Section 11(2) exemption cannot be denied merely for discrepancy in fund accumulation object in Form No. 10

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal filed by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals)-17, Chennai dated 13.09.2017 and pertains to assessment year 2012-13.

2. The assessee has raised the following grounds of appeal:-

“1. Filing Form 10 in a routine manner to avoid taxation:

The intent and purpose of providing exemptions u/sections 11 & 12 in the Income Tax Act are to encourage and facilitate channelling of public money into charitable activities, subject to fulfilment of certain conditions.

Public Charitable Trusts play a very vital role in our society. But, without these exemptions, It Is virtually impossible for trusts to survive and grow.

In the instant case, at the end of every year, after drawing up its financial statements, the trust arrives at the surplus for the year, if any.

Based on the surplus, the trust decides the end-use, First, funds are set aside for the long-term repairs and renovations to be carried out in its premises. These are apart from the regular maintenance expenses. For this, the accumulation is done under the Ashram Major Repair Fund.

Next, the trust allocates funds for the following two charitable purposes-

a) Poor Children’s Education Fund; and

b) Medical Aid Fund

The amount set apart differs from year to year, depending upon the need or requests received for support. In certain years, the trust sets apart funds u/sec 11(2) without even accumulating the eligible15% towards corpus.

The audited financial statements for Ay 2012-13 are attached hereto. In addition, the audited financial statements for AY 2014-15 and 2016-17 are also attached for reference.

The above purposes are perfectly valid and allowable under the provisions of the Act and are also authorised vide clause 4(k) of the trust deed. Copy of the trust deed is enclosed].

2. Repetition of Purposes:

Education support and Medical Aid are perennial needs for the economically weaker sections of our society. While Education provides for a bright future for the children, Medical Aid helps the family tide over a crisis that could destabilise the family.

The trust has decided to focus Its activities in these two areas and hence regularly allocates its surplus to these end uses.

3. Character of expenses are revenue in nature: Section 11(2) is reproduced below:

(2) Where eighty five] per cent of the income referred to in clause(a) or clause(b) of sub section(I) 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 it, 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 specifies by notice in writing given to the Assessing officer in the prescribed manner 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 ten years;

(b) the money so accumulated’ or set apart is invested or deposited in the forms or modes specified in sub section (5)

From the above, it is clear that the only condition regarding purpose is that they should be ‘Charitable ’ in nature

There is no stipulation that the purpose should capital or revenue in nature, Funding a school/hospital building, providing scholarship for education and meeting the costs of medical treatment/medicines are all charitable ii nature and are thus eligible expenses.

4. Proof of Utilisation

Finally, the amounts so set apart have actually been utilized for the very same purposes for which they were accumulated. The details of expenses have been duly verified by the Assessing Officer.

A statement of summary of accumulations and utilisation is attached.

Copies of the ledger accounts, bills and other documents are also submitted herewith for your records.”

3. Brief facts of the case are that the assessee trust is registered u/s.12AA of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) filed its return of income for the assessment year 2012-13 on 29.12.2010 declaring Nil total income after claiming exemption u/s.11 of the Act. During the year under consideration, the assessee has filed Form no.10 along with return of income on 18.09.2010 and accumulated sum of ` 60.00 lakhs u/s.11(2) of the Act for the purpose of objects of the trust including specific objects such as Ashram major repair fund, poor children education fund and medical aid fund. The Assessing Officer has rejected accumulation of income u/s.12AA of the Act, on the ground that the assessee has accumulated its income not for specific purpose, but merely to defer taxation of surplus of amount which has not been applied towards its objects in the corresponding accounting period. According to the Assessing Officer, filing Form no.10 is not an empty formality and assessee needs to specify the purpose for which such income has been accumulated. Since, the assessee has accumulated income for general purpose, the same cannot be allowed to be accumulated u/s.11(2) of the Act, accordingly, allowed accumulation of income for the purpose of Ashram major repair fund, but rejected accumulation of income for the purpose of poor children educational fund and medical aid fund amounting to ` 10.00 lakhs and added back to total income.

4. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee has reiterated its arguments made before the Assessing Officer and claimed that trust has accumulated income u/s.11(2) for specified purpose and the same has been spent in subsequent financial years for the purpose for which said funds has been accumulated. Therefore, the Assessing Officer has erred in rejection of accumulation of income, even though the purpose mentioned in Form no.10 is as per objects of the Trust. The learned CIT(A), after considering relevant submissions of the assessee and also by relied upon certain judicial precedents including the decision of Hon’ble Madras High Court in the case of CIT vs M. Ct. Muthiah Chettiar Family Trust reported in (245 ITR 400), held that purpose for which accumulation of income was sought to be made by the assesse for carrying out poor children education fund and medical aid fund is general in nature and suffers from vagueness. The assessee accumulates income for some vague reasons to explain shortfall in application of income for charitable purpose for the previous year relevant to the assessment year under consideration. Therefore, there is no reason to interfere with the findings recorded by the Assessing Officer to reject accumulation of income for poor children educational fund and medical aid fund and accordingly, rejected the arguments of the assessee and dismissed the appeal filed by the assesse. Aggrieved by the CIT(A)’s order the assessee is in appeal before us.

5. At the time of virtual hearing , none appeared on behalf of the assessee. However, since the issue involved in this appeal is covered, we proceed to dispose of appeal, after hearing the learned DR.

6. The learned DR, supporting the order of the learned CIT(A) submitted that assessee is accumulating income u/s.11(2) on vague reasons without specifying the purpose for which such income has been accumulated, even though section 11(2) clearly mandates the assessee to specify purpose for accumulation of income, therefore, there is no reason to interfere with the findings recorded by the learned CIT(A) to deny accumulation of income u/s.11(2) of the Act.

7. We have heard the learned DR and perused the materials available on record. The assessee is a charitable trust claiming benefit of exemption u/s.11 of the Act, has accumulated income u/s. 11(2) of the Act for specified purpose and for which Form No.10 has been filed specifying the amount and purpose. The assessee has accumulated funds for poor children education fund and medical aid fund and claimed that purpose specified in Form No.10 is in accordance with main objectives of the trust. We have gone through Form No.10 filed by the assessee along with objects of the trust and find that objects of the trust specifies extend help and relief to the distressed, poor destitute, homeless and underprivileged students and providing medical relief to the needy persons. Further, the assessee trust is regularly accumulating funds for the above purpose and such earmarked funds are continuously spent for the purpose for which they have accumulated. Once assessee has accumulated income with a specific purpose and such purpose is specified in the main objects of the trust, then the Assessing Officer cannot deny such accumulation of income merely for the reason that purpose specified in Form No.10 is vague and general in nature. As long as objects of the trust provide for such purpose, then the assessee can accumulates funds for the purpose which is specified in trust deed. This view is fortified by the decision of Hon’ble Gujarat High Court in the case of CIT (Exemption) vs. Bochasanwasi Shri Akshar Purshottam Public Charitable Trust reported in [2019] 102 taxmann.com 122, where it was held that lack of declaration in Form No.10 regarding specific purpose for which funds were being accumulated by the assessee trust would not be fatal to the exemption claimed u/s.11(2) of the Act. The Hon’ble Supreme Court reported in (2019) 263 Taxmann.com 247(SC) has dismissed SLP filed by the Department in the above case and has upheld the findings of the Hon’ble Gujarat High Court.

8. In this case, on perusal of facts available on record, clause 4k of trust deed provides for extending help and relief to distressed and destitute, homeless and underprivileged and funds accumulated u/s.11(2) is covered under main objects of the trust. We, therefore are of the considered view that Assessing Officer as well as learned CIT(A) has erred in denying benefit of accumulation of income u/s.11(2) of the Act. Hence, we direct the Assessing Officer to delete the additions made towards denial of accumulation of income u/s.11 (2) of the Act and direct him to allow benefit of accumulation as claimed by the assessee.

9. In the result, the appeal filed by the assessee is allowed.