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Income Tax Appellate Tribunal, MUMBAI “SMC” BENCH, MUMBAI
Before: SHRI G.S. PANNU, AM & SHRI RAVISH SOOD, JM Dr. Bhajekar Street,
PER RAVISH SOOD, JUDICIAL MEMBER
The present appeal filed by the assessee is directed against the order passed by the CIT(A), Mumbai-1, dated 28.08.2017, which in itself arises from the order passed by the A.O under Sec.143(3) of the Income-tax act, 1961 (for short ‘Act’), dated 23.03.2015 for A.Y. 2012-13 . The assessee assailing the order of the CIT(A) had raised before us the following grounds of appeal:-
“1. On the facts and under the circumstances of the case and in law, the ld. CIT(A) erred in upholding the Assessing Officer‟s action of not considering the TDS amount of Rs. 13,28,823/-
Bhav Vardhan Trust vs. ITO – A.Y. 2012-13 as application of income under section 11(1)(a) of the I.T. Act 1961 in the assessment order. 2. On the facts and under the circumstances of the case and in law, the ld. CIT(A) erred in mentioning that appellant has not offered refund to tax while the same has been offered for taxation in the A.Y. 2014-15.”
Briefly stated, the facts of the case are that the assessee which is a trust registered with the DIT (Exemptions), Mumbai under section 12A had filed its return of income for A.Y 2012-13 on 27/09/2012 along with its income and expenditure account, balance sheet and audit report in Form No. 10B, declaring total income at Rs. 1,63,933/-. The case of the assessee was taken up for scrutiny assessment under section 143(2) of the Act. During the course of assessment proceedings, it was observed by the Assessing Officer that the assessee had in its computation of income claimed TDS of Rs. 13,28,823/- as application of income under section 11(1)(a) of the Act. The Assessing Officer not being satisfied with the aforesaid claim, thus, called upon the assessee to justify the same. The assessee in its reply submitted before the Assessing Officer that its claim of TDS as an application of income under section 11(1)(a) was in terms of CBDT Circular No. 5- P/LXX-6, dated 19/05/1968, as per which, the term ‘income’ used in section 11(1)(a) was to be understood in a commercial sense, and as such the deemed income (i.e. tax deducted at source) was not to be taken into account for determining the ‘application’ or ‘accumulation’ of the income of the trust. The assessee, further in order to justify its aforesaid claim, relied on the following judicial pronouncements:-
Bhav Vardhan Trust vs. ITO – A.Y. 2012-13
(i) CIT vs. Jayashree Charity Trust (1986) 159 ITR 280 (Cal) (ii) CIT vs. Janaki Ammal Ayya Nadar Trust (1985) 153 ITR 159) (Mad), and; (iii) CWT vs. Nizam’s Supplemental Religious Endowment Trust (1973) 89 ITR 80 (AP)
However, the aforesaid contentions of the assessee did not find favour with the Assessing Officer. The Assessing officer was of the view that as the tax deducted at source of Rs. 13,28,823/- was the ‘deemed income’ of the assessee which was not received by it during the year under consideration, therefore, it was as per the mandate of Explanation 2(i)(a) of Sec. 11(1) vested with an option (to be exercised in writing before the expiry of the time allowed in sub-section (1) of section 139 for furnishing the return of income), to apply such income for its charitable purposes during the previous year in which the same was received or during the previous year immediately following, to the extent the same did not exceed the said amount. It was observed by the Assessing Officer that as the assessee had failed to exercise the aforesaid option, therefore, the claim of the assessee seeking treatment of the amount of TDS of Rs.13,28,823/- as an application of income under section 11(1)(a) of the Act, was not to be accepted. The A.O on the basis of his aforesaid deliberations re-casted the taxable income of the assessee at Rs.14,92,760/-.
4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions raised by the assessee before him, being of the view that the deduction
Bhav Vardhan Trust vs. ITO – A.Y. 2012-13 of tax at source could not be held as application of income, thus, dismissed the appeal.
The assessee being aggrieved with the order of the CIT(A), had carried the matter in appeal before us. The ld. Authorised Representative (for short, 'A.R') for the assessee at the very outset took us through the facts of the case and the observations of the lower authorities. The ld. A.R at the very outset of the hearing of the appeal relied on the judgment of the Hon'ble High Court of Calcutta in the case of CIT vs. Jayashree Charity Trust (1986) 159 ITR 280 (Cal), wherein the High Court had observed that as the amount of tax deducted at source would not be available with the assessee for application or accumulation, therefore, the same was not to be treated as income for the purposes of Sec. 11. The ld. A.R further to fortify his aforesaid claim also took support of an order passed under Sec. 263 by the Ld. CIT (Exemptions), Mumbai-12 in the case of M/s. Madhavi Raksha Sankalpa, wherein it was observed by the Ld. CIT that as the amount of TDS when received by the assessee as refund is shown as income, therefore, the claim of the assessee that such amount of TDS was to be held as an application of income was to be accepted.
We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find substantial force in the reliance placed by the ld. A.R on the judgment of the Hon'ble High Court of Calcutta in the case of CIT vs. Jayashree Charity Trust (1986) 159 ITR 280 (Cal). We find that the High
Bhav Vardhan Trust vs. ITO – A.Y. 2012-13 Court specifically addressing the issue as regards the treatment to be accorded to tax deducted at source for the purpose of Sec. 11 of the Act, had observed that the same could not be treated as income for the purposes of Sec. 11, and as such the assessee would be entitled to the benefit of exemption on that portion of the income which had been taken away by deduction of tax at source, even though that amount had not been spent or accumulated for the purposes of charity by the assessee. The Hon’ble High Court while arriving at the aforesaid view had observed as under:
“6. In order to qualify for exemption under s. 11(1)(a), it has to be established that the property is held under trust wholly for charitable or religious purpose and the income of the property is being actually applied for such purposes in India. The relief is limited to the extent to which the income is applied for the purpose of the trust in India. If the entire income is not actually applied for the purpose of the trust in the relevant accounting period but is accumulated for application to such purposes, the exemption is limited to the extent to which the accumulated income is not in excess of 25 per cent of the income of the property held under trust or Rs. 10,000, whichever is higher.
7. In the case before us, the assessee has spent in the relevant accounting period, the entire amount of dividend that it had actually received for charitable purposes. There is no dispute about this. A sum of Rs. 76,974 had been deducted from the dividend income on account of income-tax. Any amount that has been deducted from the dividend income is deemed to be income received by the shareholder under the provisions of s.
Sec. 11(1) lays down that the income derived from property held under trust for charitable or religious purposes shall not to the extent indicated in that section "be included in the total income of the previous year of the person in receipt of the income." The question is whether "income" in s. 11(1)(a) will include the amount of tax that has been deducted at source and is deemed to be "income received" by s. 198 of the Act.
8. To resolve this controversy, regard must be had to the language that has been employed and also to the object of the statute. It is well settled that, if possible, the words of a statute must be construed so as to give a sensible meaning to them. The words ought to be construed ut res magis valeat quam pereat. The entire object of s. 11 is to grant immunity to the income of a charitable trust from income-tax. The immunity, however, is confined "to the extent to which such income is applied to such purposes in India." The exemption will be denied if the income is not actually applied for charitable purpose. Only 25 per cent of the income or Rs. 10,000, whichever is lower, can be accumulated for application to charitable purpose. If a portion of the income
Bhav Vardhan Trust vs. ITO – A.Y. 2012-13 of a charitable trust is not applied for charitable purposes or is accumulated beyond the permitted limit, that portion will not qualify for the immunity from taxation which has been granted by s.
11. In other words, the income that has not been applied for charitable purpose or accumulated beyond the prescribed limit for charitable purpose will not enjoy the immunity from taxation. This exclusion from the immunity that has been granted by s. 11 must be confined to the real income of the trust. The amount of income which is taken away by deduction at source under s. 194 is not available to the trust for application to charitable purposes. Sec. 198 provides that the amounts deducted by way of income-tax shall be deemed to be "income received". What is deemed to be income can neither be spent nor accumulated for charitable purpose. "Application" or "accumulation" can only be of real income which has actually been received by an assessee. If a portion of the income has been taken away by way of income-tax deducted at source, that portion is not available to the assessee for application or accumulation. Sec. 11 cannot be interpreted to mean that the amount which has been deducted at source by way of income- tax shall be included in the "total income" of the trust and brought under taxation. It is true that s. 198 provides that the sums deducted by way of income-tax shall be deemed to be income received. But, the deeming provisions of s. 198 should not be construed in a way to frustrate the object of s.
11. The entire income that has been actually received by the assessee has been applied for charitable purpose. The immunity from taxation that has been granted by s. 11 cannot be denied to the assessee on the ground that the notional income remains unspent or unaccumulated for the purpose of charity. The "accumulation" or "application" in s. 11(1)(a) must be of real income. In my judgment, the immunity from taxation that has been granted to the income of a charitable trust cannot be denied on the ground that the deemed income under s. 198 has not been actually spent for the purpose of charity.
9. The Madras High Court, in the case of CIT vs. Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135 ITR 485 (Mad) : TC23R.965, held that taking into account the purposes for which the conditions of s. 11(1)(a) were imposed, it would be clear that the 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 an adjustment of any expenses extraneous to the trust. It was held that the income from properties held under trust would have to be calculated in the commercial manner. It was observed that s. 11 contemplates an application of the income for charitable purposes. The charity can accumulate 25 per cent of the income. The application as well as the accumulation has necessarily to be of the income as accounted for in the accounts and not as computed under the IT Act, subject, of course, to what is provided in sub-s. (4) of s.
11. We are in respectful agreement with the view expressed by the Madras High Court. This judgment is also in consonance with the view taken by the Andhra Pradesh High Court in the case of CIT vs. Trustees of H.E.H. The Nizam's Supplemental Religious Endowment Trust (1981) 127 ITR 378 (AP) : TC23R.983.
It also appears that the view we have taken has also been adopted by the Central Board of Direct Taxes in Board's Circular No. 5-P (LXX-6) dt. 19th May, 1968. It was stated in that circular, inter alia (see [1969] Indian Tax Laws, Appx. II, p. lxxxv): "2. Section 11(1) provides that subject to the provisions of ss. 60 to 63, the following income shall not be included in the total income of the previous year...' The reference in sub-s. (1)(a) is invariably to „income '
Bhav Vardhan Trust vs. ITO – A.Y. 2012-13 and not to „total income'. The expression „total income' has been specifically defined in s. 2(45) of the Act as „the total amount of income...computed in the manner laid down in this Act.' It would, accordingly, be incorrect to assign to the word „income', used in s. 11(1)(a), the same meaning as has been specifically assigned to the expression „total income', vide s. 2(45)....
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 s. 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 aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under s. 11(1).
5. To sum up, the business income of the trust as disclosed by the accounts plus its other income computed as above, will be the „income ' of the trust for purposes of s. 11(1). Further, the trust must spend at least 75 per cent of this income and not accumulate more than 25 per cent thereof. The excess accumulation, if any, will become taxable under s. 11(1)." This circular makes it clear that the word "income" in s. 11(1)(a) must be understood in a commercial sense. The entire income of the trust, in the commercial sense, has been spent for the purpose of charity. There is no reason to deny the benefit of exemption granted by s. 11 to that portion of the income which has been taken away by deduction at source on the ground that the amount has not been spent or accumulated for the purpose of charity.”
We have perused the aforesaid judgment of the Hon’ble High Court of Calcutta and find that the High Court had observed that though the income that has not been applied for charitable purpose or accumulated beyond the prescribed limit for charitable purpose will not enjoy the immunity from taxation, but however, the exclusion from the immunity that has been granted by s. 11 must be confined to the ‘real income’ of the trust. We though are not oblivious of the fact that Sec. 198 provides that the amounts deducted by way of income-tax shall be deemed to be "income
Bhav Vardhan Trust vs. ITO – A.Y. 2012-13 received", but then, as observed by the Hon’ble High Court, the amount of income which is taken away by deduction of tax at source, can neither be spent nor accumulated for charitable purpose, as "application" or "accumulation" can only be of real income which has actually been received by an assessee, therefore, such portion of income that has been taken away by way of income-tax deducted at source, would not be available to the assessee for application or accumulation. We are of the considered view that as observed by the Hon’ble High Court, Sec. 11 cannot be interpreted to mean that the amount which has been deducted at source by way of income-tax shall be included in the "total income" of the trust and brought to tax. We find that the High Court had rather observed that though Sec. 198 provides that the sums deducted by way of income-tax shall be deemed to be income received, but, the deeming provisions of s. 198 should not be construed in a way to frustrate the object of s.
We thus respectfully following the view taken by the High Court, are of the considered view that in the case of the assessee before us, the immunity from taxation that has been granted to the income of the said charitable trust cannot be denied on the ground that the deemed income under sec. 198, i.e tax deducted at source under Sec. 194A of Rs. 13,28,823/- had not been actually spent for the purpose of charity during the year. The ld. A.R had averred that the tax deducted at source of Rs. 13,28,823/- for the year under consideration, viz. A.Y 2012-13, which was received by the assessee as a refund on 20.03.2014, i.e in the period relevant to A.Y 2014-15, was shown by the assessee as its income in the said year of receipt, viz. A.Y 2014-15 while working out its entitlement
Bhav Vardhan Trust vs. ITO – A.Y. 2012-13 of exemption under Sec. 11 for the said year. We thus set aside the matter to the file of the A.O for the limited purpose of verifying the veracity of the aforesaid claim so raised before us by the ld. A.R. That in case the claim of the ld. A.R that the tax deducted at source of Rs. 13,28,823/- was shown by the assessee as its income in A.Y 2014-15 is found to be in order, then the said amount shall not be treated as the income of the assessee under Sec. 11 for the year under consideration i.e A.Y 2012-13.
Before parting, we may herein observe that as the amount of TDS of Rs. 13,28,823/- in terms of our aforesaid observations is not to be held as the income of the assessee for the year under consideration, therefore, the observations of the lower authorities in context of whether the same is to be construed as an application of income, or not, is rendered infructuous, and thus are not being adverted to.
In the result, appeal of the assessee is allowed for statistical purposes in terms of our aforesaid observations.
Order Pronounced in open Court on this 11th day of April, 2018.