2025 (2) TMI 325 - AT - Income Tax

Deduction u/s 11(1) - method of determining the eligible income - computation of the 15% accumulation u/s 11(1)(a) should be based on gross receipts or net income - main activities and purpose of establishing the institution is to serve the disabled persons with affordable prices of various artificial limbs - HELD THAT - Relevant sale of artificial limbs in the concessional rates has to be treated as income derived from the property held under the trust. It is settled facts on the record that the assessee has manufactured the artificial limbs from the property held in the trust. One cannot deny the above facts on record. It is relevant to point out that the main purpose of existence of the institution is to serve the disabled persons by providing the limbs at affordable purpose. Without this purpose there is no existence of this institution and also it operates as nodal agency on behalf of the GOI. Therefore in our considered view the revenue generated out of the manufacturing activities has to be treated as eligible income for the purpose of accumulation u/s 11(1) of the Act. It cannot be considered as gross income. Further what is relevant is the income available for the purpose of applying the same for the purpose of charitable purpose. We intend to explain the above aspect by an example Let s say the institution has earned Rs.1000 from the property in the trust and also undertakes certain additional services to generate income for the trust wherein it generate gross sales of Rs.2000 and incurs expenditures of Rs.1500. Assessee has actually utilized the income of trust more than the 85% of the income earned by the assessee during the year. The stand of the lower authorities on this issue is not as per the various judicial precedents. Respectfully following the decision of the co-ordinate bench in the case of Mary Immaculate Society 2015 (6) TMI 1149 - ITAT BANGALORE we hold and direct the AO that the accumulation u/s. 11(1)(a) of the Act is to be allowed at 15% of gross receipts as claimed by the assessee. Ground no 2 and 3 raised by the assessee are allowed. Treatment of loans received under the ADIP and ADIP-SSA schemes as part of the income for the purposes of Section 11(1)(a) - Assessee has included the loan granted thru ADIP funds and ADIP-SSP schemes cannot be included for the purpose of income u/s 11(1) of the Act. This loan may be utilized by the assessee for the charitable purpose and it can be considered as application of income during the year of utilization and the assessee has to claim them as excess utilization and can adjust the same in the year of generation of income. It cannot be claimed as application of income for the purpose of section 11(1) for the year under consideration. In the result we are inclined to accept the findings of CIT(A) and AO. Accordingly the ground no 4 raised by the assessee is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the computation of the 15% accumulation under Section 11(1)(a) of the Income Tax Act should be based on gross receipts or net income.
• The treatment of loans received under the ADIP and ADIP-SSA schemes as part of the income for the purposes of Section 11(1)(a).
• Whether the manufacturing activities of the assessee, a charitable trust, should be considered incidental to its charitable purpose and how this affects the calculation of income eligible for accumulation.
• The correct application of judicial precedents regarding the computation of income for charitable trusts.

2. ISSUE-WISE DETAILED ANALYSIS

Computation of 15% Accumulation under Section 11(1)(a)

• Legal Framework and Precedents: Section 11(1)(a) of the Income Tax Act allows a charitable trust to accumulate 15% of its income. The key question is whether this should be calculated on gross receipts or net income. The judgment references several precedents, including the Supreme Court decision in CIT vs. Programme for Community Organization, which supports accumulation based on gross receipts.
• Court's Interpretation and Reasoning: The Tribunal analyzed whether the assessee's manufacturing activities were integral to its charitable purpose. It concluded that the entire revenue from these activities should be considered for accumulation, aligning with the purpose of the trust.
• Key Evidence and Findings: The Tribunal noted that the assessee's activities were primarily charitable, aimed at providing artificial limbs at affordable prices. The revenue generated was integral to fulfilling the trust's objectives.
• Application of Law to Facts: The Tribunal applied the principle that income derived from property held under trust includes all revenue generated from activities integral to the trust's purpose, thus supporting accumulation on gross receipts.
• Treatment of Competing Arguments: The Revenue argued for accumulation based on net income, citing incidental business activities. The Tribunal found this inapplicable, as the manufacturing was not incidental but central to the trust's purpose.
• Conclusions: The Tribunal concluded that the assessee is entitled to compute the 15% accumulation on gross receipts, not net income.

Treatment of Loans under ADIP and ADIP-SSA Schemes

• Legal Framework and Precedents: The issue was whether loans received under these schemes should be considered income for accumulation purposes. The Tribunal referenced the statutory language of Section 11(1)(a) and relevant case law.
• Court's Interpretation and Reasoning: The Tribunal held that loans could not be treated as income for accumulation under Section 11(1)(a), as they are liabilities, not revenue.
• Key Evidence and Findings: The Tribunal noted that the loans were repaid and treated as liabilities in the financial statements, consistent with their nature.
• Application of Law to Facts: The Tribunal applied the principle that loans are not income and thus cannot be included in the computation of the 15% accumulation.
• Treatment of Competing Arguments: The assessee argued that these loans should be considered income due to their treatment in financial statements. The Tribunal rejected this, emphasizing the distinction between loans and income.
• Conclusions: The Tribunal concluded that the loans should not be included in the income for accumulation purposes.

3. SIGNIFICANT HOLDINGS

• Verbatim Quotes of Crucial Legal Reasoning: "The revenue generated out of the manufacturing activities has to be treated as eligible income for the purpose of accumulation u/s 11(1) of the Act. It cannot be considered as gross income."
• Core Principles Established: The judgment establishes that for a charitable trust, income for accumulation under Section 11(1)(a) should be based on gross receipts, including revenue integral to the trust's purpose, but excluding loans.
• Final Determinations on Each Issue: The Tribunal allowed the assessee's appeal in part, permitting the computation of accumulation on gross receipts while excluding loans from the income calculation.