Case Law Details
ORDER
N.V. Vasudevan, Judicial Member –
This is an appeal by the Assessee against the order dated 19.12.2011 of Director of Income-Tax (Exemption), Bangalore, (“DIT”) passed u/s.263 of the Act relating to AY 2009-10.
2. The Assessee is a charitable institution registered u/s.12A of the Income Tax Act, 1961 (“the Act”). For AY 2009-10, the Assessee filed a return of income declaring Nil income. By an order dated 18.3.2011 passed u/s.143(3) of the Act, the AO accepted the income so returned by the Assessee.
3. The DIT in exercise of his powers u/s.263 of the Act perused the assessment records of the Assessee for AY 2009-10 and was of the view that the order of the AO dt.18.3.2011 passed u/s.143(3) of the Act was erroneous and prejudicial to the interests of the Revenue. The DIT noticed that the Assessee trust was engaged in construction business and real estate activities and its total turnover was to the tune of Rs.194.24 crores and had earned a profit of Rs.57.38 crores. The Assessee trust had claimed exemption u/s.80-IB(10) of the Act in respect of the aforesaid profits. The AO had allowed the same. According to DIT, Charitable trusts are not eligible for deduction u/s.80-IB(10) of the Act and therefore the action of the AO in allowing the aforesaid claim of the Assessee was erroneous and prejudicial to the interests of the revenue. Accordingly a show cause notice dated 18.10.2011 was issued by the DIT proposing revision of the order of the AO u/s. 263 of the Act.
4. The Assessee by reply dated 21.11.2011 submitted that:
(a) The AO while completing the assessment u/s.143(3) of the Act had applied his mind to the claim of the Assessee for deduction u/s.80-IB(10) of the Act and thereafter allowed the claim of the Assessee. The Assessee submitted that the view taken by the AO was a possible view and in exercise of powers u/s.263 of the Act, the DIT cannot substitute his view. In this regard, the Assessee relied on the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT 243 ITR 83 (SC).
(b) Alternatively, the Assessee submitted that it was entitled to carry forward and set off the deficit incurred in earlier years against the income of the current year, in that event there would be no income which can be brought to charge. In this regard the Assessee relied on the decision of the Hon’ble Gujarat High Court in the case of Sri Plot Swetamber Murti Pujak Jain Mandal v. CIT 211 ITR 293 (Guj) and the Hon’ble Madras High Court in the case of Govindu Naicker Estate v. ADIT 248 ITR 368 (Mad).
(c) The Assessee also submitted that if the set off as aforesaid is also held to be not permissible then the income derived from developing property which becomes chargeable to tax has to be determined in the manner laid down in the Act. If income is so computed then the Assessee has to be allowed deduction u/s.80-IB(10) of the Act. In this regard the Assessee relied on the decision of the Hon’ble Supreme Court in the case of CIT Vs. Hariprasad & Co. 99 ITR 118 (SC) wherein it was held that total income has to be computed in the manner laid down in the Act. The Assessee thus submitted that a charitable trust would also be entitled to deduction u/s.80-IB(10) of the Act.
5. The DIT however did not agree with the contentions put forth on behalf of the Assessee. He held that the AO while completing the assessment u/s.143(3) of the Act did not make proper enquiries to verify the details filed and give a specific finding as to whether the Assessee was eligible for deduction u/s.80-IB(10) of the Act and whether the Assessee has applied its income for charitable or religious purposes as per the provisions of Sec.11 of the Act. He therefore held that the order of the AO was erroneous and prejudicial to the interests of the revenue.
6. With regard to the alternative contention of the Assessee regarding set off the earlier year’s deficit against the current years income, the DIT held that there was no carry forward of deficit claimed or allowed by the AO in the earlier years. The DIT also held that the provisions of Sec.70, 71 and 72 of the Act are not applicable to the income computed u/s.11 of the Act.
7. With regard to the contention of the Assessee that once the character of income does not fall within the ambit of Sec.11 of the Act the said income has to be computed in accordance with the provisions of the Act and if so computed, the Assessee is entitled to claim deduction u/s.80-IB(10) of the Act, the DIT held that income as far as it relates to income derived from property held under trust wholly for charitable or religious purposes is concerned is not equivalent to total income under the Act and therefore Sec.14 providing for different heads of income and total income and chapter VIA are not applicable while computing income u/s.11 of the Act. In this regard the DIT also referred to a circular of CBDT viz., Circular No.5 LXX-6 dated 19.6.1968 wherein it has been explained as follows:
“It would be incorrect to assign to the word “Income” used in Section 11(1)(a), the same meaning as has been specifically assigned to the expression “total income” vide Section 2(45).”
In the case of a business undertaking held under trust, its “income” disclosed by the account will be eligible for exemption under Section 11(1). The permitted accumulation of 25 per cent will also be calculated with reference to this income.
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 thereof towards the purposes 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. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 percent of the latter, if the trust is to get the full benefit of the exemption under Section 11(1).”
8. The DIT was of the view that the method of computing income of a charitable trust is different from that followed in the case of other assesses, in that, it is the commercial concept of income which is to be considered and not the income as computed under the various heads of income as specified in Section 14. In other words, the income for the purpose of section 11 is the income as per the accounts of the trust. It means the income in the commercial sense, without reference to the heads of income specified in section 14, i.e., the book income and not the total income as defined in Sec.2(45). Therefore in computing the income of the trust, the income arising from property held under trust for public charitable or religious purposes is to be first computed and thereafter, the amount applied for charitable purpose is determined. The DIT in support of the above conclusion relied on the decision of the Hon’ble Calcutta High Court in the case of DIT( E) v. Giridharilal Shewnarain Tantia Trust 199 ITR 215 (Cal). The facts of the aforesaid case were the assessee was a trust. The Assessing Officer rejected the assessee’s claim for deduction under section 80T of the Income-tax Act, 1961. Section 80T provided that where the gross total income of an assessee not being a company includes any income chargeable under the head “Capital gains” relating to capital assets other than short-term capital assets, a straight deduction to the extent of the prescribed percentage of such gains from the total income itself shall be allowed. The first Rs. 5,000 of the long-term capital gains is not liable to any tax and has to be excluded from the amount of long-term capital gains and, on the balance, the relief is allowable at the prescribed percentage. The Tribunal allowed the claim of the Assessee for deduction u/s.80T of the Act. The question before the Hon’ble High Court was as to “Whether, on the facts and in the circumstances of the case and in the light of the proper interpretation of section 11 of the Income-tax Act, 1961, the Tribunal was justified in holding that the capital gain amounting to Rs. 2,91,644 is eligible for deduction under section 80T of the Income-tax Act, 1961?” The Hon’ble Calcutta High Court held that under section 11 of the Income-tax Act, 1961, income derived from property held under trust for charitable or religious purposes is exempt from income-tax to the extent such income is actually applied to such purposes during the previous year itself or within the three months next following. As “income” includes “capital gains”, a charitable or religious trust would forfeit exemption from income-tax in respect of its income by way of capital gains unless such income is also applied for the purposes of the trust during the stipulated period. By sub-section (1A), it has been provided that, in a case where a capital asset being property held under trust for charitable or religious purposes is transferred and the whole or any part of the net consideration for the transfer (i.e., full value of consideration as reduced by the expenditure incurred wholly and exclusively in connection with the transfer) is utilised for acquiring another capital asset to be held as part of the corpus of the trust, the capital gain arising from the transfer will be regarded as having been applied to charitable or religious purposes. Where the whole of such net consideration is utilised in acquiring the new capital asset, the entire amount of the capital gain will be regarded as having been applied to charitable or religious purposes while, in a case where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gains as is equal to the amount, if any, by which the amount so utilised exceeds the aggregate of the cost of acquisition of the capital asset transferred and the cost of any improvements made to such asset, will be regarded as having been applied to such purposes. From a combined reading of sections 11(1)(a), 11(1)(b) and section 11(1A), it is clear that the income of a trust including capital gains is treated on a separate footing and the assessee-trust has to fulfil the conditions laid down therein for the purpose of availing of exemptions from taxation. The income from property held for charitable or religious purposes cannot, therefore, be equated with the income which is computed under the general provisions of the Act in respect of other assessees who are not entitled to the benefit of the aforesaid provisions. In a case where an assessee-trust has income from different sources and has applied such income and a part of such income comes within the ambit of taxation, it will not be possible to earmark any part of such income to a particular head. Therefore, the question of allowing any statutory deductions as contemplated by the different provisions of the Act dealing with different heads of income in computing the income accumulated will not arise when the trust loses the benefit of accumulation. Hence, a charitable trust is not entitled to deduction under section 80T in respect of its long-term capital gains.
9. The DIT therefore concluded that the order of the AO was erroneous and prejudicial to the interests of the revenue and the AO was accordingly set aside. The AO was directed to pass a fresh assessment order with a direction not to allow deduction u/s.80-IB(10) of the Act but consider all other aspects and re-do assessment in accordance with law after affording opportunity of being heard to the Assessee.
10. Aggrieved by the order of the DIT, the Assessee has preferred the present appeal before the Tribunal. The grounds of appeal raised by the Assessee read as follows:
“1. That the order of the learned Director of Income Tax (Exemption) in so far it is prejudicial to the interests of the appellant, is bad and erroneous in law and against the facts and circumstances of the case.
2. That the learned Director of Income Tax (Exemptions) erred in law and on facts in invoking jurisdiction u/s 263 of the Act even though the assessment order is not erroneous and prejudicial to the interest of the revenue.
3. That the learned Director of Income Tax (Exemptions) erred in law and on facts in holding that the learned Assessing Officer has not applied his mind in allowing the deduction u/s 801B(l0) of the Act.
4. That the learned Director of Income Tax (Exemptions) erred in law and on facts in holding that the appellant is not entitled to the deduction u/s 801B(10) of the Act.
5. That the learned Director of Income Tax (Exemptions) erred in law and on facts in holding that the total income of an institution eligible for exemption u/s 11 of the Act is not required to be computed in accordance with the provisions of the Act if exemption is denied for any reason.
6. That the learned Director of Income Tax (Exemptions) erred in not allowing the set-off of deficit incurred in the earlier years.
Each of the above grounds is without prejudice to one another and the appellant craves leave of the learned Commissioner Income Tax, Bangalore to add, delete, amend or otherwise modify one or more of the above grounds either before or at the time of hearing of this appeal.”
11. The learned counsel for the Assessee submitted that DIT was not justified in coming to the conclusion that the AO while allowing the deduction u/s.80-IB(10) of the Act did not make any enquiries. In this regard, our attention was drawn to the fact that the Assessee, in the course of assessment proceedings, filed details regarding built up area of flats, break up of WIP etc. The order of the AO, though it does not refer to the enquiries made by him, cannot be termed as erroneous for want of making enquiries. In this regard reliance was placed on the decision of the Hon’ble Delhi High Court in the case of Eon Technologies 343 ITR 242 (Del) wherein the Hon’ble Delhi High Court has laid down that there is a difference between lack of enquiry and adequacy of enquiry and that it is only when there is no enquiry that jurisdiction u/s.263 of the Act can be invoked. It was argued that the AO after due enquiry has taken a possible view in allowing deduction u/s.80-IB(10) of the Act and the DIT cannot revise the AO’s order because he has taken a different view with regard to allowability of deduction u/s.80-IB(10) of the Act. In this regard, reliance was placed on the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. (supra).
12. It was submitted that if for any reason any income of a charitable trust is not entitled to exemption u/s.11 of the Act, then the said income has to be assessed in accordance with the provisions of the Act. In this regard it was argued that Sec.4 is the charging section under the Act and the charge thereunder is on the total income of an Assessee. Sec.2(45) of the Act defines total income to mean the total income computed in the manner laid down under the Act. Therefore income of the Assessee has to be computed in the manner laid down in the Act and if so computed the Assessee should be allowed deduction u/s.80-IB(10) of the Act. In this regard, reliance was placed on the decision of the Hon’ble Supreme Court in the case of Harprasad & Co. Ltd. v. CIT 99 ITR 118 (SC) wherein it was observed at page 125 as follows:
“Although section 6 classifies income under six heads, the main charging provision is section 3 which levies income-tax, as only one tax, on the “total income” of the assessee as defined in section 2(15). An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the “total amount of income, profits and gains referred to in section 4(1)”. Secondly, it must be “computed in the manner laid down in the Act”. If either of these conditions fails, the income will not be a part of the total income that can be brought to charge.”
13. Based on the above observations it was argued that in order to be assessed to tax, it is necessary that the income should be classified under various heads under Chapter IV, aggregated in accordance with Chapter VI, deduction permissible under Chapter VIA be given and the resultant figure be taken as total income which can be brought to tax. It was argued that the CBDT Circular and the decision of the Hon’ble Calcutta High Court relied upon by the DIT are contrary to the law propounded by the Hon’ble Supreme Court. It was also submitted that the question of determining commercial profits is only for the purpose of determining the amount of income to be applied and that which can be accumulated and for no other purpose. It was submitted that Sec.11 is not a separate code for computation of income of a charitable trust, as is sought to be made out by the Revenue.
14. On the aspect of set off of the earlier year’s deficit against the surplus of the present year, the same submissions made before the DIT were reiterated.
15. The learned DR stressed on the point that a charitable trust has to apply its income for charitable purpose to be entitled to claim exemption u/s.11 of the Act. His submission was that a trust or a charitable or religious institution cannot refuse to apply income which is exempt u/s.80-IB(10) of the Act for non-charitable purpose. According to him, if such a course is permitted, then the very purpose of allowing exemption to a charitable trust or institution u/s.11 will get frustrated. His submission was that exemption is allowed only because the trust or charitable institution performs objects which a welfare state should perform. If the Trust or charitable institution applies its income for purposes which are not charitable, it should not get the benefit of exemption under any other provision of the Act. In all other respects, the reasoning given by the DIT in the impugned order were reiterated.
16. The learned counsel for the Assessee brought to our notice the fact that after the passing of the impugned order of the DIT, the Finance Act, 2012 has inserted sub-section (8) to Sec.13 of the Act with retrospective effect from 1.4.2000. The said provision reads as follows:
“(8) Nothing contained in Section 11 or Section 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof, if the provisions of the first proviso to clause (15) of Section 2 become applicable in the case of such person in the said previous year.”
17. Sec.2(15) defines Charitable purpose and it reads as follows:
“(15) “charitable purpose” includes relief of the poor, education, 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;”
18. The first proviso was inserted by the finance Act, 2008, w.e.f. 1-4- 2009. The learned counsel for the Assessee submitted that in AY 2009-10, the activity of construction of building and sale was in the nature of trade, business, commerce for consideration and therefore the income from the said activity will stand excluded from the provisions of Sec.11 of the Act, in view of Sec.13(8) of the Act. His submission was that if Sec.11 is excluded, then the income of the Assessee has to be computed in accordance with the provisions of the Act and therefore the claim of the Assessee for deduction u/s.80-IB(10) of the Act has to be allowed. In other words, the submission was that in view of the provisions of Sec.13(8) of the Act, the decision of the Hon’ble Calcutta High Court in the case of Giridharilal Shewnarain Tantia Trust (supra) will no longer hold good in the facts and circumstances of the Assessee’s case.
19. We have considered the rival submissions. The exercise of jurisdiction under 263 of the Act by the DIT was based on the reason that the AO while completing the original assessment did not make enquiries regarding eligibility of deduction u/s.80-IB (10) of the Act and as to whether the deduction u/s.80-IB(10) of the Act would amount to application of income so as to be eligible for deduction u/s.11 of the Act. The second reason is that in respect of a charitable trust or institution deduction u/s.80-IB(10) of the Act cannot be allowed because income, as far as it relates to income derived from property held under trust wholly for charitable or religious purposes is concerned, is not equivalent to total income under the Act and therefore Sec.14 providing for different heads of income and total income and chapter VIA are not applicable while computing income u/s.11 of the Act. Both the above reasons boil down to the question as to how income has to be computed in the case of a charitable trust or institution which claims exemption u/s.11 of the Act. The case of the DIT is based on the decision of the Hon’ble Calcutta High Court in the case of Giridharilal Shewnarain Tantia Trust (supra) in which it has been held to claim exemption u/s.11 of the Act, income, whatever be the head under which it is to be considered under the Act, has to be applied for charitable purposes. Therefore the head of income or exemption allowed while computing total income under the normal provisions of the Act, would not apply. The income which is in dispute is a sum of Rs. 57,39,68,569/- which is the profit derived from developing a housing project by the Assessee which was claimed as deduction while computing total income in view of provisions of Sec.80-IB(10) of the Act.
20. There can be no serious dispute that the AO had accepted the claim of the Assessee to deduction u/s.80-IB(10) of the Act. The Assessee had filed details before the AO in the course of assessment proceedings u/s.143(3) of the Act. The AO in the order of assessment u/s.143(3) of the Act has not discussed anything regarding the claim of the Assessee for deduction u/s.80-IB(10) of the Act, but has allowed the claim of the Assessee for deduction u/s.80-IB(10) of the Act. The adequacy of enquiry done by the AO cannot be the basis to conclude that his order was erroneous. The decision of the Hon’ble Delhi High court referred to by the learned counsel for the Assessee in the case of Eon Technologies (supra) support the plea of the Assessee. The exercise of jurisdiction u/s. 263 of the Act on the ground of lack of enquiry regarding eligibility of the Assessee for deduction u/s.80-IB(10) of the Act cannot therefore be upheld.
21. The other reason for exercise of jurisdiction u/s.263 of the Act is with regard to the non-verification by the AO as to whether the income has been applied for charitable purpose, because u/s.11 what is exempt is 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. In the light of the Hon’ble Calcutta High Court decision in the case of in the case of Giridharilal Shewnarain Tantia Trust (supra), it was incumbent on the part of the AO to examine the application of income from the housing project for charitable purpose to the extent necessary to allow deduction u/s.11 of the Act. To this extent, the AO ought to have made enquiries and failure to do so would render the order of the AO erroneous and prejudicial to the interest of the revenue. The further conclusion of the DIT based on the aforesaid decision that the Assessee would not be entitled to deduction u/s.80-IB(10) of the Act and that the AO should examine the claim for exemption u/s.11 of the Act in the light of the fact whether the Assessee has applied income for charitable purpose is also correct.
22. In the normal circumstances, the above conclusion would be sufficient decision in the appeal but the statutory amendment by insertion of Sec.13(8) to the Act w.r.e.f. 1-4-2009, in our view, will have a bearing on the above conclusion. We therefore proceed to deal with those provisions and as to whether those provisions will have a bearing on the conclusions arrived at by the DIT in the order u/s.263 of the Act. Sec.13 of the Act has the following heading “Section 11 not to apply in certain cases”. Sub-Section (8) to Section 13 introduced w.r.e.f. 1-4-2009 reads as follows:
“(8) Nothing contained in Section 11 or Section 12 shall operate so as to exclude any income from the total income of the previous year of the person in receipt thereof, if the provisions of the first proviso to clause (15) of Section 2 become applicable in the case of such person in the said previous year.”
23. The above provisions are applicable for AY 2009-10. The Assessee’s claim for deduction u/s.80-IB(10) of the Act for AY 2009-10, in so far as it relates to the profit derived from developing housing project, cannot be regarded as income of a charitable trust or institution within the meaning of Sec.11(1)(a) of the Act, because carrying on of the housing project was not a charitable purpose even in AY 2009-10 in view of the first proviso to Section 2(15) of the Act. The income from developing housing project by virtue of the provisions of Sec.13(8) of the Act would become part of the total income under the Act. In the light of the aforesaid retrospective amendment to the law, application of the income for charitable purpose becomes irrelevant. In other words, the income derived from business cannot be considered as income derived from property held for charitable purpose. In other words, it would no longer be income within the meaning of Section 11(1)(a) of the Act. The said income will form part of the total income under the Act. If that be so, then the Assessee’s income has to be computed in accordance with the provisions of the Act. If so computed, the Assessee would be entitled to deduction u/s.80-IB(10) of the Act, which as we have already seen, has been allowed by the AO after due application of mind in the order u/s.143(3) of the Act. The decision of the Hon’ble Calcutta High Court and the CBDT Circular referred to in the order u/s.263 of the Act, would not apply to the income from developing housing project in view of the statutory amendment referred to above. In that view of the matter, we are of the view that the order u/s.263 of the Act cannot be sustained. We therefore quash the order u/s.263 and allow the appeal of the Assessee.
24. In the result the appeal by the Assessee is allowed.
