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Income Tax Appellate Tribunal, “C(SMC
Before: Shri A. T. Varkey, JM]
Both these appeals preferred by the assessee against the separate orders of the CIT(A)-25, Kolkata dated 28.02.2019 for AYs 2013-14 and 2014-15. Since we have heard both the appeals together and some of the grounds are common, we dispose of both the appeals by this consolidated order for the sake of convenience.
First we take up ITA No.813/Kol.2019 for AY 20-13-14. Ground no. 1 is as under: “1. For that the Ld. CIT(A) erred in confirming the order of the AO allowing deduction of 15% on the net income after deduction of administrative expenses by misinterpreting the judgment of the Hon’ble jurisdictional High Court when the same should have been allowed on the gross total income.”
The facts of the case as noted by AO is as under: “4. Administrative & Establishment Expenses 4.1 Section 11(1)(a) of the Act says that the following income shall not be included in the total income .... " provided "income derived from property held by trust wholly for charitable trust or religious purpose, to the extent to which such income is applied to such purpose in India “it clearly means that income of the trust would be taxable unless it is applied for charitable purpose. But there is one relaxation and mentioned in the same section 11(1)(a) of the Act. A part of income can be accumulated or set apart without being applied to the extent of is not in excess of 15% of the income from such property". This accumulation will take place only when application is less than income and is allowed to the extent of 15% of income. 4.2 Examination of the computation reveals that assessee has claimed different administrative and establishment expenses that are included in the claimed application for achieving the stated objectives of the organization. Further accumulation was claimed u/s. 11(1)(a). This accumulation is calculated@ 15% of gross receipt of Rs.52,70,353 /- by the assessee. The 2 Kanehialall Lohia Trust, AY: 2013-14 & 2014-15 prime issue in this regard is whether the accumulation of 15% is to be allowed on gross receipt or on income available for charitable and religious purposes should be considered as the base figure for calculation of 15%. In its computation the assessee showed gross receipt as income for the purpose of calculation of 15%. 4.3. Income to be considered will be that, which is arrived at in the context of what is available in the hands of the assessee, subject to adjustment of any expenses extraneous to the trust. Therefore administrative and establishment expenses are to be deducted from the gross receipt to determine the income available for application. Administrative & establishment expenses are considered as a charge to the income of the organization and therefore, only the income, after such expenses are taken out from gross receipt, is available for charitable purposes. Accumulation of 15% is to be calculated on this figure i.e. income available for application. administrative & establishment expenses are neither directly nor approximately related, to purpose nor are these expenditures directed to achieving the objectives of charity. It income, after deducting these expenses, is available in the hands of the assessee trust charitable activity. These expenses are directly related to earning income and are deductible from gross receipt as expenses under normal commercial principle. These are expenses attributable to earning income and not application of income u/s 11. All applications are undoubtedly expenses but all expenses are not application of income. It is now crystal clear that income available for application u/s 11 is to be computed in normal commercial manner. The administrative and establishment expenses which are allowable under normal commercial principle but cannot be a part of application of income u/s 11 as these are not directly and proximately related to the proclaimed objective of the trust. 4.5 In view of above administrative & establishment expenses being attributable to earning income - are deductible from gross receipt to determine the net income available for application - for charitable purposes for the purpose of calculation of allowable accumulation of 15% under section 11(1)(a) of the Act. 4.6 Vide the notice u/s 142(1) dated 12.06.2015 (Item no. 14) the assessee was informed "that 15% accumulation would be available on the income available for application and not on gross receipt. Income available for application is to be arrived at by deducting administrative and establishment expenses from the gross receipt".
Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to affirm the order of AO, so the assessee filed this appeal before this Tribunal.
I have heard rival submissions and have considered the material available on record. It is noted that assessee is enjoying registration u/s. 12A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”). It is noted that the issue that arises for consideration is as to whether 15% accumulation for application in future has to be calculated on gross receipt or net receipt after deduction of revenue expenditure. The assessee claimed accumulation of income for application for charitable purpose at 15% of the gross receipts. The AO was of the view that accumulation will be allowed only to the extent of 15% of the income after revenue expenditure. In other words, income to be set apart u/s. 11(1) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) has to be computed at 15% of 3 Kanehialall Lohia Trust, AY: 2013-14 & 2014-15 the net income i.e. gross receipts minus revenue expenditure and not on the gross receipts as claimed by the assessee. The Ld. CIT(A) upheld the view of the AO. I find that the issue is no longer res integra as held by the Special Bench of the Mumbai in the case of Bai Sonabai Hirji Agency Trust Vs. ITO 93 ITD 0070 (SB). I note that this precise issue came up before this Tribunal of Bangalore Bench in ACIT (Exemption) Vs. Bhagwan Mahaveer Memorial Jain Educational & Cultural Trust, ITA Nos. 1514 & 1515/Bang/2016 for AYs 2020-11 and 2011-12 and ITA No. 137/Bang/2017 for AY 2012-13 dated21.08.2019, wherein it was held as under: “16. The third issue that arises for consideration in ITA No.1515/Bang/2016 for AY 2011-12 is as to whether 15% accumulation for application in future has to be calculated on gross receipts or net receipts after deduction of revenue expenditure. The Assessee claimed accumulation of income for application for charitable purpose at 15% of the gross receipts. The AO was of the view that accumulation will be allowed only to the extent of 15% of the income after revenue expenditure. In other words income to be set apart u/s.11(1)(a) of the Act has to be computed at 15% of the net income i.e., gross receipts minus revenue expenditure and not on the gross receipts as claimed by the Assessee. Since in the case of the Assessee, the gross receipts after revenue expenditure was nil, the AO denied the benefit of accumulation to the Assessee.
On appeal by the Assessee, the CIT(A) allowed the claim of the Assessee. Aggrieved by the order of the CIT(A), the Revenue has raised the aforesaid ground of appeal
before the Tribunal.
18. 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 chartiable 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 Vs. 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 up to 25 per cent of its income, which was subject to fulfilment 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 vs. 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. 2,57,376, 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.
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 (Ker) (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. In 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 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 take 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 vs. 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.”
5 Kanehialall Lohia Trust, AY: 2013-14 & 2014-15 19. The aforesaid decision clearly supports the plea of the Assessee. Following the same, we hold that the accumulation u/s.11(1)(a) of the Act should be allowed as claimed by the Assessee. The relevant ground of appeal of the revenue is accordingly dismissed.”
Therefore, respectfully following the aforesaid Tribunal’s decision in Bhagwan Mahaveer Memorial Jain Educational & Cultural Trust (supra) hold that the accumulation u/s. 11(1)(a) of the Act should be allowed as claimed by the assessee. This ground of appeal of assessee is allowed.
7. Ground Nos. 2 to 6 read as under: “2. For that the Ld. CIT(A) erred in confirming the disallowance of Rs.4,76,250/- u/s. 69C of the I. T. Act when the payments were recorded in the books of account and the source thereof was not disputed. 3. for that the Ld. CIT(A) erred in confirming the order of the AO in applying the provisions of sec. 115BBE when the provisions of sec. 68, 69, 69A, 69B and 69C were not applicable nor such disallowance was covered under the aforesaid provisions. 4. For that the Ld. CIT(A) should have allowed a sum of Rs.4,76,250/- as application of income under sec. 11 when the evidences were submitted and the disallowance was made without allowing the assessee any opportunity to cross examine the deponent on whose statement the disallowance was made. 5. For that the Ld. CIT(A) erred in holding that the activities of the assessee was not covered under sec. 2(15) of the I. T. Act, 1961. 6. For that the Ld. CIT(A) even otherwise erred in holding that the assessee’s activities were not covered under sec. 2(15) of the I. T. Act without allowing the assessee any proper or reasonable opportunity of being heard.”
8. The main grievance in the aforesaid ground nos. 2 to 6 are that the AO had disallowed an amount of Rs.4,76,250/- shown by assessee as application of income for purchase of blankets as bogus without following the principle of Natural Justice viz. denying cross-examination of person whose statements were recorded by AO behind the back of assessee and against the Ld. CIT(A)’s observation that assessee trust’s activities are not covered u/s. 2(15) of the Act without giving any opportunity to assessee, which action is also against principle of Natural Justice.
First of all, it is noted that the assessee is enjoying sec. 12A registration which is granted by the competent authority after satisfying himself that the assessee was engaged in charitable activities as contemplated u/s. 2(15) of the Act and the registration granted has not been withdrawn or revoked as on date. And so, as long as it enjoys sec. 12A registration, the assessee’s income is exempt u/s. 11 subject to the Act. However, the Ld.
6 Kanehialall Lohia Trust, AY: 2013-14 & 2014-15 CIT(A) while exercising his First Appellate jurisdiction emanating from the order of AO wherein AO has not raised any adverse view against the assessee in respect to its activities u/s. 2(15) of the Act, the Ld. CIT(A) ought not to have suo motto made the observation that assessee trust’s activities are not covered u/s. 2(15) of the Act. This observation of the Ld. CIT(A) is per se bad since it is fragile for non-observation of principles of Natural Justice and, therefore, it cannot be sustained and so directed to be expunged.
Coming to the blankets claimed to have been purchased by the assessee and distributed during Ganga Sagar Mela and Kumbha Mela falling on 14.01.2013 and 15.01.013 directly by the sellers i.e. three companies named in the assessment order. The AO in order to verify the veracity of the claim made by the assessee summoned u/s. 131 of the Act the Director of the two companies Shri S. L. Dugar and has recorded his statement as well as he noted that the director of one company did not appear before him; and the AO has pointed out certain discrepancies in the bills/vouchers/invoice to draw adverse view against the claim of purchase & distribution of blankets by assessee and disallowed the claim of the assessee. Assessee’s main grievance is that neither any opportunity to cross- examine Shri S. L. Dugar was given during the assessment stage nor adequate opportunity to explain the discrepancy, if any, in respect of bills etc. was provided to assessee, by the AO before he drew adverse view against the assessee and consequently disallowed the claim. I find force in the contention of the assessee that neither the statement of shri S L Dugar was recorded in the presence of the assessee nor opportunity to cross-examine shri Dugar was provided to the assessee by the AO. The AO ought to have given a copy of the statement recorded by him and provided adequate opportunity to the assessee to cross- examine the maker of the statement if it is adverse against him. However, it is noted that Shri S. L. Dugar became a director only on 01.02.2016 of the 2 companies from which assessee purchased blankets and distributed the same, and the assessment under consideration is AY 2013-14. So, the AO when verifing the facts of this AY 2013-14, ought to have summoned the director/manager of this AY 2013-14, who would be in a better position to throw light on the facts which he was enquiring. So, I set aside the impugned order of Ld. CIT(A) and remand this issue back to the file of AO to de novo adjudicate/assess the issue and give proper opportunity to cross-examine the concerned director/manager of three companies, if the AO is relying on their statement.
7 Kanehialall Lohia Trust, AY: 2013-14 & 2014-15 11. Coming to the appeal for AY 2014-15 it is noted that certain grounds of appeal which are similar to the issues raised in the appeal for AY 2013-14 and since have been answered, the result will be followed “Mutatis Mutandis” for AY 2014-15.
12. Coming to the only issue which has not been adjudicated it is noted that assessee’s claim for application of Rs. 7 lakh paid to Lohia Matri Seva Sadan has not been allowed by AO and Ld. CIT(A). The submission of assessee before Ld. CIT(A) is as under: “Kanehialall Lohia Trust is a Charitable Religious Trust registered U/s 12A of the Income Tax Act vide Certificate no 638-T/WB. VI of 1974-75 dated 10.04.1974 photocopy of which was filed before you on 30th January, 2019. That the objects of the Trust as per Trust Deed was as under and already filed before you. i) For Seva and worship of the settlor's household deity SRI SRI RADHA KRISHNA JIU. ii) For promoting education both formal and informal and for needy children and adults. iii) For providing marriage expenses of the girls of the needy poor families; iv) For undertaking, assisting in undertaking, projects like digging of the wells, providing drinking water facilities, fodder for cattle, grains and fertilizers for farming, agricultural tools etc; v) For construction of Dharamshala and Temples; vi) For giving sadabrat to the poor and for giving donations to relief fund: vii) For establishing, take over, run, maintain, assist and support hospitals, charitable dispensaries, maternity homes, sanatoriums, medical camps, health education, children welfare centers, natural health centers, nutrition centers and any other institution or forum for preventive, curative or primary health care and treatment; viii) For such other purpose as the trustees shall in their absolute discretion think fit and proper; C. That during this year Kanehiailall Lohio Trust paid Rs.7,00,000/- to Lohia Matri Seva Sedan a Society registered under the Society Registration Act as per the objectives of our registered trust vide clause no 3(vii) of the Trust Deed within the ambit of Sec2(15) of the Income Tax Act which should be considered as an application of Income. Sir I am enclosing the xerox copy of the Tribunal Wealth Tax Order vide WTA No 590(cal)/86 to WTA No 598(cal)/86 in respect of wealth Tax assessment v, here the Ld. Member of the Tribunal Specifically discussed the activities of the trust since they are maintaining the deity of SRI SRI RADHA KRISHNA JIU situated in Rajasthan and also a College at Churu, Rajasthan whom the assessee has to support as and when required. Lohia Matri Seva Sadan (Maternity) a Charitable organisation and running at a loss since its inception and as such no income tax return was required to be filed and because of financial stringency this maternity hospital is closed at the moment. I have already filed a copy of Profit & Loss Account as well as the Balance Sheet of the said maternity Hospital for the year 2013- 14 for your consideration. Actually this two organisations viz, Kanehialall Lohia Trust and Lohia Matri Seva Sadan situated at 296B Rabindra Sarani, Kolkata - 700 O06 was founded by deceased Kanehialall Lohia some times in the year 1940.
The source of the income of Kanehialall Lohia Trust is from rental income and interest out of which these activities were made to fulfill the objects of the Trust as per Trust Deed and accounts which clarifies all the activities.”
The aforesaid submissions of the assessee did not find any favour of the Ld. CIT(A) so, he was pleased to dismiss the same. Aggrieved, the assessee is in appeal before this Tribunal.
I note that assessee is a charitable religious trust registered u/s. 12A of the Act which was granted certificate of registration dated 10.04.1974. The assessee in this year has donated Rs. 7 lacs to Lohia Matri Seva Sadan Maternity Charitable Organisation, which is established for taking care of the pregnant women/ladies, which claim was not allowed by the AO/Ld. CIT(A). The object of the trust I note as under: i) For Seva and worship of the settlor's household deity SRI SRI RADHA KRISHNA JIU. ii) For promoting education both formal and informal and for needy children and adults. iii) For providing marriage expenses of the girls of the needy poor families; iv) For undertaking, assisting in undertaking, projects like digging of the wells, providing drinking water facilities, fodder for cattle, grains and fertilizers for farming, agricultural tools etc; v) For construction of Dharamshala and Temples; vi) For giving sadabrat to the poor and for giving donations to relief fund: vii) For establishing, take over, run, maintain, assist and support hospitals, charitable dispensaries, maternity homes, sanatoriums, medical camps, health education, children welfare centers, natural health centers, nutrition centers and any other institution or forum for preventive, curative or primary health care and treatment; viii) For such other purpose as the trustees shall in their absolute discretion think fit and proper.
After perusal of the aforesaid objects of the assessee, the competent authority in the year 1974 has been pleased to grant the 12A registration. Among the objectives narrated above, it is noted that assessee is engaged for promoting education and for providing marriage expenses for the girls of the needy poor families and also for giving Sadabrat to the poor and giving donation to the poors and for establishing, takeover, grant, maintain,
9 Kanehialall Lohia Trust, AY: 2013-14 & 2014-15 assistance, support, hospitals, charitable dispensaries, maternity homes etc. Here, we note that the assessee had given by way of donation to Lohia Matri Seva Sadan Maternity Charitable Organisation which is established for taking care of the pregnant women/ladies. Taking care of the poor ladies who are in labour and for running maternity ward for the poor women is a charitable activity and for which the assessee has lent its hands by giving donation of Rs. 7 lakhs and the evidence for giving donation has been filed along with supporting documents viz., bank statement etc. So, when the genuineness of the donation for a charitable activity could not be controverted by AO then the amount used as application of the income of the assessee is definitely an allowable expenditure. This ground of appeal of assessee is allowed.
In the result, both the appeals of assessee are allowed.
Order is pronounced in the open court on 10th January, 2020.