ASST CIT CEN CIR 17 & 28, MUMBAI vs. NANDLAL TAOLANI CHARITABHLE TRUST, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES “B”, MUMBAI

Before Shri P K Bansal, VP & Shri Pawan Singh, JM ITA No. 200/Mum/2011 Assessment Year : 2005-06 Asst. CIT Central Circle 17 & 28 Nandlal Tolani Charitable Trust Mumbai 10-A, Bakhtawar, Vs. Nariman Point, Mumbai 400 021

PAN : AAATN0043Q (Appellant) (Respondent)

ITA No. 1110/Mum/2011 Assessment Year : 2005-06 Nandlal Tolani Charitable Trust Asst. CIT Central Circle 17 & 28 Mumbai 400 021 Mumbai Vs. PAN : AAATN0043Q (Appellant) (Respondent)

For the Revenue : Shri V K Agarwal For the assessee : Shri Rajiv Khandelwal & Shri Neelkanth Khandelwal

Date of Hearing :30.05.2017 Date of Pronouncement : 31.05.2017

O R D E R Per Bench:

The cross appeals have been filed against the order of the CIT(A) dated 29.10.2010 for A.Y. 2005-06.

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The Revenue has taken the following effective ground of appeal:

“a. On facts and in the circumstances of the case and in law, the CIT(A) erred in holding that assessee trust has applied income to the extent of Rs. 1,02,00,000/- for charitable purposes by giving these amounts as corpus donations to another trust, when there is no obligation on donee trust to apply the amount for charitable purposes.

b. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that by giving corpus donations of Rs. 1,02,00,0007-, assessee trust has applied this amount for charitable purposes ignoring the fact that such amount will never be applied for charitable purposes, as donation given are corpus donations and hence no satisfaction as mentioned in Instruction No. 1582 dated 19/10/1884 exist.”

The only issue involved in this appeal relates to treating the corpus donation

amounting to `.1,02,00,000/- given by the assessee to Tolani Education

Society as application of income towards objects of the Trust. The facts

relating to this ground are during the assessment proceedings the Assessing

Officer noted that the assessee has given donation to Tolani Education

Society amounting to ` 1,02,00,000/-, which has been claimed by the

assessee as application of income towards the objects of the Trust. The

Assessing Officer was of the view that Tolani Education Society and the

assessee are covered within the meaning of provisions of section 13(3) of the

Act even though the tax audit report in Form 10B categorically mentioned

that no payments were made to the persons covered u/s. 13(3) of the I T

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Act. However, the Assessing Officer came to the conclusion that this

donation was covered u/s. 13(3) of the I T Act in view of the fact that the

trustees of the assessee trust Dr. Nandlal B Tolani is the Chairman/Member of

the Tolani Education Society. The Assessing Officer referred to the second

proviso to section 11(2), of the Act, which reads as under:

“Provided further that in respect of any income accumulated or set apart on or after the 1st day of April, 2001, the provisions of this sub-section shall have effect as if for the words “ten years” at both the places where they occur, the words “five years” had been substituted.

Explanation – Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.”

The Assessing Officer was of the view that the said donation is not allowable

u/s. 11(1)(a) as application of income towards the object of the assessee

trust. Accordingly, he dined the claim of the assessee.

donation as application of income for charitable purposes u/s. 11(1)(a) by

observing as under:

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“5.16 I have gone through the facts of the case, the assessment order and submissions of the appellant. The appellant ha;; made donation of Rs. 1,02,00,000/- to M/s. Tolani Education Society. The A.O. has considered these two trusts as persons covered u/s 13(3) of the Act and in view of this, the A.O. has concluded that Rs.1,02,00,000/- was not applied for the purposes mentioned in section ll(l)(a) of the Act. In this regard, the appellant has furnished the detailed submissions. From this, it is clear that Tolani Education Society will not come under the purview of section 13(3)(a), (b), (c), (cc) and (d) of the Act. So, only clause to be examined is section 13(3)(e) of the I.T. Act-However, explanation 3 to section 13 of the Act makes it very clear that section 13(3)(e) is not applicable in this case.

5.25 In view of this, I hold that donations made to Tolani Education Society is not hit by section 13 of the I.T. Act. I direct the A.O. to treat the donation of Rs.1,02,00,000/- as application of income for charitable purposes u/s 11(1)(a)”

assessee’s own case in ITA Nos.6970 & 199/Mum/2011 & ITA No.

1111/Mum/2011 for assessment year 2004-05 and contended that the issue

involved is duly covered in favour of the assessee. He also on the query from

the Bench submitted that the said donation has been given by the assessee

out of current income.

Assessing Officer.

material available on record. We noted that similar issue in respect of

donation being paid by the assessee trust to Tolani Education Trust was

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decided by this Tribunal in favour of the assessee, vide order dated

30.09.2013 in ITA Nos.6970 & 199/Mum/2011 & ITA No. 1111/Mum/2011 for

assessment year 2004-05, wherein it has been held as under:

3.3 We may next consider the add-back of the donations for Rs. 24 lacs and Rs. 36 lacs, forming part of the total sum of Rs. 60 lacs paid by the assesse to TEF, a charitable institution under the same management, during the relevant year, by the Revenue in the assessment and reassessment proceedings respectively.

The basis of the Revenue’s disallowance qua these sums, payment details of which stand listed at para 2 / page 4 of this order, are as:

(a)the same are toward corpus donations to the done-fund, i.e., per the receipts issued their respect. As such, it is only the income there-from, and not the said funds, which are liable to be spent for the objects of therecipient, so that the same would not qualify as toward application of income u/s. 11(1)(a);

(b) no explanation toward the same as being for scholarship and reimbursement of capital expenditure, as claimed during the reassessment proceedings, stood furnished in the assessment proceedings, so that the same is only an after-thought.

We have given our careful consideration to the matter. Firstly, there is no case of any round tripping inasmuch as, admittedly – vide order u/s. 154 dated 12/3/2007 assessing the income at Rs. 8,94,470/-, no donation has been received from TEF, so that there are no cross donations. Also, there is no question of considering the rent of Rs. 60 lacs received from TEF as a donation, and neither is it the Revenue’s case of the rent arrangement being not genuine. Two, the Explanation to s. 11(2), even as clarified by the Notes to Clauses introducing the relevant Bill, is only in respect of sums accumulated or set apart for application, and not sums applied for charitable purposes during the relevant year, including by way of donation to any other charitable trust with similar objects; the relevant part of the said note reading as under: ‘...... Thus, the payment to the other trust or institution out of income from property held under trust in the year of receipt will continue to

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be treated as an application of income. However, any such payment out of the accumulated income shall not be treated as an application of income, and shall be taxed accordingly.’ In fact, consequential amendments stand also made to the Act by way of insertion of clause (d) to s. 11(3) and proviso to s. 11(3A), all to the same effect and purport. The said provision/s would have no application in the instant case as, without doubt, each of the three sums comprising the total amount of Rs. 60 lacs paid by the assesse to TEF stand paid during the relevant year. We may now discuss each of the three sums separately.

The sum of Rs. 24 lacs is admittedly a corpus donation (also refer ledger accounts in the books of the donor and the donee – pages 24, 26 / PB 2). The law in the matter is by now well settled, so that donation by one charitable trust to another would entitle the donor fund to claim exemption qua application of income u/s. 11(1). As pointed out by the hon’ble court in Sarladevi Sarabhai Trust (No. 2) (supra), it would make no difference if the donation is toward the corpus of the donee-fund, so that it is only the income therefrom, and not the donation sum itself, that is liable to be spent for or utilized for the charitable purposes of the recipient. The word application’ has a wider connotation than the word ‘spent’, so that an application of income of the donor trust could not be denied. Again, the corpus fund may not necessarily be invested in specified securities but could also be toward capital expenditure, which again qualifies as an application of income. The objection, thus, raised by the Revenue is not maintainable. Coming to the donations for Rs. 36 lacs; the same have been explained as: - Rs. 20.80 lacs toward scholarship to students Marine Engg. of TEF - Rs. 15.20 lacs as reimbursement of capital expenditure

Our first observation is that the Revenue having accepted the donation of Rs. 24 lacs, comprised in the sum of Rs. 30 lacs paid vide cheque no. 30771 dtd. 21/11/2003 (supra), as a corpus donation, it cannot retract to deny the same treatment to the balance Rs. 6 lacs of the said cheque, or the amounts similarly donated vide the other two cheques supra. In fact, the sums stand ostensibly debited and reflected in the assessee’s accounts, including the income & expenditure account, forming part of its

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return of income (pgs. 37 – 43/ PB 1), so that there is no question of not recognizing the same as such.

Coming to the specifics, the amount of Rs. 20.80 lacs is paid to TEF for the scholarship to students of Tolani Maritime Institute, being run by it, i.e., the payee-trust. The same is clearly an application of income to that extent and, in fact, stands reflected in the income & expenditure account itself (pgs. 23, 25/PB 2 & pg. 39/PB 1). No doubt, as it appears, the donation is not to set up any scholarship fund, but for scholarship to be granted to the individual students, forming part of the regular expenditure of the done-trust and, as such, not a corpus donation, as stated in the relevant receipt. However, this would not materially impact; rather, only enhances the assessee’s case inasmuch as one of the Revenue’s objections was of the same being toward the corpus of the donee. The same would, therefore, without doubt, qualify for exemption u/s. 11(1)(a).

As regards the amount of Rs. 15.20 lacs, the same is again by way of corpus donation toward funding the capital expenditure of TEF on construction of Executive Residency and hostel building. There is no question of TEF having spent the money on assessee’s behalf, since reimbursed by the assessee, which would be so where the buildings under reference either belong to the assessee or are being constructed by it. As such, as far as the assesse-trust is concerned, it is donation to another trust and, thus, only an application of income (refer pgs. 22, 23 & 27/PB2). So, however, we are unable to find any reflection of the same in the assessee’s annual accounts (pgs. 37 – 43/PB 1), including the income and expenditure account (pg. 39), showing the sources and application of, including the expenditure incurred on administration or otherwise for generating, the revenue. The assessee’s claim, therefore, though acceptable in principle, would be required to be shown with reference to its accounts. The AO shall verify the incurring of the said payment with reference to the assessee’s accounts, and subject to his returning a positive finding in its’ respect, we confirm the treatment of the said sum as toward application of income. We decide accordingly.

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No contrary decision was brought to our notice. Respectfully following the

said decision, of the Tribunal, we dismiss the ground taken by the Revenue.

In this appeal, the assessee has taken as many as five grounds of

appeal, but the only issue pertains to the disallowance of claim of standard

deduction on rental income @30% u/s. 24(a) of the IT Act.

available on record. On a perusal of the Tribunal order dated 30.09.2013 in

ITA Nos.6970 & 199/Mum/2011 & ITA No. 1111/Mum/2011 for assessment

year 2004-05, we find that on identical issue has been decided against the

assessee by observing as under:

3.2 The first issue arising in the instant appeals is the validity in law of the assessee’s claim toward repairs and maintenance u/s. 24 of the Act in computing the income from house property let out by the assesse, and toward which it has (subsequently) raised a single, precise ground. The claim is, by all counts, without merit. This is for the simple reason that the income of a charitable trust or institution, subject to its application for charitable purposes, for which it has been in fact formed (per its constituting charter) is exempt from tax under Chapter III (ss.10 to 13B) ofthe Act. The said income does not form part of the total income of the entity to which it arises or accrues or is received by. It is only the income forming part of the total income u/s.2(45) of the Act, which is to be classified under the various heads of the income u/s.14 and, accordingly, subject to the computation provisions of Chapter IV (ss. 14 to 59)of the Act. The expenditure incurred in earning the same is, likewise, and only understandably, not to be taken into account in computing the total income under

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the Act, which represents trite law, and toward which a separate section (sec. 14A) has since been inserted by Finance Act, 2001 with retrospective effect from 01.04.1962. This aspect stands abundantly clarified by the hon’ble apex court in the case of CIT vs. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118 (SC), explaining that an income to come within its purview must satisfy the definition of total income u/s. 2(15) (of the Income-tax Act, 1922, which is para material with section 2(45) of the Act), prescribing two conditions. Firstly, it must comprise the total amount of income, profits and gains referred to in section4(1) and, two, must be computed in the manner laid down under the Act. The capital gain being not chargeable u/s.12B of the 1922 Act during the relevant period, the same would not enter the computation mechanism of the total income. This is as the capital gain or loss (which is only negative income) did not form part of the total income of the assessee which could be brought to charge, so that it was not required to be computed. Reference in this context may also be made to the following observation by the tribunal in the case of Pravin Shah Trust vs. Dy. CIT(in ITA No. 4782/Mum/2010 dated 05.07.2013): ‘3.3 ……. That is, an income exempt u/c. III of the Act, not forming part of the total income, would not enter the computation process to determine the quantum of income under the relevant head of income, each of which has its own computation provisions.’ To the same effect and purport are its observationsin the case of LKP Securities Ltd.(in ITA Nos. 638 & 1093/Mum/2012 dated 17.05.2013): `14 ……. The income (and loss, which is only negative income) falling under Chapter III of the Act and, thus, exempt from the levy of the tax, would not form part of the computation of the income under Chapter IV of the Act. That in fact is a fundamental premise; the basis of sec. 14A of the Act. The Revenue’s case in this regard is unexceptional, and we confirm the same.’

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In both the decisions, the tribunal relied on the decision in the case of Harprasad & Co. (P.) Ltd. (supra). The reliance by the ld. CIT(A) on the Circular issued by the Board (No.5P(LXX6) dated 19.06.1968), explaining the position in the matter, is also apposite. It stands explained that only the income as reflected in the accounts of the trust/institution that is to be applied or deemed to have been applied for charitable purposes, and which, therefore, has to be computed in the commercial sense. The said Circular has been found by the hon’ble courts of law as representing the correct interpretation of the relevant provisions and the requirement of the law, as in the case of CIT vs. Programme for Community Organisation [1997] 228 ITR 620 (Ker), since approved by the apex court (reported at [2001] 248 ITR 1 (SC)), to which (latter) decision reference stands also made by the ld. CIT(A). This aspect of the matter, i.e.,the manner of computation of income of a charitable or religious trust/institution which has to be applied for the said purposes, has been a subject matter of a number of decisions, as by the hon'ble jurisdictional High Court in the case of CIT vs. Institute of Banking Personnel Selection (IBPS) [2003] 264 ITR 110 (Bom). This is even otherwise patent inasmuch as a trust could only apply the income as available with it, i.e., as arrived at following the accepted principles of commercial accounting. The computation provisions of the Act do not come into play, so that the said computation of the income would be de horsthe same. This would of course be subject to the specific provisions of the Act, so that where specifically provided for, the income would be computed in the manner so provided; for example ss. 11(4) and 11(4A) specifically provide for the computation of income of a business undertaking forming part of the property held under trust by a charitable trust/institution in accordance with the provisions of the Act, even as pointed out by the hon’ble court in Rao Bahadur Calavala Cunnan Chetty Charities (supra). The Special Bench of the tribunal in Scientific Atlanta India Technology (P.) Ltd. vs. ACIT [2010] 2 ITR 66 (Trib) (Chennai) (SB) held that the profits of a unit eligible for deduction u/s.10A of the Act, i.e., to the extent

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not covered by the deduction there-under, would stand to be taxed directly and not enter the computation mechanism inasmuch as the same do not form part of the gross total income, as section 10A falls under Chapter III of the Act, so that the provisions of Chapter VI-A and, consequently, s. 80AB would not be applicable thereto. Before parting with the matter, we may also add that the assessee has been allowed all the expenditure on repairs and maintenance as debited in its accounts, i.e., on actual basis (Rs. 11.97 lacs/PB 1 pg. 39), even as directed by the ld. CIT(A), and which fact was also clarified by us during hearing. Accordingly, the assessee’s ground/s for the claim of the standard deduction u/s.24 fail. We decide accordingly. Finally, the reliance by the assessee on the decision in the case of IAC, Mumbai vs. Saurashtra Trust [2007] 106 ITD 1 (Mum) (SB) is, under the circumstances, misplaced. The said decision is, firstly, sansany reference to any precedents; nay, even without a discussion of the law in the matter. This aspect would in fact become clear in view of the questions referred to and answered by the tribunal. As a reading of its order would show (refer para 1), the same are not directly connected with the issue before us. The said decision, thus, would be of no assistance to the assessee, with we having even otherwise decided the matter following the binding precedentsin the matter, so that the decision in the case of Bank of Baroda v. H.C. Shrivastava[2002] 256 ITR 385 (Bom), advocating judicial discipline with reference to the decision by the apex court in CCE v. Dunlop India Ltd. AIR 1985 SC 330, only supports the same. The decision in the case of Al Ameen Educational Society v. DIT (Exemption) (in ITA No. 575/Bang./2011 dated 28/9/2012, also at [2012] 26 taxmann.com 250 (Bang.)) is again only in respect of the specific provision of sec. 11(1A) of the Act, i.e., qua capital gain, and, thus, not applicable. We have already clarified that our decision is based on and represents the general position of law, so that it would be subject to the specific provisions of the Act, giving

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example of ss. 11(4) and 11(4A). It may be relevant to state that the decision by the apex court in Harprasad & Co. (P.) Ltd. (supra), referred to earlier, is also in respect of capital gains.

view of this fact, we confirm the order of the CIT(A) disallowing the claim of

the assessee u/s. 24(a) of the Act. Thus, the ground taken by the assess

fails.

dismissed.

Order pronounced in the open court on 31st day of May, 2017.

Sd/- Sd/- (Pawan Singh) (P K Bansal) JUDICIAL MEMBER VICE-PRESIDENT Mumbai; Dated: 31st May, 2017 SA Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The CIT(A),Mumbai 4. The CIT 5. DR, ‘B’ Bench, ITAT, Mumbai BY ORDER, #True Copy # Assistant Registrar Income Tax Appellate Tribunal, Mumbai