2011 (2) TMI 805 - AT - Income Tax

Scope of Exemption under 11(1) and 11(2)-Assessee applied more than 85 percent of Income- AO disallowed accumulation under section 11(2) of the act. - Held that -The provisions contained in section 11(2) do not in any manner restrict the operation of section 11(1) of the IT Act and the accumulated income which was less than 15 per cent of the total income was also exempt because the restriction provided in section 11(2) of the IT Act comes into operation only when the accumulation is more than 15 per cent which is not in the facts of the present case. - The appeal of the assessee is allowed.

Issues Involved:
1. Disallowance of the appellant's claim for accumulation under section 11(2) of the Income Tax Act.
2. Compliance with requisite formalities for accumulation under section 11(2).
3. Legitimacy of disallowance during the effectuation of a previous order.
4. Accuracy of income computation.
5. Adherence to facts, law, and principles of natural justice.

Issue-wise Detailed Analysis:

1. Disallowance of the appellant's claim for accumulation under section 11(2) of the Income Tax Act:
The primary issue was whether the appellant's claim for accumulation under section 11(2) was rightfully disallowed by the Assessing Officer (AO). The AO had treated the amount claimed under section 11(2) as deemed income, arguing that the appellant did not fulfill the conditions specified under section 11(2), such as specifying the purpose for accumulation and ensuring the money was invested in prescribed forms. The Tribunal, however, found that the appellant had applied more than 85% of its income for charitable purposes, thereby meeting the requirements of section 11(1)(a). Consequently, the provisions of section 11(2) were deemed inapplicable since the accumulation was less than 15% of the total income.

2. Compliance with requisite formalities for accumulation under section 11(2):
The AO contended that the appellant did not comply with the formalities under section 11(2), such as submitting a notice in writing specifying the purpose and period for accumulation and ensuring the money was invested in specified forms. The Tribunal, however, clarified that these conditions under section 11(2) are only applicable when the accumulation exceeds 15% of the total income. Since the appellant had applied more than 85% of its income for charitable purposes, the remaining accumulation was within the permissible limit of 15%, thus not invoking the conditions of section 11(2).

3. Legitimacy of disallowance during the effectuation of a previous order:
The appellant argued that the disallowance should not have been made while giving effect to the previous order dated 18th May 2009 by the CIT(A)-II, Kanpur. The Tribunal noted that the AO had followed the directions of the CIT(A) to allow the benefit under section 11(2) as per law. However, since the Tribunal found that the provisions of section 11(2) were not applicable due to the compliance with section 11(1)(a), the disallowance was deemed unjustified.

4. Accuracy of income computation:
The appellant contested the computation of income at Rs. 12,66,569 as erroneous. The Tribunal, upon reviewing the facts, found that the appellant had applied Rs. 95,09,847 out of a total income of Rs. 1,07,76,416 for charitable purposes, which was more than the required 85%. Therefore, the remaining amount of Rs. 12,66,569, being less than 15% of the total income, was correctly accumulated and not subject to disallowance under section 11(2).

5. Adherence to facts, law, and principles of natural justice:
The appellant claimed that the order was contrary to facts, law, and principles of natural justice. The Tribunal, after careful consideration, concluded that the appellant had indeed complied with the requirements of section 11(1)(a) by applying more than 85% of its income for charitable purposes. Thus, the disallowance under section 11(2) was not warranted, and the appellant's claim was allowed.

Conclusion:
The Tribunal set aside the order of the CIT(A) and directed the AO to allow the appellant's claim for accumulation under section 11(1)(a), as the provisions of section 11(2) were found inapplicable. The appeals in ITA Nos. 675, 676, and 677/Luck/2010 were allowed, with the Tribunal's findings in ITA No. 675/Luck/2010 applying mutatis mutandis to the other two appeals.

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