2020 (10) TMI 302 - HC - Income Tax

Exemption u/s 11 - Determination of application of income and accumulation of income - claim of deduction of the claim of assessee for an amount u/s 24(a) on the ground that the income of the trust has to be computed in a commercial manner and not as per the Act - HELD THAT - The object of Section 11 of the Act is to grant immunity to the income of a charitable trust from income tax. The immunity however, is confined to the extent to which such income is applied to such purposes in India. The exemption will be denied if the income is not actually applied for charitable purposes. This exclusion from immunity, which has been granted by Section 11 has to be confined to the real income of the trust. The application or accumulation can only be of real income which has actually been received by an assessee. It is pertinent to note that Central Board of Direct Taxes has issued a Circular No.5-P dated 19.05.1968, which provides that the word income in Section 11(1a) of the Act must be understood in commercial sense and the entire income of the trust in the commercial sense has been spent for the purpose of charity. The real income of the trust is exempt to the extent to which some income is applied to such purposes in India. The aforesaid view has been taken by in JAYASHREE CHARITY TRUST 1984 (12) TMI 30 - CALCUTTA HIGH COURT as well as GANGA CHARITY TRUST 1985 (10) TMI 67 - GUJARAT HIGH COURT with which we respectively agree. From perusal of the order passed by the CIT(Appeals) as well as the Tribunal, we find that neither the CIT (Appeals) nor the Tribunal has examined the case of the assessee on the touchstone of aforesaid well settled legal principles. In the facts of the case left with no option but to quash the order of the Tribunal and remit the matter to the Tribunal afresh for consideration in the light of observations made supra. Since, the matter is being remitted to the Tribunal, therefore, it is not necessary for us to answer the substantial questions of law. Appeal is disposed of.

Summary

Issues:
1. Interpretation of Section 24(a) of the Income Tax Act regarding deductions for public charitable trusts.
2. Application of statutory deductions and tax levies on public charitable trusts.

Analysis:

Issue 1:
The appeal under Section 260A of the Income Tax Act, 1961 raised substantial questions of law concerning the interpretation of Section 24(a) in the context of a public charitable trust for the Assessment Year 2007-08. The appellant, a religious and charitable trust, contested the disallowance of a deduction under Section 24(a) by the Assessing Officer, arguing that the income derived from the property was utilized for charitable purposes as per Section 11 of the Act. The Commissioner of Income Tax (Appeals) and the Tribunal had differing decisions on the matter, leading to the appeal before the High Court.

Issue 2:
The crux of the issue revolved around whether the income of the trust should be computed as per commercial principles or as per the provisions of the Act for charitable trusts. The appellant contended that tax should only be levied on the total income computed under the Act after excluding amounts not includible under Chapter III. The appellant cited relevant statutory provisions and legal precedents to support their argument for entitlement to deductions under Section 24(a). On the other hand, the revenue argued that income should be computed based on commercial principles and only amounts applied for trust purposes are eligible for deduction, emphasizing the application of Section 11 provisions.

The High Court, after considering the submissions, highlighted the objective of Section 11 to grant immunity to income of charitable trusts from income tax, subject to actual application for charitable purposes. Referring to legal principles and Circulars, the Court emphasized that the exemption under Section 11 is based on the real income of the trust and its actual application for charitable purposes. The Court found that the lower authorities had not properly examined the case in light of these principles and thus quashed the Tribunal's order, remitting the matter for fresh consideration. As a result, the Court did not address the substantial questions of law raised in the appeal, disposing of the case accordingly.