2016 (7) TMI 1287 - AT - Income Tax

ITAT affirms CIT(A) decisions on income exemptions under Section 10(20)

The ITAT upheld the CIT(A)'s decisions, dismissing the Revenue's appeals. The Board's income from contributions and rental income was deemed exempt under ... Activities of the assessee within the ambit of section 10(20) - contribution received from Market Committees, rental income from godowns/shops and interest income earned - Held that:- The assessee Board while discharging its prescribed functions, is rendering services to the market committees and the same is being financed by contributions received from Market Committees. The surplus generated from the same is nothing but income from rendering services by the Board, as rightly held by the Ld. CIT(A). We see no infirmity in the order of the Ld. CIT(A) on this score. Moreover, the fact that funds have been provided by the Market Committees to carry out the functions of the Board which involve rendering services to the market committees itself proves that the income has arisen on account of supply of services by the assessee to the market committees. The Ld. CIT(A) has rightly held that the impugned income is arising in the course to supply of its services. Even if the word ‘services’ is interpreted in the manner the Assessing officer has done as being one meaning serving by human resources and through human efforts, we find that all activities undertaken by the Board includes human efforts and thus even by the Assessing officer’s definition, the Board is rendering services. The fact that there is no nexus between the contribution received or services rendered also does not disentitle the assessee from exemption u/s 10(20) since the fact still remains that the surplus has been generated on account of services rendered in its jurisdictional area, which is the only requirement for claiming exemption u/s 10(20) of the Act. As far as the eligibility of the rental income received by the assessee to exemption u/s 10(20) of the Act, we find that the Ld. CIT(A) has rightly held that the rental income of the assessee has also been derived from providing services of making available shops etc. to farmers in the assessee’s jurisdictional area, and thus was in the nature of income earned form providing services within its jurisdictional area and was thus eligible for exemption u/s 10(20) of the Act. In the present case we find that though the asseessee has been treated as a local authority for the purpose of section 10(20) of the Act, yet the surplus generated on carrying out its stipulated functions, considering which it was granted the status of local authority, has been subjected to tax. In fact the entire income of the assessee has been brought to tax. This interpretation, as has been rightly held by the CIT(A) does not sub-serve the objective of the statute. We hold that the income earned by the assessee in the form of contributions received from market committees and rental income, is exempt u/s 10(20) of the Act - Decided in favour of assessee Disallowance made of expenditure incurred on account of prize money given to farmers - Held that:- Undisputedly, the function of the Board is providing the welfare of the farmers. The expenditure incurred is for encouraging more and more farmers to sell their goods through the Market Committees and thus avail all benefits granted to them through the committee. Clearly, the expenditure has been incurred in the course of carrying out its business. Moreover the assessee incurred expenditure prescribed u/s 26 of the PAPM Act and the auditors have not pointed out any violation of the provisions of the Act. Therefore, it cannot be said that the assessee was debarred from incurring the expenditure. In any case, the impugned disallowance only results in increasing the income of the assessee from the supply of services within its jurisdictional area which in any case is exempt u/s 10(20), as held by us in ground no.1 above. Thus we uphold the order of the Ld. CIT(A) on this ground, deleting the disallowance of expenditure incurred on Krishak Uphar Yojna - Decided in favour of assessee Allowance of donation made to the Chief Ministers Relief Fund - Held that:- It is not denied that the impugned payment was made by the assessee. Therefore, the assessee was entitled to claim deduction on account of the same u/s 80G of the Act. It makes no difference to the situation whatever be the source of making the payment whether out of employees contribution or any other source. We, therefore, uphold the order of the CIT(A) on this ground and delete the addition made to the income of the assessee.- Decided in favour of assessee Expenditure incurred on information and technology - revenue or capital expenditure - Held that:- We find no infirmity in the order of the Ld. CIT(A) holding the impugned expenditure as Revenue in nature. Undisputedly, the benefit which accrues to the assessee on account of incurring the impugned expenditure is creation of an electronic network for ensuring better contact over Market Committees and carrying out its other stipulated functions in an effective manner. There is no dispute about this fact since it has not been controverted before us. Clearly, no asset has come into existence by virtue of incurring this expenditure. Ld. CIT(A) has therefore rightly held that the impugned expenditure cannot be categorized as capital in nature. There is no merit in the arguments of Ld. DR, since it is settled law that enduring benefit alone is not a certain or conclusive test for determining the true nature of an expenditure whether capital or Revenue. In any case, the impugned disallowance only results in increasing the income of the assessee from the supply of services within its jurisdictional area which in any case is exempt u/s 10(20), as held by us in ground no.1 above. Thus we uphold the order of the Ld. CIT(A) in allowing the claim of ₹ 1.5 crores on account of contribution to information and Technology Department.- Decided in favour of assessee Addition on account of propaganda, publicity and demonstration - Held that:- Advertisement is an allowable business expenditure and the Ld. CIT(A) has rightly directed the Assessing officer to verify whether the expenses are in the nature of advertisement and accordingly allow the same. The Ld. CIT(A) has not allowed the claim of the assessee as such. Therefore, to this extent the ground raised by the Revenue is incorrect. In view of the same, we uphold the order of the Ld. CIT(A) in directing the Assessing officer to verify the expenses and allow the same if found to be in the nature of advertisement.- Decided in favour of assessee Allowance of expenditure incurred on account of contribution to Agricultural Department for Rock Drilling Machine - Held that:- We find no infirmity in the order of Ld. CIT(A). The findings of the Ld. CIT(A) that the contention of the Assessing officer regarding violation by the assessee of the provisions of section 26 of the PAPM Act, are unsubstantiated remains uncontroverted before us. Ld. DR has not brought anything before us to controvert this finding of the Ld. CIT(A). In view of the same, we agree with the Ld. CIT(A) that there is no basis with the Assessing officer to disallow the impugned expenditure. We, therefore, uphold the order of Ld. CIT(A) allowing the assessee claim of expenditure incurred on account of Contribution to Agricultural Department for Rock Drilling Machine. - Decided in favour of assessee Issues Involved:1. Exemption under Section 10(20) of the Income-tax Act, 1961.2. Eligibility of various incomes (rental income, interest income, contributions) for exemption under Section 10(20).3. Allowability of expenditure on prize money to farmers.4. Allowability of donation to Chief Minister Relief Fund.5. Classification of expenditure on information and technology as revenue or capital.6. Allowability of advertisement expenses.7. Allowability of expenditure on rock drilling machine.Detailed Analysis:1. Exemption under Section 10(20) of the Income-tax Act, 1961:The primary issue was whether the activities of the assessee fell within the ambit of Section 10(20) of the Income-tax Act, 1961, and whether the income earned was exempt under this section. The CIT(A) held that the assessee, a Board set up under the PAPM Act, was a local authority and its income from contributions received from market committees and rental income was exempt under Section 10(20). The ITAT upheld this decision, noting that the contributions and rental income were derived from providing services within the Board's jurisdictional area.2. Eligibility of Various Incomes for Exemption:- Rental Income: The CIT(A) and ITAT held that rental income from godowns, shops, and staff quarters was exempt under Section 10(20) as it was derived from providing services within the Board's jurisdictional area.- Interest Income: The CIT(A) upheld the Assessing Officer's denial of exemption for interest income, and the ITAT noted that the Revenue had no grievance on this account.- Contributions from Market Committees: The contributions received from market committees were held to be exempt as they were for carrying out the Board's functions, which involved providing services within its jurisdictional area.3. Allowability of Expenditure on Prize Money to Farmers:The CIT(A) deleted the disallowance of expenditure incurred on Krishak Uphar Yojna, holding that it had a direct nexus with the Board's objective of welfare of farmers. The ITAT upheld this decision, noting that the expenditure encouraged farmers to sell their produce through market committees, thereby increasing the Board's income.4. Allowability of Donation to Chief Minister Relief Fund:The CIT(A) allowed the deduction claimed by the assessee for donation to the Chief Minister Relief Fund under Section 80G of the Income-tax Act. The ITAT upheld this decision, noting that the payment was made by the assessee and was eligible for deduction.5. Classification of Expenditure on Information and Technology:The CIT(A) held that the expenditure on information and technology was revenue in nature as it did not bring into existence any asset and was incurred to enable the assessee to cope with changing economic realities. The ITAT upheld this decision, noting that the expenditure was for creating an electronic network for better control over market committees and carrying out the Board's functions effectively.6. Allowability of Advertisement Expenses:The CIT(A) directed the Assessing Officer to verify the nature of the expenses claimed under propaganda, publicity, and demonstration and allow them if found to be in the nature of advertisement. The ITAT upheld this decision, noting that advertisement is an allowable business expenditure.7. Allowability of Expenditure on Rock Drilling Machine:The CIT(A) allowed the expenditure incurred on contribution to the Agricultural Department for a rock drilling machine, holding that it was for aiding farmers and increasing their productivity, which would eventually benefit the Board. The ITAT upheld this decision, noting that the Assessing Officer's contention regarding violation of the PAPM Act was unsubstantiated.Conclusion:The ITAT upheld the CIT(A)'s decisions on all counts, dismissing the Revenue's appeals. The Board's income from contributions and rental income was held to be exempt under Section 10(20), and various expenditures were allowed as they were incurred in the course of carrying out the Board's functions and objectives.