V.RAMAKRISHNA CHARITABLE TRUST,CHENNAI vs. DDIT, CHENNAI

आदेश / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

This appeal by assessee is directed against the order of the Commissioner of Income Tax (Appeals)-VII, Chennai, dated 03.11.21014 for the assessment year 2011-2012.

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“1. The order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case. 2. The Commissioner of Income Tax (Appeals) erred in confirming the order of the Assessing Officer treating the amount accumulated under Explanation 2 to sec 11(1) of the Act amounting to ₹1,59,08,870/- as income of the appellant. 3. The Commissioner of Income Tax (Appeals) erred in holding that the accumulated or set apart income as per Explanation (2) to sec 11(1) shall be deemed to be income applied for such purpose and exempt from tax only if the conditions stipulated in sec 11(2) of the Act are complied with. 4. The Commissioner of Income Tax (Appeals) ought to have appreciated that the appellant has carried forward the surplus income only for application as required under Explanation to sec.11(1) of the Act and hence filing of application in the prescribed form as per Section 11(2) is not necessary. 5. The Commissioner of Income Tax (Appeals) erred in not appreciating the difference between the provisions of sec 11(1) and sec. 11(2) of the At and thereby erroneously denying the accumulation properly applied by the assessee. 6. The Commissioner of Income Tax (Appeals) ought to have appreciated that the appellant has duly invested the surplus funds strictly as per requirement of sec 11(5) of the Act. 7. The Commissioner of Income Tax (Appeals) erred in not following the ratio laid down in the following decisions: (i) CIT vs. G.R. Govindarajulu & Sons Charities 144 Taxman 300 (Mad). (ii) Addl CIT vs. ALN Rao Charitable Trust 216 ITR 697 (SC). (iii) CIT vs. Trustees of Bhat Family Research Foundation 195 ITR 5332 (Bom)”.

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public charitable trust running a polytechnic college since 1976. The

trust was registered u/s.12A(a) of the Income Tax Act, 1961 vide

order in C.No.2217 dated 30.09.1976. The assessee trust filed its

return for the assessment year 2011-12 on 30.09.2011 admitting ‘nil‘

income. The case was selected for scrutiny and notice u/s.143(2) of

the Act was issued accordingly. After scrutinizing the details filed

and discussing the case with the Authorised Representative, the

assessment was completed u/s.143(3) of the Act on 24.03.2014

determining the total income at �1,59,08,870/-. During the course

of assessment proceedings, the Assessing Officer found that a sum

of �1,78,22,598/- was set apart as per clause (2) of explanation to

sec. 11(1) of the Act. A show cause notice was issued to the trust

proposing to treat the above sum of �1,78,22,598/- as per provision

of sec 11(1)(a) of the Act. In response, the Authorised

Representative stated that the trust follows accrual basis of

accounting and also the trust got considerable receivables towards

fees, interest, etc at the year end. In view of the unspent income

the option provided under explanation (2) to sec.11(1) of the Act

has been exercised to carry over the unspent income including the

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receivables towards spending in the subsequent assessment year or

during the year of receipt. The option letter has been duly filed

alongwith IT return at the time of filing of return of income. Further,

the trust spend the amount accumulated in the immediate

subsequent year i.e. in the F.Y. 2011-12. Not convinced with the

reply, the Assessing Officer found that the assessee claimed the

surplus as per clause (2) of explanation to sec. 11(1) of the Act

without assigning any reasons. Any other reason means, the

assessee should have specified the reasons for unapplied income to

be set apart in the nest year. The assessee even in the earlier years

also has not applied its income to the extent of 85% as specified in

the Act. Further, the assessee has not furnished Form No.10 for

accumulation u/s.11(2) of the Act. The assessee has carried over

the surplus as specified u/s.11(5) of the Act. In view of the above,

the shortfall in application of income to the extent of �1,59,08,870/-

(�1,78,22,598 – �19,13,728) was brought to tax. Against this, the

assessee filed an appeal before the Commissioner of Income Tax

(Appeals).

perusal of Form No.10B filed along with the return reveals that a

sum of �3,91,54,093/- only was applied to charitable purpose during

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the assessment year 2011-12 by the assessee against the amount of

�5,69,76,691/- to be spend/applied during the assessment year

2011-12. The sum of �5,69,76,691/- to be applied during

assessment year 2011-12 consisted of �4,74,80,952/- pertaining to

assessment year 2011-12 and �94,95,739/- relates to assessment

year 2009-10 as per the utilization statement furnished by the

assessee. The unspent amount worked out by the assessee was

�1,78,22,598/-. The sum of �1,78,22,598/- was sought to be

accumulated under clause(2) of explanation to sec. 11(1) of the Act.

For this purpose, letter of resolution dated 15.09.2011 and letter of

option dated 27.09.2011 were enclosed with the return of income.

In this case, the assessee invokes Explanation (2) to sec.11(1) of the

Act for accumulating �1,78,22,598/- by filing letter of option and

letter of resolution alongwith the return of income. It is pertinent to

observe that the sum to be spent/applied includes �94,95,739/-

being unspent amount for the year 2009-10 for which no details

were furnished in the return of income, either before the Assessing

Officer or before the undersigned, etc., Sub-section (2) of section

11 of the Act is invoked where 85% of the income referred to in

clause (a) or clause (b) of sub-section (1) read with explanation to

that sub-section is not applied to charitable purpose during the

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previous year but accumulated. For such accumulation the assessee

has to fulfill the following two conditions:-

Further, he observed that considering the view that even for clause

(2) of sub-section 11(1) of the Act, the conditions stipulated

u/s.11(2) of the Act apply which is crystal clear from the wording of

section 11(2) of the Act. Mere resolution and letter of option without

the purpose are not enough to accumulate or set apart the income.

The accumulated or set apart income as per Explanation (2) to

section 11(1) of the Act shall be deemed to be income applied to

such purposes and hence exempt from tax if the statement for the

year ended 31.03.2012 furnished by the assessee at the time of

assessment proceedings is irrelevant as section 11(2) of the Act was

not complied with by the assessee which is mandatory. The case

law relied on by the assessee are distinguishable from the facts and

circumstances of the present case. Hence, he declined to interfere

with the order of the Assessing Officer. The income brought to tax

by the Assessing Officer in the assessment order for the assessment

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year 2011-2012 is confirmed. Against this, the assessee is in appeal

before us.

record. The question to be considered is whether 15% of

accumulation of income under section 11(1)(a) of the Act is a flat

deduction available to the assessee or for that purpose, whether

filing of Form No.10 along with the return of income and fulfilling

other formalities are a pre-condition or not. Provisions of Sec.11(1)

(a) reads as under:-

“11.(1)(a) Income derived from property held under trust wholly or charitable or religious purposes, to the extent to which such income is applied to such purposes in India ; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which income so accumulated or set apart is not in excess of fifteen per cent of the income from such property. (b) to (d) xxx Explanation.- For the purposes of clauses (a) and (b),- (1) in computing the fifteen per cent of income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income; (2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount – (i) for the reason that the whole or any part of the income has not been received during that year, or

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(ii) for any other reason, then- (a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and (b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount.

May, at the option of the person in receipt of the income (such

option to be exercised in writing before the expiry of the time

allowed under sub-section (1) of section 139 for furnishing the

return of income) be deemed to be income applied to such purposes

during the previous year in which the income was derived; and the

income so deemed to have been applied shall not be taken into

account in calculating the amount of income applied to such

purposes, in the case referred to in sub-clause (i), during the

previous year in which the income is received or during the previous

year immediately following, as the case may be, and, in the case

referred to in sub-clause (ii), during the previous year immediately

following the previous year in which the income was derived.”

Sec.11(2) which read as under:-

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“11(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:- (a) such person specifies, by notice in writing given to the Assessing Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years; (b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5): Provided that in computing the period of ten years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded.”

On a plain reading of above section, we find that following

income of a charitable or religious trust shall not be included in the

total income -

(1) to the extent of income –

(a) applied;

(b) deemed to be applied for the object of the trust; and

(c) accumulation of income not exceeding 15%;

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(2) exemption of balance income of income (after income applied, deemed to be applied and accumulation not exceeding 15%).

down by the Hon’ble Apex Court in the case of Addl. C.I.T vs.

A.L.N.Rao Charitable Trust (SC) 216 ITR 69, we find that following

income shall not be included in the total income of the previous year

of the trust in receipt of the income.:- 1) the income applied for charitable or religious purposes in India plus 2) the income which is accumulated or set apart for application to such purposes in India not exceeding fifteen per cent of the income.

previous year are given exemption from income-tax to the extent

of that part of the income which is actually spent for charitable or

religious purposes plus accumulated income not exceeding 15% of

the income. Clause (a) of Section 11(1) of the Act permits

automatic accumulation of income up to 15% without any pre-

condition set. Once the operation of Sec.11(1)(a) exhausted, then

follows sub-section (2) of Section 11 of the Act, which deals with

the question of investment of the balance of accumulated income

over and above 15% accumulated income which has still not

qualified for exemption under clause (a) of sub-section 11(1) of the

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Act. That balance accumulated income can also qualify for

exemption from income-tax meaning thereby the ceiling or the limit

of exemption of accumulated income from income-tax as imposed

by clause (a) of sub-section (1) of section 11 would get lifted if the

additional accumulated income beyond 15% as the case may be, is

invested as laid down by section 11(2) after following the

procedure laid down therein. Therefore, sub-section (2) will

operate for the entire balance of the previous year which has not

got the benefit of tax exemption under clause (a) of sub-section (1)

of section-11 of the Act. It has to be kept in view that out of the

accumulated income of the previous year, 15% of the total income

is given exemption from income-tax by clause (a) of sub section (1)

of section 11 itself. That exemption is unfettered and not subject to

any conditions. Section 11(2) does not operate to whittle down or

to cut across the exemption provision contained in section 11(1)(a)

so far as such accumulated income does not exceed 15% of the

income accumulated in the previous year. It has also to be

appreciated that sub-section (2) of section 11 does not contain any

non obstante clause like “notwithstanding the provisions of sub-

section (1)”. Consequently it must be held that after

section11(1)(a) has had its full force and if still any accumulated

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income of the previous year is left to be dealt with and to be

considered for the purpose of income-tax exemption, sub-section

(2) of section 11 can be pressed into service and if it is complied

with, then such additional accumulated income beyond 15% will

also be eligible for exemption from income-tax on compliance with

the conditions laid down by sub-section (2) of section-11 of the

Act.

the object of the trust so as to qualify for exemption u/s 11 of the

Act. Income not exceeding 15% of income is allowed to be

accumulated under this section 11(1)(a) of the Act. This

accumulation is automatic and does not call for any statutory

stipulation. Explanation to section 11(1) provides deemed

application of the income. The said explanation deals with a

situation where income applied to charitable or religious purpose

falls short of 85% of the income for the reason that the income

was not received during that year or for any other reason, the trust

have to exercise in writing for accumulation in accordance with

Explanation to section 11(1) of the Act. It is pertinent to mention

that filing of Form 10 u/s 11(2) of the Act and exercising in writing

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before the expiry of the time allowed under sub section (1) of

section 139 while furnishing the return of income Explanation to

section 11(1) of the Act is different. For exercising in writing it is

not required to file any prescribed form. It could be on simply

application or it could be exercised by passing accounting entries in

the books of account, financial statements and other documents

filed along with the return of income. If, combinedly, 85% of

income including income applied, deemed to be applied and

accumulation not exceeding 15% are less than 85% still the trust is

eligible for exemption from income u/s 11(2) of the Act. In other

words, it can be said that a chartable or religious trust can claim

exemption from income even no income is applied for the object of

the trust during the year, the remaining 85% of the income will be

allowed exemption u/s 11(2) of the Act provided the statutory

requirements for filing Form 10 and investing the amount in

specified securities are fulfilled by the assessee.

that as per section 11(1)(a) the assessee is entitled for flat

deduction without any condition or formality of filing form No.10, if

income is accumulated or set apart for application of the objects of

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the trust in India to the extend to which the income so

accumulated or set apart does not exceed 15% of the income.

the income, for which the assessee is to satisfy the conditions laid

down in section 11(2) of the Act. As per the discussion made

above, the requirement of section 11(2) is that if such income is

accumulated or set apart, then such income shall not be included in

the total income of the previous year if such person specifies by

notice in writing given to the assessing officer in prescribed

manner, the purpose for which the income is being accumulated or

set apart and the period for which the income is to be accumulated

or set apart, which shall, in no case exceed 10 years. The money

so accumulated or set apart is invested or deposited in the forms or

modes specified in sub section (5) of section 11 of the Act. A

regards the condition in respect of furnishing of prescribed form 10

we have given the finding that form No.10 submitted before the

completion of the assessment is required to be considered if the

condition as laid down in section 11(2)(a) is satisfied. However, as

regard the condition (b) of section 11(2) that the money so

accumulated or set apart is invested or deposited in the form or

mode specified in sub section (5) of section 11 is subject to

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verification. We, therefore, think proper to send this issue to the

file of the assessing officer with a direction to verify the said

condition of clause (b) of section 11(2) of the Act as to whether the

assessee has made investment in the prescribed securities or not.

Accordingly, the assessing officer will decide this issue after

providing opportunity of hearing to the assessee and the issue in

dispute is remitted to Assessing Officer for fresh consideration.

No.92/Mds/2015 is allowed for statistical purposes.

Order pronounced on Friday, the 15th day of May, 2015, at

Chennai.

Sd/- Sd/- (च�ला नागे�� �साद ) (चं� पूजार� ) (CHALLA NAGENDRA PRASAD) (CHANDRA POOJARI) �या�यक सद�य/ JUDICIAL MEMBER लेखा सद�य/ ACCOUNTANT MEMBER चे�नई/Chennai. �दनांक/Dated:15.05.2015. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2.��यथ�/ Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.