Income Tax Appellate Tribunal - Mumbai
Bai Sonabai Hirji Agiary Trust vs The 5Th I.T.O. on 22 September, 2004
Equivalent citations: [2005]93ITD70(MUM), [2005]272ITR67(MUM), (2004)85TTJ(MUM)907
ORDER
K.K. Boliya, A.M.
1. Hon'ble President, ITAT constituted this Special Bench Under Section 255(3) of the IT Act for deciding the following question:
"Whether in the facts and circumstances of the case, the decision in the case of Parsi Zorastrian Anjuman Trust, MHOW v. CIT - 163 IT.R 832 was applicable in the assessee's case ?"
2. The relevant facts may be stated in brief. The assessee is a Public Charitable Trust enjoying exemption Under Section 11 of the IT Act. One of the prime objects of the assessee-trust is to meet the requirement of housing of the weaker sections of the society. As per the requirement of Section 11(1) of the IT Act, the assessee has to apply 75% of its income for the objects and purposes of the Trust and the assessee is permitted to accumulate or set apart up to 25% of its income, which is subject to fulfillment of other conditions. While calculating the aforesaid 25%, the important question which arises is as to whether for this purpose, the gross income earned by the assessee is relevant or the income as computed in accordance with the provisions of IT Act. In other words, whether outgoings from out of gross income, which are in the nature of application of income, should be first deducted from the gross income and 25% of only the remaining amount should be allowed to be accumulated or set apart. During the previous year relevant to the assessment year under appeal, the assessee worked out 25% of the income in the following manner:
Gross income Rs. 3,52,962/-
Less: Administrative expenses etc. Rs. 47,984/-
Depreciation (as allowable) Rs. 24,640/-
Rs. 72,6 30/-
Rs. 2,80,332/-
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Less: 25% of 2,80,332/- Rs. 70,083/-
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The AO, however, determined the 25% only at Rs. 36,061, which is worked out in the following manner:
Gross income as per assessee's computation Rs. 3,42,174/-
Less: Income from property separately considered Rs. 2,63,675/-
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Rs. 78,499/-
Add: Income from property computed above Rs. 65,747/-
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Rs. 1,44,246/-
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Less: Expenses for and on the objects of the Trust Rs. 33,591/-
Statutory deduction Rs. 36,061/-
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Rs. 69,652/-
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Rs. 74,594/-
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It may be mentioned here that the income from house property was worked by the AO in the following manner:
Rental income Rs. 2,63,675/-
Less: Outgoings Rs. 2,17,126/-
Depreciation disallowed as discussed above
(43,844/- - 24,646/-) Rs. 19,198/-
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Rs. 1,97,928/-
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Rs. 65,747/-
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From the above, it would appear that the dispute is limited to the correct amount of income from house property, whether it should be gross rent of Rs. 2,63,675/- or the net income after deducting outgoings and depreciation.
3. It may also be mentioned here that for the assessment year 80-81, similar question arose before the Tribunal and vide order dated 12.5.89 in ITA No. 6376/Bom/83, the Tribunal held that the Madhya Pradesh High Court decision in the case of Parsi Zorastrian Anjuman Trust v. CIT -163 ITR 832 was not applicable to the case of the assessee. When the similar issue again came up for consideration of the Regular Bench of the Tribunal for the assessment year 81-82, the Bench deemed it proper to refer this issue for adjudication by the Special Bench.
4. In the backdrop of the abovementioned facts, the ld. counsel, Shri V.H. Patil, appearing on behalf of the assessee contended that the assessee's case is squarely covered by the Madhya Pradesh High Court decision in the case of Parsi Zorastrian Anjuman Trust (supra). In that case, the gross rent received amounted to Rs. 17,414/- against which expenditure relating to house property was incurred by the assessee at Rs. 28,659/-. The ITAT, in that case, held that since the expenditure was more than income, no rental income was available to the assessee and therefore rent of Rs. 17,414/-should be deducted from the gross income of Rs. 73,484/- before quantifying accumulation at the rate of 25%. When the matter came up before the Madhya Pradesh High Court, it was held that reference Under Section 11(1) is not to 'total income' as defined in Section 2(45) of the IT Act. It was held that for the purposes of Section 11(1), the income of Rs. 73,484/- was relevant and the rental income of Rs. 17,414/- could not be deducted therefrom.
5. The ld. counsel for the assessee also invited our attention to the Supreme Court decision in the case of CIT v. Programme for Community Organisation - 248 ITR 1, confirming the Kerala High Court decision in the case reported at 228 ITR 620. The ld. counsel invited our attention to the following observation of the Hon'ble Supreme Court at page 2 of the Report:
"The question that really requires consideration is whether, for the purposes of Section 11(1)(a) of the IT Act, 1961, the amount for the grant of exemption of 25% should be the income of the trust or it should be its total income as determined for the purposes of assessment to income tax. This question has to be answered in the light of these facts . The assessee-trust received donations in the aggregate sum of Rs. 2,57,376/-. It applied thereout for its charitable purposes the aggregate sum of Rs. 1,70,369/- leaving a balance of Rs. 87,010/-. The question is whether the assessee is entitled to accumulate 25% of Rs. 2,57,376/- as it contends, or 25% of Rs. 87,010/-, as the Revenue appeared to contend.
Section 11(1)(a) reads thus:
'Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India, and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 25% of the income from such property' Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate 25% of its income derived from property held under trust. For the present purposes, the donations the assessee received, in the sum of Rs. 2,57,376, would constitute its property and it is entitled to accumulate 25% thereout. It is unclear on what basis the Revenue contended that it was entitled to accumulate only 25% of Rs. 87,010/-.
Shri V.H. Patil further submitted that the Kerala High Court, in the same case, has referred to the Board's circular dated 19.6.68 on the same subject and observed that 'income' for the purposes of Section 11(1), should be understood in its commercial sense. It was held by the Kerala High Court that 25% of gross amount of Rs. 2,57,376/- should be accumulated, and this finding has been confirmed by the Hon'ble Supreme Court. Shri V.H. Patil also contended that all outgoings including expenditure incurred by a public charitable trust must be considered to be in the nature of application of income for the objects and purposes of the trust. It is, therefore, contended that 25% of the gross income as reflected in the account of the assessee trust should be allowed to be accumulated Under Section 11(1).
6. The ld. CIT DR, Shri K.L. Maheshwari, at the outset, contended that the reference to the Special Bench does not arise either from the grounds of appeal taken before the CIT(A) or the grounds of appeal taken before the ITAT. It is submitted that this relevant question is nowhere reflected in the grounds raised by the assessee and therefore the reference made to the Special Bench should be returned unanswered. On merits of the claim of the assessee, Shri Maheshwari submitted that commercial income should be considered for calculating 25% and such commercial income has to be computed after deducting all such expenditure which have been incurred for earning the income. He relied on the ITAT, Mumbai 'A' Bench decision in the case of Gem Jewellery Export Promotion Council v. Sixth ITO - 68 ITD 95.
7. The ld. counsel for the assessee, in his rejoinder, submitted that even though any written ground on this issue was not raised by the assessee, during the course of hearing before the Regular Bench, relevant oral grounds were raised, which were admitted by the Tribunal, which is proved from the fact that the Tribunal referred the matter to the Special Bench. It is contended that it is a purely legal issue and therefore the oral ground was rightly admitted by the Tribunal and referred to the Special Bench.
8. We have given a careful consideration to the rival submissions made before us vis-a-vis the facts of the case and have gone through the various judgments with which we have been assisted by both the sides. First of all, we deal with the technical objection raised by the ld. CIT DR. As already mentioned above, this issue came up for consideration before the Regular Bench and the Bench made a detailed reference to the Hon'ble President, ITAT for constituting a Special Bench for deciding this issue. In our view, the very fact that the Regular Bench deemed it proper to make a detailed reference to the President proves that the ground taken before it was admitted by the Bench and therefore a reference was made to the Hon'ble President, ITAT, Under Section 255(3). Once the President, ITAT has constituted the Special Bench and has referred the question to the Special Bench, the Special Bench is bound to decide the issue Under Section 255(3) of the IT Act. In view of the above facts, the technical objection raised by the ld. CIT DR is rejected.
9. Coming to the merits of the issue, we are of the view that the same is clearly covered by the decision of the Hon'ble Supreme Court in the case of CIT v. Programme for community organization (supra), in the decision their Lordships, after taking note of provisions of Section 11(1)(a) have here as under:
"Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty five percent of its income derived from property held under trust. For the present purposes, the donations the assessee received, in the sum of Rs. 2,57,376, would constitute its property and it is entitled to accumulate twenty five percent thereout. It is unclear on what basis the Revenue contended that it was entitled to accumulate only twenty five per cent of Rs. 87,010/-.
For the aforesaid reasons, the civil appeal is dismissed."
It is clear from the above that deduction of twenty five percent was held to be allowable not on total income as computed under the Income-tax Act. Any amount or expenditure, which was application of income, is not to be considered for determining twenty five percent to be accumulated. Their Lordships, as noted earlier, affirmed the decision of Kerala High Court reported in 228 ITR 620 wherein it is held as under.
"At the outset, the statutory language of Section 11(1)(a) of the Income-Tax Act, 1961, relates to the income derived by the Trust from property. The trust is required to be wholly for charitable or religious purposes, and the income is expected to have relation to the extent to which such income is applied to such purposes in India. It is thereafter the statutory provision proceeds further that such income is not to be understood to be in excess of 25% of the income from such properties. In other words, the very language of the statutory provision under consideration sets apart 25% of the income from the source of property with reference to the extent to which such income is applied for such purposes, charitable or religious. In other words, for the purpose of the Section 11(1)(a) of the Act, the income in terms of relevance would be the income of the trust from and out of which 25% is set apart in accordance with the spirit of the statutory provision."
This means that when it is established that trust is entitled to full benefit of exemption under Section 11(1), the said trust is to get the benefit of twenty five percent and this twenty five percent has to be understood as income of the trust under the relevant head of Section 11(1). In other words, income that is not to be included for the purpose of computing the total income would be the amount expended for purposes of trust in India. Their Lordships in the above case have emphasized on the clear and unambiguous language of Section 11(1)(a) and decided the matter on the basis of the same. It has been held that as per the statutory language of the above section the income which is to be taken for purpose of accumulation is the income derived by the trust from property.
If both the decisions are carefully read, it becomes evident that any expenditure which is in the shape of application of income is not to be taken into account. Having found that trust is entitled to exemption under Section 11(1), we are to go to the stage of income before application thereof and take into account 25% of such income. Their Lordships have pointed that the same has to be taken on "Commercial" basis and not "total income" as computed under the Income-tax Act. Their Lordships in the decided case rejected the contention of the Revenue that the sum of Rs. 1,70,369/- which was spent and applied by the assessee for charitable purposes was required to be excluded for purpose of taking amount to be accumulated.
Having regard to the clear pronouncement of their Lordships of the Supreme Court it is difficult to accept that outgoings which are in the nature of application of income are to be excluded. The income available to the assessee before it was applied is directed to be taken and the same in the present case is Rs. 3,42,174/-. Twenty five percent of the above income is to be allowed as a deduction. Similar view has also been taken by the Hon'ble Madhya Pradesh High Court in Parsi Zorastrian Anjuman Trust Mhow v. CIT 163 ITR 832. No reason whatsoever has been given by the revenue authorities for deducting Rs. 2,17,126/- in this case for purposes of Section 11(1)(a). The decision cited on behalf of the revenue did not take into account the decision of the Supreme Court referred to above. The circular of CBDT has also been considered by the Hon'ble Kerala High Court in its decision referred to above. Accordingly the question referred to us is answered in the affirmative and in favour of the assessee.
10. We find that the assessee has raised some other grounds of appeal including one additional ground of appeal before the Regular Bench. Both the parties agreed that these other grounds of appeal are to be heard and decided by the Regular Bench. We accept this proposition and direct the Registry to place the matter before the Regular Bench for deciding all other issues.