Charitable or religious trust : Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 : Additional condition by way of Explanation to S. 11(2) inserted w.e.f. 1-4-2003 is to apply only to accumulations in excess of 15% u/s. 11(2) and not to accumulation

[DIT Exemption v. Bagri
Foundation, 192 Taxman 309 (Del.)]

The assessee was a trust
duly registered u/s.12AA and duly recognised u/s.80G(5)(vi) of the Income-tax
Act, 1961. For the relevant year, i.e., A.Y. 2003-04, the assessee had
shown certain gross income and deducted therefrom the amount applied for
charitable purposes by way of donation to another charitable trust, BLB, as
corpus donation and to others. The source of the amount over and above the
income of the year was the accumulation of income of the past. The AO added the
amount of donations to the income of the assessee, holding that owing to the
Explanation appended to S. 11(2) with effect from the A.Y. 2003-04, any donation
made out of income accumulated or set apart during the period of accumulation or
thereafter to any trust or institution registered u/s.12AA was liable to be
added in the income of the donor-trust. On appeal, the Commissioner (Appeals)
deleted the addition holding the donation by the assessee to BLB trust was made
out of excess of income over expenditure and not out of amount accumulated
u/s.11(1)(a). The Tribunal affirmed the order of the Commissioner (Appeals).

On appeal by the Revenue,
the Delhi High Court upheld the decision of the Tribunal and held as under :

“(i) It is clear from S.
11(1)(a) that the income applied for charitable purposes is not to be included
in the total income for the relevant year. In CIT v. Shri Ram Memorial
Foundation, (2004) 269 ITR 35/140 Taxman 263 (Delhi), the Court has held
that when a donor-trust, which is itself a charitable and religious trust,
donates its income to another trust, the provisions of S. 11(1)(a) can be said
to have been met by such donor-trust and the donor-trust can be said to have
applied its income for religious and charitable purposes, notwithstanding the
fact that the donation is subject to a condition that the donee-trust will
treat the donation as towards its corpus and can only utilise the accruing
income from the donated corpus for religious and charitable purposes.

(ii) Explanation to S.
11(2) inserted w.e.f. 1-4-2003, provides that the amount accumulated cannot be
donated to another trust. The Explanation to S. 11(2) is nothing but an
additional condition attached to accumulation in excess of 15% permitted
u/s.11(2). It cannot be held as a condition on accumulation up to 15% as
provided for in S. 11(1)(a) also. There is no rational classification for
imposing the restriction as contained in the Explanation to the accumulation
up to 15% also when there is no such restriction to donating the entire income
of a year to another charitable trust.

(iii) If the Legislature
intended to completely ban/discourage inter se donation between trusts,
it would have changed the position as existing in law, as noticed in the case
of Shri Ram Memorial Foundation (supra). The Legislature did not do so.

(iv) Even after the
insertion of the Explanation, if a trust donates its entire income for a year
to another charitable trust, it would still be entitled to exemption
u/s.11(1)(a). It defies logic as to why such donations cannot be permitted out
of 15% accumulation permitted u/s.11(1)(a) itself.

(v) There is, however,
rationale for imposing the restriction as contained in the Explanation to
accumulations in excess of 15%. Such accumulations, but for the conditions
imposed in S. 11(2) and in the Explanation aforesaid, would have been liable
to be taxed. One of the conditions in S. 11(2)(a) is the purpose for which
accumulation in excess of 15% being made is to be notified; another condition
is of the accumulation being permitted for a period not exceeding 5 years; yet
another condition is as to the modes in which the accumulation can be
invested. There are no such restrictions on accumulation u/s.11(1)(a).

(vi) The scheme of the
Section indicates that the additional condition by way of the aforesaid
Explanation is intended to apply only to accumulations in excess of 15%
u/s.11(2) and not to accumulations up to 15% u/s.11(1)(a). The Explanation is
not found to be intended to take away something from the accumulation up to
15% permitted without any condition whatsoever u/s.11(1)(a).

(vii) It also followed
that even if the donations by the assessee were to be out of accumulations
from previous years and not out of surplus reserves, the same would still not
be liable to be included in the total income as assessed by the Assessing
Officer and the orders of the Commissioner (Appeals) and the Tribunal would
still be upheld. It was nobody’s case that the said accumulations were beyond
the accumulation of 15% permitted in S. 11(1)(a).”