CHANDRA POOJARI, ACCOUNTANT MEMBER 
AND CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER

R. Vijayaraghavan, Advocate for the Appellant. 
A.V. Sreekanth, IRS, JCIT for the Respondent.

ORDER

Chandra Poojari, Accountant Member - This appeal by assessee is directed against the order of the Commissioner of Income Tax (Appeals)-VII, Chennai, dated 03.11.21014 for the assessment year 2011-2012.

2. The assessee has raised the following grounds:—

3. The brief facts of the case are that the assessee is a public charitable trust running a polytechnic college since 1976. The trust was registered u/s. 12A(a) of the Income Tax Act, 1961 vide order in C. No. 2217 dated 30.09.1976. The assessee trust filed its return for the assessment year 2011-12 on 30.09.2011 admitting 'nil' income. The case was selected for scrutiny and notice u/s. 143(2) of the Act was issued accordingly. After scrutinizing the details filed and discussing the case with the Authorised Representative, the assessment was completed u/s. 143(3) of the Act on 24.03.2014 determining the total income at Rs. 1,59,08,870/-. During the course of assessment proceedings, the Assessing Officer found that a sum of Rs. 1,78,22,598/- was set apart as per clause (2) of explanation to sec. 11(1) of the Act. A show cause notice was issued to the trust proposing to treat the above sum of Rs. 1,78,22,598/- as per provision of sec 11(1)(a) of the Act. In response, the Authorised Representative stated that the trust follows accrual basis of accounting and also the trust got considerable receivables towards fees, interest, etc at the year end. In view of the unspent income the option provided under explanation (2) to sec. 11(1) of the Act has been exercised to carry over the unspent income including the receivables towards spending in the subsequent assessment year or during the year of receipt. The option letter has been duly filed alongwith IT return at the time of filing of return of income. Further, the trust spend the amount accumulated in the immediate subsequent year i.e. in the F.Y. 2011-12. Not convinced with the reply, the Assessing Officer found that the assessee claimed the surplus as per clause (2) of explanation to sec. 11(1) of the Act without assigning any reasons. Any other reason means, the assessee should have specified the reasons for unapplied income to be set apart in the nest year. The assessee even in the earlier years also has not applied its income to the extent of 85% as specified in the Act. Further, the assessee has not furnished Form No. 10 for accumulation u/s.11(2) of the Act. The assessee has carried over the surplus as specified u/s.11(5) of the Act. In view of the above, the shortfall in application of income to the extent of Rs. 1,59,08,870/-(Rs. 1,78,22,598 - Rs. 19,13,728) was brought to tax. Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals).

4. The Commissioner of Income Tax (Appeals) observed that a perusal of Form No. 10B filed along with the return reveals that a sum of Rs. 3,91,54,093/- only was applied to charitable purpose during the assessment year 2011-12 by the assessee against the amount of Rs. 5,69,76,691/- to be spend/applied during the assessment year 2011-12. The sum of Rs. 5,69,76,691/- to be applied during assessment year 2011-12 consisted of Rs. 4,74,80,952/- pertaining to assessment year 2011-12 and Rs. 94,95,739/- relates to assessment year 2009-10 as per the utilization statement furnished by the assessee. The unspent amount worked out by the assessee was Rs. 1,78,22,598/-. The sum of Rs. 1,78,22,598/- was sought to be accumulated under clause(2) of explanation to sec. 11(1) of the Act. For this purpose, letter of resolution dated 15.09.2011 and letter of option dated 27.09.2011 were enclosed with the return of income. In this case, the assessee invokes Explanation (2) to sec. 11(1) of the Act for accumulating Rs. 1,78,22,598/- by filing letter of option and letter of resolution alongwith the return of income. It is pertinent to observe that the sum to be spent/applied includes Rs. 94,95,739/-being unspent amount for the year 2009-10 for which no details were furnished in the return of income, either before the Assessing Officer or before the undersigned, etc., Sub-section (2) of section 11 of the Act is invoked where 85% of the income referred to in clause (a) or clause (b) of sub-section (1) read with explanation to that sub-section is not applied to charitable purpose during the previous year but accumulated. For such accumulation the assessee has to fulfill the following two conditions:—

Further, he observed that considering the view that even for clause (2) of sub-section 11(1) of the Act, the conditions stipulated u/s.11(2) of the Act apply which is crystal clear from the wording of section 11(2) of the Act. Mere resolution and letter of option without the purpose are not enough to accumulate or set apart the income. The accumulated or set apart income as per Explanation (2) to section 11(1) of the Act shall be deemed to be income applied to such purposes and hence exempt from tax if the statement for the year ended 31.03.2012 furnished by the assessee at the time of assessment proceedings is irrelevant as section 11(2) of the Act was not complied with by the assessee which is mandatory. The case law relied on by the assessee are distinguishable from the facts and circumstances of the present case. Hence, he declined to interfere with the order of the Assessing Officer. The income brought to tax by the Assessing Officer in the assessment order for the assessment year 2011-2012 is confirmed. Against this, the assessee is in appeal before us.

5. We have heard both the parties and perused the material on record. The question to be considered is whether 15% of accumulation of income under section 11(1)(a) of the Act is a flat deduction available to the assessee or for that purpose, whether filing of Form No. 10 along with the return of income and fulfilling other formalities are a pre-condition or not. Provisions of Sec. 11(1) (a) reads as under:—

"11. (1)(a) Income derived from property held under trust wholly or 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 income so accumulated or set apart is not in excess of fifteen per cent of the income from such property. (b) to (d) xxx

Explanation. - For the purposes of clauses (a) and (b),—

then—

May, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived."

6. The other relevant provision governing the issue is provisions of Sec. 11(2) which read as under:—

"11(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) 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:-

Provided that in computing the period of ten years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded."

On a plain reading of above section, we find that following income of a charitable or religious trust shall not be included in the total income -
(1) to the extent of income -

(2) exemption of balance income of income (after income applied, deemed to be applied and accumulation not exceeding 15%).

7. Section 11(1)(a) of the Act and considering the procedure laid down by the Hon'ble Apex Court in the case of Addl. CIT v. A.L.N. Rao Charitable Trust [1995] 216 ITR 97/83 Taxman 252, we find that following income shall not be included in the total income of the previous year of the trust in receipt of the income:—

8. Thus, it is clear that income earned by the trust during the previous year are given exemption from income-tax to the extent of that part of the income which is actually spent for charitable or religious purposes plus accumulated income not exceeding 15% of the income. Clause (a) of Section 11(1) of the Act permits automatic accumulation of income up to 15% without any precondition set. Once the operation of Sec. 11(1)(a) exhausted, then follows sub-section (2) of Section 11 of the Act, which deals with the question of investment of the balance of accumulated income over and above 15% accumulated income which has still not qualified for exemption under clause (a) of sub-section 11(1) of the Act. That balance accumulated income can also qualify for exemption from income-tax meaning thereby the ceiling or the limit of exemption of accumulated income from income-tax as imposed by clause (a) of sub-section (1) of section 11 would get lifted if the additional accumulated income beyond 15% as the case may be, is invested as laid down by section 11(2) after following the procedure laid down therein. Therefore, sub-section (2) will operate for the entire balance of the previous year which has not got the benefit of tax exemption under clause (a) of sub-section (1) of section-11 of the Act. It has to be kept in view that out of the accumulated income of the previous year, 15% of the total income is given exemption from income-tax by clause (a) of sub section (1) of section 11 itself. That exemption is unfettered and not subject to any conditions. Section 11(2) does not operate to whittle down or to cut across the exemption provision contained in section 11(1)(a) so far as such accumulated income does not exceed 15% of the income accumulated in the previous year. It has also to be appreciated that sub-section (2) of section 11 does not contain any non obstante clause like "notwithstanding the provisions of subsection (1)". Consequently it must be held that after section 11(1)(a) has had its full force and if still any accumulated income of the previous year is left to be dealt with and to be considered for the purpose of income-tax exemption, sub-section (2) of section 11 can be pressed into service and if it is complied with, then such additional accumulated income beyond 15% will also be eligible for exemption from income-tax on compliance with the conditions laid down by sub-section (2) of section-11 of the Act.

9. A charitable or religious trust have to apply 85% of income for the object of the trust so as to qualify for exemption u/s 11 of the Act. Income not exceeding 15% of income is allowed to be accumulated under this section 11(1)(a) of the Act. This accumulation is automatic and does not call for any statutory stipulation. Explanation to section 11(1) provides deemed application of the income. The said explanation deals with a situation where income applied to charitable or religious purpose falls short of 85% of the income for the reason that the income was not received during that year or for any other reason, the trust have to exercise in writing for accumulation in accordance with Explanation to section 11(1) of the Act. It is pertinent to mention that filing of Form 10 u/s 11(2) of the Act and exercising in writing before the expiry of the time allowed under sub section (1) of section 139 while furnishing the return of income Explanation to section 11(1) of the Act is different. For exercising in writing it is not required to file any prescribed form. It could be on simply application or it could be exercised by passing accounting entries in the books of account, financial statements and other documents filed along with the return of income. If, combinedly, 85% of income including income applied, deemed to be applied and accumulation not exceeding 15% are less than 85% still the trust is eligible for exemption from income u/s 11(2) of the Act. In other words, it can be said that a chartable or religious trust can claim exemption from income even no income is applied for the object of the trust during the year, the remaining 85% of the income will be allowed exemption u/s 11(2) of the Act provided the statutory requirements for filing Form 10 and investing the amount in specified securities are fulfilled by the assessee.

10. In the light of above discussion, we are of the considered view that as per section 11(1)(a) the assessee is entitled for flat deduction without any condition or formality of filing form No. 10, if income is accumulated or set apart for application of the objects of the trust in India to the extend to which the income so accumulated or set apart does not exceed 15% of the income.

11. With regard to allowance of deduction over and above 15% of the income, for which the assessee is to satisfy the conditions laid down in section 11(2) of the Act. As per the discussion made above, the requirement of section 11(2) is that if such income is accumulated or set apart, then such income shall not be included in the total income of the previous year if such person specifies by notice in writing given to the assessing officer in 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 10 years. The money so accumulated or set apart is invested or deposited in the forms or modes specified in sub section (5) of section 11 of the Act. A regards the condition in respect of furnishing of prescribed form 10 we have given the finding that form No. 10 submitted before the completion of the assessment is required to be considered if the condition as laid down in section 11(2)(a) is satisfied. However, as regard the condition (b) of section 11(2) that the money so accumulated or set apart is invested or deposited in the form or mode specified in sub section (5) of section 11 is subject to verification. We, therefore, think proper to send this issue to the file of the assessing officer with a direction to verify the said condition of clause (b) of section 11(2) of the Act as to whether the assessee has made investment in the prescribed securities or not. Accordingly, the assessing officer will decide this issue after providing opportunity of hearing to the assessee and the issue in dispute is remitted to Assessing Officer for fresh consideration.

12. In the result, the appeal of the assessee in ITA No. 92/Mds/2015 is allowed for statistical purposes.