2015 (12) TMI 1832 - AT - Income Tax

Exemption u/s 11 - corpus fund received - AO noted that all the seven persons denied having given any donation to the assessee thus addition proposed u/s 68 - HELD THAT - As held in the case of CIT Vs P.K.Noorjahan 1997 (1) TMI 6 - SUPREME COURT the addition cannot be made by AO just for the sake of making addition - donation received from the persons who were not called and the persons who were called and accepted the fact of giving donation cannot be said to be not genuine. As regards the persons who had come and denied before the Assessing Officer the fact of giving donation we observe that certain fallacies were pointed out by the assessee before the lower authorities which have not been dealt with by either the Assessing Officer or the learned CIT (Appeals). Further cross examination of these persons was specifically asked by the assessee which was not provided to it. In this view the addition even on these accounts cannot be made. The addition on account of corpus donation in the present case even if sustained would go to increase the income of the assessee. Even if the corpus donation which is held to be bogus amounting to Rs. 1 crore will at best go to increase the income of the assessee. The receipts will become Rs. 8, 16, 18, 794/- and the application being Rs. 21, 51, 18, 322/- is in any case more than 85% of the receipts. Therefore the assessee will get the exemption under section 11 of the Act even on this count. - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of corpus fund donation under section 68 of the Income Tax Act.
2. Treatment of corpus fund donation as gross receipts of the trust and adjustment against expenditure.
3. Interpretation of statements of donors and creditworthiness verification.
4. Application of income and exemption under section 11 of the Act.

Issue 1: Addition of Corpus Fund Donation under Section 68:
The case involved an educational trust appealing against the addition of Rs. 1,00,00,000 received as corpus fund donation under section 68 of the Income Tax Act. The Assessing Officer made the addition based on the denial of donation by some individuals out of the total donors. The trust argued that the addition was not justified as it was based on a sample of donors and not the entire group. The tribunal noted that the Assessing Officer's approach was flawed as section 68 requires satisfaction regarding the identity, creditworthiness, and genuineness of transactions. The tribunal emphasized that the addition cannot be made merely on inference and without proper verification. The tribunal also highlighted that the Assessing Officer's investigation was incomplete, as certain discrepancies were not addressed, and cross-examination of donors was not allowed. Consequently, the tribunal ruled in favor of the trust and disallowed the addition.

Issue 2: Treatment of Corpus Fund Donation as Gross Receipts:
The trust contended that even if the corpus fund donation was considered income, the application of income exceeded 85%, making it eligible for exemption under section 11 of the Act. The tribunal analyzed the financial records provided by the trust and found that the revenue receipts were Rs. 7,16,18,794, while the revenue expenses totaled Rs. 7,26,05,864.72. Additionally, capital expenditure of Rs. 14,25,12,457 was incurred. The tribunal concluded that even if the corpus donation was deemed bogus, the trust's application of income for charitable purposes exceeded 85% of receipts. Therefore, the tribunal ruled that the trust qualified for exemption under section 11 of the Act, and the addition of corpus fund donation was not justified.

Conclusion:
The tribunal allowed the appeal of the educational trust, setting aside the addition of corpus fund donation under section 68 of the Income Tax Act. The tribunal emphasized the importance of proper verification and adherence to legal requirements in making such additions. Additionally, the tribunal ruled that the trust qualified for exemption under section 11 due to its application of income exceeding 85% of receipts.