By TIOL News Service

MUMBAI, JUNE 23, 2018: THE ISSUE AT HAND BEFORE THE BENCH IS - Whether trust can claim amount of TDS as application of income u/s 11(1)(a) of the Act. YES IS THE VERDICT.

Facts of the case

The assessee trust registered with the DIT (Exemptions), Mumbai u/s 12A had filed return of income for relevant AY. The case of the assessee was taken up for scrutiny assessment. During assessment proceedings, AO observed that the assessee had in its computation of income claimed TDS as application of income u/s 11(1)(a) of the Act. The AO not being satisfied with the claim, called upon the assessee to justify the same. The assessee submitted that its claim of TDS was in terms of CBDT Circular No. 5- P/LXX-6, dated 19/05/1968, as per which, the term 'income' used in section 11(1)(a) was to be understood in a commercial sense, and as such the deemed income (i.e. tax deducted at source) was not to be taken into account for determining the 'application' or 'accumulation' of the income of the trust. However, the AO was not satisfied with contentions of the assessee and denied to treat amount of TDS as an application of income for charitable purposes and thus AO held that TDS amount was not exempt from tax. On appeal, CIT(A) upheld the order of AO.

Tribunal held that,

++ High Court of Calcutta in the case of CIT vs. Jayashree Charity Trust addressing the issue as regards the treatment to be accorded to tax deducted at source for the purpose of Sec. 11 of the Act, had observed that the same could not be treated as income for the purposes of Sec. 11, and as such the assessee would be entitled to the benefit of exemption on that portion of the income which had been taken away by deduction of tax at source, even though that amount had not been spent or accumulated for the purposes of charity by the assessee. The High Court further had observed that though the income that had not been applied for charitable purpose or accumulated beyond the prescribed limit for charitable purpose will not enjoy the immunity from taxation, but however, the exclusion from the immunity that has been granted by s. 11 must be confined to the 'real income' of the trust;

++ the High Court had observed that though Sec. 198 provides that the sums deducted by way of income-tax shall be deemed to be income received, but, the deeming provisions of s. 198 should not be construed in a way to frustrate the object of s. 11. Respectfully following the view taken by the High Court, it was held that in the case of the assessee the immunity from taxation that has been granted to the income of the charitable trust cannot be denied on the ground that the deemed income u/s 198, i.e tax deducted at source under Sec. 194A of Rs. 13,28,823/- had not been actually spent for the purpose of charity during the year. The AR had averred that the tax deducted at source of Rs. 13,28,823/- for the year under consideration, AY 2012-13, which was received by the assessee as a refund on 20.03.2014, in the period relevant to AY 2014-15, was shown by the assessee as its income in the said year of receipt, AY 2014-15 while working out its entitlement of exemption under Sec. 11 for the said year. Thus it was decided to set aside the matter to the file of the AO for the limited purpose of verifying the veracity of the claim so raised. As the amount of TDS of Rs. 13,28,823/- is not to be held as the income of the assessee for the year under consideration, therefore, the observations of the lower authorities in context of whether the same is to be construed as an application of income, or not, is rendered infructuous. In the result, appeal of the assessee is allowed for statistical purposes.

(See 2018-TIOL-932-ITAT-MUM)