2012 (11) TMI 759 - AT - Income Tax

Application of Income of Society through another society - exemption u/s 11 - benefit to founders attracting provisions of section 13(1) - Following the decision of court in case of CIT v MatriSeva Trust 1999 (3) TMI 34 - MADRAS HIGH COURT Held that - As per the Bye Laws of the other Arboretum societies, the members cannot derive any benefit or have right over the property of the Society on its dissolution. Hence the amount spent by the Assessee for the maintenance of Forest land should be considered as application, notwithstanding the fact that the forest lands are held by other societies. In the circumstances such expenses incurred by the Assessee Society, either by themselves or through other societies with similar objects in furtherance of the objects of the Society should be considered as application of the Society s income. Whether any part of the application of donated funds by the assessee has directly or indirectly benefited founders of the assessee society It was stated that in the case of the other societies also the members are not entitled any income of right to any property of the society on its dissolution. This being so the other societies are no different from the assessee society and the Department has not made a case as to how the common management members would derive benefit from the monies spent by the Assessee society for maintenance of the forest lands of the other societies - individual members of the William Frederick Durr family, who are Executive Committee members of the charitable society, are not the beneficiaries of this valid application of monies by the assessee (DVA) society - application of income by the assessee (DVA) did not violate the provisions of S.13(1)(c) and hence the assessee s claim u/S. 11 is upheld - In the result, the appeal of the Department is dismissed.

Summary

Issues Involved:
1. Denial of exemption under section 11 and 12 of the Income Tax Act.
2. Alleged violation of provisions under section 13(1)(c) of the Income Tax Act.
3. Diversion of funds to other societies not registered under section 12A.
4. Common management control and substantial interest of family members in multiple societies.
5. Classification of donation as revenue receipt versus capital receipt.

Detailed Analysis:

1. Denial of exemption under section 11 and 12 of the Income Tax Act:
The assessee, a registered society under section 12A, claimed exemption under section 11 for the assessment year 2007-08. The Assessing Officer denied this exemption, arguing that the assessee violated section 13(1)(c) by diverting funds to other societies not registered under section 12A. The CIT(A) directed the Assessing Officer to consider the revised return and computation statement filed by the assessee, aiming to correct anomalies identified during survey proceedings.

2. Alleged violation of provisions under section 13(1)(c) of the Income Tax Act:
The Assessing Officer contended that the assessee violated section 13(1)(c) by benefiting other Arboretum societies in which the William Frederick Durr family had substantial interest. The CIT(A) found no evidence that the funds were used for the benefit of any individual or concerns in which the managing members had substantial interest. The Tribunal upheld this view, stating that the application of income did not violate section 13(1)(c) as the funds were used for the development and maintenance of forest lands, which aligned with the charitable objectives of the assessee society.

3. Diversion of funds to other societies not registered under section 12A:
The assessee received a donation of $500,000 from Sehgal Family Foundation, USA, with a specific direction to spend it on the infrastructural development of 450 acres of land. The Assessing Officer argued that the funds were diverted to other societies not registered under section 12A. The CIT(A) and the Tribunal found that the funds were utilized for the intended purpose and that the other societies had similar charitable objectives. Therefore, the expenditure was considered as application of income in furtherance of the assessee's charitable objectives.

4. Common management control and substantial interest of family members in multiple societies:
The Assessing Officer argued that the control of the societies vested with the William Frederick Durr family, who had substantial interest in the non-registered Arboretums. The CIT(A) found that only Mr. and Mrs. William Frederick Durr were common members in the executive committees of the societies, and there was no family control as the majority of votes could not be exercised by the family members. The Tribunal upheld this finding, stating that the common management members did not derive any benefit from the operation of the societies.

5. Classification of donation as revenue receipt versus capital receipt:
The assessee initially classified the donation as a revenue receipt but later revised it as a capital receipt in response to a notice issued under section 148. The CIT(A) directed the Assessing Officer to consider the revised return and computation statement. The Tribunal agreed with this approach, stating that the classification was corrected to align with the specific direction of the donor and the regulations under the Foreign Contribution Regulation Act, 1976.

Conclusion:
The Tribunal dismissed the Department's appeal, upholding the CIT(A)'s decision to grant exemption under section 11 and 12 of the Income Tax Act to the assessee. The Tribunal found no violation of section 13(1)(c) as the funds were used for the charitable purpose of developing and maintaining forest lands, and there was no evidence of any benefit to the William Frederick Durr family. The Tribunal also accepted the revised classification of the donation as a capital receipt.