2023 (2) TMI 963 - AT - Income Tax

Exemption u/s 11 - claiming benefit of accumulation u/s 11(2) over deemed income u/s 11(3) - non application of income - AO was that the assessee has already claimed deduction of the said deemed income in the assessment year in which such amount was computed u/s 11(2) - HELD THAT - Intention of the Act is quite clear that when the unapplied amount is deemed to be the income of the assessee u/s 11(3) of the Act, then the benefit of section 11(1)(a) would be lost. We observe that the above rulings on which reliance has been placed by the counsel for the assessee did not consider the above Circular i.e. the above Circular was not brought to the notice of the Court/ITAT for their consideration. Accordingly, we are unable to place reliance on the judicial precedents relied upon the counsel for the assessee on this issue. If the Natwarlal Chowdhury 1989 (8) TMI 19 - CALCUTTA HIGH COURT judgment is to be followed, it will result in undue benefit to the trusts and will defeat the legislative intent of section 11. Secondly, in our considered view, there is a specific reason why this Circular was introduced and the purpose of introduction of the same is that the assessee should not be eligible to claim double deduction in respect of the same income i.e. recycle the same income, which remained unapplied after the end of the fifth year. Therefore, if exemption under section 11(1)(a)is allowable in respect of the deemed income u/s 11(3), then exemption u/s 11(2) is also allowable in respect of such deemed income as sub-section (2) of section 11 refers to the income referred to in section 11(1)(a). Thirdly, the Mumbai ITAT in the case of The Trustees, The B.N. Gamadia Parsi Hunnarshala 2001 (4) TMI 928 - ITAT MUMBAI held that exemption under section 11 is available only on income within meaning of section and not on deemed income and, therefore, an assessee cannot claim benefit or accumulation with respect to deemed income . Fourthly, our view is also supported by Form No. 3A of the Income-tax Rules, 1962. Clause No. 10 of Part I of Form No. 3A prescribes the deemed income under section 11(3) to be added to the income arrived at after claiming exemption under section 11(1)(a) and 11(2). The form does not allow the assessee to claim exemption under sections 11(1)(a)and 11(2) in respect of deemed income under section 11(3). Thus we are of the considered view that the assessee Trust is not eligible to claim exemption under Section 11(1)(a) and Section 11(2) of the Act in respect of deemed income under section 11(3) of the Act. Appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Eligibility of deemed income under Section 11(3) for exemption under Sections 11(1)(a) and 11(2) of the Income Tax Act, 1961.

Detailed Analysis:

Assessment Year 2015-16 and 2016-17:
The primary issue in both assessment years is whether the deemed income under Section 11(3) of the Income Tax Act, 1961, is eligible for exemption under Sections 11(1)(a) and 11(2) of the Act.

Facts of the Case:
The assessee, a public charitable trust, filed its return of income declaring "Nil" taxable income. However, the Assessing Officer (AO) included deemed income under Section 11(3) amounting to Rs. 39,04,142/- in the taxable income, arguing that this income cannot be subject to provisions of Section 11(1)(a) as it would result in double deduction.

CIT(Appeals) Decision:
The CIT(Appeals) dismissed the assessee's appeal, relying on Circulars No. 29 and 5P, which clarify that deemed income under Section 11(3) is not eligible for exemption under Section 11(1)(a). The CIT(A) noted that the Kolkata High Court decision cited by the assessee did not consider these circulars, making it distinguishable.

Assessee's Argument:
The assessee contended that once the unapplied accumulated amount becomes deemed income under Section 11(3), it should be eligible for exemption under Sections 11(1)(a) and 11(2), as there is no specific embargo in the Act. The assessee relied on the Gujarat State Lion Conservation Society case and the Kolkata High Court decision in CIT v. Natwarlal Chowdhury Charitable Trust.

Tribunal's Analysis:
1. Circular No. 29 and 5P:
- The Tribunal emphasized that the circulars explicitly state that deemed income under Section 11(3) loses the benefit of Section 11(1)(a). The language of the circulars is clear and unambiguous, indicating that the legislative intent is to prevent double deduction.

2. Judicial Precedents:
- The Tribunal noted that the judicial precedents cited by the assessee did not consider the relevant circulars. Following these precedents would result in undue benefits to trusts, defeating the legislative intent of Section 11.

3. Double Deduction:
- Allowing exemptions under Sections 11(1)(a) and 11(2) for deemed income under Section 11(3) would enable trusts to recycle unapplied income, leading to perpetual tax benefits. This would contravene the purpose of the Act.

4. Mumbai ITAT Precedent:
- The Tribunal referred to the Mumbai ITAT decision in The Trustees, The B.N. Gamadia Parsi Hunnarshala, which held that exemption under Section 11 is available only on actual income, not deemed income.

5. Form No. 3A:
- The Tribunal highlighted that Form No. 3A of the Income-tax Rules, 1962, prescribes adding deemed income under Section 11(3) to the income after claiming exemptions under Sections 11(1)(a) and 11(2), indicating that such deemed income is not eligible for these exemptions.

Conclusion:
The Tribunal concluded that the assessee trust is not eligible to claim exemption under Sections 11(1)(a) and 11(2) for deemed income under Section 11(3). As a result, both appeals for assessment years 2015-16 and 2016-17 were dismissed.

Combined Result:
Both appeals of the assessee for assessment years 2015-16 and 2016-17 are dismissed.

Order Pronouncement:
The order was pronounced in the open court on 22-02-2023.