M/S GREEN WOOD HIGH TRUST ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX (E) CIRCLE-1, BANGALORE

PER SHRI JASON P BOAZ, ACCOUNTANT MEMBER :

2 2.1 The assessee is a trust, registered u/s. 12A of the Income Tax Act, 1961 (in short ‘the Act’) vide order dated 24.11.2011 formed with, inter alia, the object of running an educational institution. For Assessment Year 2012-13, the assessee filed its return of income on 24.09.2012 declaring Nil income after claiming exception u/s 11 of the Act. The case was taken up for scrutiny and the assessment was completed u/s. 143(3) of the Act vide order dated 26.03.2015; restricting the accumulation upto the extent of 15% of net receipts only and disallowing depreciation claimed. 2.2 Aggrieved by the order of assessment for Assessment Year 2012-13 dated 26.03.2015, the assessee preferred an appeal before the CIT(A)-14, LTU, Bangalore on both issues; i.e. (1) disallowance of depreciation and (ii) seeking accumulation u/s. 11(1)(a) of the Act on gross instead of net receipts. The ld. CIT(A) vide order dated 29/12/2016 allowed the assessee’s appeal on the issue of depreciation; but upheld the AO’s order in respect of allowing accumulation u/s 11(1)(a) of the Act of allowing accumulation u/s 11(1(a) of the Act @15% of net receipts. 3.1 Aggrieved by the order of the CIT(A)-14, LTU, Bangalore dated 29.12.2016 for Assessment Year 2012-13, the assessee has preferred this appeal, raising the following grounds:- “

1. The order passed by the learned assessing officer and CIT(A) -

14. (LTU), Bangalore to the extent prejudicial to the appellant is bad in law and liable to be quashed.

3 2.1 Denial of 15% of Gross Income for accumulation u/s 11(1)(a):- The learned assessing officer has erred in denying 15% of gross income for accumulation u/s 1 1(1)(a) and the learned CIT(A)-14 (LTU) has erred in confirming the action of the assessing officer. 2.2 The learned CIT(A)-14 (LTU), Bangalore has erred in concluding that income for the purposes of section 11(1 )(a) is to be arrived at after deducting expenditure from receipts (or net surplus). The impugned conclusion of the learned CIT(A) and the basis / rationale in support of the same is contrary to law and liable to be quashed. 2.3 On facts and circumstances of the case and law applicable, accumulation u/s 11(l)(a) at 15% should be allowed in respect of gross income of the appellant trust. 3.1 Prayer:- In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed under section 143(3) be quashed (I) Accumulation u/s 1 1(1)(a) be allowed at 15% of Gross Income of the appellant;”

4 3.2 The ld. AR for the assessee contended that the impugned order of the ld. CIT(A) was erroneous in holding that accumulation / set apart of income u/s. 11(1)(a) of the Act is to be allowed at 15% on net receipts as held by the AO and not on gross receipts as claimed by the assessee. It is submitted that this very issue has been considered by a co-ordinate bench of this Tribunal in the case of Mary Immaculate Society v DDIT(Exemptions), Bangalore and in its order in & 241/Bang/2015 dated 23.06.2015, the decision rendered on this issue is squarely covered in favour of assessee and against revenue. 3.3 Per contra, the ld DR supported the impugned order of the authorities below on this issue. 3.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements referred to. The issue for adjudication before us is whether the ld. CIT(A) was right in upholding the AO’s view to restrict the assessee’s accumulation of income for application to the extent of 15% of net receipts u/s. 11(1)(a) of the Act. 3.4.2 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 ld. CIT(A) upheld the AO’s view that the 5 assessee is to be allowed accumulation of income for application for charitable purposes only to the extent of 15% of net receipts u/s. 11(1)(a) of the Act and not 15% of gross receipts as claimed by the assessee. 3.4.3 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 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 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 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 (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. 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 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 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.”

3.4.4 Respectfully following the decision of the co-ordinate bench in the case of Mary Immaculate Society (supra), we hold and direct the AO 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 assessee are allowed.

4. In the result, the assessee’s appeal for asst. year 2012-13 is allowed. Order pronounced in the open court on 19th January, 2017.