2010 (7) TMI 85 - HC - Income Tax

Charitable Trust accumulation of income application of income current year s income - The ITO found that that donation of Rs.25 lacs as corpus donation to BLB Trust was not from current year s income but out of accumulations from the income of earlier years. The ITO, being of the opinion that owing to the explanation appended to Section 11(2) w.e.f. the Assessment Year 2003-04, any donation made out of income accumulation or set apart during the period of accumulation or thereafter to any trust or institution registered under Section 12AA, as BLB Trust was, was liable to be added in the income of the donor trust, accordingly computed the income as aforesaid of the Assessee. CIT(A) and ITAT decided in favor of assessee Held that - The explanation appended after Section 11(2) is nothing but an additional condition attached to accumulation in excess of 15% permitted under Section 11(2). We are unable to hold it as a condition on accumulation up to 15% as provided for in Section 11(1)(a) also. We are unable to find any rational classification for imposing the restriction as contained in the explanation to the accumulation of up to 15% also when there is no such restriction to donating the entire income of a year to another charitable trust. If the legislature intended to completely ban/discourage inter se donation between trusts, it would have changed the position as existing in law - even if the donations by the Assessee herein were to be out of accumulations from previous years and not out of surplus reserves, the same would still not be liable to be included in the total income as assessed by the Income Tax Officer decided in favor of assessee

Issues Involved:
1. Application of the explanation appended to Section 11(2) of the Income Tax Act, 1961.
2. Interpretation of Sections 11(1)(a) and 11(2) regarding the accumulation and application of income by charitable trusts.
3. Validity of the donation made by the Assessee Trust to another trust out of accumulated income.

Detailed Analysis:

1. Application of the Explanation Appended to Section 11(2):
The core issue addressed was whether the explanation appended under Section 11(2) of the Income Tax Act, 1961, which was inserted by the Finance Act, 2002, applies to accumulations mentioned in Section 11(1)(a). The court framed the question for adjudication as: "Whether the explanation after Section 11(2) is applicable in respect of the accumulation up to fifteen percent referred to in Section 11(1)(a) also, as distinct from the accumulation out of eighty-five percent as referred to in Section 11(2) of the Income Tax Act, 1961?"

The court concluded that the explanation appended to Section 11(2) is intended to explain Section 11(2) only and not Section 11(1). There was no indication from the Finance Act, 2002, or its objects and reasons that the explanation was intended to apply to the accumulation up to 15% under Section 11(1)(a). The Supreme Court precedents, such as M.P.V. Sundararamier & Co. Vs. State of Andhra Pradesh and Mohanlal Hargovinddas Vs. State of M.P., were cited to support the interpretation that an explanation appended to a specific sub-section is generally intended to explain that sub-section only.

2. Interpretation of Sections 11(1)(a) and 11(2) Regarding Accumulation and Application of Income:
The court examined the scheme of Sections 11(1)(a) and 11(2) of the Income Tax Act. Section 11(1)(a) allows income derived from property held under trust for charitable or religious purposes to be exempt from total income to the extent it is applied for such purposes in India, with a maximum of 15% of such income allowed to be accumulated without conditions. Section 11(2) permits accumulation in excess of 15% but imposes certain conditions.

The court referred to the Supreme Court's judgment in Addl. Commissioner of Income Tax v. A.L.N. Rao Charitable Trust, which clarified that the exemption under Section 11(1)(a) is unfettered and absolute, whereas Section 11(2) provides additional conditions for accumulation beyond 15%. The explanation appended to Section 11(2) was seen as an additional condition for accumulations in excess of 15% and not applicable to the 15% accumulation under Section 11(1)(a).

3. Validity of Donation Made by the Assessee Trust:
The court addressed whether the donation of Rs. 25 lakhs made by the Assessee Trust to another trust (BLB Trust) out of accumulated income was valid. The Income Tax Officer (ITO) had assessed this donation as income of the Assessee Trust, arguing that it was made out of past accumulations. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) had found that the donation was made out of free reserves and income for the year under consideration, not out of accumulations under Section 11(1)(a).

The court upheld the findings of the CIT(A) and ITAT, stating that the Revenue had not been able to rebut the findings that the donation was made out of free reserves. Even if the donations were made out of accumulations from previous years, they would still not be liable to be included in the total income as assessed by the ITO, as long as the accumulations were within the 15% limit permitted under Section 11(1)(a).

Conclusion:
The court dismissed the appeal, affirming that the explanation appended to Section 11(2) does not apply to the 15% accumulation under Section 11(1)(a). The donation made by the Assessee Trust to another trust was valid and not subject to inclusion in the total income. The appeal was dismissed with no order as to costs.

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