Opening balance or existing Fixed Deposits if free from lien qualifies as accumulation of income under section 11(2) of the Income Tax Act, 1961
In a recent judgment, ITAT Bangalore has held that opening balance or existing Fixed Deposits which is free from any lien constitutes sufficient compliance for accumulated the income under section 11(2) of the Income Tax Act, 1961 (the Act).
ABCAUS Case Law Citation:
4438 (2025) (03) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the addition made by the Assessing Officer (AO) by disallowing the accumulation of income under section 11(2) of the Income Tax Act, 1961 (the Act).
The appellant assessee was a charitable trust, duly recognized and registered under section 12A as well as section 80G of the Act. The assessee trust was engaged in charitable activities, including education and healthcare.
During the assessment proceedings, the AO observed from the computation of income of the assessee that the assessee had claimed a deduction under section 11(2) of the Act. This deduction allows deferred spending, provided the funds are invested in compliance with section 11(5) of the Act.
The AO also noted that Form 10, required for income accumulation under Section 11(2), reflected only the amount claimed as accumulation but did not provide details of the investments made. Accordingly, the assessee was asked to furnish details regarding whether these funds were entirely invested in the prescribed modes under section 11(5) of the Act.
In response, the assessee submitted that there was an increase in its bank balance from the last day of the immediately preceding financial year to the close of the relevant financial year, asserting that this should be considered as an investment in the mode specified under section 11(5) of the Act.
However, in the absence of any details of fresh investments made by the assessee in accordance with the provisions of Section 11(5) of the Act, the AO disallowed the deduction claimed by the assessee under section 11(2) of the Act.
Aggrieved by this decision, the assessee preferred an appeal before the CIT(A) and submitted that its total bank balance as on the 31st March of the financial year included Fixed Deposits which were much higher than amount required to make an investment to claim the deduction under section 11(2) of the Act. The assessee to substantiate its contention placed its reliance on the judgment of Hon’ble High Court of Madars wherein it was held has that the balance in current account is also treated as investment as per section 11(5) of the Act to claim the deduction provided under section 11(2) of the Act.
The assessee in support of its claim also relied on the judgment of the ITAT Cochin wherein it was held that, in order to claim a deduction under section 11(2) of the Act, it is not necessary that the deposit be made from the current year’s income; it would be sufficient compliance if existing fixed deposits are earmarked for this purpose.
Before the Tribunal, the assessee contended that the amount of FD’s appearing in the financial statements were free from any lien and therefore the same can be considered as investment for the year in dispute under the provisions of section 11(2) of the Act. The revenue had not pointed out any defect in the financial statement of the assessee. Likewise, these FD’s were carried forward from the earlier year which were duly accepted by the revenue. Accordingly, the assessee had complied with the provisions of section 11(2) read with section 11(5) of the Act.
The Tribunal noted that the investment in the mode specified under section 11(5) of the Act was demonstrated by the assessee based on the financial statements. There was an average 65 percent increase in the amount of fixed deposits as on 31st March of the relevant financial year as compared to the 31st March of the immediately preceding financial year.
The Tribunal further observed that in the statement of facts filed before the CIT(A) in Form 35, the assessee had claimed to have applied the amount towards charitable activities out of the opening balance of the FDR. As claimed by the assessee a sum was utilized for charitable activities in the year in dispute out of the fund set apart in earlier years. Accordingly, the assessee had reduced the same from the gross amount of application of income claimed in the year under consideration, otherwise, the amount of application of income would have increased by said amount as application of income which was out of the earlier year fund accumulated under section 11(2)/(5) of the Act. As such, the assessee claimed to have applied the fund for charitable purposes excluding the amount brought forward and utilized out of the fund created under section 11(2) of the Act in earlier years.
Thus, the question arose whether such an increase in the bank balance maintained with the scheduled bank can be treated as an investment as per the provisions of section 11(5) of the Act.
The Tribunal noted that the Hon’ble Madras High Court held that investment in a current account in a scheduled bank will fall within the meaning of a deposit in any bank account as per section 11(5)(iii) of the Act. The Hon’ble High Court had held that the deposit was made in the current account with the Bank will come within the meaning of the words ‘deposit in any account with a scheduled bank.
In view of the above, the Tribunal opined that the amount lying in the bank account of the assessee can be treated as an investment as per the provisions of section 11(5) of the Act. Thus, there was sufficient compliance by the assessee in keeping the money set apart as invested in the mode specified under section 11(5) of the Act.
The Tribunal also addressed the question whether the opening balance of the Fixed Deposit can be treated as an investment made in the year in dispute. The Tribunal referred to the decision of Co-ordinate Bench which held that existing FDRs, which is free from any lien constitutes sufficient compliance for accumulated the income under section 11(2) of the Act.
The Tribunal therefore held that the existing FDRs, which is free from any lien can also be treated as investments or deposit as per the provision of section 11(2)(b) of the Act.
Accordingly, the ground of appeal of the assessee was allowed.
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