M/S. NORTH WESTERN KARNATAKA ROAD TRANSPORT CORPORATION,HUBLI vs. JOINT COMMISSIONER OF INCOME TAX (EXEMPTION), HUBLI

Per Shri Jason P Boaz, A.M. : These appeals by the assessee are directed against the separate orders of Commissioner of Income Tax (Appeals), Hubli dt.29.09.2016 for the Assessment Years 2006-07 & 2012-13. 2. Briefly stated, the facts of the case are as under :- 2.1 The assessee is a corporation established under the RTC Act, 1950 and was granted registration under Section 12A of the Income Tax

2 ITA Nos.275 & 276/Bang/2017 Act, 1961 (in short 'the Act') w.e.f. 1.4.2009 for providing public transport services. For Assessment Year 2006-07, the assessee filed its return of income on 30.10.2006 declaring loss of Rs.80,99,27,540. The assessment was completed under Section 143(3) of the Act vide order dt.10.5.2007 wherein the assessee's income was determined at NIL. Subsequently, the CIT, Hubli by order under Section 263 of the Act dt.26.3.2010 directed the Assessing Officer to allow accumulation under Section 11(1)(a) of the Act only in respect of 15% of Net Receipts. The consequent assessment was completed under Section 143(3) of the Act vide order dt.31.3.2015 wherein the assessee's income was accordingly determined at Rs.20,53,10,784. For Assessment Year 2012-13, the assessee filed its return of income on 28.09.2012 declaring loss of Rs.3,00,23,213. The case was taken up for scrutiny and the assessment was completed under Section 143(3) of the Act vide order dt.31.3.2015; wherein the income was determined at Rs.21,70,12,870 in view of the Assessing Officer restricting the accumulation upto the extent of15% of net receipts only and disallowing depreciation claimed. 2.2 Aggrieved by the orders of assessment for Assessment Year 2006- 07 and 2012-13 both dt.18.02.2015, the assessee preferred appeals before the CIT (Appeals), Hubli on both issues; i.e. (1) disallowance of depreciation and (ii) seeking accumulation under Section 11(1)(a) of the Act on gross receipts instead of net receipts. The learned CIT (Appeals) allowed the assessee's appeals on the issue of depreciation, but upheld the Assessing Officer’s view of allowance of accumulation under Section

3 ITA Nos.275 & 276/Bang/2017 11(1)(a) of the Act @ 15% of net receipts and not @ 15% on gross receipts as prayed for by the assessee. 3. Aggrieved by the orders of the CIT (Appeals), Hubli both dt.29.9.2016 for Assessment Years 2006-07 and 2012-13, the assessee has preferred these appeals raising the following identical grounds :

The learned Authorised Representative for the assessee submitted that the impugned orders of the learned CIT (Appeals) were erroneous in holding that accumulation / set apart of income under Section 11(1)(a) of the Act is to be allowed at 15% on net receipts as claimed by the

4 ITA Nos.275 & 276/Bang/2017 Revenue and not on @ 15% of gross receipts as contended by the assessee. It is submitted that this very issue has been considered by various co-ordinate benches of this Tribunal. In a recent case of DCIT Vs. Podar Education and Sport Trust & Another, in its order in ITA Nos.765 & 766/Bang/2016 dt.31.5.2017, the decision rendered by the co-ordinate bench of this Tribunal on this issue is squarely covered in favour of the assessee and against revenue by holding that accumulation under Section 11(1)(a) of the Act is to be allowed @ 15% of gross receipts. It is therefore prayed that the assessee's appeals for both Assessment Years 2006-07 & 2012-13 be allowed.

4.2 Per contra, the learned Departmental Representative for Revenue supported the impugned orders of the learned CIT (Appeals) for allowing accumulation under Section 11(1)(a) of the Act on 15% of net receipts and not on gross receipts as claimed by the assessee. Reliance was placed on the decision of ITAT, Mumbai Bench in the case of Gem & Jewellery Export Promotion Council Vs. ITO (1999) 68 ITD 95 (Bom).

4.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements referred to. The issue for adjudication before us is whether the learned CIT (Appeals) was right in directing the Assessing Officer to allow the assessee accumulation of income for application to the extent of 15% of net receipts under Section 11(1)(a) of the Act or was

5 ITA Nos.275 & 276/Bang/2017 accumulation to be allowed @ 15% of gross receipts as claimed by the assessee.

4.3.2 The assessee claimed accumulation of income for application for charitable puposes under Section 11)(1)(a) of the Act at 15% of gross receipts for the years under consideration. The Assessing Officer however was of the view that accumulation was to 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 learned CIT (Appeals) rejected 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 under Section 11(1)(a) of the Act and upheld the allowance of accumulation @ 15% of net receipts as held by the Assessing Officer.

4.3.3 The issue to be decided by us is as to whether the purpose of accumulation of income for the purpose of application for charitable purposes under Section 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 recently considered and adjudicated by a co-ordinate bench of this Tribunal in the case of DCIT Vs. Podar Educaiton and Sports Trust in ITA Nos.765 & 766/Bang/2016 dt.31.5.2017 held that the assessee is to be allowed accumulation of income for application for charitable purposes under Section 11(1)(a) of the Act at 15% of gross receipts; following the decision of the ITAT

6 ITA Nos.275 & 276/Bang/2017 Special Bench in the case of Bai Sonabai HIrji Agiary Trust Vs. ITO, 93 ITD 0070 (SB). In its order (supra), the co-ordinate bench has held as under at paras 5 & 6 thereof :

“ 5. The next issue raised by the revenue is regarding allowable accumulation @ 15% of gross receipt or net receipt under Section 11(1)(a) of the Income Tax Act, 1961 (in short 'the Act').

“ 17.1 Ground Nos.9 & 10 are regarding allowing the 15% accumulation on net income of the assessee instead of gross receipts as claimed by the assessee. 17.2 We have heard the ld. A.R. as well as the ld. D.R. and considered the relevant material on record. The ld. A.R. of the assessee has submitted that this issue is covered by the decision of the Tribunal in the case of Capuchin Friar Services of Society Vs. DCIT Dt.9.10.2015 in ITA No.367/Bang/2015. 17.3 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 17.4 We find that the Tribunal in the case of Capuchin Friar Services of Society (supra) has dealt with an identical issue in paras 10 & 11 as under : “ 10. We find that the issue is covered by the Co-ordinate Bench decision in the case of Jyothy Charitable Trust in ITA No.662/Bang/2015. The relevant extract is reproduced below:- “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

7 ITA Nos.275 & 276/Bang/2017 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. 16. 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. 17. 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 Sonabai Hirji Agiary Trust Vs. ITO 93 lTD 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 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

8 ITA Nos.275 & 276/Bang/2017 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 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. I 1(1)(a). The decision cited on behalf of the Revenue did not take into account the decision of the Supreme ITA No.367/Bang/2015 Page 10 of 11 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." 18. 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.” 11. Following the decision of the co-ordinate bench of the Tribunal, we set aside the order of the CIT(A).” Following the decision of the co-ordinate bench of this Tribunal, we decide this issue in favour of the assessee and direct the Assessing Officer to consider the allowable accumulation of income at 15% of the gross receipts.”

9 ITA Nos.275 & 276/Bang/2017

In view of the decisions of this Tribunal as well as the decisions of Hon'ble Supreme Court and Hon'ble High Court as referred in the said decision of the co-ordinate bench of the Tribunal cited supra, we allow the accumulation of income at 15% of the gross receipts.”

“ 17. 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 :

10 ITA Nos.275 & 276/Bang/2017 "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

11 ITA Nos.275 & 276/Bang/2017 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.” 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.”

Following the earlier order of this Tribunal, we do not find any error or illegality in the impugned order of CIT (Appeals) qua this issue.”

12 ITA Nos.275 & 276/Bang/2017 4.4.4 Respectfully following the decision of the Special Bench in the case of Bai Sonabai HIrji Agiary Trust Vs. ITO (supra), and of DCIT Vs. Podar Education & Sports Trust & Another (supra), we hold and direct the Assessing Officer that the accumulation under Section 11(1)(a) of the Act is to be allowed to the assessee at 15% of gross receipt, as claimed by the assessee. After a careful perusal of the decision of the ITAT Mumbai Bench in the case of Gem & Jewellery Export Promotion Council (supra), we find that it would not come to the rescue of Revenue in the light of the decision of the Hon'ble Apex Court, High Courts and of the co- ordinate bench in the case of Podar Education & Sports Trust & Another (supra). Consequently, ground Nos.2 to 4 raised by the assessee for Assessment Years 2006-07 & 2012-13 are allowed.

In this ground, the assessee denies itself liable to be charged interest under Section 234B of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition was upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) (SC), and we therefore uphold the action of the Assessing Officer in charging the said interest under Section 234B of the Act. The Assessing Officer is, however, directed to recompute the interest chargeable, if any, under Section 234B of the Act while giving effect to this order.

13 ITA Nos.275 & 276/Bang/2017 6. Ground Nos.1, 6 & 7 being general in nature, no adjudication is called for thereon.

Order pronounced in the open court on the 13th day of Dec., 2017.

Sd/- Sd/- (LALIT KUMAR) (JASON P BOAZ) Judicial Member Accountant Member Bangalore, Dt.13.12.2017.

*Reddy gp

Copy to : 1 Appellant 4 CIT(A) 2 Respondent 5 DR. ITAT, Bangalore 3 CIT 6 Guard File

Senior Private Secretary Income Tax Appellate Tribunal Bangalore.