2023 (3) TMI 212 - AT - Income Tax

Deduction of tax deducted at source in the computation of income exempt u/s 11 - authorities below have held that TDS cannot be treated as application of income so as to qualify for deduction in computing the total income exempt under the Act - interpretation of sections 11(1)(a)/11(2) qua the amount of tax deducted at source claimed as application against the interest income, which was accounted for on gross basis in the Income and expenditure account - HELD THAT - As it only the net amount of Rs.90/- which can be said to be available with the assessee for application or accumulation, the deduction on account of tax deducted at source has to be allowed in computing the amount of income available after entering such income at gross level. If suppose, in a later year, the amount of tax deducted at source in this year is refunded fully or partly, the amount of such refund shall fall for consideration on the income side of the Income and expenditure account. On a specific query, the ld. AR pointed out that income-tax refund was granted to the assessee in the succeeding year for a sum of Rs.1,55,39,950/-, which was duly included on the income side of the Income and expenditure account. As gone through the Income and expenditure account for the succeeding year ending 31-03-2017, in which the last item on the Income side is Income-tax refund amounting to Rs.1,55,39,950/-. Computation of income for such later year has been done by including the amount of income-tax refund in the gross income available for application or accumulation - the authorities below were not justified in jettisoning the claim of allowing deduction of TDS in the computation of income available for application or accumulation. The impugned order is overturned pro tanto . Appeal is allowed.

Summary

Issues:
- Deduction of tax deducted at source in computation of income exempt u/s 11 of the Act.

Analysis:
The judgment by the Appellate Tribunal ITAT Pune, delivered by Vice President R.S. Syal, pertains to an appeal by an assessee against the order of the ld. CIT(A) in relation to the assessment year 2016-17. The primary issue raised is the disallowance of deduction of tax deducted at source amounting to Rs.22,67,406/- in the computation of income exempt u/s 11 of the Act. The assessee, a charitable trust engaged in educational activities, claimed the TDS on interest income as an expenditure in its Income and expenditure account. However, the AO disallowed this claim, leading to an addition of Rs.22,67,406/-. The ld. CIT(A) upheld the assessment order, prompting the appeal before the Tribunal.

The crux of the matter revolves around the interpretation of sections 11(1)(a) and 11(2) concerning the treatment of tax deducted at source as application against interest income. Section 11(1)(a) provides for the exemption of income derived from property held under trust for charitable purposes if applied for such purposes in India or accumulated within certain limits. Section 11(2) elaborates on the conditions for accumulation of income. The Tribunal observed that for income to be available for application or accumulation, it must be the commercial income of the trust, excluding expenses and taxes paid. The judgment emphasizes that unless taxes paid are deducted, the income cannot be considered available for application or accumulation.

The AO contended that the TDS amount would be refunded due to non-taxability of income, hence disallowing the deduction. However, the Tribunal reasoned that only the net income after TDS deduction is available for application or accumulation. It highlighted a scenario where the gross interest income was Rs.100/-, TDS was Rs.10/-, and the net amount available was Rs.90/-. The Tribunal stressed that the deduction of TDS should be allowed in computing the available income after entering it at the gross level. The judgment further discussed the treatment of income-tax refund in the subsequent year, emphasizing its inclusion in the gross income for application or accumulation.

Ultimately, the Tribunal concluded that the authorities erred in rejecting the claim for allowing the deduction of TDS in the computation of income available for application or accumulation. Consequently, the impugned order was overturned partially, and the appeal by the assessee was allowed. The judgment was pronounced in the Open Court on 2nd March 2023.