21 May 2008
As per Income TAx Law, we have to apply minimum of 85% of our income in the previous year in order to claim exemption u/s 11 (being a charitable trust)
My question is What is the meaning of income over here? Is it the Surplus as per income and expenditure account or is it the total of credit side of the Income and expenditure account? i.e. of which amount we have to apply atleast 85% - 1. Surplus as per Income & Expenditure Account. or 2. Total of credit side of the Income and expenditure account.
“Income” must be understood in commercial sense, and not as ‘total income’ as assessed - It is not the ‘total income’ as would be assessed by the ITO that is relevant for the purpose of investing the funds of the trust or assessing the income of the trust. Taking into account the purpose for which the conditions of section 11(1)(a) are imposed, it would be clear that ‘income’ to be considered will be that which is arrived at in the context of what is available in the hands of the assessee subject to an adjustment of any expenses extraneous to the trust - CIT v. P.S.G. & Sons Charities 1996 Tax LR 477 (Mad.). See also - CIT v. Programme for community organisation [1997] 228 ITR 620 (Ker.).
Refund of income-tax is not ‘income from property held under trust’ - Refund of income-tax can by no stretch of imagination be held as income derived from property held under the trust, and hence will not be covered under section 11(2) - CIT v. Hamdard Dawakhana (Wakf) [2002] 120 Taxman 186 (Delhi).
Heads of income under section 14 have no relevance and question of allowing statutory deductions will not arise - The ‘income’ contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable. Since the income from property held under trust has to be arrived at in a normal commercial manner and when the income from property held under trust as such is excluded, there is no scope of computing the income from property by applying the provisions of section 14 of the Act. 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 does not arise when the trust loses the benefit of accumulation - Director of Income-tax v. Girdharilal Shewnarain Tantia Trust [1993] 199 ITR 215/71 Taxman 150 (Cal.).
Deemed income (tax deducted at source) must be excluded - CBDT Circular 5-P/LXX-6 dated 19-5-1968 makes it clear that the word ‘income’ in section 11(1)(a) must be understood in a commercial sense. Thus, deemed income (i.e., tax deducted at source) is not to be taken into account for determining the ‘application’ or ‘accumulation’ of income - CIT v. Jayashree Charity Trust [1986] 159 ITR 280 (Cal.).
Depreciation as per normal rules of accountancy must be allowed - ‘Income’ referred to in section 11(1)(a) is to be computed not in accordance with the provisions of the Act, but in accordance with the normal rules of accountancy, under which depreciation has to be allowed while computing the income - CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust [1992] 198 ITR 598 (Guj.).
Taxes like income-tax and wealth-tax must be excluded - Payments of income-tax or wealth-tax made in a year are outgoings and constitute expenditure of the trust, and are therefore liable to be excluded from the income of the trust in the year of payment for the purposes of section 11(1) - CIT v. Trustee of H.E.H. Nizam’s Supplemental Religious Endowment Trust [1981] 127 ITR 378 (AP)/CIT v. Ganga Charity Trust Fund [1986] 162 ITR 612 (Guj.)/CIT v. Janaki Ammal Ayya Nadar Trust [1985] 153 ITR 159 (Mad.).
Amounts returned by beneficiaries must be included - Section 11(1) itself contains sufficient indication to treat moneys received by a trust from its beneficiaries as income of the trust. Under this sub-section, only the income spent on charitable or religious purposes is excluded from the total income of the trust and when that amount is returned by the beneficiaries of the trust, the receipt in the hands of the trust can only be its income of the years in which it is received; it cannot have any different character. This is also the tenor of Circular dated 24-1-1973 issued by the CBDT - CIT v. Cutchi Memon Union [1985] 155 ITR 51 (Kar.).
Salaries and other administrative expenses must be allowed - Expenditure on salaries and miscellaneous expenses for purpose of carrying out objects and purposes of the trust can be considered as application of income for charitable purpose - CIT v. Birla Janahit Trust [1994] 208 ITR 372/73 Taxman 465 (Cal.).
Expenditure on earning dividend must be apportioned - Where the quantum of expenditure for carrying out the objects and purposes of the trust and the expenditure made to earn income from dividend had not been separately allocated or determined, the assessee would be entitled to the benefit of the said expenditure incurred for the purpose of carrying out objects and purposes of the trust only, but any expenditure incurred for earning the income from dividend would not qualify as amount spent for carrying out objects and purposes of the trust - CIT v. Birla Janahit Trust [1994] 208 ITR 372/73 Taxman 465 (Cal.).
Legal expenses are allowable - The same principle as applies to allowability of expenses for defence in a criminal proceeding emanating in the course of carrying on a trade shall also apply to expenses on defence that a charitable institution may have to incur for the defence of any of its founders or trustees getting involved in criminal prosecution in the course of carrying out the objects of the trust. Hence, legal expenses incurred by a charitable institution for depending its president from criminal charges are allowable as a permissible deduction while computing its income - Ananda Marga Pracharaka Sangha v. CIT [1994] 76 Taxman 88 (Cal.).
Still in my opinion, 85% of total income derived, before deducting expenses incurred on charitable purposes, is to be considered and not the surplus.
In support of my claim the complete case of CIT v. Programme for community organisation [2001] 116 Taxman 608 (SC) is produced hereunder: -
[2001] 116 TAXMAN 608 (SC)
SUPREME COURT OF INDIA
Commissioner of Income-tax
v.
Programme for Community Organisation
S.P. BHARUCHA AND RUMA PAL, JJ.
CIVIL APPEAL NO. 2658 OF 1998
NOVEMBER 28, 2000
Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under
- Assessment year 1978-79 - Whether assessee-trust was entitled to exemption under section 11 at 25 per cent of its total
income derived, not on amount remained after expending money on charitable purposes out of its total income - Held,
yes
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 Assessing Officer granted exemption under section 11 at 25 per cent on balance amount of Rs. 87,010. The assessee, on
appeal, contended that exemption should be granted on total income derived. The Commissioner (Appeals), the Tribunal and
the High Court reversed the order of the Assessing Officer.
On appeal to the Supreme Court :
HELD
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 per cent of its income derived from property held under trust. For the present purpose, the donations,
the assessee received, in the sum of Rs. 2,57,376 would constitute its property and it was entitled to accumulate twenty-five per
cent thereout. It was 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 was dismissed.
CASE REVIEW
The decision of the Kerala High Court in
CIT v. Programme for Community Organisation [1997] 228 ITR 620 affirmed. ORDER
1.
The questions that were referred to the High Court for consideration, at the instance of the revenue, read thus : "
1. Whether, on the facts and in the circumstances of the case and on an interpretation of the relevant provisions of the Income-tax Act, 1961, the assessee is entitled to exemption at 25 per cent on Rs. 2,57,376 or only on Rs. 87,010 ?
2.
Whether, on the facts and in the circumstances of the case, should not the Tribunal have accepted the view of the revenue expressed in the circular, the same being consistent with the relevant provisions of the Income-tax Act, 1961 ?
3.
Whether, on the facts and in the circumstances of the case, and also considering the scope of the earlier order of the Commissioner (Appeals) dated 18-11-1983 the Tribunal is right in law in holding that the Commis-sioner (Appeals) has
rightly interfered with the order of the Income-tax Officer ?"
2.
The answers being in favour of the assessee, the revenue is in appeal by special leave. 3.
The question that really requires consideration is whether, for the purposes of section 11(1)(a) of the Income-tax Act, 1961 ('the Act'), the amount for the grant of exemption of twenty-five per cent should be the income of the trust or it should be its
total income 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 twenty-five per cent of Rs. 2,57,376, as it contends, or twenty-five per cent of Rs. 87,010, as the revenue appeared
to contend.
Section 11(1)(
a) reads thus : "11.
Income from property held for charitable or religious purposes.—(1)(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 twenty-five per cent of the income from such property;"
4.
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 per cent 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 per
cent 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.
5.
For the aforesaid reasons, the civil appeal is dismissed. 6.
here, income is gross income without deducting any exp., after that all expenditure in nature of business exp. (to earn that income) are considered to be applied for charitable purpose and would be counted in 85%. also u can claim and defer application of income, which is actually not recd. till the period of its receipt.
CAclubindia
