2012 (7) TMI 126 - AT - Income Tax

Addition made on account of unrecoverable fees - amount of unrecoverable fee as taxable income as expenditure is considered as bad debts in the sections of Business and Profession and since the assessee is a trust and covered u/s. 12AA so it can not take the benefit of those sections application for B & P - CIT(A)deleted the addition made by AO - Held that - the appellant has claimed exemption u/s 11 on the basis of registration u/s 12AA and fulfillment of prescribed conditions regarding accumulation, amount expended on objects of the trust, modes of investments, application of income etc, no such violation of any of the conditions has been found by the A.O. during the entire course of assessment proceedings. For the purpose of computing income and its application u/s 11, real income received by the appellant is to be treated as income for the purpose of application - as various courts have held that the amount of depreciation debited to the accounts of a charitable institution has to be deducted to arrive at the income available for application to charitable purposes even when the said capital expenditure has also been allowed for purposes of application of income. By following the same analogy, amount of unrecoverable fee, treated as bad debts, is also allowable to the appellant trust while computing its surplus and application of its income for the purpose of granting exemption u/s 11 - in favour of assessee.

Summary

Issues:
Challenge to deletion of addition of unrecoverable fees by Revenue.

Analysis:
The appeal pertains to the deletion of an addition of Rs.34,24,948 on account of unrecoverable fees by the ld. CIT(A) for the assessment year 2008-09. The Appellate Tribunal considered the arguments presented by the ld. DR and reviewed the findings of the authorities below. Despite the absence of the assessee during the proceedings, the Tribunal proceeded ex parte. The appellant, a charitable trust engaged in educational and medical activities, declared an excess of income over expenditure. The dispute arose when the AO treated the unrecoverable fee as income of the assessee, leading to the addition in the total income. The appellant contended that the unrecovered fee was accounted for based on the RGPV notification and cited legal precedents to support the treatment of unrecovered fees similar to depreciation. The ld. CIT(A) analyzed the case, emphasizing the trust's registration under sections 12AA and 11 of the IT Act, fulfilling prescribed conditions for exemption. The ld. CIT(A) highlighted that the AO failed to demonstrate any violation of conditions for claiming exemption under section 11. The Tribunal concurred with the ld. CIT(A)'s decision, emphasizing that real income received by the appellant should be considered for calculating income and its application under section 11. The Tribunal dismissed the Revenue's appeal, upholding the deletion of the addition of unrecoverable fees.

The Tribunal's decision rested on the interpretation of provisions under sections 12AA and 11 of the IT Act, emphasizing the trust's compliance with the prescribed conditions for exemption. The Tribunal underscored that exemptions for charitable trusts are subject to specific grounds enumerated in the IT Act, and no violations were found in the present case. The Tribunal aligned with legal principles stating that income for charitable purposes should be determined on commercial principles, considering real income received by the trust. The Tribunal rejected the AO's rationale for treating unrecoverable fees as taxable income, emphasizing the trust's eligibility for exemption under section 11. The Tribunal upheld the ld. CIT(A)'s deletion of the addition, emphasizing that the AO lacked justification for making the addition based on the treatment of unrecoverable fees. The Tribunal's decision underscored the importance of considering the trust's activities and compliance with statutory provisions while determining tax liabilities, ultimately dismissing the Revenue's appeal.

In conclusion, the Tribunal's detailed analysis focused on the trust's registration, fulfillment of conditions for exemption, and the treatment of unrecoverable fees in the context of charitable activities. The decision highlighted the significance of real income in calculating tax liabilities for charitable trusts and emphasized adherence to statutory provisions for granting exemptions. The Tribunal's ruling upheld the deletion of the addition of unrecoverable fees, affirming the trust's eligibility for exemption under the IT Act.