Organization denied section 11 exemption as 2019 registration cannot provide retrospective benefit for 2012-13 assessment

ITAT Kolkata denied exemption u/s. 11 to an assessee organization engaged in infrastructure development for government. The tribunal held that registration u/s. 12A applied in 2019 could not grant retrospective benefit for AY 2012-13 as assessment was already completed and the relevant proviso to section 12(2) was omitted w.e.f. 01.04.2023. Infrastructure expenditure was correctly treated as capital in nature, though maintenance costs remain revenue expenditure. The tribunal directed the assessee to rectify accounting treatment of government grants wrongly recorded as loans with notional interest. Revenue's appeal was partly allowed.

---

---

Issues Involved:

1. Treatment of government grants as income.
2. Applicability of exemption under sections 11/12 of the Income Tax Act, 1961.
3. Reliance on a precedent case by the Ld. CIT(A).
4. Classification of project expenses and interest on loan as capital or revenue in nature.

Detailed Analysis:

1. Treatment of Government Grants as Income:

The primary issue is whether the grants received from the government should be considered as income. The assessee, a statutory corporation, argued that it receives grants for specific infrastructure projects, which are then handed over to the government, and any surplus is refunded. The Assessing Officer (AO) treated these grants as income, while the Ld. CIT(A) ruled in favor of the assessee, stating that the organization operates on a no-profit-no-loss basis as an instrument of the government. However, the Tribunal disagreed with the Ld. CIT(A), concluding that the assessee's model, which includes collecting toll charges, constitutes a business model. Therefore, the grants should be considered income, as the organization is authorized to generate its own income through toll collection.

2. Applicability of Exemption under Sections 11/12:

The assessee sought exemption under sections 11/12, arguing that it was registered as a charitable organization under section 12A in 2019, and the appeal for AY 2012-13 was pending at the time of registration. The Tribunal noted that the proviso to section 12(2), which allowed such retrospective benefits, was omitted effective 01.04.2023. Moreover, the assessment proceedings for AY 2012-13 were not pending before the AO at the time of registration. Hence, the exemption under sections 11/12 was not applicable for AY 2012-13.

3. Reliance on a Precedent Case:

The Ld. CIT(A) relied on a decision from the Hon'ble High Court of Punjab and Haryana. The Tribunal found this reliance inappropriate, as the facts of the precedent case were distinguishable from the current case. The Tribunal emphasized that the assessee's activities and authority to collect toll charges signify a commercial activity, contrasting with the precedent case.

4. Classification of Project Expenses and Interest on Loan:

The AO classified the project expenses and interest on loan as capital in nature. The Tribunal upheld this classification, stating that infrastructure creation expenses are capital, while maintenance expenses are revenue. The Tribunal also addressed the issue of notional interest on the initial grant treated as a loan, advising the assessee to rectify its accounts to reflect the true nature of the transactions. The Tribunal allowed the assessee to claim depreciation on infrastructure assets as per law.

In conclusion, the Tribunal partly allowed the revenue's appeals for both AY 2012-13 and AY 2013-14, affirming the treatment of grants as income and the capital nature of project expenses, while denying the applicability of section 12A exemption for the assessment years in question.

---