2011 (10) TMI 193 - AT - Income Tax

Charitable Trust- voluntary accumulations - trust was established by the State Government for the purpose of improvement of Karnal City within Municipal limits- accumulation of income u/s 11(2) for general public utility- income tax paid for earlier assessment years(then status local authority ) & TDS on FDRs now claimed as application of income- Held that - Additional condition by way of section 11(2) is intended only to apply in respect of accumulation in excess of 15 per cent and not to accumulation upto 15 per cent under section 11(1)(a) of the Act. The income applied u/s 11(1)(a) and accumulated for specified purpose to be spent in specified period u/s11(2) taken together should 85% in order to claim 100% exemption of the income derived by the assessee. See Bagri Foundation s case(2010 - TMI - 77103 - Delhi High Court) - there is short fall in application/accumulation of income of Rs. 72, 535/- (12, 09, 91, 502.40 -12, 09, 18, 967). The amount of Rs. 72, 535/- has neither been applied nor accumulated. Therefore the amount of Rs. 72, 535/- will be liable to be taxed. However the purpose of accumulation to be specified should be a concrete one an itemized purpose or a purpose instrumental to the implementation of its object or objects. It is not for all the objects of the trust but where heavy amount is needed for meeting the cost of project falling within the objects of the trust or institution accumulation of income to meet the cost of such project is permitted. Hence the charitable trust cannot list all its objects as purposes for accumulation of income under section 11(2). See DIT Exemption v. Trustees of Singhania Charitable Trust (1991 - TMI- 21454 - Calcutta High Court). In present case since A.O. has allowed accumulation for general public utility u/s 11(2) and it is not in appeal before Tribunal hence allowed.Similarly since CIT(A) has allowed payment of income taxes as application of income and the Revenue is not in appeal before Tribunal against the same hence claim of the assessee is allowed. - Decided partly in favor of the assessee.

Summary

Issues Involved:
- Accumulation of 15% of income under section 11(1)(a) of the Income Tax Act.
- Application and accumulation of income for the purposes of the trust.
- Taxability of unapplied income.

Detailed Analysis:

Accumulation of 15% of Income under Section 11(1)(a):
The primary issue in this case was whether the assessee trust could accumulate 15% of its income amounting to Rs. 2,13,30,208 under section 11(1)(a) of the Income Tax Act. The assessee, a trust established for the improvement of Karnal City, argued that it was entitled to accumulate this amount without any conditions, as per section 11(1)(a). The assessee had earned an income of Rs. 14,23,42,944 during the relevant assessment year and applied Rs. 3,99,18,967 for its objects. The trust also passed a resolution to set apart Rs. 8,10,00,000 for future application and informed the assessing officer in Form No. 10.

The assessing officer, however, noted that the assessee had debited certain amounts for income tax paid in previous years and TDS on FDRs, which were not considered as application of income. Consequently, the AO disallowed these amounts while computing the application of income and brought Rs. 5,30,12,827 to tax.

Application and Accumulation of Income:
The assessee contended before the CIT (Appeals) that voluntary accumulations at the rate of 15% under section 11(1)(a) should be allowed without any conditions. The CIT (Appeals) rejected this claim, stating that the assessee neither applied 85% of its receipts for its objects nor followed the procedure specified in section 11(2) and 11(5) for the remaining amount. Therefore, the exemption for the excess amount was not allowed. However, the CIT (Appeals) did allow the claim that income tax paid by the assessee was an application of income under section 11(1)(a).

Taxability of Unapplied Income:
The ITAT analyzed whether 15% of receipts were eligible for exemption under section 11(1)(a). The provisions of sections 11(1)(a) and 11(2) were examined. Section 11(1)(a) provides that income applied for charitable purposes is exempt, and up to 15% of income can be accumulated without conditions. Section 11(2) allows for the accumulation of income beyond 15%, provided specific conditions are met.

The ITAT held that the income applied under section 11(1)(a) and accumulated under section 11(2) should together constitute 85% of the income to claim 100% exemption. Any shortfall in this application/accumulation would be liable to tax. In this case, the assessee applied Rs. 3,99,18,967 and accumulated Rs. 8,10,00,000, totaling Rs. 12,09,18,967, against the required Rs. 12,09,91,502.40. Thus, there was a shortfall of Rs. 72,535, which was liable to tax.

Clarifications and Precedents:
The ITAT also clarified that they had not examined the issue of income tax and TDS as application of income, as the revenue had not appealed against the CIT (Appeals) decision. The ITAT noted that accumulation under section 11(2) should be for specific purposes and not for all objects of the trust, as supported by the decision of the Hon'ble Calcutta High Court in the case of DIT [Exemption] v. Trustees of Singhania Charitable Trust.

Conclusion:
The appeal was partly allowed. The ITAT concluded that the assessee was entitled to accumulate 15% of its income under section 11(1)(a) without conditions, but any shortfall in the application/accumulation of the remaining 85% would be taxable. The specific accumulation under section 11(2) must be for concrete purposes and not for all objects of the trust.