2015 (11) TMI 173 - AT - Income Tax

Exemption u/s 11(2) - whether 15% of accumulation of income under section 11(1)(a) of the Act is a flat deduction available to the assessee or for that purpose, whether filing of Form No.10 along with the return of income and fulfilling other formalities are a pre-condition or not? - Held that - As per section 11(1)(a) the assessee is entitled for flat deduction without any condition or formality of filing form No.10, if income is accumulated or set apart for application of the objects of the trust in India to the extend to which the income so accumulated or set apart does not exceed 15% of the income. With regard to allowance of deduction over and above 15% of the income, for which the assessee is to satisfy the conditions laid down in section 11(2) of the Act. As per the discussion made above, the requirement of section 11(2) is that if such income is accumulated or set apart, then such income shall not be included in the total income of the previous year if such person specifies by notice in writing given to the assessing officer in prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall, in no case exceed 10 years. The money so accumulated or set apart is invested or deposited in the forms or modes specified in sub section (5) of section 11 of the Act. A regards the condition in respect of furnishing of prescribed form 10 we have given the finding that form No.10 submitted before the completion of the assessment is required to be considered if the condition as laid down in section 11(2)(a) is satisfied. However, as regard the condition (b) of section 11(2) that the money so accumulated or set apart is invested or deposited in the form or mode specified in sub section (5) of section 11 is subject to verification. We, therefore, think proper to send this issue to the file of the assessing officer with a direction to verify the said condition of clause (b) of section 11(2) of the Act as to whether the assessee has made investment in the prescribed securities or not. Accordingly, the assessing officer will decide this issue after providing opportunity of hearing to the assessee and the issue in dispute is remitted to Assessing Officer for fresh consideration. - Decided in favour of assessee for statistical purposes

Summary

Issues Involved:
1. Treatment of accumulated income under Explanation 2 to Section 11(1) of the Income Tax Act.
2. Compliance with conditions stipulated in Section 11(2) of the Income Tax Act.
3. Difference between provisions of Section 11(1) and Section 11(2) of the Income Tax Act.
4. Investment of surplus funds as per Section 11(5) of the Income Tax Act.
5. Judicial precedents cited by the assessee.

Issue-Wise Detailed Analysis:

1. Treatment of Accumulated Income under Explanation 2 to Section 11(1):
The primary issue was whether the amount of Rs. 1,59,08,870 accumulated under Explanation 2 to Section 11(1) should be treated as the income of the appellant. The Assessing Officer (AO) found that the assessee claimed the surplus as per clause (2) of Explanation to Section 11(1) without specific reasons, and had not applied its income to the extent of 85% as specified in the Act. The AO brought the shortfall in application of income to tax. The Commissioner of Income Tax (Appeals) upheld this view, noting that mere resolution and letter of option without specifying the purpose were insufficient for accumulation under Explanation (2) to Section 11(1).

2. Compliance with Conditions Stipulated in Section 11(2):
The Commissioner of Income Tax (Appeals) held that the conditions stipulated in Section 11(2) were mandatory for the exemption of accumulated income. The assessee had not furnished Form No.10 for accumulation under Section 11(2). The Tribunal observed that Section 11(2) requires specific notice in writing to the AO, and investment or deposit in specified forms. The Tribunal directed the AO to verify whether the assessee complied with the investment condition under Section 11(2)(b).

3. Difference between Provisions of Section 11(1) and Section 11(2):
The Tribunal clarified that Section 11(1)(a) permits automatic accumulation of income up to 15% without any precondition. For accumulation beyond 15%, Section 11(2) applies, which requires compliance with specific conditions, including filing Form No.10 and investing in specified securities. The Tribunal emphasized that Section 11(2) does not override Section 11(1)(a), and the 15% accumulation under Section 11(1)(a) is unfettered and not subject to conditions.

4. Investment of Surplus Funds as per Section 11(5):
The Tribunal noted that the assessee claimed to have invested surplus funds as required under Section 11(5). However, the AO needed to verify whether the investments were made in the prescribed securities. The Tribunal remitted this issue to the AO for fresh consideration and verification.

5. Judicial Precedents Cited by the Assessee:
The assessee cited several judicial precedents, including CIT vs. G.R. Govindarajulu & Sons Charities, Addl CIT vs. ALN Rao Charitable Trust, and CIT vs. Trustees of Bhat Family Research Foundation. The Commissioner of Income Tax (Appeals) found these cases distinguishable from the present case. The Tribunal did not specifically address these precedents but focused on the statutory provisions and compliance requirements under Sections 11(1) and 11(2).

Conclusion:
The Tribunal concluded that the assessee is entitled to a flat deduction of 15% under Section 11(1)(a) without filing Form No.10. For accumulation beyond 15%, compliance with Section 11(2) is required. The Tribunal remitted the issue to the AO to verify the investment condition under Section 11(2)(b) and decide the matter afresh after providing an opportunity of hearing to the assessee. The appeal was allowed for statistical purposes.