2010 (2) TMI 753 - AT - Income Tax

Rejection of or Renewal of exemption u/s 80G - Held that - the assessee trust is working for charitable purposes in spite of the fact that the charges are very low as stated above still the assessee-trust showed some surplus because the assessee institution is a very old one and having a long experience in its field. - The observation of the learned CIT-I, Jalandhar regarding engagement of the assessee trust in profiteering rather than in charitable is baseless without any supporting evidence. Therefore, the same is not sustainable in the eye of law. - CIT has not recorded finding of violation of the provisions of Section 80G5(iii) read with Expln. 3 to Section 80G(5C). - Decided in favor of assessee.

Issues Involved:
1. Refusal of renewal of exemption under Section 80G of the IT Act, 1961.
2. Examination of the assessee-trust's income and expenditure.
3. Evaluation of the charitable nature of the trust's activities.
4. Legality of claiming depreciation by the trust.
5. Utilization of funds for charitable purposes.

Issue-wise Detailed Analysis:

1. Refusal of Renewal of Exemption under Section 80G of the IT Act, 1961:
The assessee-trust appealed against the order dated 22nd September 2009 by the CIT-I, Jalandhar, which refused the renewal of exemption under Section 80G for the assessment years 2010-11 to 2014-15. The CIT-I's refusal was based on the observation that the trust was generating substantial surplus/profits systematically, indicating engagement in business rather than charitable activities.

2. Examination of the Assessee-Trust's Income and Expenditure:
The CIT-I, Jalandhar, scrutinized the trust's assessment records and noted that the trust was charging fees for services and had an excess of income over expenditure even after claiming depreciation. This led to the conclusion that the trust was generating surplus income systematically. Additionally, donations were not fully utilized for charitable purposes, further contributing to the surplus.

3. Evaluation of the Charitable Nature of the Trust's Activities:
The CIT-I concluded that the trust appeared to be engaged in profiteering rather than charitable activities as per its objectives. The trust's surplus income and the manner of its utilization were key factors in this determination. However, the assessee's counsel argued that the surplus should not negate the charitable nature of the trust, citing legal precedents that support the view that surplus generation does not necessarily imply non-charitable activities.

4. Legality of Claiming Depreciation by the Trust:
The CIT-I's observation that the trust generated surplus even after claiming depreciation was challenged by the assessee's counsel. The counsel cited the Karnataka High Court's decision in CIT vs. Society of The Sisters of St. Anne, which recognized depreciation as a legitimate expenditure under the law. The Tribunal agreed that depreciation is a necessary outgoing and its claim should not be a basis for denying exemption under Section 80G.

5. Utilization of Funds for Charitable Purposes:
The assessee's counsel provided detailed records showing the application of funds for charitable purposes, including capital expenditure. The Tribunal noted that the funds were almost fully utilized for charitable activities, and capital expenditure should be considered as an application of income. The Tribunal referenced the Gujarat High Court's decision in Satya Vijay Patel Hindu Dharamshala Trust vs. CIT and the Supreme Court's decision in S.RM.M.CT.M. Tiruppani Trust vs. CIT, which support the inclusion of capital expenditure as an application of income for charitable purposes.

Conclusion:
The Tribunal found that the CIT-I, Jalandhar, did not appreciate the facts and legal precedents adequately. The trust's surplus was not a valid reason to deny the exemption under Section 80G, especially when the funds were utilized for charitable purposes. The Tribunal concluded that the trust's activities were charitable, and the surplus generation was within legal expectations. Consequently, the Tribunal canceled the CIT-I's order and directed the renewal of exemption under Section 80G for the period commencing from the assessment year 2010-11.

Judgment:
The appeal filed by the assessee was allowed, and the CIT-I, Jalandhar, was directed to grant the renewal of exemption under Section 80G of the IT Act, 1961, for the specified period.

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