the issue, we are of the view that the same is clearly covered by the decision of the Hon'ble Supreme Court in the case of CIT v. Programme for Community Organization (supra). In the decision, their Lordships, after taking note of provisions of s. 11(1)(a), have held as under: "Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent of its income derived from property held under trust. For the present purposes, the donations the assessee received, in the sum of Rs. 2,57,346/-would constitute its property and it is entitled to accumulate twenty-five per cent thereout. It is unclear on what basis the Revenue contended that it was entitled to accumulate only twenty five per cent of Rs. 87,010. For the aforesaid reasons, the civil appeal is dismissed. It is clear from the above that deduction of twenty-five per cent was held to be allowable not on total income as computed under the IT Act. Any amount or expenditure, which was application of income, is not to be considered for determining twenty five per cent to be accumulated. Their Lordships, as noted earlier affirmed the decision of Kerala High Court in (1997) 141 CTR (Ker) 502: [1997] 228 ITR 620 (Kerala) (supra) wherein it is held as under: At the outset, the statutory language of s. 11(1)(a) of the IT Act, 1961, relates to the income derived by the trust from property. The trust is required to be wholly for charitable or religious purposes, and the income is expected to have relation to the extent to which such income is applied to such purposes in India. It is thereafter the statutory provision proceeds further that such income is not to be understood to be in excess of 25 per cent of the income from such properties. It other words, the very language of the statutory provision under consideration sets apart 25 per cent of the income from the source of property with reference to the extent to which such income is applied for such purposes, charitable or religious, In other words, for the purpose of s. 11(1)(a) of the Act, the income in terms of relevance would be the income of the trust from and out of which 25 per cent is set apart in accordance with the spirit of the statutory provision." This means that, when it is established that trust is entitled to full benefit of exemption under s. 11(1), the said trust is to get the benefit of twenty-five per cent and this twenty-five per cent has to be understood

Page 29 of 36 as income of the trust under the relevant head of s. 11(1). In other words, income that is not to be included for the purpose of computing the total income would be the amount expended for purposes of trust in India. Their Lordships in the above case have emphasized on the clear and unambiguous language of s. 11(1)(a) and decided the matter on the basis of the same. It has been held that as per the statutory language of the above section the income which is to be taken for purpose of accumulation is the income derived by the trust from property. If both the decisions are carefully read, it becomes evident that any expenditure which is in the shape of application of income is not to be taken into account. Having found that trust is entitled to exemption under s. 11(1), we are to go to the stage of income before application thereof and taken into account 25 per cent of such income. Their Lordships have pointed that the same has to be taken on "commercial" basis and not "total income" as computed under the IT Act. Their Lordships in the decided case rejected the contention of the Revenue that the sum of Rs. 1,70,369 which was spent and applied by the assessee for charitable purposes was required to be excluded for purpose of taking amount to be accumulated. Having regard to the clear pronouncement of their Lordships of the Supreme Court, it is difficult to accept that outgoings which are in the nature of application of income are to be excluded. The income available to the assessee before it was applied is directed to be taken and the same in the present case is Rs. 3,42,174. Twenty five per cent of the above income is to be allowed as a deduction. Similar view has also been taken by the Hon'ble Madhya Pradesh High Court in Parsi Zorastrian Anjuman Trust v. CIT (supra). No reason whatsoever has been given by the Revenue authorities for deducting Rs. 2,17,126 in this case for purposes of s. 11(1)(a). The decision cited on behalf of the Revenue did not take into account the decision of the Supreme Court referred to above. The circular of CBDT has also been considered by the Hon'ble Kerala High Court in its decision referred to above. Accordingly the question referred to is answered in the affirmative and in favour of the assessee."

Page 30 of 36 that the accumulation u/s. 11(1)(a) of the Act is to be allowed at 15% of gross receipts, as claimed by the assessee. Consequently, grounds raised by the Revenue are dismissed."

21. Respectfully following the above decisions and the cases relied by the revenue authorities including Ld. DR are distinguishable to the facts on record as discussed in the above paragraphs. Hence, the ground no 2 and 3 raised by the assessee are allowed.”

28. Per contra, Ld. DR raised following contentions:

(i) That the assessee is charging fee from students for running hostel/mess. He submitted that this point alone is against the very concept of ‘charity’. He submitted that ‘charity’ pre-supposes giving from own sources, though one may accept donations/grants from donors.

(ii) That, section 11(4) prescribes for maintenance of separate books of account. In the light of concept of ‘charity’ as narrated by him and having regard to the provisions of section 11(4)/(4A), the books of account of business cannot be mixed up with other books of account.

He submitted that the assessee’s own action of maintaining separate books for the activity of hostel/mess, supports his stand that the said activity done by assessee was in the nature of business.

(iii) That, the CBDT has brought Circular to clarify the position of law and the AO is very much justified in applying same to assessee.

Page 31 of 36 He submitted that the activity of hostel/mess done by assessee is not at parity with the donation receipts and therefore the decision of Hon’ble Supreme Court is not relevant. He relied upon a contrary decision of ITAT, Ahmedabad in Shree Bhartimaiya Memorial Foundation Vs. ACIT, Cir.2, the relevant portion of order is re- produced:

“4. Brief background of the case being that the assessee is a registered charitable trust, both under the Income Tax Act and with the Charity Commissioner, providing services to the public at large. During the impugned year it had shown gross receipts of Rs. 23,90,62,222/- including receipt of Rs. 7,40,55,485/- from its pharmacy business. Finding the pharmacy business to be incidental to the charitable activities of the assessee-trust, the AO held that in terms of the provisions of section 11(1)(a) of the Act it was only profits and gains of the pharmacy business which were to be considered for the purpose of computing the amount to be allowed to set apart, at the rate of 15% of the income. The assessee had computed the same on the gross-receipts of the pharmacy business. Accordingly the excess accumulation claimed by the assessee to the tune of Rs. 33,40,283/- was denied by the AO. The same was upheld by the ld. CIT(A). The finding of the ld. CIT(A) in this regard at para 4.3 to 4.4 of the order is as under: XXX 10. The contention of the Ld. Counsel for the assessee that it is the gross receipts of the business on which the quantum of accumulation is to be determined is based on case laws which have been rightly distinguished by the ld. CIT(A). The decision of the Hon’ble Apex Court in the case of Programme for Community Organization (supra), relied upon by the Ld. Counsel for the assessee was followed by the ITAT, Bangalore Bench in the case of Society of the Servant of the Holy Spirit (supra). The Ld. CIT(A) has rightly distinguished the same pointing out that the said case dealt with a totally different issue and was rendered entirely on different set of facts. In the said case, the issue was not as to what would comprise income of an incidental business carried out by a charitable entity, but on the contrary, the issue before the Bench was whether the gross-receipts of the charitable entity, as such would qualify as income for determining the amount statutorily allowed to be set apart/accumulated in terms of section 11(1)(a) of the Act or the net receipts. In the said case, the ITAT followed the decision of the Hon’ble Apex Court in the case of Programme for Community Organization (supra) and held that it would be gross- receipts viz. donation and income from charitable activities, which would qualify as income for the said purpose. The decision clearly did not address as to what would constitute income of business incidental to Page 32 of 36 charitable activities for the purpose of accumulation/setting apart. Therefore, the said decision does not apply to the case before us.

12. In view of the above, we uphold order of the ld. CIT(A) holding that it is the only profits and gains derived from the incidental business of the assessee charitable-trust i.e. its pharmacy business, which would qualify as income for the purpose of computing the statutorily allowed accumulation at the rate of 15% in terms of section 11(1)(a) of the Act.”

Undisputably, the assessee is a renowned University engaged in imparting education to its students. Another undisputed fact is that the assessee has provided hostel/mess facility only to its students and not to others.

Therefore, in these facts, the decision in New Noble Educational Society (supra) is directly applicable in which the Hon’ble Supreme Court has categorically clarified that providing hostel facilities to pupils would be an activity incidental to imparting education. Notably, in the case of New Noble

Page 33 of 36 Education Society (supra), the Hon’ble Supreme Court was concerned with the interpretation of activity of carrying hostel for the purpose of section 10(23C) which section has a much stricter phraseology. The section 10(23C) grants exemption to an institution ‘existing solely for educational purpose’ and it is in that context that the Hon’ble Supreme Court held that providing hostel facility to students is an activity incidental to imparting education.

Thus, when the Hon’ble Apex Court has accepted assessee’s claim in the context of much stricter section 10(23C), there is no reason or justification to treat the hostel/mess facility provided by present assessee as something in the nature of ‘business’ or ‘business undertaking’. Therefore, in our considered view, the provisions of section 11(4)/(4A) do not have any application in present case and so also the Para 3 of CBDT Circular is not applicable.

Ground No. 5:

Order pronounced in open court on 09/10/2025