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2015 (6) TMI 764 - ITAT CHANDIGARH

2015 (6) TMI 764 - ITAT CHANDIGARH - TMI - Disallowance of excess utilization of income - CIT (Appeals) in allowing credit for 15% of the gross receipts in working the short fall of the amounts spent when the assessee - Held that:- 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 (1995 (10) TMI 2 - SUPREME Court) rightly decided the issue in favour of the .....

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assessment proceedings - CIT(A) allowed claim - Held that:- 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) [2013 (5) TMI 802 - ITAT CHANDIGARH] in which it was held that the assessee can raise additional ground and make claim during the assessment proceedings.

The learned CIT (Appeals) also relied upon Explanation-5 to section 32 of the Act, which provides "for the removal of doubts, it is .....

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s 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. - Decided against revenue. - ITA No. 1093/Chd/2013, CO No. 2/Chd/2014 - Dated:- 30-4-2015 - Bhavnesh Saini, JM And T. R. Sood, AM,JJ. For the Appellant : Shri As .....

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claim of ₹ 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 Offi .....

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#8377; 60,14,3 98/- was debited to the Profit & Loss Account on account of depreciation. After excluding this amount of depreciation from the amount shown as expenditure, the total amount applied during the year was only ₹ 6,78,97,441/- . There was thus a short fall of ₹ 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 be .....

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n the computation. Therefore, the short fall in application of income would amount to ₹ 98,41,655/- and not ₹ 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 .....

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aritable 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 .....

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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 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 accorda .....

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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 ₹ 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 .....

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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 expire .....

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under : "Vide the next ground of appeal the appellant is agitating against the set off of excess expenditure incurred during the previous years against the surplus for the year under appeal. As per the provisions of Section 11 of the Income Tax Act, 1961, a trust has to apply its income up to 85% towards the objectives of the trust to get accumulation / set apart of income of the remaining 15% of the income. By taking this into consideration, the appellant is claiming excess utilization of .....

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the previous year, the appellant has excess utilization of expenditure in earlier years amounting to ₹ 2,57,90,420/-. Out of which, a sum of ₹ 98,41,655/- was adjusted against the short utilization of income for the year under appeal and the balance has been taken/carried to next year. For the purpose of the adjustment of excess utilization of income in earlier years against the surplus for the current year, various Hon'ble Courts have decided/held the issue in favour of the app .....

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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 earl .....

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nking reported in 264 ITR p. 110 (Bom.) wherein the Assessing Officer did 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 ca .....

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ble 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 .....

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64 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, e .....

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st 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 ₹ 2,46,21,680/- as against Nil Income wherein the AO negated the claim of the appellant of excess utilization of income in earlier yea .....

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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 (348 ITR 344). The reason being facts of the present case are different from the case as cited above, because in the said case the expenses were more than the receipts i.e. there was ac .....

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e 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 cited above the assessee has incurred debt in carrying out charitable objects in earlier years. 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 .....

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o 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 .....

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19941 72972492 105.46 85% 14159342 Nil 23481016 37640358 A.Y. 07-08 71646870 63035045 87.98 85% 4564198 Nil 37640358 42204716 A.Y. 08-09 85439902 66264816 77.56 85% (-) 6359101 Nil 42204716 35845615 A.Y. 09-10 92001695 68146246 74.07 85% (-) 10055195 6771010 35845615 25790420 A.Y. 10-11 98533522 73911839 75.01 85% (-) 9841655 6014398 25790420 15948765 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 .....

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an 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 ( .....

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d amount to ₹ 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 ₹ 9.22.4S2/- out of total shortfall of ₹ 10055195/- during AY 09-10. There would still be a shortfall of ₹ 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 .....

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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 ₹ 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 ₹ 59,770 arising out of the excess of expenditure over income during the previous year relev .....

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aring a deficit of ₹ 74.97 lakhs. In the revised return filed by the asses see on April 3, 1986, the deficit was increased to ₹ 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 "Pr .....

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e 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 c .....

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ble 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 th .....

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dal [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 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 .....

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een 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 .....

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d forward from the earlier 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 ap .....

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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 alt .....

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artmental 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 o .....

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ble institution is not charged to tax to the 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 .....

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ad 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 Ac .....

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

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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 ₹ 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 p .....

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me from property or ₹ 10,000, whichever is higher, will also earn exemption from being considered as income for the purpose of income-tax, that is, ₹ 25,000 will thus get excluded from the tax net. Thus out of the total income of ₹ 1,00,000 which has accrued to the trust ₹ 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 .....

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ion (2) of section 11 will also get excluded from the tax net. But for such investment and if section 11(1) alone had applied ₹ 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 .....

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n 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 ₹ 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 ₹ 10,000, whichever is higher, will also get exempted from inco .....

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d if additional accumulated income beyond 25 per cent, or ₹ 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 (2) only will have to operate qua the balance of 75 per cent, of the total income of the previous year or income beyond ₹ 10,000, whichever is higher, which has not got the benefit of tax exemption under subsection (1)(a) of section 11. If learned counsel for the R .....

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w that out of the accumulated income of the previous year an amount of ₹ 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 sectio .....

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as 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 ₹ 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 sect .....

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ccumulated in excess of 25 per cent, or ₹ 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 ₹ 10,000, whichever is higher, it will not be incl .....

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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 ₹ 1,00,000 and if ₹ 20,000 therefrom are actually applied to such purposes in India then those ₹ 20,000 will get exempted .....

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econd part of section 11(1) (a). (iii) The aforesaid ceiling of ₹ 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 illustration if, say, an additional amount of ₹ 20,000 out of the balance of accumulated income of ₹ 55,000 is invested as per section 11(2), then this additional amount of ₹ 20,000 of accumulated i .....

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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 11(1)(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 i .....

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owing 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 in excess of twenty-five per cent, of the income from the property or rupee .....

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ted 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 11(1)(a) and 11 (2) as they were in force in the year 2009-2010, i.e the year to whi .....

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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 previous year but is accumulated or s .....

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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 accumu .....

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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(1)(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 11(1)(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 se .....

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tion 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, .....

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Y 1962-63 to 1970-71 1961 Act provisions applicable for AY 1971-72 to 1975-76 1961 Act provisions applicable from 1976 onwards Unconditionally exempt {s.4(3)(i)}. Conditionally exemption - (a) if a notice in From No. 10 is given to the 1TO in accordance with rule 17 and income so accumulated {minus accumulation permitted under (b), below} is invested in Government securities, or other approved securities, the accumulation up to a period of ten years is exempt [s. 11(1)(a), latter part, read with .....

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with rule 17 and income so accumulated accumulation permitted under (b), below] is invested in the Government securities or other approved securities or is deposited in Post Office Savings Bank accounts or under the Post Officer (Time Deposits) Rules, 1970, or in a banking company to which the Banking Regulation Act, 1949, applies or cooperative land mortgage bank or a cooperative land development bank, or deposited in an account with an approved financial corporation, the accumulation up to a p .....

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latter part read with Expl. (1)]. 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 ₹ 9,85,33,522/- u/s 11(1)(a) of the Income Tax Act. The AO is accordingly directed to allow this exemption of 15% of the gross receipts amounting to ₹ 1,47,80,028/-. This ground of appeal is accordingly allowed. 15. After hearing the rival contentions, we do .....

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or the Revenue did not 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 (A .....

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