Exemption Allowable On Donations Made By One Charitable Trust To Other Charitable Institutions For Temporary Period: Delhi High Court

The Delhi High Court has held that exemption is allowable on donations made by one charitable trust to other charitable institutions for a temporary period.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav has observed that Section 11(3) of the Income Tax Act and the adverse consequences would have been attracted provided the incomes so accumulated were diverted for a purpose other than charitable or religious, or where they were not utilized for the purpose for which they were so accumulated or set apart during the period of five years contemplated under Section 11(2)(a). This was not a case where a permanent endowment was made or one where the donation stood imbued with some degree of permanency. It also cannot possibly be said that the money was lost or became unavailable to be applied.

The bench opined that since the donations were in any case reversed and had been advanced only for an extremely short duration, the Tribunal has clearly, and for justifiable reasons, answered the issue in favor of the assessee.

In terms of Section 11(1)(a), the income derived from trust property is firstly liable to be applied for charitable or religious purposes, and to the extent of that application, it is liable to be removed from the total income of the charity. Section 11(1)(a) then proceeds to accord a facility to a charity that may have failed to apply the income derived from property for charitable or religious purposes to accumulate a part, subject to the condition that the income so accumulated or set apart does not exceed 15% of that income. In terms of Section 11(1)(a), therefore, a charity becomes entitled to either employ the entire income derived from trust property for charitable or religious purposes or set aside not more than 15% of that income for charitable or religious purposes. Once an accumulation to the extent of 15% of that income is made, the provisions of Section 11(1)(a) get exhausted.

As per Section 11(2), the charitable entity becomes entitled to accumulate 85% of the income referred to in Section 11(1)(a) or (b), which could not be used for charitable or religious purposes. 85% of the income is thus enabled to be accumulated and set apart, subject to the fulfillment of the conditions specified in clauses (a), (b), and (c) of Section 11(2). In terms of the conditions which the statute imposes for the purposes of accumulation of 85% of the income, under clause (a), the charitable institution is required to furnish a statement in the prescribed form, setting out the purpose for which the income is sought to be accumulated or set apart, subject to the condition that the aforesaid accumulation would not exceed five years. In terms of clause (b) of Section 11(2), the money accumulated is liable to be invested or deposited in accordance with the provisions contained in Section 11(5). The only additional condition that then stands attached to the accumulation of 85% of the income is the requirement under clause (c) of the statement spoken of in clause (a) being furnished at least two months prior to the date specified for filing a return of income in terms of Section 139(1).

Sub-section (3) of Section 11 is concerned with the 85% of income that stands accumulated in terms of the facilities provided to charitable institutions by Section 11(2). Section 11(3) prescribes that any income referable to Section 11(2) that is either applied for a purpose other than charitable or religious or that ceases to be accumulated or set apart shall be deemed to be the income of the charitable institution of the previous year.

The respondent assessee is registered under Section 12-A of the Income Tax Act, 1961, and has also been extended the benefit of Section 80G(5)(vi). It had claimed exemption under Sections 11 and 12. Although a return for the assessment year 2009–10 had been originally filed on September 30, 2009, the respondent submitted a revised return of income. The reasons assigned for submission of the revised return were stated to be on account of a sum of INR 20 crore that had been set apart as accumulated income under Section 11(2) during the financial year in question and had been used to extend donations to other charitable institutions. The sum, though transferred to the Trust Fund Account, was used for granting corpus donations to other charitable trusts.

Out of the accumulated amount, the fund was utilized to the extent of INR 20 crore while granting donations to other charitable trusts. The Assessing Officer took the view that extending donations to other charitable trusts would amount to the utilization of the funds for a purpose other than those for which the surplus was accumulated under Section 11(2), thus violating Sections 11(3)(c) and 11(3)(d).

The assessee filed an appeal before the Commissioner of Income Tax (Appeals). The CIT(A) held in favor of the assessee as the issue of accumulation of 15% under Section 11(2) is concerned, following the view expressed by the Calcutta High Court in Commissioner of Income Tax vs. . Natwarlal Chowdhury Charity Trust. The Calcutta High Court has held that the assessee would be entitled to accumulate 25% of the total income of the previous year relevant to the assessment year 1978–79, inclusive of the deemed income under Section 11(3) of the Income-tax Act, 1961.

The appellants approached the Tribunal, which affirmed the view taken by the CIT (A), finding that the issue stood squarely in favor of the assessee.

The court relied on the decision of the Supreme Court in the case of Additional Commissioner of Income Tax vs. . A.L.N. Rao Charitable Trust, in which it was held that sub-section (2) of Section 11 extends the limit that would otherwise be applicable to income that could be possibly accumulated under Section 11(1)(a) or Section 11(1)(b). The Supreme Court pertinently observes that both Section 11(1)(a) and Section 11(2) operate independently. It was observed that while a trust may set aside 15% of the income derived from trust property in terms of Section 11(1)(a), sub-section (2) extends to the balance of the income of that year, which may not have been imbued with the exemption in terms of Section 11(1)(a). It then explains the scheme underlying sub-section (2) as contemplating the balance of accumulated income also not being liable to be taxed provided the charitable institutions were to abide by the conditions prescribed in clauses (a), (b), and (c). The provisions of Section 11(2), in essence, lift the ceiling or the limit of exemption of accumulated income as otherwise applicable by virtue of Section 11(1)(a).

The court has upheld the order of the tribunal.

Counsel For Appellant: Abhishek Maratha

Counsel For Respondent: Jehangir Mistry

Case Title: Commissioner Of Income Tax (Exemptions) Versus M/S Jamnalal Bajaj Foundation

Citation: 2024 LiveLaw (Del) 697

Case No.: ITA 808/2017

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