Take notes as you read a judgment using our Virtual Legal Assistant and get email alerts whenever a new judgment matches your query (Query Alert Service). Try out our Premium Member services -- Free for one month.
Income Tax Appellate Tribunal - Rajkot
Income Tax Officer(Exemption), ... vs Laxmiben J. Shethia Public Charitable ... on 16 March, 2017
आयकर, अपील य अ धकरण राजकोट यायपीठ । IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT [Conducted through "E" Court at Ahmedabad] BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER आयकर अपील सं./ ITA.No.107/RJT/2015 With CO 36/RJT/2015 ITO (E)I, Ward-1. Smt.Laxmiben J. Shethia Public Rajkot Vs Charitable Trust "Laxmi Villa" 14, Bhaktinagar Society Rajkot. PAN : AAATL 0878 M अपीलाथ / (Appellant) यथ / (Respondent) Revenue by : Shri Yogesh Pande, CIT-DR Assessee by : Shri D.M. Rindani, AR सन ु वाई क तार ख/ Dateof Hearing : 09/02/2017 घोषणा क तार ख / Date of Pronouncement: 16 /03/2017 आदे श/O R D E RPER RAJPAL YADAV, JUDICIAL MEMBER:
Revenue is in appeal before the Tribunal against order of theld.CIT(A)-3, Rajkot dated 5.1.2015 for Asstt.Year 2010-11. On receipt ofnotice on the Revenue's appeal, the assessee has filed cross-objection bearingno.36/RJT/2015.
2. At the time of hearing, the assessee has not pressed its CO foradjudication, hence, it is dismissed.
ITA No.107/RJT/2015 with CO 2
3. Though the Revenue has taken three grounds of appeal, but itsgrievance revolves around a single issue viz. the ld.CIT(A) has erred in lawand on facts in allowing assessee's claim of Rs.55 lakhs as donation.
4. Brief facts of the case are that the assessee is a charitable trust derivingincome from property held under the Trust, by way of donations and intereston investment. It has filed its return of income on15.9.2010 declaring totalincome at NIL. The case of the assessee was selected for scrutiny assessmentand notice under section 143(2) of the Income Tax Act dated 28.9.2011 wasissued and served upon the assessee. On scrutiny of the accounts, it revealedto the AO that the assessee-trust had shown gross receipt of Rs.89,23,738/- inwhich a sum of Rs.55 lakhs was shown as transfer from corpus fund. Thissum of Rs.55.00 lakhs was donated to another charitable trust i.e. M/s.J.V.Sethia Public Charitable Trust, Rajkot. The stand of the assessee was that thissum was withdrawn out of corpus fund and it was given to another charitabletrust, which is enjoying benefit under section 12AA of the Act. Thus, it couldnot be treated as income. The AO somehow harboured a belief that it waswithdrawn from accumulated funds, and therefore, it could not be consideredas an application of income for availing benefit under section 11(1) of theIncome Tax Act. Accordingly, the ld.AO has denied benefit of section 11 andassessed it as income of the assessee. An addition of Rs.55 lakhs was made tothe total income of the assessee.
5. On appeal, the assessee has reiterated its contentions as were raisedbefore the AO. The ld.CIT(A) has made a lucid enunciation of law and factson the subject and thereafter deleted the addition. Elaborate discussion madeby the ld.CIT(A) on this issue is worth to note. It reads as under:
ITA No.107/RJT/2015 with CO 3
"5.3 I have carefully considered the contention of the appellant andthe order passed by the A.O. The two very basic facts that are pivotal tothe case arc that, Rs.55 lakhs were withdrawn from the corpus fund bythe trust and the same were donated to another charitable trust in thesame year. In order to decide the appeal, it would be appropriate toformulate certain questions on this issue and try to answer them. Thequestions are, in my opinion, as under:-
Q-I. Whether the amount of Rs.55 lakhs withdrawn from the corpusfund partakes the character of income or not in the hands of the trust ?
Q-2. If yes, whether the donation to another charitable trust can besaid to be application of income by the charitable trust ?
Q-3. Has the trust applied 85% of its income for charitable purposes ornot and if not, whether the unapplied amount has been properlyaccumulated as per the provisions of the Act?
5.4 The first issue is whether the amount of Rs.55 lakhs withdrawnthe corpus fond partakes the character of income or not. The incomeof the trust which is to be applied for charitable (purposes has beendefined in S.11(1), sub-section (a) to (d) as under- .
s.11l)(a) - Income derived from property held under the trustwholly for charitable or religious purposes, to the extent to which suchincome is applied lo such purposes in India and where any such income isaccumulated or set apart for application to such purposes in India, to theextent to which the income so accumulated or set apart is not in excess of15% of the income from such property.
s.11(1)(b) - Not applicable s. 11(1 )(c)- Not applicable s.11(l)(d) - income in the form of voluntary contributions madewith a specific direction that they shall form part of the corpus of thetrust or institution.
5.5 Thus, the income derived from-property and income in the formof voluntary contributions forming part of the corpus of the trust areto be considered for exemption u/s.11. The first question whichrequires to be considered is whether the corpus donation has toremain a permanent part of the trust fund or not, Secondly, whethertrustees are competent to give donations from the corpus fund or not.
ITA No.107/RJT/2015 with CO 4
In the case of ITO vs. Abhilash Kumari Public Charitable Trust 28TTJ 523, the Hon'ble ITAT Delhi-C Bench in its decision has heldthat the contention of the revenue that the corpus donation has toremain a permanent part of the trust fund and cannot be appliedtowards the objects of the trust is not acceptable. Voluntarycontributions with a specific direction that they will go to the corpusof the trust will be exempt u/s.11. In other words, voluntarycontributions received without any such specific direction shall have tobe spent on charitable objects to the extent of 85%. There will be no suchstipulation as regards the Voluntary contributions for corpus. In thepresent case, the appellant has withdrawn Rs.55 lakhs from the corpusfund. The appellant has filed the decision taken by the trustees afterfollowing the procedure for the same as per the trust deed. However,whatever money has been specifically sent to the corpus, cannot be madeto change its character. The moment the trust withdraws the same fromthe corpus fund, the amount goes out of the ambit of s.11(1)(d), i.e. it nolonger remains the corpus fund and thus not exempt u/s.11(1)(d). In otherwords, the moment the appellant has withdrawn the money from thecorpus fund, it immediately partakes the character of income in the handsof the trust. I am not concerned as to whether the withdrawal from thecorpus is as per the provisions of the Trust Law or not or whether thetrustees were competent to withdraw the same or not. This is because themoment the amount is withdrawn from the corpus fund, it comes in theambit of s.11(1)(a) and not s.11(1)(d). Thus the first finding is that Rs.55lakhs withdrawn by the trust from the corpus fund are nothing but incomeof the trust. Secondly, withdrawal from the corpus fund merely lends acharacter of income to this amount and does not lead to any violation ofs.11 / s.13 taking the trust out of the ambit of the exemption.
5.6 Once it is held that the amount withdrawn from the corpus fundpartakes the character of income, the next question required to beanswered is whether donation of such amount to another charitable trustis application of income or not. Explanation to S. 11 states that anyamount credited or paid, out of income referred to in clause (a) / (b) ofsub-section (I) which is not applied but accumulated or set apart, to anyother trust or institution registered U/S.12AA shall not be treated asapplication of income for charitable or religious purposes cither duringthe period of accumulation or thereafter. Whatever amount has beenaccumulated or set apart by the trust is the amount which is utilised forcharitable or religious purposes during the year. Donation out of suchaccumulated income to another trust docs not amount to application ofincome. However, it automatically means that donation to another charitabletrust during the year the income is generated can be held to be application of ITA No.107/RJT/2015 with CO 5income. This is because the income generated during the year is neitheraccumulated nor set apart. The accumulation or setting apart comes intoplay only after the year is over. The donation given out of current year'sincome to another trust registered u/s.UAA thus partakes the character ofapplication of income. In the case of CIT vs. Sarladevi Sarabhai Trust 172ITR 698, the Hon'ble Gujarat High Court has held as under:-
"If the assessee-trust is a trust which holds]properties wholly forcharitable or religious purposes, income derived from such properties inthe hands of the trust would be allowed to be excluded from the totalincome of the previous year if it is shown that such income is applied bythe said trust for charitable or religious purposes in India. The mainquestion which had to be considered in the instant case was as to whetherthe assessee-trust during the relevant year applied its income forcharitable or religious purposes or not. What the assessee did was that itdonated the concerned income to another trust which was admittedly acharitable and religious' trust duly registered under the Bombay PublicTrust Act. The word 'application' is not defined by the Act. The dictionarymeaning of the term 'apply' as given in Chambers Twentieth CenturyDictionary amongst other is 'to put to use'. It could not be gainsaid thatthe assessee had made use of its income for the purpose of making itavailable to another trust, objects of which were also of charitable orreligious nature. Consequently, it could not be said that the assessee-trusthad not complied with the provisions of section II when it made thedonation of income in favour of the donee-trust which was also a religiousand charitable trust. "
5.7 The appellant has made a donation of Rs.55 lakhs to anothercharitable trust, namely M/s. J. V. Sethia Public Charitable Trust, Rajkot.The appellant has submitted a copy of the registration u/s.12AA in caseof M/s. J. V. Sethia Public Charitable Trust to whom the donation wasgiven. Thus, the of Rs.55 lakhs given to another charitable trust is heldto be application of income for the purpose of s.11.
5.8 The third question is whether the trust has applied its income towardscharitable purposes to the extent of 85% or not. From the copy of auditedaccounts filed by the appellant, the income of the appellant from propertyheld under the trust was Rs.27, 1 3,74 1 /-. If Rs.55 lakhs is added to this,the income becomes Rs.79,57,233/-. The amount applied towards objectsfor charitable purposes is Rs. 34,23, 73 8/-. Adding Rs.55 lakhs to thesame, the income applied towards objects of the trust is Rs.89,23,738/-.This is more than the income of the trust and thus definitely more than85% of the income. Hence, there is no question of any disallowance onthis account.
ITA No.107/RJT/2015 with CO 6
6.0 To sum up, it is held that the withdrawal of Rs.55 lakhs from the corpus fund is income of the trust for the year, the donation to another charitable trust during the year amounts to application of income and the income applied for charitable purposes is more than the income of the trust. There is no case for disallowance or addition as proposed by the A.O. The same is directed to be deleted. These grounds of appeal are partly allowed."
6. Before us, the ld.DR relied upon order of the AO. He further observedthat trust was hit by Explanation to Section 11(2) of the Act, because it is tobe inferred that the said donation was given out of accumulated funds of theTrust, hence, it cannot claim deduction as application of income.
7. On the other hand, the ld.counsel for the assessee has relied upon orderof the ld.CIT(A). He explained the issue with help of an example. Copy ofthe Board Circular No.8 dated 27.8.2002 was also referred during the courseof hearing. The ld.counsel for the assessee further contended that theld.CIT(A) has relied upon the order of the ITAT, Delhi Bench in the case ofITO Vs. Abhilash Kumar Public Charitable Trust, 28 TTJ 523 and also on thedecision of the Hon'ble Gujarat High Court in the case of CIT Vs. SarladeviSarabhai Trust, 172 ITR 698. The ld.counsel for the assessee has placed onrecord copy of ITAT, Delhi Bench decision cited supra.
8. We have duly considered rival contentions and gone through the recordcarefully. Before embarking upon an inquiry on the facts of present case, wewould like to take cognizance of Board Circular No.8 dated 27.8.2002. Itreads as under:
"Restriction on the application of accumulated income of the charitable or religious trusts.
21.1 Through the Finance Act, 2002, an Explanation has been inserted below sub-section (2) of section 11 so as to provide that any amount paid or credited out of income from property held under trust referred ITA No.107/RJT/2015 with CO 7to in clause (a) or clause (b) of sub section (1), read withthe Explanation to that sub-section, which is not applied, but isaccumulated or set apart, to any trust or institution registered undersection 12AA or to any fund or institution or trust or any university orother educational institution or any hospital or other medical institutionreferred to in sub clause (iv) or sub clause (v) or sub clause (vi) orsub clause (via) of clause (23C) of section 10, either during the periodof accumulation or thereafter, shall not be treated as application ofincome for charitable or religious purposes. Thus, payment to othertrusts and institutions out of income from property held under trust inthe year of receipt will continue to be treated as application of income.However, any such payment out of the accumulated income shall notbe treated as application of income and will be taxed accordingly.
21.2 Through the Finance Act, 2002, a new clause (d) has also beeninserted in sub-section (3) of section 11 so as to provide that if anyincome referred to in sub section (2) of the said section, is paid orcredited to any trust or institution registered under section 12AA or toany fund or institution or trust or any university or other educationalinstitution or any hospital or other medical institution referred to insub clause (iv) or (v) or (vi) or (via) of clause (23C) of section 10, suchpayment or credit shall be deemed to be the income of the personmaking such payment or credit, of the previous year in which suchpayment or credit is made.
21.3 A proviso in sub section (3A) has also been inserted so as toprovide that the Assessing Officer shall not allow application ofaccumulated income by way of payment or credit made for thepurposes referred to in clause (d) of sub section (3) of section 11. Thistakes away the discretion of the Assessing Officer provided insub section (3A) to allow the trusts to apply the accumulated incomefor payment or credit to other charitable or religious trusts andinstitutions.
21.4 These amendments will take effect from 1st April, 2003 and will,accordingly, apply in relation to the assessment year 2003 2004 andsubsequent years.
[Section 7]Condition of publication of accounts by religious and charitabletrusts in a local newspaper has been dispensed with.
ITA No.107/RJT/2015 with CO 8
22.1 Under the existing provision contained in clause (c) of section 12A, the exemption under sections 11 and 12 is not available to a trust or institution, having total income exceeding one crore rupees (before giving effect to the provisions of sections 11 and 12), unless such trust or institution publishes its accounts in a local newspaper, before the due date of furnishing the return of income and also furnishes a copy of such newspaper along with the return of income.
We would further like to note the illustration given by the ld.counselfor the assessee, which reads as under:
"Illustration Only (Amount in Rs.) Gross income of a trust 1000 Less: Corpus contribution (Sec.11(1)(d)) 200 800 Less: Income applied/paid actually, say 400 (Sec. 11(1)(a) earlier part) 400 Less: Income accumulated, not applied, 120 not exceeding 15% of income (15% of 800) 280 Less: Unspent income further accumulated as permitted vide Expl.
(2)(b) to Sec. 11(1) as per option exercised in prescribed manner in 180 Rule 17, Form no.10 - say Balance Income of trust 100"
9. A bare perusal of the Circular would indicate that by virtue ofamendment carried out during the Finance Act, 2002, a restriction has beenput for construing the application of income if donation to any fund orinstitution or trust who was enjoying the benefit under section 12AA or sub-
ITA No.107/RJT/2015 with CO 9
clause (iv) or (v) or (vi) or sub-clause (via) of clause (23C) of section 10, ifsuch donation was given out of accumulated funds carved out by the assesseein earlier years. If donation is being given, out of income from property heldunder the trust in the year of receipt, then that will be considered asapplication of income. Similarly, the ld.counsel for the assessee hasexplained that if the donation is being given from the amount of Rs.180/-which was kept aside for accumulation purpose, then, the assessee will not beentitled to claim such donation as application of income. But if it waswithdrawn from the corpus contribution, it will be treated as income of theassessee for the current year, and if the donation was given out of suchincome, then it is to be treated as application of income. We find that theld.CIT(A) has made reference to section 11(1)(d) and thereafter arrived aconclusion that the assessee has not withdrawn this amount out ofaccumulated funds, rather it was withdrawn from the corpus fund, and themoment it was withdrawn, it will be treated as income of the assessee for thecurrent year. The Board has also explained this in the above circular. Theld.CIT(A) has rightly construed the provisions of law and appreciated thefacts in right perspective while deleting the addition. We do not find anyerror in the order of the ld.CIT(A). It is confirmed. Accordingly, the appealof the Revenue is dismissed.
10. In the result, the appeal of the Revenue as well as CO of the assesseeare dismissed.
Order pronounced in the Court on 16th March, 2017 at Ahmedabad.
Sd/- Sd/-(PRADIP KUMAR KEDIA) (RAJPAL YADAV)ACCOUNTANT MEMBER JUDICIAL MEMBERAhmedabad; Dated 16/03/2017
