Charitable Trust: Accumulation of Income u/s 11(2) & its application thereafter- Confusions & Clarifications

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Charitable Trust: Accumulation of Income u/s 11(2) & its application thereafter- Confusions & Clarifications 

In case of charitable trust & institutions, the amount to the extent of 85% of income needs to be applied for charitable purposes during the same year only. If an amount to the extent of 85% is not applied, there is a provision u/s 11(2) which allows the benefit of accumulation to the assessee for application in subsequent years.  For accumulation, trust needs to upload Form No. 10 specifying the purpose for which accumulation is sought by the trust. The said declaration is required to be uploaded on or before the due date of filing income tax return u/s 139(1). The benefit of accumulation is not admissible if the declaration in Form No. 10 is not uploaded.

Few of the most common questions which arises in case of accumulation are,

  1. Whether it is necessary to specify the purpose for which accumulation is sought? Whether declaration in Form No. 10 could be for more than one object?
  2. Is it necessary to exactly specify the objects for which accumulation is sought? Whether it would be sufficient if the Form No. 10 mentions the purpose of accumulation as “towards the object of the trust” or “towards any object of the trust” or towards a few object of the trust.
  3. Whether, if some particular purpose is specified, whether the amount could be spent not for that purpose but for other objects of the trust?

First Issue

It must be noted that the Delhi HC in the case of Director Of Income Tax (Exemption) Vs. Daulat Ram Education Society has held that just because more than one purpose have been specified and details about plans not given cannot be the reason to deny exemption admissible u/s 11(2) for accumulation. In short, it has held that the plurality of objects could be specified in the Form No. 10. In this case, out of 29 purposes/objects stipulated in the memorandum of association, the assessee has specified eight purposes in Form No. 10 for which it was accumulating the unspent income while claiming benefit u/s 11.

It was categorically held by the Delhi HC that so long as one or more of the purposes specified by the assessee find place in the objects for which the society has been incorporated and so long as the said purpose are charitable in character, the benefit admissible under s. 11 must flow to the assessee. In this judgment, Delhi HC has relied upon earlier pronouncements by the same court in the case of CIT vs. Hotel & Restaurant Association (2003) 182 CTR (Del) 374 : (2003) 261 ITR 190 (Del) followed.

In short, exemption u/s 11 cannot be denied on the ground that more than one purpose has been specified in Form No. 10 and details about plans which the assessee has for spending on such purposes or not given.

[The judgment of Delhi HC in the case of Director Of Income Tax (Exemption) Vs. Daulat Ram Education Society is produced at the end of this article].

Second Issue:

Now, coming to the second question with regard to whether Form No. 10 can just mention the purpose of accumulation as “towards the object of the trust” or it is necessary to mention the specific or some objects in Form No. 10.

It may be noted that High Court Of Delhi in the case of Bharat Krishak Samaj Vs. Deputy Director Of Income Tax (Exemption) (2008) 306 ITR 0153, (2008) 166 TAXMAN 0147, has held that the benefit of accumulation of unapplied income under s. 11(2) could not be denied to the assessee trust only for the reason that it had sought permission to accumulate the unspent funds for the entire range of its objects and not particularized the objects of accumulation. It has relied upon CIT vs. Hotel & Restaurant Association (2003) 182 CTR (Del) 374, (2003) 261 ITR 190 (Del). In short, as per Delhi High Court, Form No. 10 could specify “towards object of the trust” for getting the benefit of accumulation u/s 11(2).

However, the contrary view is rendered by Calcutta High Court in the case of DIT (Exemption) v. Trustees of Singhania Charitable Trust [1993] 199 ITR 819. It has been held by Calcutta High Court that unless a specific purpose is mentioned, the benefit under Section 11(2) of the Act would not be available. It may be noted that the Calcutta HC has expressed its reservation against blanket accumulation u/s 11(2) and nothing specific was there on the plurality of the objects u/s 11(2).

In short, the judicial view on the issue is divided. It may be noted that Madras HC in CIT Vs. M.Ct. Muthiah Chettiar Family Trust & Ors (2000) 162 CTR 0063, (2000) 245 ITR 0400, (2001) 114 TAXMAN 0069 has concurred with the views of the Calcutta HC. However, Karnataka HC in the case of DIT, Exemptions v. Envisions [2015] 378 ITR 483/232 Taxman 164 has concurred with the views of the Delhi HC. In my opinion, it is always advisable to follow the conservative approach and mention the exact purpose for which the benefit of accumulation u/s 11(2) is sought.

[For ease of reference, the copy of the judgement by Delhi HC in the case of Bharat Krishak Samaj Vs. Deputy Director Of Income Tax (Exemption) (2008) 306 ITR 0153 as well as Calcutta High Court in the case of DIT (Exemption) v. Trustees of Singhania Charitable Trust [1993] 199 ITR 819 is produced at the end of this article.]

Third Issue:

Whether, if some particular purpose is specified, whether the amount could be spent not for that purpose but for other objects of the trust? It may be noted that the High Court Of Delhi in the case of Bharat Krishak Samaj Vs. Deputy Director Of Income Tax (Exemption) (2008) 306 ITR 0153, (2008) 166 TAXMAN 0147 has allowed the benefit of the exemption u/s 11(2) towards the object of the trust. It has not held that the amount can be applied for “any object of the trust” without mentioning the same in Form No. 10. In short, the Delhi HC in the said case has not held that if the trust has mentioned as “X” & “Y” as the purpose of accumulation then the amount could not be append for “A” or “B” purpose even if “A” & “B” are forming the part of the object clause of the trust.

Once the purpose of accumulation is specified in Form No. 10, application has to be done for the specified purpose and cannot be for other purposes (even if it is in the object clause of the trust) not specified in Form No. 10.

 

Bharat Krishak Samaj

Vs.

Deputy Director Of Income Tax (Exemption)

(2008) 306 ITR 0153

JUDGMENT

The assessee is aggrieved by an order dt. 28th Feb., 2006 passed by the Tribunal, Delhi Bench “E”, New Delhi, in ITA No. 831/Del/2002 relevant for the asst. yr. 1997-98.

  1. Admit.
  2. The following substantial questions of law arise for consideration :

(a) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in negating the assessee’s claim for accumulation of unspent income in the sum of Rs. 8,16,799 for the asst. yr. 1997-98 ?

(b) Whether the Tribunal was right in holding that the sum of Rs. 2,00,000 received by the assessee from WAFM for holding a national convention for farmers was not a capital receipt in the hands of the assessee but was its income under s. 2(24)(iia) of the of the IT Act, 1961 ?

  1. Filing of paper books is dispensed with.
  2. The assessee is a society registered under the Societies Registration Act, 1860, and is also registered under s. 12A(a) of the IT Act,1961 (‘the Act’).
  3. The assessee filled in Form No. 10 provided under the IT Rules, 1962 and submitted it to the AO along with its resolution dt. 30th May, 1997, seeking permission to accumulate unspent funds under s. 11(2) of the Act for the objects of the trust. The AO was of the view that the objects for which accumulation was sought were not particularized inasmuch as they covered the entire range of objects of the trust. On this basis, the AO denied the benefit of accumulation to the assessee.
  4. The assessee then preferred an appeal before the CIT(A) but that appeal was dismissed.
  5. Aggrieved, the assessee then preferred a further appeal before the Tribunal. During the course of submissions before the Tribunal the assessee relied on decisions rendered by this Court on the interpretation of s. 11(2) of the Act and the question whether the benefit of accumulation should be given to an assessee and under what circumstances.
  6. The Tribunal considered one of the decisions rendered by this Court, namely, Director of IT (Exemption) vs. Daulat Ram Education Society (2005) 278 ITR 260 (Del) and came to the conclusion that this decision did not help the case of the assessee as in that case out of 29 objects of the trust, the assessee therein had specified 8 objects for which accumulation was sought. In the present case the assessee had sought accumulation in respect of all the objects of the trust.
  7. We do not think that this is the correct way to distinguish a decision of a superior Court. The Tribunal has first to see what is the law laid down and then apply it to the facts of a given case. What has been done by the Tribunal in this case is that it has noted that the facts of the cited case are different and have not discussed the law laid down. This is not the correct approach for determining whether a decision is distinguishable or not.
  8. Our attention has been drawn to the CIT vs. Hotel & Restaurant Association (2003) 182 CTR (Del) 374 : (2003) 261 ITR 190 (Del). On a reading of this judgment, we find that it has been held by this Court that it is not necessary for a charitable trust to particularize each and every object for which accumulation is sought. It is enough if the assessee seeks accumulation for the objects of the trust. In the case at hand, the assessee has gone a step further and has specified each and every object for which accumulation is sought.
  9. As held in Hotel & Restaurant Association (supra) the plurality of purposes for which accumulation is sought is not precluded but whether accumulation should be permitted depends on the precise purpose for which it is intended. This is what the Division Bench had to say in this context :

“It is true that specification of certain purpose or purposes is needed for accumulation of the trust’s income under s. 11(2) of the Act. At the same time the purpose or purposes to be specified cannot be beyond the objects of the trust. Plurality of the purposes for accumulation is not precluded but it depends on the precise purpose for which the accumulation is intended. In the present case, both the appellate authorities below have recorded a concurrent finding that the income was sought to be accumulated by the assessee to achieve the object for which the assessee was incorporated. It is not the case of the Revenue that any of the objects of the assessee company were not for charitable purpose. The aforenoted finding by the Tribunal is essentially a finding of fact giving rise to no question of law.”

  1. In view of the law laid down, it is held that the Tribunal erred in denying the claim of the assessee for accumulation of a sum of Rs. 8,16,799 as unapplied income in terms of s. 11(2) of the Act. Question (a) is accordingly answered in the negative, in favour of the assessee and against the Revenue.
  2. As regards question (b), the contention that is urged by learned counsel for the assessee is that it had received an amount of Rs. 2,00,000 from WAFM for the purposes of holding a national convention for farmers. According to the assessee the amount was received by way of advance for holding the convention but the convention could not held in that year and was only held in the subsequent year and the amount of Rs. 2,00,000 was utilised for that purpose.
  3. However, we find from the record of the case that there is nothing to suggest that the amount was actually received by the assessee as an advance as contended. The amount received was for holding a national convention. It is also not clear from the record whether the national convention of farmers was to be held for and on behalf of the donor or was to be utilised for holding a national convention of the assessee.
  4. Under the circumstances, in view of the failure of the assessee to explain the receipt of Rs. 2,00,000 the provisions of s. 2(24)(iia) of the Act would be attracted and the amount must be treated as income of the assessee and not as a capital receipt for the assessment year in question.
  5. We answer the second question in the affirmative, in favour of the Revenue and against the assessee.
  6. The appeal is disposed of accordingly.

DIRECTOR OF INCOME TAX (EXEMPTION) vs. TRUSTEES OF SINGHANIA CHARITABLE TRUST

HIGH COURT OF CALCUTTA

Ajit K.Sengupta & Shyamal Kumar Sen, JJ.

IT Ref. No. 35 of 1991

22nd July, 1991

(1991) 59 CCH 0765 KolHC

(1993) 199 ITR 0819

AJIT K. SENGUPTA, J.

ORDER

 

In this reference under s. 256(1) of the IT Act, 1961, for the asst. yr. 1984-85, the following two questions of law have been referred to this Court :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that there is nothing illegal on the part of the assessee in giving notice to the ITO in Form No. 10 listing all its objects for the purpose of accumulation of income as provided in s. 11(2) of the IT Act, 1961, which requires specification of the purposes?

  1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in cancelling the order of the CIT under s. 263 of the IT Act, 1961, holding that the assessment of the ITO allowing accumulation of the income under s. 11(2) of the IT Act, for all the objects for which the trust was created and not for any specific objects, was neither erroneous nor prejudicial to the interests of the Revenue?”
  2. The facts leading to this reference are that the assessee, a public charitable trust, was assessed by the ITO for the asst. yr. 1984-85 on 7th Jan., 1987, and allowed exemption under s. 11, relying on the notice given by the assessee under s. 11(2). Thereafter, the CIT, invoking the powers vested in him under s. 263 of the IT Act, 1961, called for and examined the assessment records of the assessee. On such examination, the CIT found that, in the notice given by the assessee under s. 11(2) of the Act, the assessee had listed as purposes of accumulation of income all the charitable objects for which the assessee-trust was created. According to the CIT, s. 11(2) enjoins on the assessee to state the specific or concrete purposes to which its income is being accumulated for application at a later point of time. Since this was not done by the assessee, the impugned order of the ITO was erroneous and prejudicial to the interests of the Revenue. He, therefore, put the assessee on notice of his intention to pass suitable orders under s. 263 of the Act.

The assessee responded by pointing out that the notice given by it in Form No. 10 was valid in law and that the ITO rightly exempted the assessee’s income on the basis of the said notice and that, therefore, the impugned order of the ITO was neither erroneous nor prejudicial to the interests of the Revenue.

The aforesaid arguments of the assessee did not find favour with the CIT. Holding that s. 11(2) contemplates only specific or concrete purposes and holding further that “it will be a mockery of the section if, in the application for permission, all the objects of the trust are listed out and the period also is mentioned as ten years which is the maximum permitted under law”, the CIT set aside the impugned order of the ITO and directed him to redo the assessment “taking into account the correct position of facts and law as stated above”.

  1. Thereupon, the assessee moved the Tribunal which, on an examination of the scheme of the Act, held that since a plurality of charitable purposes is not ruled out under the scheme of the Act, no objection could possibly be taken to the assessee’s listing out all the objects of the trust in Form No. 10 : “that when the Act itself allows the accumulation of trust income up to a maximum period of ten years, no objection could possibly be taken to the assessee’s deciding to accumulate its income for the maximum permissible period of ten years; and that, consequently, the CIT was not justified in taking recourse to s. 263 of the IT Act, 1961”.
  2. The main controversy raised before us is as to whether it is necessary for the assessee to make particular mention of any purpose or purposes to enable it to accumulate the income. The resolution passed by the board of trustees of the trust is as follows :

“That consent be and is hereby accorded that, out of the balance of unapplied income of Rs. 94,125 for the year, the sum of Rs. 68,814 be accumulated and/or set apart for purposes of application to any one or more of the objects of the trust as set out in items Nos. (i) to (xvi) under paragraph 1 of the deed of trust till the previous year ending on 31st March, 1994.”

Notice was given by the assessee in Form No. 10. That notice mentions the clauses of the trust deed and says that the accumulation was being made for any one or more of the said purposes. The purposes are :

“(i) To assist, finance, support, found, establish and maintain any institution meant for the relief of the poor, advancement of education and medical relief;

(ii) To open, found, establish or finance, assist and contribute to the maintenance of hospitals, charitable dispensaries, maternity homes, children’s clinics, family planning centres, welfare centres, schools, colleges and/or institutions for promotion of research and education in medical science including surgery;

(iii) To maintain beds in hospitals and to make research grants for the promotion and advancement of medical science in India;

(iv) To help needy people in marriage, funeral and cremation of the dead;

(v) To open, found, establish, maintain and assist leper asylums or other institutions for the treatment of leprosy;

(vi) To open, found, establish, assist and maintain schools, colleges and boarding houses;

(vii) To open, found, establish or contribute to the maintenance of orphanages, widows’ homes, lunatic asylums, poor houses;

(viii) To open, found, establish and assist schools, colleges and hostels, for the physically or mentally handicapped, spastics, blind, the deaf and the dumb;

(ix) To distribute dhotis, blankets, rugs, woollen clothing, quilts or cotton, woollen, silken or other varieties of clothes to the poor;

(x) To grant fees, stipends, scholarships prizes, books, interest free loans and other aid for prosecuting studies, training or research;

(xi) To establish, found and maintain libraries, reading rooms for the convenience of the public;

(xii) To establish scholarships, teaching and research chairs in Indian universities and to contribute towards installation of capital equipment in educational and research institutes;

(xiii) To print, publish, distribute journals, periodicals, books and leaflets for the promotion of the objects of the society;

(xiv) To establish or support or aid in the establishment or support of any other associations having similar objects;

(xv) To assist, support and to give monetary help to any individual in distress, poor or poors for his or their medical treatment, advancement of education;

(xvi) To start, maintain and assist in relief measures in those parts of India which are or become subjected to natural calamities such as famine, epidemics, fire, flood, dearth of water, earthquake.”

  1. It was contended that one purpose is interlinked with the other and, therefore, the mention of all the purposes does not make any difference and satisfies the requirement of sub-s. (2) of s. 11. We are unable to accept this contention having regard to the broad nature of the purpose being all the objects mentioned in the deed of trust. Doubtless, it is not necessary that the assessee has to mention only one specific object. There can be setting apart and accumulation of income for more objects than one but whatever the objects or purposes might be, the assessee must specify in the notice the concrete nature of the purposes for which the accumulation is being made. Plurality of the purposes for accumulation may not be precluded but it must depend on the exact and precise purposes for which the accumulation is intended for the statutory period of ten years. The generality of the objects of the trust cannot take the place of the specificity of the need for accumulation.

We are, therefore, of the view that the Tribunal was not right in allowing the benefit of the accumulation without first ascertaining whether the purpose has been precisely specified or not.

  1. The Tribunal’s decision in fact overlooks the scheme relating to the accumulation of income for a particular future use. Sec. 11(1) itself provides for marginal setting apart and accumulation not in excess of 25 per cent of the income of the trust. It is only such accumulation which can be taken for the broad purposes of the trust as a whole that the statute does not require specification of the purpose. Such setting apart for any of the purposes of the trust is, however, a short-term accumulation, accumulation not beyond the year next succeeding. It is sub-s. (2) which provides for the long-term accumulation of the income. Obviously, such long-term accumulation should be for a definite and concrete purpose or purposes. What the assessee has sought to be permitted to do here is to accumulate not for any determinate purpose or purposes but for the objects as enshrined in the trust deed in a blanket manner. Accumulation in such a global manner is definitely not in the contemplation of s. 11(2) when it is construed in its setting. The assessee’s contention that saving and accumulation of income for future application of the same is for the purposes of the trust in the widest terms so as to embrace the entirety of the objects clause of the trust deed would render the requirement of specification of the purpose for accumulation in that sub-section redundant. The purposes to be specified cannot, under any circumstances, tread beyond the objects clause of the trust. The legislature could not have thought of the need of specification of the purpose if it did not have in mind the particularity of the purpose or purposes falling within the ambit of the objects clause of the trust deed. When sub-s. (2) of s. 11 requires specification of the purpose, it does so having in mind a statement of some specific purpose or purposes out of the multiple purposes for which the trust stands. Were it not so, there would have been no mandate for such specification. For, a charitable trust, in no circumstances, can apply its income, whether current or accumulated, for any purposes other than the objects for which it stands. The very fact that the statute requires the purpose for accumulation to be specified implies such a purpose to be a concrete one, an itemised purpose or a purpose instrumental or ancillary to the implementation of its object or objects. The very requirement of specification of purpose predicates that the purpose must have an individuality. In our view, the provision of sub-s. (2) is a concession provision to enable a charitable trust to meet the contingency where the fulfilment of any project within its object or objects needs heavy outlay to call for accumulation to amass sufficient money to implement it. Therefore, specification of purpose as required by s. 11(2) admits of no amount of vagueness about such purpose.
  2. We, therefore, answer question No. 2 in the negative and we decline to answer question No. 1. We remand the matter to the Tribunal and the Tribunal will allow the assessee to adduce fresh evidence whether in the form of any resolution or otherwise showing that the specific purpose for which the trust requires the accumulation of the income exists and, if such resolution or evidence is placed before the Tribunal, the Tribunal will consider whether the obligation cast on the assessee under s. 11(2) has been discharged and the exemption, accordingly, may be granted to the assessee.

There will be no order as to costs.

SHYAMAL KUMAR SEN, J. :

I agree.

DIRECTOR OF INCOME TAX (EXEMPTION) vs. DAULAT RAM EDUCATION SOCIETY

HIGH COURT OF DELHI

T.S. Thakur & Badar Durrez Ahmed, JJ.

IT Appeal No. 644 of 2005

24th August, 2005

(2005) 73 CCH 0809 DelHC

(2005) 278 ITR 0260 : (2006) 156 TAXMAN 0399

Legislation Referred to

Section 11,

Case pertains to

Asst. Year –

Decision in favour of:

Assessee

Counsel appeared:

R.D. Jolly, for the Appellant : O.S. Bajpai, for the Respondent

BY THE COURT

JUDGMENT

CM No. 11169 of 2005 :

Heard. For the reasons stated in the application which is supported by an affidavit, the delay in filing of this appeal is condoned and the application disposed of.

ITA No. 644 of 2005 :

  1. The only question which the Revenue proposes to raise for the determination of this Court is whether the Tribunal was correct in law in granting exemption under s. 11 of the IT Act despite the fact that the assessee had not mentioned any specific purpose for accumulation of its income in Form No. 10 submitted by it.
  2. Mr. Jolly, learned counsel for the Revenue argued that the purposes specified in Form No. 10 were general and did not, therefore, constitute a sufficient compliance with the provisions of s. 11(2) of the Act. He urged that in order to be eligible for the grant of the benefit under s. 11, the assessee was required to specify in clear terms the purpose for which the income was being accumulated by it. This requirement, according to him, was not satisfied by the assessee in the present case as the purposes mentioned were of a general nature.
  3. The Tribunal has placed reliance upon the judgment of a Division Bench of this Court in CIT vs. Hotel & Restaurant Association (2003) 182 CTR (Del) 374 : (2003) 261 ITR 190 (Del). In that case also the assessee had accumulated the unspent amount for being spent on more than one purposes specified by it. The question for consideration was whether it was necessary for the assessee to make a specific mention of any purpose or purposes to enable it to accumulate the income. The Court held that s. 11(2) of the Act did not prohibit plurality of purposes. The Court also held that the purposes which the assessee had specified formed part of its objects and were charitable in nature. The position is no different in the instant case. Here too, out of 29 purposes/objects stipulated in the memorandum of association, the assessee has specified eight purposes in Form No. 10 for which it was accumulating the unspent income while claiming benefit under s. 11. It is not the case of the Revenue that any of these eight purposes are not charitable or that the same do not figure in the memorandum of association. In the circumstances, just because more than one purpose have been specified and just because details about the plans which the assessee has for spending on such purposes are not given may not be sufficient to deny the exemption admissible to it under s. 11. So long as one or more of the purposes specified by the assessee find place in the objects for which the society has been incorporated and so long as the said purpose are charitable in character, the benefit admissible under s. 11 must flow to the assessee.
  4. In the light of what is stated above, no substantial question of law arises for consideration. The appeal fails and is hereby dismissed.

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