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Deputy Commissioner of Income-tax (Ex) , Versus M/s. Rashtrothana Parishat,

Exemption u/s.11 and 12 - Revenue disputed only regarding deficit being based on figures after considering 15% of the gross income as exempt - Held that:- 15% of the gross income or receipts have to be first deducted before computing the surplus or deficit arising to the assessee for a year. See Addl. CIT v. ALN Rao Charitable Trust [1995 (10) TMI 2 - SUPREME Court ]

Eligibility for carry forward of such deficit - rectification of mistake - Held that:- Allowing or not allowing carry .....

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N. V. VASUDEVAN, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER Appellant by : Shri. Raghavan. M, Advocate Respondent by : Shri.Sunil Kumar Agarwala, JCIT ORDER PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : These are appeals filed by Revenue directed against an order dt.25.02.2014 of CIT (A) -V, Bengaluru, for the impugned assessment years. 02. Grounds taken by the Revenue are as under : 1) The CIT(A) has erred in interpreting the provisions of section 11(1)(a) and coming to the co .....

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come in the same year itself and in such case the unutilized/ applied portion of the income varying from 15% to 0% of income, as the case may be, shall be allowed as income accumulated/ set apart u/s 11(1)(a). 3) The CIT(A) has erred in coming to a conclusion that the assessee is entitled to claim 15% of the income as standard deduction u/s 11(1)(a) and therefore, the expenditure incurred in excess of 85% of the income can be allowed as excess application of income/ deficit/ loss and the same is .....

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5% of the income cannot be treated as excess application of income/ deficit/ loss, but the same would come under the purview of actual application/ utilization of income which is mandatory for the purpose of claiming exemption of income u/s 11 of the I.T. Act. 6) The CIT(A) has failed to appreciate the fact that the assessee cannot enjoy double benefit, firstly, in the form of exemption of income by way of set apart/ accumulation at the rate of 15% of income u/s 11(1)(a) and secondly, by way of .....

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lose the benefit of set apart of 15% of income as a standard deduction as it will not be in a position to show investments in the prescribed modes to the extent of 15% of such unavailable income. 8) The CIT(A) has erred in placing reliance on the decision of Hon ble High Court of Gujarat in the case of CIT Vs. Shri Plot Swetamber Murti Pujak Jain Mandal [211 ITR 293] without appreciating the fact that the Hon ble High Court had no occasion to deal with the issue of allowing expenditure incurred .....

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come-tax Act, 1961 ( the Act in short), and eligible for claiming exemption u/s.11 and 12 of the Act. During the impugned assessment years it had filed nil return and had also claimed carry forward of deficit. AO did not allow the claim of depreciation as a part of its application of income since, according to him the entire amount of capital expenditure incurred by the assessee for acquiring the assets on which depreciation was claimed were already allowed as utilisation. Though there remained .....

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e Income Rent (after M. Tax) 23389123 28459252 Others 52210288 83707703 Gross income 75599411 112166955 15% ( u/s.11(1)(a) 11339912 16825043 Balance (85%)* 64259499 95341912 Expenditure Revenue expenditure 50985934 63967450 (incl.depreciation on assets (8964755) (11612545) Capital (asset) expenditure 48321761 47754189 Loan repayment 6400000 Total application 105707695 111721639 CF Surplus /deficit 41448196 16379727 05.As per the CIT (A) assessee had not reduced the deficits available to it from .....

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60503 Expenditure Revenue expenditure 50985934 63967450 (incl.depreciation on assets (8964755) (11612545) Utilisation on assets (incl WIP) 48321761 47754189 Loan repayment 6400000 Total expenditure 105707695 111721639 Surplus /deficit 478331639 25061136 He directed the AO to allow the deficit as per the above table. It appears, CIT (A) allowed the claim of depreciation to the assessee. 06.Now before us, the Ld. DR submits that 15% accummulation allowed u/s.11(1)(a) of the Act was not a statutory .....

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llowance given by the CIT (A) to the assessee while working out its net income / deficit. Its grievance is only regarding such deficit being based on figures after considering 15% of the gross income as exempt. Hon ble Apex Court in the case of Addl. CIT v. ALN Rao Charitable Trust (216 ITR 697)had clearly elucidated how Section 11(1)(a) is to be construed. Relevant observations of the Hon ble Apex Court is given hereunder : "A mere look at section 11(1) (a) as it stood at the relevant time .....

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urpose 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 .....

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m being considered for the purpose of income-tax under the first part of section 11(1). So far as the remaining ₹ 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 ₹ 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 .....

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money so accumulated is invested as laid down by section 11(2)(b) meaning thereby, out of the total accumulated income 19 of ₹ 80,000 accruing during the previous year and which could not be spent for charitable or religious purposes by the trust, the balance of ₹ 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 ₹ 55,000 being the balance of the accumulated i .....

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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 accumulat .....

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ich has still not earned exemption under subsection (1)(a). So far as that balance of the accumulated income is concerned, that also can earn exemption from incometax meaning thereby the ceiling or the limit of exemption of accumulated income from income-tax as imposed by subsection (1) (a) of section 11 would get lifted 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 pr .....

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the ceiling of 25 per cent, or ₹ 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 ₹ 10,000 or 25 per cent, of the total income from property, whichever is higher, is given exemption .....

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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 subsection (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) o .....

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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 ₹ 10,000, whichever is higher, is taxable under section 11(1) (a) of the Act, unless the special conditions regarding accumula .....

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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 app .....

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m of ₹ 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, ₹ 1,00,000, ₹ 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 ₹ 25,000 of the accumulated income from property of the previous year, will get lifted under sectio .....

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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 ₹ 55,000 is wholly invested as per section 11 (2), the said entire amount of ₹ 55,000 will get exempted from the tax net. Thus it is clear from the judgement of Hon ble Apex Court that 15% of the gross income or receipts have to be first deducted before computing the surpl .....

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ward of deficit, it was held as under at paras 11 to 13 of the order dt. 16.02.2009 of this Tribunal in the case of TMA Pai Foundations s case (supra) : 11. With regard to the second issue, the learned counsel submitted that the stand of the revenue that the assessee did not claim the carry forward in the original return and the claim was made for the first time through application u/s.154 of the Act which was time barred and there is no provision under the Income tax to allow carry forward of t .....

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fit. Surplus is being determined for the purpose of section 11 and not u/s.28. While processing the assessment for the Assessment Year 2006-07 the Assessing Officer raised the issue and in order to enable the Assessing Officer to ascertain the excess application in the preceding year the assessee filed application u/s.154 to enable the Assessing Officer to quantify such excess application in the relevant year. The assessee filed the application u/s.154 up to assessment years 2004-05 in fact to e .....

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ssee, submitted that the excess application as claimed for the earlier years up to 2004-05 cumulatively was to be considered for set off against the surplus for the Assessment Year 2006-07. The counsel for the assessee submitted surplus for the purpose of section 11 is required to be considered after allowing application towards objects of the trust. It is only the surplus over the expenditure is required to be assessed. Undisputedly in the instant case of the assessee, the trust had excess appl .....

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e head profit and gains of the business u/s.28 for which provision the benefit of carry forward loss was relevant. The assessee is a charitable trust for education purpose and has no profit motive. Surplus is required to be determined for the purpose of section 11 and the provisions of section 28 has no application significantly the provisions of section 70 of the Act also cannot be brought in. The surplus is computed after taking into account the net outgoing of the relevant year and earlier ye .....

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no income for the relevant assessment year is liable to be taxed as exemption continues to be in operation for the relevant assessment years. Hence the learned counsel for the assessee submitted the appeal by the revenue is to be dismissed. 13. Considering the rival submissions we are of the view that all the appeals preferred by the revenue is to be allowed. The assessee is relying on the decision of the Bombay High Court in the case of Institute of Banking (supra) whereas the revenue is relyi .....

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