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Income Tax Officer-II (2) , Lucknow Versus M/s R.K.K.R. Foundation and vice-versa

2010 (9) TMI 1224 - ITAT LUCKNOW

C.O. No.42/Luc/09 (in I.T.A. No.253/Luc/09) - Dated:- 9-9-2010 - SHRI H. L. KARWA, HON BLE VICE PRESIDENT AND SHRI N. K. SAINI, ACCOUNTANT MEMBER Revenue by : Shri Praveen Kumar, D. R. Assessee by : Shri Roopesh Jain, C. A. ORDER PER N. K. SAINI: The appeal by the department and the Cross Objection by the assessees are directed against the order dated 26/02/2009 of the learned CIT(A)-I, Lucknow. 2. In the departmental appeal, the following grounds have been raised: 1. The Ld. CIT(A) has erred in .....

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and when need of doing so arises with the prior permission of the Hon'ble Bench. 2.1 The department has also raised the following additional grounds: 3. On the facts of the case, the trust has transferred a sum of ₹ 2,10,00,000/- to the three trusts in contravention of Rule 177 of Delhi Schools Education Rules 1973. Therefore, the transfer of this amount being prohibited by law could not be allowed as an legitimate deduction and cannot be treated as the application of fund. 4.(i) Witho .....

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circumstances of the case, the Ld. Commissioner of Income Tax (Appeal) has erred in not considering the applicability of sec. 10(23C)(vi) of the IT Act. 1961 and denying of exemption to the assessee. 3. In the Cross Objection the assessee has raised the following grounds: 1. That the CIT (A) erred on facts and in law in holding that, since, there is no income from letting out of assets on hire, the appellant is not entitled to depreciation thereon. 2. That the CIT (A) erred on facts and in law .....

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reof. 4. The facts relating to the issue raised by the department, in brief, are that the assessee is a charitable society registered u/s 12AA of the I.T. Act, 1961 (in short, the Act) with the main object to promote education and filed its return of income on 30/11/2005 in the status of body of individual showing NIL income. The return was accompanied with the statement of assessable income, audit report in Form No. 10B, balance sheet and income and expenditure account. Later on case was select .....

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come over expenditure was shown at ₹ 32,95,450/- which was within the limit of 15% of the income of the trust and which otherwise qualified for exemption u/s 11(1) of the Act. The Assessing Officer also pointed out that the assessee had shown a sum of ₹ 2,10,00,000/- under the head donation which had been debited towards expenditure side in the income and expenditure account. He asked the assessee to furnish the details of the persons/institutions to whom such donation had been given .....

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ount of depreciation by observing as under: 1. For outright exemption the trust or institution has to apply at least 85% of its income for charitable or religious purpose [Sec-II (1) (a)] 2. Where the unutilised amount out of 85% as mentioned above is accumulated and set a part and certain conditions are fulfilled, the assessee is entitled for exemption even without actual utilisation. In other words such accumulation shall be deemed to be utilization for the purpose of Section 11(1) [Section 11 .....

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refers to clause (a) or (b) of Sub Sec (1) of Section 11. The inference is thus clear that the restriction imposed through clause (d) of Sub Sec. (3) of Sec 11 has reference to the 85% of income mentioned in Sec. 11(1) which is obviously the income of the current year. Therefore, the conclusion is clearly arrived at that any amount of income of the current year is credited or paid to any trust or institution will not be considered as utilization. Therefore, the impact of C.B.D.T. Inst. No. 1132 .....

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e provision of section 56 to 59 it is seen that deduction for depreciation is admissible in respect of only those assets which are let on hire and income from which is chargeable to tax under other sources. Admittedly the assessee has no income from letting of assets on hire and therefore, the amount of depreciation is not allowable in computation of income nor it can he considered to have been applied or utilized for charitable purpose. 5. The assessee carried the matter to learned CIT(A) and t .....

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on under section 11 of the Income Tax Act, 1961, merely because the donee did not spend the donations during the year of receipt itself. On this issue, the appellant has submitted several case laws which are as under: (i) Ellerman Lines Ltd. Vs. CIT 82 ITR 913 (SC) (ii) TP Kapadia Vs. CIl 87 ITR 511 (Mys.) (iii) Tata Iron & Steel Co. Ltd. Vs. NC Upadhyay 96 ITR 1 (Bom) (iv) MM Annaih Vs, CIT 76 ITR 582 (Mys) (v) CIT Vs. Official Liquidator Tax LR 445 (Raj) (vi) CIT Vs. B.M.Edward India Sea F .....

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n (2) and sub-section (3) and proviso to sub-section (3A) of section 11 by the Finance Act, 2002 to provide that the donation made by a registered trust to another charitable trust would not be considered as application of income if the same has been made out of the funds accumulated by the registered trust in earlier years as per the provisions of section 11(2) of the Act. The aforesaid Circular No. 8 dated 27.08.2002 issued by the CBDT on provisions relating to the Direct Taxes in Finance Act, .....

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ohibits donations out of the accumulated income of a trust but allows donations out of current year s receipts. It is also obvious that this amendment in clause (d) of section 11 (3) has superseded Instruction no. 1132 dated 5.1.1978 relied upon by the AO. The facts are that the appellant has made the donations out of its current year's incorne, Therefore, the addition is hereby deleted. 5.2 The learned CIT(A) considered the issue relating to depreciation as academic in nature by observing t .....

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g that it goes to the root of the matter and strongly supported the order of the Assessing Officer. He further submitted that the assessee accumulated unutilized current years income also. The learned CIT, D. R. contended that any amount relating to income of current year, credited or paid to any trust or institution, was not to be considered as utilization for the purpose of utilization of the income u/s 11(3)(d) of the Act, therefore, the Assessing Officer rightly made the addition. The learne .....

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de before the authorities below and further submitted that the provisions contained in clause (d) to sub section (3) of section 11 of the I.T. Act only bars giving donations to other charitable trusts out of its accumulated income and does not bar giving of donations out of current income. He further submitted that the Explanation appended to clause (d) sub-section (2) in sub-section (3) and proviso in sub-section (3A) of section 11 of the Act were simultaneously introduced by the Finance Act, 2 .....

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ation of income if the same has been made out of the funds accumulated by the registered trust in the earlier years as per the provisions of section 11(2) of the Act. He further submitted that as per Instruction No.1132, dated 05.01.1978 issued by the C.B.D.T., a charitable trust would not lose exemption under section 11 of the Act if it donates a sum of money to another charitable trust for utilization by the donee trust towards its charitable purposes and that it shall be proper utilization of .....

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f the accumulated income shall not be treated as application of income and will be taxed accordingly. It was contended that the donation of ₹ 2,10,00,000/- had been made out of the receipt of ₹ 4,88,45,928/- received by the assessee during the relevant previous year and it was embedded in the expenditure of ₹ 4,55,50,478/- incurred during the relevant previous year. A reference was made to page No.26 of the assessee s compilation which is the copy of audited Income and Expendit .....

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f current year's income or even income accumulated u/s 11(1)(a) of the Act. The reliance was placed on the recent judgment of Hon'ble Delhi High Court in the case of DIT(E) Vs. Bagri Foundation, order dated 02/07/2010 in ITA No.19/2000, copy of the same was furnished during the course of hearing. As regards to the decision of Hon'ble Jurisdictional High Court relied by the learned CIT, D. R. in the case of CIT Vs. Roshan Lal 98 ITR 349, the learned counsel for the assessee submitted .....

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ant previous year for such purposes. The learned counsel for the assessee submitted that the profits of the year for relevant previous year cannot by any stretch of imagination, be considered as part of accumulated profits for the purposes of Section 11(2) of the Act. As such the decision of Hon'ble Allahabad High Court relied by the learned CIT, D. R. is not applicable to the facts of the assessee s case. 9. As regards to the additional ground raised by the department, the learned counsel f .....

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e, the same shall not be admitted. Reliance was placed on the following case laws: (i) Samaj Kalyan Parishad, Modinagar vs. Income Tax Officer Central Circle-XXVI, New Delhi [2007] 105 ITD 29 (Delhi) (SB) (ii) Inspecting Assistant Commissioner (Assessment) Range-IVC, Mumbai vs. Saurashtra Trust [2007] 106 ITD 1 (Mum.) (SB) 10. In his rejoinder, the learned CIT, D.R. submitted that the dropping of the proceedings u/s 263 of the Act has no bearing as regards to the additional ground raised by the .....

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be said that facts are already available on record and no further enquiry/ investigation is required. In that view of the matter, we are of the view that the additional grounds raised by the department cannot be admitted at this stage particularly when the Assessing Officer has not discussed this issue at all in the assessment order dated 24/12/2007 and facts are not available on record as such fresh enquiry/investigation is required. 12. As regards to the merit of the case is concerned, the Ass .....

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ssessing Officer himself admitted in the assessment order dated 24/12/2007 at page No. 2 that a sum of ₹ 2,10,00,000/- has been debited towards expenditure side in the income and expenses account under the head donation which is a part of sums aggregating to ₹ 4,55,50,478/- debited in the income and expenditure account. Therefore, it cannot be said that the assessee gave the donations to three institutions (mentioned in para 4 of the this order) out of the accumulated funds, this fac .....

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read with section 11(2) and section 11(1)(a) of the Act is concerned, the Hon'ble Delhi High Court in the case of Director of Income Tax (Exemption) vs. Bagri Foundation, adjudicated the issue in detail vide decision dated 2nd July, 2010 in I.T. A.No.19/2010 and their Lordships observed in para 7 to 15 as under: 7. Section 11(1)(a) is as under: "11. Income from property held for charitable or religious purposes - (1) Subject to the provisions of sections, 60 to 63, the following income .....

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y." Thus the income applied for charitable purposes is not to be included in the total income for the relevant year. A Division Bench of this Court, of which one of us was a member, in Commissioner of Income- Tax v. Shri Ram Memorial Foundation (2004) 269 ITR 35 has held that when a donor trust which is itself a charitable and religious trust donates its income to another trust, the provisions of Section 11(1)(a) can be said to have been met by such donor trust and the donor trust can be sa .....

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pt from inclusion in the total income of the Assessee trust for the relevant year. The emphasis is on utilizing the income in the relevant year and accumulation is permitted only to a maximum extent of 15%. As long as such accumulation is not more than 15%, such accumulation is also exempt from inclusion in the total income. However, if more than 15% of the income is accumulated, under Section 11(1)(a) the same would not be exempt from inclusion in the total income for the relevant year. 8. No c .....

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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 1O, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter." .....

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ed to another trust. The question which arises is whether such prohibition/embargo is only on the accumulations in excess of 15% with which Section 11(2) deals or extends even to accumulation to the extent of 15% under Section 11(1)(a). 10. Ordinarily, the "explanation" having been appended to Section 11 (2), is intended to explain 11(2) only and not Section 11(1). There is nothing to indicate that the explanation though placed after sub-Section (2) is intended to explain Section 11(1) .....

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e enactment governs the scope of the "explanation". In M.K. Salpekar Vs. Sunil Kumar Shamsunder Chaudhari AIR 1988 SC 1814, the scope of the "explanation" was construed again in the light of the scheme of the enactment. In M/s. Patel Roadways Ltd. Vs. M/s. Prasad Trading Co. AIR 1992 SC 1514, the question was whether the explanation to Section 20 of the CPC was to clause (a) only. The Supreme Court decided, taking into consideration the circumstances and the history of the le .....

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of the section, is generally meant to explain the entire section. 12. The question whether the conditions prescribed in Section 11(2) with respect to accumulation in excess of 15%, apply also to accumulation to the extent of 15% under Section l1(I)(a) arose for consideration in Addl. Commissioner of Income Tax v. A.L.N. Rao Charitable Trust [1995] 216 ITR 697 (S.C.). The Supreme Court explained the scheme of Section II (1 )(a) and Section II (2) as under: "A mere look at Section 11(1)(a) a .....

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le 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 II 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 .....

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)(a) also, then what is an absolute and unfettered exemption of accumulated income guaranteed by Section 11(l)(a) would become a restricted exemption as laid down in Section 11 (2). Section 11(2) was held to not operate to whittle down or to cut across the exemption provision contained in Section 11(1)(a). In this regard, it was further noticed that Section 11 (2) does not contain any non obstante clause like "notwithstanding the provisions of the sub-Section (1)". Consequently, it was .....

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g the restriction imposed by Section 11(1)(a) was held not to take away the exemption allowed by Section 11(1)(a). 14. The same view was followed in S.RM.M.CT.M. Tiruppani Trust v. The Commissioner of Income- Tax (1998) 230 ITR 636 (S.C.) 15. The "explanation" appended after Section 11(2) is nothing but an additional condition attached to accumulation in excess of 15% permitted under Section 11(2). We are unable to hold it as a condition on accumulation up to 15% as provided for in Sec .....

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orial 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 1I(1)(a) itself. There is however rationale for imposing the restriction as contained in the "explanation" (supra) to accumu .....

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trictions 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 in excess of 15% under Section 11(2) and not to accumulations upto 15% under Section 11(l)(a). The explanation is not found to be intended to take away something from the accumulation upto 15% permitted without any conditions whatsoever under Section 11(1)(a). 14. From the ratio laid dow .....

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