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Income Tax Appellate Tribunal, ‘C’ BENCH, BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BANGALORE
BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
ITA No.1443/Bang/2015 (Assessment year: 2011-12)
Shree Devi Education Trust, Maina Towers, Ballalbagh, Mangalore-575003. … Appellant Vs. Income-tax Officer, Ward 2(1),Bangalore. … Respondent
Appellant by : Shri Suresh Muthukrishnan, CA. Respondent by : Shri Sanjay Kumar, CIT(DR).
Date of hearing : 28/04/2016 Date of pronouncement : 13/05/2016 O R D E R Per INTURI RAMA RAO, AM :
This is an appeal filed by the assessee-society directed against the order of the Commissioner of Income-tax (Exemptions), Bangalore, passed u/s 263 of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] dated 16/11/2015 for the assessment year 2011-12.
ITA No.1443/Bang/2015 Page 2 of 10 2. The assessee-society raised the following grounds:
The order passed by the learned C.I.T. u/s 263 of the Act, in so far as it is against the appellant, is opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The learned C.I.T. is not justified in passing the impugned order u/s. 263 of the Act since the very notice issued u/s. 263 of the Act was illegal in as much as the same was only for the purposes of conducting fishing and roving enquires as there were no grounds stated by the learned CIT for invoking the provisions of section 263 of the Act and the appellant was merely called upon the appear before the learned CIT and give details and thus, the very initiation of the proceedings u/s. 263 of the Act, is illegal and void ab- initio. 3. Without prejudice to the above, the learned C.I.T. failed to appreciate that there was no error much less an error prejudicial to the interest of the revenue in the order passed by the learned Assessing Officer warranting revision u/s.263 of the Act and consequently, the order passed by the C.I.T. is opposed to law and facts of the appellants case and requires to be cancelled. 4. The learned C.I.T. failed to appreciate that there was no requirement to direct the learned A.O. to examine the issue relating to the computation of the accumulation u/s. 11[1][a] of the Act and compute the same on the basis of net receipts of educational institutions and such a direction issued by the learned CIT is contrary to law and hence, the same is liable to be vacated. 5. The learned C.I.T. failed to appreciate that there was no requirement to direct the learned A.O. to examine the issue relating the provisions of 11 [2] of the Act after having categorically held that the said issue is not covered u/s. 263 of the Act and therefore such a direction issued by the learned CIT is contrary to law and hence, the same is liable to be vacated. 6. The learned C.I.T. failed to appreciate that there was no requirement to direct the learned A.O. to examine the issue relating to depreciation and such a direction
ITA No.1443/Bang/2015 Page 3 of 10 issued by the learned CIT is contrary to law and hence, the same is liable to be vacated. 7. 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 as part of the costs.
Briefly facts of the case are that the assessee-society is a charitable trust engaged in the promotion of education activity. It was registered under the provisions of sec.12A of the Income- tax Act, 1961 [hereinafter referred to as 'the Act' for short]. Return of income for the assessment year 2011-12 was filed on 28/09/2011 declaring nil income after claiming exemption u/s 11(1)(a) of the Act. Against the said return of income, assessment was completed by the ITO, Ward 2(1), Mangalore vide order dated 29/11/2013 passed u/s 143(3) of the Act accepting the same. While the matter stood there, the CIT(Exemption), Bangalore, has issued a notice u/s 263 calling upon the assessee-society to show cause as to why, the order of assessment passed by the AO should not be treated as erroneous and prejudicial to the interests of revenue, as the AO had failed to examine the (i) advance payment for purchase of land (ii) no break-up accumulations was collected with regard to accumulation of income of Rs.3.39 crores u/s 11(1)(a) and (iii) the AO has not examined the second proviso to sec.11(2)(d) and
ITA No.1443/Bang/2015 Page 4 of 10 allowed depreciation/deduction which amounted to double deduction.
In response to show cause notice, assessee-society contended that advance payment made for purchase of land should be treated as application of income though it is capital in nature. The income of the trust/society should be computed following normal commercial principles of accounting. As regards income eligible for accumulation, it was submitted that the assessee-society was entitled to accumulate 15% of the gross receipts for future application. As regards applicability of second proviso to sec.11(2), assessee-society submitted that details of the same are available in the assessment records. Regarding the claim for allowance of depreciation, the assessee-society has stated that it is entitled to depreciation. The CIT(Exemption), after considering the explanation filed by the assessee-society, directed the AO to recomputed income for assessment year 2011- 12 after considering the above issues and after affording due opportunity of hearing to the assessee-society and accordingly set aside the assessment order.
Being aggrieved, assessee-society is before us in the present appeal.
4.1 Though the assessee-society raised grounds relating to service of show cause notice, the same was given up during the course of hearing before us. The learned AR of the assessee-
ITA No.1443/Bang/2015 Page 5 of 10 society submitted that the issues sought to be revised by the CIT(Exemption) are covered in favour of the assessee-society by an order of the co-ordinate bench in ITA No.662/Bang/2015 dated 14/08/2015 in the case of Jyothy Charitable Trust vs. DCIT and therefore, submitted that the CIT(Exemption) was not justified in assuming jurisdiction u/s 263 of the Act.
4.2 On the other hand, learned CIT(DR) relied upon the order of the CIT(Exemption) passed u/s 263 of the Act.
We heard rival submissions and perused material on record. In this appeal, we are called upon to adjudicate upon the validity of the order passed u/s 263 by the CIT(Exemption). Some of the issues sought to be revised by the CIT(Exemption) such as allowability of depreciation and the issue of determination of amount to be accumulated whether with reference to gross receipts or net income, as right submitted by the learned AR of the assessee of the assessee, is covered in favour of the assessee-society by the order of the co-ordinate bench of the Tribunal in the case of Jyothy Charitable Trust (supra) in which it was held as follows:
“8. We may also add that the legal position has since been amended by a prospective amendment by the Finance (No.2) Act, 2014 w.e.f.1.4.2015 by insertion of sub-section (6) to section 11 of the Act, which reads as under:-
ITA No.1443/Bang/2015 Page 6 of 10 “(6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.”
As already stated, the aforesaid amendment is prospective and will apply only from AY 2015-16. In view of the above legal position, we are of the view that the order of the CIT(A) has to be reversed. Consequently ground No.2 raised by the Assessee is allowed.
The second issue-that arises for consideration in this appeal which is projected by the Revenue in grounds of appeal, is as to whether the CIT(Appeals) was justified In holding that assessee a trust is entitled to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years? The assessee is a trust registered u/s. 12Aof The Act. For the A.Y. 2011-12, the assessee filed a return of income claiming carry forward of excess application of income from earlier years to the tune of Rs.2,09,46,593/-. The assessee sought to carry forward the excess application for setting off as application of income in the subsrqu4assessrnent years. According to the AO there was no provision in the Act for carry forward of excess expenditure of earlier year to be adjusted against income of the subsequent year and he therefore denied the claim of the Assessee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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
ITA No.1443/Bang/2015 Page 7 of 10 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. 2,57,376, 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
ITA No.1443/Bang/2015 Page 8 of 10 : (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 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
ITA No.1443/Bang/2015 Page 9 of 10 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.”
As regards other issues, the appellant neither raised any ground of appeal nor pleaded during the course of hearing. Therefore, we uphold the order of the CIT(Exemption) to the extent of setting aside the assessment order to examine issues on the advance given for purchase of capital items as well as applicability of second proviso to sec.11(2) of the Act.
ITA No.1443/Bang/2015 Page 10 of 10 6. In the result, the appeal filed by the assessee-society is partly allowed.
Order pronounced in the open court on this 13th May, 2016
sd/- sd/- (VIJAY PAL RAO) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place : Bangalore D a t e d : 13/05/2016 srinivasulu, sps Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order Assistant Registrar Income-tax Appellate Tribunal Bangalore