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TMI Blog2025 (3) TMI 1078X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has neither substantiated that the payments were made for charitable purposes nor demonstrated that the recipient entity fulfilled the requirements of section 12A of the Act. Accordingly, the ground of appeal of the assessee is dismissed. Addition by treating certain expenses as not allowable as an application of income - whether the disputed expenditures qualify as an 'application of income' for the purposes of section 11? - Role of the AO regarding the determination of income of a trust is limited to the provision of section 11 of the Act. In the present case, the authority below has not doubted regarding payment of expenses but only had a doubt regarding the expenses incurred in connection to charitable purposes or not. In this regard, we referred the judgment of CIT Vs. Trustee of H.E.H. the Nizam's Supplemental Religious Endowment Trust [1978 (2) TMI 7 - ANDHRA PRADESH HIGH COURT] where it was held that expenses which are incidental to carrying out the charitable purpose cannot be excluded from the exemption. As in view of above it clear that any incidental expenses incurred in carrying out the activity of charitable purpose, it should be excluded from the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, the ground of appeal of the assessee is allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... cted as application of income is linked with the purpose of charitable activity of the assessee. On perusal of the expenses, we find that the nature of the payments was towards civil works, maintenance, and repairs etc. but there was no evidence available on record establishing that such expenses are directly linked with charitable activity of the assessee. 8.2 The provision of section 11(1)(a) allows a charitable trust to claim an exemption if at least 85% of its income is applied for charitable or religious purposes. However, the benefit of application is available only if the recipient entity is a registered charitable trust under Section 12A, as clarified in Explanation 2 to section 11(1) of the Act. Moreover, the assessee failed to provide any documentary evidence proving that the amounts were spent for charitable purposes. The burden of proof lies with the assessee to demonstrate that the expenditure qualifies for exemption under section 11 of the Act. In the absence of such proof, the AO was justified in making the disallowance. Accordingly, we concur with the decision of the lower authorities. The assessee has neither substantiated that the payments were made for charitabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecified under section 11 of the Act and therefore such expenses cannot be disallowed after referring to the different provisions of the Act which are not applicable to it. 13. On the other hand, the Ld. DR vehemently supported the order of the authorities below. 14. We have heard the rival contentions of both the parties and perused the materials available on record. At this Juncture, we note that the core issue before us is whether the disputed expenditures qualify as an 'application of income' for the purposes of section 11 of the Act. In this regard, we note that while computing the income of a trust u/s 11 of the Act, the AO has to adhere to the provisions of section 11 of the Act. The provisions of section 11 of the Act specially lay down the method of determination of income of a trust. In holding so, we draw support and guidance from the judgment of Hon'ble High Court of Andhra Pradesh in the case of CIT Vs. Trustee of H.E.H. the Nizam's Supplemental Religious Endowment Trust reported in 127 ITR 378 wherein it was held as under: Undoubtedly, sub-section (4) of section 11 specifically lays the mode of determination of the income of the business undertaking of a trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of Hon'ble High Court of Andhra Pradesh in the case of CIT Vs. Trustee of H.E.H. the Nizam's Supplemental Religious Endowment Trust reported in 127 ITR 378 where it was held that expenses which are incidental to carrying out the charitable purpose cannot be excluded from the exemption. The relevant extraction of the order is reproduced as under: "As regards the deduction of income tax and wealth-tax liability, it is true that payments on account of income-tax and wealth-tax are not expenditure by themselves for the purpose of the trust. But it can hardly be disputed that such expenses are incidental to the carrying out of charitable purposes. It was an incidence of the income or the accumulation of the income of the Trust. It is true that the payments in a particular year as shown in the accounts is not on account of the tax for that year and they relate to the preceding assessment years. But it can nevertheless be said that those payments are outgoings in that particular year and are only incidental to the carrying out of the purposes of the trust. It is difficult to say that on account of the income-tax or wealth tax, a provision should have been made in the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue Expenses (Rs. 1,81,075.00) 14.7 The expenditure on the statue pertains to promoting the cultural and educational objectives of the trust. Similar expenses have been allowed in ITO Vs. Choksi Mafatlal Memorial Trust (1995) 54 ITD 473 (Bom.), where it was held that capital expenditures on projects advancing the trust's objectives qualify as an application of income. Input Tax Credit Write-off (Rs. 12,44,081.00) 14.8 The assessee had to write off unutilized Input Tax Credit (ITC), which is a recognized accounting expense. The Supreme Court in CIT Vs. Munjal Showa Ltd. (2008) 298 ITR 298 (SC) has held that any write-off required due to legal and operational reasons must be considered a valid deduction. 14.9 In view of the above discussion and the judicial precedents relied upon, we hold that the expenses incurred by the assessee are incidental to the carrying out of its charitable objectives and qualify as an application of income under section 11 of the Act. Therefore, we direct the AO to delete the disallowance of Rs. 39,99,359.00 only. 15. In the result, the appeal filed by the assessee is partly allowed. Now Coming to ITA No. 1076/Bang/2024 for the AY 2021-22 16. The firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment of Rs. 54,61,28,031 to claim the deduction under section 11(2) of the Act. The assessee to substantiate its contention placed its reliance on the judgment of Hon'ble High Court of Madars in the case of ACIT(Exemption) Vs. Marugappa Chettiar Trust reported in 303 ITR 360 wherein the Hon'ble Court held has that the balance in current account is also treated as investment as per section 11(5) of the Act to claim the deduction provided under section 11(2) of the Act. 19.1 The assessee in form 35 (statement of facts before the ld. CIT-A) also submitted the computation representing the application of income that the amount of Rs. 11,53,72,381 accumulated in AY 2019-20 and 2020-21, was applied for charitable purpose during the year under consideration. Accordingly, the assessee claimed that there was no remaining balance available for application from the accumulation of earlier years, and thus, the total balance in bank account including the FDR should be treated as an investment as per the provisions of section 11(5) of the Act so as to allow the deduction under section 11(2) of the Act. The assessee in support of its claim relied on the judgment of the Hon'ble Tribunal of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. 23.2 The provisions of section 11(2) of the Act provide the conditions to claim the deduction in respect of accumulation or setting a-part of the income during the year. These conditions are as follows: (a) Such a person furnishes a statement in the prescribed form and manner to the Assessing Officer, stating 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 five years. (b) The money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5). (c) The statement referred to in clause (a) is furnished at least two months prior to the due date specified under sub-section (1) of section 139 for furnishing the return of income for the previous year. 23.3 It is clear that there are three conditions. The authorities below have not doubted the condition of furnishing the documents i.e. intimation in form 10A in respect of accumulation or setting a-part of the income for the purpose for which the income is accumulated. 23.4 In light of the above discussion, the controversy arises for our adjudication as to whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tune of Rs. 191,12,43,398.00, excluding the amount brought forward and utilized out of the fund created under section 11(2) of the Act in earlier years. This fact was also not disputed by the authorities below. 23.7 Accordingly, the FD amount shown by the assessee as the opening balance amounting to Rs. 58,55,73,290.95 will be reduced by Rs. 11,53,72,381.00, meaning thereby that the opening of FD stands at Rs. 47,02,00,909.95 only. Indeed, the amount of FD has increased from Rs. 47,02,00,909.95, which implies that there was an enhancement in the amount of FD to the tune of Rs. 50,37,69,297.92 (97,39,70,207.85- 47,02,00,909.95) in the year under consideration. Thus, effectively, it transpires that the amount of FD made by the assessee in the year under consideration stands at Rs. 50,37,69,297.92 only, whereas the amount of FD claimed to have been made by the assessee under section 11(2) of the Act stands at Rs. 54,61,28,031.00, which is short by Rs. 4,23,58,733.08 23.8 Nevertheless, there was an increase in the current bank account of the assessee by Rs. 34,74,68,786.36 as tabulated below: S. No. Particulars Balance as on 31-03-2021 Balance as on 31-03-2020 Increase amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in accordance with the law." 23.10 In view of the above, we are of the opinion that the amount lying in the bank account of the assessee can be treated as an investment as per the provisions of section 11(5) of the Act. Thus, in view of the above, it transpires that there was sufficient compliance by the assessee in keeping the money set apart as invested in the mode specified under section 11(5) of the Act. 23.11 Before concluding and for the sake of completeness, it is also necessary to address the issue of whether the opening balance of the FD can be treated as an investment made in the year in dispute. In this regard, we note that the ITAT Cochin Bench in the case of Dharmodayam Co Vs ITO reported in 59 taxmann.com 467 held that existing FDRs, which is free from any lien constitutes sufficient compliance for accumulated the income under section 11(2) of the Act. The relevant extraction of the judgment is reproduced as under: 12. In the instant case, there is no dispute that the assessee has passed a resolution for accumulation of income duly specifying the purpose of accumulation. Out of the sum of Rs. 31.35 lakhs claimed u/s 11(2) of the Act as accumulation of income, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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