2015 (8) TMI 405 - AT - Income Tax

Eligibility to claim exemption u/s 11 - whether contribution to chit funds is violative of the provisions of section 11(5) and therefore the exemption u/s 11 of the Act cannot be granted? - Held that - The requirement of investing or depositing, u/s 11(5) of the Act is confined to money in hand or cash. When the entire income of the year has already been spent towards the objects of the society, there cannot be said to be any funds remaining out of the funds received by way of income. A person can invest only the money which is in his hands. If the entire money in hand is already spent for a particular purpose then the question of spending the same amount for another purpose as well does not arise. Thus the interpretation of the term any funds by the Hon ble Delhi High Court in the case of CIT Vs. Sri Sriram Foundation 2001 (2) TMI 71 - DELHI High Court though made in the context of section 13(2)(h), is on all fours applicable, while interpreting section 13(1)(d) of the Act. Even the CBDT Circular No.335 dt.13.4.1982 explains the same position. The example given therein clearly explains that in a case where the trust derives income of ₹ 40,000 in a year, as per S.11(1)(a) it has to spend at least ₹ 30,000 on charitable purpose and the balance of ₹ 10,000 will have to be invested in the forms or modes prescribed u/s 13(5)(now S.11(5)). Therefore, in a case where the entire income of ₹ 40,000 is spent for charitable purposes exemption u/s 11(1)(a) has to be granted and there is no need to further examine whether any investments were made in violation of S.11(5) of the Act in as much as the trust is left with no more funds out of the income of ₹ 40,000 received. In the case of both the assessees, as per the charts submitted by the assessees it is evident that they have incurred deficit in every year and thus entire income of each assessment year was fully spent towards the charitable objects. In this case, contribution to the chit fund was made to enable the assessee society to raise funds for expansion. This is clear from funds flow statement and the projected investment required by the assessee. When the assessee is paying huge amount of interest to various banks, it is wrong to conclude that assessee has with an intention to earn profit or income made a contribution to the chit fund. As we have held that contribution to chit fund in this case, is not an investment, and much less an investment with someone else, and further that the provisions of S.11(1)(a) have been complied by investing the entire income of the year towards charitable purposes, we conclude that there is no violation of section 13(1)(d) r.w.s. 11(5) of the Act. - Decided in favour of assessee. Ropening of assessment - Held that - It is an undisputed fact that at the time the assessment was originally completed u/s 143(3) the assessing officer was aware of the contribution made by the assessee to chit funds. However, the assessing officer was of the view that in such circumstances the denial of exemption u/s 11 would be restricted to the amount invested in violation of S.11(5). As rightly argued by the learned counsel for the assessee, this view taken by the assessing officer is supported by a few decisions. We do not wish to express any views on the correctness of these decisions. Suffice to say that on these facts and circumstances of the case, the view taken by the assessing officer cannot be termed as patently erroneous. It is the consistent view of various high courts that in the absence of any fresh material an assessment concluded u/s 143(3) cannot be reopened on mere change of opinion. In the decisions cited by the counsel for assessee this was the view taken by the hon ble Delhi High Court and Gujarat High Court. Respectfully following these decisions, we hold that the CIT(A) was justified in quashing the assessment for A.Y.2005-06 on the ground that the reopening of the assessment was invalid. - Decided against revenue.

Summary

Issues Involved:
1. Whether the contribution to chit funds by the assessee constitutes an investment or deposit as per Section 13(1)(d) read with Section 11(5) of the Income Tax Act, 1961.
2. Whether the entire income of the assessee should be denied exemption under Section 11 due to the alleged violation of Section 13(1)(d).
3. Validity of reopening of assessment under Section 147 for the assessment year 2005-06.

Detailed Analysis:

Issue 1: Contribution to Chit Funds as Investment or Deposit
The primary issue revolves around whether the contribution to chit funds by the assessee can be considered an investment or deposit under Section 13(1)(d) read with Section 11(5) of the Income Tax Act, 1961. The Tribunal analyzed various judicial precedents and the nature of chit fund transactions to determine this.

Nature of Chit Funds:
- The Tribunal referred to several judgments, including those of the Hon'ble Supreme Court and various High Courts, which clarified that chit fund transactions are primarily mutual benefit schemes and not investments or deposits.
- The Supreme Court in the case of Sriram Chits & Investment (P.) Ltd. vs. Union of India held that chit fund transactions do not create a debtor-creditor relationship and are essentially mutual benefit organizations.
- The Delhi High Court in CIT vs. Saheb Chits (Delhi) Pvt. Ltd. and the Andhra Pradesh High Court in CIT (TDS) vs. Suman Chit Funds Pvt. Ltd. reiterated that contributions to chit funds are not deposits or investments but mutual activities.

Tribunal's Conclusion:
- The Tribunal concluded that contributions to chit funds by the assessee do not constitute investments or deposits as per Section 13(1)(d) read with Section 11(5). The funds contributed to chit funds are part of a mutual benefit scheme and are not laid out with the intention of earning income or profit.

Issue 2: Denial of Entire Income Exemption under Section 11
The Tribunal examined whether the entire income of the assessee should be denied exemption under Section 11 due to the alleged violation of Section 13(1)(d).

Arguments and Findings:
- The Tribunal noted that the assessee societies had taken loans for expansion and infrastructure, indicating that they did not have surplus funds to invest.
- The Tribunal referred to the CBDT Circular No.335 dated 13.4.1982, which clarified that if the entire income is spent on charitable purposes, there is no requirement to invest the remaining funds in the specified modes under Section 11(5).
- The Tribunal also referred to the Delhi High Court's judgment in CIT vs. Shree Sriram Foundation, which explained that the term "funds" refers to money in hand or cash capable of being invested.

Tribunal's Conclusion:
- The Tribunal concluded that the assessee societies had fully utilized their income for charitable purposes, and there were no surplus funds to be invested. Therefore, there was no violation of Section 13(1)(d) read with Section 11(5), and the entire income exemption under Section 11 should not be denied.

Issue 3: Validity of Reopening of Assessment under Section 147 for AY 2005-06
The Tribunal examined the validity of the reopening of the assessment for the assessment year 2005-06 under Section 147.

Arguments and Findings:
- The Tribunal noted that the original assessment was completed under Section 143(3), and the Assessing Officer was aware of the contributions to chit funds.
- The Tribunal referred to the Delhi High Court's decisions in Orient Craft Ltd. and Mohan Gupta (HUF), which held that in the absence of new material, an assessment completed under Section 143(3) cannot be reopened merely on account of a change of opinion.

Tribunal's Conclusion:
- The Tribunal concluded that the reopening of the assessment for the assessment year 2005-06 was invalid as it was based on a mere change of opinion without any new material. Therefore, the reassessment proceedings were quashed.

Final Judgments:
- Assessee's Appeals (ITA Nos. 175/V/2012 & 479 to 481/V/2012): The appeals were allowed, and it was held that the contributions to chit funds did not violate Section 13(1)(d) read with Section 11(5), and the entire income exemption under Section 11 should not be denied.
- Revenue's Appeal (ITA No. 447/V/2012): The appeal was dismissed, and the reassessment proceedings for the assessment year 2005-06 were quashed as invalid.