M/S ALLARD EDUCATION SOCIETY,BANGALORE vs. DDIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ‘ C ’ BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T. A. No.355/Bang/2015 (Assessment Year : 2011-12) M/s. Allard Education Society, No.441, St. Thomas Town, Hennur Road, Bangalore-560 084 …. Appellant. PAN AAATA 3937E Vs. Dy. Commissioner of Income Tax (Exemptions), Circle 17(1), Bangalore. ….. Respondent. Appellant By : Shri V. Srinivasan, C.A. Respondent By : Shri Sunil Kumar Agarwala, JCIT (D.R.) Date of Hearing : 6.10.2015. Date of Pronouncement : 23.10.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-14, LTU, Bangalore dt.29.10.2014 relating to Assessment Year 2011-12. 2. The facts of the case, briefly, are as under :- 2.1 The assessee is a public religious cum public charitable institution registered under the Karnataka Societies Act, 1960 and also registered under Section 12A of the Income Tax Act vide order No.PRO 718/10A/Vol.A1/A-280 dt.23.4.1975 as a religious-cum-educational institution. The assessee filed its return of income for Assessment Year 2011-12 on 27.3.2012

2 ITA No.355/Bang/2015 declaring a taxable income of NIL after claiming application of income and accumulation under Section 11(2) of the Income Tax Act, 1961 (in short 'the Act') to the extent available. 2.2 In the course of assessment proceedings the Assessing Officer noticed that the assessee had claimed accumulation under Section 11(1)(a) of the Act at 15% of the gross receipts of the educational institutions. After referring to CBDT’s Circular No.5P(LLX-C) dt.19.6.1968, the Assessing Officer took the view that the income of the assessee trust is required to be computed on commercial principles. He, therefore, held that the accumulation under Section 11(1)(a) of the Act cannot be allowed on gross receipts but must be computed after reducing the expenses for earning such income. Therefore, however, in the computation of total income, the Assessing Officer did not allow any deduction towards accumulation under Section 11(1)(a) of the Act at all and the entire income computed after the application allowed was treated as accumulation under Section 11(2) of the Act, for which Form No.10 was filed. In this manner, the Assessing Officer completed the assessment under Section 143(3) of the Act vide order dt.30.1.2014 at NIL income but enhanced the accumulation under Section 11(2) of the Act to Rs.1,10,01,235 instead of Rs.19,96,601 claimed by the assessee. 2.3 Aggrieved by the order of assessment for Assessment Year 2011-12 dt.30.1.2014, the assessee preferred an appeal before the CIT (Appeals) – 14, LTU, Bangalore, who, by order dt.29.10.2014 dismissed the assessee's appeal and upheld the view taken by the Assessing Officer.

3 ITA No.355/Bang/2015 3. Aggrieved by the order of the CIT (Appeals) – 14, LTU, Bangalore for Assessment Year 2011-12 dt.30.10.2014, the assessee has preferred this appeal before the Tribunal raising 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 (Appeals) is not justified in upholding the action of the learned Assessing Officer in not granting the accumulation of income under Section 11(1)(a) of the Act, at 15% of the income form property held under trust as against a sum of Rs.89,15,752 claimed by the appellant in its return of income filed for the year under apepal under the facts and in the circumstances of the appellant’s case. 3. The learned CIT (Appeals) is not justified in upholding the computation of the amount accumulated under Section 11(2) of the Act, at Rs.1,0,01,235 as against a sum ofRs.19,96,601 computed by the appellant by reckoning 15% of the accumulation in terms of section 11(1)(a) of the Act, on the net surplus after deducitng 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. The learned CIT (Appeals) is not justified in sustaining the addition of Rs.88,882 as income of the appellant being the cost / WDV of the vehicle sold during the year on the ground that the purchase of the vehicle was allowed as application of income in the past and therefore, the appellant ought to have regarded the entire sale price of Rs.2,50,000 as income and not merely the sum of Rs.1,61,118 that was credited as profit on sale of vehicle under the facts and in the circumstances of the appellant’s case. 5. For the above and other grounds that maybe 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.” 4. The Grounds at S.Nos.1 and 5 are general in nature and not being urged before us are rendered infructuous and accordingly dismissed. 5. Ground No.4 was not urged before us and is accordingly dismissed as infructuos. 6.1 In Grounds at S.Nos.2 and 3, the learned Authorised Representative for the assessee submitted that the Assessing Officer was not justified in refusing to allow accumulation under

4 ITA No.355/Bang/2015 Section 11(1)(a) of the Act. It was further submitted that the accumulation under Section 11(1)(a) of the Act requires to be computed on the basis of gross receipts and not on the net income / net receipts, as held by the Assessing Officer and confirmed by the learned CIT (Appeals). In support of this proposition, the learned Authorised Representative placed reliance on the judgment of the Hon'ble Apex Court in the case of CIT V Programme for Community Organisation reported in 248 ITR 1 (SC) affirming the decision of the Hon'ble Kerala High Court reported in 228 ITR 620 (Ker). Reliance was also placed on the judgment of the Hon'ble Apex Court in the case of S.R.M.M.C.T.M. Tiruuppani Trust reported in 230 CTR 638 (SC) and CIT V A.L.N. Rao Charitable Trust reported in 216 ITR 697 (SC). The learned Authorised Representative also drew the attention of the Bench to the decision of the co-ordinate bench of this Tribunal in the case of Jyothi Charitable Trust in ITA No.662/Bang/2015 dt.14.8.2015, wherein the Bangalore Bench took the view and held that accumulation under Section 11(1)(a) of the Act has to be considered on the gross receipts. 6.2 Per contra, the learned Departmental Representative supported the impugned order of the learned CIT (Appeals) and submitted that the learned CIT (Appeals) had distinguished the judgment of the Hon'ble Apex Court reported in 248 ITR 1 (supra) as not being applicable to the assessee in the case on hand. 6.3.1 We have heard the rival submissions and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find from a perusal of the assessment order that the Assessing Officer has discussed the issue relating to the manner of computation of the accumulation under Section 11(1)(a) of the Act; i.e. whether the

5 ITA No.355/Bang/2015 same should be allowed on gross receipt or net income. It is seen that, however, finally in the computation, no accumulation whatsoever under Section 11(1)(a) of the Act has been allowed by the Assessing Officer, which in our view appears to be erroneous. Be that as it may, coming to the accumulation under Section 11(1)(a) of the Act, we find that the co-ordinate bench of the Tribunal in the case of Jyothi Charitable Trust in ITA No.662/Bang/2015 dt.14.8.2015, has considered this very issue and held that the accumulation under Section 11(1)(a) of the Act is to be computed on the basis of the gross receipts. The relevant portion of the Tribunal’s order at paras 15 to 18 is extracted hereunder :-

“ 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.11(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 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

6 ITA No.355/Bang/2015 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 : (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.

7 ITA No.355/Bang/2015 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.”

6.3.2 We find that the co-ordinate bench of this Tribunal in the case of Jyothi Charitable Trust (supra) in coming to the aforesaid conclusion has followed the decision of the Special Bench of the ITAT in the case of Bai Sonabai Hirji Agiary Trust V ITO 93 ITD 70 (SB). In the light of the above discussions, and following the decision of the co-ordinate bench of this Tribunal in Jyothi Charitable Trust (supra), we hold and direct the Assessing Officer to allow the accumulation of income at 15% of the gross receipts as claimed by the assessee and not on the basis of net income as held by him and accordingly set aside the orders of the authorities below. Grounds at S. Nos. 2 and 3 are allowed as indicated above.

8 ITA No.355/Bang/2015 6. In the result, the assessee's appeal for Assessment Year 2011-12 is allowed as indicated above. Order pronounced in the open court on 23rd October, 2015.

Sd/- Sd/- (ASHA VIJAYARAGHAVAN) (JASON P BOAZ) Judicial Member Accountant Member

*Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore