2009 (8) TMI 43 - HC - Income Tax

Charitable Societies/Institutions Application of Income Exemption - Held that - Once exclusion contemplated under section 11(4A) is not applicable, the exemption had to be allowed as Sections 11(1), (2) and (3) become applicable even in respect of profits and gains. Regarding accumulation of income held that - Even if 85% income has not been applied in the manner laid down, it is not enough to disallow exemption unless there is a further condition of accumulation beyond contemplated period or not maintaining accounts or intimating the Assessing Officer as laid down. - Thus, while holding that the observation of the Tribunal that sub-section (1), (2), (3) or (3A) of Section 11 do not apply to the income falling under Section 11(4A) of the Act is erroneous, there is no error in the conclusion for holding the assessee eligible for exemption

Summary

Issues:
1. Interpretation of exemption under Section 11(1)(a) vs. Section 11(4A) for a charitable society's income.
2. Application of income on construction of school building for charitable purposes under Section 11.
3. Eligibility for exemption under Section 11 based on income application and statutory requirements.

Issue 1: Interpretation of exemption under Section 11(1)(a) vs. Section 11(4A):
The case involved a charitable society running schools seeking exemption under Section 11 of the Income Tax Act. The Assessing Officer rejected the claim citing non-compliance with the requirement of applying 85% of profits for the society's purposes under Section 11(4A). However, the CIT(A) reversed this decision, noting that the society had indeed spent more than 85% of its income for charitable purposes. The Tribunal affirmed this view, emphasizing that the society's actions aligned with the statutory requirements, making it eligible for exemption. The Court dismissed the appeal, concluding that the Tribunal's interpretation was correct, and the society qualified for exemption under Section 11.

Issue 2: Application of income on construction of school building for charitable purposes:
The Tribunal addressed the expenditure incurred on constructing a school building, amounting to Rs.41,12,590. The Tribunal found that this expenditure did not violate the aims and objects of the society, as per the society's registration and relevant provisions. It was noted that the society's activities, including investing in school infrastructure, were incidental to its charitable objectives, making the expenditure an application of income for charitable purposes. The Tribunal's decision was based on the premise that the society's actions were in line with the statutory requirements for exemption under Section 11.

Issue 3: Eligibility for exemption under Section 11 based on income application and statutory requirements:
The Court addressed the contention raised by the revenue regarding the incorrect allowance of exemption under Section 11(1)(a) instead of Section 11(4A) for the society's profits derived from its activities. The Court rejected this argument, stating that once the exclusion under Section 11(4A) did not apply, the exemption had to be granted under Sections 11(1), (2), and (3). The Court emphasized that the Tribunal's finding that certain subsections would not apply in cases under Section 11(4A) was erroneous. It was clarified that as long as the income did not fall under the exclusionary provision, the society was eligible for exemption. The Court further held that the society had met the statutory requirements for income application, making it eligible for exemption under Section 11.

In conclusion, the judgment clarified the interpretation of exemption provisions under Section 11, emphasizing compliance with income application requirements for charitable purposes. The Court affirmed the Tribunal's decision, dismissing the appeal and confirming the society's eligibility for exemption under Section 11 of the Income Tax Act.