2025 (2) TMI 325 - AT - Income Tax

Deduction u/s 11(1) - method of determining the eligible income - computation of the 15% accumulation u/s 11(1)(a) should be based on gross receipts or net income - main activities and purpose of establishing the institution is to serve the disabled persons with affordable prices of various artificial limbs - HELD THAT - Relevant sale of artificial limbs in the concessional rates has to be treated as income derived from the property held under the trust. It is settled facts on the record that the assessee has manufactured the artificial limbs from the property held in the trust. One cannot deny the above facts on record. It is relevant to point out that the main purpose of existence of the institution is to serve the disabled persons by providing the limbs at affordable purpose. Without this purpose there is no existence of this institution and also it operates as nodal agency on behalf of the GOI. Therefore in our considered view the revenue generated out of the manufacturing activities has to be treated as eligible income for the purpose of accumulation u/s 11(1) of the Act. It cannot be considered as gross income. Further what is relevant is the income available for the purpose of applying the same for the purpose of charitable purpose. We intend to explain the above aspect by an example Let s say the institution has earned Rs.1000 from the property in the trust and also undertakes certain additional services to generate income for the trust wherein it generate gross sales of Rs.2000 and incurs expenditures of Rs.1500. Assessee has actually utilized the income of trust more than the 85% of the income earned by the assessee during the year. The stand of the lower authorities on this issue is not as per the various judicial precedents. Respectfully following the decision of the co-ordinate bench in the case of Mary Immaculate Society 2015 (6) TMI 1149 - ITAT BANGALORE we hold and direct the AO that the accumulation u/s. 11(1)(a) of the Act is to be allowed at 15% of gross receipts as claimed by the assessee. Ground no 2 and 3 raised by the assessee are allowed. Treatment of loans received under the ADIP and ADIP-SSA schemes as part of the income for the purposes of Section 11(1)(a) - Assessee has included the loan granted thru ADIP funds and ADIP-SSP schemes cannot be included for the purpose of income u/s 11(1) of the Act. This loan may be utilized by the assessee for the charitable purpose and it can be considered as application of income during the year of utilization and the assessee has to claim them as excess utilization and can adjust the same in the year of generation of income. It cannot be claimed as application of income for the purpose of section 11(1) for the year under consideration. In the result we are inclined to accept the findings of CIT(A) and AO. Accordingly the ground no 4 raised by the assessee is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

(1) Whether the assessee's computation of the 15% accumulation of income under Section 11(1)(a) of the Income Tax Act should be based on gross receipts or net income.

(2) Whether the loans received under the ADIP and ADIP-SSA schemes should be included in the income for the purpose of claiming the 15% deduction under Section 11(1)(a).

(3) Whether the assessee's method of including loans as income and their subsequent application as charitable expenditure is valid under the Income Tax Act.

ISSUE-WISE DETAILED ANALYSIS

1. Computation of 15% Accumulation of Income

Relevant legal framework and precedents: The legal framework under Section 11(1)(a) of the Income Tax Act allows charitable trusts to accumulate 15% of their income. The controversy centers on whether this should be computed on gross receipts or net income. Precedents considered include decisions from the ITAT Bangalore and the Special Bench of ITAT Mumbai, which have interpreted "income" for the purpose of accumulation as gross receipts.

Court's interpretation and reasoning: The Tribunal found that the assessee's activities, including the manufacturing and sale of artificial limbs, are integral to its charitable purpose. Therefore, the gross receipts from these activities should be considered for the 15% accumulation under Section 11(1)(a).

Key evidence and findings: The Tribunal noted that the assessee's operations are primarily funded through sales and grants, and these are intertwined with its charitable objectives.

Application of law to facts: The Tribunal applied the law to include gross receipts in the computation of the 15% accumulation, aligning with the assessee's contention and previous judicial interpretations.

Treatment of competing arguments: The Revenue argued for net income computation, citing the incidental nature of the assessee's business activities. However, the Tribunal found the activities to be central to the assessee's charitable purpose.

Conclusions: The Tribunal concluded that the assessee is entitled to compute the 15% accumulation based on gross receipts.

2. Inclusion of Loans in Income

Relevant legal framework and precedents: The issue revolves around whether loans received under specific government schemes can be treated as income for the purpose of Section 11(1)(a). The Tribunal considered the nature of these funds and their intended use.

Court's interpretation and reasoning: The Tribunal held that loans should not be included as income for the purpose of computing the 15% accumulation, as they are liabilities and not income.

Key evidence and findings: The Tribunal noted that the loans were specifically recouped by the government in subsequent years, confirming their nature as liabilities.

Application of law to facts: The Tribunal applied the principle that only income, not liabilities, should be considered for accumulation under Section 11(1)(a).

Treatment of competing arguments: The assessee argued that the loans were treated as grants due to their recoupment. However, the Tribunal maintained that their initial classification as loans was correct.

Conclusions: The Tribunal concluded that loans should not be included in the income for the purpose of the 15% accumulation.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The eligible income for the purpose of section 11(1) of the Act is the income derived from the property held under the trust, including gross receipts from its charitable activities."

Core principles established: The Tribunal established that for the purpose of Section 11(1)(a), the income of a charitable trust should be computed on gross receipts, not net income, when the activities are integral to its charitable purpose.

Final determinations on each issue: The Tribunal allowed the assessee's appeal in part by permitting the computation of the 15% accumulation on gross receipts while excluding loans from the income computation for this purpose.