2025 (5) TMI 1297 - AT - Income Tax

Charitable trust - Working of accumulation u/s. 11(1)(a) - AO allowed 15% accumulation u/s. 11(1)(a) after reducing the administrative establishment expenses from the gross receipts/income - AO worked out accumulation u/s. 11(1)(a) of the Act by taking net receipt in place of gross receipt/income - HELD THAT - DR has pointed out that the assessee has earned certain interest income from bank deposits. The question here is not about income earned by the assessee but about the expenditure as to whether the administrative and establishment expenses incurred by the assessee shall be treated as part of application of income for charitable activities. The assessee nonetheless under the relevant provisions of section 11 is entitled to accumulate 15% of its income for subsequent application and the mode of accumulation has also been provided under the relevant provisions of sec. 11 of the Act and one of the mode is by deposit of the amount with a scheduled bank also. Therefore there is no dispute relating to the deposit of the amount in the bank or earning of interest in this case. The proposition of law in the case of Birla Janahit Trust 1990 (8) TMI 5 - CALCUTTA HIGH COURT has been decided in favour of the assessee therefore we do not find any reason to interfere with the order of the Ld. CIT(A) on the above issue and the same is hereby upheld. CIT(A) in allowing the accumulation u/s. 11(2) as against the action of the AO in denying the same on the ground that no specific purpose for such accumulation has been mentioned in form No. 10 by the assessee and therefore it did not specify the conditions laid down u/s. 11(2) - CIT(A) has held that the assessee had made clear statement and set out the purpose for which the income is to be set apart. CIT(A) has relied upon various case laws to the effect that it was enough if the assessee mentioned a specific object regarding accumulation of income and it is not necessary to give a detailed plan as to how and in what manner the said expenditure will be incurred. Even in the case of Trustees of Singhania Charitable Trust 1991 (7) TMI 16 - CALCUTTA HIGH COURT relied upon by the Ld. DR has specifically held that a charitable trust in no circumstances can apply its income whether the current or accumulated for any purpose other than the objects for which it stands. It has been further held that the accumulation u/s. 11(2) of the Act requires specification of the purpose out of multiple purposes for which the trust stands. What has been held in the said case is that the assessee trust cannot simply claim to accumulate income for objects of the trust in general in blanket manner. The aforesaid case law is therefore supports the case of the assessee. In view of this there is no merit in the submissions of the Ld. DR. No infirmity in the order of the Ld. CIT(A) on this issue and the same is hereby upheld. Appeal of the revenue stands dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Tribunal considered two core legal issues in the appeal filed by the revenue for the Assessment Year 2014-15 under the Income Tax Act, 1961:

(a) Whether the administrative and establishment expenses incurred by a charitable trust should be deducted from gross receipts to determine the net income for calculating the allowable accumulation of 15% under Section 11(1)(a) of the Act, or whether the accumulation should be computed on gross receipts without such deduction;

(b) Whether accumulation of income under Section 11(2) of the Act can be allowed when the Form No. 10 filed by the trust does not specify a detailed or specific purpose for accumulation, and whether a general or single stated purpose suffices to meet the statutory requirements.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deductibility of Administrative and Establishment Expenses in Computing 15% Accumulation under Section 11(1)(a)

Relevant Legal Framework and Precedents:

Section 11(1)(a) exempts income derived from property held under trust wholly for charitable or religious purposes, to the extent such income is applied to such purposes, and allows accumulation or setting apart of up to 15% of such income for application to such purposes in India. The key question is whether "income" for this purpose means gross receipts or net receipts after deducting administrative and establishment expenses.

The CBDT Circular No. 5-P(LXX-6) dated 19.06.1968 clarifies that "income" should be understood in its commercial sense, i.e., book income before application or appropriation, and that expenditure incurred for the purposes of the trust is application of income, not a deductible expense for computing accumulation.

Judicial precedents include:

• The Apex Court in 'The Addl. Commissioner of Income Tax vs. The A.L.N. Rao Charitable Trust' clarified the mechanism of exemption and accumulation under Section 11(1)(a), emphasizing that accumulation is based on income derived from property before application.
• The Calcutta High Court in 'CIT vs. Birla Janhit Trust' held that expenditure on salaries and miscellaneous expenses for carrying out the objects of the trust is application of income and must be considered as such, not deductible from gross income for accumulation purposes.
• The Special Bench of Mumbai ITAT in 'Bai Sonabai Hirji Agiary Trust' held that accumulation under Section 11(1)(a) must be calculated on gross income, not net income after revenue expenditure, since such expenditure is application of income.
• ITAT Kolkata in 'Kanehialall Lohia Trust vs. ITO' reiterated that accumulation should be computed on gross receipts, and administrative expenses are application of income.
• Various other High Court and ITAT decisions, including those from Madhya Pradesh High Court and Lucknow High Court, have affirmed that expenses incurred for charitable purposes cannot be deducted from gross income for calculating accumulation.

Court's Interpretation and Reasoning:

The Tribunal carefully examined the submissions and the assessment order. It found that the Assessing Officer (AO) erred in reducing administrative and establishment expenses from gross receipts before computing the 15% accumulation. The Tribunal emphasized that such expenses are part of the application of income for charitable purposes and not deductible expenses for the purpose of calculating accumulation under Section 11(1)(a).

The Tribunal relied extensively on the CBDT Circular, Supreme Court rulings, and authoritative judgments of various High Courts and ITAT benches, which consistently interpret "income" in Section 11(1)(a) as gross receipts before application, and treat administrative expenses as application of income.

The Tribunal also noted that the assessee had consistently computed accumulation on gross receipts in earlier and subsequent assessment years, and the AO had accepted this approach in those years, underscoring the principle of consistency.

Key Evidence and Findings:

The facts revealed that the assessee is a charitable society engaged in micro-financing, registered under Section 12A and approved under Section 80G. The AO had deducted Rs. 1,74,95,075/- of administrative and establishment expenses from gross receipts before computing accumulation. The assessee contended that accumulation must be computed on gross receipts.

The Tribunal found no evidence that the administrative expenses were incurred for earning income from dividend or other non-charitable purposes, which could disqualify them from being treated as application of income.

Application of Law to Facts:

Applying the legal principles and precedents, the Tribunal held that the administrative and establishment expenses were part of the application of income for charitable purposes, and therefore, accumulation under Section 11(1)(a) must be computed on gross receipts without deducting such expenses.

Treatment of Competing Arguments:

The revenue argued that the AO's approach was correct and that expenses should be deducted before computing accumulation. The revenue cited the Calcutta High Court decision in 'Birla Janhit Trust' to contend that expenses incurred for earning income from dividend are not charitable application.

The Tribunal observed that the revenue failed to demonstrate that the expenses were incurred for earning dividend income or any non-charitable purpose. The Tribunal distinguished the cited case and found the administrative expenses in the present case to be bona fide application of income for charitable purposes.

Conclusion:

The Tribunal upheld the CIT(A)'s order allowing accumulation of 15% on gross receipts, rejecting the AO's deduction of administrative expenses. The ground of appeal on this issue was dismissed.

Issue 2: Validity of Accumulation under Section 11(2) without Specific Purpose Mentioned in Form No. 10

Relevant Legal Framework and Precedents:

Section 11(2) allows a trust to accumulate income not applied for charitable purposes, provided certain conditions are met, including furnishing a statement in Form No. 10 specifying the purpose and period (not exceeding five years) for which the income is accumulated.

Judicial precedents include:

• The Gujarat High Court in 'CIT (Exemption) v. Bochasanwasi Shri Akshar Purshottam Public Charitable Trust' held that lack of detailed declaration in Form No. 10 regarding specific purpose is not fatal if the purpose is within the objects of the trust.
• The Hon'ble ITAT Chandigarh in 'M/s Rogi Kalyan Samiti vs. ACIT' held that vague or general objects in Form No. 10 should not lead to denial of accumulation benefit if accumulation is for trust's objects.
• The Delhi High Court in 'CIT vs. Hotel & Restaurant Association' and 'OIT (Exemption) vs. Daulat Education Society' held that detailed plans are not necessary if purposes are consonant with trust objects.
• The Calcutta High Court in 'Director of Income Tax (Exemptions) vs. Trustees of Singhania Charitable Trust' emphasized that the trust must specify the purpose of accumulation and that accumulation cannot be for all objects in a blanket manner but must be for specific objects.

Court's Interpretation and Reasoning:

The Tribunal examined the facts and found that the assessee had specified a single specific objective in Form No. 10, namely "relief, rehabilitation and medical care of poor and weaker section," rather than listing all general objectives. The Tribunal held that this was a clear and specific purpose within the ambit of the trust's objects.

The Tribunal relied on the above judicial pronouncements to conclude that the statutory requirement of specifying the purpose of accumulation in Form No. 10 is satisfied if the stated purpose is specific and in line with the trust's objects. The Tribunal rejected the AO's contention that the purpose was vague or general and that accumulation should be denied.

The Tribunal also noted that the assessee had consistently been allowed accumulation under Section 11(2) in earlier and subsequent assessment years on similar grounds, reinforcing the principle of consistency and estoppel against the revenue.

Key Evidence and Findings:

The assessee's Form No. 10 contained a specific stated purpose for accumulation. The AO had rejected accumulation on the ground that the purpose was not specific enough. The Tribunal found the AO's observation incorrect and unsupported by the record.

Application of Law to Facts:

Applying the legal principles, the Tribunal held that the assessee had complied with the requirements of Section 11(2) by furnishing Form No. 10 with a specific purpose for accumulation, and thus was entitled to claim accumulation of Rs. 1,90,00,000/-.

Treatment of Competing Arguments:

The revenue relied on the Calcutta High Court's decision in 'Trustees of Singhania Charitable Trust' to argue that the purpose of accumulation was not sufficiently specified and the matter should be remanded for fresh evidence. The Tribunal distinguished this case on facts, noting that in the present case, a specific purpose was stated and supported by the trust deed.

The Tribunal rejected the revenue's plea for remand and held that the assessee's claim was valid and the AO's denial was unwarranted.

Conclusion:

The Tribunal upheld the CIT(A)'s order allowing accumulation under Section 11(2) on the basis of the specific stated purpose in Form No. 10, dismissing the revenue's appeal on this ground.

3. SIGNIFICANT HOLDINGS

On the first issue, the Tribunal held:

"The administrative and establishment expenses incurred by the appellant are part of the charitable application. Therefore, the AO was incorrect in reducing such an amount from the gross income derived from trust to determine accumulation as per Section 11(1)(a) of the Act."

The Tribunal reaffirmed the principle that "accumulation under Section 11(1)(a) of the Act should be allowed on gross receipts and not on net receipts after deduction of administrative expenses," following the CBDT Circular and authoritative judicial pronouncements.

On the second issue, the Tribunal observed:

"It is the common ratio of law that once assessee has accumulated income with a specific purpose and such purpose is specified in the main objects of the trust, then the AO cannot deny such accumulation of income merely for the reason that purpose specified in Form No. 10 is vague and general in nature."

The Tribunal emphasized that "the purpose or purposes to be specified cannot be beyond the objects of the trust," and that "plurality of the purposes of accumulation is not precluded but it depends on the precise purpose for which the accumulation is intended."

Finally, the Tribunal dismissed the revenue's appeal on both grounds, confirming that:

• Accumulation of 15% under Section 11(1)(a) must be computed on gross receipts without deduction of administrative and establishment expenses, as these are applications of income for charitable purposes;
• Accumulation under Section 11(2) is permissible when the trust specifies a clear and specific purpose in Form No. 10, even if it is not elaborately detailed, provided it is within the objects of the trust.