2010 (1) TMI 807 - AT - Income Tax

Denial of approval under section 80G of the Act - findings of the learned CIT that such capital expenditure is not an application or utilization of funds cannot be accepted since without having the building of the school or bus, it is not possible for the society to run the school - assessee is enjoying the exemption under section 12AA and there is nothing on record to prove that the same has been withdrawn - Held that - Commissioner of Income-tax is not justified in denying the approval under section 80G of the Act. The cases relied upon by the learned CIT are also not applicable to the present set of facts. Commissioner of Income-tax directed to grant approval under section 80G of the Act accordingly, appeal allowed.

Summary

Issues:
Denial of approval under section 80G of the Income-tax Act, 1961 to an Educational Society for not meeting the utilization criteria for funds meant for charitable purposes.

Analysis:
The appeal challenged the order of the Commissioner of Income-tax, Faridabad, regarding the denial of approval under section 80G of the Income-tax Act, 1961 to an Educational Society registered under the Societies Registration Act. The issue revolved around the utilization of funds by the society for charitable purposes. The Commissioner observed that the society had not met the requirement of applying funds to the extent of 85% and accumulating only up to 15% of the receipts. The society was found to have utilized surplus funds mainly on capital account, such as construction of school buildings and purchase of buses, which were deemed not constituting application of funds for charitable purposes. The Commissioner also noted the absence of submission of mandatory Form No.10. Consequently, the Commissioner held that the society violated section 11(2) of the Act and rejected the claim under section 80G.

The counsel for the assessee argued that depreciation and capital expenses should be considered as the application of funds of the institution. Referring to various court decisions, it was contended that depreciation should be treated as the application of income for charitable institutions. The society's aims and objects included the establishment and expansion of educational facilities, justifying the capital expenditure incurred. The Tribunal agreed that depreciation and capital expenses were essential for the functioning of the society within its stated objectives. By deducting these expenses from the gross receipts, the surplus turned negative, indicating no accumulation of funds. As the society was already enjoying exemption under section 12AA, the Tribunal found the denial of approval under section 80G unjustified. The Tribunal directed the Commissioner to grant approval under section 80G, allowing the appeal.

In conclusion, the Tribunal allowed the appeal, emphasizing that the depreciation and capital expenses incurred by the society were integral to fulfilling its educational objectives and should be considered as the application of funds for charitable purposes. The denial of approval under section 80G was deemed unwarranted, given the circumstances and facts of the case, and the society's compliance with the exemption under section 12AA.