BACKGROUND MATERIAL ON CHARITABLE TRUST TAXATION …agra-icai.org/images/charitabletrust.pdf · ON CHARITABLE TRUST TAXATION OWNER INCOME TAX ACT BY. SH. KAPIL GOEL (FCA, LLB) PH:-

Charity taxation Income Tax Act, 1961

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BACKGROUND MATERIAL

ON CHARITABLE TRUST

TAXATION

OWNER INCOME TAX ACT

BY. SH. KAPIL GOEL

(FCA, LLB)

PH:-

9910272806/9310272806

[email protected]

mailto:[email protected]


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The Chartered Accountant Study Circle Tax Case (Appeal) No.593 of 2011 13.2.2012 (Madras

High Court)

Issue for consideration before Madras High Court

"Whether on the facts and circumstances of the case, the Tribunal was right in directing to grant

the assessee the renewal of its approval u/s.80G of the Act without considering the material fact

that the activities of the assessee are not as per Section 2(15) of the Act?"

Aims and Objects of Assessee/Petitioner Society

2. The assessee-trust is a Society known as "The Chartered Accountants Study Circle".

The aims and objects of the Society among other things are as follows:

"a. To conduct periodical meetings on professional subjects;

b. To publish books, booklets, etc. on professional subjects;

c. To organise Seminars, Conventions, Conferences, etc., as may be deemed fit from

time to time;

DIT(E) Rejection order : Section 2(15) amended proviso: Commercial activity test applied

3. The assessee-trust filed an application in Form 10G to the Director of Income-tax

(Exemptions), Chennai for grant of renewal under Section 80G of the Income-tax Act. The said

request was rejected on the ground that the assessee was publishing and selling books of

professional interest to be used as a reference material by the general public as well as the

professionals in respect of Bank Audit, Tax Audit, etc. and its activities are commercial in nature

and will fall within the amended provision of Section 2(15) of the Income-tax Act. Being

aggrieved by the said order, the assessee preferred an appeal to the Income-tax Appellate

Tribunal.


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Revenue‟s Plea before Madras High Court challenging ITAT order

5. On a challenge to the said order, Mr.T.Ravikumar, learned standing counsel for the

Revenue, would submit that in terms of first proviso to Section 2(15) of the Income-tax Act, in

the event the activities of the trust involve the carrying on of any activity in the nature of trade,

commerce or business or any activity of rendering any service in relation to any trade, commerce

or business, it shall not be construed to be a charitable purpose. Hence, the assessee in question

shall not fall within the definition of Section 2(15) of the Act.

Madras High Court Order on aforesaid factual background

6. We have considered the above submission. The question, therefore, is whether the

publication of books of professional interest to be used as a reference material by the general

public including the professionals in respect of Bank Audit, Tax Audit, etc. would be construed

to be a charitable purpose.

Therefore, it cannot be held that the activities of the assessee-trust in publishing and selling

books of professional interest, which are meant to be used as a reference material even by the

general public as well as the professionals in respect of Bank Audit, Tax Audit, etc., cannot be

construed to be one of commerce in nature. The finding of the Tribunal in this regard requires

no interference.

10. That apart, under Section 12AA of the Income-tax Act, while considering the

application, the Officer has to satisfy about the genuineness of activities of the trust or the

institution and for that reason, he may also make such enquiries as he deem it necessary in that

behalf. In the given case, there is nothing to doubt about the genuineness of the activities of the

assessee-trust in question.

Bombay High Court in The Chembur Gymkhana INCOME TAX APPEAL

NO.5568 OF 2010 February 13, 2012.

In the light of stated assessee‟s objects, the Assessing Officer held


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that the dominant object of the assessee is to provide amenities and

facilities to the members of the Club. Consequently, the assessee

was held to be a mutual organization. The income of the assessee

was computed at Rs.13.64 lakhs .The Commissioner (Appeals) further noted that

the assessee provided for the sale of alcohol in its restaurant. This activity, it was

held, is not of a charitable nature nor is it incidental to any other main activity.

Since the true nature and character of the assessee was held to be that of a mutual

concern, the Commissioner (Appeals) held that the Assessing Officer was justified

in taxing interest receipts in the hands of the assessee.

ITAT order on section 2(15): sports promotion vs GENERAL PUBLIC

UTILITY

In appeal, the Tribunal has reversed the findings of the Commissioner (Appeals).

The Tribunal noted that the definition of the expression “charitable purpose” in

Section 2(15) includes inter alia, “any other object of general public utility

Tribunal relied upon the decision of the Andhra Pradesh High Court in the case of

Andhra Pradesh Police Welfare Society1 and of this Court in the case of Breach

Candy Swimming Bath Trust2 and held that „general public‟ does not mean

necessarily the entire public. Reliance was also placed on the judgment of the

Madras High Court in Ootacamund Gymkhana Club.3 The activities of the

assessee, the Tribunal held, are to encourage or promote and to advance games,

sports, athletic activities and cultural activities which are of a general public utility

The Tribunal held that the Club has a variety of members drawn from a diverse

cross section of the public at large and is not meant for a group or a private

family.This was held to meet the test spelt out by the Andhra Pradesh High Court

in the case of Andhra Pradesh Riding Club;4 since it was open to every member

of the public to become a member of the club.

BHC order approving ITAT order


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Since the decision of the Supreme Court in CIT vs. Surat

Art Silk Cloth Manufacturers Association,5 it is a settled

principle of law that the primary or dominant purpose of the

institution must be charitable. The test to be applied is whether

the object which is pursued is of the main or primary object or

whether it is ancillary to a dominant object. These principles were

reiterated by the Supreme Court in Director of Income Tax Vs.

Bharat Diamond Bourse.6 In Commissioner of Income Tax vs.

Gujarat Maritime Board,7 the Supreme Court, after adverting to

its earlier decision, interpreted the words “any other object of public general

utility” in Section 2(15)….

In the present case, it is evident from the material before

the Tribunal that the assessee under its memorandum as amended

established that the aims and objects are to provide for general

public utility, grounds and buildings, convenient, desirable or

necessary for games and sports both indoor and outdoor and to

promote, manage or assist in the promotion or management of all

forms of social intercourse of athletic sports, pastimes and/or

cultural and educational activities for its members. There is a

finding of fact that the assessee is providing sports facilities as a

part of its activities consisting of badminton, table tennis, billiards,


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cricket and skating among others. On these facts, the

primary issue which has been decided by the Tribunal must be

answered by holding that the assessee for Assessment Year 199697

fulfilled the definition of the expression “charitable organization” in

Section 2(15). The first question of law would, accordingly, have

to be answered in the affirmative. ((1) Whether in the facts and circumstances of

the case and in law, the Tribunal was right in holding that the assessee performs a

charitable purpose within the meaning of Section 2(15) of the Income Tax Act,

1961)

Baun Foundation Trust WRIT PETITION NO.1206 OF 2010 IN THE HIGH

COURT OF JUDICATURE AT BOMBAY 27 March 2012

3. Counsel appearing on behalf of the Petitioner submits that the

fundamental test which is required to be adopted is whether the object of the

trust is to make a profit or contrariwise whether the trust exists solely for

philanthropic purposes. Learned counsel submitted that it is the dominant

nature of the purpose for which the trust exists that has to be borne in mind and

if that is found to be philanthropic, any other object merely ancillary or incidental

to the primary or dominant purpose would not detract from the true nature or

character of the trust. Consequently, it was urged that the Chief Commissioner

has misapplied himself in law. On the other hand counsel appearing on behalf of

the Revenue has supported the order passed by the Chief Commissioner


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The Chief Commissioner has not doubted the genuineness of the

trust or the fact that it is conducting a hospital. Even if the figures which are

taken into account by the Chief Commissioner are to be had regard to, it is

evident that the activity of a chemist shop is an activity which is incidental or

ancillary to the dominant object and purpose which is to run a hospital. The

Chief Commissioner has accepted that the surplus which is earned from the

operation of a chemist shop is utilized for the purposes of the hospital. A hospital

must of necessity have a section or department where medicines can be dispensed and it is not

uncommon for a medical hospital which exists even for philanthropic purposes to have a chemist

shop where pharmaceutical products are sold. This is a facility which is intended to be used

predominantly by patients and their relatives. Though the members of the general public are not

prohibited from using the facility, the crucial question to ask or the test to answer is whether the

establishment of a chemist shop is incidental or ancillary to the dominant object and purpose

which is to set up and conduct a hospital for philanthropic purposes. As a matter of fact, Section

10(23C) permits the accumulation of income upto a certain stipulated amount over a stipulated

period. In our view, the Chief Commissioner of Income Tax has clearly misapplied himself in

law by having regard to a clearly ancillary or incidental activity and elevating it to the status of

the dominant purpose for which the hospital has been established. Running the chemist shop

in the present case is not the dominant object or purpose of the trust. Nor would the figures as

disclosed indicate that the nature of the activity has assumed such a dominating or

overwhelming importance so as to cast doubt on the true nature and character of the hospital

which is conducted by the Petitioner. The Chief Commissioner has acted contrary to the

judgments of the Supreme Court which hold the field consequent upon which the impugned

order would have to be set aside

IN THE HIGH COURT OF JUDICATURE AT MADRAS

Tax Case (Appeal)No.641 of 2011 Sarvodaya Ilakkiya

Pannai

(i) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal

was right in law in holding that the registration granted to the assessee under section 12A(a)

would hold good, even though the assessee's main object in publication, purchase and sale of


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books which are not definitely charitable activity and the activities are purely a commercial

venture with profit motive is valid ?

(ii) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate

Tribunal was right in law in not considering the aggregate value of the receipts for the

assessment years 2008-09, 2009-10 and 2010-11 exceeds the limit specified in Second proviso

and hence first proviso does not apply to the facts of the case is valid ?

On a challenge to the said order, the Appellate Tribunal has found that the order of the

Commissioner was not justified as the power to cancel could be only traced out to section

12AA(3) and in the absence of any activity carried on by the trust contrary to the objects, the

registration cannot be revoked. With that finding, the Tribunal has allowed the appeal filed by

the Society. Challenging the said order, the present appeal has been filed.

HELD

6. In order to apply the above provision, there must be a specific finding by the Commissioner

that the activities of the trust or institution are not genuine or not being carried out in

accordance with the objects of the trust or institution as the case may be. The question is,

whether the order of the Commissioner of Income Tax could fall under the powers conferred on

him under section 12AA(3) of the Act. The only reason given by the Commissioner of Income

Tax to cancel the registration is that the activities of the trust were not charitable and therefore,

the trust is not entitled to exemption under section 11 and consequently, cancelled the

registration granted under section 12AA.

7. It is not as if that the registration was granted without considering the objects of the

trust in question…9. Under section 12AA, the Commissioner is empowered to grant or refuse

the registration and after granting registration, would be empowered to cancel and that too,

only on two conditions laid down under section 12AA(3) of the Act. Whether the income

derived from such transaction would be assessed for tax and also whether the trust would be

entitled to exemption under section 11 are entirely the matters left to the assessing officer to

decide as to whether it should be assessed or exempted.

10. The Tribunal had allowed the case of the assessee with the finding that none of the

conditions under section 12AA(3) were violated and therefore, the satisfaction which was

arrived at by the Commissioner of Income Tax was not justified. In that view of the matter, we


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find no reason to interfere with the order of the Tribunal and accordingly, both the questions

require no further consideration.

IN THE HIGH COURT OF JUDICATURE AT MADRAS

Tax Case Appeal No.643 of 2011 Arulmigu Sri Kamatchi

Amman

"1.Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal

was right in law in holding that the assessee trust is entitled to registration under Section 12AA

of the Act, even though the trust not entitled to claim exemption since the trust has twin

objectives which are both charitable and religious in nature?

2. Whether on the facts and in the circumstances of the case, the Income-tax Appellate

Tribunal was right in law in directing the Commissioner of Income-tax to grant registration

under Section 12AA of the Act to the assessee trust, even though the assessee not established two

parameters i.e., genuineness of the trust and charitable activities carried out in terms of the trust

deed in terms of the provisions of Section 12AA[1][b][ii] of the Income Tax Act, 1961?"

HELD

5.We have carefully considered the above submission. For the purpose of making an application

under Section 12AA, the applicant must apply in Form 10. The said Form prescribes the format

of the notice of accumulation of income to be given by charitable and religious trusts under

Section 11[2] of the Act. For the purpose of availing the benefit of Section 11, registration is

required. …6.From a reading of the above, it is clear that the income derived from the property

held under trust wholly for charitable or religious purposes, shall not be included in the total

income of the Trust. Therefore, the said provision would be applicable to both the Trusts

established with the object of charitable as well as religious purposes. Therefore, Section 12AA

of the Act does not make any difference between the Trusts created with the object of charitable

and religious purposes

Karnataka High Court Rama Krishna Sewa Ashram: ITA 248/2010: …The

parliament intended to pass on the benefit of exemption of income tax to

charitable and religious institutions. We are really surprised at the attitude

of these authorities who are over technical in denying the benefit to


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deserving institutions, which are rendering laudable services to rural

masses. By not granting the tax exemption benefit which they deserve the

authorities have hampered said social activities of the trust and they are

made to waste their precious time, energy and money in fighting this

litigation….unfortunately the person who took decision to file this appeal

before this court are wasting precious time of the trust which could have

been used in the social service….this attitude on the part of the department

cannot be countenanced. National Litigation policy 2011 to be kept in mind

before filing appeals…Rs 1 lac costs imposed on department

Karnataka High Court In case of Karuna Health care society: ITA 77/2011:

The order of DIT(E) gives us an impression that he was not concerned about

the charitable activity carried on by the trust as such. He had no doubt in his

mind that they were carrying on charitable activity. In the absence of any

finding of siphoning of funds on part of trust for non charitable

activity/personal activity, no adverse view should be taken at registration

stage. Both the DIT(E) and ITAT missed the object with which the

parliament has enacted these provisions to offer an incentive to persons who

are well placed in life to take up charitable activities. Cost of Rs 25000

imposed on Department

ITA

No.701 of 2010 (Commissioner of Income Tax-II, Chandigarh Vs. M/s Surya

Educational & Charitable Trust)

Commissioner of Income Tax Vs, Red Rose

School 2007 (163) TAXMAN 19


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Gaur Brahmin Vidya Pracharini Sabha, Gaukaran Road, Rohtak Charity Sec.

12AA vs 80G

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Sonepat Hindu Educational and Charitable Society Vs.

Commissioner of Income Tax and another (2005) 278 ITR 262 (P&H)

Pinegrove International Charitable Trust Vs.

Union of India (UOI) and others (2010) 327 ITR 73 (P&H) Merely, because

there are some surplus with the respondent, this should not be a ground to deny

the registration under Section 80G (5)(vi) of the Act.

M/s State Urban Development Society Date of Decision: 19.10.2011

ITA No. 210 of 2011 The argument that the assessee has

shown the entire amount as its income in the profit and loss account as not

determinative of nature as the mere entries in the books of account do not decide

the nature of receipt and its taxability. The Tribunal also held that even if the

amount is not disbursed due to imposition of model code of conduct by the

Election Commission, the surplus at the end of the year cannot be included as

income under Sections 11 and 12 of the Act. If the grant is not includable as

income the surplus at the end of the year remaining unspent is not of any

relevance. In respect of the Bank interest, the Tribunal found that the assessee has

to keep funds in separate accounts and such interest is treated as part of the grants

under respective Schemes to which said funds relate. Hence, with the said findings,

the orders of the Assessing Officer and Commissioner of Income Tax (Appeals)

was set aside. Learned counsel for the appellant vehemently argued that the


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Society itself has reflected the grants received from Central and State Governments

as income. Therefore, it is not open to the assessee to take a stand that such grants

are not the income. The said aspect has been considered by the Tribunal, wherein,

it has been held that reflection in the profit and loss account towards the income is

not determinative. The entries in the books of account do not decide the nature of

receipts. Since, the grants have been received by the assessee for disbursement and

keeping in view the fact that the same cannot be utilized for any other purpose such

as distribution for the poverty in furtherance to the object of the Schemes, it cannot

be treated as income of the assessee. As per the finding of fact recorded by the

Tribunal, no substantial question of law arises in the present petition.

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “C” NEW DELHI Heart Care Management ITA Nos. 5241 &

55242/Del/11

U/s 12AA(1)(b) & 80-G of the I.T. Act. 31-5-2012.

5.1. A plain reading of the objects does not reflect that any object is noncharitable

in nature. The main issue raised by the DIT(E) is in respect of holding of

conference of doctors at a five star hotel and the fact that the donors are

pharmaceutical companies and some of them have deducted TDS. Adverse

inference has also been drawn from extravagance of expenses the fact that the

conference was of doctors and there is no benefit to the common public. Except

holding of this conference and corresponding donation, the charitable objects, as

per the trust deed, have not been challenged by the DIT(E). If the objects of the

trust are duly incorporated and charitable in nature and conform to the various

rules and regulations; the assessee trust

maintains its books of account and the genuineness of the account is

established by the society, in normal circumstances the registration should be

granted to the Trust u/s 12AA and 80-G of the I.T. Act. The scheme of the Income-

tax Act provides – (i) procedure at the time of registration and thereafter (ii) rules

for assessment of trusts. Since at the time of registration assessee trust is newly

formed, therefore, only the objects of the trust and the accounts of the trust and

activities of the trust till registration are to be inquired into. In the given facts and

circumstances the conference organized by the assessee is authorized by the


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objects of the Trust; there is no ban or embargo whether conference can be held in

five star hotel or not. Therefore,

the adverse inference drawn by the DIT(E) is not proper inasmuch as the trustees

will have a discretion to organize the conference at a place and in the manner

which is befitting into the participants and objects. Consequently, we are unable to

draw any adverse inference only because the conference was organized in a five

star hotel.

5.2. Coming to the issue about some of the donors being pharmaceutical

companies and having deducted TDS. In our view while accepting donation, a

donee has limitations and if the donor offers the donation in cash kind or in a

manner which it thinks legal, generally the donee would not refuse the donation.

This is so because TDS can be claimed by trust towards the tax paid. It has not been disputed that for these amounts only donation receipts

were issued. There was no loss to trust as on application of income i.e. utilization

of donation, the TDS becomes refundable to it. Only because donors are

pharmaceutical companies and they deducted TDS, will not convert a donation

into a commercial receipt on the basis of presumptive inferences. As long as the

assessee has credited the amount as donations and issued donation receipts, in our

view, the same cannot be held to be commercial receipt.

5.3. Assessee has demonstrated that no cess or fee was charged from the

participants of conference, therefore, there is no contravention of sec. 2(15).

Besides, even if the delegates are charged with some fee it goes to the defraying of

the expenses on conference, thus, on this issue also nothing turns against the

assessee.

5.4. DIT(E)‟s apprehension that the donors may claim it as the business expenditure in their

assessment, is premature and do not concern the assessee and will be decided by their AO. In any

case, if there is any issue about application of expenses, the same can be verified by the AO

while framing the regular assessment on the trust.

IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA ‘A’ BENCH, KOLKATA

Santiban Rural Innovation and Supporting Vocational Institute I.T.A. No.:

1284 and 1285/ Kol. / 2011 February 17, 2012 We have noted that the learned

Commissioner did not have any issues so far as objects of the assessee institution


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were concerned, and the only reason for which the registration was declined was

that the persons who were given remuneration had donated those amounts to the

assessee institution. We are unable to find legally sustainable merits in this

approach. Just because the persons who were given the honorarium have donated

those amounts back to the assessee institution does not, by itself, vitiate

genuineness of the activities. It is not the case of the Commissioner that the

payments were bogus or that no activities were carried out, or there is anything else

to indicate that activities are not genuineness. The fact of recipients of honorarium

having donated back these amounts to the assessee institution, in our humble

understanding, does not in any manner show that the activities of the assessee

institution are not genuineness Learned Commissioner was apparently swayed by

the considerations which were not germane to the legal framework in which the

matter was being examined, Its worth noting that the learned Commissioner has

used the expression „doubtful‟ to describe his take on genuineness of assessee‟s

activities, and not rejected them as „not genuineness‟ straightaway, but even these

doubts, in our considered view, were ill conceived, since application of honorarium

received by the trainers cannot be determinative of the genuineness of its activities

as a whole. In view of these discussions, as also bearing in mind entirety of the

case, we set aside the impugned order and direct the learned Commissioner to

grant registration under section 12 AA to the assessee appellant. The assessee gets

the relief accordingly.


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Delhi high court:NASSCOM: charity taxation The next question

which arises is regarding the applicability of Section 28(iii) of the

Act ; If this test is applied to the present case it will be seen that in

consideration of the receipt of the annual subscription fees, the

assessee-trust has not been shown to have performed any specific

services to the members. Whereas the annual subscription fees is

a recurring receipt, receivable by the assessee-trust by mere

efflux of time irrespective of whether any services are rendered

or not to the members, what is contemplated in Section 28(iii) is

the receipt of fees from particular members to whom specific

services have been rendered by the trust. The annual

subscription fee is paid merely to keep the membership alive on

yearly basis. The distinction between the two being clear, and in

the absence of any evidence to show that the assessee receives

fees from the members as a “quid pro quo” for specific services

rendered to them, we are unable to hold that the Tribunal was

wrong in holding that the annual subscription fees was not

assessable under the section. The substantial question of law is

thus answered in the affirmative, in favour of the assessee and

against the Revenue.

IN THE HIGH COURT OF KARNATAKA AT BANGALORE

DATED THIS THE 17th DAY OF OCTOBER 2011

PRESENT

THE HON’BLE MR. JUSTICE N. KUMAR

AND

THE HON’BLE MR. JUSTIC RAVI MALIMATH

ITA NO. 248OF 2010


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BETWEEN:

1. The Director Of Income TAX

Exemptions. C.R. Building

Queens Road Bangalore

2. The Income Tax-Officer

Exemptions-3

C.R. Building. Queens Road

Bangalore. … APPELLANTS

(By Shri K.V. Aravind For

Sri M.V. Seshachala, Advocates)

AND:

Sri Ramakrishna Seva Ashrama.

Pavagada … Respondent

(By Sri.S. Parthasarathi, Advocate)

From the aforesaid definition clauses it is clear that the

voluntary contribution received by a trust and credited wholly

or partly for Charitable or religious purposes or by the

institution established wholly or partly for the said purpose

would constitute income within the aforesaid definition

Section-II deals with income from property held for charitable

or religious purposes. It declares that subject to the provisions

of sections60to63, the income tax mentioned in the aforesaid

provision shall not be included n the total income of the

previous year of the person, in respect of the income. In other

words if such income do not fall in one of those categories


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mentioned in the said section, the recipient of the said income

(assesses) is liable to pay tax under the Act.

Section 11(1) (d) reads as under :-

“Income in the form of voluntary contributions made with a

specific direction that they shall form part of the corpus of the

trust or institution.”

The word corpus is not defined under the Act. We do not find

any judgment explaining the meaning of‘corpus’. In the

chambers 21sCentury Dictionary the meaning of the

word’corpus’has been given as under :

1) body of writings, eg: by a particular author, on a particular

topic etc:,

2) a body of written and /or spoken material for language

research:

3) anatomy any distinct mass of body tissue that may be

distinguished from its surroundings:

Latin: meaning ‘body’.

In the law Lexicon of P. Ramanatha Aiyar, 2nd Edition reprint-

208 the meaning of the word’ corpus’ is given as under :

“A Body; human body; an artificial body created by

law; as a corporation, a body or collection of laws; a material

substances; something visible and tangible; as the subject of a

right; something having legal position as distinguished from an

incorporeal physical substance as distinguished from


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intellectual conception; the body of estate; or a capital of an

estate”

The word’ corpus’ is used in the context of Income Tax Act. We

have to understand the same in the context of a capital,

opposed to am expenditure. It is a capital of an assesses; a

capital of an estate; capital of a trust; a capital of an institution.

Therefore, if any voluntary contribution s made with a specific

direction, then it shall be treated as the capital of the trust for

carrying on its charitable or religious activities. Then such an

income falls under section 11(d) of the I.T. Act and is not liable

to tax. Therefore, it is not necessary that a voluntary

contribution should be made with a specific direction to

treat it as corpus. If the intention of the donar is to give that

money to a trust which they will keep it in trust account in

deposit and the income from the same is utilized for

carrying on a particular activity, it satisfies the definition

part of the corpus. The assesses would be entitled to the

benefit of exemptions from payment of tax levied.

In fact the Bombay High Court in the case of Trustees of

Kilachand Devchand Foundation vs. commissioner of Income

Tax, Bombay city-I, Bombay reported in ITR 1988 (172)

382dealing with the said voluntary contribution made for a

charitable purpose, held that for being eligible for exemption.

the donations must be voluntary and of a capital nature. That

cannot be applied to charitable or religious purposes if the

income there of they must be so applied. The contribution

made expressly to the capital or corpus of trust fall within the

purview of sub-section (2) of section12. Therefore, such


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contributions cannot be deemed to be the income derived from

the property for the purpose of section11 will not apply.

The Rajasthan High Court in the case of Sukhdeo Charity

Estate Vs. Income Tax Officer (1991) 192 ITR 615 (RAJ)

dealing with such contributions held that ,the principles

enunciated in various cases when applied to the present case,

leave no room for debate that the intention of the donar-trust

as well as done trust was to treat the money as capital to be

spent for Ladnu Water Supply Scheme. It is of no consequence

whether the amount had since been paid to the State

Government or kept in the account of the above-referred

scheme by the assessee-trust.From whatever angle it may be

seen, the deposited amount cannot be said to be income in the

hands of the recipient trust.Therfore,what ultimately reveals

that (i)the intention of the donar and (ii)how the recipient

assessee treat the said income.If the intention of the donar

is that the amount/donation given is to be treated as capital

and the income from that capital has to be utilized for the

charitable purposes, then the said voluntary contribution is

towards the part of the corpus of the trust. Similarly, the

assessee after receiving the amount, keeps the amount in

deposit and only utilize the income from the deposit to carry

out the charitable activities, then also the said amount

would be a contribution to the corpus of the trust and the

nomenclature in which the amount is kept in deposit isof no

relevance as long as the contribution received are kept in

deposit as capital and only the income from the said capital

which is to be utilized for carrying on charitable and

religious activities of the institute/corpus of the trust, for

which section 11 (i) (d) of the Act is attracted and the said

income is not liable for tax under the Act.


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Insofar as the argument that the persons who made these

contributions does not specifically direct that they shall from

part of the corpus of the trust is concerned, it has no substance.

In view of the language employed in Clause (b) of sub-section

(a) of section11, the requirement is that the voluntary

contributions have to be made with a specific direction. The

laws does not require that the said direction should be in

writing. In the absence of the direction in writing, the only way

that one can find out whether there was a specific direction

and to find out how the money so paid it is utilized. If the

money so received by way of voluntary contributions, it is

meant to use for the Leprosy patients and is credited to a

particular account and from the income from the said capital,

the said activity is carried on, the requirement of clause (b) of

sub-section(i) of section11 is complied with. In the instant

case, on record we see that those people who have paid

amounts by way of donation that includes the cheque with a

letter with a specific direction, which is in compliance with

section (1) (b) of the Act. But in case if the contributions are

made without cheques i.e.. by cash, and oral direction has been

issued to the trust to utilize the said fund for the purpose of

treating the leprosy patients and if such amounts are credited

to the account meant for it, even then the requirement of

clause (b) of sub-section (1) of section 11 is complied with.

Therefore, we do not see any substances in the said contention.


22

In the High Court of Kerala At Ernakulam

Present:

The Honourable Mr. Justice C.N.

Ramachandran Nair

And

The Hon,ble Mr. Justic Babu Mathew P. Joseph

Wednesday,The 22nd Day of February

2012/3rd Phalguna1933


23

ITA.NO. 193 of 2011

Date 22/02/212

After hearing the standing Counsel and on going through the

Tribunal’s order what we notice is the Tribunal has taken note

of the amendment to “Charitable purpose to the finance

Act,2008-2009 and allowed respondent’s entitlement for

registration under S.12AA(3) of the Act. We notice that the

Tribunal after examining objects and activities of the society

found that it was engaged in processing and marketing milk

products produced by poor agriculturists of the area which

help them to fetch maximum price for the milk produced by

them .Admittedly ,the society has not declared dividend to the

members and all it’s investments and activities were to render

benefit to the poor agriculturists. So much so, we do not find

any ground to interfere with the Tribunal’s order. Accordingly

this I.T. Appeal is dismissed.

Maruti Centre for Excellence (latest

amendment in section 2(15) and section

13(8) by Finance Act, 2012)

Section 2(15) of the Act defines”Charitablpurpose”.The last

portion there of includes “advancement of any other object of

general public utility”. It is accepted position that the

respondent claims that it was/ is a charitable institution

because its activities fall in the last portion or the residuary

part of the aforesaid clause. The Supreme Court in Surat City


24

Gymkhana. (300ITR 214 ), did not permit and allow the

Revenue to challenge the ratio expounded by the Gujarat High

Court in Hiralal Bhagwati vs.CIT, (2000)246 ITR 188 (GUJ). It

has been held in Hiralal Bhagwati’s case 300 ITR 214 that once

an institution has been registered under section 12A/12AA,

the Assessing Officer cannot go into and reexamine whether or

not objects for which the institution was established is

charitable with in the meaning of section 2(15) of the Act. This

aspect has to be examined at the time of registration and

cannot be re-examined every time of assessment. At the time of

the registration,the authority is to examine the objects for

which the institution was created as well as conduct an

empirical study of the past activities.

To this extent, we find merit in the contention raised by the

assessee who has drawn our attention to the aims and objects for

which the respondent society was established. He has also drawn

our attention to the paragraph 4 of the Memorandum of

Association which has been also reproduced above. A reading of

the said objects ex-facie shows that the respondent is established

for advancement of an object of general public utility.

However,the aims and objects of association which are

incorporated in the Memorandum is one aspect and the other

aspect is the actual working and the activities undertaken by the

assessee with reference to the assessment year in question. These

are two separate aspects and have to be examined independently.

We are concerned with the second aspect i.e, the application of

Income and use of property of the institution, during the

assessment years in question. The activities undertaken and

performed should be charitable and should not violate the specific

Stipulations mentioned in the Act. Incorporated in sections11,12

and 13, are various provisions/stipulations regarding the actual.


25

IN THE HIGH COURT OF DELHI AT NEW DELHI

Reserved on 6th March ,2012

Date of decision :- 29th March,2012

ITA No.140/2012

Director of IINCOME TAX

Through : Mr. Abhishek Maratha Sr. Standing

Counsel with Ms. Anshul Sharma,

Advocate.

VERSUS

VISHWA JAGRITI MISSION ….Respondent

Through:

R.V. EASWAR,J:

The revenue is in appeal against the aforesaid order of the

Tribunal. We are not inclined to admit the appeal and frame any

Substantial question of law since none arises from the order of the

Tribunal. There is no dispute that the assessee has been granted

registration under section 12AA Vide order dated 11th

September,2009 and, therefore, it was entitled to exemption of its

income under section11. The only question is whether the income

of the assessee should be computed on commercial principles and

in doing so whether depreciation on fixed assets utilized for the

charitable purposes should be allowed.. On this issue, there seems

to be a consensus of judicial thnking as is seen from the

authorities relied upon by the CIT (Appeals) as well as the


26

Tribunal. In CIT vs. The Society of the sisters of St.Anme 146

1to28, an identical question arose before the Karnataka High

Court. There the society was running a school in Bangalore and

was allowed exemption under section11.The question arose as to

how the income available for application to charitable and

religious purposes should be computed jagannatha Setty,J.

speaking for the Division Bench of the court held that income

derived from property held under trust cannot be the “total

income” as defined in section 2(45) of the act and that the word

“income” is a wider term the expression “profits and gains of

business or profession “. Reference was made to the nature of

depreciation and it was pointed out that depreciation was nothing

but decrease in the value of property through wear, deterioration

or obsolescence. It was observed that depreciation, if not allowed

as a necessary deduction for computing the income of charitable

institutions, then there is no way to preserve the corpus of the

trust for deriving the income.The circular No.5(LXX-6) OF 1968,

dated july 19,1968 was reproduced in the judgment in which the

board has taken the view that the income of the trust should be

understood in its commercial sense. The circular is as under :-

“ Where the trust derives income from house property interest on

securities, capital gains, or other sources, the word “income should

be understood in its commercial sense,i.e, book income, after adding

back any appropriations or applications there of towards the

purpose of the trust or otherwise, and also after adding back any

debits made for capital expenditure incurred for the purposes of the

trust or otherwise. It should be noted, in this connection, that the

amounts so added back will become chargeable to tax u/s.11(3) to

the extent that they represent outgoings for purposes other than

those of the trust. The amounts spent or applied for the purposes of

the trust from out of the income computed in the aforesaid manner,


27

should be not less than 75 percent. Of the latter, if the trust is to get

the full benefit of the exemption u/s. 11(1).”

A. Similar view was earlier expressed by the Andhra Pradesh

High Court in Commissioner of Income-tax v. Nizam’s

Suppl.Religious Endowment Trust. (1981)127 ITR 378 and

by the Madras High Court in Commissioner of Income Tax vs

Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135

ITR 485. The Madhya Pradesh High Court in CIT vs. Raipur

Pallottine Society (sours) has held, following the judgment of

the Karnataka High Court cited above, that n computing the

income of a charitable institution/ trust, depreciation of assets

owned by the trust/institution is a necessary deduction on

commercial principles.The Gujarat High Court, after referring

to the judgement of the Karnataka, Maharashtra and Madhya

Pradesh High courts cited above, also came to the same

conclusion and held that the amount of depreciation debited to

the accounts of the charitable institution has to be deducted to

arrive at the income available for application to charitable and

Religious purposes.

NOTE OF SECTION 263: ITAT APPEAL

MATTER

That reason on which LD CIT has exercised jurisdiction to

issue subject notice u/s 263 for passing impugned revision

order in para1 of order states as under :

“due to reason that the AO allowed expenses to the tune of

6,09,366 against the interest income on FRD,S in contravention

of provisions of section 57 (i) of the Act “


28

This reason itself being vague and against the material on

record as admitted in later part of order(concluding portion

para5) which states that

“After considering reply as well as discussion with AR of

assessee, it is observed that albeit the major income of the

assessee during the year is from interest, there are certainly

some other income as well as receipts from membership fees.

However the extent of these receipts is nominal in comparison

to receipts from interest on FDR. Therefore the claim of

assessee that whole of expenditure of Rs609.366 is allowable

against such other nominal income receipts is NOT

JUSTIFIABLE. A portion of such expenditure is certainly

allowable which requires to be WORKED OUT. The balance of

the expenditure requires to be disallowed.”

From collective reading and comparison, of point which

weighed with LD CIT to invoke section263 initial show cause

notice and conclusion drawn by CIT in final portion of section

263 impugned order, following things get surfaced.

a) There were two views possible on the issue and view taken

by LD AO in original 143 (3) order after requisite enquiry

was plausible view on said date. Therefore on this score

alone, impugned order needs to be quashed/vacated , as LD

AO order in stated facts cannot be termed as “ prejudicial”

to interest of revenue.

b) The initial point of section263 jurisdiction and final order of

section 263 being at total variance, goes to root of the

matter and attracts nullity of impugned revision order being

JURISDICTIONAL lapse.

c) That mere case of LD CIT u/s 263 is apportionment of

expenses between marginal membership fees and


29

substantial interest income. This in our humble submission

is against the basic canon of taxation viz. there is no

necessity of reciprocity of expenses being necessarily

converted into positive receipts as there are certain

establishment expenses which are not only” fixed’ in nature

but are required to maintain “artificial” vehicle (here

society). That is, merely because there is no match in debit

and credit side that can neither give LD CIT Jurisdiction to

proceed / invoke u/s 263 nor to direct the LD AO to

bifurcate the expenses.

d) That it is neither the case of LD CIT that section263 is

invoked for non enquiry/lack of enquiry not it is his case

that what LD AO accepted was not possible by any sort of

plausible reasoning. This is supported by multiple finding of

LD CIT that certain expenses are definitely allowable.There

is no allegation leveled against LD AO in CIT section 263

order that he passed 143 (3) order or non application of

mind.

e) Admittedly, LD CIT has not casted an inch of doubt on

genuineness and purpose of stated expenses being related

to society activities. This needs to be appreciated in light of

the fact that for earning interest from FDR there can be no

visible and invisible.(direct/ indirect) incurring of an

expenses.

f) Further, on admitted position that society being not

enjoying charity status u/s 12A/12AA of the act and is

operating on absolute MUTUTALITY basis, on basis of

jurisdictional DHC ruling reported at 195 taxman 110;186

taxman 142 and latest order in delhi Gymkhana club case,

albeit subject FDR interest income is excludible from TOTAL

income on MUTUALITY principle, we humbly submit that

LD CIT in his impugned order not appreciating the

applicable legal position, deserves to be set aside as


30

appellant society has offered the said interest income to

taxation in FULL.

g) Further, on aforesaid position, if total income of appellant

society is classified as per section 14 then there will be loss

in business head (excess of expenses over membership

fees) and interest income would stand classified in section

56 of the Act. In this connection, as per section 70 and 71of

the act, current year business loss is allowable to be set off

against “ Other sources” income (here interest income).On

this position also, we humbly submit that subject section

263 revision order of CIT deserves to be vacated.

IN THE HIGH COURT OF DELHI AT NEW DELHI

ITA Nos.12/2012&18/2012

Director of Income Tax …Appellant

Through : Mr. Abhishek Maratha, Sr. Standing

Counsel with Ms.Anshul Sharma,Adv.

VERSUS


31

Society for Development Alternatives….. Respondent

Through

Coram:

Hon’ble Mr. Justice Sanjiv Khanna

Hon’ble Mr. Justic R.V. Easwar

ORDER

13.01.2012

With regard to the second contention, the findings recorded

by the tribunal are that the respondent-assessee had

received grants for specific purpose/projects from the

government, non-government, foreign institutions etc.

These grants were to be spent as per the terms and

conditions of the projects grant. The amount, which

remained unspent at the end of the year, got spilled over to

the next year and was treated as unspent grant. The

commissioner of Income Tax (appeals) while deleting the

said addition had observed as under :-

“I have considered the assessment order and submissions of

the appellant along with evidences placed on record. On

perusal of the evidences regarding the project grants placed

on record, it is seen that the said amounts are received/

sanctioned for a specific purpose/ project to be utilized over

a particular period. The utilization of the said grants is

monitored by the funding agencies who send persons for

inspection and also appoint independent auditors to verify

the utilization of funds as settled terms. The appellant has to


32

submit inter/ final progress/ work completion reports

along with evidences to the funding agencies from time to

time. These agreements also include a term that separate

audits accounts for the project will be maintained. The

unutilized amount has to be refunded back to the funding

agencies in most of the cases . All the terms and conditions

are simultaneously complied with otherwise the grants are

withdrawn. The appellant has to utilize the funds as per the

terms and conditions of the grant. If the appellant fails to

utilize the grants for the purpose for which grant is

sanctioned, the amount is recovered by the funding agency.

On the basis of the evidences placed on record, it is seen

that the appellant is not free to use the funds voluntarily as

per its sweet will and, thus, these are not voluntary

contribution as per section12 of the Act. These are tied up

grants where the appellant acts as a custodian of the funds

given by the funding agency to channelize the same in a

particular direction.

In case of voluntary contribution, the appellant is free to use

the money as per its will and neither have to render the

account of the same to the donor nor the same is monitored

by the donor. The said amount becomes income of the

appellant and has to be used for charitable purposes as per

its objects. However, in case of specific tied up grants,

money is received for specific purposes and is to be utilized

for the same.”

8. The Commissioner of Income Tax (Appeals) has also

referred to the judgment of the Rajasthan High Court in

Sukhdeo Charity Estate Vs. CIT (1984) 149 ITR 470 (Raj).

9. In view of the aforesaid factual position, the tribunal has


33

Upheld the order passed by the Commissioner of Income

Tax (Appeals) and has not accepted the appeal filed by the

Revenue.

10. In view of the aforesaid factual position, we are not

inclined to entertain the present appeals on the second

aspect.

IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH:

MUMBAI

ITA NO.2094/MUM/2010

Assessment Year 2008-09

Matushree Jeviben Premji Jivraj Nisar Charitable Trust,

Sho No-7, Giriraj Bldg,

Devidas Lane, Borivali (west)

Mumbai-400092

Date of Pronouncement: 18.01.2012

3. We have heard the rival submissions of the parties and

perused the records. We find that the only reason for denial of

the registration to the assessee is that the assessee is having

the mixed object, partly religious and partly charitable.

Nowhere it is the case of DIT (Exm.) that the assessee is having


34

non-religious or non-charitable objects. Now this issue stands

covered in favour of the assessee by the decision of the ITAT

Cochin Bench in the case of Calicut Islamic Cultural Society vs.

ACTI(2001) 28 SOT 148 (coch) and the said decision has been

followed by the same bench in the case of the Society of

presentation Sisters vs.ITO (2009) 318 ITR (AT) 287

coach(TM) .The ld. Cit D.R. fairly conceded that now the issue

has been covered in favour of the assessee by the decision of

the ITAT cochin Bench in the cases of Calicut Islamic Cultural

society (supra) as well as the society of the presentation sisters

(suprs). The issue in question was elaborately discussed and

decided by the cochin bench of the tribunal and operative part

of the decision of the tribunal in the case of Calicut Islamic

Cultural Society (suprs) is as under.

“21 . The above observations are quoted in N.S. Bindra’s

Interpretation of Statutes (Ninth Edition ,pageNo.15) .In short

the English language cannot be treated as instrument of

mathematic precision. Now the question it can it be said that it

is the intention of the legislature as per the language used

inclause (a) to section 11(1) of the act that save the provisions

of sections 60 to 63 of the act for claiming the income exempt

which is derived from the property held under the trust which

must wholly for the charitable or wholly religious purposes. If

the institution or trust are engaged into the mixed object which

are partly religious and partly charitable or as per the case of

the assessing officer as well as the cit (a) the institution or

trust is having the mixed activities of charity as well as religion

then the exemption cannot be claimed. The argument of the

learned senior counsel is that there is a very thin line of

demarcation between the charity and religion. Every religion is

having the principles of the charity and many charitable

purposes may not have the principles of religion, though the


35

religion is the question of faith. It is to be mentioned here that

“charitable purpose” in section 2(15) of the act making the

inclusive definition and trying to make the charitable purpose

more elaborate but there is no definition of the “religious

purpose” under the act. No doubt the law recognizes no

purpose as charitable unless it is of the public character. In

short , if should be for the benefit of the community or the

section of the community as held in the case of Ahmadabad

Rana Caste Association (suprs) by the Hon,ble Supreme court.

As far as religious purpose is concerned means religious

purpose with in the meaning of personal law applicable to the

Assessee as held by the hon,ble High Court of Bombay in the

caseof Bai Hirbai Rahim Aloo Paroo & Kesarbai Dharamsey

Kakoo Charitable &Religious TrustV. CIT /1968/68 ITR

821.There are innumerable example where there will be very

thin line of demarcation between the purposes to identify

which are the charitable purposes or which are the religious

purposes. In both these appeals, it is not the case of the

department either that any of the bars provided under

section13 of the act are applicable to both these assesses as per

the interpretation given by the Assessing officer as well by the

CIT (A). As per the provisions of section 11(1) (a) of the act, it

requires that there should be nexus between the property held

under the trust wholly for charitable or religious purposes and

the income under consideration. The interpretation given by

the Assessing officers as well as by the CIT (A) is that the

purpose should be wholly charitable or wholly religious. We

are afraid, whether such interpretation can be accepted. In our

opinion ,said interpretation given by both the authorities is

only academic. When the legislature has categorically defined

the purposes like religious and charitable and if the assessee is

engaged as per their objects in mixed activities, which are

partly charitable and partly religious, it cannot be said that


36

section 11(1) (a) of the act does not contemplate such

situation.

4. As admittedly, in the present case the only reservation of the

LD. CIT (A) for refusing the registration to the assessee is that

the assessee Trust/ institution is having mixed objects, i.e.

partly charitable and partly religious. In our opinion, the ratio

laid down in the cases of Calicut Islamic Cultural Society

(supra) and the society of presentation sisters vs. ITO (2009)

318 ITR (AT)287 (coch) ™ (Supra) are squarely applicable to

the present case. We, therefore, set aside the order of the DIT

(exe.) Mumbai and he is hereby directed to grant registration

to the assessee u/s.12AA with in thirty days from the date of

receipt of this order.


Pune Bench “B” Pune

ITA NO. 1173/PN/2007

Asstt. Year : 2004-05)

Cummins Diesel India Foundation,

35A/1/2, Erandawana,

Pune-411038

PAN: AAATC0700D

DATE of Pronouncement:-30.11.2011


37

The assessee Trust opted for availing the benefit of section

11(2) of the act regarding accumulation of amount of Rs

16,00,000/-. In support, the assessee submitted from No.10

r.w.s rule 17 of the I.T. Rules 1962.The reasons for such

accumulation as mentioned in the Form No.10 are reproduced

below:

“A resolution passed by the trustees/ governing body, that, out

of the income year(s), relevant to the assessment year 2004-05

set apart to enable the trustees/governing body to accumulate

sufficient funds for carrying out the following purposes of

trust/association/ institution.

1) Educational]

2) And other objects of the trust deed, as mentioned in clauses

5to 39 etc”

The A.O. did not agree with the cause shown by the

assessee. He held that where assessee seeks permission to

accumulate a part of income not for any determinate

purposes(s)/ but for the objects as enshrined in trust deed

in a blank manner, such accumulation is definitely not in the

contemplation of section 11(2). The id CIT (A) has also

upheld the same

4) Before us, the LD A.R. while reiterating the submissions

made before the authorities below has placed reliance on

the following decisions :

1) Bharat Kalyan Pratishtan Vs. Director of Income tax

(exemption) (2008),299 ITR 406 (DELHI).

2) Sir Sobha Singh Public Charitable Trust Vs.Asstt.Director

of Income Tax Exemption 201 79 ITD 1(DEL™


38

3) Associated Electronics Research Foundation Vs. Dy

Director of Income Tax (Exemption ) (2006), 100TTJ

(DEL).480

5) The ld D.R. on the other hand tried to justify the orders of

the authority below.

6) Having gone through the above cited decision of Hon,ble

delhi high court in the case of Bharat Kalyan Pratishtan vs.

Director of income tax (exemption) (supra) relied upon by

the A.R., we find that the issue raised in the grounds before

us is fully covered by this decision. In that case, the trust

was having its object to utilize its funds for charitable

purposes vis, medical relief, education and relief to the poor.

The assessee specified all these three objects in the

application seeking accumulation of income. The matter

travelled up to the Hon,ble high court and the Hon’ble high

court in the appeal preferred by the trust held that it was

not required for the assessee to be more specific with

regard to utilization of funds,plurality of purposes is

permitted and it was not required for the assessee to be

more specific with regard to utilization of funds. Benefit of

section 11(2) of the act cannot be denied, held the Hon’ble

High Court.

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI

BENCH

“C” NEW DELHI

I.T.A. NO 4498/DEL/2011

Assessment year:

Harnam Singh Harbans Kaur Director of Income-tax


39

Charitable Trust, 5/49, WEA VS Delhi

Karol Bagh, New Delhi

Pan: AAATH0372G

(Appellant) (Respondent)

Date of order :-16 december2011

In the light of the above discussion and relying upon the

decision of Hon,ble High court of Allahabad in the case of

babu Hargovind Dayal Trust 199 taxman 138, we hold that

the assessee trust’s approval/ exemption granted under

sec.80G vide order dated 2.09.2008 for the period from

1.04.2008 to 31.03.2011, which was to expire on

31.03.2011, would be deemed to have been extended in

perpetuity unless specifically with drawn. In the present

case, it is no doubt that the registration granted vide order

dated 2.09.2008 for the period from 1.04.2008 to

31.03.2011 has not been withdrawn by the DIT (E) as per

the provisions of the act. Therefore, exemption granted

earlier upto 31.03.2011 would be deemed to have been

extended in perpetuity and it will continue so long as it is

not with drawn, as per the provisions of the act. We further

hold that mere because the assessee has moved an

application for renewal of exemption after the expiry of

original period of exemption upto 31.03.2011, would not

divest the assessee of its right to treat the exemption to

have been extended in perpetuity unless specifically

withdrawn in view of the amendment made in the act with

effect from 1.10.2009 read with the board’s aforesaid

circular. We therefore, hold that the assessee shall be

treated to have been approved for exemption u/s 80g of the


40

Act and the order of the learned DIT (E) dated16.08.2011

shall stands cancelled.

8. One more reason given by the DIT (E) is that assessee’s

activities are hit by proviso to sec 2 (15) of the act inserted

by the Finance Act,2008 w.e.f.1.04.2009. Under this proviso,

it has been provided that the advancement of any other

object of general public utility shall not be a charitable

purpose, if it involves carrying on of any activity in the

nature of trade, commerce or business, or any activity of

rendering any service in relation to any trade, commerce or

business ,for access or fee or any other consideration,

irrespective of the nature, of use or application or retention

of the income, from such activity. It makes it clear that this

proviso is applicable in respect of charitable institutions

engaged in the activity of advancement of any other object

of general public utility i.e. the 4th limb of sec.2(15) of the

act. The first three limbs,i.e. relief of the poor, education and

medical relief are outside the purview of the aforesaid

proviso inserted to sec.2(15) of the act. It has been admitted

by the DIT (E) himself that the assessee society has been

registered under sec.12A as charitable trust and is running

dispensary and health centre, which makes it clear that the

charitable purpose for which the assessee society is

established includes medical relief, and it is not a case of

advancement of any other object of general public utility.

Therefore, applying the provisions of proviso to sec.2(15) of

the act to the present case by the DIT (E) is also totally

misplaced and for that reason, the assessee cannot said to

Be not eligible for exemption under sec.80g of the act.

Further, the charging of fee from the patients in itself cannot

be considered to be a commercial activity. The assessee has

produced before us the details of fees charged from patients


41

on various counts which goes to show that the assessee has

been charging a very nominal fee as compared to the

medical institutions or hospitals or nursing homes carrying

on commercial activity. It is not the case of the DIT (E) that

all the receipts or income of the assessee trust have not

been utilized towards the objects of the trust for which it

has been established. Therefore, the rejection of the

exemption or approval under sec.80g on this count by the

learned DIT (E) is also not justified.


HYDERABAD BENCH “B” HYDERABAD

I.T.A NO. 1208/ HYD/2010 Assessment year 2003-04

I.T.A. NO.1213/HYD/2010 Assessment year 2007-08

Date of order 9.12.2011

We have considered the rival submissions and perused the

material on record. Admittedly, assessee society has been

registered under S.12Aof the act, and such registration,

though done in pursuance of the order of the tribunal dated

22.2.2008 for the assessment year 2003-04, it relates back

to the date of establishment of the assessee-trust. That

being so, the income of the assessee is exempt under s.11 of

the act.As regards the method to be adopted for computing

the income of a charitable trust, the CIT (A) accepted the

contentions of the assessee by placing reliance on the


42

Board,s circular No.5(LXX-6) dated 19.6.1968 and

thedecisions of the Hon’ble Kolkata High Court in CIT V/S.

Birla janahit trust; of the hon’ble Andhra Pradesh High

Court in CIT V/S. HEH the Nizam’s supplemental Religious

Endowment Trust (127 ITR 378); of the Hon’ble Maras High

Court in CIT/ Rao Bahadur Calavalla Cunnan Chetti

Charities (135 ITR 485).CIT V/S. Estate of V. Ethiraj

(136ITE12), and concluded that there is no merit in the

view taken by the assessing officer that the income of the

assessee from rents received from IT department, guest

room and conference hall. Etc should have been considered

under the head house property income, and held that the

same should be computed in the normal commercial

manner. Without taking recourse to the provisions of S.22 of

the act. He also accepted the claim of the assessee for

allowance of depreciation relying on the decisions of the

Hon’ble Bombay High Court in CIT V/S.Munisurvrat jain

(1994) tax LR 1084 (Bom) and CIT V.S. Institute of Banking

Personnel section (131 taxman 366). We find that the CIT

(A) has passed well reasoned and elaborate speaking orders

and we find no infirmity in the same. We accordingly,

Uphold the orders of the CIT (A),and reject the grounds of

the Revenue in these appeals.

IN THE HIGH COURT OF PUNJAB AND HARYANA AT

CHANDIGARH.

I.T.A. NO- 44 OF 2011

Date of decision: 06.12.2011


43

Commissioner of Income –Tax, Rohtak ….Appellant

VS

M/S Shri Lalita Ashram Trust …. Respondent

The assessee-Trust was constituted on 14.10.1996 and was

registered under section 12A of the act on 20.01.1987. The

assessee-trust was given registration under section 80g of

the act as well. The last renewal was on 26.05.2006 for the

period from 01.04.2004 to 31.03.2009. The assessee-trust

sought renewal of registration under section 80G(5) of the

act.The subsequent request for renewal of registration was

declined by the commissioner of Income tax inter-alia for

the reason that the trust has incurred an expenses of Rs

2,40,167/- on Mandir pooja,which exceeds 5% of the total

Income of the trust permissible for religious activities. In

appeal,the learned tribunal returned a finding that the

amount incurred on Mandir Pooja- a religious activity is

4.93% it being Rs 5,40,167/- out of the total income of Rs

48,68,989/- therefore, the trust is entitled to registration.

2. Learned counsel for the appellant on the basis of Circular

No.5p(LXX-6)issued by the central Board of Direct Taxes

dated 16.06.1968 and a judgement of Madras High Court

reported as Commissioner of Income-Tax, Tamil Nadu-I

VS. Rao Bahadur Calavala Cunnan Chetty Charities 135

ITR 485 has vehemently argued that section 11 of the act

does not deal with total income, it deals with income and,

therefore, the expenditure on religious activity has to be


44

seen after allowing the expenditure and not on the total

income.

3. We find that the argument raised by the Revenue iswholly

misconceived. Under Section 80G (5B), the expenditure of a

religious nature should not exceed5% of its total income.

The relevant clause reads as under ;-

“(5b) Notwithstanding anything contained in clause(ii) of sub-section (5) and

Explanation3,an institution or fund which incurs expenditure,during any previous

year,which is of a religious nature for an amount not exceeding five percent of its

total income in that previous year shall be deemed to be an institution or fund to

which the provisions of this section apply”

A perusal of above provision would show that the expression used

is “total income” and not “income” which falls with in

the scope of section 11 of the Act. The income as

mentioned in section 11 is exclusive definition, as certain income is

not to be included in the total income in respect of charitable and

religious trusts. The total income is defined in section 5 of the Act.

INCOME TAX

CHARITABLE TRUST-REGISTRATION UNDER S.12A- Cancellation

under S. 12AA(3)- objects of the assessee society having been

considered and found to be charitable in nature when the

registration unders.12A was granted, said registration could not be

cancelled by CIT by invoking the provisions of S. 12AA (3) in the

absence of anything on record to show that there was any change in

the objects of the society or that its activities were not in

accordance with those objects- proceedings unders. 80g and

proceedings under s.12A are separate,distinct and independent of

each other and therefore proceedings under s.80g cannot form basis


45

for initiation of proceedings under s .12AA (3)- Maulana Mohammad

Ali JauharTrust vs.CIT (Lucknow-A)416.

-Cancellation under s. 12AA(3)-Persons included in the scheduled

caste,scheduled tribe and minorities categories do not belong to a

particular community and, therefore,registration under s.12A

granted to assessee-society could not be cancelled by invoking s.

12AA (3) on the ground that the persons included inthese categories

represent a particular community, more so when there was no

material on record to substantiate that there was any change in the

objects of \ the assessee from the date when the registration was

granted under s.12Aor that the activities of the assessee were not in

accordance with those objects- bharat jyoti vs. CIT (LUCKNOW-A)

409.

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “A” Delhi

Before Shri I.P. Bansal And Shri K.. Bansal

ITA Nos. 3586&4252 (del) /2011

Assessment year: N.A. Director of Income Tax

Appan Asia Pacific Performing (Exemptions),3RD Floor

Arts Network,C-51, Gulmohar VS Aayakar Bhawan ,distt.centre

Park,New Delhi- Laxmi Nagar Delhi

PAN:- AABAA6734D

(Appellant) (Respondent)

Appellant by: Mrs. Prem lata Bansal, sr. Advocate &

Shri Sudhir Chatrath ,Advocate

Respondent by : Mrs. Anusha Khurana, Sr. DR

Date of Hearing : 30.09.2011


46

Date of Pronouncement: 14.10.2011

Having considered all these matters, we are of the view that the DIT

(E) is entitled to examine whether objects are charitable in nature

and activities are genuine. Although a finding has been recorded that

the objects are not charitable in nature, the finding is in vacuum, as

no reason whatsoever has been furnished to support the same, In

other words ,this issue has not been examined at all. He has

examined the expenses and came to the conclusion that even

activities are not genuine. In this connection, we tend to agree with

the id.DR that the genuineness of activities can only br ascertained

from the expenditure incurred as no activity is feasible without

expending money. Therefore, apart from filing details of the

expenses, it was incumbent on the assessee to show that the bulk of

the expenditure had been incurred in pursuance of objects of the

society. It is true that some of the expenses may or may not be

deductible u/s 11 (1) (a). However,according to us, it is equally true

that a finding about genuineness of the activities can be recorded

only if major expenses have been incurred towards objects of the

society. In this connections, it may be clarified that it is not a case

where activities have not started and, therefore, the question of

genuineness of activities will have to be gone into. Looking to the

aforesaid deficiencies in the case of the revenue as well as the

assessee, we think it fit to restore the matter to the file of the DIT (E)

with a direction that he will examine material on record, including

any further material filed by the assessee or gathered by him, and

frame a fresh order after granting due opportunity of being heard to

the assessee.

As the matter regarding registration has been restored to the file of

the DIT (E),it will be appropriate to restore the matter regarding

grant of approval u/s 80G also to his file, to be decided afresh after

deciding the matter regarding registration.


47

In the result, both the appeals are treated as allowed for statistical

purposes.

Production of television and radio programmes for purpose of

telecasting and broadcasting through assessee’s own network or

through network hired by it would not constitute advancement of

any object of general public utility with in meaning of section 2 (15)

(Assessment year 2006-07} { In favour of revenue}

CITv.A.Y. Broadcast Foundation {2011} 199 taxman 376/11

taxmann.com 240 (ker.)

Adjustment of deficit of current year against income of subsequent

year would amount to application of income of trust for charitable

purposes in subsequent year with in meaning of section 11 (1) (a) { In

favour of assessee}

DIT v. Raghuvanshi Charitable Trust {2011] 197 taxman 170/{2010)

8 taxmann.com142 (delhi).

Adjustment of deficit of current year against income of subsequent

year would amount to application of income of trust for charitable

purposes in subsequent year with in meaning of section 11 (1) (a).

A trust can be allowed to carry forward deficit of current year and to

set off same against income of subsequent years in favour of

assessee.

DITV. Raghuvanshi Charitable Trust {2011} 197 taxman 170{2010} 8

taxmann.com 142 (delhi).

A trust can be allowed to carry forward deficit of current year and to

set off same against income of subsequent years.

Merely because assessee was an institution which was running

professional courses, it could not be presumed that the amounts

which were received as donations were attributable to the allotment


48

of seats ; through assessee was not able to give names and addresses

of the donors as well as mode of payments, etc, if said amount was

utilized or spent for charitable purposes, then said amount would be

eligible for exemption under section 11 (i) (d) {Assessment year 2001-

02} in favour of assessee.

DIT (Exemptions)v.Sri Belimatha Mahasamsthana Socio Cultural and

educational Trust {2011}336 ITR 694 (KAR)

The Assessing officers found that the assessee running charitable

institution and offering professional courses had not maintained

proper books of account and that the assessee was receiving cash

from unknown sources which was not explained properly and,

consequently, held that the trust was not being administered in

accordance with law and, consequently denied the exemption under

section 11. He held that a sum of Rs 28,30,094 collected towards

donations from students were contrary to law and that the trust was

acting as opposed to public policy and had failed to comply with the

pre-requisite of a charitable organization.

Held that the assessee was a social, cultural and educational trust,

running educational institutions and having various professional

courses. Merely because the assessee was an institution which was

running professional courses, it could not be presumed that the

amounts which were received as donations were attributable to the

allotment of seats. The contention of the revenue that the donations

received during the said period were in violation of the prohibition of

capitation Fee Act, 1984, and, therefore, the trust had acted as

opposed to public policy,and consequently, was not entitled to be

treated as a charitable organization had no merit. Through the

assessee was not able to give the names and addresses of the donors

as well as the mode of payments,etc. that such amount has been

received by the trust was not in dispute. The tribunal, in fact had not

accepted the contention of the assessee that the said donation had

to be treated as corpus donation. On the other hand, the Tribunal


49

had held that the said amount, since it has come from third parties

would have to be treated as income. If the said amount was utilized

or expended for charitable purpose, then the said amount would be

eligible for exemption under section 11 (1) (d). The Tribunal rightly

rejected the claim of the assessee to treat the said amount as corpus

donations and had correctly granted the relief under section 11 (1)

(d).

REGISTRATION, PROCEDURE FOR {SECTION 12AA}

Object of section 2AA is to examine genuineness of objects of trust

but not application of income of trust for charitable or religious

purpose. {In favour of assessee}.

CITv. Surya Educational &Charitable Trust {2011} 203 taxman 53/15

taxmann .com 123 (pun&har).

Unless a trust or an institution is registered under section 12AA, such

a trust or an institution shall not be entitled to exclude from its total

income, deductions or contributions from other sources. Therefore,

the principles laid down for excluding the income from consideration

under section 10(22) now section 10(23) © or section 11 and 12 are

not applicable while considering the application for registration

under section 12AA. The application for registration is required to be

made with in one year of the creation of the trust. Section

12AArequires satisfaction in respect of the genuineness of the

avtivities of the trust, which includes the activities which the trust is

undertaking at the instant time and also which it may contemplate to

undertake.

Therefore, the object of section 12AA is to examine the genuineness

of the objects of the trust, but not the income of the trust for

charitable or religious purposes. The stage foe application of income

is yet to arrive , i.e. when such trust or institution files its return.


50

The commissioner declined registration to the assessee society on

the ground that its claim for registration under section 12A with

respect to its dominant objective of establishing educational

institutes was premature, as it was still in the process of purchasing

of land for that purpose; construction of building of ebucational

institute had still not started and no action had been taken for raising

infrastructure and no permission from AITEC had been received. The

Tribunal held that the quantum of activities undertaken by the trust

after its creation could not be the basis for examining its registration

application under section 12AA. On that basis, the tribunal set aside

the order passed by the Commissioner and ordered granting of

registration to the assessee.

Held that the tribunal was justified in ordering grant of registration to

the assessee. When an assessee fulfils all relevant conditions for

registration under section 12AA, no other condition can be imposed

on it while granting registration under section 12AA (IN FAVOUR OF

ASSESSEE).

DIT V. Commerce Teachers Association {2011} 203 taxman 171/15

taxmann.com 236 (delhi).

The assessee, an association of commerce teachers, applied for

registration under section 12AA. The Director of Income-tax

(exemption) granted same on being satisfied that the assessee had

fulfilled all relevant conditions for registration. However ,he imposed

condition that society should not charge any fee/amount from

beneficiaries. The tribunal observes that imposition of such a

condition was unwarranted when the assessee had fulfilled all

relevant conditions for registration.

Held that the tribunal was justified in its decision and, thus no

question of law arose out of its order.


51

Annual gross receipts of all three educational institutions run by

assessee society could not be considered collectively to be eligible for

exemption under section 10 (23c) (iiiab) { Assessment years 2003-04

and 2004-05} { In favour of assessee}.

ITO v. Rajeev Builders 2011 47 SOT 33 (URO)/9 taxmann.com242

(visakha)

The assessee-society was running several educational institutions. In

course of assessment, the Assessing officers found that aggregate of

annual gross receipts of three educational institutions run by the

assessee exceeded monetary limit of Rs. One crore as prescribed in

rule 2BC of 1962 Rules. Accordingly, the assessing officers held that

income of those institutions was not exempt under section 10 (23c)

Held from the provisions of section 10 (23c) (iiiab) it is apparent that

one has to examine the position on the basis of individual institution

and not with respect to an assssee-society having several educational

institutions being run by it.

Hence, for the purpose of section 10 (23c) (iiiad), the annual gross

receipts of three educational institutions being run separately by the

assessee society could not be clubbed together for examining the

fulfillment of the conditions of receipt being less than the prescribed

limit of annual gross receipts. If the annual gross receipts of those

three educational institutions were considered separately, the same

was below Rs 1 crore in each year for each of those educational

institutions. It was therefore, held that income of the three

institutions was exempt.

Merely because some surplus has arisen to a charitable society in

course of carrying on educational activity it does not mean that it is


52

not existing for educational purpose {Assessment years 2000-01 to

2002-03} In favour of assessee.

Gagan Education Society v. Addl.CIT {2011} 131 itd 442/10

taxmann.com 156 (Agra)

The assessee-society was running an educational institution and

claimed exemption under section 10(23c). The Assessing officer

noticed that society was running institution for profit and initiated

proceedings under section 147. He denied exemptions in each of

assessment years.

Held that merely because the surplus had arisen to the assessee

during the course of carrying on the education activity,it did not

mean that the assessee was not existing for educational purpose.

Even no such evidence or material was brought on record which

might prove that the assessee was engaged in any of the activities

other than the educational activities so that the assessee might be

disentitled for the exemption under section 10(23c) (iiiad), rather the

Assessing officers had accepted by following exemption to the

assessee under section11 during the assessment year 2007-08 that

the assessee was a genuine educational institution and the activities

of the assessee were genuine and had been carried on as per the

objects of the assessee. Accordingly, the order of the Assessing

officer was to be set aside and the exemption to the assessee was to

be allowed under section 10 (23c)(iiiad).

PRINCIPLES OF MUTUALITY (6.1)

The fundamental test of mutuality was clearly enunciated by Lord

Macmillan in the landmark judgment of the house of lords in the case

of Muncipal Mutual Insurance Ltd. Vs. Hills 16TC 430 as follows:-

“The cardinal requirement is that all the contributors to the

common fund must be entitled to participate in the surplus and

that all the participators in the surplus must be contributors to the


53

common fund. In other words, there must be complete identity

between the contributors and the participators”.

(6.3)

The said principle has been explained by the various High Courts

that the contributors to the common fund and the participators in

the surplus must be an identical body. It is not necessary that each

member should contribute to the common fund or that each

member should participate in the surplus or get back from the

surplus precisely what he has paid. The courts have held that it is

enough if they have a right of disposal over the surplus of the

common fund and in the exercise of that right they may agree that

on the winding up, the surplus would be transferred to a similar

concern or association or may be used for some charitable objects.

(6.8)

A mutual association may also earn interest or dividend income by

investing its surplus funds. Would such income also be exempt on

grounds of mutuality ? In the following cases the High Courts have

taken a view that while applying the principles of mutuality, it was

the source of deposit that had to be taken into consideration and not

the manner in which the funds were applied. Hence, if the member’s

contribution which had become the corpus fund was invested, then

income earned from such investment would be exempt on grounds

of mutuality. In arriving at the above conclusion, reliance was placed

on the Supreme court decision in CIT vs. Bankipur Club Ltd ,226 ITR

97.

(i) Canara Bank Golden Jubilee Staff Welfare Fund vs.DY. CIT, 308

ITR 202 (Kar).

(ii) DIT (E) vs. All india Oriental Bank of commerce Welfare Society

130 Taxman 575 (Del).


54

(iii) CIT vs. Standing Conference of Public Enterprises (SCOPE),319

ITR 179 (delhi).

(6.13)

The Supreme Court has observed that a host of factors have to be

considered to arrive at the conclusion whether the principle of

mutuality applies in a given case or not. Hence, various factors as

follows may be helpful in deciding whether the interest income

earned by a mutual association is exempt or not :

(i) Whether the investment is a mere temporary deployment of

surplus funds, or of a long-term nature?

(ii) Whether the intention behind making the investment is merely

to see that the funds are not kept idle, but deployed till such

time as required?

(iii) Is the quantum of investment income small as compared to

member’s contribution.

(iv) Whether the surplus has been built up only out of members

contribution?

(6.14)

Generally, if the investment is primarily with a view to deploy

unutilized funds, the investment activity cannot be regarded as an

activity independent of the objects of the Association, and would be

part of the surplus qualifying for exemption. The case would be even

stronger when investment is made with members of the association.

However in such a case also the distinction between investment

made in order to earn interest as an investor and one made in the

course of carrying on membership related activities would also have

to be considered.


55

(6.20)

Therefore, an industry or trade association deriving income from

specific services performed for non-members would not be eligible

for the benefits of section 11&12 as it would fall within the mischief

of the proviso to section 2(15). However, if the income is earned

entirely on account of dealings with members then following the

above mentioned circular, such income, subject to the provisions of

section 28 (iii), would be exempt on grounds of mutuality.

(6.21)

It may be pointed out that if such trade or professional association is

held liable to tax then under section 44A,any deficiency incurred by

such an association with regard to membership related activities

would be allowed as a deduction in computing the income of the

association assessable under the head’ Profits and gains of business

or profession. The membership related deficiency would arise if

receipts from members by way subscription or otherwise(not being

amounts received for rendering specific services to members) falls

short of expenditure incurred solely for the purpose of protection or

advancement of the common interest of its members. The deficiency

which cannot be absorbed against such business income will be

allowed as a deduction in computing the income of the association

for the relevant assessment year under any other head of income.

In computing the income of the association for the relevant

assessment year, effect shall first be given to any other provisions of

the act under which any allowance or loss in respect of any earlier

year is carried forward and set off against the income for the relevant

assessment year.

The amount of deficiency to be allowed as a deduction shall not

exceed one-half of the total income as computed before making any

allowances as mentioned in the forgoing para.


56

This section 44AA applies only to trade, professional or similar

association the income of which or any part thereof is not distributed

to its members except as grant to any association or Institution

affiliated to it.

(6.32)

As discussed in para 6.30 above, a society which enjoys exemption as

a charitable institution cannot also claim exemption by invoking the

principles of mutuality. However, in certain circumstances it may be

possible for a society or association which has been denied

exemption under section 10or 11, to claim exemption on grounds of

mutuality if its activities are restricted to contributions from and

participation from only their members as envisaged by the circular of

the CBDT No. 11/2008, dated 19.12.2008. As such, membership fees

(life and ordinary) and other contributions from members which

satisfy the tests of mutuality would be entitled to exemption on

grounds of mutuality.

(6.33)

Hence it will be appreciated that the principle of mutuality could,

under certain situations, be an alternative claim for exemption for

trusts incorporated as associations, chambers of commerce, bar

councils, societies, sports club etc. Generally such concerns would

claim the benefit of section11 if they are established for the benefit

of the public or a definite identifiable section of the public. However,

if that claim fails for some reason then it could examine whether it is

entitled to invoke the principle of mutuality. The principle of

mutuality applies not only to societies but also to companies

registered under section 25 of the companies Act and trusts, so long

as they satisfy the basic tests of mutuality.


57

7.8.41

If during the relevant year the assesses existed, solely for educational

purposes it would be entitled to exemption under section 10(22). In

the case of CITvs. Geetha Bhavan Trust,(1995) 213 ITR 296 (Ker) the

assessee trust was granted exemption as an educational institution

despite the permissive amplitude of its object clause, since the trust

had not embarked upon any other activity except running

educational institutions.

7.8.42

It is not necessary that the activity of the educational institution

should necessarily have been carried on during the year, if steps have

been taken to commence such activity and the objects are clearly to

run an educational institution. In MR. AR. Educational Society vs. CIT

253 ITR 589 (MAD),it was held that a society which was constructing

buildings and other facilities for a school during the year was entitled

to the exemption, though the school had not yet commenced. The

Court interpreted the term “existing” as not necessarily meaning

“being functional”.

Income Tax Review (Public Charitable Trust)

Income section11 (3.1)

The starting point for computation under section 11 is the

commercial income of the trust or income as is

understood generally, and not the income computed

under the various heads of income under section14 of the

act. Section 11 refers to „income‟ and not‟ total income,

which is defined u/s 2 (45) of the act. Also, circular No.5-p

(LXX-C) of 1968 dated 19th june1968, and the decision in

the case of CITvs. Rao Bahadur Calwala Cunnan Chetty


58

Charities 135 ITR 485 (MAD) have accepted the position

that income for section 11 is the commercial income.

4.Application of Income for Objects. (4.1)

Sections 11(1) (a) and 11(1) (b) provide for exemption for

income applied in India for charitable and religious

purposes and for income accumulated or set apart to the

extent it does not exceed 15% of the income. Clause (a) f

section 11(1) deals with the income of a trust which is

wholly for charitable or religious purposes while clause (b)

deals with the income of a trust created before the

commencement of the act which is partly for religious or

charitable purposes. In the cases governed by clause (b)

the exemption and accumulation provisions are

applicable only to that part of the income which, under

the provisions of the trust, is to be spent for religious or

charitable purposes.

(4.2)

In computing 15% of income which may be

accumulated, donations other than corpus donations are

included in the income {Refer clause(1) of Explanation to

section 11 (1). This accumulation is without any condition

as to its application towards charitable purposes.

(4.3)

Application of income towards charitable or religious

purposes includes administrative expenses incurred in

fulfilling the objects of the trust. The expenditure towards

the objects of the trust may be revenue or capital, but in

either case it is considered as application of income

towards the objects of the trust. {Refer Supreme court


59

decision in M. CT. M. Tiruppani Trust vs. CIT 230

ITR636}.However, expenditure on mere improvement of

the trust property may not be considered as application

for exemption u/s 11 unless the expenditure is for

charitable purposes of the trust. {Refer CIT vs. Kannika

Parameswari Devasthanam and Charities 133 ITR

779(MAD). However, the Kerala High Court in the case of

CITvs.st.George Forana Church 170ITR 62 took a different

view and held that additions to a building that was let out

was application of income towards the objects of the

trust.

4.5

Loans and loan scholarships are also considered as

application of income in the year of grant. In the year in

which the loans are refunded, as per CBDT Circular

No.100 dated 24th januaryu,1973, they have to be added

to the income of the year. However, the Bombay high

court in the case of CIT vs.Trustees of Kasturbai Scindia

Commission Trust 189 ITR 5has held that the repayment of

loan scholarships cannot be considered as income even

if these have been considered as application in the year

of their grant.

Application in Subsequent Year. (5.2)

This option has to be exercised by the trust in writing

before the due date for filling of the return of income u/s

139 (1). However, the Bombay High court in the case of

Tulsidas Gopalji Charitable and Chaleshwar Temple Trust

vs.CIT 207 ITR 368 and the high court of Jammu and

Kashmir in the case of CITvs.Ziarat Mir Syed Ali Hamdani,

248 ITR 769 have held that the option under clause (2) of


60

Explanation to section11(1) may be exercised with in the

period for filing a belated return u/s 139 (4).

CAPITAL GAIN (6.1)

Section11(1a) exempts capital gain arising on

transfer of a capital asset held as property under

trust for charitable or religious purposes. If the

whole of net consideration is utilized for acquiring

a new capital asset, the entire capital gain is

exempt. If only a part of the net consideration is

utilized,the exemption is available to the extent the

amount utilized for acquiring new asset exceeds

the cost of the asset transferred.

(6.2)

In case the asset transferred was held under trust

only in part for charitable or religious purposes then

the above provisions are applicable vis-à-vis that

proportion of capital gain which represents the

extent to which income derived from capital gain

of the transferred asset was applicable to

charitable or religious purposes. For the purposes

of section 11 (1A),cost of transferred asset would

include cost of improvement and net

consideration means full value of consideration as

reduced by expenditure incurred for the transfer of

the capital asset.


61

ACCUMULATION OF INCOME (7.2)

Due to various reasons, a trust may not apply its

income towards the objects during the previous

year. Section 11(2) provides for exemption of

accumulated income. For this purpose the trust

has to give notice to the Assessing officer in Form

No.10 as per rule 17. The notice has to be given

before the due date for filing the return u/s 139 (1)

of the act. The Madras High Court in the case of

M.CT. Muthia Chettiar Family Trust vs.ITO, Madras

,86 ITR282, held that the section neither provides for

any time limit nor authorizes prescribing such a

time limit. Hence, the time limit provided under rule

17 was ultra vires.This decision has been followed

by various High Courts including the Bombay High

Court CITvs.Nagpur Hotel Owner,s Association 209

ITR 441 and CITvs. Trustees of Shri Tekchand

Chandiram Trust 184 ITR 537. The Supreme Court in

the case of CIT vs. Nagpur Hotel Owners;

association 247 ITR 201set aside the decision of the

Bombay High Court holding that form No.10 could

be filed before the assessment is completed, while

the Bombay High court had held that Form No.10

could be filed even after completion of the

assessment. It may be noted that the Gujarat High

court in case of CIT vs. Mayor Foundation 274 ITR

564 held that assessment proceedings are

completed only when appeal against the


62

assessment is finally decided by the tribunal.

Consequentially, Form No.10 may be filed even

during the pendency of appeal before the

tribunal. The CBDT by an order issued u/s 119 (2) (b)

contained in circular No.273 dated 3rd june, 1980

has provided for admitting belated applications

for accumulation subject to certain conditions.

(7.4)

The section requires the purpose of accumulation

to be specified in the notice. It is a matter of

debate what this requirement contemplates-

whether merely mentioning the objects of the trust

would satisfy the requirement. The Delhi High Court

in various decisions has held that the notice stating

the objects in broad terms would be compliance

of the section. {Refer CITvs, Hotel &Restaurant

association 261 ITR 190 (DEL), DIT (E)vs. Daulat Ram

EducationSociety 278 ITR 260 (DEL),DIT(E)vs.Eternal

Science of Man;s society 290 ITR 535 (Del) DIT

(E)vs.Mamta Health Institute for Mother and

children 293ITR 380 (DEL) and bharat Kalyan

Pratishthan vs.DIT (E)299 ITE 406 del} However, the

Calcutta High Court,in DIT (E)vs.Trustees of

Singhania Charity Trust 139 ITR 199, has held that all

the objects cannot be listed as purposes of

accumulation. The Bombay Tribunal in Cotton

Textile Export Promotion Council vs. First ITO 4 ITD

642 held that mere reproduction of main object


63

would not be sufficient compliance. The

accumulation should be for a specific purpose

and not vague. In any case, the purpose of

accumulation should be with in the objects of the

trust.

2.2 With aggregate annual receipts not exceeding

RS 1 CRORE-Clause (iiiad) of s.10 (23c)

Smaller educational institutions also have a

general exemption similar to that available to

institutions wholly or substantially financed by the

government. No registration is required for such

institutions. The conditions here are that the

aggregate annual receipts should not exceed the

prescribed amount (currently Rs1 crore) and that

the institution should exist solely for educational

purposes and not for purposes of profit.

The meaning of the term “aggregate annual

receipts” is not defined. Would it include only

receipts in the nature of income? Would capital

gains and corpus donations are included in

aggregate annual receipts? Should such amounts

be computed only on cash basis, even if the

institution is following mercantile system of

accounting? If some expenses are incurred for

raising funds or receiving income, does one

consider the net funds raised/ income or the gross

amounts? Unfortunately, there has been no


64

clarification on any of these aspects either by the

legislature or by the CBDT.

Considering the purpose of this section ; i.e, to

grant an exemption to income of the institution,

the term should be considered as including all

receipts having the character of income.

Therefore, receipts such as refund of investments

would not form part of aggregate annual receipts,

not being in the nature of income. However,

donations, revenue grants, fees, interest, rent

etcwould certainly form part of aggregate annual

receipts.

The Hyderabad Tribunal in case of DCITvs. Mangal Dayak Chit Fund (p) Ltd.

(2005)92 ITD 258 (HYD)Observed as under:

“It is well-settled that the terms sales, turnover

and gross receipts have to be interpreted with

reference to the items which go into P&L a/c of

a concern and that this has to be ascertained,

based on the method of accounting regularly

employed by the assessee. Items of receipts

which are capital in nature do not go into the

P&L a/c and are not turnover. Trade practice

cannot be contrary to statutory requirements.The

views published in the Guidance Note issued by

the Institute of Chartered Accountants of india

that the terms turnover,sales and gross

receipts,should be construed in accordance

with the method of accounting regularly


65

employed by the assessee, are in line with the

interpretation placed by the CBDT on the terms

total sales turnover and gross receipts. The view

herein, as already stated, is that the trade

practices prevalent in the country with regard to

this particular business have to be considered

and are relevant for determining the turnover,

sales and gross receipts for the application of

s.44AB. The terms gross receipts, sales and

turnover are distinct from the term “cash inflows”

or funds inflows. A particular cash receipt should

be received on revenue account and should

form a part of the P&L a/c as per the method of

accounting regularly employed by the assessee,

to come under the purview of the terms “sales”,”

turnover” and gross receipts”.

Capital gains are really in the nature of capital

receipts. The definition of “income” under s.2(24)

includes only capital gains chargeable

unders.45.Therefore, a view is possible that

capital gains are really not in the nature of

income-character receipts, and therefore should

be excluded.

The Rajasthan High Court in case of Bajrang Oil

Mills vs.ITO (2007) 295ITR314 (Raj) held that under:

The three expressions used by the legislation, the

total sales “turnover” or “gross receipts” though

not defined under the Act, in the ordinary sense


66

refer to the volume of the business to which it

relates and which is/are carried on by the

assessee and in making assessment of profits and

gains from the business whether such volume is a

part of the business concerns trading in

commodities or otherwise the business activities

where the assessee has to indulge in incurring

cost before receiving the amount in relation to

that business or he is carrying on other business

activities in which the cost factor is excluded by

the assessee and what he is receiving as charges

for the work done by him, like job work, where

the raw material is provided by the other

manufacturer, the assessee is merely to relate his

receipts to labour charges or procuring cost

incurred by him along with part of his profit. It is in

that sense that business which is carried on by

the assessee has to be taken into totality. It may

be noticed that the “sales”, “turnover” or gross

receipts are not words of art used in relation to

any individual transaction independently but has

been used as “sales” “turnover” or “gross

receipts” .The expression total qualify all the

other three expression viz.‟sales‟ “turnover” and

gross receipts. Total sales indicate the aggregate

price of the sales of commodities carried out by

the assessee as a trading business. Obviously, it

would not include such transfer of immovable or

movable property by way of investment


67

.Similarly, where the assessee is not merely selling

the movable commodities, but relating to other

trading activities e.g. where assessee is a land

developer and he is engaged in business of

acquiring land, developing it and selling houses

or purchasing or is indulging in leasing business or

is indulging in stock market so on and so forth,

the expression “turnover” is made out to denote

receipts from such activities. There may be third

or residuary category which may not be termed

properly a trading activity yet it is carrying on as

business activity like job works for others, without

himself being the manufacturer and selling such

manufactured goods, or running a motor service

garage, for the receipts of such business can

aptly be termed as receipts of firm. However,

integral relation of receipts by a person from

business, does indicate that it refers to revenue

receipts only and do not include capital receipts

and certainly not the receipts which are not

relatable to business and may fall under the

expression income to be subjected to tax as

income from sources other than profits or gains

from business, profession or vocation.

However, the very fact that capital gains are

generally credited to the income and

expenditure account (or profit and loss account)

under normal accounting practice would


68

indicate that a contrary view is possible. Having

credited such gains to the income and

Expenditure account, it would be very difficult to

contend that such gains do not form part of

aggregate receipts. The safer view therefore is to

treat such capital gains as part of aggregate

annual receipts. The issue as to whether corpus

donations would form part of aggregate annual

receipts is a more difficult question. It is well

established that the nature of corpus donations is

really capital. On account of the definition of

“income” under 2(24) including voluntary

contributions, the question is whether all

voluntary contributions, including corpus

donations, would then be regarded as income?

In view of the controversy, a safer view to adopt

would be to consider corpus donations also as

part of aggregate annual receipts.

The fact that the term “ receipts” has been used

in contradistinction to the term income would

indicate that the actual receipts should be

considered, and not the income on accrual

basis, even if the institution is following the

mercantile system of accounting.Since the term

“aggregate” is used , it is clear that the receipts

should not be netted out against expenses

incurred to earn such incomes.For instance, fund


69

raising expenses should not be deducted from

expenses incurred for raising those incomes.

The term “annual” would imply that the

aggregate receipts for the previous year should

be considered. The question arises that, if in a

particular year, there are substantial receipts of

Non-recurring nature, by virtue of which the

aggregate receipts exceed Rs1 crore for that

year, though in other years, the receipt are less

than Rs1 crore, does the exemption continue to

be available under this clause? It would appear

that in such a situation, the exemption under this

clause would not be available for that particular

year. The aggregate annual receipts would have

to be seen for each year to consider the

availability of the exemption for that year.


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Documents

BACKGROUND MATERIAL ON CHARITABLE TRUST TAXATION …agra-icai.org/images/charitabletrust.pdf · ON CHARITABLE TRUST TAXATION OWNER INCOME TAX ACT BY. SH. KAPIL GOEL (FCA, LLB) PH:-