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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
Charity taxation Income Tax Act, 1961
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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.
Charity taxation Income Tax Act, 1961
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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
Charity taxation Income Tax Act, 1961
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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
Charity taxation Income Tax Act, 1961
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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,
Charity taxation Income Tax Act, 1961
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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
Charity taxation Income Tax Act, 1961
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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
Charity taxation Income Tax Act, 1961
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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
Charity taxation Income Tax Act, 1961
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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
Charity taxation Income Tax Act, 1961
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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
Charity taxation Income Tax Act, 1961
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Gaur Brahmin Vidya Pracharini Sabha, Gaukaran Road, Rohtak Charity Sec.
12AA vs 80G
` `
Charity taxation Income Tax Act, 1961
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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
Charity taxation Income Tax Act, 1961
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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
Charity taxation Income Tax Act, 1961
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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
Charity taxation Income Tax Act, 1961
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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.
Charity taxation Income Tax Act, 1961
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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
Charity taxation Income Tax Act, 1961
17
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
Charity taxation Income Tax Act, 1961
18
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
Charity taxation Income Tax Act, 1961
19
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
Charity taxation Income Tax Act, 1961
20
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.
Charity taxation Income Tax Act, 1961
21
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.
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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.
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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,
Charity taxation Income Tax Act, 1961
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 “
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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.
IN THE INCOME TAX APPELLATE TRIBUNAL
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
Charity taxation Income Tax Act, 1961
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™
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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.
IN THE INCOME TAX APPELLATE TRIBUNAL
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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.
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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.
Charity taxation Income Tax Act, 1961
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.
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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).
Charity taxation Income Tax Act, 1961
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.
Charity taxation Income Tax Act, 1961
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.
Charity taxation Income Tax Act, 1961
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.
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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.
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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
Charity taxation Income Tax Act, 1961
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.
Charity taxation Income Tax Act, 1961
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Charity taxation Income Tax Act, 1961
71