2010 (3) TMI 2 - AT - Income Tax

Tribunal rules in favor of assessee on tax issues, allowing deductions and treating income for charitable purposes.

The Tribunal ruled in favor of the assessee on all issues. Taxes paid under VDIS were treated as application of income under Section 11. Expenditure ... Exemption claimed u/s 11 - Charitable activities - payment of taxes under VDIS - Assessee has substantially challenged the action of the CIT(A) in not treating the taxes paid in respect of the VDIS application as application of income for the purpose of s. 11 and the action of the CIT(A) in upholding the action of the AO in treating the expenditure incurred on events and activities outside India has not eligible to be treated as application of income for charitable purpose u/s. 11 - the assessee did not have the registration u/s. 12A for the asst. yrs. 1989-90 to 1997-98 and the assessee had registration u/s. 12A only for the asst. yr. 1998-99. HELD THAT:- The expenditure incurred by way of the payment of taxes out of the current year income has to be considered as applicable for charitable purposes. Because the payment is made to protect the existence in which it is absolutely necessary for the continuance of the trust. In these circumstances, respectfully following the decision in the case of Janaki Ammal Ayya Nadar Trust [1982 (8) TMI 4 - MADRAS HIGH COURT] and the decision of Hon'ble High Court in the case of Nizam's Supplemental Religious Endowment Trust [1978 (2) TMI 7 - ANDHRA PRADESH HIGH COURT], the AO is directed to treat the payment of taxes under VDIS, as made by the assessee, to be application of income u/s 11. In these circumstances, the findings of the learned CIT(A) and the AO on this issue stand reversed and ground Nos. 2 and 2.1 of the assessee's appeal stand accepted. Expenditure on the earning from activities outside India - Whether not eligible to be treated as application of income for charitable purpose under s. 11? - HELD THAT:- Assessee is registered u/s 12A as a charitable institution. A perusal of the provisions of s. 11 (1)(a) clearly shows that the words used are 'is applied to such purpose in India'. The words are not 'is applied in India'. The fact that the legislature has put the words 'to such purpose' between 'is applied' and 'in India' shows that the application of income need not be in India, but the application should result and should be for the purpose of charitable and religious purpose in India. In these circumstances, we are of the view that the expenditure incurred by the assessee in Hanover, Germany for the purpose of attaining the objects of the assessee in India is eligible to be treated as application u/s 11. In these circumstances, the findings of the learned CIT(A) on the issue stand reversed and consequently, ground Nos. 3 and 3.1 of the assessee's appeal stand accepted. Income not taxable u/s 28(3) - corpus donations - HELD THAT:- A perusal of the facts in the present assessee's case shows that the memorandum of association of the assessee itself clearly holds that the one-time admission fee is to be used only for acquiring capital assets. Thus, when a member makes a payment of one-time admission fee, it is clearly understood by the member that he is making the payment as a donation for the acquisition of a capital asset. Further, even otherwise, the assessee duly enjoyed the benefit of registration under s. 12A of the Act. As long as the assessee is holding registration under s. 12A the assessee is deemed to be a charitable organization Once it is found that the assessee is a charitable organization and it is also found that the members who have paid one-time subscription fee are also well aware that the amount can be spent by the assessee only for the purpose of acquiring capital asset, the one-time subscription fee received by the assessee from the members would have to be held to be a donation to the corpus of the assessee and corpus donations are not liable to be treated as income of the assessee, as per the provisions of s. 11(1)(d). In these circumstances, the findings of ld CIT(A) on this issue are found to be well versed and the same are upheld. Disallowance for doubtful debts - As per AO as no outflow of cash and consequently, no deduction would be allowed on the said amount - HELD THAT:- A similar disallowance had been made for the asst. yr. 2003-04, which has been deleted by the CIT(A) on the ground that since exemption u/s11 has been directed to be allowed to the assessee, the ground becomes academic and is infructuous. However, for the asst. yr. 2004-05, which is the year under appeal, CIT(A) has deleted the disallowance on the ground that the AO has made disallowance without any cogent reason and consequently exemption was granted u/s 11 and consequently the income of the assessee would be completely exempted. Therefore, the issue as raised by the revenue in this appeal becomes infructuous and academic in nature and consequently, the same is dismissed as infructuous. Issues Involved:1. Treatment of taxes paid under VDIS as application of income under Section 11.2. Eligibility of expenditure incurred on activities outside India as application of income for charitable purposes under Section 11.3. Taxability of subscription income under Section 28(3) and eligibility for exemption under Section 11.4. Treatment of donations as corpus donations.5. Allowance of provision for doubtful debts.Detailed Analysis:Treatment of Taxes Paid under VDIS as Application of Income under Section 11:The assessee argued that taxes paid under the Voluntary Disclosure of Income Scheme (VDIS) should be treated as application of income for charitable purposes under Section 11. The assessee cited several High Court rulings, including CIT vs. Janaki Ammal Ayya Nadar Trust (Madras High Court) and CIT vs. Trustee of H.E.H. The Nizam's Supplemental Religious Endowment Trust (Andhra Pradesh High Court), to support this claim. The Tribunal agreed with the assessee, stating that the payment of taxes is necessary to preserve the property and ensure the continuation of the trust. Therefore, the AO was directed to treat the payment of taxes under VDIS as application of income under Section 11.Eligibility of Expenditure Incurred on Activities Outside India:The assessee contended that expenditure incurred on activities outside India should be considered as application of income for charitable purposes under Section 11. The Tribunal noted that the phrase 'is applied to such purpose in India' in Section 11(1)(a) does not restrict the expenditure to be incurred within India, but rather the purpose of the expenditure should benefit charitable activities in India. The Tribunal referred to the case of Gem & Jewellery Export Promotion Council vs. ITO (Mumbai ITAT) to support this interpretation. Consequently, the Tribunal held that the expenditure incurred by the assessee in Hanover, Germany, for promoting Indian software was eligible to be treated as application of income under Section 11.Taxability of Subscription Income under Section 28(3):The Revenue challenged the CIT(A)'s decision to treat the subscription income as not taxable under Section 28(3) and eligible for exemption under Section 11. The assessee argued that the one-time non-refundable admission fee was a contribution towards the corpus, not taxable as income under Section 11(1)(d). The Tribunal upheld the CIT(A)'s decision, citing that the memorandum of association specified the use of the admission fee for capital purposes, thus qualifying it as a corpus donation.Treatment of Donations as Corpus Donations:The Tribunal upheld the CIT(A)'s finding that the one-time admission fee paid by members was to be used for acquiring capital assets, making it a corpus donation. The Tribunal referenced the cases of CIT vs. Sthanakvasi Vardhman Vanik Jain Sangh (Gujarat High Court) and CIT vs. Vanchi Trust (Kerala High Court) to support this conclusion. Therefore, the one-time admission fee was not treated as taxable income.Allowance of Provision for Doubtful Debts:The assessee claimed a deduction for the provision for doubtful debts, which the AO disallowed due to the lack of cash outflow. The CIT(A) had previously allowed similar deductions for earlier assessment years without Revenue's appeal. The Tribunal noted that the income of a trust claiming exemption under Section 11 should be determined on commercial principles, including all outgoing expenses. Citing Ganga Charity Trust Fund (Gujarat High Court), the Tribunal upheld the CIT(A)'s decision to allow the provision for doubtful debts, rendering the Revenue's appeal on this issue academic and infructuous.Conclusion:The Tribunal allowed the assessee's appeals and dismissed the Revenue's appeals, thereby resolving all issues in favor of the assessee.