2020 (7) TMI 460 - AT - Income Tax

ITAT & High Court affirm assessee's charitable status & tax exemptions under Income Tax Act

The Assistant Commissioner of Income Tax (Exemption) Circle : 2 (1), New Delhi. Versus New Delhi Young Men’s Christian Association

The Assistant Commissioner of Income Tax (Exemption) Circle : 2 (1), New Delhi. Versus New Delhi Young Men’s Christian Association - TMI Issues Involved:1. Eligibility for exemption under Sections 11 and 12 of the Income Tax Act, 1961.2. Charitable nature of activities under Section 2(15) of the Income Tax Act.3. Applicability of provisions of Sections 13(1)(b) and 13(1)(d) of the Income Tax Act.4. Disallowance of provisions for contingencies, leave encashment, bad and doubtful debts, and gratuity.Detailed Analysis:1. Eligibility for Exemption under Sections 11 and 12:The primary issue in this case was whether the assessee, a registered society, was eligible for exemption under Sections 11 and 12 of the Income Tax Act, 1961. The Assessing Officer (AO) denied this exemption, arguing that the assessee's activities were not charitable and were hit by the proviso to Section 2(15) of the Act. The AO also cited violations of Sections 13(1)(b) and 13(1)(d) as reasons for denial.The Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) both found in favor of the assessee. The CIT(A) noted that the assessee's activities had remained consistent with its objectives and past practices, which had previously been deemed charitable. The ITAT upheld this view, citing the absence of any material change in the objectives or activities of the assessee that would warrant a different conclusion. The ITAT also referenced past decisions in the assessee's favor for similar issues, reinforcing the consistency of the charitable status.2. Charitable Nature of Activities under Section 2(15):The AO argued that the assessee's activities were commercial in nature, particularly pointing to the running of educational courses, some of which were unrecognized, and the provision of hostel services. The AO contended that these activities were profit-driven and thus not charitable.The CIT(A) and ITAT disagreed, stating that the educational courses, even if unrecognized, were still educational and aligned with the assessee's charitable objectives. The provision of hostel services was also deemed aligned with the educational activities and not for commercial purposes. The ITAT emphasized that the mere generation of surplus from these activities did not negate their charitable nature, as long as the surplus was redeployed for charitable purposes.3. Applicability of Sections 13(1)(b) and 13(1)(d):The AO claimed that the assessee was promoting a particular religion, thus violating Section 13(1)(b), and that its properties were controlled by another trust, violating Section 13(1)(d).The CIT(A) and ITAT found no evidence to support these claims. They noted that the AO had not provided specific material to indicate any such violations. The ITAT reiterated that past assessments had consistently recognized the charitable status of the assessee without any such violations being identified.4. Disallowance of Provisions:The AO disallowed provisions for contingencies, leave encashment, bad and doubtful debts, and gratuity, arguing that these were unascertained liabilities.The CIT(A) and ITAT, referencing the decision of the Delhi High Court in the case of DIT (E) vs. NASSCOM, held that these provisions were bona fide and should be deducted when computing income on commercial principles. The ITAT emphasized that reasonable provisions made for potential losses or outgoings could be deducted from income, aligning with commercial accounting principles.Conclusion:The ITAT dismissed the appeal of the Revenue, upholding the CIT(A)'s decision to allow the assessee's exemption under Sections 11 and 12. The ITAT confirmed that the assessee's activities were charitable and not hit by the proviso to Section 2(15). The disallowances made by the AO were also overturned, with the ITAT directing that the provisions should be deducted in line with commercial principles. The findings were consistent with past decisions and upheld by the High Court, reinforcing the assessee's charitable status and eligibility for exemptions.