When Investment in FDR is treated as Application of Income u/s 11(5)

Sushil Verma for the Appellant. Tej Mohan Singh for the Respondent.

ORDER

Annapurna Mehrotra, Accountant Member – This appeal has been filed by the Revenue against the order of ld. CIT(A) Panchkula, dt. 26/11/2014.

2. Brief facts of the case are that the assessee is a registered society under section 12 AA of the Act. For the impugned assessment year the assessee filed its return of income on 26/09/2011, declaring NIL income. During assessment proceedings, the AO noted that the assessee had invested an amount of Rs. 1,20,00,000/- in fixed deposits in Punjab National Bank, Jagadhri and claimed the same as application of income as per the provisions of Section 11(1)(a) of the Act. The AO further observed that as per Annexure to the auditors report, at column No. 5, it was mentioned that the assessee had not accumulated any income for specified purposes under section 11(2) of the Act, nor it had invested or deposited the same in any manner laid down in Section 11(2)(b) of the Act. Thus the AO held that the investment of Rs. 1,20,00,000/- in fixed deposit was not in pursuance to the provisions of Section 11(2) read with Section 11(5) of the Act. Further the AO held that the impugned investment could not be treated as application of income as per Section 11(1)(a) and in view thereof held that the assessee had short applied its income by Rs. 37,14,985/- and made an addition thereof to the returned income of the assessee. The matter was carried in appeal before the CIT(A), who placing reliance on the judgment of the Hon’ble ITAT in the case of Ved Prakash Mukand Lal Educational Soceity in ITA No. 952/Chandi/2011 for Assessment year 2008-09, dt. 25/01/2012 held the investment in FDRs to be application of income and allowed the assessee’s appeal by holding at paras 5.2 and 5.3 of his order as follows:

‘5.2 I have gone through the facts of the case and the written submission filed by the appellant. It is noted that the AO has treated investment in FDR as non-application of money after considering the assessee’s reply and distinguishing the decisions cited by the appellant. The distinguishment have been on minor technicalities like in case of East India Charitable Trust (supra), the money was generated on sale of shares, in case of DLF Qutub Enclave Complex Medical Charitable Trust, the money was generated on account of premium received on leasing the plots and in case of Ved Parkash Mukand Lal Education Society, the assessee had failed to file Form No. 10. However, in all such cases it is not relevant that what was the source of generation of money by the trusts but the common question before the Hon’ble Courts and Tribunal was whether the investments made in FDR was liable to be treated as application of money. On perusal of judicial pronouncements referred by the appellant, I am in agreement with the submissions made by the appellant that the investments in FDR made by the trust is application of money as per provisions of section 11(2) read with section 11(5) of the Act. The Hon’ble ITAT in the case of the Ved Prakash Mukand Lal Educational Society(supra) in para 11 observed as under:—

“We find no merit in the abovesaid plea of the assessee in view of the provisions of section 11(2) of the Act under which it is provided that where 85% of the ‘income’ referred to in sub-section (1)(a) or (b) read with Explanation, is not applied, or not deemed to have been applied, to charitable or religious purpose during the previous year, and the same is accumulated or set apart, for application to such purpose, then such income so accumulated shall not be included in the total income of the previous year in the hands of the person, provided either of the two conditions are fulfilled; a) such person by notice in writing specifies to the Assessing Officer the purpose for which the income is being accumulated or set apart and the period for which it is so accumulated or set apart; b) the money so accumulated or set apart is invested or deposited in the modes specified in sub-section (5). The assessee during the year under consideration had complied with the provisions of section 11(5) of the Act by investing the surplus in FDRs. Even otherwise one of the objects of the assessee society was to invest surplus money in the deposit specified u/s 11(5) of the Act. Where the surplus money has been so invested in the FDRs, the said investment is to be treated as application of income of the previous year in which such investment is made, in the hands of the assessee.”

5.3 In view of the facts of the case and judicial pronouncements as referred above, the investment in FDR is treated as application of money as per provisions of section 11(5) of the Act. The AO is directed to re-compute the income of the trust after giving effect of Rs. 1,20,000/- as income applied by the trust during the year. The ground of appeal is allowed.’

3. Aggrieved by the same the Revenue has filed this appeal before us taking the following grounds:

4. Before us the ld. DR stated that the reliance placed by the ld. CIT(A) on the decision of Hon’ble ITAT in the case of Ved Prakash Mukand Lal Educational Society (supra) while allowing the assessee’s appeal was misplaced. The ld. DR pointed out that the facts of that case were different from the facts of the assesses case. Ld. DR, while referring to the judgment, stated that in that case, the investment in FDRs had been treated as application of income on account of the fact that one of the main objects spelled out in the Memorandum of association of the assessee society was to make investments as per requirements under section 11(5) of the Act. The ld. DR drew our attention to para 11 of the order where the impugned findings of fact was recorded. Further ld. DR stated that in the assessee’s case it was neither brought on record nor was it the case of the assessee that the investment in FDRs had been made as per the object of the assessee society. The ld. DR also stated that in the above referred case the assessee had been allowed the benefit following the principle of consistency since the Hon’ble Tribunal found that similar application of income had been allowed in earlier years also. This fact, the ld. DR pointed out was not present in the case of the assessee.

5. Ld. AR on the other hand relied upon the order of the ld. CIT(A) and stated that the ratio propounded in the case of Ved Prakash Mukand Lal Educational Society (supra) squarely applied to the assessee’s case.

6. We have heard the submissions made by the representative of both the parties and have perused the documents and order of the authorities below. The undisputed facts in the present case are that the Gross Receipts of the assessee from its charitable activities carried out during the impugned AY was Rs. 3,30,95,888/-. The assessee claimed application of this income u/s 11(1) amounting to Rs. 2,19,66,769/- on account of expenses incurred on carrying out its charitable activities and Rs. 24,49,751/- on account of addition to fixed assets during the year which again are not in dispute. The assessee also invested a sum of Rs. 1,20,00,000/- in Fixed Deposits with PNB and claimed the same to be application of income. Thus, after taking the investment in FDRs into consideration the assessee claimed application of more than 85% of its income in charitable activities and claimed exemption u/s 11 of the Income-tax Act, 1961. It is also a matter of record, evident from the audit report filed in Form No. 10 by the assessee, that no amount had been accumulated by the assessee as per section 11(2) of the Act and neither had any amount been invested as per section 11(5) of the Act. Meaning thereby that the investment in FDRs was not in pursuance to the provisions of section 11(2) read with section 11(5) of the Act and no claim of application of income had been made thereunder by the assessee.

7. The only question to be answered in the present appeal is whether for the purposes of section 11(1)(a), investment in FDRs can be treated as application of income?

For the sake of clarity the provisions of section 11(1)(a), Explanation 2 to Section 11(1) and 11(2) are being reproduced hereunder:

Section 11(1)

“Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income.

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India, and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property.”

Explanation 2

“(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount— (i) for the reason that the whole or any part of the income has not been received during that year, or

(ii) for any other reason,

then—

Section 11 (2)

“Where eighty five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with namely:—

It is evident from a bare perusal of the section that for the purpose of claiming exemption u/s 11 of the Act, 85% of the income from property held under trust for charitable or religion purposes should be “applied” to “such” purposes meaning charitable purposes. The same is to be done in the same year but where an assessee is unable to apply such income, a saving grace is provided in Explanation 2 to section 11(1) (a) whereby the application of income for charitable purposes can be postponed, by intimating the AO in writing of the same. Similarly section 11(2) also gives a further period of 5 years for application of income provided the assessee accumulates it for a specific and charitable purpose, intimates the same to the AO in a specified form and invests it in modes specified u/s 11(5).

The common thread running through section 11(1)(a), Explanation (2) to section 11(1) and in section 11(2) is that the income of the trust must be applied for charitable purposes whether in the same years or in succeeding years. Meaning thereby it must be used for charitable purposes. This conclusion is logical enough considering that exemption u/s 11 is granted to charitable organizations for carrying out charitable activities. Thus it is only when funds of such entities are utilized for charitable purposes, the object of the entity will be achieved which in turn would justify the exemption granted by statute to such entities.

8. In the backdrop of the above factual and legal position we shall now proceed to examine whether investment of funds of the assessee trust in FDRs could be treated as application of income for charitable purpose. For arriving at this conclusion there has to be nexus between investment in FDRs and achievement of the charitable objects of the assessee, meaning thereby that by virtue of making this investment, some charitable objects of the assessee should be achieved. The purpose/intention for which the investment is made should be towards fulfilling the charitable objects of the assessee. Merely deposit of surplus funds in FDRs cannot be treated as application of funds for the purposes of charity. But if the deposit in FDRs is made for using them in the future for charitable purposes, the same will amount to application for charitable purposes subject to the condition that the same is done in conformity with the provisions of section 11(2) of the Act whereby the assessee has to inform the AO of this accumulation of income along with the specific purpose also for which it has been accumulated and utilize the same in five years.

9. In the present case we find that there is no finding by the authorities below regarding the purpose of investments in the FDRs. If the investments were made only to take care of the surplus funds of the assessee it would not amount to using the income of the assessee for charitable purposes. If the investment was made to set aside funds for future use for specific purpose of the trust, the same ought to have been done as per the provisions of section 11(2) by filing Form No. 10B to the AO. We find that the assessee has denied any claim of application of income u/s 11(2) of the Act, in the Audit Report submitted. Therefore this possibility is ruled out.

10. In the impugned case, we find that both the AO and the ld. CIT(A) have not examined this aspect. There is no finding in the orders of authorities below as to the purpose of making the investment. Even in the case of Ved Prakash Mukand Lal Educational Society (supra) relied upon by the ld. CIT(A), while allowing the assessee’s appeal, the Hon’ble Tribunal has treated the investment in FDRs as application only on account of the fact that as per the Memorandum of Association of the assessee society, the objects of the assessee society, in addition to running Educational and Technology Institute, as per clause (vii) was to invest the money of the society in a manner as provided u/s 11(5) of the Act. In our considered opinion the examination of this aspect is important for determining whether the investment in FDRs could be treated as application for charitable purpose. The ld. CIT(A) while allowing the assessee’s claim has not examined the case on the touchstones of the parameter on the basis of which the investment in FDRs was treated as application in the case of Ved Prakash Mukand Lal Educational Society (supra).

11. In view of the same we remit the matter back to the file of the ld. CIT(A) to decide the issue afresh in accordance with law and as per the ratio laid down in the case of Ved Prakash Mukand Lal Educational Society (supra). Needless to say that the assessee may be given adequate opportunity of hearing and is free to produce all evidences relating to the issue, on which it wishes to place reliance.

12. In the result appeal of the Revenue is allowed for Statistical purposes.