Introduction

The case of Shri Prabhas Patan Jain Swetambermurti Pujak Sangh, Rajkot v. The Income Tax Officer (Exemption), Ward-2, Rajkot adjudicated by the Income Tax Appellate Tribunal (ITAT) Rajkot Bench on February 22, 2023, addresses a pivotal issue concerning the tax exemption eligibility of deemed income under Section 11(3) of the Income Tax Act, 1961. The appellant, a public charitable trust, contested the disallowance of its deemed income, claiming it should be exempt under Sections 11(1)(a) and 11(2) of the Act. This commentary delves into the intricacies of the judgment, exploring its implications on charitable trusts and their tax benefits.

Summary of the Judgment

The ITAT Rajkot Bench dismissed the appeals filed by Shri Prabhas Patan Jain Swetambermurti Pujak Sangh for both the assessment years 2015-16 and 2016-17. The core issue revolved around whether the deemed income accrued under Section 11(3) should be considered eligible for tax exemption under Sections 11(1)(a) and 11(2). The Tribunal concluded that such deemed income should not qualify for these exemptions, thereby upholding the disallowance issued by the Commissioner of Income Tax (Appeals). The decision emphasized adherence to prevailing circulars and clarified the legislative intent to prevent double deductions on the same income.

Analysis

Precedents Cited

The appellant relied primarily on two judicial precedents:

• Gujarat State Lion Consideration Society v. DCIT (ITA No. 69/Rjt/2017)
• CIT v. Natwarlal Chowdhury Charitable Trust (189 ITR 656)

Additionally, the appellant referenced a Calcutta High Court decision advocating that deemed income under Section 11(3) should be subject to Sections 11(1)(a) and 11(2). However, the Tribunal highlighted that these precedents did not account for relevant circulars which directly addressed the issue, thereby diminishing their applicability. Notably, the Tribunal contrasted these with the Mumbai ITAT's stance in The Trustees, The B.N. Gamadia Parsi Hunnarshala [2002] 77 TTJ 274 (Mum.), which aligned with the Tribunal's view against exempting deemed income under Section 11(3).

Legal Reasoning

The Tribunal's legal reasoning can be dissected into several key points:

• Circulars as Guiding Principles: The Tribunal underscored the importance of Circular No. 29 [F. No. 20/22/69-IT(A-I)], dated August 23, 1969, and Circular No. 5-P(LXX-6) dated June 19, 1968. These circulars clarified that deemed income under Section 11(3) exceeds the income shown in accounts and should not be eligible for exemptions under Sections 11(1)(a) and 11(2) to prevent double deductions.
• Legislative Intent: The Tribunal emphasized the legislature's intention to avoid trusts receiving undue benefits by claiming exemptions on both actual and deemed income, which could lead to perpetual deductions.
• Interpretation of Sections: By analyzing Section 11(1)(a) and Section 11(2), the Tribunal noted that exemptions under these sections are designed for actual income from property held for charitable purposes and not for deemed income resulting from unused accumulated funds.
• Form No. 3A Compliance: The Tribunal referenced Form No. 3A of the Income Tax Rules, 1962, which mandates that deemed income under Section 11(3) be added to taxable income after claiming exemptions, reinforcing that such income is not eligible for exemptions under Sections 11(1)(a) and 11(2).

Impact

This judgment establishes a clear precedent that deemed income under Section 11(3) is not eligible for tax exemptions under Sections 11(1)(a) and 11(2). Charitable trusts must be cautious to avoid claiming multiple exemptions on the same income, ensuring compliance with the prescribed guidelines to prevent double deduction. Future cases involving similar issues will likely reference this judgment, reinforcing the non-eligibility of deemed income for exemptions and emphasizing adherence to circulars and legislative intent.

Complex Concepts Simplified

Section 11 of the Income Tax Act, 1961

Section 11 provides tax exemptions to income derived from property held for charitable or religious purposes. It is subdivided as follows:

• Section 11(1)(a): Allows a trust or institution to claim exemption on the income derived from property held for charitable or religious purposes, subject to certain conditions and limits.
• Section 11(2): Permits trusts to accumulate or set aside income if specific conditions are met, such as investing in government securities.
• Section 11(3): Deems income to be received as revenue if a trust fails to apply a specified portion of its income for its purposes within a prescribed time, typically five years. This deemed income is subject to tax.

Deemed Income

Deemed income under Section 11(3) refers to the income that a trust fails to apply towards its charitable or religious purposes within the stipulated time. This income is treated as taxable income rather than exempt, differentiating it from regular income under Sections 11(1)(a) and 11(2).

Double Deduction

Double deduction refers to the ineligible practice of claiming multiple tax exemptions on the same income. In this context, the Tribunal aimed to prevent trusts from claiming exemptions on both actual income and deemed income derived from surplus funds.

Conclusion

The ITAT Rajkot Bench's decision in Shri Prabhas Patan Jain Swetambermurti Pujak Sangh v. ITO serves as a clarion call for charitable trusts to meticulously adhere to the provisions of Section 11 of the Income Tax Act, 1961. By unequivocally stating that deemed income under Section 11(3) cannot be exempted under Sections 11(1)(a) and 11(2), the Tribunal reinforced the legislative intent to prevent misuse of tax benefits through double deductions. This judgment not only clarifies the treatment of deemed income but also underscores the importance of compliance with statutory guidelines and circulars. Charitable organizations must now navigate their financial strategies with a heightened awareness of these regulations to maintain their tax-exempt status legitimately.