Can a multiplicity of objects, specified in Form 10 for accumulation, be acceptable for charitable institutions to get the benefit of the provisions of section u/s. 11(2) of the Income Tax Act, 1961 (“the Act”) where 85% of the income of the charitable institution cannot be spent in the same year.
2. A charitable institution is allowed to accumulate or set apart, either in whole or a part, for application to charitable purposes in India. One of the conditions for getting the benefit of accumulation is that the institution should furnish a statement in the prescribed form to the Assessing Officer. The said purposes for which the income is being accumulated or set apart and period for which the income is to be accumulated can in no case shall exceed five years. As per Rule 17, the prescribed form is Form 10 for purpose of accumulation.
3. There are two High Courts which have taken the view that the purpose of accumulation mentioned in Form 10 should be specific and an option to spend on a multiplicity of objects would not suffice in giving the benefit of accumulation.
4. The first is that of the Calcutta High Court in Director of Income Tax (Exemption) vs. Trustees of Singhania Charitable Trust, (1992) 199 ITR 819 (Cal). In this case the trust had passed a resolution to the following effect:-
“That consent be and is hereby accorded that, out of the balance of unapplied income of Rs.94,125 for the year, the sum of Rs.68,814 be accumulated and/or set apart for purposes of application to any one or more of the objects of the trust as set out in items Nos. (i) to (xvi) under paragraph 1 of the deed of trust till the previous year ending on March 31, 1994.”
The Court held at page 823 and 824 as under:-
“…Doubtless, it is not necessary that the assesse has to mention only one specific object. There can be setting apart and accumulation of income for more objects than one but whatever the objects or purposes might be, the assessee must specify in the notice the concrete nature of the purpose for which the 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 generality of the objects of the trust cannot take the place of the specificity of the need for accumulation.”
“The Tribunal’s decision in fact overlooks the scheme relating to the accumulation of income for a particular future use. Section 11(1) itself provides for marginal setting apart and accumulation not in excess of 25 per cent of the income of the trust. It is only such accumulation which can be taken for the broad purposes of the trust as a whole that the statute does not require specification of the purpose. Such setting apart for any of the purposes of the trust is, however, a short-term accumulation, accumulation not beyond the year succeeding. It is sub-section (2) which provides for the long–term accumulation of the income. Obviously, such long-term accumulation should be for a definite and concrete purpose or purposes. What the assessee has sought to be permitted to do here is to accumulate not for any determinate purpose or purposes but for the objects as enshrined in the trust deed in a blanket manner. Accumulation in such a global manner is definitely not in the contemplation of section 11(2) when it is construed in its setting. The assessee’s contention that saving and accumulation of income for future application of the same is for the purposes of the trust in the widest terms so as to embrace the entirety of the objects clause of the trust deed would render the requirement of specification of the purpose for accumulation in that sub-section redundant. The purposes to be specified cannot, under any circumstances, tread beyond the objects clause of the trust. The legislature could not have thought of the need of specification of the purposes if it did not have in a mind the particularity of the purpose or purposes falling within the ambit of the objects clause of the trust deed. When sub-section (2) of section 11 requires specification of the purpose, it does so having in mind a statement of some specific purpose or purposes out of the multiple purposes for which the trust stands. Were it not so, there would have been no mandate for such specification. For, a charitable trust, in no circumstances, can apply its income, whether current or accumulated, for any purposes other than the objects for which it stands. The very fact that the statute requires the purpose for accumulation to be specified implies such a purpose to be a concrete one, an itemised purpose or a purpose instrumental or ancillary to the implementation of its object or objects. The very requirement of specification of purpose predicates that the purpose must have an individuality. In our view, the provision of sub-section (2) is a concession provision to enable a charitable trust to meet the contingency where the fulfilment of any project within its object or objects needs heavy outlay to call for accumulation to amass sufficient money to implement it. Therefore, specification of purpose as required by section 11(2) admits of no amount of vagueness about such purpose.”
5. The second such decision is that of the Madras High Court in CIT vs. M.CT. Muthiah Chettiar Family Trust & Ors., (2000) 162 CTR 63 (Mad). The Court stated, at para 10:-
“…We are in agreement with the view of the Calcutta High Court in Director of IT vs. Singhania Charitable Trust (1993) 199 ITR 819 (Cal) : TC 23R.1317 wherein the Calcutta High Court held that the long-term accumulation should be for a definite and concrete purpose or purposes and the charitable trust cannot use its objects as the purposes for the accumulation of the income under s. 11(2) of the Act. It is only by mentioning the purposes specifically, it will be possible for the ITO to monitor the situation whether the trust has applied its accumulated income for the purposes mentioned in Form No. 10. Therefore, it is essential that the trust should specify its purposes and the requirement is that the purposes must have some individuality and mere repetition of the objects of the trust would not meet the requirements of s. 11(2) of the Act …”
6. However, the Delhi, Gujarat and Karnataka High Courts have taken a broader and contrary view to that of the Calcutta and Madras High Courts.
7. In CIT vs. Hotel & Restaurant Association, (2003) 261 ITR 190 (Del), the Delhi High Court held in para 7 as under:-
“7. We do not agree. It is true that specification of certain purpose or purposes is needed for accumulations of trust’s income under s. 11(2) of the Act. At the same time the purpose or purposes to be specified cannot be beyond the objects of the trust. Plurality of the purposes for accumulation is not precluded but it depends on the precise purpose for which the accumulation is intended. In the present case, both the appellate authorities below have recorded a concurrent finding that the income was sought to be accumulated by the assessee to achieve the object for which the assessee was incorporated. It is not the case of the Revenue that any of the objects of the assessee-company were not for charitable purpose. The aforenoted finding by the Tribunal is essentially a finding of fact giving rise to no question of law”. (emphasis supplied)
8. In Bharat Kalyan Pratisthan vs. Director of Income Tax (Exemption), (2008) 299 ITR 406 (Delhi) the Court after referring to the contrary decisions of the Calcutta High Court in Director of IT (Exemption) vs. Trustees of Singhania Charitable Trust, (1992) 199 ITR 819 (Cal), and that of the Madras High Court in CIT vs. M.Ct. Muthaiah Chettiar Family Trust & Ors. (2000) 162 CTR (Mad) 63, held, at para 6, as under:-
“6. …It is true that specification of certain purpose or purposes is needed for accumulations of the trust’s income under s. 11(2) of the Act. At the same time, the purpose or purposes to be specified cannot be beyond the objects of the trust. Plurality of the purposes for accumulation is not precluded but it depends on the precise purpose for which the accumulation is intended. In the present case, both the appellate authorities below have recorded a concurrent finding that the income was sought to be accumulated by the assessee to achieve the object for which the assessee was incorporated. It is not the case of the Revenue that any of the objects of the assessee-company was not for charitable purpose. The aforenoted finding by the Tribunal is essentially a finding of fact giving rise to no question of law.” (emphasis supplied)
Further, the High Court followed its own decision in Hotel and Restaurants Association (supra) and held as under at paras 8, 9 and 10:
“8. Learned counsel for the Revenue has contended that if the observations of this Court in Hotel & Restaurants Association (supra) are carefully read, then the purpose should be specified. We are of the view that given the question of law in Hotel & Restaurants Association (supra), the conclusion of this Court was that the details of the purposes for which the income was accumulated need not be specified. For example, if the purpose of accumulation is educational, the assessee is not required to indicate or specify whether it is elementary education, primary education or secondary education, etc. If the assessee’s case is that the income was accumulated for utilization for educational purposes, it would not require specification as long as the educational purpose is one of the objects of the assessee.
9. In the present case, the assessee has only three objects as far as its trust deed, a copy of which has been placed on record, is concerned. The trust deed requires the trust to utilize its funds for charitable purposes which are medical relief, education and relief to the poor. In the application seeking exemption, the assessee has specified these three objects. We are of the opinion that it was not required for the assessee to be more specific with regard to the utilization of the funds.
10. It is true that the assessee has mentioned that it is accumulating funds for all the objects for which it was created, but as held by this Court in Hotel & Restaurants Association (supra), plurality of purposes is permitted and if it so happens that an assessee has only three objects or purposes, it may well utilize the funds for all the three objects and purposes.” (emphasis supplied)
9. In DIT vs. Mitsui & Co. Environmental Trust, (2008) 303 ITR 111 (Del), the Court held at paras 5 and 6, as under:-
“5. As regards the first issue considered by the AO, namely, that the assessee had not specified in Form No. 10 the purpose for which the accumulation was sought to be made, our attention has been drawn to a decision of this Court in CIT vs. Hotel & Restaurant Association (2003) 182 CTR (Del) 374 : (2003) 261 ITR 190 (Del). In that case, a similar argument was raised by the learned senior standing counsel for the Revenue to the effect that the assessee had failed to indicate in the prescribed form the specific purpose for which the income was sought to be accumulated and, therefore, the statutory requirement had not been strictly complied with, disentitling the assessee from relief under s. 11(2) of the Act.
This Court rejected the contention and held that the purpose or purposes to be specified cannot be beyond the objects of the trust. Plurality of purposes for accumulation is not precluded. In other words, it need not necessarily be specifically stated for which purpose the accumulation is sought.
6. While we reiterate the view already taken by this Court, we may mention that the Calcutta High Court had taken different view in Director of IT (Exemption) vs. Trustees of Singhania Charitable Trust (1993) 199 ITR 819 (Cal).”
It is important to note that Delhi High Court noticed the Calcutta High Court decision which took different view but still did not choose to follow it.
10. In DIT (Exemption) vs. Guru Nanak Vidya Bhandar Trust, (2004) 187 CTR (Del) 558, at para 8 (i) and 8(ii), it was held that where the assessee was allowed to accumulate income in the preceding as well as subsequent years and there was no change in objects of the assessee during the relevant assessment years, the accumulation of income could not be denied.
11. In CIT (Exemptions) vs. Bochasanwasi Shri Akshar Purshottam Public Cable Trust, (2018) 409 ITR 591 (Guj), at para 8, the Court held that:-
“8. Section 11(2) of the Act provides that eighty five percent of the income which is not utilized by the Trust for charitable or religious purposes would not be included in the total income of the previous year of receipt of the income provided the conditions laid down in clause (a) to (c) contained therein are satisfied. Clause (a) in particular, which is applicable, provides that such person furnishes the statement in the prescribed form and in prescribed manner to the Assessing Officer stating 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 five years. Undoubtedly therefore, the statement of purpose for which the income is being accumulated or set apart is one of the requirements which must be satisfied before the assessee can avail the benefit under sub-section (2) of section 11 of the Act. However, that by itself would not mean that any inaccuracy or lack of full declaration in the prescribed format by itself would be fatal to the claimant. The prime requirement of this clause is of stating of the purpose for which the income is being accumulated or set apart. In the present case, we are prepared to accept the Revenue’s stand that the declaration made in Form 10 by the assessee was not sufficient to fulfill this requirement. However, as noted, during the course of assessment proceedings, the Assessing Officer called upon the assessee to explain the position in response to which, the assessee in detail pointed out background under which the board of trustees had met, considered the material and eventually passed a formal resolution setting apart the funds for the ongoing hospital projects of the Trust and for modernization of the existing hospitals. There was thus a clear statement made by the assessee setting out the purpose for which the income was being set apart. We therefore do not find any error in view of the Tribunal.”
12. In DIT (Exemption) vs. Envisions, (2015) 378 ITR 483 (Kar), the Karnataka High Court observed, at page 486, as under:-
“In the present case, we find that the revenue does not dispute the fact that all the three purposes specified by the assessee in Form 10 are for achieving the objects of the trust, and that the purposes as well as objects, are both charitable. Merely because more than one purpose has been specified and details about the plan of such expenditure has not been given, the same would not, in our view, be sufficient to deny the benefit under section 11(2) of the Act to the assessee. As long as the objects of the trust are charitable in character and as long as the purpose or purposes mentioned in Form 10 are for achieving the objects of the trust, merely because of non-functioning of the details, as how the said amount is proposed to be spent in future, the assessee cannot be denied the exemption as is admissible under sub-section (2) of section 11 of the Income-tax Act, 1961”. (emphasis supplied)
13. Following this view, in CIT (Exemption) vs. Gokula Education Foundation, (2017) 394 ITR 236 (Kar), the Court held, at page 246, as under:-
“The aforesaid shows that as per the view taken by this court as long as the objects of the trust are charitable in character and as long as the purpose or purposes mentioned in Form 10 are for achieving the objects of the trust, merely because the details are not furnished, the assessee cannot be denied benefit of the exemption under section 11(2) of the Act.” (emphasis supplied)
14. In Sir Sobha Singh Public Charitable Trust vs. Asstt. Director of IT (2001) 72 TTJ (Del)(TM) 1007 : (2001) 79 ITD 1 (Del)(TM) it was held by Delhi Tribunal as under:-
“Perhaps to meet the contingency where the fulfilment of the project requires heavy outlay and calls for accumulation of funds, which wants to accumulate its income for a long period of 10 years to carry out the charitable objects as set out in the trust deed, does require time to think, time to plan and time to garner its resources, etc. to fulfil those objects for which it has sought accumulation of funds and the legislature in its wisdom has allowed a long period of 10 years. Therefore, the argument of the Revenue that even when the application for accumulation was filed, assessee trust must mention the type of institution, medical or educational which it should set up as also the type of the educational or medical treatment which it would impart could not be appreciated. This was never the intention of the law makers and the provision in the form of concession was introduced thereby a charitable institution need not pay any tax on its earning for a good period of 10 years, provided it carried out charitable activities with a view to fulfilling the specific objects mentioned in the application seeking accumulation.” (emphasis supplied)
15. In M.P. Gandhi Trust vs. ADIT, (2006) 8 SOT 0808 (Mumbai Trib), the Mumbai Tribunal held as under at paras 7 and 8 of the Order:-
“7. Coming to the purpose for which the income is sought to be accumulated or set apart by the assessee as mentioned in the notice under s. 11(2)(d) of the Act, the assessee has mentioned that it was for the purpose of making substantial donations to selected institutions after a careful appraisal for meeting the objects of the trust. According to us, the section only provides for specifying the purpose for accumulating the funds. The assessee had mentioned the purposes i.e., for making donations and has not mentioned the specific institutions to which the donations are to be made.
8. The object of permitting the accumulation or setting apart of the income of the trust is to facilitate the trust to meet the contingency where for fulfilment of its objects, heavy outlay is needed and accumulation of sufficient funds is called for. Therefore, the accumulation must necessarily be for charitable purposes alone and as held by the Hon’ble Delhi High Court in the case of Hotel & Restaurant Associated accumulation depends on the precise purpose or object of the trust and as long as it was for the fulfilment of the object of the trust, the exemption cannot be denied.”
16. The summation of the aforementioned judgments is as under:-
i. The decisions of the Madras and Calcutta High Courts taking the view that a specific purpose should be specified in the form for accumulation has been dissented from the Delhi and Gujarat High Courts.
ii. The subsequent decisions should hold the field.
iii. Even multiple objects specified in the form of accumulation would be in order so long as they are charitable purposes.
iv. An inaccuracy or lack of full declaration in the format would not be fatal to the assessee’s claim so long as there is a clear statement (in the form of a resolution or otherwise) setting out the purpose for which the income is being set apart (see Bochasanwasi’s case supra)
(Ashok Rao)
Place : Mumbai
Date : 11.12.2019
Tax Talk with Ashok Rao 