2012 (12) TMI 9 - AT - Income Tax

Charitable Trust accumulation and application of income - inter-charity donations out of accumulation of income in excess of 15% of income whether Explanation below Sec. 11(2) could be interpreted to draw a distinction between accumulation of income in excess of 15% and upto 15% of income - assessee Trust having income of Rs 6.41 crores, had incurred expenditure of Rs 7.80 lacs during the year including Rs 2.50 crores donation Revenue contending as to how donation of Rs 2.50 crores could be considered as application of income in view of Explanation to sec. 11(2) on the ground that the said donation was not paid out of the current year s income but from the accumulation of income Held that - It has been held in case of Bagri Foundation (2010 (7) TMI 85 - DELHI HIGH COURT ) that Explanation appended after section 11(2) is nothing but an additional condition attached to accumulation in excess of 15 per cent permitted u/s 11(2). It cannot be held as a condition on accumulation up to 15 per cent as provided for in section 11(1)(a) also. There is no rational classification for imposing the restriction as contained in the Explanation to the accumulation of up to 15 per cent also when there is no such restriction to donating the entire income of a year to another charitable trust. Hence, CIT(A) in view of aforesaid decision, has rightly deleted the addition Decided against Revenue

Summary

Issues:
Inter-charity donations out of accumulation of income in excess of 15% of income.

Analysis:
The case involved the interpretation of the provisions of Explanation to sec. 11(2) of the Income Tax Act regarding inter-charity donations made out of accumulation of income exceeding 15% of the total income. The appellant, a hospital running for philanthropic purposes, had debited a substantial amount as donations to a trust. The Assessing Officer (AO) questioned the application of income, considering the donation was from accumulated income, and taxed the surplus amount. The appellant argued that the Explanation to sec. 11(2) did not cover accumulation out of 15% or 25% of surplus income, citing a CBDT Circular and the absence of accumulation exceeding 15% in any year. The AO rejected the argument, deeming it absurd.

Before the CIT(A), the appellant reiterated that the Explanation to sec. 11(2) only explained sec. 11(2) and not sec. 11(1), supported by a Delhi High Court decision. The CIT(A) ruled in favor of the appellant, relying on the same High Court decision, stating that the Explanation did not apply to accumulation up to 15% as per sec. 11(1)(a). The Revenue appealed, supported by the AO's order, while the appellant cited the High Court decision again.

The ITAT, Delhi analyzed the provisions of sec. 11(1)(a) and sec. 11(2) along with the Explanation, emphasizing the distinction between accumulation exceeding 15% and up to 15% of income. Referring to the High Court decision, the ITAT concurred that the Explanation was an additional condition for accumulation over 15%, not applicable to accumulation up to 15% under sec. 11(1)(a). Consequently, the ITAT upheld the CIT(A)'s decision to delete the addition of the surplus income, dismissing the Revenue's appeal.

In conclusion, the ITAT affirmed that the Explanation to sec. 11(2) did not restrict inter-charity donations from accumulation up to 15% of income, as clarified by the Delhi High Court decision. Therefore, the ITAT upheld the CIT(A)'s decision to delete the addition, dismissing the Revenue's appeal.