Chit fund contributions not taxable under Income Tax Act; Cancer hospital eligible for exemption

The Tribunal held that contributions to a chit fund did not violate section 11(5) of the Income Tax Act, and the assessee, a registered society running a cancer hospital, was eligible for exemption under section 11 as it applied its entire income for charitable purposes. The Tribunal did not adjudicate on the claim for depreciation on assets since the main ground was allowed. The appeal was partly allowed in favor of the assessee, with the order pronounced on 31.07.2015.

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Issues Involved:
1. Whether the transactions with Kapil Chit Funds violate the provisions of section 11(5) of the I.T. Act.
2. Whether the assessee is entitled to claim exemption under section 11 of the I.T. Act.
3. Whether the assessee is entitled to depreciation on assets used in deriving income when exemption under section 11 is denied.

Issue-Wise Detailed Analysis:

1. Violation of Section 11(5) by Transactions with Kapil Chit Funds:
The primary issue revolves around whether the contributions to Kapil Chit Funds by the assessee violate section 11(5) of the I.T. Act, thereby making the assessee ineligible for exemption under section 11. The Assessing Officer (AO) contended that the investment in the Chit Fund Company violated section 11(5), which specifies permissible forms and modes of investment for charitable trusts. The AO denied the exemption under section 11 based on this violation. However, the assessee argued that the contributions were not investments but were made for better management of funds and did not constitute a deposit or investment as contemplated under section 11(5). The Tribunal examined the provisions of sections 11(2) and 11(5) and concluded that these sections apply only when there is an accumulation or setting apart of income. Since the assessee had no surplus funds and had applied its entire income towards its charitable objectives, there was no requirement to invest in the modes specified under section 11(5). The Tribunal held that contributions to a chit fund, governed by the principles of mutuality, do not amount to investments or deposits as defined under section 11(5).

2. Eligibility for Exemption under Section 11:
The Tribunal found that the assessee, a society registered under section 12AA and running a cancer hospital, had applied its entire income towards its charitable purposes, resulting in a deficit. The Tribunal noted that the assessee had obtained approval under section 10(23C) belatedly from the assessment year 2007-08 onwards. The Tribunal held that since the entire income was applied for charitable purposes and there was no surplus, the provisions of section 11(5) did not apply. Consequently, the assessee was eligible for exemption under section 11, as there was no violation of section 11(5).

3. Entitlement to Depreciation on Assets:
The assessee raised an additional ground seeking depreciation on assets used in deriving income if exemption under section 11 was denied. However, since the Tribunal allowed the main ground and concluded that the assessee was eligible for exemption under section 11, the additional ground became academic and was not adjudicated.

Conclusion:
The Tribunal concluded that the contributions to the chit fund did not violate section 11(5) and the assessee was eligible for exemption under section 11. The appeal was partly allowed in favor of the assessee. The additional ground regarding depreciation was not adjudicated as it became academic.

Order Pronounced:
The appeal of the assessee was partly allowed, and the order was pronounced in the open Court on 31.07.2015.

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