Charitable Institution Free to use Accumulated Income up to 5 years without Prior Exhaustion of Current Year’s Income: ITAT [Read Order]

The Lucknow Bench of the Income Tax Appellate Tribunal ( ITAT ) recently ruled that the charitable institution is free to use the accumulated income up to 5years without prior exhaustion of the current year’s income.

The bench clarified that “charitable institutions can accumulate income upto a period of five years which is to be utilized for specified charitable purposes. However, it does not provide that expenditure of relevant assessment year should first be made from income of relevant assessment year and then only the surplus (accumulation brought forward) should be utilized. Such a condition is not prescribed in the Act and the charitable institution accumulating its surplus funds under section 11(2) of the Act is entirely free to spend the same in furtherance of its objects.”

The assessee, Uttar Pradesh Police and Armed Forces Sahayata Sansthan, a charitable trust formed in 1963 by the Government of Uttar Pradesh, provides education, technical training, and financial support for the welfare of members of the state’s police and armed forces.

For the assessment year 2013-14, the Assessing Officer (AO) added nearly Rs. 1.99 crore to the income of the trust. The AO reasoned that the assessee had wrongly carried forward Rs. 99.45 lakh from earlier accumulations and had also made excess accumulation of Rs. 1 crore in the current year.

The department argued that income of the current year must be fully applied first, and only thereafter could the accumulated income of earlier years be spent. On appeal, the Commissioner of Income Tax (Appeals) deleted the additions, holding that the AO’s interpretation was inconsistent with the income tax law.

The Revenue challenged this order before the Tribunal.

The bench, after considering rival submissions and examining Section 11(2) of the Income Tax Act, 1961, observed that the law allows charitable institutions to accumulate income for up to five years for application to approved purposes.

Also, the provision does not mandate that the current year’s income must first be exhausted before spending accumulated income. The bench clarified that the AO’s interpretation effectively imposed a restriction not contemplated by law.

The bench of Nikhil Choudhary (AM) and Sudhanshu Srivatsava (JM), therefore, held that a charitable institution has complete freedom to utilize its accumulated income within the permitted five-year window, irrespective of whether the current year’s income has been spent or not.

Consequently, both additions made by the AO were found unsustainable, and the appeal filed by the Revenue was dismissed.

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