DEPUTY COMMISSIONER OF INCOME TAX(E), CIRCLE-1, BANGALORE vs. M/S KRUPANIDHI EDUCATIONAL TRUST, BANGALORE

The learned CIT[A] is not justified in confirming the restriction of the accumulation u/s.11[1][a] of the Act to Rs.75,76,420/-, by computing the same at 15% of the net surplus of Rs.5,05,09,469/- reflected in the Income Et Expenditure account instead of determining a sum of Rs. 4,33,48,846/-, being 15% of the gross receipts of the appellant amounting to Rs. 28,89,92,309/-under the facts and in the circumstances of the appellant's case.

Without prejudice to the right to seek waiver with the Hon' ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s. 234-B and 234-D of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled. 4. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees aspart of the costs.” 3. The grounds raised by the revenue in its appeal are as under. “On Carry forward of excess expenditure (of A.Ys 2006-07 to 2009- 10) for application of income to subsequent (future) year: a) The CIT (A) has erred in directing the assessing officer to allow set-off of excess expenditure/application pertaining to current asst.year and earlier years against the income of the future asst.year without appreciating the fact that as per the scheme of taxation of charitable or religious trust/institution as codified u/s.11,12 and 13, there is no provision for computing loss from property held under trust/institution on account of excess application of income/funds of the trust. b) The CIT (A) has failed to appreciate the fact that the normal computation of income under respective heads as envisaged u/s 15 to 59 are not applicable to the computation of income in respect of charitable trust/institution for the purpose of claiming exemption under sec.11, 12 and 13 and, therefore, the provisions relating to set- off of loss from one source against the income from another source, set-off of loss from one head against income from another head and carry forward and set-off of loss against the income of subsequent years as envisaged u/s 70 to 79 are also not applicable to the charitable trusts/institutions. c) The CIT (A) has failed to discuss the issue in detail bringing out the facts and applying the relevant provisions of the Act, but came to a conclusion that excess expenditure/excess application shall be allowed to be carried forward and set-off against the income of the future assessment years and, thereby, rendering the order perverse.”

We have considered the rival submissions. We find that before CIT(A) also, reliance was placed by assessee on the same Tribunal order rendered in the case of Jyothy Charitable Trust Vs. DCIT(E) as reported in (2015) 60 taxmann.com 165 (Bangalore ITAT). But CIT(A) has not followed this Tribunal order by saying that the facts are different. But before us, the ld. DR of revenue could not point out any difference in facts in the present case and in that case. For ready reference, we reproduce the relevant paras of this Tribunal order being paras 15 to 18 which are as under. “15. The third issue that arises for consideration in this appeal 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.1 1(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) confirmed the order of the AO. Hence ground No-4 raised by the Assessee before the Tribunal.

The issue to be decided is therefore as to whether for the purpose of computing accumulation of income of 15% under section 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 SonabaiHirjiAgiary Trust Vs. ITO 93 lTD 0070 (SB). The facts in the aforesaid case were that the assessee was & 1683/Bang/2017 Page 4 of 7 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 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 vs. Programme for Community Organization (supra). In the decision, their Lordships, after taking note of provisions of sec. 11(l)(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. u(i)(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. ii(i)(a) of the Act, the income in terms of relevance would be the income of the trust from and out & 1683/Bang/2017 Page 5 of 7 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 ZorastrianAnjuman 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. I 1(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."

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. Ground No.4 raised by the Assessee is accordingly allowed.” & 1683/Bang/2017 Page 6 of 7 6. From the above paras of this Tribunal order, it is seen that in this case also, the dispute was this as to whether 15% accumulation for application in future has to be calculated on gross receipts or net receipts after deduction of revenue expenditure. In this case also, this was the claim of the assessee that accumulation of income for application for charitable purpose in future @ 15% should be of the gross receipts and in para 18 of this Tribunal order, it was held by the Tribunal that the accumulation u/s. 11(1)(a) of IT Act should be allowed as claimed by the assessee. Hence respectfully following this Tribunal order, we decide the issue in favour of the assessee.

In the result, the appeal filed by the assessee is allowed.

Now we take up the appeal of the revenue. The ld. DR of revenue supported the assessment order whereas the ld. AR of assessee supported the order of CIT(A). He also placed reliance on a Tribunal order rendered in the case of DDIT (E) Vs. Daughters of St. Mary of Providence Society in dated 08.09.2017. Copy of this tribunal order was submitted and our attention was drawn to para 4 of this Tribunal order. 9. We have considered the rival submissions. First of all, we reproduce para no. 4 of this Tribunal order cited by ld. AR of assessee. The same is as under. “4. We have considered the rival submissions. We find that in the case cited by the learned AR of the assessee having been rendered in the case of M/s Dominician Sisters of Presentation vs. DDIT (Exemption) (Supra), the tribunal has followed another tribunal order rendered in the case of St. Francis De Sales in ITA No. 315/B/2015 dated 10.07.2015 and reproduced the relevant portion of this tribunal order. As per the same reproduction, the tribunal in that order has followed the judgment of Hon’ble Bombay High Court rendered in the case of CIT vs. Institute of Banking Personnel Selection as reported in 264 ITR 110. The tribunal in the case of M/s Dominician Sisters of Presentation vs. DDIT (Exemption) (Supra) has followed this earlier tribunal order and this judgment of Hon’ble Bombay High Court and held that the claim of the assessee for carry forward of excess application is in accordance with the judicial precedents on the issue and the same is allowable. Learned DR of the revenue cold not point out any difference in facts and therefore, we find no reason to take a contrary view. Therefore respectfully following the earlier decision of the Co ordinate Bench, we decline to interfere in the order of CIT (A).”

From the above para of this Tribunal order, it is seen in that case, the Tribunal has followed the judgement of Hon’ble Bombay High Court rendered in the case of CIT Vs. Institute of Banking Personnel Selection as reported in 264 ITR 110. In that case also, this was the dispute as to whether excess of expenditure / application can be allowed to be carried forward in the present year for set off in the future year and this issue was decided by Tribunal in favour of the assessee. In present case also, the dispute is similar and no difference in facts could be pointed out by ld. DR of revenue and hence, we find no reason to interfere in the order of CIT(A) on this issue by respectfully following this Tribunal order. Hence we decline to interfere in the order of CIT(A) on this issue.

In the result, the appeal filed by the revenue is dismissed.

In the combined result, the appeal filed by the assessee is allowed and the appeal of the revenue is dismissed. Order pronounced in the open court on the date mentioned on the caption page.