Accumulation u/s 11(1)(a) for an incidental business is to be calculated on net profits

Accumulation of charitable income u/s 11(1)(a) for incidental business is to be calculated on net profits not gross receipts.

ABCAUS Case Law Citation:
ABCAUS 3662 (2023) (02) ITAT

Important Case Laws covered:
Holy Spirit v/s. DCIT (Exemption)
CIT vs. Thanthi Trust (2001) 247 ITR 785 (SC)  
Programme for Community Organization, (2001) 248 ITR 1 (SC)
ACIT vs. ALN Rao Charitable Trust (1995) 216 ITR 697 (SC)
Society of the Servant of the Holy Spirit Vs. DCIT (Exp)
Public Education Society vs. DCIT

In the instant case, the assessee had challenged the order passed by the CIT(A) in calculating deduction towards accumulation of income u/s 11(1) of the Income Tax Act, 1961 (the Act) based on net income instead of gross receipts.

The appellant assessee was a registered charitable trust providing services to the public at large. During the impugned year the Assessing Officer (AO) found that the income of the assessee was from business incidental to the charitable activities. The AO held that in terms of the provisions of section 11(1)(a) of the Act relating to accumulation of income, it was only net profits and gains of such business were to be considered for the purpose of computing the amount to be allowed to set apart, at the rate of 15% of the income.

Accordingly, the AO denied the accumulation of income on the gross-receipts of the business as claimed by the assessee.

The CIT(A) held that it is only the profits, that can be applied for  charitable activity not the gross receipts/turnover as no business can be  run without certain expenditure. Therefore, the principle that only surplus income is to be transferred to the main account of the charitable trust for calculation of accumulated income u/s.11(1)(a) of the Act.

Before the Tribunal, the assessee heavily relied on the decision  of  the Hon’ble Apex Court in support of his contention that the accumulation is to be calculated on the gross receipts and not profits and gains of business. He also relied on various decisions of the ITAT which had followed the decision of Hon’ble Apex Court.

The Tribunal observed that a bare perusal of sub section 4(A) of section 11 leaves no scope for any doubt about the scope of the term income of businesses qualifying for charitable purposes, as referring to their profits and gains only. The section clearly states profits and gains of businesses incidental to the main objects of the charitable entities and qualifying for exemption being, to be incomes of such trusts eligible for exemption.

With regard to the judgment relied upon by the assessee, the Tribunal observed that said case the issue was not  as to  what  would comprise income of  an  incidental  business  carried  out  by a charitable entity, but on the contrary, the issue was  whether the  gross-receipts of the charitable entity, as such would qualify as income for determining the amount statutorily allowed to be set apart/accumulated in terms of section 11(1)(a) of the Act or the net receipts.

The Tribunal opined that the decision clearly did not address  as to what would constitute income of business incidental to   charitable activities for the purpose of accumulation/setting  apart. Therefore, the said decision did not apply to the present case.

As a result the Tribunal upheld the order of the CIT(A)

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