Mahakavi Edasseri Smaraka Trust Vs ITO (Exemptions) (ITAT Cochin)
The Income Tax Appellate Tribunal (ITAT), Cochin allowed the assessee’s appeal against the order of the Commissioner of Income Tax (Appeals) dated 21.12.2022, which had upheld the rectification of the processing of the assessee’s return under Section 143(1)(a) of the Income-tax Act, 1961 through an order passed under Section 154.
The assessee, a charitable trust registered under Section 12A on 15.06.2015, filed its return of income for AY 2018-19 on 14.09.2018. It declared income of ₹87,430 after claiming accumulation of 15% of its gross income of ₹1,02,862 under Section 11(1)(a), resulting in a nil tax liability. While processing the return under Section 143(1)(a), the Centralized Processing Centre denied the claim for accumulation and computed tax on the returned gross income, resulting in a tax liability of ₹30,858.
The assessee filed an application under Section 154 seeking rectification of the processing under Section 143(1)(a). The Revenue rejected the rectification request, following which the assessee’s appeal before the Commissioner (Appeals) was also dismissed. The assessee then appealed before the Tribunal.
No one appeared on behalf of the assessee before the Tribunal despite service of notice and repeated opportunities. The appeal was therefore heard ex parte after hearing the Departmental Representative and examining the record.
The Tribunal identified the principal issue as the computation of the income of a charitable institution where there was no application of income during the relevant year. Specifically, it examined whether the assessee was entitled to accumulate or set apart 15% of its income under Section 11(1)(a) despite not having applied any portion of its income towards its charitable objects during the year.
The Commissioner (Appeals) had held that the deduction representing 15% accumulation was not allowable because the assessee had not applied the remaining 85% of its income towards charitable purposes. Accordingly, the adjustment made by the CPC had been upheld.
The Tribunal examined the language of Section 11(1)(a) and Explanation 1 thereto. It observed that, unless an option is specifically exercised before the expiry of the time prescribed under Section 139(1), an assessee cannot accumulate or set apart more than 15% of its income from property held under trust. Consequently, the assessee is ordinarily required to apply 85% of its income for charitable purposes during the relevant year. Since the assessee had made no application of income and had not exercised the statutory option contemplated by Explanation 1, the shortfall extended to the entire 85%.
The Tribunal also noted that the assessee had not challenged the original intimation issued under Section 143(1)(a) but had instead sought rectification under Section 154, whose scope is limited. However, it held that this would not prevent relief because the Revenue itself had made the impugned adjustment in summary proceedings under Section 143(1)(a), whose scope is confined to apparently incorrect claims. According to the Tribunal, the issue did not fall within that limited scope. It therefore directed that the assessee be assessed at the returned income of ₹87,430.
The Tribunal further considered the tax rate applied by the Revenue, observing that this issue had resulted in the impugned demand. Although the Commissioner (Appeals) had not adjudicated this issue because it had not been raised before that authority, the Tribunal considered it to be a legal issue capable of determination on the available facts.
The Tribunal held that Section 167B, which prescribes taxation at the maximum marginal rate, had no application in the case of the assessee, which was a charitable trust. It observed that Section 167B applies where the shares of the beneficiaries of the trust are not known. Since the assessee was a public charitable trust, there was no question of individual beneficiaries having defined shares. The Tribunal held that applying Section 167B in such circumstances was misconceived.
The Tribunal also referred to CBDT Circular No. 320 dated 11.01.1982, observing that it clarified the position and was binding on the Revenue. It held that the assessee’s tax liability was to be computed at the normal rates applicable to an Association of Persons. The Tribunal further observed that the issue regarding the applicable tax rate constituted an apparent mistake and, where contested, fell outside the scope of adjustments permissible under Section 143(1)(a).
Accordingly, the Tribunal allowed the assessee’s appeal.
FULL TEXT OF THE ORDER OF ITAT COCHIN
This is an Appeal by the Assessee agitating the Order dated 21.12.2022 by the Commissioner of Income Tax (Appeals), Income Tax Department [CITA)], dismissing the assessee’s appeal contesting the rectification of the processing under section 143(1)(a) of the Income Tax Act, 1961 (the Act) of it’s return of income for Assessment Year (AY) 2018-19 vide order u/s. 154 of the Act dated 08.01.2020.
2. None appeared for and on behalf of the assessee when the appeal was called out despite service of notice of hearing, nor was there any adjournment motion. There has in fact been no representation by/for the assessee in this case throughout, with the Bench on each occasion the matter was listed for hearing, observing this, allowing opportunity toward the same, also requiring filing of Vakalath/PoA. Under the circumstances, hearing in the matter was proceeded with ex parte the assessee-appellant, who stands allowed an opportunity even after a final opportunity.
3. The brief facts of the case are that the assessee, a charitable trust, registered u/s. 12A of the Act (on 15.06.2015), filed it’s return of income for the relevant year on 14.09.2018, disclosing income at Rs.87,430, i.e., after deducting 15% of it’s gross income of Rs.1,02,862, returning nil tax liability thereon. The same was processed u/s. 143(1)(a) of the Act, denying the same and computing the tax liability on the returned gross income at Rs.30,858. The assessee moved a rectification application on 12.11.2019, disputing the said adjustment to it’s returned income. The said application is not on record for us to ascertain if the assessee had also disputed the tax rate applied in determining it’s tax liability on the assessed income. The rectification order, which is in the form of a statement, reiterates the Revenue’s stand, so that the assessee, unsuccessful in the first, is in second appeal before us.
4. We have heard the party before us, and perused the material on record.
4.1 The issue arising in the instant case, and toward which we have perused the impugned order and also the grounds raised before the first appellate authority, is the manner in which the income of such an Institution is to be computed in the absence of any application of income, i.e., if the allowance for 15% of the income from property held under trust is to be allowed u/s. 11(1)(a) of the Act or not. The relevant part of the impugned order read as under:
‘7.2 Thus it is seen that the appellant has claimed a deduction of Rs. 15429/- from its total gross receipt of Rs. 1,02,862/- and offered an adjusted total income of Rs. 87,433/- in its return of income. However, the deduction claimed by the appellant for Rs. 15,429/- being 15% of the gross receipts accumulated or set apart for application to charitable or religious purposes is not allowable to the appellant because the appellant has not reflected any application of funds for its purposes in respect of the remaining 85% of the gross receipts. Therefore, the adjustment made by the CPC is upheld and the grounds nos. 2 & 3 are dismissed.’
(emphasis, ours)
4.2 Section 11(1)(a) of the Act, also read out during hearing, reads as under:
Income from property held for charitable or religious purposes.
11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—
a. 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 fifteen per cent of the income from such property;
b. to (d)
4.3 The issue arising, in fine, is the applicability of section 11(1)(a) of the Act in the absence of any application of its income for it’s objects by the assessee, a charitable trust, during the relevant year. We see no reason for it being not so, and neither has any been stated by the Revenue at any stage. The language of the provision is unambiguously clear, so that an assessee is not entitled to, save where an option is specifically exercised in its respect, and before expiry of the time allowed for furnishing the return of income u/s. 139(1) of the Act, accumulate or set aside for application in excess of 15% of it’s income from the property held under trust. That is to say, it is necessarily to, save where an option is specifically exercised in its respect – which is not so in the instant case, apply 85% of it’s income for charitable purposed during the relevant year. The assessee, as afore-said, having not done so, it’s income is accordingly to be limited thereto, i.e., 85% of it’s total income. A reading of Explanation 1 to section 11(1), reproduced hereunder, makes it abundantly clear that in the absence of option being exercised, the deeming qua application of income, which extends to the shortfall w.r.t. eighty-five percent of income derived from property held under trust, shall not apply:
Explanation 1.—For the purposes of clauses (a) and (b),—
1. in computing the fifteen per cent of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income;
2. if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount—
i. for the reason that the whole or any part of the income has not been received during that year, or
ii. for any other reason, then—
a. in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and
b. in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, may, at the option of the person in receipt of the income (such option to be exercised before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income, in such form and manner as may be prescribed) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.
The application in the instant case being nil, the shortfall extends to the entire 85%.
4.4 We are conscious that the assessee did not file an appeal against the Intimation u/s. 143(1)(a) of the Act raising the impugned demand, preferring instead rectification thereof, scope of which is severely limited. This, to our mind, would not constrain us inasmuch as the Revenue itself has made the impugned adjustment under summary proceedings u/s. 143(1)(a), the scope of which is, again, limited to apparently incorrect claims, which is not the case. The assessee shall accordingly be assessed at the returned income of Rs.87,430.
4.5 Continuing further, even as observed by the Bench during hearing, the principal issue arising in the instant case, inasmuch as it is this that leads to the impugned demand, is the tax rate applied, which has been by the Revenue at the maximum marginal rate, duly raised by the assessee per its grounds of appeal before us. The assessee surely did not raise this issue before the ld. CIT(A), whose adjudication accordingly does not include the same. We, nevertheless, consider the same, being a legal issue, with the relevant facts available on record, adjudicating the same in disposal of the appeal, upon hearing Smt. Devi, the ld. Sr. DR.
4.6 We again find no reason for application of section 167B of the Act, prescribing the maximum marginal rate in the instant case, which is one of a charitable trust. Section 167B, as a reading of the provision would show, is only where the shares of the beneficiaries of the trust are not known. The assessee, registered as a charitable trust, is a public body and, accordingly, there is no question of it’s beneficiaries being individual members, whose shares have therefore to be defined. The application thereof in the instant case is wholly misconceived. The matter in fact stands clarified by the Board per it’s Circular No. 320, dated 11/01/1982, also binding on the Revenue. The tax rate accordingly is to be computed as per the normal rates as applicable to Association of Persons. The same, in our view, is again an apparent mistake and, where contested, outside the ambit of s. 143(1)((a) in the first instance, so that it could not have been effected there-under.
4.7 We decide accordingly.
5. In the result, the assessee’s appeal is allowed.
Order pronounced on February 29, 2024 under Rule 34 of The Income Tax (Appellate Tribunal) Rules, 1963
