2013 (10) TMI 875 - AT - Income Tax

Charitable trust - claiming deduction u/s 24 on account of repair from rental income - Held that - The claim is, by all counts, without merit. This is for the simple reason that the income of a charitable trust or institution, subject to its application for charitable purposes, for which it has been in fact formed (per its constituting charter) is exempt from tax under Chapter III (ss.10 to 13B) of the Act. The said income does not form part of the total income of the entity to which it arises or accrues or is received by. It is only the income forming part of the total income u/s.2(45) of the Act, which is to be classified under the various heads of the income u/s.14 and, accordingly, subject to the computation provisions of Chapter IV (ss. 14 to 59) of the Act. The expenditure incurred in earning the same is, likewise, and only understandably, not to be taken into account in computing the total income under the Act, which represents trite law, and toward which a separate section (sec. 14A) has since been inserted by Finance Act, 2001 with retrospective effect from 01.04.1962. - Decided against the assessee. Exemption u/s 11(1)(a) of the Income Tax Act Donation made to TEF, a charitable institution under the same management - Held that - The law in the matter is by now well settled, so that donation by one charitable trust to another would entitle the donor fund to claim exemption qua application of income u/s. 11(1). As pointed out by the hon ble court in Sarladevi Sarabhai Trust (No. 2) (1988 (3) TMI 53 - GUJARAT High Court), it would make no difference if the donation is toward the corpus of the donee-fund, so that it is only the income therefrom, and not the donation sum itself, that is liable to be spent for or utilized for the charitable purposes of the recipient. The word application has a wider connotation than the word spent , so that an application of income of the donor trust could not be denied. Again, the corpus fund may not necessarily be invested in specified securities but could also be toward capital expenditure, which again qualifies as an application of income. The amount of Rs. 20.80 lacs is paid to TEF for the scholarship to students of Tolani Maritime Institute, being run by it, i.e., the payee-trust. The same is clearly an application of income to that extent and, in fact, stands reflected in the income & expenditure account - The donation is not to set up any scholarship fund, but for scholarship to be granted to the individual students, forming part of the regular expenditure of the done- trust and, as such, not a corpus donation, as stated in the relevant receipt. However, this would not materially impact; rather, only enhances the assessee s case inasmuch as one of the Revenue s objections was of the same being toward the corpus of the donee. The same would, therefore, without doubt, qualify for exemption u/s. 11(1)(a).

Summary

Issues Involved:
1. Validity of the assessee's claim for repairs and maintenance under Section 24 of the Income Tax Act.
2. Add-back of donations amounting to Rs. 24 lakhs and Rs. 36 lakhs paid by the assessee to Tolani Education Foundation (TEF).

Issue-wise Detailed Analysis:

1. Validity of the Assessee's Claim for Repairs and Maintenance under Section 24:

The assessee, a charitable trust, claimed a deduction under Section 24(a) of the Income Tax Act for repairs and maintenance at 30% of the rental income. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this claim, stating that the income of a charitable institution or trust should be computed based on its regular accounts and not under any specific head of income. The AO's view, supported by CIT(A), was that the income to be applied for charitable purposes and exempt under Section 11 should be considered in a commercial sense, i.e., the entire receipt less actual expenditure like municipal taxes and repair expenses. Therefore, no separate deduction under Section 24 was exigible.

The Tribunal upheld this view, emphasizing that the income of a charitable trust exempt under Chapter III of the Act does not form part of the total income and hence does not enter the computation process under Chapter IV. The Tribunal cited several precedents, including CIT vs. Harprasad & Co. (P.) Ltd., to support this interpretation. The Tribunal also noted that the assessee had been allowed all actual expenditure on repairs and maintenance as debited in its accounts. Thus, the assessee's ground for claiming the standard deduction under Section 24 failed.

2. Add-back of Donations Amounting to Rs. 24 Lakhs and Rs. 36 Lakhs:

The second issue involved the add-back of donations made by the assessee to TEF. The AO had added Rs. 24 lakhs and Rs. 36 lakhs to the assessee's income, claiming these were corpus donations and thus not liable to be spent for the donee's objects, thereby not qualifying as an application of income under Section 11(1)(a).

Upon appeal, the Tribunal examined the nature of these donations. The Rs. 24 lakhs was acknowledged as a corpus donation, and the Tribunal referred to precedents like CIT v. Sarladevi Sarabhai Trust (No. 2) to conclude that even corpus donations qualify as an application of income under Section 11(1). The Tribunal dismissed the Revenue's objection, stating that the word 'application' has a wider connotation than 'spent'.

For the Rs. 36 lakhs, the Tribunal found that Rs. 20.80 lakhs was for scholarships and Rs. 15.20 lakhs for reimbursement of capital expenditure. The Tribunal noted that the Rs. 20.80 lakhs for scholarships was clearly an application of income and should be exempt under Section 11(1)(a). However, for the Rs. 15.20 lakhs, the Tribunal required verification from the AO to ensure it was reflected in the assessee's accounts as an application of income.

Conclusion:

The Tribunal dismissed the assessee's appeal regarding the claim under Section 24 and the Revenue's appeal regarding the assessment. The Revenue's appeal concerning the reassessment was partly allowed for statistical purposes, pending verification of the Rs. 15.20 lakhs donation. The order was pronounced in the open court on September 30, 2013.