Accumulation of income u/s 11(2) – Utilization of current expenditure first not necessary

Section 11(2) related to accumulation of income not require that it can be utilized only after expenditure of relevant assessment are applied.

In a recent judgment, ITAT Lucknow has held that Section 11(2) related to accumulation of income by charitable institutions does not provide that expenditure of relevant assessment year should first be made from income of relevant assessment year and then only the surplus (accumulation brought forward) should be utilized. 

ABCAUS Case Law Citation:
4707 (2025) (08) abcaus.in ITAT

Section 11(2) of the Income Tax Act, 1961 (the Act) relates to charitable or religious trusts/institutions registered under section 12A of the Act and deals with the accumulation of income.

Normally, under section 11(1), income derived from property held under trust for charitable or religious purposes is exempt to the extent that it is applied to such purposes in India (at least 85% of such income must be applied during the relevant Assessment Year. However, when a trusts cannot spend 85% of their income in the same year. In such cases, Section 11(2) allows them to accumulate or set apart for a maximum period of 5 years, the income for future application by filing Form 10, subject to specified conditions.

In the instant case, the Assessing Officer (AO) had made an addition on the premise that fund accumulated u/s 11(2) of the Act can be utilized to meet out the application of the current year only when the receipts of the current year get exhausted.

The AO observed that till surplus was available from the current year’s receipts, no utilization could be made out of the previous years’ accumulated income. 

The Tribunal observed that a perusal of the provisions of section 11(2) shows that it provides that charitable institutions can accumulate income upto a period of five years which is to be utilized for specified charitable purposes.  However, it does not provide that expenditure of relevant assessment year should first be made from income of relevant assessment year and then only the surplus (accumulation brought forward) should be utilized.  Such a condition is not prescribed in the Act and the charitable institution accumulating its surplus funds under section 11(2) of the Act is entirely free to spend the same in furtherance of its objects. 

Accordingly, the Tribunal opined that the interpretation by the AO was not correct interpretation of law.

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