2014 (6) TMI 806 - AT - Income Tax

Tribunal confirms trust's tax exemption for charitable activities, disallowances overturned

The Tribunal upheld the CIT(A)'s decisions, granting the trust exemption under Section 11 of the Income Tax Act. The trust's activities, including temple ... Denial of exemption u/s 11 of the Act – Objectives of Trust - Shortfall in application of income derived from property - Held that:- Following Society of Presentation Sisters Vs. ITO [2009 (9) TMI 75 - ITAT COCHIN] - no distinction is made between charitable and religious purposes in s. 11(1)(a) - a trust which is partly religious and partly charitable is entitled to exemption u/s 11(1)(a) of the Act - even otherwise, maintenance of mosque and church is to be treated as charitable purpose and not purely religious purpose - exemption u/s 11(1)(a) could not be denied to the assessee trusts which exist for various charitable purposes besides maintenance of chapels and mosques, on the ground that they are partly charitable and partly religious trusts, once no case is made out for application of provisions of section 13 – the AO was not correct in denying exemption u/s 11 in assessee’s case and registration granted to assessee u/s 12A is intact - CIT(A) has rightly appreciated the facts and held that the assessee is entitled to exemption u/s 11 – Decided against Revenue. Function hall used for commercial purposes – Held that:- Following CIT vs. Narayana Guruviah Chetty's Estate & Charities [2008 (9) TMI 528 - MADRAS HIGH COURT] - so long as the dominant object is of general public utility and there is no profit motive, it cannot be said that the trust/institution is not established for charitable purpose, even if there is some profit in the activity carried on by the trust/institution – thus, the order of the CIT(A) is upheld – Decided against Revenue. Deletion of corpus donations – Held that:- Following Sukhdeo Charity Estate vs. ITO [1991 (5) TMI 47 - RAJASTHAN High Court] - voluntary contributions received for 'specific purpose' are not assessable as income - even when the assessee had been assessed as AOP and deprived of Section 11 benefits, the AO could assess only net income of the assessee and not gross receipts – thus, the order of the CIT(A) is upheld – Decided against Revenue. Original audit report not consulted – Held that:- The earlier report showed that amount spent on the objects of the trust as NIL - such a mention was made by mistake - CIT(A) has rightly held that the AO has neither shown that the revised report filed was incorrect or that the assessee not applied its income for charitable or religious purposes - thus, the order of the CIT(A) is upheld – Decided against Revenue. Deletion of disallowance of pooja expenses – Held that:- The disallowance will not survive once the assessee’s claim for exemption u/s 11 is allowed - even otherwise, there is no case for the disallowance because once the income from the pooja activity is included, the connected expenditure is to be allowed - the order of the CIT(A) is upheld – Decided against Revenue. Addition u/s 40(a)(ia) of the Act – Held that:- The disallowance will not survive once the assessee's claim for exemption u/s 11 is allowed - even otherwise, the disallowance was made without affording an opportunity to the assessee to rebut the assumption of the AO that the items of expenditure comprised in the amount are liable for disallowance u/s 40(a)(ia). Disallowance out of Administration expenses – Held that:- The disallowance will not survive once the assessee's claim for exemption u/s l1 is allowed - there is no case for separate disallowance because expenditure debited by the assessee is normal administrative expenditure and there is no finding that such expenditure was not incurred or that the same was not vouched etc. – the order of the CIT(A) is upheld – Decided against Revenue. Issues Involved:1. Denial of exemption under Section 11 of the Income Tax Act.2. Commercial use of the function hall.3. Treatment of corpus donations.4. Consideration of the original and revised audit reports.5. Disallowance of pooja expenses.6. Disallowance under Section 40(a)(ia) of the Income Tax Act.7. Disallowance of administrative expenses.Detailed Analysis:1. Denial of Exemption under Section 11 of the Income Tax ActThe AO denied the exemption under Section 11, arguing that the assessee's activities were not charitable as they included the construction of a temple, which is religious in nature. The CIT(A) overturned this decision, stating that the propagation of Jagannadh Dharma is part of the cultural and charitable objectives of the trust. The CIT(A) relied on various judicial decisions, including the case of Society of Presentation Sisters Vs. ITO, which held that a trust can have both charitable and religious purposes and still qualify for exemption under Section 11. The Tribunal upheld the CIT(A)'s decision, affirming that the trust's activities were in line with its charitable objectives and that the registration under Section 12A was intact.2. Commercial Use of the Function HallThe AO argued that the function hall was used for commercial purposes, disqualifying the trust from exemption. The CIT(A) refuted this, stating that any income generated from renting the hall was ancillary and used for the trust's charitable objectives. The CIT(A) cited judicial precedents to support this view. The Tribunal upheld the CIT(A)'s decision, noting that the income from the function hall was used for charitable purposes and did not constitute a separate business requiring separate books of account.3. Treatment of Corpus DonationsThe AO did not accept the assessee's claim that certain donations were corpus donations exempt under Section 12. The CIT(A) found that the donations were received with specific directions for temple construction and were maintained in a separate bank account, thus qualifying as corpus donations. The Tribunal upheld the CIT(A)'s decision, citing judicial precedents that voluntary contributions for specific purposes are not assessable as income.4. Consideration of the Original and Revised Audit ReportsThe AO questioned the reliability of the revised audit report, which showed a significant amount applied for the trust's objectives, contrary to the original report. The CIT(A) accepted the revised report, stating that the AO did not prove it to be incorrect. The Tribunal upheld the CIT(A)'s decision, noting that the revised report accurately reflected the trust's expenditures.5. Disallowance of Pooja ExpensesThe AO disallowed expenses for religious activities, arguing that the trust was not entitled to exemption under Section 11. The CIT(A) restored the exemption and deleted the disallowance. The Tribunal upheld this decision, stating that the disallowance would not survive once the exemption under Section 11 was allowed.6. Disallowance under Section 40(a)(ia) of the Income Tax ActThe AO disallowed certain expenses under Section 40(a)(ia) for non-deduction of tax at source. The CIT(A) deleted the disallowance, as the trust's claim for exemption under Section 11 was allowed. The Tribunal upheld this decision, noting that the AO did not provide details of the disallowance and did not afford the assessee an opportunity to rebut the assumption.7. Disallowance of Administrative ExpensesThe AO made an ad hoc disallowance of 50% of administrative expenses, arguing that the main activity was temple construction. The CIT(A) deleted the disallowance, as the trust's claim for exemption under Section 11 was allowed. The Tribunal upheld this decision, stating that the administrative expenses were normal and properly vouched.ConclusionThe Tribunal dismissed the appeals filed by the Revenue, upholding the CIT(A)'s decisions on all counts. The trust was found to be entitled to exemption under Section 11, and the various disallowances made by the AO were overturned.