2017 (11) TMI 994 - AT - Income Tax

Disallowing the claim u/s 11(2) and U/s 11(1)(a) - AO observed that giving and receiving funds between two trust having common trustees for mutual benefits is a clear violation of the provisions of section 13(1)(c) - purpose of accumulation was not specific, which is mandatory for accumulation u/s 11(2) - Held that - We are of the view that when the Assessing Officer finds that the income which was set apart in any Assessment Year for future expenditure for charitable purposes has not been utilized for the charitable purpose, then he has to bring such non-charitable expenditure to tax in the year of its expenditure as per the provisions of section 11(3). But such expenditure for non-charitable purpose cannot be the basis for denial of exemption u/s.11. Therefore, the observation of the Assessing Officer that the assessee is not expending the set apart incomes of the earlier years in subsequent years for charitable purposes is not borne out of facts. In the assessee s case under consideration, the assessee trust filed the Form no.10 and made the compliance and there is no any mistake on the part of the assessee. - Decided in favour of assessee.

Summary

Issues:
Assessment Year 2002-03 - Disallowance of claim u/s 11(2) and 11(1)(a) - Violation of section 13(1)(c) - Specific purpose of accumulation under section 11(2) - Denial of exemption u/s 11 based on non-charitable expenditure - Compliance with Form 10 notice requirements for accumulation.

Analysis:
The appeal pertains to the Assessment Year 2002-03 challenging the disallowance of the claim u/s 11(2) and 11(1)(a) by the Assessing Officer (AO). The AO disallowed the claim based on violation of section 13(1)(c) due to funds transfer between trusts with common trustees, invoking the proviso to Sec.13(1)(c) for forfeiture of tax exemption. The AO relied on judicial precedents like Champa Charitable Trust Vs. CIT and CIT Vs. Rattan Trust to support the disallowance.

The Commissioner of Income Tax (Appeals) upheld the AO's decision, emphasizing the lack of a specific purpose of accumulation under section 11(2) and the non-charitable nature of the expenditure. The Commissioner held that the Trust's purpose of accumulation was not specific and therefore, the AO rightly disallowed the exemption u/s 11 of the Act.

The appellant contended that substantial income was spent on charitable purposes, questioning the discrepancy in allowing the exemption initially but disallowing it later. The appellant argued that non-charitable expenditure should be taxed under section 11(3) but cannot be the basis for denial of exemption u/s 11. The appellant cited the Trust's history of charitable activities and compliance with Form 10 notice requirements for accumulation.

Upon review, the ITAT found that the AO's observation regarding non-charitable expenditure was unfounded, emphasizing that such expenditure cannot be the basis for denying exemption u/s 11. The ITAT distinguished the cited judgments, including Trustees of Singhania Charitable Trust and Champa Charitable Trust, concluding that the appellant's compliance with Form 10 notice requirements was satisfactory. The ITAT also noted a previous ruling in favor of the appellant in a similar case. Consequently, the ITAT allowed the appeal, ruling in favor of the appellant.

In conclusion, the ITAT's decision favored the appellant, emphasizing the importance of compliance with statutory requirements and distinguishing the cited judgments to uphold the appellant's claim for exemption u/s 11.