2010 (5) TMI 174 - HC - Income Tax

Court affirms capital treatment of donation & TDS, allows loss carry forward.

The court upheld the treatment of donation and TDS debited to the P&L Account as capital receipts exempt from tax based on the principle of mutuality. ... Capital receipt versus revenue receipt – receipt of donation – concept of mutuality – society - the ITAT observed that the donation of Rs. 20,50,000/- being donation and Rs. 1,46,200/- being TDS debited to P&L Account, as capital receipts not liable for tax – Held that: - The doctrine of mutuality has been applied to the assessee Society on the ground that no one can make a profit out of himself. It has been found as a fact that when a number of persons combine together and contribute to a common fund for an object and in that regard they do not have any dealings or relations with anybody outside the body then any surplus remaining to such a body is not to be regarded as a profit. Accordingly, if the participators to the fund are also the contributors and such an identity is established then the test of mutuality is fulfilled - The school is being run by the Society for the children of its members and any surplus remaining of the school attract the principle of mutuality. Any dealing done by the assessee Society or by the school with the non-members would not attract the principle of mutuality - Once the Assessing Officer has excluded Rs. 15,00,000/- received from Punjab Government on account of infrastructure fund donation then it follows that donations received by the assessee Society for development account from other have to be regarded as ‘capital receipt’. Accordingly, the orders passed by the CIT (A) and the Tribunal are not open to challenge Issues:1. Whether the donation and TDS debited to P&L Account are capital receipts not liable for taxRs.2. Whether the Assessing Officer correctly treated the amounts as capital receiptsRs.3. Whether the direction to allow carry forward loss/depreciation for certain assessment years was appropriateRs.Analysis:1. The case involved an appeal by the revenue against a common order passed by the Income Tax Appellate Tribunal regarding the treatment of donation and TDS debited to P&L Account as capital receipts not liable for tax. The society in question provided housing facilities, maintenance services, and ran a school. The Assessing Officer completed assessment, and the CIT(A) partly allowed the appeal, holding some income exempt based on the principle of mutuality and deleting certain additions made by the Assessing Officer. The Tribunal upheld the CIT(A)'s view regarding the donation and TDS, directing them to be treated as capital receipts exempt from tax. The Tribunal also addressed the issue of a transfer fee and one-time payments received for development account, following the principle of mutuality. The Assessing Officer was directed to exclude specific amounts from the income of the society, similar to the treatment of a donation received from the Punjab Government.2. The judges emphasized that the determination of whether an amount is a capital receipt or income receipt is a question of fact. They explained the doctrine of mutuality and its application to the society, noting that any surplus remaining within the society due to contributions from its members is not considered a profit. The society's income from providing facilities to its members and running the school was held exempt based on the principle of mutuality. The judges clarified that any dealings with non-members would not fall under the principle of mutuality.3. Another issue addressed was the direction to allow carry forward loss/depreciation for specific assessment years. The Assessing Officer had already passed an order allowing the losses to be carried forward, and the department representative did not contest this ground seriously. The judges found no substantive question of law to determine and concluded that the orders passed by the CIT(A) and the Tribunal were not open to challenge. They dismissed the appeals, stating that they were without merit.In conclusion, the judgment clarified the treatment of specific receipts as capital receipts exempt from tax based on the principle of mutuality and upheld the direction to allow carry forward loss/depreciation for certain assessment years.