TMI Blog2010 (7) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... sing the restriction as contained in the “explanation” to the accumulation of up to 15% also when there is no such restriction to donating the entire income of a year to another charitable trust. If the legislature intended to completely ban/discourage inter se donation between trusts, it would have changed the position as existing in law - even if the donations by the Assessee herein were to be out of accumulations from previous years’ and not out of surplus reserves, the same would still not be liable to be included in the total income as assessed by the Income Tax Officer – decided in favor of assessee - 19/2010 - - - Dated:- 2-7-2010 - Appellant through: Ms. P.L. Bansal with Mr. Paras Chaudhary Mr. Anshul Sharma, Advocates. Respondent through: Mr. Salil Aggarwal with Mr. Prakash Kumar, Advocates. CORAM:- HON'BLE MR. JUSTICE BADAR DURREZ AHMED HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW RAJIV SAHAI ENDLAW, J. 1. This appeal has been preferred against the order dated 27th February, 2009 of the Income Tax Appellate Tribunal (ITAT) dismissing the appeal of the Revenue against the order dated 18th June, 2007 of the Commissioner of Income Tax (Appeals) [CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid including the donation of Rs.25 lacs to BLB Trust to have been made out of excess of income over expenditure and not out of amount accumulated under Section 11(1)(a) of the Act. The appeal was accordingly allowed and the Assessee was held to have not violated the provisions of Section 11(1)(a) or 11(2)(a) of the Act. 5. The ITAT affirmed the order of the CIT (A) and held that the Revenue has not been able to make out any case to controvert or rebut the finding of the CIT(A) of the donation in question having been made by the Assessee out of free reserves and income for the year under consideration and not out of accumulations. 6. The Revenue in the appeal before us inter alia raised a question as to whether the "Explanation" appended under Section 11(2) and inserted by the Finance Act, 2002 w.e.f. 1st April, 2003, applies to accumulations mentioned in Section 11(1)(a) of the Act. The following question was framed for adjudication:- "Whether the explanation after Section 11(2) is applicable in respect of the accumulation upto fifteen percent referred to in Section 11(1)(a) also, as distinct from the accumulation out of eighty-five percent as referred to in Section 11(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich we are not concerned at present. However, the explanation appended w.e.f. 1st April, 2003 to Section 11(2) is as under:- "Explanation. - Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under Section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of Section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter." 9. What follows is that the amount accumulated cannot be donated to another trust. However, the said explanation does not place a total embargo on donations by one trust to another. It does not prohibit the trust from donating its entire income in a relevant year to another trust, as is the law as noticed in the Division Bench judgment in Shri Ram Memorial Foundation (supra). The embargo is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rust [1995] 216 ITR 697 (SC). The Supreme Court explained the scheme of Section 11 (1)(a) and Section 11(2) as under:- " A mere look at Section 11(1)(a) as it stood at the relevant time clearly shows that out of total income accruing to a trust in the previous year from property held by it wholly for charitable or religious purpose, to the extent the income is applied for such religious or charitable purpose, 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% 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 procedur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in Shri Ram Memorial Foundation aforesaid. The legislature did not do so. Even after the insertion of the "explanation", if a trust donates its entire income for a year to another charitable trust, it would still be entitled to exemption under Section 11(1)(a). It defies logic as to why such donations cannot be permitted out of 15% accumulation permitted under Section 11(1)(a) itself. There is however rationale for imposing the restriction as contained in the "explanation" (supra) to accumulations in excess of 15%. Such accumulations, but for the conditions imposed in Section 11(2) and in the explanation aforesaid, would have been eligible to be taxed. One of the conditions in Section 11(2)(a) is that the purpose for which accumulation in excess of 15% is being made is to be notified; another condition is of the accumulation being permitted for a period not exceeding 10 years; yet another condition is as to the modes in which the accumulation can be invested. There are no such restrictions on accumulation under Section 11(1)(a). The scheme of the section indicates that the additional condition by way of the aforesaid "explanation" is also intended to apply only to accumulations ..... X X X X Extracts X X X X X X X X Extracts X X X X
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