2016 (9) TMI 1262 - AT - Income Tax

Exemption u/s 11 denied - charging of fees for carrying activities - Held that - Mere charging of fees for carrying activities will not loose the character of charity and in this case, the department has already granted registration treating the activities as charitable but has not declared under which activity whether under education or general public utility. The assessee has carried on the activities of imparting training to the bottom line employees and there is no element of profit in the said activity as the surplus generated out of the activities is again applied for the charitable activity only. Moreover, the assessee quoted various case laws in support of its claim that they are in the field of education. When analysed closely, all the institutions i.e. Ahmadabad Management Assocation, ICAI, Peter s education society, are educating people more on structured manner and acknowledging by issuing proper certificates. In the present case, we are not sure if such activities are being carried on by the assessee. We are not inclined to adjudicate whether they fall into education activities in the absence of relevant material before us. However, assessee is imparting training to the bottom like employees, which may be similar to education. Hence, in our view, the assessee is involved in carrying on of charitable activities and not in any commercial activities as held by the AO. Thus, AO cannot deny the benefit u/s 11 of the Act. - Decided in favour of assessee Disallowance of 20% of expenditure due to the observation of the AO that assessee had not maintained proper books of account - Held that - From the records, the books of the assessee was audited gives the impression that there exists books of account and we are in agreement with CIT(A) that because of books of account are audited, the AO has also a right to review the books of account. There is no dispute that the books of account was audited since, the assessee has submitted audited financial statement. Since the books are audited, there exists books of account. Considering the above, we find it appropriate to remit this issue back to the file of the AO to verify the books. We direct assessee to submit the books before the AO so that AO can verify the genuineness of the transactions and vouchers. We direct the AO to verify the books as per law and complete the assessment after giving proper opportunity to assessee in this regard instead of resorting to disallow on adhoc basis. Accordingly, ground raised by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Denial of exemption under Section 11 of the Income-tax Act, 1961.
2. Disallowance of 20% of the expenditure claimed.
3. Disallowance of depreciation claimed by the assessee.

Detailed Analysis:

Denial of Exemption under Section 11:
The primary issue was whether the assessee's activities qualified as "charitable" under Section 2(15) of the Income-tax Act, 1961, and thus eligible for exemption under Section 11. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] concluded that the assessee's activities were in the nature of business and commerce, as they charged fees for services rendered, such as training programs, seminars, and sale of publications. The CIT(A) held that the activities did not benefit the general public but were limited to members who paid for the services, thereby denying the exemption under Section 11.

The assessee argued that their activities were educational in nature and fell under the definition of "education" in Section 2(15). They contended that the fees charged were nominal and aimed at covering costs, not generating profit. The assessee relied on various judicial precedents to support their claim, asserting that their activities should be considered charitable even if they involved some commercial aspects, as long as the proceeds were applied towards their objectives.

The Tribunal analyzed the judicial pronouncements and concluded that merely charging fees does not negate the charitable nature of the trust. The Tribunal noted that the assessee's activities involved imparting training and education, which could be considered similar to education. Thus, the Tribunal held that the assessee was engaged in charitable activities and not in commercial activities, allowing the exemption under Section 11.

Disallowance of 20% of the Expenditure Claimed:
The AO disallowed 20% of the revenue expenditure, amounting to ?54,00,245/-, on the grounds that the assessee failed to produce proper books of account and supporting evidence like bills and vouchers. The CIT(A) upheld this disallowance, stating that the assessee was obliged to produce the books of account when called upon to do so.

The Tribunal observed that the assessee's books were audited, indicating the existence of proper records. However, the Tribunal agreed that the AO has the right to review the books of account. The Tribunal remitted the issue back to the AO, directing the assessee to submit the books for verification. The AO was instructed to verify the genuineness of the transactions and vouchers and complete the assessment accordingly, instead of resorting to an ad-hoc disallowance.

Disallowance of Depreciation:
The AO disallowed ?13,35,805/- claimed as depreciation, citing the Supreme Court decision in the case of Escorts Ltd vs. Union of India. However, since the exemption under Section 11 was denied, the AO allowed depreciation on the assets acquired during the current year.

The Tribunal noted that the AO had not disallowed any depreciation in the assessment. Therefore, the Tribunal found this ground inappropriate for adjudication and rejected it.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, granting the exemption under Section 11 and remitting the issue of expenditure disallowance back to the AO for verification. The ground related to depreciation was rejected. The judgment emphasized that charging fees does not necessarily negate the charitable nature of an organization, provided the proceeds are applied towards its charitable objectives.