2013 (6) TMI 682 - AT - Income Tax

Investment by the assessee-society - whether investment is not according to section 11(5) and had violated the provisions of section 13(1)(d)? - Held that - The reasoning given by the Assessing Officer is not correct inasmuch as the advances given by the assessee towards implementation of its project have to be treated as application of income and not as an investment out of the grant received by the assessee. The word applied need not necessarily imply spent . Even if an amount is irretrievably earmarked and allocated for the charitable or religious purpose or purposes, it may be said to have been applied to the said purposes. (CIT v. Radhaswami Satsang Sabha 1953 (10) TMI 36 - ALLAHABAD HIGH COURT . Therefore, the Assessing Officer was wrong in observing that the application of funds by the assessee was not according to section 11(5) and the advance was not utilisation of the funds. Further, the Assessing Officer held that purchase of land at Silchar for ₹ 11,25,297 was in violation to section 11(5) as property purchased was in the name of Department of Heavy Industry and not in the name of the assessee. Considering the terms of the grant, this objection is not sustainable. Therefore, the purchase of land is also to be considered as application of income. Accordingly, there was no violation of section 11(5). Therefore, the very premise on which the Assessing Officer had proceeded, was wrong and the same cannot be sustained. Further the grant received was on capital account and not a recurring grant towards revenue expenses. Hence it could not be taken to income and expenditure account as per Accounting Standards 12 issued by the Institute of Chartered Accountants of India. Therefore, the learned Commissioner of Income-tax (Appeals) rightly held that the project grant was neither income nor corpus of the assessee-society. As far as interest on fixed deposit receipt is concerned the same related to the unutilised project grant on which the Government had overriding title. Further, this interest was also at par with the grant received from the Government of India and, therefore, the same reasoning would apply to the interest on fixed deposit receipt as to the grant. Therefore, interest on fixed deposit receipt amounting to ₹ 2,20,21,847 could not be treated as income of society - Decided in favour of assesse.

Summary

Issues Involved:
1. Compliance with Section 11(5) of the Income-tax Act.
2. Violation of Section 13(1)(d) of the Income-tax Act.
3. Treatment of project grants and interest on fixed deposits as income.

Detailed Analysis:

Compliance with Section 11(5) of the Income-tax Act:
The Assessing Officer (AO) observed that the assessee had given advances amounting to Rs. 59.63 crores for land purchase and facility upgrades, which were not in accordance with Section 11(5). The AO also noted that the assessee purchased land in the name of the Department of Heavy Industries, which was not compliant with Section 11(5). However, the Commissioner of Income-tax (Appeals) (CIT(A)) and the Tribunal found that these advances should be treated as application of income rather than investments. The Tribunal held that the term "applied" does not necessarily mean "spent" and can include amounts earmarked for charitable purposes. Therefore, the advances and land purchase were considered as application of income, not violating Section 11(5).

Violation of Section 13(1)(d) of the Income-tax Act:
The AO argued that the advances given were not in accordance with Section 11(5) and thus violated Section 13(1)(d). The CIT(A) and the Tribunal disagreed, stating that the advances were for project implementation and should be considered as application of income. The Tribunal also noted that the terms of the grant allowed such expenditures, and thus there was no violation of Section 13(1)(d).

Treatment of Project Grants and Interest on Fixed Deposits as Income:
The AO included the project grant and interest on fixed deposits as income, determining the assessee's income at Rs. 3,99,85,170. The CIT(A) and Tribunal found that the project grant was neither income nor corpus of the assessee-society. The interest on fixed deposits, earned from unutilized project grants, was also not considered income since it had to be refunded to the Government of India or adjusted against the grant. The Tribunal emphasized that the interest had an overriding title by the Government, and thus, could not be treated as the assessee's income.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, dismissing the Department's appeal and the assessee's cross-objection as infructuous. The Tribunal concluded that the advances and land purchases were applications of income, not investments, and that the project grants and interest on fixed deposits were not the income of the assessee-society. The order was pronounced on June 28, 2013.