ACIT, Kanpur v. M/s. Education Society of St. Mary's Convent High School, Kanpur

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B LUCKNOW BEFORE HONBLE SHRI H.L. KARWA AND HONBLE SHRI N.K . SAINI ITA NO.661/LUC/2010 ASSESSMENT YEAR:2005-06 ACIT-1 KANPUR V. M/S EDUCATION SOCIETY OF ST. MARYS CONVENT HIGH SCHOOL 53 TAGORE ROAD KANPUR PAN: AAATE0827D (APPELLANT) (RESPONDENT) APPELLANT BY: SRI P. K. BAJAJ D.R. RESPONDENT BY: SRI S.K. JAIN FCA O R D E R PER N.K. SAINI: THIS IS AN APPEAL BY THE DEPARTMENT AGAINST THE OR DER DATED 17.8.2010 PASSED BY THE CIT(A)-I KANPUR. THE FOLLOWING GROUNDS HAV E BEEN RAISED IN THIS APPEAL:- 1. THAT THE LD. COMMISSIONER OF INCOME-TAX (APPEAL S)-I KANPUR HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.38 50 000/- ON ACCOUNT OF PROVISION OF GRATUITY WITHOUT THE FACTS OF THE CASE AND MATER IAL BROUGHT ON RECORD BY THE ASSESSING OFFICER. 2. IN DOING SO LD. COMMISSIONER OF INCOME TAX (APP EALS)-I HAS IGNORING THE FACT THAT THE ASSESSEE HAS NOT FILED FORM NO. 10 AL ONG WITH THE RETURN OF INCOME AS WELL AS DURING THE COURSE OF ASSESSMENT PROCEEDI NG. THE INCOME OF THE ASSESSEE WAS COMPUTED BY THE A.O. UNDER SECTION 11 TO 13 OF THE INCOME TAX ACT 1961 AND THE DEDUCTION ON ACCOUNT OF EXPENDITU RE ACTUALLY INCURRED HAS TO BE ALLOWED NO DEDUCTION ON ACCOUNT OF PROVISION IN AN TICIPATION OF FUTURE LIABILITY IS ALLOWABLE UNDER THE LAW. MOREOVER THE GRATUITY FUN D IS NOT APPROVED BY THE COMMISSIONER OF INCOME TAX. 3. THAT THE ORDER OF THE LD. CIT (A)-I KANPUR DAT ED 17.08.2010 NEEDS TO BE QUASHED AND THE ORDER PASSED BY THE ASSESSING OFFIC ER DATED 26.10.2007 BE RESTORED. 4. THAT THE APPELLANT CRAVES LEAVE TO MODIFY ANY O F THE GROUNDS OF APPEAL MENTIONED ABOVE AND/OR TO ADD ANY FRESH GROUNDS AS AND WHEN IT IS REQUIRED TO DO SO. :-2-: 2. FROM THE ABOVE GROUNDS IT WOULD BE CLEAR THAT T HE ONLY GRIEVANCE OF THE DEPARTMENT RELATES TO THE DELETION OF ADDITION OF RS. 38.50 LAKHS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PROVISION OF GRATUITY. 3. THE FACTS OF THE CASE IN BRIEF ARE THAT THE ASSE SSEE IS A TRUST REGISTERED U/S. 12A OF THE INCOME-TAX ACT 1961 AND IS ENGAGED IN RUNNI NG OF EDUCATIONAL INSTITUTION FOR GIRLS UNDER THE NAME ST. MARYS CONVENT HIGH SCHOOL FOR MORE THAN 100 YEARS. THE ASSESSEE-TRUST FILED RETURN OF INCOME DECLARING NIL INCOME ON 20.10.2005. HOWEVER THE ASSESSMENT WAS FRAMED AT AN INCOME OF RS. 30 51 670. WHILE COMPUTING THE INCOME OF THE ASSESSEE THE ASSESSING OFFICER MADE AN ADDITIO N OF RS.3 8.50 LAKHS ON ACCOUNT OF PROVISION FOR GRATUITY BY OBSERVING THAT MERELY DED UCTION ON ACCOUNT OF PROVISION IN ANTICIPATION OF FUTURE LIABILITY CANNOT BE GIVEN A S SUCH DEDUCTION IS NEITHER ADMISSIBLE UNDER THE LAW NOR THE GRATUITY FUND IS APPROVED BY THE COMMISSIONER OF INCOME-TAX. 4. THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A ) AND SUBMITTED THAT THE ASSESSEE MADE A PROVISION OF RS. 40 LAKHS TOWARDS GRATUITY WHICH WAS KEPT IN A SEPAR ATE FIXED DEPOSIT WITH A BANK TO MEET THE LIABILITY FOR GRATU ITY ON A FUTURE DATE. IT WAS FURTHER STATED THAT THE COPIES OF FIXED DEPOSIT RECEIPTS WERE SUBM ITTED BEFORE THE ASSESSING OFFICER AND THAT THE ACTUAL PAYMENT OF GRATUITY TO THE RETIRING EMPLOYEES WAS MADE OUT FROM THE SAID FUND. THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE LD. CIT(A) ARE REPRODUCED VERBATIM AS UNDER:- (I) THAT THE AO DID NOT SPECIFICALLY GIVE ANY SHOW CAUSE NOTICE FOR MAKING ADDITION OF RS.38 50 000/- BEING THE BALANCE OUTSTA NDING IN GRATUITY FUND ACCOUNT THEREFORE HE VIOLATED THE PRINCIPLES OF NATURAL JU STICE. (II) THE APPELLANT FILED THE REVISED FORM NO.10 FOR ACCUMULATION OF FUNDS OF 40 00 000/- ALONG WITH LETTER DATED 25.10.2007 WHI CH WAS RECEIVED IN THE OFFICE OF LD. AO ON 29TH OCTOBER 2007 BUT THE LD. ASSESSING OFFICER DID NOT GIVE DUE COGNIZANCE TO IT. (III) THE LD. AO DID NOT TAKE COGNIZANCE OF REVISED FORM NO. 10 SAYING THAT HE HAS ALREADY COMPLETED THE ASSESSMENT ON 26.10.2007. HOWEVER EVEN ON THAT DATE I.E. 29.10.2007 THE LD. AO DID NOT SERVE THE ASSESSMENT ORDER ON THE APPELLANT OR ITS COUNSEL WHO PERSONALLY APPEARED BE FORE THE LD. AO FOR FILING OF REVISED FORM NO.10 FOR THE ASSESSMENT YEAR 2005-200 6. MOREOVER THE ASSESSMENT WAS NOT GETTING BARRED BY LIMITATION. :-3-: (IV) THE APPELLANT TRUST WHILE CREATING THE GRATUIT Y FUND GOT RS.33 00 000/- DEPOSITED IN A SEPARATE EARMARKED FIXED DEPOSIT WIT H A SCHEDULED BANK ON 30 TH MARCH 2005 ITSELF WHICH TANTAMOUNTS TO ACTUAL OUT FLOW OF FUNDS FOR EARMARKED PURPOSE. (V) IT IS A SETTLED LAW THAT LIABILITY TOWARDS GRAT UITY COMPUTED BY ASSUMING THAT WHAT SHALL BE THE AMOUNT OF GRATUITY PAYABLE IF ALL THE EMPLOYEE RETIRES ON 30 TH MARCH OR AT THE END OF THE FINANCIAL YEAR IS AN AS CERTAINED LIABILITY AND IS FULLY ADMISSIBLE AND ALLOWABLE. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAW:- 1. BHARAT EARTH MOVERS VS. CIT (2000) 245 ITR 428 (SC) 2. DLF QUTAB ENCLAVE COMPLEX .MEDICAL CHARITABLE TR UST VS. :DIRECTOR OF INCOME TAX (EXEMPTION) AND OTHERS (2001) 248 ITR 41 THE ASSESSEE ALSO FILED DETAILS OF FIVE FIXED DEPOS ITS SPECIFICALLY BY THE CITATION GRATUITY FUND EDUCATION SOCIETY OF S.M.C.. THE D ETAIL WAS AS UNDER:- FDR NO. DATE OF FDR AMOUNT TERM AE/2004/0431714 30.03.2005 3 00 000.00 3 YEARS AE/2004/0431715 30.03.2005 5 00 000.00 3 YEARS AE/2004/0431716 30.03.2005 5 00 000.00 3 YEARS AE/2004/0431717 30.03.2005 10 00 000.00 3 YEARS AE/2004/0431718 30.03.2005 10 00 000.00 3 YEARS TOTAL 33 00 000.00 IT WAS CONTENDED THAT SINCE THE ASSESSEE KEPT THE G RATUITY FUND AS EARMARKED SEPARATE FUND THEREFORE IT COULD NOT BE SAID THAT THE FUNDS WERE NOT ACTUALLY APPLIED FOR THE EARMARKED PURPOSE. THE ASSESSEE ALSO FURNISHED COPY OF THE RESOLUTION PASSED IN THE MEETING OF THE GOVERNING BOARD OF THE EDUCATION AL SOCIETY HELD ON 29.3.2005 WHEREIN IT WAS SPECIFICALLY RESOLVED THAT OUT OF T HE TOTAL LIABILITY FOR GRATUITY PAYABLE WORKED OUT AT RS. 41 19 784 A SUM OF RS. 40 00 000 BE PROVIDED IN THE BOOKS OF ACCOUNT AS AT THE END OF THE CURRENT FINANCIAL YEAR AND FIXED DEPOSITS FOR A SUM OF RS. 33 00 000 BE :-4-: MADE IN THE NAME OF GRATUITY FUND EDUCATIONAL SOCI ETY OF SMC INITIALLY FOR 3 YEARS AND THE SAME SHALL NOT BE UTILIZED FOR ANY PURPOSE OTHE R THAN THE PAYMENT OF GRATUITY TO THE STAFF AND EMPLOYEES RETIRING AFTER 31 ST MARCH 2005 AND THE BALANCE FIXED DEPOSITS BE MADE IN SUBSEQUENT YEARS TO COVER THE ENTIRE LIABIL ITY ON ACCOUNT OF GRATUITY. 5. THE ASSESSEE FURTHER SUBMITTED BEFORE THE LD. CI T(A) THAT REVISED FORM NO.10 WAS ALSO SUBMITTED BEFORE THE ASSESSING OFFICER ON 29 TH OCTOBER 2007 BY WHICH TIME THE ASSESSMENT ORDER WAS NOT SERVED BUT THE ASSESSING O FFICER DID NOT TAKE COGNIZANCE OF THE SAME AND INFORMED THE ASSESSEE-TRUST THAT THE A SSESSING OFFICER HAS ALREADY PASSED THE ORDER ON 26 TH OCTOBER 2007. RELIANCE WAS PLACED ON THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. MAYUR FOUNDATION (2005) 274 ITR 562 WHEREIN THE HON'BLE GUJARAT HIGH COURT EXPLAINED THE WORDS COM PLETION OF ASSESSMENT AS UNDER:- PROCEEDINGS BEFORE THE TRIBUNAL ARE MEANT TO CO RRECTLY ASSESS THE TAX LIABILITY OF AN ASSESSEE. IF THIS BE SO IT FOLLOWS THAT THE ASSESSMENT PROCEEDING CANNOT BE SAID TO BE COMPLETE AND IS PENDING TILL T HE APPEAL IS HEARD AND DISPOSED OF BY THE TRIBUNAL AND THE ORDER OF THE TRIBUNAL IS GIVEN EFFECT TO BY THE ASSESSING AUTHORITY BY COMPUTING THE CORRECT TAX LIABILITY OF AN ASSESSEE. IN OTHER WORDS WHETHER AN ASSESSEE IS REQUIRED TO PAY TAX OR BECOM ES ENTITLED TO A REFUND WOULD BE ASCERTAINED BY THE ASSESSING AUTHORITY AFTER GIV ING EFFECT TO THE ORDER OF THE TRIBUNAL . THE HON'BLE HIGH COURT FURTHER HELD AS UNDER: I) THAT THE ASSESSING AUTHORITY IS EMPOWERED AND IS DUTY BOUND TO PASS AN ORDER GIVING EFFECT TO THE ORDER OF THE TRIBUNAL FO R THE PURPOSES OF ASSESSING THE TAX LIABILITY OF THE ASSESSEE FOR THE ASSESSMENT YEAR WHICH WAS UNDER CONSIDERATION BEFORE THE TRIBUNAL. IN THE SE CIRCUMSTANCES IT CANNOT BE CONTENDED ON BEHALF OF THE REVENUE THAT T HE ASSESSMENT PROCEEDINGS COME TO AN END WHEN THE ASSESSMENT ORDE R IS FRAMED. II) THAT THE TRIBUNAL WAS WELL WITHIN ITS JURISDICT ION TO ENTERTAIN THE NEW GROUND BY WHICH THE ASSESSEE CLAIMED THE BENEFIT UNDER SEC TION 11(2) OF THE ACT AND ADJUDICATE THE TAX LIABILITY OF THE ASSESSEE. III) THAT THE TRIBUNAL WAS CORRECT IN HOLDING THAT THE ASSESSEE WAS ENTITLED TO THE BENEFITS ALLOWABLE U/S. 11(2). :-5-: 6. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE ASSESSEE-TRUST PURCHASED FIVE FDRS AGGREGATING TO RS. 33 00 000 FOR A PERIOD OF THREE YEARS ON 30 TH MARCH 2005 FOR A SPECIFIC AND EXCLUSIVE PURPOSE OF PAYMENT OF GRATUITY TO STAFF AND EMPLOYEES RETIRING AFTER 31 ST MARCH 2005. HE FURTHER OBSERVED THAT THE OBJECTIVE/PURPOSE OF THE ASSESSEE-TRUST WAS CLEAR F ROM THE RESOLUTION PASSED IN THE MEETING OF THE GOVERNING BOARD OF THE TRUST HELD ON 29 TH MARCH 2005 CONSEQUENT TO WHICH THE SAID 5 FDRS WERE PURCHASED ON 30 TH MARCH 2005. ACCORDING TO HIM THE INVESTMENTS FOR FIXED TERM IN SCHEDULED BANK FULFIL LS THE CONDITIONS PROVIDED IN SECTION 11(1A) OF THE ACT AND IS TO BE CONSTRUED AS ACQUISI TION OF A CAPITAL ASSET. HE THEREFORE TREATED THE FIXED DEPOSIT PURCHASED ON 30.3.2005 AS APPLICATION OF CURRENT YEARS INCOME FOR PAYMENT OF GRATUITY TO THE STAFF AND EMPLOYEES RETIRING AFTER 31 ST MARCH 2005 AND TREATED THE SAME AS APPLICATION OF CURRENT YEARS IN COME OF THE TRUST. RELIANCE WAS ALSO PLACED ON THE JUDGMENT OF THE HON'BLE DELHI HIGH CO URT IN THE CASE OF DLF QUTAB ENCLAVE COMPLEX MEDICAL CHARITABLE TRUST (SUPRA). THE LD. CIT(A) ALSO OBSERVED THAT THE SAID GRATUITY AMOUNT OF RS. 33 LAKHS WAS EARMARKED IN THE NATURE OF A FIXED FUN D TOWARDS THE FIXED LIABILITY OF GRATUITY TO BE PAID TO THE STAFF AND EMPLOYEES THOUGH SEPARATE CALCULATION OF AMOUNTS FOR EACH EMPLOYEE W AS NOT FURNISHED BEFORE ASSESSING OFFICER HOWEVER THE RESOLUTION CLEARLY PROVIDES T HAT SAID AMOUNT WAS SPECIFICALLY AND NECESSARILY EARMARKED FOR GRATUITY PAYMENT. THE LIA BILITY OF GRATUITY IS OBVIOUSLY RELATING TO DIFFERENT PERSONS THAN THE ASSESSEE AND SAME WAS PART OF THE EXPENDITURE FOR THIS PURPOSE. ONCE SUCH AMOUNT WAS TIED-UP EXCLUSIVELY F OR GRATUITY PAYMENT IN THE FORM OF LONG TERM FIXED DEPOSIT THEN IT COULD NOT BE SAID THAT SUCH AMOUNT WAS IN ANY MANNER AT THE DISPOSAL OF THE ASSESSEE FOR ANY OTHER PURPOSE OR THAT IT WAS AVAILABLE WITH THE ASSESSEE FOR UTILIZATION IN ANY OTHER MANNER. THESE TWO ASPECTS CLEARLY SHOW THAT SUCH AMOUNT OF GRATUITY FIXED DEPOSIT WAS NOT ONLY IN TH E NATURE OF A RESERVE AND PROVISION RATHER IT WAS OUTSIDE THE CONTROL OF THE ASSESSEE A ND NOT AT ITS DISPOSAL FOR ANY OTHER USE. HENCE ONCE THE ASSESSEE LOOSES THE CONTROL ON THE SAID AMOUNT FOR UTILIZATION FOR ANY OTHER MANNER THAN FOR THE PURPOSE OF ASSESSEE IT W AS LIABLE TO BE TREATED AS AMOUNT APPLIED FOR CHARITABLE PURPOSES UNLESS OTHERWISE PR OVED OR BROUGHT ON RECORD. HE THEREFORE DIRECTED THE ASSESSING OFFICER TO TREAT T HE AMOUNT OF RS. 33 LAKHS IN FIXED DEPOSITS AS APPLICATION OF INCOME DURING THE YEAR. 7. NOW THE DEPARTMENT IS IN APPEAL. :-6-: 8. THE LD. D.R. STRONGLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND FURTHER SUBMITTED THAT THE ASSESSEE HAD NOT MADE ANY PAYMEN T ON ACCOUNT OF GRATUITY THEREFORE PROVISION IN ANTICIPATION OF FUTURE LIAB ILITY CANNOT BE ALLOWED AS DEDUCTION THEREFORE THE ASSESSING OFFICER RIGHTLY MADE ADDIT ION WHILE THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE SAME. 9. IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR TH E ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND F URTHER SUBMITTED THAT THE ASSESSEE WAS MAINTAINING BOOKS OF ACCOUNT ON MERCANTILE BASI S AND THE PAYMENT OF GRATUITY WAS AN ASCERTAINED LIABILITY. FOR THAT PURPOSE THE AS SESSEE MADE PROVISION FOR GRATUITY AND DEPOSITED THE AMOUNT IN FIXED DEPOSITS WHICH WERE E ARMARKED FOR MAKING PAYMENT OF GRATUITY AS SUCH THE CLAIM OF THE ASSESSEE WAS ALL OWABLE. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF MADHO MAHESH SUGAR MILLS (P.) LTD VS. CIT [1972] 92 ITR 503. 10. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIALS AVAILABLE ON RECORD. IN THE PRESENT CASE IT APPEARS THAT THE ASSESSING OFFICER MADE THE ADDITION ONLY ON THE BAS IS THAT THE ACTUAL PAYMENT FOR GRATUITY WAS NOT MADE DURING THE YEAR UNDER CONSIDE RATION. HE DID NOT ALLOW EXEMPTION U/S. 11 OF THE ACT. IN THE INSTANT CASE IT IS NOT IN DISPUTE THAT THE LIABILITY TO MAKE PAYMENT OF GRATUITY WAS AN ASCERTAINED LIABILITY AN D THE ASSESSEE WAS REQUIRED TO MAKE PAYMENT OF GRATUITY WHENEVER OCCASION OF RETIREMENT OF EMPLOYEES ARISES. AS REGARDS TO THE DEDUCTION ON ACCOUNT OF PROVISION OF GRATUITY I S CONCERNED THE ISSUE HAS BEEN SETTLED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CAS E OF MADHO MAHESH SUGAR MILLS (P.) LTD VS. CIT (SUPRA) WHEREIN BY FOLLOWING THE JUDGMENT O F THE HON'BLE SUPREME COURT IN THE CASE OF METAL BOX COMPANY OF INDIA LTD. VS. THEIR W ORKMEN [1969] 73 ITR 53 THEIR LORDSHIPS OBSERVED AT PAGES 507 AND 508 OF THE JUDG MENT AS UNDER:- PREVIOUSLY THERE APPEARED TO BE SOME DOUBT AS TO W HETHER SUCH A LIABILITY IS CAPABLE OF ASCERTAINMENT AND IT COULD BE CALLED A L IABILITY IN PRAESENTI. THE DOUBT HAS HOWEVER NOW BEEN SET AT REST BY THE SUPREME C OURT IN METAL BOX COMPANY OF INDIA LTD. V. THEIR WORKMEN. THE QUESTION THAT A ROSE IN THAT CASE WAS AS TO WHETHER PROVISION FOR GRATUITY WAS AN EXPENDITURE W HICH COULD BE DEDUCTED OUT OF THE GROSS PROFIT OF THE COMPANY FOR THE PURPOSE OF WORKING OUT THE AVAILABLE SURPLUS FOR PAYMENT OF BONUS TO ITS WORKMEN. A SIMI LAR ARGUMENT WAS RAISED IN THAT CASE NAMELY THAT THE PROVISION FOR GRATUITY DID NOT REPRESENT ANY PRESENT AND :-7-: ASCERTAINABLE LIABILITY AND AS SUCH WAS NOT DEDUC TIBLE. IT WAS ARGUED IN THAT CASE JUST AS IN THE CASE BEFORE US THAT THE GRATUITY IF AND WHEN PAID COULD ONLY BE ALLOWED AS A DEDUCTION AND NOT A PROVISION FOR ITS PAYMENT MADE EACH YEAR. THIS IS WHAT THE SUPREME COURT OBSERVED : ' IN THE CASE OF AN ASSESSEE MAINTAINING HIS ACCOU NTS ON MERCANTILE SYSTEM A LIABILITY ALREADY ACCRUED THOUGH TO BE D ISCHARGED AT A FUTURE DATE WOULD BE A PROPER DEDUCTION WHILE WORKING OUT THE PROFITS AND GAINS OF HIS BUSINESS REGARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMM ERCIAL PRACTICE AND ACCOUNTANCY. IT IS NOT AS IF SUCH DEDUCTION IS PERM ISSIBLE ONLY IN CASE OF AMOUNTS ACTUALLY EXPENDED OR PAID. ' WITH THESE OBSERVATIONS THE SUPREME COURT HELD THA T THE ESTIMATED LIABILITY OF THE ASSESSEE COMPANY FOR PAYMENT OF GRATUITY BAS ED ON ACTUARIAL VALUATION WAS A PERMISSIBLE DEDUCTION. IT FURTHER HELD THAT SUCH A LIABILITY WAS A LIABILITY IN PRAESENTI THOUGH PAYABLE IN FUTURE AND IT WAS ASCER TAINABLE. IN OUR OPINION THIS DECISION OF THE SUPREME COURT PROVIDES A COMPLETE A NSWER TO THE CONTENTIONS RAISED BY THE DEPARTMENT IN THE INSTANT CASE 11. IN THE PRESENT CASE ALSO LIABILITY TO MAKE PAYM ENT OF GRATUITY WAS AN ASCERTAINED LIABILITY THOUGH PAYABLE IN FUTURE. THEREFORE DED UCTION WAS PERMISSIBLE IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE ABOVE REFERRED TO CASE. AS REGARDS TO THE INVESTMENT FOR FIXED TERM IN SCHEDUL ED BANK FULFILS THE CONDITION PROVIDED IN SECTION 11(1A) OF THE ACT THE HON'BLE DELHI HIG H COURT IN THE CASE OF DLF QUTAB ENCLAVE COMPLEX .MEDICAL CHARITABLE TRUST VS. :DIRE CTOR OF INCOME TAX (EXEMPTION) AND OTHERS (SUPRA) HAS HELD AS UNDER:- SECTION 11 OF THE INCOME-TAX ACT 1961 DEALS WITH INCOME FROM PROPERTY HELD FOR CHARITABLE OR RELIGIOUS PURPOSES. SUB-SECTION (1) O F SECTION 11 PROVIDES THAT SUBJECT TO SECTIONS 60 TO 63 THE ENUMERATED INCOME S SHALL NOT BE INCLUDED IN THE TOTAL INCOME OF THE PREVIOUS YEAR OF THE PERSON IN RECEIPT OF THE INCOME. SECTION 11(1A) DEALS WITH THE GAINS ARISING FROM THE TRANSF ER OF CAPITAL ASSETS HELD BY A CHARITABLE TRUST. IT STATES THAT THE CAPITAL GAINS WILL BE DEEMED TO HAVE BEEN APPLIED TO CHARITABLE OR RELIGIOUS PURPOSES TO THE EXTENT IT IS UTILISED IN ACQUIRING A NEW CAPITAL ASSET. THE FORMS AND MODES OF INVESTING OR DEPOSITING MONEY ARE PROVIDED IN SUB-SECTION (5) OF SECTION 11. IT IS CL EAR FROM SECTION 11(5)(III} THAT :-8-: DEPOSIT IN ANY ACCOUNT WITH A SCHEDULED BANK IS ALS O RELATABLE TO THE FORMS AND MODES OF INVESTING OR DEPOSITING THE MONEY REFERRED TO IN CLAUSE (B) OF SUB- SECTION (2). THE EXPLANATION TO THE SUBSECTION INDI CATES WHAT ARE ENCOMPASSED BY THE EXPRESSION 'SCHEDULED BANK'. THE EXPRESSION 'CAPITAL ASSET' IS DEFINED IN SECTION 2(14) OF THE ACT. IT MEANS PROPERTY OF ANY KIND HELD BY AN ASSESSEE. CERTAIN CATEGORIES OF ASSETS HAVE BEEN SPECIFICALLY EXCLUDED FROM THE MEANING OF CAPITAL ASSET. DEPOSITS IN SCHEDULED BANKS ARE NOT ONE OF THESE ENUMERATED CATEGORIES EXCLUDED FROM THE MEANING OF CAPITAL ASS ET AS GIVEN IN SECTION 2(14). INVESTMENT FOR A FIXED TERM IN A SCHEDULED BANK FUL FILS THE CONDITIONS PROVIDED IN SECTION 11(1A) AS A FIXED TERM DEPOSIT IS A CAPITA L ASSET. 12. IN THE PRESENT CASE ALSO ASSESSEE DEPOSITED A S UM OF RS. 33 LAKHS AS A SEPARATE EARMARKED FIXED DEPOSIT WITH SCHEDULED BANK ON 30.3 .2005 AND CREATED A GRATUITY FUND TO DISCHARGE LIABILITY TOWARDS GRATUITY COMPUTED BY ASSUMING THAT WHAT SHALL BE AMOUNT OF GRATUITY PAYABLE IF ALL THE EMPLOYEES RETIRE ON 30 TH OF MARCH 2005 OR AT THE END OF THE FINANCIAL YEAR AND ALSO PASSED IN THE MEETING OF TH E GOVERNING BOARD A RESOLUTION ON 29.3.2005. IN THE SAID RESOLUTION IT WAS SPECIFICA LLY RESOLVED THAT OUT OF THE TOTAL LIABILITY FOR GRATUITY PAYABLE WORKED OUT AT RS. 41 19 784 A SUM OF RS. 40 00 000 BE PROVIDED IN THE BOOKS OF ACCOUNT AS AT THE END OF THE CURRENT FINAN CIAL YEAR AND FIXED DEPOSITS FOR A SUM OF RS. 33 00 000 BE MADE IN THE NAME OF GRATUITY FUND EDU CATIONAL SOCIETY OF SMC INITIALLY FOR 3 YEARS AND THE SAME SHALL NOT BE UTI LIZED FOR ANY PURPOSE OTHER THAN THE PAYMENT OF GRATUITY TO THE STAFF AND EMPLOYEES RETI RING AFTER 31 ST MARCH 2005 AND THE BALANCE FIXED DEPOSITS BE MADE IN SUBSEQUENT YEARS TO COVER THE ENTIRE LIABILITY ON ACCOUNT OF GRATUITY. 13. FROM THE ABOVE RESOLUTION IT IS CLEAR THAT THE GRATUITY PAYABLE WAS WORKED OUT AT RS. 41 19 784 FOR THE STAFF AND EMPLOYEES RETIRING AFTE R 30.3.2005 I.E. END OF THE YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION AND THE ASSESSEE-TRUST DEPOSITED RS. 33 LAKHS IN EARMARKED FIXED DEPOSIT TOWARDS FIXED L IABILITY OF GRATUITY. THEREFORE THE AMOUNT IN FIXED DEPOSITS WAS TIED-UP EXCLUSIVELY FO R GRATUITY PAYMENT AS SUCH IT CANNOT BE SAID THAT SUCH AMOUNT WAS IN ANY MANNER AVAILABL E TO THE ASSESSEE TO BE UTILIZED FOR ANY OTHER PURPOSE. HENCE ONCE THE ASSESSEE LOOSES THE CONTROL ON THE AMOUNT IN QUESTION FOR UTILIZATION FOR ANY OTHER PURPOSE THE N IT WAS LIABLE TO BE TREATED AS AMOUNT APPLIED FOR CHARITABLE PURPOSES BECAUSE THE ASSESSI NG OFFICER HAS NOT BROUGHT ANYTHING ON RECORD IN CONTRAVENTION OF THE ABOVE. WE THERE FORE CONSIDERING THE TOTALITY OF THE :-9-: FACTS AS DISCUSSED HEREINABOVE AND ALSO KEEPING IN VIEW THE JUDICIAL PRONOUNCEMENTS BY THE VARIOUS HON'BLE COURTS AS MENTIONED IN THE EARL IER PART OF THIS ORDER ARE OF THE VIEW THAT THE LD. CIT(A) WAS FULLY JUSTIFIED IN DIRECTIN G THE ASSESSING OFFICER TO TREAT THE AMOUNT OF RS. 33 LAKHS IN FIXED DEPOSITS AS APPLICATION OF INCOME OF THE ASSESSEE FOR THE PURPOSE OF DEDUCTION U/S. 11 OF THE ACT. ACCORDINGLY WE DO NOT FIND ANY MERIT IN THE APPEAL OF THE DEPARTMENT. 14. IN THE RESULT APPEAL IS DISMISSED. (ORDER PRONOUNCED IN THE OPEN COURT ON 28.2.2011) SD/- SD/- [H. L. KARWA] [ N. K. SAINI] VICE PRESIDENT ACCOUNTANT MEMBER DATED: 28 TH FEB 2011 JJ:2302 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR ASSISTANT REGISTRAR