2019 (9) TMI 1644 - AT - Income Tax

Exemption u/s. 11 12 - corpus donation - DR submitted that the CIT(A) ignored the fact that in the absence of written direction from the donor, the donation will not be treated as corpus donation and consequently, from part of the income of the organization - CIT(A) allowed the appeal of the assessee - HELD THAT - CIT(A) has rightly observed that merely making an accounting entry does not change the substance of the transaction that the Corpus Fund has been utilized for the purchase of capital assets. Thus, there is no need to interfere with the findings of the CIT(A). The appeal of the revenue is dismissed.

Summary

Issues:
1. Treatment of donation without written direction from the donor.
2. Earmarking of funds for specific expenses by a separate entity.
3. Allowance of carry forward of losses for entities claiming exemption u/s 11 & 12.
4. Benefit of carry forward of deficit loss as per the decision of Delhi Tribunal.

Issue 1: Treatment of Donation without Written Direction
The Revenue contended that the CIT(A) erred in not considering that without a written direction from the donor, the donation should not be treated as corpus donation and should form part of the organization's income. However, the CIT(A) held that the Corpus Fund was used to acquire capital assets in accordance with the charitable institution's objectives. The CIT(A) emphasized that voluntary contributions for charitable activities, even if spent on expenses, should not lose exemption status. Consequently, the CIT(A) found no merit in the Revenue's argument and ruled in favor of the assessee.

Issue 2: Earmarking of Funds for Specific Expenses
The Revenue also argued that the CIT(A) overlooked the fact that a separate entity like the assessee could allocate funds for education and specific expenses. However, the CIT(A) maintained that the transfer from the Corpus Fund to the General Reserve was merely an accounting entry and did not alter the substance of the transaction where the Corpus Fund was used to purchase capital assets. The CIT(A) supported this decision by citing relevant case laws and concluded that the Revenue's objections lacked merit.

Issue 3: Allowance of Carry Forward of Losses
The Revenue further contended that the CIT(A) wrongly permitted the carry forward of losses, asserting that Sections 72 to 74 apply only to taxable incomes under the Income Tax Act, not to entities claiming exemptions under sections 11 & 12. Despite this argument, the CIT(A) maintained that the AO's addition to the appellant's income lacked substance as the Corpus Fund was appropriately utilized for acquiring capital assets. The CIT(A) reiterated that the AO's actions were unjustified, leading to the dismissal of the Revenue's appeal.

Issue 4: Benefit of Carry Forward of Deficit Loss
Lastly, the Revenue challenged the direction given by the CIT(A) to allow the benefit of carrying forward a deficit loss based on a Delhi Tribunal decision. The CIT(A) justified this decision by emphasizing that the Corpus Fund's utilization for capital asset acquisition aligned with charitable objectives, warranting the dismissal of the Revenue's appeal. The Tribunal concurred with the CIT(A)'s findings, leading to the dismissal of the Revenue's appeal and upholding the order in favor of the assessee.

In conclusion, the Tribunal upheld the CIT(A)'s decision, emphasizing the proper utilization of funds for charitable purposes and dismissing the Revenue's contentions regarding the treatment of donations, earmarking of funds, and allowance of carry forward of losses for entities enjoying exemptions under the Income Tax Act.