Section 11 Trust can not claim rental income under income from house property

By | September 9, 2015

Whether in case of Trust,  actual rent received is to be treated as the income from house property of the assessee and  not  under the head income from house property  (with the provisions of u/s. 23 & 24 of the Act) ?

while arriving at the rental income of the assessee trust any expenditure incurred whatsoever related to the rental income has to be allowed as deduction and the net income which is the real income, will be treated as the income of the trust. [Para 6.3]

Provision of the Act in Chapter-III deals with the manner in which the income of the assessee trust has to be applied in order to exempt such income from the total income. It is not a case of computation of income chargeable to tax as per the provisions of Chapter-IV under the head ‘C- Income from house property‘.Therefore while determining the ‘income’ of the assessee trust and its ‘application of income’ for the purpose of claiming exemption under section 11(1)(a), the provisions of Chapter-IV – Sections 22 to 27 applicable for computing the income chargeable to tax under the head ‘income from house property’, will not be attracted.

IN THE ITAT CHENNAI BENCH ‘A’

Anjuman-E-Himayath-E-Islam

v.

Assistant Director of Income-tax (Exemption)-IV, Chennai

N.R.S. GANESAN, JUDICIAL MEMBER
AND A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER

IT APPEAL NO. 2271 (MDS.) OF 2014
[ASSESSMENT YEAR 2009-10]

JUNE  2, 2015

U.M. Khalilulliah, C.A. for the Appellant. P. Radhakrishnan, JCIT, D.R., for the Respondent.

ORDER

A. Mohan Alankamony, Accountant Member – This appeal is filed by the Assessee, aggrieved by the order of the Learned Commissioner of Income Tax (A)-VII, Chennai dated 18.07.2014 in ITA No.344/11-12 passed under Sec.143 (3) read with section Sec. 250 of the Act.

2. The Assessee has raised five elaborate grounds in its appeal, however the crux of the issue is that the Assessee is aggrieved by the order of the Ld. CIT (A):—

(i ) for having sustained and improved the order of the Ld. Assessing Officer by disallowing the carry forward and set off of excess application of income.
(ii ) for having sustained the order of the Ld. Assessing Officer in disallowing the depreciation while computing the income of the assessee-trust.
(iii ) for having sustained the order of the Ld. Assessing Officer wherein the actual rent received is treated as the income from house property of the assessee and not computed in accordance with the provisions of u/ss. 23 & 24 of the Act.

3. The brief facts of the case are that the assessee-trust is engaged in the activity of organizing and running orphanage and educational institutions, registered u/s 12A(a) of the Act vide order of the Ld. CIT–III, Chennai in C. No. 212(66)/70 dated 02.07.1975, filed its return of income for the assessment year 2009-10 on 30.09.2009. The case was taken up for scrutiny and assessment was completed u/s. 143(3) of the Act on 14.12.2011 wherein the Ld. Assessing Officer allowed the claim of set off of excess application only to the extent of Rs. 23,96,355/- as against the claim of Rs. 1,00,70,474/- by the assessee, disallowed the claim of depreciation while computing the income of the assessee and adopted the rent received from house property as the income from house property instead of determining the same in accordance with the provisions of sections 23 & 24 of the Act.

4.1 Ground No. (i) – Disallowance of the carry forward and set off of excess application of income.

The assessee in its return of income had claimed Rs. 1,00,70,474/- as excess application of income to be carried forward as follows:—

Gross receipts

85% of the Gross receipts

Rs. 5,11,60,794

Rs. 4,34,86,675

Application of income including

Capital expenditure

Excess Application c/f

Rs. 5,35,57,149

Rs. 1,00,70,474

However, the Ld. Assessing Officer allowed the claim of excess application to be carry forward Rs. 23,96,355/- as worked out herein below:—

S.No. A.Y Gross Receipts Application Excess Application
1 2008-09 5,11,60,794 5,35,57,149 Rs.23,96,355

4.2 On appeal, the Ld. CIT (A) denied the benefit of carry forward of excess application by observing as under:—

“Income derived from property held under trust means real income and not the income computed for assessment. The question of spending of 85% of income and accumulation of 15% of income arise only when there is real income. The income derived should be during the current year and accumulation is also from current year’s income. If the trust is able to spend the entire income derived from trust, the whole expenditure is treated as application and exempted u/s. 11 of the Act. There is no provision u/s. 11 of the Act to carry forward the excess spending in excess of 85% stipulation. If the trust spends more than the income, it should be either from corpus or from loan obtained. The application should always be from income derived or from income set apart or accumulated income. Therefore the question of carry forward of excess expenditure and set off of the same subsequently does not arise at all in the case of trusts. Reliance is placed on the decision of ITAT Delhi Bench ‘F’ in the case of Pushpawati Singhania Research Institute for Liver, Renal & Digestive Diseases v. DDIT(E), Inv. Circle-II, New Delhi [2009] 29 SOT 316 (Delhi). In the above decision, the Hon’ble ITAT analysed all the decisions which are in favour of carry forward and set off and distinguished them and arrived at the correct decisions as declared by the Income-tax Act. The Bombay High Court in the case of Ld. CIT v. Institute of Banking Personnel Selection [2003] 131 Taxman 386 observed that the income of the trust is to be computed on the basis of commercial principles. It is not in dispute that to arrive at the actual income, commercial principles are to be applied. This does not mean that the excess expenditure is to be carried forward and allowed in the subsequent year. The principles of set apart/accumulation of income arise only if it is real income. Otherwise, the investment u/s. 11(5) of the Act is not possible with deemed income. The intention of the legislature is to invest real income derived from property of the trust in specific assets when they are not utilized/applied. The very concept of exemption u/s. 11 of the Act is defeated if provisions of profits and gains of business or provision relating to carry forward and set off is substituted for the “Income which do not from part of Total income” included under Chapter-III of the Income-tax Act.”

4.3 Before us, the Ld. A.R. citing the decision of the Bombay Tribunal in ITA No. 6129/Mum./2013 in the case of Maharashtra Industrial Development Corpn., Mumbai vide order dated 05.03.2015 argued that the assessee should be allowed to carry forward the excess application. The Ld. D.R on the other hand argued in support of the order of the Ld. CIT (A).

4.4 We have heard both the parties and carefully perused the materials available on record. Section-11(1)(a) of the Act provides that “income derived from property held under Trust wholly for charitable or religious purpose” shall not be included in the total income to the extent such income is applied for charitable or religious purpose in India. The Act also provides that upto 15% of such income is accumulated or set apart, then that shall also not be included in the total income. Further Section-11(1)(d) of the Act provides that “income in the form of voluntary contribution made with specific direction that they shall form part of the corpus of the trust or institution” will also not be included in the total income. By virtue of Section-2(24) of the Act the definition of ‘income’ includes any “voluntary contribution received by the trust created wholly or partly of charitable or religious purposes”. Further explanation to section-11(1)(a)(b) r.w.s 12(1) of the Act provides that any “voluntary contribution received other than with specific direction that they shall form part of the corpus of the trust or institution” created wholly for charitable or religious purpose shall be deemed to be the “income derived from property held under trust”. From the above it is clear that, when the assessee trust applies 85% of its income received by way of “voluntary contributions other than the voluntary contributions received with specific directions” and the “income derived from property held under trust”, then such income shall not be included in the total income of the Trust. Further the balance 15% of such income even if accumulated or set apart shall also not be included in the total income of the Trust. Therefore, what is provided under the Act is with respect to ‘application of income’ from the ‘income derived from the property held under the Trust’ and any ‘voluntary contributions received by the Trust other than contributions made with specific directions that they shall form part of the corpus of the trust’. Thus, there is no reference in Section-11 of the Act with respect to application of fund from the ‘corpus’ of the trust, ‘loan’ obtained by the Trust, ‘Sundry creditors’ of the Trust or ‘accumulate fund’ of the Trust for claiming exemption u/s. 11(1) of the Act.

4.5 Application of fund by any charitable institution is possible only from the following sources:—

(i ) Voluntary contributions received by the Trust towards its corpus,
(ii ) Other voluntary contributions,
(iii ) Accumulated fund,
(iv ) Amount received by way of loan,
(v ) Sundry creditors,
(vi ) “Income” derived from the “Property” held under the Trust.
[Hon’ble Calcutta High Court has held in the case DIT (Exemption) v. Girdharilal Shewnarain Tantia Trust [1993] 199 ITR 215/71 Taxman 150 that “The “income” contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable”.
Further, Hon’ble Apex High Court has held in the case of J.K. Trust v.CIT/CEPT [1957] 32 ITR 535 that “Property” is a term of the widest import, and subject any limitation or qualification which the context might require, it signifies every possible interest which a person can acquire, hold and enjoy. Business would undoubtedly be property unless there is something to the contrary in the enactment.]

When the Trust applies its funds from its Corpus, accumulated fund, Sundry creditors or from the loan obtained by the Trust, then such funds which are applied cannot be said to be funds applied from the income of the Trust. Therefore, there cannot be a case where the trust can apply its income more than the income received by it for the purpose of Section-11(1)(a) & (b) of the Act. Thus excess application of fund over and above the income of the Trust can arise only when funds are applied from the Corpus of the Trust, accumulated fund, Loan obtained by the Trust or goods and services received from Sundry Creditors. It can be logical to deduce that when funds are applied from borrowed funds or by way of Sundry creditors the same can be treated as application of fund in the year in which such Loan/Sundry creditors are repaid from the income of the Trust. However when amount is applied from the corpus fund or accumulated fund the same cannot be treated as application of fund for the purpose of Section 11 of the Act, because such fund have already been exempt from the income of the Trust in the year in which it is received or such amount is set aside and therefore once again treating the same as application of fund will amount to double deduction. Similarly voluntary contribution received toward Corpus is exempt from income of the trust in the year in which it is received and therefore when it is utilized for the objects of the Trust it cannot be considered as application of fund otherwise it will amount to double deduction. From the above factual and mathematical matrix it is evident that carry forward of excess application of fund in the commercial principles cannot be allowed as per the provisions of the Act because it would result in notional application of income in the subsequent year. These aspects have not been considered by the Mumbai Bench of the Tribunal, and the unreported decision of the Hon’ble Bombay High Court is also not placed before us.

4.6 Now analyzing the facts of the case before us, it appears that the assessee trust’s gross receipts is Rs. 5,11,60,794/- and the assessee trust have spent Rs. 5,35,57,149/- which shows that the assessee trust has spent Rs. 23,96,355/- more than its income received during the relevant year. This amount of Rs. 23,96,355/- may have been taken out from the ‘corpus funds’, ‘accumulated funds’, ‘loan’ obtained by the assessee trust or arising out of ‘Sundry Creditors’. Therefore it is obvious that there is no excess application of income over and above the income received by the trust, hence the question of carry forward of excess application of income does not arise. However the amount applied from the ‘Loan’ or ‘Sundry Creditors’ will be allowed as application of fund in the year in which such ‘Loan’ or ‘Sundry Creditors’ are repaid. It is pertinent to mention that if the amount is applied from the ‘Corpus fund’ or ‘accumulated fund’ it will not be treated as application of fund because ‘Corpus fund’ and ‘accumulate fund’ are already exempt from the income of the Trust and once again if it is treated as application of fund it would amount to double deduction. Therefore the claim of the assessee to carry forward the excess application of fund cannot be entertained applying the commercial principles. However if the excess amount of Rs. 23,96,355/- is applied from the borrowed fund or from Sundry Creditors, the same shall be allowed as application in the year in which such Loan or Sundry Creditors are repaid from the income of the Trust as discussed herein above. Needless to mention that the income of the Trust refers to ‘income derived from the property held under the Trust’ and any ‘voluntary contributions received by the Trust other than contributions made with specific directions that they shall form part of the corpus of the trust’ i.e., item Nos.(ii) and (vi) mentioned hereinabove. This ground raised by the assessee is accordingly disposed of.

5.1 Ground No. (ii) – Disallowance of the depreciation while computing the income of the assessee trust.

The assessee Trust had claimed depreciation on the assets as application of income in the return of income. The Ld. Assessing Officer opined that the claim of depreciation by the assessee would amount to double deduction because the entire cost of asset has already been claimed as application of income in the year in which the assets were purchased. Thereafter, the Ld. Assessing Officer citing certain decisions held that the claim of depreciation cannot be considered as application of income. On appeal, the Ld. CIT (A) was also of the view of the Ld. Assessing Officer and therefore confirmed Ld. Assessing Officer’s order.

5.2 We find this issue is elaborately discussed in the case of Lissie Medical Institution v. CIT [2012] 348 ITR 344/209 Taxman 19 (Mag.)/24 taxmann.com 9 (Ker.) and held the issue against the assessee. While doing so, the Hon’ble Kerala High Court had considered the Circular No.5P(LLX-6) dated 19.06.1968 which has not been considered by the other decisions. The Circular No. 5P(LLX-6) is reproduced herein below for reference:—

1. Circular No. 5-P (LXX-6) of 1968, dated 19-6-1968.
Subject : Section 11—Charitable trusts—Income required to be applied for charitable purpose—Instructions regarding.
In Board’s Circular No. 2-P(LXX-5) of 1963, dated the 15th May, 1963, it was explained that a religious or charitable trust claiming exemption under section 11(1) of the Income- tax Act, 1961, must spend at least 75 per cent of its total income, for religious or charitable purposes. In other words, it was not permitted to accumulate more than 25 per cent of its total income. The question has been reconsidered by the Board and the correct legal position is explained below.
2. Section 11(1) provides that subject to the provisions of sections 60 to 63 “the following income shall not be included in the total income of the previous year . . . “. The reference in sub-section (a) is invariably to “income” and not to “total income”. The expression “total income” has been specifically defined in section 2(45) of the Act as “the total amount of income . . . computed in the manner laid down in this Act”. It would accordingly be incorrect to assign to the word “income” used in section 11(1)(a), the same meaning as has been specifically assigned to the expression “total income” vide section 2(45).
3. In the case of a business undertaking held under trust, its “income” will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the Income-tax Officer in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed by the account will be eligible for exemption under section 11(1), the permitted accumulation of 25 per cent will also be calculated with reference to this income.
4. Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word “income” should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1).
5. To sum up, the business income of the trust as disclosed by the accounts plus its other income computed above, will be the “income” of the trust for purposes of section 11(1). Further, the trust must spend at least 75 per cent of this income and not accumulate more than 25 per cent thereof. The excess accumulation, if any, will become taxable under section 11(1).

After considering the Circular, the Hon’ble Kerala High Court held as follows:—

“Held, that after writing off the full value of the capital expenditure on acquisition of assets as application of income for charitable purposes and when the assessee again claimed the same amount in the form of depreciation, such notional claim became a cash surplus available with the assessee, which was outside the books of account of the trust unless it was written back which was not done by the assessee. It was not permissible for a charitable institution to generate income outside the books in this fashion and there would be violation of section 11(1)(a). It was for the assessee to write back the depreciation and if that was done, the Assessing Officer would modify the assessment determining higher income and allow recomputed income with the depreciation written back by the assessee to be carried forward for subsequent years for application for charitable purposes.”

Further Hon’ble Calcutta High Court has held in the case Girdharilal Shewnarain Tantia Trust (supra ) that The “income” contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable. Respectfully following the decision of the Hon’ble Kerala High Court and taking cue from the decision of the Hon’ble Calcutta High Court, we do not find any hesitation to confirm the order of the Ld. CIT(A) and also the views expressed by him in his order. Accordingly this appeal is held in favour of the Revenue.

6.1 Ground No. (iii) – Gross rent received is treated as the income from house property of the assessee and not computed in accordance with the provisions of u/ss. 23 & 24 of the Act.

On perusing the return of income, the Ld. Assessing Officer observed that the assessee had computed its income from house property after claiming deduction u/ss. 23 & 24 of the Act. Accordingly the actual rental income received by the assessee amounting to Rs. 3,54,60,534/- was substituted to Rs. 2,39,43,919/- as the income received from house property in the income and expenditure account of the assessee trust. The Ld. Assessing Officer was of the view that notional deductions u/ss. 23 & 24 of the Act cannot be granted to the assessee Trust while computing the income of the assessee trust for granting benefit Under Section-11 of the Act, and accordingly the same was disallowed. On appeal, the Ld. CIT (A) confirmed the order of the Ld. Assessing Officer by observing as under:—

“4. Regarding deduction claimed u/ss. 23 & 24 of the Act to arrive at the income from house property, the gross receipts alone should be considered for calculating 85% for application and not the income after deduction u/ss. 23 & 24 of the Act. As the income from house property held under trust is to be determined in normal commercial manner, there is no scope for computing income from property by complying with the provisions of section 14. In this connection, the order of the A.O is correct and requires no interference and the working adopted by the A.O is confirmed.”

6.2 The Ld. A.R. argued by stating that the income derived from the property of the trust has to be computed according to the commercial principles and therefore, benefit of the provisions of sections 23 & 24 of the Act has to be granted to the assessee. Ld. D.R on the other hand argued in support of the orders of the Revenue.

6.3 We have heard both the parties and carefully perused the materials available on record. Chapter-III refers to “income which does not form part of total income”. Section-11 of the Act placed under Chapter-III deals with ‘income from property held for charitable or religious purpose’. Section-11(1)(a) provides that income derived from the property held under trust wholly for charitable or religious purpose, to the extent to which such income is applied, shall not be included in its total income. The Act also provides that upto 15% of the gross income received is accumulated and then the same shall also be exempt from the income of the trust. From the above it is clear that provision of the Act in Chapter-III deals with the manner in which the income of the assessee trust has to be applied in order to exempt such income from the total income. It is not a case of computation of income chargeable to tax as per the provisions Chapter IV under the head “C-Income from house property”. Therefore while determining the “income” of the assessee trust and its “application of income” for the purpose of claiming exemption u/s. 11(1)(a) of the Act, the provisions of Chapter-IV – Sections 22 to 27 of the Act which is applicable for computing the income chargeable to tax under the head ‘income from house property’ will not be attracted. However, provisions of sections 22 to 27 of the Act will come into play when the assessee is not entitled to the benefit of Section-11(1)(a) of the Act and when such income of the Trust is chargeable to tax under the head “income from house property”. It is pertinent to mention here that Hon’ble Calcutta High Court supra has held that income contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable. Accordingly, while arriving at the rental income of the assessee-trust any expenditure incurred whatsoever related to the rental income has to be allowed as deduction and the net income which is the real income, will be treated as the income of the Trust. From our above discussion the ground raised by the assessee on this issue will not survive and therefore, the order of the Revenue is upheld.

7. In the result the appeal of the assessee is dismissed.

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