2011 (10) TMI 79 - HC - Income Tax

Conditions of section 11 or 12 - A society formed by Government of Haryana - Grant received from the Government - Amount spend on administrative & office expenses - Held that - the grants received by the assessee should not be considered either as income or for ascertaining the amount expanded or amount to be accumulated. Provisions of Section 11 and 12 of the Act are not applicable for grants received by the assessee under the Schemes - even if the amount is not disbursed due to imposition of model code of conduct by the Election Commission, the surplus at the end of the year cannot be included as income under Sections 11 and 12 of the Act. - Revenue vehemently argued that the Society itself has reflected the grants received from Central and State Governments as income. Therefore, it is not open to the assessee to take a stand that such grants are not the income. The said aspect has been considered by the Tribunal, wherein, it has been held that reflection in the profit and loss account towards the income is not determinative. The entries in the books of account do not decide the nature of receipts. Since, the grants have been received by the assessee for disbursement and keeping in view the fact that the same cannot be utilized for any other purpose such as distribution for the poverty in furtherance to the object of the Schemes, it cannot be treated as income of the assessee. - Decided in favor of assessee.

Summary

Issues:
1. Interpretation of Sections 11 and 12 of the Income Tax Act, 1961 regarding the tax treatment of grants received by a society formed by the Government for poverty eradication programs.
2. Determination of whether grants received by the society should be considered as income for the purpose of taxation.
3. Assessment of the nature of surplus funds remaining unspent at the end of the financial year.
4. Examination of the treatment of bank interest earned on funds kept in separate accounts.

Analysis:
The High Court judgment involved a dispute regarding the tax treatment of grants received by a society formed by the Government for poverty eradication programs. The Assessing Officer had assessed the income of the society and concluded that the essential conditions of Sections 11 and 12 of the Income Tax Act, 1961 were not fulfilled. The Commissioner of Income Tax (Appeals) granted some relief to the society but upheld that the gross amount received from the Central and State Governments should be considered as income. However, the Tribunal held that the grants received by the society should not be considered as income under Sections 11 and 12 of the Act. The Tribunal emphasized that the society acted as a nodal agency for distributing grants to district authorities and had no discretion to utilize the funds for its own purposes. It further noted that any unutilized funds at the end of a scheme had to be refunded to the Government. The Tribunal also clarified that the grants did not form part of the society's income or corpus and were not donations under the Act.

Regarding the surplus funds remaining unspent at the end of the financial year, the Tribunal ruled that if the grants were not includable as income, the surplus funds were not relevant for taxation under Sections 11 and 12. The Tribunal also addressed the treatment of bank interest earned on funds kept in separate accounts, stating that such interest was part of the grants under the respective schemes. The Tribunal set aside the orders of the Assessing Officer and the Commissioner of Income Tax (Appeals) based on these findings.

In the appeal before the High Court, the appellant argued that the society had reflected the grants received as income in its accounts, implying that they should be treated as income for tax purposes. However, the High Court upheld the Tribunal's decision, emphasizing that the mere reflection of grants in the profit and loss account did not determine their nature for tax purposes. The High Court agreed with the Tribunal's finding that since the grants were received for specific purposes and could not be used for other objectives, they should not be considered as income of the society under Sections 11 and 12 of the Act. The High Court concluded that no substantial question of law arose in the case and dismissed the appeal.