Facts of the Case

The Revenue appealed against the decision of the Income Tax Appellate Tribunal (ITAT) which had allowed the assessee—Jamnalal Bajaj Foundation, a registered charitable trust—the benefit of accumulation to the extent of 15% under Section 11(1)(a) on deemed income arising under Sections 11(3)(c) and 11(3)(d) of the Income Tax Act, 1961.

For Assessment Year 2009–10, the assessee originally filed a return declaring nil income. Subsequently, it filed a revised return after noticing that ₹20 crore of accumulated income under Section 11(2) had been utilized for granting corpus donations to other charitable trusts. Treating this as triggering deemed income provisions under Section 11(3), the assessee offered the amount to tax out of abundant caution.

The Assessing Officer, however, denied the exemption and treated the entire amount as taxable income, holding that utilization of accumulated funds for donations violated statutory conditions.

Issues Involved

  1. Whether deemed income arising under Section 11(3) is eligible for accumulation up to 15% under Section 11(1)(a).
  2. Whether donations made from accumulated funds to other charitable trusts constitute violation of Section 11(2).
  3. Scope and interplay of Sections 11(1), 11(2), and 11(3) of the Income Tax Act.

Petitioner’s (Revenue’s) Arguments

The Revenue contended that once accumulated income is applied for purposes other than those specified under Section 11(2), it loses exemption and becomes fully taxable under Section 11(3). It argued that permitting further accumulation on such deemed income would grant a double benefit to the assessee and defeat statutory intent.

Respondent’s (Assessee’s) Arguments

The assessee argued that the funds were temporarily deployed as donations to other charitable institutions and were subsequently retrieved within a short period. It was submitted that such deployment still constituted application for charitable purposes and did not amount to diversion for non-charitable use.

Court Order / Findings

  • Section 11(1)(a) permits a charitable trust to accumulate up to 15% of its income without conditions.
  • Section 11(2) provides an additional facility to accumulate the remaining income subject to prescribed conditions.
  • Deemed income under Section 11(3) does not lose its character as income for purposes of Section 11(1)(a).
  • Donations to other charitable institutions generally qualify as application of income for charitable purposes.
  • Temporary deployment of funds, especially where amounts are recovered within a short duration, does not amount to permanent diversion.
  • The scheme of Section 11 must be interpreted harmoniously to preserve exemption benefits where charitable intent is evident.

Important Clarification

The judgment clarifies that deemed income arising from technical violations of accumulation provisions does not automatically become fully taxable. Charitable trusts remain entitled to the statutory 15% accumulation under Section 11(1)(a), and temporary use of funds for charitable purposes does not negate exemption benefits.

This ruling is significant for non-profit organizations managing large accumulated funds, as it affirms a liberal interpretation aligned with the charitable objectives underlying tax exemptions.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1772177111_COMMISSIONEROFINCOMETAXVsMSJAMNALALBAJAJFOUNDATION.pdf  

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