2022 (3) TMI 35 - AT - Income Tax

Exemption u/s 11 - accumulation of income - capital expenditure incurred by the assessee Trust from the corpus funds, shall be allowed as application of income - HELD THAT - Provisions of section 11(1)(d) specifying the income in the form of voluntary contributions made with a specific direction are independent of section 11(1)(a) - corpus donation as referred to in section 11(1)(d) of the Act does not require any application of income as it has to be received with specific direction that the said income would be forming part of the corpus of the trust or institution as contemplated in section 11(1)(a) . Therefore, incurring of capital expenditure out of corpus fund, if read with inserted provisions of section 11(6) of the Act, has to be allowed. The amendment brought in the Statute book by inserting the provisions of sub-section (6) and (7) w.e.f.1.04.2015 to redress the controversy over allowing the depreciation on the capital assets generated by spending the corpus donation or revenue receipts generated by carrying out other activities. In section 11(6), it is specifically provided that In this section, where any income is required to be applied or accumulated or set apart does not make any distinction as to whether such income should be only revenue receipts and not capital receipts in the form of corpus donation with specific directions for construction of the hospital building and other infrastructural facilities as brought on record by the assessee. The legal position as existing at the relevant of point, we find no infirmity in the order passed by the ld.CIT(A) in allowing the claim of the assessee.

Summary

Issues Involved:
1. Eligibility of the assessee Trust for exemption under Section 11(1)(d) of the Income Tax Act on corpus funds.
2. Allowability of capital expenditure incurred from corpus funds as application of income under Section 11(1)(a) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Eligibility of the Assessee Trust for Exemption under Section 11(1)(d) of the Income Tax Act on Corpus Funds:

The assessee is a public charitable trust registered under the Bombay Public Trust Act, 1950, and under section 12AA of the Income Tax Act, 1961. The trust is engaged in providing eye-care services and running a hostel for blind children. For the assessment year 2015-16, the assessee filed a return declaring NIL income, which was scrutinized, and the total income before application was determined to be ?3,04,37,986/-. The assessee received corpus donations amounting to ?2,68,45,899/-, which were claimed as exempt under section 11(1)(d) of the Act.

The Assessing Officer (AO) held that corpus funds received by the assessee-trust are exempt under section 11(1)(d) of the Act and should not be considered part of the income of the trust. The AO argued that since the corpus fund is already exempt, any expenditure made from such corpus fund would not qualify for further deduction under section 11(1)(a) of the Act, to avoid double deduction.

The CIT(A) examined the provisions of sections 11(1)(a) and 11(1)(d) and concluded that corpus donations received with specific directions should be treated independently of the income derived from property held under trust. The CIT(A) noted that there is no restriction on incurring capital expenditure out of corpus donations, which should be treated as an application of income for charitable purposes.

2. Allowability of Capital Expenditure Incurred from Corpus Funds as Application of Income under Section 11(1)(a) of the Income Tax Act:

The AO rejected the assessee's claim to allow capital expenditure incurred out of corpus funds as an application of income. However, the CIT(A) allowed the claim, referencing the decision of the Hon'ble High Court of Orissa in CIT v. Silicon Institute of Technology (370 ITR 567), which held that capital expenditure incurred by a trust for its objectives qualifies for exemption under section 11.

The CIT(A) emphasized that section 11(1)(a) refers to income applied for charitable purposes, without distinguishing between revenue and capital receipts. The CIT(A) further noted that the amendment introduced in section 11(6) and (7) by the Finance Act, effective from 1.04.2015, clarified that capital expenditure out of corpus funds should be allowed, provided it does not result in double deduction of depreciation.

The Tribunal upheld the CIT(A)'s order, affirming that sections 11(1)(d) and 11(1)(a) are independent provisions. The Tribunal noted that the assessee used corpus donations for constructing a hospital and other medical facilities, which aligns with the trust's objectives. The Tribunal concluded that the legal position at the relevant time supported the allowance of capital expenditure as an application of income, irrespective of whether it was derived from property held under trust or corpus donations.

Conclusion:

The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal, affirming the eligibility of the assessee trust for exemption under section 11(1)(d) on corpus funds and the allowability of capital expenditure incurred from corpus funds as an application of income under section 11(1)(a).

Order Pronounced:

The appeal of the Revenue is dismissed. Order pronounced on 25th February 2022 at Ahmedabad.