2012 (12) TMI 251 - AT - Income Tax

Person u/s 2(31) - Artificial Judicial Person (AJP) as defined in section 2(31)(vii) - Society - Change of status from AJP to AOP - held that - After verifying the genuineness of the activities of the society and satisfying about its objects, the registration was granted u/s 12AA(1)(b)(i) with effect from 1.4.2002. The return was also filed in the status of AJP. However, without giving any notice or any reason much less a cogent reason, the Assessing Officer has assessed the same as AOP. We do not find any justification in the action of the Assessing Officer which was confirmed by the Commissioner of Income Tax (Appeals). - the Assessing Officer was not justified in changing the status of the assessee without giving any notice. - Decided in favor of assessee. Disallowance of traveling expense - telephone expenses - held that - lower authorities were not justified in declining the claim of exemption u/ss 11 and 12 of the Act on the plea of contravention of section 13(2) and 13(3) of the Act. Subsction (2) of section 13 under Clause No. (c) provides the payment of salary and other allowance to the persons referred to in sub-section (3) of section 13 out of the resources of the institution for services rendered by that person to the institution provided the amount paid is not in excess of what may be reasonably paid for such services. The payment of DA for the purpose of travelling for the work of the institution is not at all excessive and the payment of such expenditure is not for the personal benefit of office bearers and, therefore, there is no violation of section 13 of the Act. Application of income in respect of acquisition of fixed assets Held that - Assets have been acquired for the purpose of advancement of the objects of the society and, therefore, such investment should be treated as an application of income in terms of the provisions of section 11 of the Act - there is no violation of section 13 and as such the Assessing Officer was not justified in declining the deduction for application of income u/s 11(1)(a) of the Act in favor of assessee Inclusion of corpus donation Held that - Section 11(1)(d) provides that the income the form of corpus donation shall not be included in the total income of the person who is in receipt of such income. The Assessing Officer since held that sections 11 and 12 will not operate and, therefore, he has not taken into consideration the provisions of section 11(1)(d) and included the said amount in the assessed total income - assessee s eligibility for benefit of sections 11 and 12 of the Act cannot be declined and the corpus donation is required to be excluded from the total income as per the provisions of section 11(1)(d) of the Act Disallowance alleged that assessee has paid land diversion charges which are in violation of section 40A(3) Held that - Land diversion charges were paid by the assessee to State Government which does not violate the provisions of section 40A(3), hence, disallowance made by the Assessing Officer and confirmed by Commissioner of Income Tax (Appeals) is not justified.

Issues Involved:
1. Assessment status of the assessee.
2. Disallowance of telephone expenses.
3. Disallowance of traveling expenses.
4. Denial of exemption under sections 11 and 12 of the Income Tax Act.
5. Disallowance of application of income for acquisition of fixed assets.
6. Inclusion of corpus donation in total income.
7. Non-allowance of credit for TDS.
8. Levy of interest under sections 234A, 234B, 234C, and 234D.
9. Addition on account of accrued interest and cessation of liability.

Detailed Analysis:

1. Assessment Status of the Assessee:
The assessee contended that it filed its return in the status of an Artificial Judicial Person (AJP) as defined under section 2(31)(vii) of the Income Tax Act. However, the lower authorities assessed it in the status of a "Society," which is not recognized under section 2(31). The Tribunal found that the Assessing Officer (AO) changed the status without giving notice or valid reasons, making the assessment void ab initio. The Tribunal referenced a similar case, Chandravadani Mahila Shiksha Samiti, and held that the AO was not justified in changing the status without proper notice.

2. Disallowance of Telephone Expenses:
The AO disallowed Rs. 6143/- out of the telephone expenses claimed by the assessee, suspecting personal use. The Tribunal noted that the phones were provided to the Chairman and a Member for administrative purposes, and there was no personal element involved. Thus, the disallowance was deemed unjustified.

3. Disallowance of Traveling Expenses:
The AO disallowed Rs. 498050 out of traveling expenses, questioning their necessity. The Tribunal found that these expenses were incurred for regulatory, administrative, and construction-related activities essential for the society's operations. The payments, including daily allowances, were reasonable and necessary for the society's work, thus the disallowance was unjustified.

4. Denial of Exemption under Sections 11 and 12:
The AO denied exemptions under sections 11 and 12, citing violations of section 13. The Tribunal observed that the payments for telephone and traveling expenses were for services rendered and not for personal benefit, thus there was no violation of section 13. Consequently, the denial of exemptions was overturned.

5. Disallowance of Application of Income for Acquisition of Fixed Assets:
The AO denied the application of income for acquiring fixed assets, citing violations of sections 13(1) and 13(2). The Tribunal found no such violations and noted that the assets were acquired for charitable purposes. Referencing the case of Vichar Bharti Education Society, the Tribunal held that such investments should be treated as an application of income.

6. Inclusion of Corpus Donation in Total Income:
The AO included a corpus donation of Rs. 50500000 in the total income, arguing that sections 11 and 12 did not apply. The Tribunal held that corpus donations should be excluded from total income under section 11(1)(d), as the assessee was eligible for exemptions under sections 11 and 12. This inclusion was thus reversed.

7. Non-Allowance of Credit for TDS:
The assessee's claim for TDS credit was not pressed during the hearing and was dismissed in limine.

8. Levy of Interest under Sections 234A, 234B, 234C, and 234D:
The Tribunal did not address this issue in detail, implying no significant change or challenge to the lower authorities' decision on interest levies.

9. Addition on Account of Accrued Interest and Cessation of Liability:
The AO added Rs. 108420/- for notional interest and Rs. 1126928/- for cessation of liability, alleging that the assessee provided interest-free loans to its President, violating section 13. The Tribunal found that the amounts were repayments of earlier loans taken for infrastructure development, not new loans. Thus, the findings of the AO were incorrect, and the additions were reversed.

Conclusion:
The Tribunal allowed the appeals in part, reversing the lower authorities' decisions on the assessment status, disallowance of telephone and traveling expenses, denial of exemptions under sections 11 and 12, application of income for fixed assets, and inclusion of corpus donation. The issues regarding TDS credit and interest levies were either dismissed in limine or not significantly addressed. The final order was pronounced on June 1, 2012.

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