Ved Prakash Mukand Lal Educational Society Vs DCIT (ITAT Chandigarh)
Investment in Bank FDR Is Not Application of Income for Charitable Purposes Merely Because Trust Deed Permits Such Investment: ITAT Special Bench
Summary: The Special Bench of the Chandigarh Income Tax Appellate Tribunal has held that investment of a charitable trust’s funds in bank fixed deposits under section 11(5) does not amount to application of income for charitable or religious purposes under section 11(1).
The position does not change merely because the trust’s memorandum includes investment of funds in the modes prescribed under section 11(5) as one of its objects. Investment in an FDR represents accumulation or setting apart of income for its future application and cannot be equated with actual application towards charitable objects.
The ruling was rendered in the case of The Ved Prakash Mukand Lal Educational Society v. DCIT, concerning Assessment Years 2005-06 and 2006-07.
Questions Before the Special Bench
The Special Bench was constituted to decide whether:
- an object in the memorandum authorising the society to invest its income in the modes prescribed under section 11(5) could itself be regarded as a charitable object; and
- where the society invested its income in bank FDRs pursuant to such an object, the investment could be treated as application of income for charitable or religious purposes.
The Special Bench answered both questions in the negative.
Facts of the Case
The assessee was a charitable educational society registered under section 12AA. It filed its return for AY 2005-06 declaring nil income after claiming exemption under section 11.
The society received total income of ₹8.86 crore, but applied approximately ₹7.06 crore towards its objects by incurring revenue and capital expenditure. To cover the shortfall in the statutory application requirement, it claimed that ₹1.25 crore had been deposited in bank FDRs under sections 11(2) and 11(5).
The Assessing Officer found that the society had not furnished the required intimation in Form No. 10, specifying the purpose and period of accumulation. Consequently, an addition of ₹46.67 lakh was made.
For AY 2006-07, against total receipts of approximately ₹9.95 crore, the society applied only ₹6.51 crore towards its objects. It claimed that ₹3.86 crore deposited in bank FDRs should also be counted as application. Since Form No. 10 had not been furnished, the Assessing Officer made an addition of ₹1.94 crore.
The CIT(A) accepted the society’s contention that the bank deposits constituted application of income, relying upon the Tribunal’s earlier decision in the assessee’s own case for AY 2008-09.
When the matter reached the Tribunal, the Division Bench disagreed with the earlier decision and referred the legal questions to a Special Bench.
Assessee’s Contention
The assessee relied upon clause III(7) of its memorandum, which authorised it to invest the society’s funds in the modes prescribed under section 11(5).
It was argued that the society had been granted registration under section 12AA after examination of its objects. Once investment in the prescribed modes formed part of those approved objects, placing funds in an FDR with a nationalised bank should be treated as application of income.
The assessee also relied upon the earlier order in its own case for AY 2008-09, in which additions to fixed deposits had been treated as application of income.
Revenue’s Contention
The Revenue argued that section 11(1) requires at least 85% of income to be applied towards charitable or religious purposes in India. The balance 15% may be accumulated without any specific condition.
Where the trust cannot apply 85% of its income during the year and seeks to accumulate the shortfall for future application, it must satisfy section 11(2). This includes furnishing the prescribed statement specifying the purpose and period of accumulation and investing the money in the modes specified under section 11(5).
Therefore, investment under section 11(5) was only a permitted mode of holding accumulated income. It was not an application of income in itself.
Findings of the Special Bench
The Special Bench drew a clear distinction between application of income and accumulation or setting apart of income.
Section 11(1) exempts income actually applied to charitable or religious purposes in India. It also permits accumulation of up to 15% of income without further conditions.
Where 85% of the income is not applied during the year, section 11(2) allows the shortfall to be accumulated for future application, subject to statutory conditions. The trust must furnish the prescribed statement stating the specific purpose and period of accumulation, which cannot ordinarily exceed five years. The accumulated money must thereafter be invested in one of the modes specified in section 11(5).
Section 11(5), therefore, merely prescribes the forms and modes for investment of accumulated money. It does not convert the investment itself into expenditure or application for charitable purposes.
The Special Bench further held that investment in an FDR cannot independently constitute a “charitable purpose” within the meaning of section 2(15). It is only a method of safely preserving funds for eventual utilisation towards education, medical relief, relief of the poor or another recognised charitable object.
The presence of an investment clause in the memorandum could not alter the statutory scheme. A trust is permitted to invest accumulated income under section 11(5) even if its memorandum does not expressly contain such a clause. Consequently, including the statutory investment power as an “object” does not transform the investment into charitable application.
The Tribunal also declined to follow the earlier decision in the assessee’s own case for AY 2008-09. It noted that the earlier decision arose from a different factual situation where the total amount treated as applied exceeded the gross receipts. More importantly, the earlier Bench had failed to maintain the statutory distinction between application and accumulation.
The Special Bench reiterated that res judicata does not strictly apply to income-tax proceedings, and an erroneous interpretation in an earlier year need not be perpetuated.
Author’s Comments
The ruling settles an important controversy for charitable and religious institutions. An FDR is an asset representing retained funds. It does not, by itself, advance education, medical relief or any other charitable purpose.
A trust may retain 15% of its income without filing Form No. 10. However, if application falls below 85% and the trust seeks exemption for the additional unspent amount, it must validly exercise the accumulation option under section 11(2), specify the purpose and period in the prescribed form and keep the funds invested in the permitted modes.
Thus, investment under section 11(5) is a condition governing accumulated income—not a substitute for application under section 11(1).
Trusts should separately compute actual application, unconditional 15% accumulation and specific accumulation under section 11(2). Merely transferring the year-end surplus into a bank FDR will not cure a shortfall in application.
Cases Discussed
- DLF Qutab Enclave Complex Medical Charitable Trust, 248 ITR 41 (Delhi)
- ACIT v. A.L.N. Rao Charitable Trust, 216 ITR 697 (SC)
- CIT v. Highway Construction Co. (P.) Ltd., 217 ITR 234 (Gauhati)
- The Ved Prakash Mukand Lal Educational Society — assessee’s own case for AY 2008-09, ITA No. 952/Chandi/2011
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT CHANDIGARH
This Special Bench is constituted to decide the following questions :-
“i) Whether the object of an assessee Society to invest its income in the mode and manner as per provisions of Section 11(5) can be said to be an object of charitable nature ?
ii) Where an assessee Society is having an object that its income will be invested in the mode and manner as prescribed u/s 11(5) of the Act and it invests its income in the FDRs, can it be said to be an application of the income for charitable or religious purposes ?”
Brief Facts
2. The Ved Prakash Mukund Lal Educational Society – the appellant-assessee is a charitable society registered under Section 12AA of the Income Tax Act, 1961 (‘Act’ for short). The assessee filed its Return of Income (RoI) for assessment year 2005-06 on 30.10.2005 declaring total income at Nil, claiming surplus of income over expenditure as exempt under Section 11 of the Act. The RoI was processed under Section 143(1) of the Act. Subsequently, the case was selected for scrutiny and the assessment was finalized under Section 143(3) of the Act vide order dated 25.10.2007 accepting the returned income. Later on, the case was selected for reassessment under Section 147 r.w.s. 148 of the Act on the ground that the Income and Expenditure account of the assessee showed that out of the total receipts of Rs.8,86,35,665/-, only a sum of Rs.7,06,25,737/- (revenue expenditure of Rs.3,67,90,756/- + capital expenditure of Rs.3,38,81,961/-) has been spent towards its objects, which approximately formed only 80% of the total receipts. In order to cover the deficit, the assessee claimed that balance amount of Rs.1,25,82,774/- was deposited in the bank fixed deposit in pursuance of Section 11(2) and 11(5) of the Act. The Assessing Officer (‘AO’ for short) found that the assessee had not given intimation in Form no. 10 as required by Sub-section 5 of Section 11 of the Act with regard to the purpose and period for which the excess income was accumulated or set apart. The AO having found that the assessee had failed to follow the prescribed procedure, vide order dated 20.03.2013 made an addition of Rs.46,67,779/-.
3. Insofar as assessment year 2006-07 is concerned, the appellant filed its RoI on 30.10.2006, again declaring total income at Nil claiming the surplus of income over expenditure as exempt under Section 11 of the Act. The return was processed under Section 143(1) of the Act followed by assessment order under Section 143(3) of the Act dated 30.12.2008 accepting the returned income. Later on, the case was selected for reassessment under Section 147 of the Act. The AO found that out of the total receipt of Rs.9,94,56,533/-, only a sum of Rs.6,51,26,448/- (revenue expenditure of Rs.4,75,81,711/- + capital expenditure of Rs.1,75,44,737/-) has been spent towards the objects, which approximately formed 72% of the total receipts. The AO found that in order to cover the deficit, a sum of Rs.3,86,28,412/- was claimed to have been deposited in a fixed deposit with the bank as per Section 11(2) and 11(5) of the Act. Here again the AO found that the assessee had not filed Form no. 10 as required by Sub-section 5 of Section 11 of the Act. The assessee thus having failed to follow the prescribed procedure, the AO made an addition of Rs.1,94,11,605/-.
4. The assessee, feeling aggrieved, challenged both these orders before the Commissioner of Income Tax (Appeals) (‘CIT(A)’ for short). Apart from the issue of deposit in the bank being treated as application of income, the assessee also challenged the reopening and disallowance of carry forward of excess expenditure over its income for the earlier year to be adjusted in the subsequent year.
5. The learned CIT(A) by a common order dated 31.07.2014 has refused to accept the ground challenging the reopening and the issue of carry forward of excess expenditure over the income in the subsequent year. The learned CIT(A), however, allowed ground no. 3 pertaining to claim of the assessee of the deposit in the bank being treated as application of income for charitable purposes. A perusal of the order of learned CIT(A) shows that for the purpose of ground no. 3 the learned CIT(A) has placed reliance on the decision of Chandigarh Benches in assessee’s own case for assessment year 2008-09 (ITA No. 952/Chandi/2011 dated 25.01.2012). In that view of the matter, the appeals came to be partly allowed by the learned CIT(A).
6. The present set of four appeals comprise of two appeals each filed by the assessee and the Revenue for assessment year 2005-06 and 2006-07.
7. When the appeals came up before the Division Bench, the Division Bench expressed its inability to agree with the decision of the co-ordinate Bench in assessee’s own case in ITA No. 952/Chandi/2011 for assessment year 2008-09. In such circumstances, the Division Bench by an order dated 17.03.2020 has required the aforesaid issues to be placed before a Special Bench. Although the Division Bench has observed that the Special Bench may also decide the other/all issues involved in these appeals, the President in his discretion has only referred the aforesaid two issues to the Special Bench. In the present reference, we are only concerned with the appeals filed by the Revenue challenging the finding recorded by the learned CIT(A) allowing ground no. 3 raised before him.
Rival submissions
8. We have heard Smt. Kusum Bansal, learned DR and Shri Tejmohan Singh, learned counsel for the assessee. With their assistance, we have gone through the record.
9. It is submitted by the learned DR that deposit of the amount in nationalized bank as contemplated under Sub-section (5) of Section 11 of the Act cannot be treated as application of income for charitable purposes. It is submitted that under Sub-section (1) of Section 11 of the Act, assessee is obliged to apply 85% of the income for charitable purposes. It submitted that any amount falling short of 85% can be invested in nationalized bank subject to the conditions as prescribed in Sub-section (5) of Section 11 of the Act. It is submitted that such investment can be for a period of five years subject to an intimation in Form no. 10 being furnished to the AO indicating the object and the period for which the balance amount is accumulated or set apart. It is submitted that the assessee in this case has not complied with the said condition as admittedly no intimation in Form no. 10 has been furnished to the AO. It is submitted that reliance placed by the assessee on the Objects is misplaced. It is pointed out that an object permitting the assessee to invest in a nationalized bank cannot by itself be an object of charitable purpose. It is submitted that Sub-section (5) of Section 11 of the Act cannot partake or be elevated as application of income under Section Sub-section (1) of Section 11 of the Act else otherwise Sub-section (1) of Section 11 would be rendered otiose.
10. The learned DR has referred to the definition of “charitable purpose” under Section 2(15) of the Act in order to submit that investment in a Fixed Deposit cannot be said to be a charitable purpose. It is submitted that there is an essential difference between application of the income for charitable purpose and the income being accumulated or set apart for such application.
11. The learned counsel for assessee has strenuously urged that investment in nationalized bank itself being provided as one of the objects of the assessee-Trust, the investment so made in the subject assessment years has to be treated as an application of income. It is submitted that the assessee is registered under Section 12AA of the Act. It is pointed out that the competent authority on the basis of the objects as set out in the Memorandum of Association (MoA) has granted the registration and, therefore, the AO was not justified in refusing to treat the investment so made as application of income. The learned counsel was at pains to point out that clause III (1) to (6) of the MoA have to be read together with clause (7). He submitted that the Division Bench in assessee’s own case for assessment year 2008-09 has allowed the claim of such investment being treated as application of income, which has rightly been relied upon by the learned CIT(A). He, therefore, submitted that the issues referred may be answered in favour of the assessee.
12. On behalf of the assessee, reliance is placed on the decision of Delhi High Court in Director of Income Tax (Exemption) vs DLF Qutab Enclave Complex Medical Charitable Trust, 248 ITR 41 (Delhi) and the decision of Gauhati High Court in CIT vs Highway Construction Co. (P.) Ltd., 217 ITR 234 (Gauhati)
Consideration
13. We have given our anxious consideration to the rival circumstances and the submissions made. The material facts are not in dispute, apart from being matters of record. It is not in dispute that for both the assessment years, assessee had not spent 85% of the amount as required by Section 11(1) of the Act. The balance falling short was invested in a nationalized bank. The only question is whether such investment can be treated as application of income within the meaning of Section 11(1) and 11(5) of the Act read with the objects of the assessee-Trust. In order to appreciate the rival contentions, it is necessary to reproduce the objects as set out in Clause III of the MoA as under :-
“1. To run Seth Jai Parkash Mukand Lal Institute of Engineering & Technology, Village Chhotabans, Radaur, Distt. Yamuna Nagar (Haryana), Jai Parkash Mukand Lal Innovative Engineering & Technology Institute, Village Chhotabans, Radaur, Distt. Yamuna Nagar (Haryana) and to establish & run Medical Institutions, Hospitals, Diagnostic Centre, other educational & charitable institutions, in any part of India.
2. To purchase, take on lease & rent, accept gifts/donation or otherwise acquire/transfer any land, building or other moveable/immovable assets
3. To construct or alter any building of the society.
4. To sell, lease, to let, exchange or otherwise transfer for construction all or any portion of the properties, assets of the Society to any other Society or person or persons.
5. To enter into any arrangement/contract with Government or any other person or persons for securing grant-in-aid for the Society & the institutions run by the Society.
6. To raise and borrow money on such terms & conditions as the Society shall deem fit and to pay out of the funds of the Society all expenses of or incidental to the raising of money for the Society.
7. To invest the funds/money of the Society in a manner as provided U/S 11(5) of Income Tax Act from time to time be determined, and from time to time transfer/sell such investments.
8. The society will utilize its surplus of revenue & receipts over expenses & payments, if any, or other income in promoting its objects.
9. To make such grants as the Society may think fit for the benefit of the employee or employees of the Society and to grant scholarships, study loans and Financial aids to deserving students/persons.
10. To give donations to institutions, organizations or Societies engaged in social welfare programmes.
11. To give loans to institutions being run/managed by registered Societies/Trusts.
12. To do all such other things as may be incidental or conducive to the attainment of the above objects.”
14. Section 11 of the Act, to the extent relevant, reads as under :-
“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) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property;
(c) …………..
(d) …………..
(1A) …………..
(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:—
(a) such person furnishes a statement in the prescribed form and in the prescribed manner to the Assessing Officer, stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years;
(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5);
(c) the statement referred to in clause (a) is furnished [at least two months prior to] the due date specified under sub-section (1) of section 139 for furnishing the return of income for the previous year:
Provided that in computing the period of five years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded.
Explanation.—Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or section 12AB or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.
(3) …………..
(3A) …………..
(4) …………..
(4A) …………..
(5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely :—
(i) investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government;
(ii) deposit in any account with the Post Office Savings Bank;
(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).
Explanation.—In this clause, “scheduled bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);
(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);
(v) investment in any security for money created and issued by the Central Government or a State Government;
(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government;
(vii) investment or deposit in any public sector company:
Provided that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company,—
(A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company;
(B) such other investment or deposit shall be deemed to be an investment or deposit made under this clause for the period up to the date on which such investment or deposit becomes repayable by such company;
(viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;
(ix) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;
(ixa) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of providing long-term finance for urban infrastructure in India.
Explanation.—For the purposes of this clause,—
(a) “long-term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;
(b) “public company” shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);
(c) “urban infrastructure” means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport;
(x) investment in immovable property.
Explanation.—”Immovable property” does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth;
(xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964);
(xii) any other form or mode of investment or deposit as may be prescribed.”
15. From a plain reading of the aforesaid provisions, the following principles emerge:-
i) The Trust is required to apply or deemed to have applied 85% of its income for charitable or religious purposes in India in order to claim the benefit of exemption under Section 11(1) of the Act. Apart from the application of such income, the Trust can also accumulate or set apart such income not in excess of 15%;
ii) Sub-section (2) to Section 11 of the Act envisages a situation where the Trust has not applied or deemed to have applied 85% of the income for religious or charitable purposes in India. In terms of Sub-section (2) of Section 11 of the Act, the income which falls short of 85% of application, can be accumulated or set apart subject to the conditions as specified in Sub-section (2);
iii) Section 11(2)(a) of the Act requires the Trust to furnish a statement, in the prescribed form and in the prescribed manner, to the AO stating the purpose and period for which the income is being accumulated or set apart for eventual application, which shall not exceed 5 years;
iv) As per Section 11(2)(b) of the Act, any money so accumulated or set apart has to be invested or deposited in the forms or modes specified in Sub-section (5) of Section 11 of the Act;
v) Sub-section (5) of Section 11 of the Act only prescribes the forms and modes of investing or depositing the money as is referred to in clause (b) of Section 11(2) of the Act.
vi) Section 11(5) of the Act refers to the investment or deposit of money referred in clause (b) of Section 11(2) of the Act. Clause (b) of Section 11(2) of the Act refers to the money ‘so accumulated or set apart’.
16. It is thus clear that Sub-section 5 of Section 11 of the Act, which merely prescribes the forms and modes of investing or depositing the money, relates to the money ‘accumulated or set apart’. In other words, Section 11(2) and 11(5) of the Act do not provide for any application of income as such, as is referred to in Section 11(1) of the Act. Quite to the contrary, these provisions are relating to the investment or deposit of income which falls short of the required 85% of the income (which is to be applied for religious or charitable purposes in India).
17. It was strenuously urged on behalf of the assessee that clause III (7) has to be read alongwith other clauses of clause III of MoA. A plain reading of clause III (7) indicates that it refers to investment of the fund/money of the assessee “in a manner as provided under Section 11(5) of the Act”. As noticed earlier, Section 11(5) of the Act refers to the forms or modes of investment of the money which is accumulated or set apart, which would be distinct from the application of income as contemplated in Section 11(1) of the Act. We are, therefore, clearly of the view that the investment/deposit of income, as is referred to in Section 11(5) of the Act, cannot partake of the nature of an application of income as contemplated in Section 11(1) of the Act.
18. There is yet another reason why we are unable to accept that clause III (7) of MoA can be said to be application of income. Section 2(15) of the Act defines “charitable purpose” as under :-
“15) “charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:
Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves 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, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless-
(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year”
It can thus clearly be seen that any investment as contemplated under Section 11(5) of the Act cannot be said to be a charitable purpose by itself. It is essentially an investment of the amount which is either accumulated or set apart for eventual application to such charitable purpose.
19. It is contended on behalf of the assessee that the competent authority having granted registration to the assessee under Section 12AA of the Act in the context of the objects as set out in clause III (1) to (7) of MoA, it is not open for the authorities to hold that clause III (7) of MoA cannot be treated as application of income. We are unable to accept the said contention. This is for the reason that, as noticed earlier, the clause refers to investment of the fund/money, ‘in a manner as provided under Section 11(5) of the Act’, which in itself is pertaining to the money which is accumulated or set apart. A trust can resort to Section 11(5) of the Act even without there being object of that nature as set out in the MoA, as the trust is statutorily permitted to invest/deposit the income which is accumulated or set apart as referred to in Section 11(2)(a) of the Act, in a mode and manner as provided under Section 11(5) of the Act. Nonetheless, the said investment continues to be of income which falls short of 85% which the trust is required to apply for such charitable purpose. It is thus necessarily the income which is accumulated or set apart.
20. We now propose to deal with the decision of the Division Bench in assessee’s own case for assessment year 2008-09. In that case, it was contended on behalf of the assessee that the net additions to the Fixed Deposit Receipts (FDRs) of Rs.6,00,42,237/- should be treated as application of income in view of Section 11(5) of the Act. The Bench placing reliance on clause III (7) of the MoA held that the net addition to the FDRs should be treated as application of income.
21. A perusal of para 12 of the order for assessment year 2008-09 indicates that the Tribunal, on facts, found that as against the gross receipts of Rs.15,52,33,648/-, the Trust was found to have applied the income to the extent of Rs.18,32,95,603/-. In these circumstances, this Tribunal found that there was no merit in the stand of the authorities that the assessee was required to show its intention of setting apart the income by notice under Section 11(2) of the Act. The following observations in para 12 are relevant for the purpose :-
“12. In view of our observations in paras hereinabove, the total expenditure incurred by the assessee and the additions to fixed assets and FDRs, which are allowed as application of income of the previous year, amounts to Rs.18.32,95,603/. The gross receipts of the previous year in the hands of the assessee-society being Rs.15,52,33,648/-, there is no merit in the stand of the authorities below that the assessee was to show his intention of setting apart the income which has not been utilized during the year, by way of any notice under section 11(2) of the Act. The assessee having invested more than its income by way of application of income in the form of fixed assets and FDRs invested during the year, there was no provisions of the Act compelling the assessee to issue the notice of its intention to make the investments in the succeeding years. In view thereof, we set aside the order of CIT (Appeals) and direct the Assessing Officer to adopt the income of the assessee-society at nil. Ground No. 1 to 5 raised by the assessee are thus allowed.”
(Emphasis supplied)
We, therefore, find in the first instance that the decision was rendered in a factual matrix which was different than the one obtaining in the present case. In that case, the amount having being applied was found to be in excess of the gross receipts, quite contrary to the present case where there is a shortfall for both the relevant years in applying 85% of the receipts for such application. Nonetheless, we are unable to subscribe to the finding recorded by the Bench that the net addition to the FDRs should be treated as application of income. As noticed earlier, Sub-section (5) read with Sub-section (2)(b) of Section 11 of the Act refers to the income which is accumulated or set apart, which is necessarily the income which the Trust was unable to apply for charitable purposes. There is a clear distinction between the application of income as contemplated under Section 11(1) of the Act and the income which is accumulated or set apart, which is necessarily the whole or part of the income which the Trust is unable to apply for charitable purposes within the meaning of Section 11(1) of the Act. Apart from placing reliance on clause III (7) of the MoA, the Bench was also swayed by assessment order under Section 143(3) of the Act for assessment year 2005-06 and 2007-08 in which the investment/deposit was allowed as application of income. It is trite that principles of res judicata do not strictly apply to the assessment proceedings which are essentially to be examined on the facts of the case on a year-to-year basis. The interpretation placed by the Division Bench which has failed to notice the distinction between application of such income to charitable purpose as against accumulation or setting apart, the same cannot be concurred with even assuming that for certain earlier years, viz. 2005-06 and 2007-08, such investment in deposit was allowed as an application of income.
22. Coming to the present case, and even assuming for the sake of argument that the investment/deposit as contemplated under Section 11(5) of the Act can be treated as application of income, the AO has found on facts that the assessee in this case has not complied with the said provisions by furnishing a statement in the prescribed form as contemplated under Section 11(2)(a) of the Act. It is clear that such accumulation or setting apart of income which falls short of the required 85% can be so accumulated or set apart for a maximum period of 5 years. This is another indicator to hold that it is an interim measure which the Trust can adopt for accumulation or setting apart of whole or part of income for a period of 5 years, after which it has to be applied for charitable purposes as contemplated under Section 11(1) of the Act.
23. Reliance on the decision in case of DLF Qutab Enclave Complex Medical Charitable Trust (supra), in our opinion, is misplaced. That was a case where the assessee-Trust, which was registered under Section 12A of the Act, had received certain premium amount on leasing of a plot of land for a period of 99 years. That amount was deposited by the assessee in a FDR with a scheduled bank and had complied with Section 11(5) of the Act. The AO found that the FDR with bank did not constitute investment in a capital asset. The AO was of the view that assessee had infringed the provisions of Section 11(5) of the Act. The Commissioner (Appeals) accepted the stand of the assessee and found that there was no breach of either Section 11(5) or Section 11(1)(a) of the Act, which order was confirmed by the Tribunal and the matter went to the High Court at the instance of the Revenue.
24. Para 3 of the judgment in DLF Qutab Enclave Complex Medical Charitable Trust (supra) would indicate that the only contention raised on behalf of the Revenue was that the term deposits were not sufficient compliance with the requirement of Section 11(5) of the Act. The High Court noticed a decision of Supreme Court in ACIT vs A.L.N. Rao Charitable Trust, 216 ITR 697 (SC) in which it was held that Section 11(1) of the Act is not in any manner restricted by Section 11(2) of the Act. The accumulated income which is exempt under Section 11(1)(a) of the Act is not required to be invested in ‘government securities’. It was found that Section 11(2) of the Act relates only to additional accumulated income beyond 25% (as the section then stood, which is now 15%). The High Court after noticing Section 11(1), (2) and (5) of the Act found that the time deposit in ‘scheduled bank’ would be a capital asset within the meaning of Section 2(14) of the Act. It can be seen that in the said case the proceeds on leasing out of the land were kept in fixed deposit for construction of a hospital at a future date. Thus, the income was essentially accumulated or set apart for eventual application to the charitable purpose, which in that case was construction of a hospital. The assessee had also complied with Section 11(2) of the Act by furnishing an intimation in Form 10. In our humble view, the decision turned on its own facts as it was a case of accumulation of income. The facts in the present case are clearly distinguishable.
25. In Highway Construction Co. Pvt. Ltd. (supra) before the Gauhati High Court, it was, inter alia, held that a Special Bench has no jurisdiction to decide matters which are not referred to it. Incidentally, in that case, one of the questions was whether the Tribunal was justified in taking up the case on assessee’s appeal when earlier the Tribunal had remitted the matter back to the AO in an appeal by the Revenue. We are unable to see as to how that decision can come to the aid of assessee in this case.
26. In the result, we answer both the issues as referred to in the negative. The appeals shall now be placed before the regular Division Bench for disposal according to law.
Order pronounced in the open court on 29/09/2025
