2013 (8) TMI 436 - AT - Income Tax

Tribunal rules FD pledge for assets valid, unspent grants not taxable income

The tribunal upheld the appellant's eligibility for exemption under Section 11, ruling that pledging Fixed Deposit Receipts did not violate Section 13, ... Exemption u/s 11 - Withdrawal of Registration u/s 12A - Creation of FDR - Unspent grant received for specific purpose - CIT granted exemption and registration - Held that:- The assessee can be covered only under clause 13(3)(e) only when the persons mentioned in section 13(3)(a) to 13(3)(d) have substantial interest in the society which is not the case here. Ld. Commissioner of Income Tax (Appeals) has also rightly observed that perusal of the auditor report and audited balance sheet it was seen that fact regarding the pledging of FDRs has been mentioned in the Notes to Account attached with balance sheet which are prepared by the assessee only for the purpose of disclosure. This cannot be said to be disqualification of the auditors in the report. In these circumstances, it is apparent that the assessee’s funds have not been parted away as the FDRs were lying intact in the bank, the assessee has received interest thereon and got the maturity proceeds in the next year - therefore, assessee is eligible for exemption u/s 11 of the Act - Decided against Revenue. Unspent grant received for specific purpose - Held that:- Assessee has maintained separate accounts for each project and grant and has given complete details regarding the same in the audited balance sheet itself. The Assessing Officer did not point out any discrepancy in the said details and brought nothing adverse to prove its allegations - Therefore, unspent grant cannot be taxed as voluntary contribution or income u/s 12 of the Act - Decided against Revenue. Issues Involved:1. Denial of exemption under Section 11 due to alleged contravention of Section 13.2. Taxability of unspent grants as income.Issue-wise Detailed Analysis:1. Denial of Exemption under Section 11:The revenue appealed against the orders of the Commissioner of Income Tax (Appeals) for the assessment years 2006-07 and 2007-08, challenging the exemption under Section 11 of the Income Tax Act. The primary grounds were:- The appellant, a registered charitable society under Section 12A, was accused of violating Section 13(1)(c) and 13(2)(a) read with Section 13(3) by pledging Fixed Deposit Receipts (FDRs) as collateral for loans to two societies with some common management committee members.- The auditors had qualified their report, noting this contravention.- The Assessing Officer (AO) argued that the pledging of FDRs without proper authorization and security amounted to an unsecured loan to interested persons, thereby violating the trust's charitable status.The Commissioner of Income Tax (Appeals) found that:- The provisions of Sections 13(1)(c) and 13(2)(a) apply only when the benefit of the trust's income or property goes to persons covered under Section 13(3), which was not the case here as the borrowing societies were not covered under Section 13(3).- The pledging of FDRs was disclosed in the notes to accounts, and the funds remained intact, earning interest and maturing in the subsequent year.- The case cited by the AO (Society for Integrated Development in Urban and Rural Areas vs DCIT) was distinguishable as it involved direct benefit to an individual covered under Section 13(3).The tribunal upheld the Commissioner's findings, confirming that the pledging of FDRs did not constitute an infringement under Section 13, and thus, the appellant was eligible for exemption under Section 11. Consequently, the amount of Rs. 6,96,676/- incurred towards the purchase of fixed assets was also allowed as application of funds for charitable purposes.2. Taxability of Unspent Grants:The AO added Rs. 16,92,50,496/- as income, arguing that unspent grants constituted voluntary contributions taxable in the year of receipt. The grounds for this addition were:- The appellant did not maintain separate books of accounts for each donor agency.- Voluntary contributions are deemed income under Section 2(24)(iia) unless specifically directed to form part of the corpus.The Commissioner of Income Tax (Appeals) found that:- The grants were tied up for specific projects and purposes, monitored by the funding agencies, and subject to strict terms and conditions, including the return of unutilized funds.- The appellant acted as a custodian of these funds, which were not voluntary contributions as per Section 12.- The appellant maintained separate accounts for each project, and the AO did not point out any discrepancies in the details provided.The tribunal upheld the Commissioner's decision, noting that the grants were tied up and not voluntary contributions. The case laws cited (Sukhdeo Charity Estate Vs CIT and Nirmal Agricultural Society Vs ITO) supported the view that tied-up grants for specific purposes do not constitute income. Therefore, the unspent grant could not be taxed as income under Section 12.Conclusion:The tribunal dismissed the revenue's appeals for both assessment years, confirming the appellant's eligibility for exemption under Section 11 and ruling that unspent grants could not be taxed as income. The order was pronounced in the open court on 01/04/2011.