2004 (9) TMI 91 - HC - Income Tax

Charitable purpose - benefit of section 11(1)(a) - According to the Assessing Officer, the assessee did not apply 75 per cent, of his income for charitable purposes and therefore, it was liable to tax. The Assessing Officer, taking note of the fact that the assessee exceeded the 25 per cent, limit for accumulation and so the assessee ought to have sent a notice of accumulation in Form No. 10, the Assessing Officer treated the entire amount as taxable income Held that amount has been set apart for utilizing for charitable purposes in the subsequent year, will amount to exercising option under Explanation (2)(i) or (ii) to section 11(1)(a) and such amount can be taken as amount set apart for application under section 11(1)(a) Further, it is held that there is no mandatory requirement under section 11(1) requiring the assessee to exercise the option when he seeks relief under section 11(1) of the Act, as it is enough for the assessee to submit a statement along with the return to exercise such option Revenue appeal dismissed

Summary

Issues Involved:
1. Interpretation of Section 11(1)(a) of the Income-tax Act.
2. Requirement of notice of accumulation under Section 11(2) of the Income-tax Act.

Detailed Analysis:

Issue 1: Interpretation of Section 11(1)(a) of the Income-tax Act

The core of the dispute revolves around whether the Income-tax Appellate Tribunal (ITAT) was correct in holding that merely mentioning in the adjusted total income statement that the amount has been set apart for charitable purposes in the subsequent year constitutes exercising the option under Explanation (2)(i) or (ii) to Section 11(1)(a) of the Income-tax Act, thereby qualifying the amount as set apart for application under Section 11(1)(a).

The assessee, a public charitable trust, claimed exemption under Section 11(1)(a) for the assessment year 1994-95, declaring nil income. The Assessing Officer (AO) contended that the assessee had not applied 75% of its income for charitable purposes and had exceeded the 25% limit for accumulation without filing the required notice of accumulation in Form No. 10. Consequently, the AO treated the entire amount as taxable income.

On appeal, the Commissioner of Income-tax (Appeals) sided with the assessee, interpreting that the disputed amount should be deemed to have been spent for charitable purposes as per Section 11(1B)(b). The Commissioner noted that the amount accumulated or set apart for future application was less than 25% of the income, thus rejecting the applicability of Section 11(2). The Tribunal confirmed this view, granting the benefit of Section 11(1)(a) to the assessee.

The Tribunal clarified that Section 11(2) stipulates two conditions for exemption: specifying the purpose of accumulation by notice in writing and investing the accumulated money in specified forms or modes. However, since the case fell under Section 11(1), these conditions were deemed unnecessary. The Tribunal's interpretation was supported by precedents from various High Courts and the Supreme Court, which affirmed that the exemption available under Section 11(2) is in addition to that under Section 11(1)(a).

Issue 2: Requirement of Notice of Accumulation under Section 11(2) of the Income-tax Act

The second issue was whether the ITAT was correct in holding that it was unnecessary for the assessee to give notice of accumulation by complying with the statutory requirements of Section 11(2) read with Section 17 of the Income-tax Rules for the amount shown as set apart for use in the following year.

The Revenue argued that the case of the assessee fell under Section 11(2) and not Section 11(1). However, the court was not convinced by the Revenue's arguments, citing precedents that clarified the scope and applicability of Sections 11(1)(a) and 11(2). The Supreme Court, in the case of Addl. CIT v. A.L.N. Rao Charitable Trust, held that the exemption under Section 11(2) is in addition to that under Section 11(1)(a), and that Section 11(2) does not override the provisions of Section 11(1)(a).

The court further noted that there is no mandatory requirement under Section 11(1) for the assessee to exercise the option in a prescribed form when seeking relief under this section. It is sufficient for the assessee to submit a statement along with the return to exercise such an option.

In conclusion, the court found no substantial question of law in the appeals and dismissed them, upholding the decisions of the Commissioner (Appeals) and the Tribunal. The judgment reaffirmed the principles that the exemption under Section 11(1)(a) is absolute and not subject to the conditions of Section 11(2), and that the procedural requirements for exercising the option under Section 11(1) are minimal.