Donations out of 15 Percent accumulation permitted under section 11(1)(a) are not to be restricted by Explanation to section 11(2

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DECIDED BY:

HIGH COURT OF DELHI, IN THE CASE OF: DIT (Exemption) v. Bagri Foundation, APPEAL NO: ITA No. 19/2010, DECIDED ON July 2, 2010

HELD

No conditions are prescribed for the accumulation of up to 15% permitted under Section 11(1)(a). Section 11(2) permits accumulation in excess of 15% also but subject to certain conditions and with which we are not concerned at present. However, the explanation appended w.e.f. 1st April, 2003 to Section 11(2) is as under:-

“Explanation. – Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under Section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub- clause (vi) or sub-clause (via) of clause (23C) of Section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.”

The “explanation” appended after Section 11(2) is nothing but an additional condition attached to accumulation in excess of 15% permitted under Section 11(2). We are unable to hold it as a condition on accumulation up to 15% as provided for in Section 11(1)(a) also. We are unable to find any rational classification for imposing the restriction as contained in the “explanation” to the accumulation of up to 15% also when there is no such restriction to donating the entire income of a year to another charitable trust. The legislature did not do so. Even after the insertion of the “explanation”, if a trust donates its entire income for a year to another charitable trust, it would still be entitled to exemption under Section 11(1)(a). It defies logic as to why such donations cannot be permitted out of 15% accumulation permitted under Section 11(1)(a) itself. There is however rationale for imposing the restriction as contained in the “explanation” (supra) to accumulations in excess of 15%. Such accumulations, but for the conditions imposed in Section 11(2) and in the explanation aforesaid, would have been eligible to be taxed. One of the conditions in Section 11(2)(a) is that the purpose for which accumulation in excess of 15% is being made is to be notified; another condition is of the accumulation being permitted for a period not exceeding 10 years; yet another condition is as to the modes in which the accumulation can be invested. There are no such restrictions on accumulation under Section 11(1)(a). The scheme of the section indicates that the additional condition by way of the aforesaid “explanation” is also intended to apply only to accumulations in excess of 15% under Section 11(2) and not to accumulations upto 15% under Section 11(1)(a). The explanation is not found to be intended to take away something from the accumulation upto 15% permitted without any conditions whatsoever under Section 11(1)(a).