2015 (12) TMI 106 - AT - Income Tax

Accumulation of income - 15% accumulation for application in future has to be calculated on gross receipts or net receipts after deduction of revenue expenditure? - Held that - As per the statutory language of section 11(1)(a) the income which is to be taken for purpose of accumulation is the income derived by the trust from property any expenditure which is in the shape of application of income is not to be taken into account. Having found that trust is entitled to exemption under s. 11(1), we are to go to the stage of income before application thereof. The gross income earned by the assessee is relevant. See Jyothy Charitable Trust Versus The Deputy Commissioner of Income Tax (Exemptions) , Circle 17 (1) , Bangalore 2015 (11) TMI 1295 - ITAT BANGALORE - Decided in favour of assessee.

Summary

Issues Involved:
1. Restriction of accumulation of income under Section 11(1)(a) of the Income Tax Act, 1961.
2. Computation of income accumulation based on gross receipts versus net receipts.

Detailed Analysis:

Issue 1: Restriction of Accumulation of Income under Section 11(1)(a) of the Income Tax Act, 1961
The core issue in this appeal is the restriction of the accumulation of income under Section 11(1)(a) of the Income Tax Act, 1961. The assessee, a public religious and charitable institution, filed its return for the assessment year 2011-12 declaring a taxable income of 'nil'. The Assessing Officer (AO) restricted the accumulation of income to Rs. 21,43,711 as opposed to the Rs. 45,71,247 claimed by the assessee. The AO computed the accumulation at 15% of the net income of the society, arguing that the gross receipts of an educational institution are not fully available for application to charitable purposes due to necessary expenditures for running the institution.

Issue 2: Computation of Income Accumulation Based on Gross Receipts versus Net Receipts
The assessee contended that the accumulation of income should be based on gross receipts, referencing the Supreme Court's decision in CIT vs Programme for Community Organization, which held that accumulation under Section 11(1)(a) should be with reference to 'gross' and not 'net' income. However, the CIT(Appeals) disagreed, noting that the cited decision pertained to a case involving only voluntary contributions without income-generating activities. The CIT(A) further referenced the Supreme Court rulings in S.R.M. M.C.T.M. Tiruppani Trust vs CIT and CIT vs ALN Rao Charitable Trust, which dealt with the issue of accumulation based on gross receipts. However, the CIT(A) concluded that these decisions were based on different facts and legal issues.

The CIT(A) also referred to CBDT Circular No. 5-P(LXX-6) dated 19.06.1968, which clarified that the income of charitable or religious trusts should be computed by applying general commercial principles rather than the regular provisions of the Income Tax Act. The circular indicated that the term "income" in Section 11(1)(a) should be understood in its commercial sense, meaning book income after adding back appropriations or applications towards the purposes of the trust.

The CIT(A) concluded that the AO did not adequately appreciate the different kinds of receipts available to the assessee, including voluntary contributions and income from hospital and nursing school activities. The CIT(A) directed the AO to bifurcate the receipts from donations and income-generating activities, treating the accumulation from donations based on gross receipts and from income-generating activities based on net receipts.

Tribunal's Judgment:
The Tribunal found that the issue was covered by the Co-ordinate Bench decision in the case of Jyothy Charitable Trust. The Tribunal reiterated that the accumulation under Section 11(1)(a) should be based on gross receipts, as supported by the Special Bench Mumbai in Bai Sonabai Hirji Agiary Trust vs. ITO and the Supreme Court's decision in CIT vs Programme for Community Organization. The Tribunal held that the accumulation should be allowed as claimed by the assessee, setting aside the order of the CIT(A).

Conclusion:
The appeal of the assessee was allowed, with the Tribunal directing that the accumulation under Section 11(1)(a) should be calculated based on gross receipts rather than net receipts. The order pronounced in the open Court on 9th October 2015 concluded that the assessee's claim for accumulation of income should be granted as per the statutory language of Section 11(1)(a).