INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'C', BANGALORE

I.T.A No.975/Bang/2015 Assessment Year : 2011-12
M/s. Society of the Servants of the Holy Spirit (Appellant) vs Deputy Commissioner of Income-tax (Exemption) (Respondent)
Date of Order: 27-11-2015

ORDER

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by assessee it is aggrieved that accumulation of income u/s.11(1)(a) of the Income-tax Act, 1961 [‘the Act’ in short] was computed at 15% of the net income from property held under trust and not from the gross income from property held under trust.

02. Facts apropos are that assessee running convents, hospitals and rehabilitation center for mentally challenged, had filed return for the impugned assessment year declaring nil income after claiming exemption u/ss.11 & 12 of the Act. AO while allowing such exemption was of the opinion that accumulation u/s.11(1)(a) of the Act, had to be worked out only on the gross receipts and not on the net receipts. The net surplus after meeting the expenditure and application for the objects of the assessee trust came to Rs.1,95,63,110/-. Gross receipts of the assessee came to Rs.4,07,69,705/-. Assessee had claimed benefit of accumulation u/s.11(1)(a) of the Act, on the gross receipts of Rs.4,07,69,705/- whereas the AO had restricted such accumulation to 15% of the net surplus, viz., Rs.1,95,63,110/-.

03. Assessee’s appeal before the CIT (A) was partly successful. According to the CIT (A), 15% accumulation on net donation and medical income was applied by the AO without application of mind. Relying on the judgment of Hon’ble Apex Court in the case of CIT v. Programme for Community Organization [248 ITR 1], CIT (A) held that application of income for charitable purposes should be calculated with reference to gross income and not net income. He directed the AO to bifurcate the receipts of the assessee into two heads, namely donation and income from charitable activities. According to him in respect of the former, gross receipts and in respect of the latter net receipts had to be reckoned while applying 15% to work out the accumulation available to the assessee u/s.11(1)(a) of the Act.

04. Now before us, Ld. AR strongly assailing the order of the CIT (A) submitted that accumulation can be applied only on the gross income irrespective of the source and cannot be restricted to the net amount.

05. Per contra, Ld. DR supported the orders of CIT (A),

06. We have perused the orders and heard the rival contentions. We find that the issue raised before us is squarely covered by the judgment of Hon’ble Apex High Court in the case of Addl.CIT v. A. L. N. Rao Charitable Trust [216 ITR 697]. Same view has been taken by us in the case of DCIT v. M/s. Rashtrothana Parishat [ITA Nos.896& 897/Bang/2014, dt.14.08.2015]. In paras 10 & 11 of the judgement of Hon’ble Apex Court in the case of A. L. N. Rao Charitable Trust (supra), it was held as under :

“10. A mere look at s. 11(1)(a), as it stood at the relevant time, clearly shows that out of total income accruing to a trust in the previous year from property held by it wholly for charitable or religious purpose, to the extent the income is applied for such religious or charitable purpose, the same will get out of the tax net but so far as the income which is not so applied during the previous year is concerned at least 25% of such income or Rs. 10,000 whichever is higher, will be permitted to be accumulated for charitable or religious purpose and it will also get exempted from the tax net. Then follows sub-s. (2) which seeks to lift the restriction or the ceiling imposed on such exempted accumulated income during the previous year and also brings such further accumulated income out of the tax net if the conditions laid down by sub-s. (2) of s. 11 are fulfilled meaning thereby the money so accumulated is set apart to be invested in the Government securities, etc., as laid down by cl. (b) of sub-s. (2) of s. 11 apart from the procedure laid down by cl. (a) of s. 11(2) being followed by the assessee-trust. To highlight this point we may take an illustration. If Rs. 1,00,000 are earned as the total income of the previous year by the trust from property held by it wholly for charitable and religious purposes and if Rs. 20,000 are actually applied during the previous year by the said trust to such charitable or religious purposes the income of Rs. 20,000 will get exempted from being considered for the purpose of income-tax under first part of s. 11(1). So far as the remaining Rs. 80,000 are concerned if they could not be actually applied for such religious or charitable purposes during the previous year then as per s. 11(1)(a) at least 25% of such total income from property or Rs. 10,000 whichever is higher will also earn exemption from being considered as income for the purpose of income-tax, that is, Rs. 25,000 will thus get excluded from the tax net. Thus out of the total income of Rs. 1,00,000 which has accrued to the trust Rs. 25,000 will earn exemption from payment of income-tax as per s. 11(1)(a) second part. Then follows sub-s. (2) which states that the ceiling or the limit or the restriction of accumulation of income to the extent of 25% of the income or Rs. 10,000, whichever is higher for earning IT exemption as engrafted under s. 11(1)(a) will get lifted if the money so accumulated is invested as laid down by s. 11(2)(b) meaning thereby out of the total accumulated income of Rs. 80,000 accruing during the previous year and which could not be spent for charitable or religious purposes by the trust balance of Rs. 55,000 if invested as laid down by sub-s. (2) of s. 11 will also get excluded from the tax net. But for such investment and if s. 11(1) alone had applied Rs. 55,000 being the balance of accumulated income would have been covered by the tax net. Learned counsel for the Revenue submitted that the investment as contemplated by sub-s. (2)(b) of s. 11 must be investment of all accumulated income in Government securities, etc., namely, 100% of the accumulated income and not only 75% thereof. And if that is not done then only the invested accumulated income to the extent of 75% will get excluded from IT assessment. But so far the remaining 25% of the accumulated income is concerned it will not earn such exemption. It is difficult to appreciate this contention. The reason is obvious.

Sec. 11, sub-s. (1)(a) operates on its own. By its operation two types of income earned by the trust during the previous year from its properties are given exemption from income-tax, (i) that part of the income of previous year which is actually spent for charitable or religious purposes in that year; and (ii) out of the unspent accumulated income of the previous year 25% of such total property income or Rs. 10,000 whichever is higher can be permitted to be accumulated by the trust, earmarked for such charitable or religious purposes. Such 25% of the income or Rs. 10,000 whichever is higher will also get exempted from income-tax. That exhausts the operation of s. 11(1)(a). Then follows sub-s. (2) which naturally deals with the question of investment of the balance of accumulated income which has still not earned exemption under sub-s. (1)(a). So far as that balance of accumulated income is concerned, that also can earn exemption from income-tax meaning thereby the ceiling or the limit of exemption of accumulated income from income-tax as imposed by sub-s. (1)(a) of s. 11 would get lifted if additional accumulated income beyond 25% or Rs. 10,000, whichever is higher, as the case may be, is invested as laid down by s. 11(2) after following the procedure laid down therein.

Therefore, sub-s. (2) only will have to operate qua the balance of 75% of the total income of the previous year or income beyond Rs. 10,000 whichever is higher which has not got the benefit of tax exemption under sub-s. (1)(a) of s. 11. If learned counsel for the Revenue is right and if 100% of the accumulated income of the previous year is to be invested under sub-s. (2) of s. 11 to get exemption from income-tax then the ceiling of 25% or Rs. 10,000 whichever is higher, which is available for accumulation of income of the previous year for the trust to earn exemption from income-tax as laid down by s. 11(1)(a) would be rendered redundant and the said exemption provisions would become otiose. It has to be kept in view that out of the accumulated income of the previous year an amount of Rs. 10,000 or 25% of the total income from property, whichever is higher, is given exemption from income-tax by s. 11(1)(a) itself. That exemption is unfettered and not subject to any conditions. In other words, it is an absolute exemption. If sub-s. (2) is so read as suggested by the learned counsel for the Revenue, what is an absolute and unfettered exemption of accumulated income as guaranteed by s. 11(1)(a) would become a restricted exemption as laid down by s. 11(2). Sec. 11(2) does not operate to whittle down or to cut across the exemption provisions contained in s. 11(1)(a) so far as such accumulated income of the previous year is concerned. It has also to be appreciated that sub-s. (2) of s. 11 does not contain any non obstante clause like "notwithstanding the provisions of sub-s. (1)". Consequently, it must be held that after s. 11(1)(a) has full play and if still any accumulated income of the previous year is left to be dealt with and to be considered for the purpose of IT exemption, sub-s. (2) of s. 11 can be pressed in service and if it is complied then such additional accumulated income beyond 25% or Rs. 10,000, whichever is higher, can also earn exemption from income-tax on compliance with the conditions laid down by sub-s. (2) of s. 11. It is true that sub-s. (2) of s. 11 has not clearly mentioned the extent of the accumulated income which is to be invested. But on a conjoint reading of the aforesaid two provisions of ss. 11(1) and 11(2) this is the only result which can follow. It is also to be kept in view that under the earlier IT Act of 1922 exemption was available to charitable trust without any restriction upon the accumulated income. There was a change in this respect under the present Act of 1961. Under the present Act, any income accumulated in excess of 25% or Rs. 10,000, whichever is higher, is taxable under s. 11(1)(a) of the Act, unless the special conditions regarding accumulation as laid down in s. 11(2) are complied with. It is clear, therefore, that if the entire income received by a trust is spent for charitable purposes in India, then it will not be taxable but if there is a saving, i.e., to say an accumulation of 25% or Rs. 10,000 whichever is higher, it will not be included in the taxable income. Sec. 11(2) quoted above further liberalizes and enlarges the exemption. A combined reading of both the provisions quoted above would clearly show that s. 11(2) while enlarging the scope of exemption removes the restriction imposed by s. 11(1)(a) but it does not take away the exemption allowed by s. 11(1)(a). On the express language of s. 11(1) and 11(2) as they stood on the statute book at the relevant time no other view is possible.

11. In the light of the aforesaid discussion and keeping in view the illustration which we have given earlier the combined operation of s. 11(1)(a) and s. 11(2) as applicable at the relevant time would yield the following result :
(i) If the income derived from property held under trust wholly for charitable or religious purposes during the previous year is Rs. 1,00,000 and if Rs. 20,000 therefrom are actually applied to such purposes in India then those Rs. 20,000 will get exempted from payment of income-tax as per the first part of s. 11(1)(a).
(ii) Out of the remaining accumulated income of Rs. 80,000 for the previous year, a further sum of Rs. 25,000 will get exempted from payment of income-tax as per second part of s. 11(1)(a). Thus out of the total income derived from property as aforesaid during the previous year, that is, Rs. 1,00,000, Rs. 45,000 in all will get excluded from the tax net on a combined operation of first and second part of s. 11(1)(a).
(iii) The aforesaid ceiling of Rs. 25,000 of accumulated income from property of previous year, will get lifted under s. 11(2) to the extent the balance of such accumulated income is invested as laid down by s. 11(2). To take an illustration if, say, an additional amount of Rs. 20,000 out of the balance accumulated income of Rs. 55,000 is invested as per s. 11(2) then this additional amount of Rs. 20,000 of accumulated income will get excluded from the tax net as per s. 11(2).
(iv) The remaining balance of the accumulated income out of Rs. 55,000, that is, Rs. 35,000 if not invested as per sub-s. (2) of s. 11 will be added to the taxable income of the trust and will not get exempted from the tax net.
(v) If on the other hand the entire remaining accumulated income of Rs. 55,000 is wholly invested as per s. 11(2) the said entire amount of Rs. 55,000 will get exempted from the tax net.”

07. Accordingly we are of the opinion that assessee’s claim for accumulation under section 11(1)(a)of the Act, could not have been restricted and was eligible for accumulation of 15% of gross receipt from all streams of its income. Ordered accordingly.

08. In the result, appeal filed by the assessee is allowed.

Order pronounced in the open court on 27th day of November, 2015.
 
 (VIJAYPAL RAO)                    (ABRAHAM P GEORGE)
JUDICIAL MEMBER                ACCOUNTANT MEMBER