2023 (10) TMI 1416 - AT - Income Tax

Trust loses Section 11 exemption as General Public Utility exceeds gross receipts limits under Section 2(15) proviso

M/s. Ramsahaimal Sahuwala & Sons Charitable Trust Versus The ACIT Central Circle-2 (3), Chennai. And The ITO Exemptions Ward-4, Chennai.

ITAT Chennai denied exemption under Section 11 to a Trust with composite objects, ruling it was a General Public Utility (GPU) Trust with gross receipts ... Denial of Exemption u/s 11 - appellant Trust is having composite object and not a Trust with the sole object of advancement of General Public utility - HELD THAT:- The objects and activities of the Trust are GPU in nature and thus, proviso to Sec.2(15) of the Act is applicable for the assessee’s Trust. Since, the assessee is a GPU Trust and gross receipts from said activities is in excess of prescribed limit provided under proviso of Sec 2(15) for these assessment years, in our considered view, the AO has rightly rejected exemption u/s.11 of the Act, for these assessment years. CIT(A) after considering relevant facts rightly upheld the reasons given by the AO to reject exemption u/s.11 and thus, we are inclined to uphold the findings of the Ld.CIT(A) and reject the ground taken by the assessee for all assessment years. Additions towards depreciation on fixed assets - Since, the assessee’s Trust has been denied exemption u/s.11 of the Act, income of the Trust needs to be computed under normal commercial accounting principles and further, depreciation, if any, needs to be allowed as per the provisions of the Act. Further, before amendment, depreciation is an allowable deduction even if the cost of asset acquired during the relevant previous year, has been allowed as application of income u/s.11 of the Act. Therefore, we are of the considered view that the AO needs to verify these facts and consider the issue of allowability of depreciation in accordance with law. We find that an identical issue has been considered by the decision of co-ordinate Bench in the case of Veeravel Trust [2021 (7) TMI 1084 - ITAT CHENNAI] wherein, the issue has been considered in light of provisions of Sec.11, 12 & 12A of the Act, and after considering relevant facts and also by following the decision of M/s. U.P. Forest Corporation & Anr. [2007 (11) TMI 303 - SUPREME COURT] held that voluntary contribution received by a Trust with a specific direction that forming part of corpus of the Trust is income of the trust, when the Trust is not entitled for exemption u/s.11 of the Act. As in the case of Veeravel Trust [2021 (7) TMI 1084 - ITAT CHENNAI] we are of the considered view that ‘corpus donations’ received by the assessee’s Trust would fall under the definition of income and includable in the total income of the Trust. In so far as case relied upon by the counsel for the assessee, although ITAT Mumbai has taken view and held that corpus donation is capital receipt and not taxable, but fact remains that the ITAT Chennai Bench after considering ITAT Mumbai bench decision has taken a view and held that corpus donation is income when section 11 benefit is not applicable, we prefer to follow jurisdictional ITAT decision and thus, we are inclined to uphold the findings of the AO and the CIT(A) and reject the ground taken by the assessee for these assessment years. Additions towards donations paid - assessee has claimed exemption towards donations paid to other Trust as application of income u/s.11 of the Act - AO has denied exemption u/s.11 and taxed excess of income over expenditure, he has disallowed donation paid for charitable purpose on the ground that said expenditure has not been incurred for earning income - HELD THAT:- Since, the AO has denied exemption u/s.11 of the Act, and computed income as per provisions of Sec.2(15) of the Act, and proviso provided therein, in commercial lines after denying exemption, any expenditure incurred towards earning of income including donations, if any, paid in the course of carrying on activities needs, to be allowed as deduction. Since, the assessee has incurred expenditure in the course of carrying out its trade or commerce, the AO is directed to delete additions made towards disallowance of donations for both assessment years. Additions towards accumulation of income u/s.11(2) - HELD THAT:- AO has made additions towards accumulation of income for AY 2016-17 u/s.11(2). Since, the AO has rejected exemption u/s.11 of the Act and taxed excess of income over expenditure as per income and expenditure account for relevant assessment year, in our considered view, accumulation of income u/s.11(2) of the Act, by filing form No.10 and set off of said income to subsequent years to be applied for charitable purpose becomes academic in nature. Denial of benefit of exemption u/s.11 in accordance with provisions of Sec.2(15) - In addition to taxation of excess of income over expenditure, the AO has disallowed expenses incurred for maintaining Kulod Bhawan on the ground that said expenditure is in the nature of personal expenses. Since, the assessee’s Trust is maintaining Kulod Bhawan exclusively for the benefit of Sahuwala family members, said expenditure cannot be considered as expenditure incurred wholly and exclusively for the purpose of earning of income and further said expenditure is in the nature of personal expenses. Therefore, we are of the considered view that there is no error in the reasons given by the AO and the CIT(A) to disallow expenses incurred for maintaining Kulod Bhawan for both assessment years and thus, we are inclined to uphold the findings of the CIT(A) and reject the ground taken by the assessee. Issues Involved:1. Reopening of Assessment2. Denial of Exemption u/s 113. Provision of Section 13(1)(c) not invocable4. Denial of Depreciation5. Assessment of Corpus Donations as Income6. Additions towards Donations Paid7. Additions towards Accumulation of Income u/s 11(2)8. Validity of Re-opening of Assessment9. Additions towards Disallowance of Expenses for Maintaining Kulod BhawanIssue-wise Detailed Analysis:1. Reopening of Assessment:The assessee challenged the reopening of assessments for AYs 2013-14 to 2015-16, arguing it was a change of opinion. The CIT(A) upheld the reopening, stating the AO formed a reasonable belief of income escapement based on tangible materials discovered during a survey. The Tribunal dismissed the grounds challenging the validity of reopening as withdrawn.2. Denial of Exemption u/s 11:The AO denied exemption u/s 11, arguing the Trust's activities predominantly involved running Kalyan Mandapams on commercial lines, falling under 'General Public Utility' (GPU) and thus hit by the proviso to Sec. 2(15). The CIT(A) and Tribunal upheld this, noting the Trust's activities were commercial in nature, and the receipts exceeded the specified limit, disqualifying it from exemption. The Tribunal referenced the Supreme Court decision in ACIT (Exemptions) v. Ahmadabad Urban Development Authority to support this conclusion.3. Provision of Section 13(1)(c) not invocable:The AO cited violations of Sec. 13(1)(c), alleging Trust funds were used for the trustees' benefit, evidenced by payments for printing a family directory and a Diwali get-together. The Tribunal found these observations unsubstantiated, stating such expenses did not per se amount to diversion of funds for trustees' benefit and rejected the AO's findings on this issue.4. Denial of Depreciation:The AO disallowed depreciation on fixed assets, arguing it amounted to double deduction since the cost was already allowed as application of income. The Tribunal directed the AO to verify facts and consider depreciation allowance under normal commercial principles, as the Trust was denied exemption u/s 11.5. Assessment of Corpus Donations as Income:The AO treated corpus donations as income, arguing they fall within the income definition when Sec. 11 exemption is denied. The Tribunal upheld this, referencing the ITAT Chennai decision in Veeravel Trust and the Supreme Court ruling in M/s. U.P. Forest Corporation & Anr. v. DCIT, which stated corpus donations are includable in income if Sec. 11 benefits are not applicable.6. Additions towards Donations Paid:The AO disallowed donations paid to other Trusts, stating they were not incurred for earning income. The Tribunal directed the AO to allow such donations as deductions if incurred in the course of carrying out trade or commerce activities, as the Trust was denied exemption u/s 11.7. Additions towards Accumulation of Income u/s 11(2):The AO added accumulated income for AYs 2015-16 and 2016-17, arguing it became academic since exemption u/s 11 was denied. The Tribunal directed the AO to delete these additions, as the income was taxed under normal provisions.8. Validity of Re-opening of Assessment:The Tribunal dismissed the grounds challenging the validity of reopening of assessments as withdrawn by the assessee.9. Additions towards Disallowance of Expenses for Maintaining Kulod Bhawan:The AO disallowed expenses for maintaining Kulod Bhawan, arguing they were personal expenses for the Sahuwala family. The Tribunal upheld this, agreeing the expenses were not incurred wholly and exclusively for earning income and were personal in nature.Conclusion:The Tribunal partly allowed the appeals for statistical purposes, upholding the denial of exemption u/s 11, the inclusion of corpus donations in income, and the disallowance of expenses for Kulod Bhawan, while directing the AO to reconsider depreciation and donations paid under normal provisions.