Bhartiya Vidya Mandir Trust, Ludhiana vs Department Of Income Tax

The Income Tax Officer, Vs. Bhartiya Vidya Mandir Trust, Ward VI(1), New Rose Garden, Ludhiana. Udham Singh Nagar, Ludhiana. PAN: AAATB4880H And

C.O.No.2/Chd/2014

In

ITA No. 1093/Chd/2013 (Assessment Year : 2010-11)

Bhartiya Vidya Mandir Trust, Vs. The Income Tax Officer, New Rose Garden, Ward VI(1), Udham Singh Nagar, Ludhiana. Ludhiana. PAN: AAATB4880H (Appellant) (Respondent)

Assessee by : Shri Ashwani Kumar Department by : Shri Manjit Singh, DR

Date of hearing : 27.04.2015 Date of Pronouncement : 30.04.2015

PER BHAVNESH SAINI, J.M. :

The Departmental appeal as well as Cross

Objection by the assessee are directed against the order 2

of learned CIT (Appeals)-II, Ludhiana dated 11.9.2013

for assessment year 2010-11.

2. We have heard the learned representatives of both

the parties and perused the material available on record.

3. The assessee in Cross Objection has challenged

the order of the learned CIT (Appeals) in upholding the

disallowance of claim of Rs.2,57,90,420/- made by the trust

in respect of excess utilization made in the earlier years.

4. The brief facts are that assessee society was

formed on 7.12.1968 and registered with the Registrar of

firms and Societies on 17.12.1968. The Society was

registered under section 12AA of the Income Tax Act vide

order dated 4.3.1976. The Society is also approved under

section 10(23C) by the Chief Commissioner of Income Tax.

During the course of assessment proceedings, the Assessing

Officer noted that the gross receipts declared by the

assessee were Rs. 9,85,33,522/-. As provided under section

ll(l)(b) of the Income Tax Act, 85% of this amount was

required to be applied for charitable purposes during the

year. Thus the assessee was required to apply an amount of

Rs.8,37,53,494/- for charitable purposes towards the

objects of the society. As against this the assessee had

a p p l i e d a n a m o u n t o f R s .7,39, 11, 839/-. The Assessing

Officer further noted that an amount of Rs.60,14,398/- was

debited to the Profit & Loss Account on account of

depreciation. After excluding this amount of 3

depreciation from the amount shown as expenditure,

the total amount applied during the year was only

Rs.6,78,97,441/-. There was thus a short fall of

Rs.1,58,56,053/- towards the application of income as

required under the Income Tax Act. The Assessing Officer

further observed that no intimation in Form No. 10 was

given by the assessee to the Assessing Officer before the

due date of filing of return with regard to accumulation of

income. In these circumstances, the Assessing Officer

asked the assessee to explain why the short fall in

application amounting to Rs.1,58,56,0537- may not be

taxed. The assessee vide his reply dated 6.11.2012

submitted that the short fall had been computed wrongly by

the assessee in as much as the amount of depreciation

amounting to Rs.60,14,3987- although debited to the Profit

& Loss Account had not been taken in the computation.

Therefore, the short fall in application of income would

amount to Rs.98,41,655/- and not Rs. 1,58,56,053/-. The

assessee further submitted that the depreciation though

not claimed in the return of income was allowable in view of

the judgement of the Hon'ble Punjab and Haryana High

Court in the case of CIT Vs. Tiny Tots Education Society

330 ITR 21 (P&H) and CIT Vs. Market Committee, Pipli

(2011) 238 CTR 103 (P&H). The assessee submitted that

even if there were two views on this issue, as the final

verdict of the Apex Court is not there., the view of the

Jurisdictional High Court is to be considered. With regard

to the short fall in application of income, the assessee 4

submitted that there was excess utilization of income during

the earlier years which had been adjusted against the short

fall in the utilization during current year. In this regard,

the assessee relied upon the following case laws:-

- CIT Vs. Trustee of Seth Merwarjee Framji Pandey Charitable Trust (2003) 177 Taxman 19 (Bom), and CIT Vs. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439

5. The Assessing Officer was not satisfied with the

assessee's submissions. With regard to the issue of

depreciation, the Assessing Officer referred to the case of

Lissie Medical Institutions Vs. CIT, 348 ITR 344 (Ker),

wherein, the Hon'ble Kerala High Court held that

depreciation is not considered to be application of income

once the entire cost of asset has been treated as application

under section ll(l)(b) of the Income Tax Act. In view of this

decision, the Assessing Officer held that to keep the issue

alive, the depreciation is not to be considered as application

of income. Regarding the issue of excess utilization in the

earlier years, the Assessing Officer discussed the case of

CIT Vs. Maharana of Mewar Charitable Foundation (Supra)

and pointed out that the expenses incurred by the assessee

in the case of Maharana of Mewar Charitable Foundation

were more than the receipts i.e. there was actual loss. The

Assessing Officer observed that the facts in the assessee's

case are different in as much as the assessee had claimed

carry forward of expenses in excess of 85% of receipts which

is not provided in the Act. The Assessing Officer thereafter 5

discussed in detail the quantum of receipts and expenses

incurred by the assessee over the years and pointed out

that actually there was no set off available with the

assessee if the working was made in accordance with the

case of CIT Vs. Maharana of Mewar Charitable Foundation

(Supra). The Assessing Officer did the working in this case

and established that there was no loss available to the

assessee for set off in the current year. This working has

been done in Para 4.4 of the assessment order. The

Assessing Officer also referred to the case of Pushpawati

Singhania Research Institute for Liver, Renal & Digestive

Disease Vs. DDIT (Exemption) by Delhi Bench of ITAT-29

SOT 316 on this issue. In view of these facts and case laws,

the Assessing Officer once again issued a show cause notice

to the assessee on 20.12.2012, wherein, the total income

not applied towards the objects of the trust was worked out

at Rs.2,46,21,6837- as under:-

i) Total income i.e. receipts of the trust Rs.9,85,33,522/-

ii) Income applied towards objects of the trust Rs.7,39,11,839/-

iii) Amount of income not applied towards Objects of the trust/set apart Rs.2,46,21,683/-

iv) 85% of the total income of the trust Rs.8,37,53,500/-

6. The Assessing Officer asked the assessee to

explain why this amount may not be taxed. The assessee

vide his reply dated 28.12.2012 requested the Assessing

Officer to allow the depreciation in the light of the

judgement of the Hon'ble Punjab and Haryana High Court in

the case of CIT Vs. Tiny Tots Education Society. The 6

assessee also relied upon the case of A.L.N Rao Charitable

Trust reported in 216 ITR 697(SC), wherein, the Hon'ble

Supreme Court has held that there was a blanket exemption

of 25% of total income from the unspent amount of the

trust. The assessee claimed that in view of this judgement,

15% of its total income from unspent amount was exempt.

The Assessing Officer once again found the assessee's

submissions unsatisfactory. Regarding the claim of

depreciation, the Assessing Officer held that the same is

not acceptable because the claim has not been made in the

return of income filed by the assessee and time for filing

revised return has expired. Regarding the issue of deficit,

the Assessing Officer observed that no court had allowed

deficit out of 85% of income to be adjusted against income

of the following years as claimed by the assessee in the

return of income. In view of these facts and circumstances

total income of the assessee was computed at

Rs.2,46,21,680/-.

7. The assessee challenged the addition before the

learned CIT (Appeals) and written submission of the

assessee is reproduced in the appellate order, which reads

as under :

"V ide the nex t ground of appe al the appel l an t i s ag i tating ag ains t the se t of f of excess ex pend iture incurre d dur ing the prev ious ye ars ag ains t the s ur pl u s f or the ye ar u nder appe al . As per the provis ions of Section 11 of the Inco me T ax Ac t, 1961, a trus t h as to appl y i ts in co me up to 85% to war ds the ob jec tives of the trus t to ge t accu mu l ation / se t ap ar t of inco me of the re main in g 15% of the i nco me. B y tak ing th is in to 7

cons ider ation, th e appel l an t is c l ai min g excess u til iz ation of inco me over and above the ex pend iture incurred by 85% of the inco me of a p ar ticul ar ye ar and the re turns we re be ing f il ed accord ingl y. T he assess men ts f or al l the ye ars f rom A/Y 2006- 07 h ave been f rame d under sec tion 143( 3) of the Inco me T ax Ac t, 1961. Co p ie s of co mpu tation ch ar ts of inco me al ong wi th co p ies of asses s men t orders f or A/ys 06-07 to 09-10 are encl osed. T he returned inco me f il e d by the appel l an t in al l the res pec tive ye ars, h ave been acce p ted b y the De p ar tme n t. As on the f irs t d ay of the prev ious ye ar , the appel l an t h as excess u til iz ation of ex pend iture in e arl ier ye ars amo un ting to Rs. 2, 57, 90, 420/-. Ou t of wh ich, a su m of Rs. 98, 41,655/- was ad jus ted ag ains t the shor t u til iz ation of inco me f or the ye ar under appe al an d the b al ance h as been taken/c arr ied to nex t ye ar. For the pur pose of the ad jus tme n t of excess u til iz ation of inco me in e arl ier ye ars ag ains t the sur pl us f or the c urren t ye ar, v ar ious Hon'bl e C our ts h ave dec id ed/hel d the issu e in f avour of the appel l an t.

Your Honour's k i nd atten tion is in v ited to the r atio of CIT vs Maharana Mewar Charitable Foundation re ported in 164 ITR page 439 ( Raj. ) wh ere i n Their Lordships have held that the anomaly which has arisen that if the Trust takes a loan for the purposes of incurring expenditure for charitable and religious purposes in a particular year and the said loan is repaid out of the income of the subsequent year, the said repayment would be entitled to the exemption from tax u/s 11(1)

(a) of the Act. But if the Trust instead of taking a loan, incurs the expenditure for charitable and religious purposes out of the corpus of the Trust and seeks to reimbursement of the said amount out of the income of the subsequent year, the Trust would not be entitled to claim exemption in respect of such reimbursement u/s 11(1) (a) of the Act. A construction which leads to such anomaly should be avoided. The adjustment of the expenditure incurred by the Trust for charitable or religious purposes in earlier years against the income earned by the Trust in subsequent year, would amount to applying the income of the Trust for charitable or religious purposes in the subsequent year in which such adjustment had been made and would have to be excluded from the income of the Trust u/s 11(1) (a) of the Act.

The similar issue of adjustment of expenditure incurred earlier against the surplus of the subsequent year has also come before the Hon 'ble Mumbai High Court in the case of CIT vs Institute of Banking reported in 264 ITR p. 110 (Bom.) wherein the Assessing Officer did 8

not allow carry forward of excess expenditure to be set off against the surplus of subsequent year on the ground that in the case of charitable trust, their income was assessable under self contained code mentioned in section 11 to 13 of the Income Tax Act and that the income of the charitable trust was not assessable under the head "Profits and gains from business profession" u/s 28 in which the provisions of carry forward of losses was relevant. That in a case of charitable trust, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of the subsequent years. Their Lordships have held that there is no merit in this argument of the Department. Income derived from the trust property has also got to be computed on commercial principals and if commercial principals are applied then adjustment of the expenditure incurred by the Trust for charitable or religious purposes in earlier years against the income earned by the Trust in subsequent year will have to be regarded as application of income of the Trust for charitable or religious purposes in subsequent year in which adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the Trust u/s 11(1) (a) of the Act.

Further, Your Honour's kind attention is drawn to the ratio of CIT vs Trustee of Seth Merwarjee Framji Pandey Charitable Trust [2003] 177 Taxman p. 19 (Bom) wherein Their Lordship have held that if a Trust has incurred a deficit during a particular year, the surplus made by it in a subsequent year to make up for the past deficit should be set off against such deficit. Similar view was also taken in the case of CIT vs Maharana of Mewar Charitable Foundation [1987) 164 ITR p. 439 (Raj) and also in the case CIT vs Institute of Banking Personnel Selection 264 ITR p. 110 (Bom) wherein the AO has disallowed the claim for carry forward of deficit of earlier years for adjustment against the surplus of the subsequent years, on the ground that such carry forward was applicable only in the case of income under the head Business or Profession and was not permissible in the case of income assessable u/s 11 to 13 of the Act. The Hon'ble High Court held that income derived from the Trust property is to be computed on commercial principles. Accordingly, excess of expenditure incurred by the Trust for charitable and religious purposes in earlier years against the income earned by the Trust in subsequent year would have to be regarded as application of income of the Trust in subsequent year. The Court also held that section 11 being the benevolent provision and had to be liberally construed.

9

From the above citations, it is very much clear that the appellant has rightly claimed the set off of extra expenditure than the income of earlier years against the surplus for the year under appeal and this ground of appeal be adjudicated accordingly."

8. The submissions of the assessee were forwarded to

the Assessing Officer, who has submitted his report dated

30.8.2013, which reads as under :

"Vide his letter dated 18.06.2013, the counsel of the assessee has submitted that income was assessed at the Rs.2,46,21,680/- as against Nil Income wherein the AO negated the claim of the appellant of excess utilization of income in earlier years against surplus of the year. In support of his claim he cited the ratio of judgment of the Hon'ble Rajasthan in the case of CIT vs Maharana Mewar Charitable Foundation reported in 164 ITR page 439 (Raj.) wherein Their Lordships have held that the anomaly which has arisen that if the Trust takes a loan for the purposes of incurring expenditure for charitable and religious purposes in a particular year and the said loan is repaid out of the income of the subsequent year, the said repayment would be entitled to the exemption from tax u/s 11(1) (a) of the Act.

The judgment of the Hon'ble High Court of Rajas than does not favour the assessee as already discussed in the assessment order in detail relying on the decision in the case of Lissic Medical institution Vs CIT, Hon 'ble Kerala High Court (348ITR 344). The reason being facts of the present case are different from the case as citied above, because in the said case the expenses were more than the receipts i. e. there was actual loss. Whereas in the present case the assessee is claiming excess of application of income above 85% in earlier years against the current year Income which is not according to Law. As such this claim of the assessee may not be entertained.

The assessee also placed reliance on the judgment of the Hon'ble Mumbai High Court in the case of CIT vs Institute of Banking reported in 264 ITR p.110 (Bom.). The facts of this case are also different from that the present case of the assessee. In the present case the assessee is claiming excess of 85% of income application in previous year against the income of the subsequent year whereas in the case citied above the assessee has incurred debt in carrying out charitable objects in earlier years.

10 8.1 Copy of the Assessing Officer's report was

provided to the assessee. The learned counsel for assessee

once again placed reliance upon the submissions dated

18.06.2013.

9. The learned CIT (Appeals) considering the

submissions of the assessee in the light of the material on

record confirmed the addition and dismissed this ground of

appeal of the assessee. The findings of the learned CIT

(Appeals) in paras 4.5 to 4.9 of the appellate order are

reproduced as under :

"4.5 I have carefully considered the rival submissions. The appellant had claimed that there was excess utilization during the earlier years over and above the amount applied upto 85% of the income in those years and this excess application of income had been claimed to be carried forward to the subsequent years. The appellant has claimed that the short fall in the application of income in the current year is adjustable against carry forward of expenses from the earlier years. In order to appreciate the full facts of the case, during the course of appellate proceedings, the AR of the appellant was requested to file evidence of excess utilization brought forward which was claimed to be set off against short fall during the current year. The appellant vide his reply dated 05.07.2013, submitted the following details:-

Income Expenditure % Required Excess Deprecia O/Balance Excess C/f to be tion incurred A.Y. 28728418 22197779 77.27 75% 651466 Nil 1884141 2535607 01-02 A.Y. 36850001 40351003 109.5 75% 12713502 Nil 2535607 15249109 02-03 A.Y. 46552799 44821832 96.28 85% 5251953 Nil 15249109 20501062 03-04 A.Y. 55789036 49101523 88.01 85% 1680842 Nil 20501065 22181904 04-05 A.Y. 62925625 54785893 87.06 85% 1299112 Nil 22181904 23481016 05-06 A.Y. 69119941 72972492 105.46 85% 14159342 Nil 23481016 37640358 06-07 A.Y. 71646870 63035045 87.98 85% 4564198 Nil 37640358 42204716 07-08 11

A.Y. 85439902 66264816 77.56 85% (-) Nil 42204716 35845615 08-09 6359101 A.Y. 92001695 68146246 74.07 85% (-) 6771010 35845615 25790420 09-10 10055195 A.Y. 98533522 73911839 75.01 85% (-) 6014398 25790420 15948765 10-11 .9841655

Perusal of these details clearly show that except for the A/Ys 2002-03 and 2006-07, the income of the appellant in each of the years was more than the amount applied by the appellant in that year on charitable purposes. There was no deficit of income over application in any of the years except these two years. The appellant had worked out the deficit on the basis of income required to be applied with regard to section ll(l)(b) of the Income Tax Act and not on the basis of total income. The excess amount of application over and above this requirement was claimed to be eligible for carry forward even though the total expenditure was less than the total income in each year.

4.6 The actual excess amount applied in these years works out as under:-

Income Expenditure % Excess A.Y. 01-02 28728418 22197779 77.27 Nil A.Y. 02-03 36850001 40351003 109.5 3501002 A.Y. 03-04 46552799 44821832 96.28 Nil A.Y. 04-05 55789036 49101523 88.01 Nil A.Y. 05-06 62925625 54785893 87.06 Nil A.Y. 06-07 69119941 72972492 105.46 3780551 A.Y. 07-08 71646870 63035045 87.98 Nil A.Y. 08-09 85439902 66264816 77.56 (-) 6359101 A.Y. 09-10 92001695 68146246 74.07 (-) 10055195 A.Y. 10-11 98533522 73911839 75.01 (-) 9841655

From the aforesaid details it is evident that during the assessment year under reference, the appellant had no excess application of income or expenditure which could have been carried forward from the earlier years and which could have been adjusted against the short fall in application of income of the current year. Even if the claim of carry forward of excess application of incomeduringAY02-03and06-07 is considered, the same would amount to Rs.72,81,553/-.This excess application can at best be set off against shortfall of application in the AY 08-09 (Rs 6359101) and shortfall to the extent of Rs 9.22.4S2/- out of total shortfall of Rs 10055195/- during AY 09-10. There would still be a shortfall of Rs.91,32,643/- in the AY 2009-2010. Therefore, the claim of the appellant for set off of shortfall in application of income during AY 2010-2011 against carry forward of excess expenditure of earlier years is not tenable.

12 4.7 The appellant's reliance on the case of CIT Vs. Maharana Of Mewar Charitable Foundation (supra) is misplaced. In this case, the facts were as under:

"During the previous year relevant to the assessment year 1970-71, the assessee spent a sum of Rs. 95,863 towards the aims and objects of the trust and the income of the assessee during the said year was only Rs. 36,093 and thus a sum of Rs. 59,770 was spent in excess of the income during the period relevant to the assessment year 1970-71. In the previous year relevant to the assessment year 1971-72, the assessee claimed adjustment of the sum of Rs. 59,770 against the surplus of income over expenditure during the assessment year 1971-72. "

The Hon'ble High Court held as under:

"The aforesaid discussion leads to the conclusion that the Tribunal was right in directing that the deficit of Rs. 59,770 arising out of the excess of expenditure over income during the previous year relevant to the assessment year 1970-71 should be set off against the surplus of income over expenditure relating to the assessment year 1971-72 in computing the taxable income of the latter assessment year. "

4.8 Similarly, in the case of CIT Vs. Institute of Banking reported 264 ITR 110, the facts were as under:

"The assessee is a charitable trust. For the accounting year ending December 31, 1984 (assessment year 1984-85) a return of income was filed on June 28, 1985, by the asses see declaring a deficit of Rs. 74.97 lakhs. In the revised return filed by the asses see on April 3, 1986, the deficit was increased to Rs. 89.18 lakhs. During the assessment year in question the assessee had carried forward the deficit of the earlier years and had adjusted the deficit of the earlier years against the surplus of the subsequent years which was disallowed by the Assessing Officer on the ground that such carry forward was applicable only to income assessable under the head "Profits and gains of business" and such carry forward and adjustment was not permissible in case of income assessable under section 11 to section 13 of the Income-tax Act as the income of the charitable trust was not assessable under the head "Profits and gains of business".

13 Hon'ble High Court held as under:

"Now coming to question No. 3, the point which arises for consideration is : whether excess of expenditure in the earlier years can be adjusted against the income of the subsequent year and whether such adjustment should be treated as application of income in the subsequent year for charitable purposes? It was argued on behalf of the Department that expenditure incurred in the earlier years cannot be met out of the income of the subsequent year and that utilisation of such income for meeting the expenditure of earlier years would not amount to application of income for charitable or religious purposes. In the present case, the Assessing Officer did not allow carry forward of the excess of expenditure to be set off against the surplus of the subsequent years on the ground that in the case of a charitable trust, their income was assessable under self-contained code mentioned in section 11 to section 13 of the Income-tax Act and that the income of the charitable trust was not assessable under the head "Profits and gains of business" under section 28 in which the provision for carry forward of losses was relevant. That, in the case of a charitable trust, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of the subsequent years. We do not find any merit in this argument of the Department. Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the trust under section 11(1) (a) of the Act. Our view is also supported by the judgment of the Gujarat High Court in the case of CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293. Accordingly, we answer question No. 3 in the affirmative, i.e., in favour of the assessee and against the Department. "

4.9 In both the cases there was actual deficit, i.e. expenditure was more than the income. As discussed above, in the appellant's case there 14

is no actual deficit. It is thus evident that the appellant's claim of carry forward of excess utilization pertaining to the earlier years for set off against income of current year is not in accordance with the provisions of law and is not supported by any of the case laws relied upon by the appellant. This ground of appeal is accordingly dismissed."

10. After considering the rival submissions, we do not

find any merit in this ground of Cross Objection of the

assessee. The assessee claimed before the learned CIT

(Appeals) that there was excess utilization during the earlier

years over and above the amount applied upto 85% of the

income in those years and excess application of income had

been claimed to be carry forward to the subsequent years.

The assessee further claimed that the short fall in the

application of income in the current year is adjustable

against carry forward of expenses from the earlier years.

The learned CIT (Appeals) directed the assessee to file

evidence of excess utilization brought forward which was

claimed to be set off against short fall during the year.

The details from assessment year 2001-02 to 2010-11 are

reproduced above. The learned CIT (Appeals) on perusal of

these details noted that except for the assessment years

2002-03 and 2006-07, the income of the assessee in each of

the other years was more than the amount applied by the

assessee in that year on charitable purposes. Therefore,

there was no deficit of income over application in any of the

years except these two years. The actual excess amount

applied was also worked out and it was found that the

assessee had no excess application of income or expenditure

which could have been carried forward from the earlier 15

years and which could have been adjusted against the short

fall in application of income of the current year. The

learned CIT (Appeals) taking the total of excess application

of income for these two assessment years 2002-03 and

2006-07 found that the amount could be set off against

short fall of application in assessment years 2008-09 and

2009-10. Therefore, the claim of the assessee for set off of

short fall in application of income during the assessment

year under appeal i.e. 2010-11 against carry forward of

excess expenditure of earlier years was not found tenable.

The learned CIT (Appeals), therefore, noted that in

assessee's case there is no actual deficit. Therefore, there

is no question of allowing carry forward of excess utilization

of earlier years. The findings of fact recorded by the

learned CIT (Appeals) are based on the factual details

provided by the assessee. Therefore, no infirmity has been

pointed out during the course of arguments. Since the

findings of fact recorded by the learned CIT (Appeals) have

not been rebutted through any material on record,

therefore, in the absence of any specific arguments against

the learned CIT (Appeals), no interference is required in the

matter. The learned counsel for assessee relied upon the

order of the I.T.A.T., Agra Bench in the case of JCIT Vs.

Sewa Education Trust, 40 Taxmann.com 143. The facts of

this case are clearly distinguishable from the facts of the

present case and the issue is altogether different.

Therefore, the same order would not support the case of the

assessee.

16

11. Considering the factual facts recorded by the

learned CIT (Appeals) against the assessee and finding no

case of actual deficit, there is no question of allowing carry

forward as claimed by the assessee. Therefore, we do no

find any merit in this ground of Cross Objection of the

assessee. The same is accordingly dismissed.

12. In the result, the Cross Objection of the assessee

is dismissed.

13. In the Departmental appeal, the Revenue

challenged the order of the learned CIT (Appeals) in allowing

credit for 15% of the gross receipts in working the short fall

of the amounts spent when the assessee had not fulfilled

the requirements by giving a notice under section 11(2)(a) of

the Income Tax Act for accumulation of income intended to

be applied for charitable purposes in future years.

14. The assessee challenged the order of the Assessing

Officer before the learned CIT (Appeals) against the denial

of credit for 15% of the gross receipts i.e. an amount of

Rs.1,47,80,028/-. The facts are same as noted above while

disposing of the Cross Objection of the assessee. It was

submitted that as per the provisions of section 11 of the

Act, "if a charitable trust incurred 85% of its income for the

objectives of the trust, the balance 15% is free to be set

apart/accumulated without any conditions and nothing is

taxable". The assessee explained that as per section 11 of

the Act, a charitable institution is not charged to tax to the 17

extent of 15% of its income and relied upon the decision of

the Hon'ble Apex Court in the case of Addl.CIT Vs. A.L.N.

Rao Charitable Trust, 216 ITR 697. It was submitted that

from the above judgment, it is clear that an amount upto

15% of the income is exempt from income tax and can be

accumulated. The Assessing Officer reiterated the facts

stated in the assessment order. The learned CIT (Appeals)

following the provisions of section 11 of the Act and the

judgment of the Hon'ble Supreme Court in the case of

A.L.N. Rao Charitable Trust (supra) directed that the

assessee is eligible for exemption of 15% of the gross

receipts and allowed this ground of appeal of the assessee.

The finding of the learned CIT (Appeals) in paras 5.5 to 5.12

of the impugned order are reproduced as under :

" 5 . 5 I have carefully considered the rival submissions. It is seen from the assessment order that the appellant vide his submissions dated 28.12.2012 had claimed that there is a blanket exemption of 15% of the total income from the unspent amount of the trust. In this regard, the appellant had relied upon the decision of the Hon'ble Supreme Court in the case of A.L.N. Rao Charitable Trust reported in 216 ITR 697. The AO did not discuss this issue in the assessment order while rejecting the appellant's claim. During the course of appellate proceedings, the appellant once again referred to the provision of Section 11 of the Income Tax Act and reiterated his reliance on the case of A.L.N. Rao Charitable Trust(Supra). The appellant once again claimed that there is blanket exemption of 15% of total income from the unspent amount for charitable purposes out of the income of the Trust for that previous year. The AO in his counter comments dated 30.08.2013 merely mentioned that the details had already been considered in the assessment order at Page-11. No submissions were given by the AO as to why this case is not applicable in the appellant's case.

The Hon'ble Supreme Court in the case of A.L.N. Rao Charitable Trust has held as under:-

18 "A mere look at section 11(1) (a) as it stood at the relevant time clearly shows that out of the total income accruing to a trust in the previous year from property held by it wholly for charitable or religious purposes, to the extent the income is applied for such religious or charitable purposes, the same will get out of the tax net but so far as the income which is not so applied during the previous year is concerned at least 25 per cent, of such income or Rs. 10,000, whichever is higher, will be permitted to be accumulated for charitable or religious purpose and it will also get exempted from the tax net. Then follows sub-section (2) which seeks to lift the restriction or the ceiling imposed on such exempted accumulated income during the previous year and also brings such further accumulated income out of the tax net if the conditions laid down by sub-section (2) of section 11 are fulfilled meaning thereby the money so accumulated is set apart to be invested in the Government securities, etc., as laid down by clause (b) of sub-section (2) of section 11 apart from the procedure laid down by clause (a) of section 11(2) being followed by the assessee-trust.

To highlight this point we may take an illustration. If Rs. 1,00,000 are earned as the total income of the previous year by the trust from property held by it wholly for charitable and religious purposes and if Rs. 20,000 are actually applied during the previous year by the said trust to such charitable or religious purposes the income of Rs.20,000 will get exempted from being considered for the purpose of income-tax under the first part of section 11(1). So far as the remaining Rs. 80,000 are concerned if they could not be actually applied for such religious or charitable purposes during the previous year then as per section 11 (1) (a) at least 25 per cent, of such total income from property or Rs. 10,000, whichever is higher, will also earn exemption from being considered as income for the purpose of income-tax, that is, Rs. 25,000 will thus get excluded from the tax net. Thus out of the total income of Rs. 1,00,000 which has accrued to the trust Rs. 25,000 will earn exemption from payment of income-tax as per section 11(1) (a), second part. Then follows sub-section (2) which states that the ceiling or the limit or the restriction of accumulation of income to the extent of 25 per cent, of the income or Rs. 10,000, whichever is higher, for earning income- tax exemption as engrafted under section 11(1) (a) will get lifted if the money so accumulated is invested as laid down by section ll(2)(b) meaning thereby, out of the total accumulated income 19

of Rs. 80,000 accruing during the previous year and which could not be spent for charitable or religious purposes by the trust, the balance of Rs. 55,000 if invested as laid down by sub-section (2) of section 11 will also get excluded from the tax net. But for such investment and if section 11(1) alone had applied Rs. 55,000 being the balance of the accumulated income would have been covered by the tax net. Learned counsel for the Revenue submitted that the investment as contemplated by sub-section (2)(b) of section 11 must be investment of all the accumulated income in Government securities, etc., namely, 100 per cent of the accumulated income and not only 75 per cent, thereof. And if that is not done, then only the invested accumulated income to the extent of 75 per cent, will get excluded from income-tax assessment. But so far as the remaining 25 per cent, of the accumulated income is concerned, it will not earn such exemption. It is difficult to appreciate this contention. The reason is obvious. Section 11, subsection (l)(a) operates on its own. By its operation two types of income earned by the trust during the previous year from its properties are given exemption from income-tax:

(i) that part of the income of the previous year which is actually spent for charitable or religious purposes in that year;

and

ii) out of the unspent accumulated income of the previous year 25 per cent, of such total property income or Rs. 10,000, whichever is higher, can be permitted to be accumulated by the trust, earmarked for such charitable or religious purposes. Such 25 per cent, of the income or Rs. 10,000, whichever is higher, will also get exempted from income-tax. That exhausts the operation of section 11(1) (a). Then follows sub-section (2) which naturally deals with the question of investment of the balance of accumulated income which has still not earned exemption under subsection (l)(a). So far as that balance of the accumulated income is concerned, that also can earn exemption from income- tax meaning thereby the ceiling or the limit of exemption of accumulated income from income-tax as imposed by subsection (I) (a) of section 11 would get lifted if additional accumulated income beyond 25 per cent, or Rs. 10,000, whichever is higher, as the case may be, is invested as laid down by section 11(2) after following the procedure laid down therein. Therefore, sub-section 20

(2) only will have to operate qua the balance of 75 per cent, of the total income of the previous year or income beyond Rs. 10,000, whichever is higher, which has not got the benefit of tax exemption under subsection (l)(a) of section 11. If learned counsel for the Revenue is right and if 100 per cent, of the accumulated income of the previous year is to be invested under sub-section (2) of section 11 to get exemption from income-tax, then the ceiling of 25 per cent, or Rs. 10,000, whichever is higher, which is available for accumulation of income of the previous year for the trust to earn exemption from income-tax as laid down by section 11(1) (a) would be rendered redundant and the said exemption provision would become otiose. It has to be kept in view that out of the accumulated income of the previous year an amount of Rs. 10,000 or 25 per cent, of the total income from property, whichever is higher, is given exemption from income-tax by section 11(1) (a) itself. That exemption is unfettered and not subject to any conditions. In other words, it is an absolute exemption. If sub section (2) is so read as suggested by learned counsel for the Revenue, what is an absolute and unfettered exemption of accumulated income as guaranteed by section 11(1) (a) would become a restricted exemption as laid down by section 11(2). Section 11(2) does not operate to whittle down or to cut across the exemption provisions contained in section 11(1) (a) so far as such accumulated income of the previous year is concerned. It has also to be appreciated that subsection (2) of section 11 does not contain any non obstante clause like " notwithstanding the provisions of sub- section (1) ". Consequently, it must be held that after section 11(1)

(a) has full play and if still any accumulated income of the previous year is left to be dealt with, and to be considered for the purpose of income-tax exemption, sub-section (2) of section 11 can be pressed into service and if it is complied with then such additional accumulated income beyond 25 per cent, or Rs. 10,000, whichever is higher, can also earn exemption from income-tax on compliance with the conditions laid down by sub-section (2) of section 11. It is true that sub-section (2) of section 11 has not clearly mentioned the extent of the accumulated income which is to be invested. But on a conjoint reading of the aforesaid two provisions of sections 11(1) and 11(2), this is the only result which can follow. It is also to be kept in view that under the earlier Income-tax Act of 1922, exemption was available to charitable 21

trusts without any restriction upon the accumulated income. There was a change in this respect under the present Act of 1961. Under the present Act, any income accumulated in excess of 25 per cent, or Rs. 10,000, whichever is higher, is taxable under section 11(1)

(a) of the Act, unless the special conditions regarding accumulation as laid down in section 11(2) are complied with. It is clear, therefore, that if the entire income received by a trust is spent for charitable purposes in India, then it will not be taxable, but if there is a saving, that is to say, an accumulation of 25 per cent, or Rs. 10,000, whichever is higher, it will not be included in the taxable income. Section 11(2) quoted above further liberalizes and enlarges the exemption. A combined reading of both the provisions quoted above would clearly show that section 11(2), while enlarging the scope of exemption, removes the restriction imposed by section 11(1) (a), but it does not take away the exemption allowed by section 11(1) (a). On the express language of sections 11(1) and 11(2) as they stood on the statute book at the relevant time, no other view is possible.

In the light of the aforesaid discussion and keeping in view the illustration which we have given earlier, the combined operation of section 11(1) (a) and section 11(2) as applicable at the relevant time would yield the following result:

(i) If the income derived from property held under trust wholly for charitable or religious purposes during the previous year is Rs. 1,00,000 and if Rs. 20,000 therefrom are actually applied to such purposes in India then those Rs. 20,000 will get exempted from payment of income-tax as per the first part of section ll(l)(a).

(ii) Out of the remaining accumulated income of Rs. 80,000 for the previous year, a further sum of Rs. 25,000 will get exempted from payment of income-tax as per the second part of section 11(1) (a). Thus, out of the total income derived from property as aforesaid during the previous year, that is, Rs. 1,00,000, Rs.

45,000 in all will get excluded from the tax net on a combined operation of the first and the second part of section 11(1) (a).

(iii) The aforesaid ceiling of Rs. 25,000 of the accumulated income from property of the previous year, will get lifted under section 11(2) to the extent the balance of such accumulated income is invested as laid down by section 11(2). To take an 22

illustration if, say, an additional amount of Rs. 20,000 out of the balance of accumulated income of Rs. 55,000 is invested as per section 11(2), then this additional amount of Rs. 20,000 of accumulated income will get excluded from the tax net as per section 11 (2).

(iv) The remaining balance of the accumulated income out of Rs. 55,000, that is, Rs. 35,000 if not invested as per sub-section (2) of section 11, will be added to the taxable income of the trust and will not get exempted from the tax net.

(v) If, on the other hand, the entire remaining accumulated income of Rs. 55,000 is wholly invested as per section 11 (2), the said entire amount of Rs. 55,000 will get exempted from the tax net. "

5.7 This decision of the Hon'ble Supreme Court clearly held that there is a blanket exemption with regard to the 25% (now 15%) of gross receipts as per second part of Section ll(l)(a) of the Income Tax Act. This exemption of 25% is not dependent on any other condition except that the trust or society should be registered u/s 12AA of the Income Tax Act. The only issue to be examined here is whether the provisions of section 11(1) (a) and 11(2) have been since amended and if so, whether the aforesaid decision would apply to the amended provisions also?

5.8 The provisions of section ll(l)(a) and 11 (2) as they were in force in the year 1968-69 relevant to AY 69-70, i.e the year to which the case of A.L.N. Rao Charitable Trust (supra) relates have been reproduced in the order of the Hon'ble Supreme Court itself as under:

"These provisions as they stood at the relevant time read as under:

"11. (1) Subject to-the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income--

(a) income derived from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India ; and, where any such income is accumulated for application to such purposes in India, to the extent to which the income so accumulated is not 23

in excess of twenty-five per cent, of the income from the property or rupees ten thousand, whichever is higher,...

(2) Where the persons in receipt of the income have complied with the following conditions, the restriction specified in clause

(a) or clause (b) of sub-section (1) as respects accumulation or setting apart shall not apply for the period during which the said conditions remain complied with--

(a) such persons have, by notice in writing given to the Income-

tax Officer in the 'prescribed manner, specified 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 ten years.

(b) the money so accumulated or set apart is invested in any Government security as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944), or in any other security which may be approved by the Central Government in this behalf."

5.9 The provisions of section ll(l)(a) and 11 (2) as they were in force in the year 2009-2010, i.e the year to which the present case relates are reproduced as under:

"11. Income from property held for charitable or religious purposes.

(1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;

(2) Where eighty-five per cent, of the income referred to in clause

(a) or clause (b) of sub-section (1) read with the Explanation to that subsection is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the 24

previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely -

(a) such person specifies, by notice in writing given to the Assessing Officer in the 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 ten years;

(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5):

Provided that in computing the period of ten years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded:

Provided further that in respect of any income accumulated or set apart on after the 1st day of april, 2001, the provisions of this sub-section shall have effect as if for the words "ten years " at both the places where they occur, the words "five years " had been substituted.

5.10 It is apparent from the reading of provisions referred to above that section11 (a) was almost identical during the AY 69-70 and during AY 20010-11. As regards the provisions of section 11(2) are concerned, even the amended sub section (2) operates qua the balance of 85 per cent, of the total income of the previous year which has not got the benefit of tax exemption under sub-section(l)(a) of section 11. Section 11(2), as amended, does not operate to whittle down or to cut across the exemption provisions contained in section ll(l)(a)so far as such accumulated income of the previous year is concerned. As held by the Hon'ble Supreme Court in the case of A.L.N. Rao Charitable Trust (supra),it has to be appreciated that sub-section (2) of section 11 does not contain any non obstante clause like "notwithstanding the provisions of sub-

section(1)".Consequently, it must be held that after section ll(l)(a) has full play and if still any accumulated income of the previous year is left to be dealt with, and to be considered for the purpose of income- 25

tax exemption, sub-section (2) of section 11 can be pressed into service and if it is complied with then such additional accumulated income beyond 15 per cent, can also earn exemption from income-tax on compliance with the conditions laid down by sub-section (2) of section 11.

5.11 It may also be relevant to refer to the views expressed by 'Chaturvedi and Pithisaria' on this issue. These views read as under:

"Section 11 has undergone amendments more than once. In order to be able to better grasp the provisions as applicable from time to time, it will be better to put the effect of such provisions, except those of sub-section (1A) dealt separately hereunder, vis- a-vis exemption and taxability of income derived from property held under charitable or religious trust, in a tabular form subject-wise. Thus:-

Income derived from property held under trust of other legal obligation wholly for charitable purposes and such income or part thereof is not applied to such purposes in India during the previous year wherein it is derived, but is accumulated for application to such purposes in India: -

1 2 3 4 1922 Act 1961 Act provisions 1961 Act provisions 1961 Act provisions provisions applicable for AY applicable for AY applicable from 1962-63 to 1970-71 1971-72 to 1975-76 1976 onwards Unconditionally exempt Conditionally Conditionally Conditionally exemption - (a) if a exempt - (a) if a exempt - (a) same {s.4(3)(i)}. notice in From No. notice in Form No. as in col. (3), for 10 is given to the 10 is given assessment years 1TO in accordance to the 1TO in 1976-77 to 1982-

with rule 17 and accordance with 83. For and from income so rule 17 and assessment year accumulated {minus income so 1983-84, investment accumulation accumulated or deposit is to be permitted under (b), accumulation made in the forms below} is invested in permitted under (b), or modes specified Government below] is invested in in section 11(5).

securities, or other the Government approved securities or other (b) if conditions at securities, the approved (a) are not fulfilled, accumulation up to securities or is accumulation to a period of ten deposited in Post the extent of 25% years is exempt [s. Office Savings only is exempt. In ll(l)(a), latter part, Bank accounts or computing the read with s. 11(2)}; under the Post 25%, any and Officer (Time voluntary (b) if conditions at Deposits) Rules, contributions 26

(a) are not 1970, or in a referred to in s. 12 fulfilled, banking company to shall be deemed to accumulation to which the Banking be part of the the Regulation Act, income [s. 11(1)(a), extent of 25 per 1949, applies or co- latter part read with cent of the operative land Expl. (1)]. income from the mortgage bank or property or Rs. a cooperative land 10,000/- whichever development bank, is higher, is or deposited in an exempt. In account with an computing the 25 per approved financial cent., the income corporation, the from such accumulation up to a property for the period of ten years is relevant previous exempt [s. 11(2)]. year or the [(b) No such immediately exemption]. preceding previous year, whichever is higher, may be taken [s. 11(1) (a), latter part, read with the Explanation]._____________

5.12 As such, this judgement of the Hon'ble Supreme Court is squarely applicable to the appellant's case. The appellant is thus eligible for exemption of 15% of gross receipts i.e. 15% of Rs.9,85,33,522/- u/s ll(l)(a) of the Income Tax Act. The AO is accordingly directed to allow this exemption of 15% of the gross receipts amounting to Rs.1,47,80,028/-. This ground of appeal is accordingly allowed.

15. After hearing the rival contentions, we do not find

any merit in this ground of appeal of the Revenue. The

learned CIT (Appeals) on proper appreciation of facts in the

light of the provisions of section 11 of the Act and the

judgment of the Hon'ble Supreme Court in the case of

A.L.N. Rao Charitable Trust (supra) rightly decided the

issue in favour of the assessee. The issue is covered in

favour of the assessee by the judgment of the Hon'ble

Supreme Court noted above in the findings of the learned

CIT (Appeals). The learned D.R for the Revenue did not 27

contribute much on this issue and merely relied upon the

order of the Assessing Officer without pointing out any

infirmity in the order of the learned CIT (Appeals) in

allowing the exemption of 15% on the gross receipts. Thus

we do not find any justification to interfere in the order of

the learned CIT (Appeals). This ground of Departmental

appeal is accordingly dismissed.

16. On ground No.2 of the Departmental appeal, the

Revenue challenged the order of the learned CIT (Appeals) in

allowing claim of depreciation, which was subsequently

claimed during the course of assessment proceedings.

17. The learned CIT (Appeals) allowed the claim of

depreciation by following the decision of Hon'ble

Jurisdictional High Court. The Revenue is not aggrieved

against this finding. The only issue raised in the ground

of appeal is that the said claim of depreciation was raised

subsequently during the course of assessment proceedings.

The learned CIT (Appeals) followed the decision of I.T.A.T.,

Chandigarh Bench in the case of Budhewal Cooperative

Sugar Mills Ltd. Vs. The A.C.I.T.(OSD) in ITA

No.1077/Chd/2012 dated 24.5.2013, in which it was held

that the assessee can raise additional ground and make

claim during the assessment proceedings. The Tribunal

followed the decision of the Hon'ble Punjab & Haryana High

Court in the case of CIT Vs. Ramco International. Thje 28

learned CIT (Appeals) also relied upon Explanation-5 to

section 32 of the Act, which provides "for the removal of

doubts, it is hereby declared that the provisions of this sub-

section shall apply whether or not the assessee has claimed

the deduction in respect of depreciation in computing his

total income". The learned CIT (Appeals), therefore, noted

that the depreciation has to be allowed to the assessee

whether it is claimed while computing total income or not.

He has also relied upon the order of the I.T.A.T., Bangalore

Bench in the case of Rakesh Singh Vs. ACIT, 139 ITR 128

in support of his findings. The learned CIT (Appeals),

therefore, following the above decisions and Explanation-5

to section 32 of Income Tax Act directed the Assessing

Officer to allow the claim of depreciation. In principle, the

Revenue did not agitate the allowing of depreciation to the

assessee. Therefore, nothing survives in favour of the

Revenue. Further the claim of depreciation was raised at

the assessment stage, which is supported by the judgment

of the I.T.A.T., Chandigarh Bench in the case of Budhewal

Cooperative Sugar Mills Ltd. (supra), in which following the

decision of the Hon'ble Jurisdictional High Court similar

claim has been allowed. We, therefore, do not find any

merit in this ground of appeal of the Revenue. The same is

accordingly dismissed.

18. In the result, the Departmental appeal is

dismissed.

29

19. In the result the Departmental appeal as well as Cross

Objection by the assessee are dismissed.

Order pronounced in the open court on this 30th day

of April, 2015.

Sd/- Sd/- (T.R.SOOD) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated : 30 t h April, 2015

*Rati*

Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.

Assistant Registrar, ITAT, Chandigarh