Court Remands Tax Exemption Case for Charitable Trust's Building Fund

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Case Name:

CNN Educational Trust vs Income Tax Officer (High Court of Madras)

T.C.A.Nos.268 and 269 of 2016 and C.M.P.No.5840 of 2016 

Date: 12th March 2020

Key Takeaways:

1. The court emphasized the importance of properly documenting and specifying the purpose of income accumulation for charitable trusts.

2. The case highlights the significance of Form No. 10 and resolutions in claiming tax exemptions under Section 11 (of Income Tax Act, 1961).

3. The High Court's decision to remand the case shows a willingness to allow for reconsideration when additional evidence is available.

Issue: 

Did the Income Tax Appellate Tribunal err in rejecting the CNN Educational Trust's claim for tax exemption under Section 11 (of Income Tax Act, 1961), based on the accumulation of income as per Section 11(2) (of Income Tax Act, 1961)?

Facts:

1. CNN Educational Trust filed appeals under Section 260A (of Income Tax Act, 1961), against the order passed by the Income Tax Appellate Tribunal 'A' Bench, Chennai on 23.09.2015.

2. The Trust claimed tax exemption for Assessment Years 2008-09 and 2009-10.

3. The Trust had accumulated surplus funds of Rs. 59,13,658/- for the purpose of constructing a building and purchasing assets for the Trust's use.

4. The Trust submitted a corrected Form No. 10 dated 01.09.2008 along with a resolution to the Tribunal.

5. The Tribunal rejected the Trust's plea for accumulation of income, resulting in the denial of tax exemption under Section 11 (of Income Tax Act, 1961).

Arguments:

Appellant (CNN Educational Trust):

1. The Trust has been assessed as a 'Charitable Trust' under Section 11 (of Income Tax Act, 1961) for all other assessment years except 2008-09 and 2009-10.

2. The accumulation of surplus funds was resolved to be spent on building construction and asset purchase for the Trust's use.

3. The corrected Form No. 10 and resolution were furnished to the Tribunal but not properly appreciated.

Respondent (Income Tax Department):

1. The resolution did not specify details about the future use of the accumulated surplus funds.

2. The Tribunal had considered the resolution in its order.

3. The findings of the Tribunal do not require interference by the High Court.

Key Legal Precedents:

1. CIT vs. MCT Muthiah Chettiar Family Trust (245 ITR 400):

Held that trusts must specify a particular purpose for income accumulation, not just repeat trust objects.

2. DIT(E) vs. Singhania Charitable Trust (199 ITR 189)(Cal):

Emphasized the need for concrete and precise purposes for accumulation, even if multiple purposes are specified.

Judgement:

The High Court decided to remand the case back to the Income Tax Appellate Tribunal for reconsideration. The court directed the Tribunal to:

1. Re-examine the Form No. 10 furnished by the Trust along with the Resolution.

2. Consider any additional evidence that may be produced by the Trust.

3. Take into account that the Trust has been assessed in the 'Exempted Category' for subsequent Assessment Years.

4. Evaluate whether the surplus fund has been spent by the Trust for construction or charitable purposes as per the Trust Deed.

FAQs:

Q1: What is Form No. 10 in the context of this case?

A1: Form No. 10 is a prescribed form under the Income Tax Act where charitable trusts specify the purpose and period for which they are accumulating income.

Q2: Why did the High Court remand the case instead of making a final decision?

A2: The court felt that the Tribunal should reconsider the case with additional evidence, including the corrected Form No. 10 and resolution, which may not have been properly appreciated earlier.

Q3: What is Section 11 (of Income Tax Act, 1961) about?

A3: Section 11 (of Income Tax Act, 1961) deals with income tax exemptions for charitable or religious trusts and institutions.

Q4: How long can a trust accumulate income under Section 11(2) (of Income Tax Act, 1961)?

A4: A trust can accumulate income for a maximum period of ten years under Section 11(2) (of Income Tax Act, 1961).

Q5: What are the key conditions for claiming exemption under Section 11(2) (of Income Tax Act, 1961)?

A5: The key conditions include specifying the purpose of accumulation in writing to the Assessing Officer, stating the accumulation period (not exceeding 10 years), and investing the accumulated money in specified forms or modes.

The Assessee, C.N.N.Educational Trust has filed these appeals under Section 260A (of Income Tax Act, 1961) aggrieved by the order passed by the learned Income Tax Appellate Tribunal 'A' Bench, Chennai on 23.09.2015, raising the purported questions of law arising from the said order. The appeals were admitted by the Coordinate Bench of this Court on 13.04.2016 on the following substantial questions of law.

"(1) Whether the Appellate Tribunal is correct in law in their action to reject and to sustain the denial of the tax exemption claimed in terms of Section 11 (of Income Tax Act, 1961) consequent to the non acceptance of the plea for accumulation of income as per Section 11(2) (of Income Tax Act, 1961) read with Form No.10 on presumption of wrong facts establishing perversity in such findings recorded in relation thereto?

(2) Whether the Appellate Tribunal is correct in not considering the power vested with the First Appellate Authority for entertaining the plea for accumulation of income as per Section 11(2) (of Income Tax Act, 1961) read with Form No.10 even after noticing the compliance of defects pointed out in making the said plea in statutorily prescribed Form No.10 filed before the Original Authority?

And

(3) Whether the Appellate Tribunal was correct in law in rejecting the plea for accumulation of income, which resulted in denial of tax exemption under Section 11 (of Income Tax Act, 1961) even though the purpose of accumulation was clearly communicated to the Original Authority proving the violation of the principles of legitimate expectation at every stage of the proceedings?"

2.The relevant findings of the learned Tribunal denying the exemption to the Assessee under Section 11 (of Income Tax Act, 1961), are quoted below for ready reference. " 6. We have heard both the parties and perused the material on record. As seen from the above, it is necessary that the AO must have the information under Form-10 at the time of completion of the assessment and in its absence, it is not possible for the assessing authority to give benefit of such exclusion. We are completely in agreement with the above judgment. But in the present case, though the assessee filed Form-10, it should be considered rectified in view of resolution passed. The resolution passed does not show the name of the assessee as well as the period. Thus, the resolution is also defective and it is not having all the information required. Further, it did not comply with the requirements of Sec.11(2) (of Income Tax Act, 1961), which reads as follows:

"11(2) [Where [eighty five] per cent of the income referred to in clause (a) of sub-section(1) 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 in 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; Page 3 of 8

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

7. There is no dispute that it is mandate of Sec.11 (of Income Tax Act, 1961) to specify the purpose and period for which accumulation is sought for. The above position was upheld by the Jurisdictional High Court in the case of CIT Vs. MCT Muthiah Chettiar Family Trust (245 ITR 400), wherein it was held as under:

"The trust is allowed to accumulate its income for a maximum period of ten years. The condition is that the trust should specify in the prescribed form the purpose for which the income is accumulated or set apart. It is not enough for the trustees to repeat the objects of the trust, but they must specify a particular purpose for which the income is being accumulated."

7.1. Similar view was also expressed by the High Court of Calcutta in the case of DIT(E) Vs. Singhania Charitable Trust (199 ITR 189)(Cal), wherein it was held as under:

"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 objects or purposes might be, assessee must specify in notice concrete nature of purposes, for which 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 generating of the objects of the trust cannot take the place of specificity of the need for accumulation."

8. Further, it is pertinent to note that the assessee has not complied with the provisions of Sec.11(5) (of Income Tax Act, 1961). Considering the totality of facts and circumstances of the case, in our opinion, the orders of the lower authorities are justified in dismissing the appeal of the assessee. Accordingly, we are inclined to dismiss the appeals for the assessment years 2008-09 and 2009-10."

3. Learned counsel for the Assessee Mr.S.Sridhar however submitted that except for these two assessment years in question ie., A.Y.2008-09 and 2009-10, the Assessee Trust has been assessed by the Department as 'Charitable Trust' under Section 11 (of Income Tax Act, 1961). He submitted that the accumulation of surplus funds of Rs.59,13,658/- was resolved to be spent for the purpose of construction of building and purchase of assets for the usage of the Trust and corrected Form No.10 dated 01.09.2008, along with the said Resolution was furnished before the learned Tribunal, but the learned Tribunal has failed to appreciate the same in correct perspective.

4. Per contra, Mr.J.Narayanasamy, learned Senior Standing Counsel for the Revenue has submited before us that, the said Resolution does not specify any details about the alleged future use of the said accumulated surplus funds and the said Resolution has been considered by the learned Tribunal in Para 6 of the learned Tribunal's order quoted above.

He therefore submitted that those findings of the learned Tribunal do not require any interference by this Court.

5. Having heard the learned counsel for the parties, we are of the opinion that, the matter would deserve a remand to the learned Income Tax Appellate Tribunal. As a matter of fact, the Assessee could have approached the learned Tribunal by way of a Miscellaneous Application if a document like Form No.10 along with the Resolution filed before the learned Tribunal contained all the details and evidence of such accumulation set apart by the Assessee Trust for the purpose of construction of building etc., in terms of the provisions of Section 11 (of Income Tax Act, 1961) permitted by law. We find from paragraph 6 of the learned Tribunal's order that, though the learned Tribunal has referred to the said Resolution dated 01.09.2008 passed by the Assessee Trust, without finding it to be defective, they have not given any benefit of the same to the Assessee Trust. Whether the said surplus fund has been really spent by the Assessee Trust for such construction or not for charitable purposes of the Trust contained in its Trust Deed or not might be a subsequent fact, which may be relevant for the Tribunal to consider, coupled with the fact that the Assessee Trust has been assessed as such in 'Exempted Category' for the subsequent Assessment Years as stated by the learned counsel for the Assessee.

6. Therefore, in the light of these facts, the learned Tribunal should re-examine the Form No.10 furnished by the Assessee along with the Resolution and additional evidence, which may be produced by the Assessee Trust before the learned Tribunal. Therefore, we dispose of the present appeals without answering the questions of law as such and request the learned Tribunal to reconsider the said Form No.10 dated 01.09.2008 and the Resolution along with the evidence of the surplus amount having been spent by the Assessee Trust for the purposes of the Trust. With the above observations, the appeals are disposed of. No costs.

(V.K., J.) (R.S.K.,J.)

12-03-2020