[1999]

68 ITD 95 (MUM.)

IN THE ITAT MUMBAI BENCH ‘A’

M.A. BAKSHI, JUDICIAL MEMBER AND J.K. VERMA, ACCOUNTANT MEMBER

I.T. APPEAL NO. 1572 (BOM.) OF 1989 [ASSESSMENT YEAR 1985-86]

OCTOBER 3, 1997

Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property
held under - Assessment year 1985-86 - Whether excess application of income in earlier years would be
considered as application out of income of a succeeding year and, therefore, deficit of earlier years be
allowed as set off out of income of succeeding year - Held, yes
FACTS
The assessee-company, recognised as a charitable institution for the purposes of sections 11 and 12, claimed adjustment of excess
application of income for charitable or religious purposes in earlier years out of the income of the year under appeal. The
Assessing Officer disallowed the claim on the ground that the deficit was not worked out in earlier years and that the computation
of surplus/deficit was subject-matter of appeals. This was confirmed by the Commissioner (Appeals)
On second appeal :
HELD
The claim of the assessee was that the excess application of income in earlier years should be considered as application out of the
income of the current year, for purposes of section 11. Following the decision of the Bombay Bench of the Tribunal in the case of
Volkart Foundation v. Third ITO [IT Appeal No. 4204 (Bom.) of 1973-74] and the decision of the Rajasthan High Court in the case
of CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439/[1986] 29 Taxman 476 , the claim of the assessee
was to be allowed subject to verification and determination of deficit by the Assessing Officer.
Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property
held under - Assessment year 1985-86 - Whether income available to trust for accumulation under section
11(1) (a) is income as computed on commercial principles, as also taking into account provisions of Act -
Held, yes - Whether it is forAssessing Officer to work out the extent of non-code expenditure which is
attributable to earning of income - Held, yes [case remanded back]
FACTS
The assessee, while computing income for purposes of accumulation in relation to deduction under section 11(1)(a), claimed that
the gross receipts of the trust formed the income of the trust. The Assessing Officer, however, set off non-code expenditure from
gross receipts while computing income for the said purpose. On appeal the Commissioner (Appeals) affirmed the order of the
Assessing Officer.
On second appeal :
HELD
It is clear from the decisions of various High Courts that it is the income computed on commercial principles which is available
for purposes of accumulation under section 11(1)(a). The contention that in the case of trust, gross receipts is the income of the
trust, was not well founded. Accordingly, it was to be held that the income available for accumulation under section 11(1)(a) is the
income as computed on commercial principles, as also taking into account the provisions of the Act.
The assessee’s alternative contention that the entire non-code expenditure could not be attributed to the earning of the income of
the assessee was, however, to be accepted. However, the portion of the expenditure, attributable to the earning of income, would
have to be determined by the revenue authorities, after giving an opportunity of being heard to the assessee. For that purpose,
the issue was set aside and remitted to the Assessing Officer for working out the expenditure to be deducted out of the gross
income, for the purpose of determining the income and then working out the 25 per cent of the same for accumulation.
Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property
held under - Assessment year 1985-86 - Whether where assessee, a charitable trust has applied its income
for charitable purposes in India, mere fact that expenditure has been incurred out of India does not
disqualify expenditure for exemption - Held, yes.
FACTS
The assessee, a charitable trust, sent a trade delegation abroad and in respect of that incurred substantial expenditure. The
Assessing Officer refused to consider the expenditure as an expenditure in connection with the application of income on the
ground that the application of income under section 11 must be in India and any expenditure incurred outside India did not
qualify for deduction under section 11. This was confirmed by the Commissioner (Appeals).
On second appeal :
HELD
The requirement under section 11 is for application of income for charitable purposes in India and its does not restrict the
application of income within the territory of India. The charitable purpose for which the income should be applied for claiming
exemption under section 11(1)(a) should be in India. In this case, the trade delegation had been sent abroad for the benefit of the
entire trade in India. The exports were made from India and the purpose for sending the delegation was to increase the
possibilities of exports out of India. Since the assessee had applied the income for charitable purposes in India, the mere fact that
the expenditure had been incurred out of India, did not disqualify the expenditure from exemption under section 11(1)(a ).
Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property
held under - Assessee-trust advanced certain amount to diamond institute by way of fixed assets, current
assets, etc. - Institute was treated as assessee’s branch which was later accorded by Government a separate
identity - Assessee wrote off advance and claimed it as deduction - Whether, where at no stage assessee had
claimed that expenditure in regard to its branch institute as application of its income for charitable
purposes, mere fact that amount had been written off on directions of Government did not alter character of
expenditure and, therefore, same did not qualify for exemption under section 11(1)(a) - Held, yes.
FACTS
In the year 1979 a Diamond Institute was formed which had been treated as branch of the assessee-council. The assessee
advanced to the institute a sum of Rs. 6,32,467 by way of fixed assets, current assets, etc., at the time of its formation. From 1-4-
1982 the institute obtained a separate identity and was being looked after by the Government. It was approved by the
Government on 12-7-1985. The Government also granted the assessee approval for writing off the said amount in the year 1984-
85. Accordingly, the assessee wrote off the advance and claimed deduction thereof in the previous year ending on 31-3-1985
which was disallowed by Assessing Officer. On appeal the Commissioner (Appeals) affirmed the order of the Assessing Officer.
On second appeal :
HELD
The decision of the revenue authorities, in this regard, did not call for any interference. The exemption under section 11(1)(a) is
permissible in respect of the income which is applied for charitable or religious purposes in India. The assessee had not, at any
stage, claimed the expenditure in regard to the Institute to be the application of its income for charitable purposes. The mere fact
that the amount had been written off on the directions of the Government, did not alter the character of the expenditure.
Therefore, the expenditure, at the very outset, did not qualify for exemption under section 11(1)(a). As a result, the disallowance
was to be upheld.
CASES REFERRED TO

Volkart Foundation v. Third ITO [IT Appeal No. 4204 (Bom.) of 1973-74], CIT v. Maharana of Mewar Charitable Foundation [1987]
164 ITR 439/ [1986] 29 Taxman 476 (Raj.), CIT v. Ganga Charity Trust Fund [1986] 162 ITR 612/ 29 Taxman 413 (Guj.),
CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad.), CIT v. Estate of V.L. Ethiraj (by Official
Trustee) [1982] 136 ITR 12 (Mad.), CIT v. Janaki Ammal Ayya Nadar Trust [1985] 153 ITR 159/ 23 Taxman 416 (Mad.),
CIT v. Trustee of H.E.H. the Nizam’s Supplemental Religious Endowment Trust [1981] 127 ITR 378 (AP) and CIT v. Society of
the Sisters of St. Anne [1984] 146 ITR 28/ 16 Taxman 400 (Kar.).
S.E. Dastur and P.J. Pardiwala for the Appellant.
D.J. Tralshawala for the Respondent.
ORDER
Per M.A. Bakshi, (JM) - The appeal of the assessee, for assessment year 1985-86, is directed against the order dated 10-1-1989 of
Commissioner of Income-tax (Appeals)-XIII, Mumbai. Rival contentions have been heard and records perused.
2. The relevant facts briefly stated are that the assessee is a company recognised as a charitable institution for the purposes of
sections 11 and 12 of Income-tax Act, 1961. For assessment year 1985-86, for which the previous year ended on 31st of March
1985, the assessee had filed the return of income on 07-10-1985, disclosing deficit of Rs. 4,22,490. On 14-08-1986, the assessee
filed a revised return, disclosing a deficit of Rs. 3,16,340. The Assessing Officer completed the assessment by computing the
taxable surplus at Rs. 10,96,370. The assessee appealed to the CIT (A), but without any success. Therefore, the present appeal.
3. The first ground of appeal reads as under :
"1. The income of the Council be considered as fully exempt on the ground of mutuality, on the ground that the surplus
accruing as a result of mutual activity is not taxable, more particularly, in view of section 44A of the Income-tax Act."
4. This ground is dismissed as not pressed.
5. The second ground of appeal reads as under :
"2. Grants-in-aid received from the Government of India be considered as not taxable."
6. This ground of appeal has also not been pressed, without prejudice to assessee’s right to contest similar ground in any
subsequent year. This ground of appeal is also dismissed as not pressed.
7. Ground No. 3 reads as under :
"Deficit of earlier years be allowed to be carried forward and set off against total income of the current year."
8. The assessee had claimed adjustment of excess application in earlier years out of the income of the year under appeal. The
Assessing Officer disallowed the claim of the assessee on the ground that firstly the deficit was not worked out in earlier years
and secondly, the computation of surplus/deficit was subject-matter of appeals.
9. The learned counsel for the assessee relied upon the decision of the Tribunal in the case of Volkart Foundation v. Third ITO [IT
Appeal No. 4204 (Bom.) of 1973-74], assessment year 1972-73, in support of the contention that the assessee was entitled to
adjust out of the current year’s income, the surplus application of earlier years. Reliance was also placed on the decision of the
Rajasthan High Court in the case of CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439/ [1986] 29 Taxman
476 (Raj.).
10. The learned Departmental Representative, on the other hand, contended that the A.O. has pointed out that there was no
deficit in earlier years and, therefore, the assessee is not entitled to any relief.
11. In our considered view, the dispute on facts as to whether there is actually any deficit in earlier years; or not, is a matter
which can be determined with reference to records. The A.O. may verify the claim of the assessee "that there is actually a deficit
in earlier years." After arriving at the deficit, the question still remains as to whether the assessee is entitled to set off of the
deficit out of the income of the year under appeal. The setting off of deficit out of the income has wrongly been equated by the
revenue authorities with the setting off of carried forward loss of earlier years. The issue involved in this appeal is some what
different. The assessee, in fact, is not claiming setting off of carried forward losses. The claim of the assessee is that the excess
application of income in earlier years should be considered as application out of the income of the current year, for purposes of
section 11 of the Act. In our view, the assessee deserves to succeed. If the assessee applied borrowed funds for the objects of the
trust, the repayment of such borrowed funds is considered to be application of income for the purposes of the trust. The issue, in
any case, is covered by the decision of the Bombay Bench of the Tribunal in the case of Volkart Foundation (supra), and the
decision of the Rajasthan High Court in the case of Maharana of Mewar Charitable Foundation (supra). We respectfully following
the aforementioned decisions of the Tribunal and that of the Rajasthan High Court, allow the claim of the assessee subject to
verification and determination of the deficit by the Assessing Officer.
12. The next ground of appeal is relating to computation of deduction under section 11(1)(a). Section 11(1)(a) allows
accumulation of income for application to the extent of 25 per cent of the income. The dispute between the assessee and the
revenue is relating to the computation of income for purposes of accumulation. The assessee claims that the gross receipts of the
Trust forms income of the Trust for purposes of section 11(1)(a). The claim of the revenue is that the income has got to be
computed after setting off of the non-code expenditure. The assessee calculated the 25% of income for purposes of accumulation
as under :

Gross Receipts : Rs. 30,05,200

Grant-in-aid : Rs. 35,52,000

Total : Rs. 65,57,200

25% for accumulation : Rs. 16,39,300

13. The Assessing Officer calculated the amount available for accumulation as under :

Gross Receipts
including

Grant-in-aid : Rs. 65,57,200

Less : Non-code
 Expenditure : Rs. 18,46,012

14. The CIT (A) has confirmed the view of the Assessing Officer.
15. The claim of the assessee is that the gross receipts is the income of the Trust and, therefore, the 25% of the accumulation is
to be calculated with reference to the gross receipts. It has been pointed out that in earlier years also the assessee has followed
the same system and there was no dispute on this issue with the revenue.
16. In the alternative, it has been contended that the entire non-code expenditure was not to be taken into account in computing
the income of the Trust. Referring to the details of the non-code expenditure, the learned counsel contended that most of the
expenditure has been incurred in connection with the application of income and not in connection with earning of the income.
According to the learned counsel, at the most the expenditure that has been incurred for earning the income alone would be
deductible in computing the income of the Trust for purposes of accumulation.
17. The learned Departmental Representative, on the other hand, contended that the assessee is entitled to accumulation to the
extent of 25% of the income and the income cannot be equated with gross receipts. According to the learned D.R., the income
first has got to be determined in accordance with the provisions of the Act and the commercial principles and the accumulation
would be permissible to the extent of 25% of the resultant income.
18. We have given our careful consideration to the rival contentions. As already pointed out, there are two areas of dispute. One
is as to whether the gross receipts are to be taken as the income of the Trust or the income as computed in accordance with
commercial principles. The second area of dispute is as to whether the entire non-code expenditure is attributable to the earning
of income or part of it is attributable to the application of income of the Trust.
19. With regard to the first dispute, i.e., whether the gross receipts forms the base as income for accumulation or the net income
after taking into account the necessary expenditure for earning the income, there are several decisions throwing light on this
issue.
20. In the case of CIT v. Ganga Charity Trust Fund [1986] 162 ITR 612/ 29 Taxman 413, their Lordships of the Gujarat High
Court have held that income derived from Trust property must be determined on commercial principles and in doing so, all
outgoings including outgoings by way of income-tax paid by the assessee-trust must be deducted and it is only from the surplus
income in the hands of the trustees that the question of application or accumulation or setting apart of income can arise.
21. In the case of CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485, their Lordships of the Madras
High Court have held that the income to be considered for purposes of section 11(1)(a) is to be 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. It was further held that
the application of income for charitable purposes will have to be excluded for the purposes of determination of the income
available for accumulation. Their Lordships further held that the income from the properties held under Trust will have to be
arrived at in the normal commercial manner.

22. In the case of CIT v. Estate of V.L. Ethiraj (by Official Trustee) [1982] 136 ITR 12, their Lordships of the Madras High
Court have held that the income from properties held under trust would have to be arrived at in the normal commercial manner
without reference to the provisions which are attracted by section 14.
23. In the case of CIT v. Janaki Ammal Ayya Nadar Trust [1985] 153 ITR 159/ 23 Taxman 416, their Lordships of the Madras
High Court have held that the income-tax paid should be taken into account for the determination of the commercial profits and
available surplus in the hands of the Trust for application.

24. In the case of CIT v. Trustee of H.E.H. The Nizam’s Supplemental Religious Endowment Trust [1981] 127 ITR 378 , it was
held by the Andhra Pradesh High Court that "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. The mode of determination by the ITO as per the
provisions of the I.T. Act is specifically restricted to the income over and above the income as shown in the accounts of the
business undertaking held by a Trust. It follows that with regard to the income of the Trust as such it is the accounts of the Trust
alone that have to be taken into consideration for purposes of section 11(1)(a) of the I.T. Act, 1961."
25. The Karnataka High Court in the case of CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28/16Taxman 400, held that
the amount of depreciation debited to the accounts of a charitable institution is to be deducted to arrive at the income available
for application to charitable and religious purposes.
26. It is clear from the decisions cited above, that it is the income computed on commercial principles which is available for
purposes of accumulation under section 11(1)(a). The contention that in the case of Trust, gross receipts is the income of the
Trust, in the light of the above decisions, we find is not well founded. We accordingly hold that the income available for
accumulation under section 11(1)(a) is the income as computed on commercial principles, as also taking into account the
provisions of the Income-tax Act, 1961.
27. We, however, agree with the contention on behalf of the assessee, that the entire non-code expenditure cannot be attributed
to the earning of the income of the assessee. The contention of the assessee that only a small portion of the expenditure is
attributable to the earning of income shall have to be determined by the revenue authorities, after giving an opportunity of being
heard to the assessee. For that purpose, the issue is set aside and remitted to the Assessing Officer for working out the
expenditure to be deducted out of the gross income, for the purpose of determining the income and then working out the 25% of
the same for accumulation.
28. The next ground of appeal is relating to the disallowance of expenses amounting to Rs. 4,16,013 incurred by the assessee
outside India.
29. The relevant facts relating to this issue are that the Council had sent a Trade Delegation abroad, in respect of which an
expenditure amounting to Rs. 4,86,975 had been spent outside India. The delegates had contributed a sum of Rs. 72,962 and the
balance of Rs. 4,16,013 was incurred by the Council. The Assessing Officer refused to consider the expenditure of Rs. 4,16,013 as
an expenditure in connection with the application of income, as according to the revenue, the application of income under section
11 must be in India and any expenditure incurred outside India does not qualify for deduction under section 11.
30. Before us, it was contended that section 11 provides for exemption where the application of income of a Trust is for the
purposes in India. It was further contended that the requirement under section 11(1)(a) is not that the expenditure should be
incurred in India, but on the other hand, the condition for exemption is that for the charitable or religious purpose for which the
income is applied should be in India. It was further contended that in this case the public utility purpose that was sought to be
achieved by sending a Trade Delegation was for the Indian traders and, therefore, the application of income was for purposes in
India. The mere fact that the expenditure has been incurred abroad, according to the learned counsel, does not disqualify the
Trust from claiming that the expenditure has been incurred for the purposes in India. Citing an example, the learned counsel
pointed out that where a Library functioning in India purchases books for it from abroad and makes the payment for such
purchases, the purpose for which the expenditure has been incurred would be in India, though the expenditure has been incurred
outside India. Citing another example, the learned counsel pointed out that where a charitable hospital purchases equipment
from abroad for the purpose of use in the hospital, it cannot be said that the amount spent for purchase of machinery from abroad
would not qualify for exemption under section 11(1)(a). According to the learned counsel, the expenditure incurred by the
assessee is for purposes in India and, therefore, the revenue was not justified in denying the benefit under section 11(1)(a) of the
said expenditure.
31. The learned Departmental Representative relied upon the orders of the revenue authorities.
32. In our considered view, the assessee deserves to succeed. It may be useful to reproduce section 11(1)(a).
"11(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 ;"
33. A bare reading of the sub-section 11(1)(a) does not leave us in doubt that the requirement under section 11 is for application
of income for purposes in India and it does not restrict the application of income within the territory of India. The charitable
purpose for which the income should be applied for claiming exemption under section 11(1)(a) should be in India. In this case, it
is not disputed that the Trade Delegation had been sent abroad for the benefit of the entire trade in India. The exports are made
from India and the purpose for sending the Delegation was to increase the possibilities of exports out of India. We accordingly
hold that since the assessee has applied the income for charitable purposes in India, the mere fact that the expenditure has been
incurred out of India, does not disqualify the expenditure from exemption under section 11(1)(a).
34. The next ground of appeal is relating to the writing off of Rs. 6,04,639. The relevant facts relating to this deduction are that,
in the year 1979, an institute by the name Indian Diamond Institute was formed, which had been treated as Branch of the
assessee Council. A sum of Rs. 6,32,467 had been advanced to the Indian Diamond Institute by the assessee, by way of fixed
assets, current assets, etc. As on 31st of March 1982, the said advance stood at Rs. 6,04,637. The assessee had reflected this
amount as an investment in the Balance Sheet. From 1st of April, 1982, the Indian Diamond Institute had obtained a separate
identity and was looked after by a Government Body. The assessee sought approval of the Government of India, Ministry of
Commerce, which was granted vide letter dated 12th July, 1985. The assessee has written off the said amount in the previous year
ending March 1985. The Assessing Officer disallowed the claim. The CIT (A) has confirmed the disallowance.
35. The learned counsel for the assessee contended that assessee was governed by the decision of the Government in regard to
write off of advance given to the Indian Diamond Institute. The learned counsel pointed out that though the Government of India,
Ministry of Commerce have granted approval to write off this amount on 12th July 1985, it has been specifically mentioned in the
approval that the said amount shall be written off in the year 1984-85 and accordingly the Council had no option but to write off
the said assets in the year under appeal.
36. In our considered view, the decision of the revenue authorities, in this regard, does not call for any interference. The
exemption under section 11(1)(a) is permissible in respect of the income which is applied for charitable or religious purposes in
India. The assessee has not, at any stage, claimed the expenditure in regard to Indian Diamond Institute to be the application of
its income for charitable purposes. The mere fact that the amount has been written off on the directions of the Government, does
not alter the character of the expenditure. In our view, the expenditure, at the very outset, does not qualify for exemption under
section 11(1)(a) and, therefore, we need not consider the objection of the revenue authorities that in any case the set off was
wrongly made in the year under appeal, as the approval of the Government of India was given only on 12th of July 1985, which
falls in assessment year 1986-87. The disallowance of the claim to the extent of Rs. 6,04,639 is upheld.
37. Ground No. 7 is relating to the levy of interest amounting to Rs. 6,339. The assessee had claimed a sum of Rs. 6,339 paid as
penal interest for short deduction of taxes from the salaried employees as application of income. This has been rejected by the
Assessing Officer on the ground that the expenditure is not for purposes of the objects of the Trust. We do not see any infirmity in
the orders of the revenue authorities in this regard. The assessee is entitled to exemption in respect of the income applied for
charitable or religious purposes in India. The penal interest imposed for short deduction of salaries does not qualify for
exemption, as it does not amount to application of income for charitable purposes.
38. The last ground of appeal is relating to levy of interest under section 139(8) and section 217. It was prayed that only
consequential relief may be directed to be granted to the assessee. Since the assessee is entitled to consequential relief, the
Assessing Officer is directed to give the same.
39. In the result, appeal of the assessee is partly allowed.