M/S THE CAPUCHIN FRIAR SERVICES SOCIETY,BANGALORE vs. DDIT, BANGALORE

Per Asha Vijayaraghavan, Judicial Member

“3.7 I find from the appellant’s Income and Expenditure Account that different kinds of receipts are available to it which include sources directly related to its educational activity such as admission fees, tutition fees, management fees, school development fees etc. while other sources from bank interest, voluntary contribution, donation, are also reflected therein. The principle of 15% of net income is to be applied only to receipts from activities for which a consideration has been charged and not to the entire gross receipts of the appellant. To the extent the appellant receives donations, the accumulation from such receipts are to be treated in terms of the Hon’ble Supreme Court’s decision in case of Programme for Community Organization (supra). The receipts from the educational institutions, even if fixed at non commercial rates (subject to verification and recording clearly by the AO) could be earned only through the incurring of operational expenses relating to salary, academic material, maintenance etc. for these activities. Therefore, the application of income and accumulation are both to be reckoned from the net income available for these purposes. The AO is, therefore, directed to bifurcate the receipts from the consideration charging activities and those without consideration such as donation etc., and treat the accumulation in the former in terms of net receipt and in the latter in terms of gross receipts. In view of this discussion, the grounds raised are partly accepted.”

9. Aggrieved, the assessee is in appeal before us on the following grounds:-

“1. The orders of the authorities below in so far as they are against the appellant are opposed to Law, equity, weight of evidence, probabilities, facts and circumstances of the case.

2. The Learned CIT[A] is not justified in upholding the action of the Learned Assessing Officer in not granting the accumulation of Income u/s.11[1][a] of the Act at 15% of the income from property held under trust as against a sum of Rs.30,62,529/- claimed by the appellant in its return of income filed for the year under appeal under the facts and in the circumstances of the appellant’s case.

3. The Learned CIT[A] is not justified in upholding the computation of the amount accumulated u/s.11[2] of the Act at Rs.33,61,725/- as against a sum of Rs.NiL computed by the appellant after reckoning 15% of the accumulation in terms of section 11[1][a] of the Act, on the net surplus after deducting revenue expenditure incurred by the appellant, instead of computing the same at 15% of the gross income from property held under trust, as done by the appellant under the facts and in the circumstances of the appellant’s case.

4. 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.”

“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 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.

"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 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

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."

Pronounced in the open court on this 9th day of October, 2015.