2019 (4) TMI 762 - AT - Income Tax

Exemption & application u/s 11 - Deductability of standard deduction u/s 24(a) against rental income in case of a trust/institution - standard deduction @30% vs actual expenditure - HELD THAT - It is the settled position of law that once income of a trust / institution is computed under the provisions of section 11, whatever income derived from the property held under trust is to be taken into account and against which actual expenditure incurred for the objects of the trust has to be considered as application of income. Therefore, while arriving at income u/s 11, the AO needs to allow deduction towards actual repairs and maintenance expenses incurred for ₹ 13,00,635. Therefore, we direct the AO to allow deduction towards actual repairs and maintenance expenditure incurred before arriving at income available for accumulation u/s 11(2) / taxable income of the trust / institution. Computation of capital gain u/s 11(1)(a) in case of trust - deduction towards re-purchase of mutual funds purchased - HELD THAT - The issue raised by the assessee in respect of deduction towards re-purchase of mutual funds purchased out of sale consideration received from sale of investments u/s 11(1)(a) is either not discussed by the AO in his assessment order nor emanating from the records furnished by the assessee before the lower authorities. Although, the assessee has disclosed profit on sale of investments in the P&L Account, other facts with regard to the re-investment on sale consideration for purchase of mutual funds is not clear. The assessee neither made any claim in the return of income filed for the year nor sought to include such claim by way of revised return or revised statement of total income before the AO. When there is no claim with regard to deduction towards re-investment u/s 11(1)(a), before the AO and also the facts with regard to the issue is not placed at the time of assessment proceedings, the Ld.CIT(A) had no option but to proceed on the basis of materials brought out by the AO during assessment proceedings. Accordingly, we find no infirmity in the finding recorded by the CIT(A) in dismissing ground taken by the assessee regarding deduction towards capital gain income derived from sale of investments u/s 11(1)(a). Accumulation of income u/s 11(2) - AO has allowed accumulation of income u/s 11(2) as per the details filed by the assessee alongwith form 10 - Revised accumulation - HELD THAT - In this case, the facts with regard to the availability of funds for making investments are under dispute. The assessee failed to file any details with regard to the availability of funds for making investments in the modes specified u/s 11(5). Therefore, we are of the considered view that there is no merit in the argument of the assessee that it has accumulated income u/s 11(2) of the Act, for the purpose of object of the trust in compliance with provisions of section 11(5). Therefore, we reject the ground taken by the assessee. - Decided against assessee.

Issues Involved:
1. Deductibility of standard deduction claimed under section 24(a) of the Income-tax Act, 1961.
2. Deduction of actual expenditure incurred towards repairs and maintenance.
3. Computation of income of a trust in respect of income derived from capital gains under section 11(1)(a).
4. Accumulation of income under section 11(2) of the Income-tax Act, 1961.

Detailed Analysis:

1. Deductibility of Standard Deduction Claimed under Section 24(a) of the Income-tax Act, 1961:
The primary issue was whether the assessee trust could claim a standard deduction of 30% under section 24(a) of the Income-tax Act, 1961, on rental income derived from property. The assessee argued that the income chargeable to tax must be computed under the provisions of the Act, and thus, the deduction under section 24(a) should be allowed. However, the AO and CIT(A) disallowed the deduction, following the Tribunal's decision in the assessee’s own case for earlier years, which held that the income of a trust claiming exemption under section 11 should be computed under normal commercial principles without resorting to the computation mechanism provided under respective heads of income. The Tribunal upheld this view, citing that income exempt under Chapter III does not form part of the total income and thus does not enter the computation process under Chapter IV.

2. Deduction of Actual Expenditure Incurred Towards Repairs and Maintenance:
The assessee claimed actual repairs and maintenance expenses of ?13,00,635 in its financial statements. The AO disallowed the standard deduction under section 24(a) but did not allow the actual expenditure incurred. The Tribunal noted that while computing income under section 11, actual expenses incurred for the objects of the trust should be considered as application of income. Therefore, the Tribunal directed the AO to allow the deduction towards actual repairs and maintenance expenses before arriving at the income available for accumulation under section 11(2).

3. Computation of Income of a Trust in Respect of Income Derived from Capital Gains under Section 11(1)(a):
The assessee sold certain investments during the year and reinvested the sale consideration in mutual funds, claiming that this should be allowed as a deduction under section 11(1)(a). The AO did not discuss this issue in the assessment order, and the assessee did not make any claim in the return of income or through a revised return. The Tribunal found no infirmity in the CIT(A)’s decision to dismiss the ground, as the facts regarding re-investment were not clear and the claim was not made during the assessment proceedings.

4. Accumulation of Income under Section 11(2):
The assessee initially accumulated ?2.10 crores under section 11(2) and later sought to accumulate an additional ?63,81,840 through a revised form 10 and a board resolution. The Tribunal noted that while there is no bar under the Act to file a revised form 10, such accumulation cannot be stretched to a period of six years to overcome taxable income computed by the AO. The Tribunal emphasized that the benefit of accumulation under section 11(2) is intended for trusts to accumulate income for specified purposes within a reasonable timeframe. The Tribunal found no merit in the assessee’s argument and rejected the ground, noting the lack of details regarding the availability of funds for making investments in specified modes under section 11(5).

Conclusion:
The Tribunal dismissed the appeal filed by the assessee, upholding the decisions of the lower authorities on all grounds. The Tribunal confirmed that the standard deduction under section 24(a) is not allowable for trusts claiming exemption under section 11, actual repairs and maintenance expenses should be allowed as application of income, and accumulation of income under section 11(2) should adhere to the legislative intent and specified conditions.

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