2019 (6) TMI 139 - AT - Income Tax

Assessee trust appeals allowed for reexamination of expenses & taxable income calculation. Only net income taxed.

Kund Kund Kahan Digamber Jain Versus Mumokshu Ashram Bajaj Palace, Near Paliwal Compound, Kota Versus ITO (E), Kota Chhawani

The appeals filed by the assessee trust were allowed for statistical purposes, with the matter remanded to the Assessing Officer for proper examination of ... Exemption claimed u/s 11 and 12 - taxability of unregistered trust - objects & activities of the trust in AY 2013-14 to 2016-17 remains the same as in the FY 2018-19 when the registration granted u/s 12AA - Charitable activity or not ? - gross receipt taxable or income - HELD THAT:- What can be brought to tax is the net income in the hands of the assessee trust and not the gross receipts. In all these years, we find that while denying the exemption u/s 11 and 12 for want of registration u/s 12AA, AO has brought gross receipts to tax which is against the basic tenets of law where only the real income which is determined after deducting expenses from gross receipts can be brought to tax. We therefore agree with the alternate contention so advanced by the AR and without going into merit of the other contention which is left open, the matter is set-aside to the file of the AO to examine the claim of the expenditure so claimed by the assessee trust against the gross receipts for each of the relevant years and where the AO determines the net receipts as not exceeding the maximum amount not chargeable to tax, allow the necessary relief to the assessee trust. - Appeals filed by assessee trust are allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether the proviso to section 12AA(2) applies where registration under section 12AA is granted with effect from the date of an amended trust deed purportedly made effective from the date of creation of the trust, for preceding assessment years in which exemption was claimed. 2. Whether an amendment to the trust deed inserting a clarificatory proviso (stating objects are not restricted to a particular religion and replacing specific religious references with 'Sarvadharm') constitutes a change in objects such that proviso to section 12AA(2) would not cover earlier years. 3. Whether, where exemption under sections 11/12 is denied for want of registration under section 12AA, the Assessing Officer may tax gross receipts or is limited to taxing only net income (gross receipts less expenditure incurred for charitable objects), and the consequences where net surplus falls below the maximum amount not chargeable to tax. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of proviso to section 12AA(2) when registration is granted effective from amended deed date Legal framework: The proviso to section 12AA(2) operates to allow the benefit of exemption under sections 11/12 for preceding assessment years provided registration is granted and the objects/activities remain the same for those preceding years. Precedent Treatment: No specific judicial precedent was relied upon or applied by the Tribunal in the judgment under review; the Tribunal considered statutory wording and factual matrix. Interpretation and reasoning: The Tribunal noted that an application for registration was earlier rejected and the matter remitted with directions to inquire into whether benefits were confined to a particular community. Following that inquiry, the assessee executed an amendment clarifying that objects are for all religions and replaced references to a specific religion with 'Sarvadharm', and CIT(E) granted registration with effect from the date of the amended deed. The Tribunal examined whether such registration, given based on the amended deed effective from the trust's inception, can be relied upon for earlier assessment years under the proviso. Ratio vs. Obiter: The Tribunal did not finally decide the proviso's applicability on merits; it expressly left the primary contention open and directed limited relief on a separate ground. Thus, detailed statements concerning the application of the proviso in this factual posture are largely obiter, although treated as a live issue in the appeal. Conclusions: The Tribunal refrained from conclusively determining whether the proviso to section 12AA(2) applied to the preceding years in view of the amended deed and registration effective from that amended-deed date, leaving that question open for further consideration. The Tribunal resolved the appeal on an alternate and narrower ground (see Issue 3), thereby permitting the appeals for statistical purposes. Issue 2 - Whether amendment to trust deed was a material change in objects Legal framework: Registration under section 12AA requires that objects/activities of a trust be charitable and not confined to a particular section of the public; a change in objects may affect the retrospective applicability of registration. Precedent Treatment: No specific precedent cited. The Tribunal referenced the fact-finding and direction recorded by the earlier appellate process which required clarification whether benefits were available to public at large. Interpretation and reasoning: The Tribunal recorded that the amendment was styled as clarificatory - inserting a proviso declaring activities not restricted to a particular religion and directing that occurrences of the specific religion be read as 'Sarvadharm' - and that the amendment purported to operate as if present in the original deed (i.e., made effective from date of creation). The Commissioner (Appeals) had held that registration was based on modified objects effective from the amendment date and therefore objects in earlier years differed. The Tribunal did not accept or overturn that factual/legal conclusion on the merits in this order; instead it noted the assessee's position that the amendment merely clarified existing intent and did not effect a substantive change in objects. Ratio vs. Obiter: The Tribunal's discussion on whether the amendment constituted a substantive change is non-decisional in the sense that the Tribunal did not resolve the dispute finally; statements suggesting the amendment was clarificatory are part of the assessee's argument and were noted, but the Tribunal chose to decide the appeal on the alternate ground. Accordingly, characterisation of the amendment as clarificatory remains obiter in this order. Conclusions: The Tribunal left open the question whether the amendment effected a substantive change in objects for the purpose of proviso to section 12AA(2), declining to decide that issue conclusively in these appeals. Issue 3 - Taxability of gross receipts versus net receipts where exemption under sections 11/12 is denied for want of registration Legal framework: Income of a charitable trust, when not entitled to exemption, is assessable under the income-tax law; the measure of taxable income is net income (real income) defined by deducting legitimate expenditures properly attributable to earning the receipts, not gross receipts simpliciter. Precedent Treatment: The Tribunal relied on established tax principles (as reflected in the judgment) that only net income (gross receipts less deductible expenditure) constitutes taxable income; no fresh precedent was invoked or overruled. Interpretation and reasoning: The Tribunal found that despite denial of exemption under sections 11/12 for want of registration, the Assessing Officer had brought gross receipts to tax, which the Tribunal characterized as contrary to the basic tenets of law. The Tribunal reasoned that expenditure incurred directly connected with the donations and charitable objects (evidenced by lists of beneficiaries and expenditure) is deductible in computing net income. The Tribunal therefore set aside the assessments (or orders) to the file of the Assessing Officer with directions to examine and determine the claim of expenditure against gross receipts for each relevant year and compute net receipts. If the net receipts do not exceed the maximum amount not chargeable to tax, relief is to be allowed accordingly. Ratio vs. Obiter: This holding - that only net income, not gross receipts, is taxable even where exemption under sections 11/12 is denied for lack of registration, and that the AO must examine and allow legitimate expenditure against receipts - is the operative ratio of the Tribunal's decision in these appeals. Conclusions: The Tribunal concluded that the Assessing Officer erred in taxing gross receipts without allowing expenditure. The Tribunal set aside the matters to the Assessing Officer to verify and allow deductible expenditure and compute net income; where net receipts fall below the maximum non-chargeable limit, the assessee is entitled to relief. Accordingly, the appeals were allowed for statistical purposes on this ground. Cross-reference: The Tribunal expressly left open the question whether the proviso to section 12AA(2) applied in the circumstances of an amended deed made effective from inception (Issues 1-2) and resolved the appeals on the alternative ground that the Assessing Officer must compute net income after allowing expenditure (Issue 3).