2013 (11) TMI 1492 - HC - Income Tax

Reserve fund for educational purposes - Violation of Section 11(3)(d) Held that - The funds were created during the assessment year 1996-97; 1997-98; and 1998-99 i.e. prior to 01.04.2003 though it was utilized during the assessment year under consideration As per the amended provisions - The Assessing Officer shall not allow application of accumulation of income by way of payment or credit made for the purposes referred to in clause (d) of sub-section (3) of Section 11 - This takes away the discretion of the Assessing Officer provided in sub-section (3A) to allow the trusts to apply the accumulated income for payment or credit to other charitable or religious trusts and institutions - The Finance Act, 2003, has amended the proviso to sub-section (3A) of Section 11 so as to empower the Assessing Officer to allow donation to another trust or institution as application of accumulated income for charitable purposes in the year in which the trust or institution claiming exemption is dissolved Following assessee s own case for the assessment years 1994-95 - The assessee is registered under Section 12AA as well as 80G(5) and also under Section 10(23C)(iv) - The entire income of the assessee remains non-taxable The issue is restored for fresh adjudication.

Issues:
1. Interpretation of the Explanation appended to Sub-Section 2 of Section 11 and Clause (d) of Section 11(3) for retrospective effect.
2. Correctness of the interpretation by the Income Tax Appellate Tribunal.
3. Application of Section 11(3)(d) regarding utilization of reserve funds.
4. Justification of the impugned order by the Tribunal.
5. Examination of relevant provisions for charitable institutions.
6. Non-taxability of income due to registration under Section 12AA and 80G(5).
7. Lack of examination by Income Tax Authorities and Tribunal before making additions to income.

Analysis:
1. The appeal raised substantial questions of law regarding the retrospective application of the Explanation under Section 11 and Clause (d) of Section 11(3). The Court admitted the appeal for consideration on these grounds, questioning whether authorities can apply these provisions retrospectively despite their prospective introduction by the legislature.

2. The Tribunal disallowed the utilization of reserve funds by the assessee, citing a violation of Section 11(3)(d) of the Income Tax Act. The AO made an addition to the income, which was upheld by the Tribunal. The Court examined the timing of accumulation and utilization of funds, emphasizing that the amount was accumulated before the provision came into force, even though it was utilized later.

3. The counsel for the assessee argued that the funds were genuinely used for educational purposes, citing specific payments made to registered entities under Section 12A of the Act. The Court considered the genuine utilization of funds for charitable objectives and noted the lack of examination by the authorities on these aspects before making additions to income.

4. The Court highlighted the amendment made by the Finance Act, 2003, to address hardships faced by trusts and institutions in applying accumulated income for charitable purposes. It discussed the provisions related to exemption from tax for charities under Section 10(23C)(iv) and (v) and emphasized the conditions that must be fulfilled for such exemptions.

5. The Court pointed out that the entire income of the assessee remained non-taxable due to registration under Section 12AA and 80G(5). It noted that the Income Tax Authorities and the Tribunal did not examine these crucial aspects before making additions to the income, indicating a lack of thorough consideration.

6. In the interest of justice, the Court set aside the impugned order by the Tribunal and remanded the matter for a fresh decision, providing the assessee with a reasonable opportunity for a fair hearing. The Court allowed the appeal for statistical purposes, indicating a favorable outcome for the assessee based on the detailed analysis and considerations presented.

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