2018 (8) TMI 1245 - AT - Income Tax

Appeal partially allowed: corpus fund not taxable, expenses disallowed, rectification upheld. No consequential directions.

Bank of India Retired Employees Medical Assistance Trust Versus ITO (E) -1 (1), Mumbai

Bank of India Retired Employees Medical Assistance Trust Versus ITO (E) -1 (1), Mumbai - TMI Issues Involved:1. Taxability of Corpus Fund received by the Trust.2. Applicability of Doctrine of Mutuality.3. Allowability of Expenses under Section 57(iii).4. Addition of Interest Income.5. Direction for Consequential Effect in case of Restoration of Registration under Section 12A.Issue-wise Detailed Analysis:1. Taxability of Corpus Fund received by the Trust:The primary issue revolves around the taxability of Rs. 2,30,00,000 received by the assessee trust from Bank of India towards the corpus fund. The trust, not being registered under Section 12A, was denied exemption under Section 11(1)(d) by the Assessing Officer (A.O). The A.O contended that every contribution received by a trust is to be taken as its income under Section 2(24)(iia). However, the tribunal observed that the amount received towards the corpus fund is in the nature of a capital receipt and thus not taxable as income, even if the trust is not registered under Section 12A. This view was supported by various judicial pronouncements, including the Hon’ble High Court of Delhi in DIT (Exemption) Vs. Smt. Basanti Devi and Shri Chakhan Lal Garg Education Trust.2. Applicability of Doctrine of Mutuality:The A.O accepted that the membership fees received from members amounting to Rs. 3,47,82,601 were covered by the doctrine of mutuality and thus not taxable. However, the A.O did not extend this doctrine to the corpus fund received from Bank of India, which was treated as taxable income. The tribunal upheld the A.O’s view that the trust was not a charitable trust but a mutual association, and hence, the doctrine of mutuality did not apply to the corpus fund.3. Allowability of Expenses under Section 57(iii):The assessee claimed deductions for expenses incurred for the objects and administration of the trust, including demat charges, legal expenses, and medical relief expenses. The A.O and CIT(A) disallowed these expenses on the grounds that they were not incurred wholly and exclusively for the purpose of earning interest income. The tribunal upheld this view, citing the necessity of an inextricable nexus between the expenditure and the income earned for it to be deductible under Section 57(iii).4. Addition of Interest Income:The assessee contended that the A.O had erroneously added an excess interest income of Rs. 28,03,868. The CIT(A) directed the A.O to expeditiously dispose of the assessee’s application under Section 154 for rectification of this error. The tribunal found no merit in the assessee’s contention to challenge the CIT(A)’s direction, as the assessee itself had requested such directions.5. Direction for Consequential Effect in case of Restoration of Registration under Section 12A:The assessee requested directions for giving consequential effect in case of restoration of its registration under Section 12A. The tribunal declined to issue such directions in the absence of a specific ground of appeal but clarified that its observations would not preclude giving consequential effects if the registration is restored.Conclusion:The appeal was partly allowed. The tribunal deleted the addition of Rs. 2,30,00,000 received towards the corpus fund from Bank of India, recognizing it as a capital receipt not taxable as income. The tribunal upheld the disallowance of expenses claimed under Section 57(iii) and dismissed the ground regarding the addition of interest income due to the procedural direction already provided by the CIT(A). The tribunal also declined to issue directions for consequential effects in case of restoration of registration under Section 12A, emphasizing the absence of a specific ground of appeal.