Judgement of Delhi Tribunal – Assessee allowed accumulation of income for application for charitable purposes under section 11(1)(a) at 15 per cent of gross receipts

In the case of Artificial Limbs Manufacturing Corporation of India v. Additional Commissioner of Income-tax [2025] 170 taxmann.com 743 (Delhi – Trib.), the primary issue was the method of computing the 15% accumulation allowed under Section 11(1)(a) of the Income Tax Act, 1961, for a charitable organization.

Arguments Presented:

Assessee’s Arguments:

1. Computation Basis: The assessee, a government undertaking established to manufacture and supply artificial limbs at reasonable costs, argued that the 15% accumulation should be computed on the gross receipts, which include total sales, government grants, and other income.
2. Nature of Activities: They contended that their manufacturing and distribution activities are integral to their charitable purpose and not incidental businesses. Therefore, the entire revenue should be considered as income derived from property held under trust.
3. Inclusion of Grants: The assessee included government grants in their total income for computing the 15% accumulation, asserting that these grants are part of their income.

Revenue’s Arguments:

1. Computation Basis: The Revenue argued that the 15% accumulation should be computed on the net income, i.e., gross receipts minus expenses, rather than the gross receipts.
2. Nature of Activities: They viewed the manufacturing activities as incidental to the charitable purpose. Therefore, only the net income from these activities should be considered for the 15% accumulation.
3. Exclusion of Loans: The Revenue pointed out that the assessee had included loans received under government schemes (ADIP and ADIP-SSA) in their income. They argued that since these amounts were loans and not grants, they should not be included in the income for the purpose of computing the 15% accumulation.

Tribunal’s Conclusion:

The Income Tax Appellate Tribunal (ITAT) held in favor of the assessee with the following observations:

1. Computation Basis: The Tribunal concluded that the 15% accumulation under Section 11(1)(a) should be computed on the gross receipts, aligning with the assessee’s method.
2. Nature of Activities: It was determined that the assessee’s manufacturing and distribution activities are integral to its charitable objectives and not merely incidental. Therefore, the entire revenue from these activities qualifies as income derived from property held under trust.
3. Exclusion of Loans: The Tribunal agreed with the Revenue that loans received under the ADIP and ADIP-SSA schemes should not be included in the income for computing the 15% accumulation, as they are liabilities and not income.

In summary, the Tribunal ruled that the assessee is entitled to compute the 15% accumulation on its gross receipts, excluding any loan amounts, thereby supporting the assessee’s primary method of computation.

_{Limitation: The purpose of this article is for knowledge sharing purpose. Views expressed in this note are personal views of the author. The same should not be construed as professional advise}