2008 (4) TMI 523 - HC - Income Tax

Exemption under section 11(2) of the Act - Assessing Officer noticed that the assessee was carrying over 75 per cent. of the income from year to year for 10 years every year on a regular basis and the assessee was only engaged in creation of assets - Held that - section 11(2) of the Act providing for carry over up to 75 per cent. is an exception and if it is followed from year to year then the genuineness of the activities of the trust itself should be examined by the Assessing Officer. Matter remanded back to the Assessing Officer for fresh consideration appeal is disposed of.

Summary

Issues:
1. Exemption under section 11(2) of the Income-tax Act for assessment years 1995-96 and 1996-97.
2. Whether the trust is genuinely achieving its stated objects.
3. Justifiability of carrying forward income up to 75% on a routine basis.
4. Requirement for a detailed investigation into the trust's activities and expenditures.

Analysis:

Issue 1: The appeals challenged the orders of the Income-tax Appellate Tribunal regarding the respondent/assessee's claim for exemption under section 11(2) of the Income-tax Act for the assessment years 1995-96 and 1996-97. The assessee, a charitable institution focusing on education in Vedas and Upanishads, was observed by the Assessing Officer to be accumulating over 75% of income annually for 10 years without substantial progress in educational activities. The Inspector of Income-tax noted a decline in student numbers and raised doubts about the trust's capability to fulfill its objectives. The Assessing Officer also questioned the purpose of income accumulation and the feasibility of funding projects while maintaining surplus funds for the trust's activities. The Tribunal, however, upheld the assessee's accumulation and investment practices.

Issue 2: The High Court acknowledged the technical approach of the Tribunal but emphasized the importance of assessing whether the trust was genuinely achieving its objectives to qualify for exemption. While recognizing the provision allowing carry forward of income up to 75%, the Court cautioned against routine accumulation without actual progress towards the trust's goals. It deemed a detailed investigation necessary to evaluate the trust's activities, expenditures, and any potential diversions, suggesting a re-examination by the Assessing Officer considering subsequent years' activities.

Issue 3: The Court opined that consistent carry forward of income under section 11(2) should trigger scrutiny into the trust's activities to ensure the genuineness of its operations. It highlighted the exceptional nature of the provision and the need for the Assessing Officer to delve deeper into the trust's functioning, especially considering the significant time elapsed since the relevant assessment years.

Issue 4: Consequently, the Court set aside the orders of all authorities and remanded the matter to the Assessing Officer for fresh consideration. It directed a comprehensive review of subsequent assessments, an inquiry into the trust's activities, and potentially a local inspection of the trust's premises to ascertain the nature and extent of its operations. The appeal was disposed of with these directions for further assessment and investigation.