2012 (10) TMI 749 - AT - Income Tax

Tribunal directs reassessment of donations, contributions as income, upholds re-computation based on commercial principles.

The tribunal allowed the appeals for statistical purposes, directing the assessing officer to re-examine the treatment of donations and contributions as ... Characterisation of donations as corpus fund or revenue - onus of proof on assessee for non-taxability of receipts - computation of income on commercial principles where exemption is denied - aggregate annual receipts threshold for 10(23C)(iiiad) applicability - verification of fee in advance while determining aggregate receiptsCharacterisation of donations as corpus fund or revenue - onus of proof on assessee for non-taxability of receipts - Whether donations received by the assessee for AY 2005-06 were to be treated as income or corpus - HELD THAT: - The Tribunal records that the assessee did not furnish any documentary evidence to show that the contributions were given with specific direction to form corpus. The lower authorities treated the receipts as income after noting absence of particulars of donors or earmarking. While agreeing that the onus to prove non taxability lies on the assessee, the Tribunal nevertheless set aside the findings and directed the Assessing Officer to grant one more opportunity to the assessee to produce evidence that the donations were capital/corpus or not in the nature of capitation fees, and thereafter to decide the issue afresh in accordance with law after hearing the assessee. [Paras 6]Matter remitted to the Assessing Officer for fresh adjudication after affording opportunity to the assessee to prove that donations were corpus or otherwise not taxableAggregate annual receipts threshold for 10(23C)(iiiad) applicability - verification of fee in advance while determining aggregate receipts - Whether for AY 2006-07 the assessee's aggregate receipts exceeded Rs.1 crore for the purpose of section 10(23C)(iiiad) and whether donations included in receipts could be so treated - HELD THAT: - The CIT(A) treated certain items (fee receipts, donations, other fees and lab hire charges) as together exceeding Rs.1 crore and, on that basis and absence of approval or registration, denied exemption. The Tribunal observed the assessee's contention that fee receipts included fee received in advance which ought to be excluded in computing the aggregate. The Tribunal remitted the question to the Assessing Officer to examine whether advance fees were included in the aggregate and to apply the conclusion reached in the disposal of the donations issue in AY 2005-06 when dealing with donations for this year. [Paras 12, 13]Issue remitted to the Assessing Officer to verify inclusion of advance fees in aggregate receipts and to decide afresh; donations to be considered in accordance with the direction in the AY 2005-06 remandComputation of income on commercial principles where exemption is denied - characterisation of donations as corpus fund or revenue - For AY 2007-08, whether (a) on denial of exemption income must be computed by applying commercial principles and (b) whether contributions received were taxable as income - HELD THAT: - The Tribunal upheld the premise that in absence of registration or approval exemption was not available. However, it held that denial of exemption does not permit treating all contributions as taxable revenue without inquiry; where exemption is denied and the trust is assessed as AOP/business, income must be computed in accordance with normal commercial principles allowing appropriate deductions. The Tribunal therefore directed recomputation of income on commercial lines and observed the Assessing Officer must verify and reconcile discrepancies (including the correct quantum of donations as shown in accounts) before making any addition. [Paras 15, 18]Income to be recomputed on commercial principles; Assessing Officer to verify figures and determine whether contributions are capital (corpus) or taxable receipts before giving effect to assessmentFinal Conclusion: All three appeals are allowed for statistical purposes: issues concerning characterisation of donations were remitted for fresh adjudication (with opportunity to the assessee to produce evidence) and the Assessing Officer directed to verify aggregates, advance fees and reconcile accounts; income for the year where exemption is denied is to be computed on commercial principles. Issues Involved:1. Denial of exemption under Section 11 and Section 10(23C) due to lack of registration under Section 12A.2. Treatment of donations and contributions as revenue receipts.3. Computation of income by applying commercial principles.4. Verification of the actual amount of donations received.Detailed Analysis:Issue 1: Denial of Exemption under Section 11 and Section 10(23C)The assessee society, incorporated in September 2002, was engaged in running educational institutions and filed returns for the assessment years 2005-06 to 2007-08. A search and seizure operation led to the discovery that the society had been granted registration under Section 12A only from the financial year 2008-09 onwards. Consequently, exemption under Section 11 was not available for the years under consideration. The assessing officer observed that the income of the trust should be assessed as business income, as no exemption was available for the years in question. The CIT(A) confirmed this view, noting that the assessee did not have the necessary approvals under Section 10(23C)(vi) and Section 12A, making the income taxable.Issue 2: Treatment of Donations and Contributions as Revenue ReceiptsThe assessing officer found that the assessee had received contributions and donations totaling Rs.96,40,000 for the year 2005-06. Since no exemption was allowed, these contributions were treated as income. The assessee contended that these were capital receipts meant for corpus funds or development funds and should not be taxed. However, the CIT(A) noted that no documentary evidence was provided to substantiate this claim. The CIT(A) stated, 'The appellant has not been able to prove that the said contribution received by it are not in the nature of capitation fee collected from students/prospective students or their relatives in the garb of donation.' Consequently, the CIT(A) confirmed the assessing officer's decision to treat these contributions as income.Issue 3: Computation of Income by Applying Commercial PrinciplesThe assessee argued that if exemption was denied, the income should be computed by applying commercial principles, considering revenue receipts and expenditures, and allowing depreciation. The CIT(A) acknowledged this argument for the year 2007-08, directing the assessing officer to re-compute the income accordingly. However, for the years 2005-06 and 2006-07, the CIT(A) did not find merit in this contention and confirmed the assessments made by the assessing officer.Issue 4: Verification of the Actual Amount of Donations ReceivedFor the year 2007-08, the CIT(A) noted discrepancies in the reported donations. While the receipts and payments account showed donations of Rs.27,500, the assessing officer had added Rs.2,75,000 to the income. The CIT(A) directed the assessing officer to verify the correct amount while giving effect to his order. Similarly, for the year 2006-07, the CIT(A) observed that the aggregate annual receipts exceeded Rs.1 crore, making the assessee ineligible for exemption under Section 10(23C)(iiiad). The CIT(A) directed the assessing officer to verify whether fees received in advance were included in the aggregate receipts.Conclusion:The tribunal set aside the orders of the lower authorities on the issue of donations and contributions, directing the assessing officer to give the assessee another opportunity to provide evidence that the donations were meant for the corpus or were not capitation fees. The tribunal also remitted the issue of aggregate receipts exceeding Rs.1 crore for the year 2006-07 to the assessing officer for re-examination. For the year 2007-08, the tribunal upheld the CIT(A)'s direction to re-compute the income by applying commercial principles and verify the actual amount of donations received. All three appeals were treated as allowed for statistical purposes.