2018 (3) TMI 1974 - AT - Income Tax

Exemption u/s 11 - assessment of trust - assessee had received the voluntary contributions for the purpose of building infrastructure in the educational institution - HELD THAT - As decided in case of Touching Heart Ministries 2017 (12) TMI 111 - ITAT VISAKHAPATNAM . Donations received for specific purpose should not be treated as income u/s 2(24) of the Act and accordingly, we uphold the order of the CIT(A) and dismiss the appeal of the revenue. Addition u/s 40(ba) - AO disallowed the salary paid to the Joint Secretary by applying section 40(ba) - CIT(A) deleted the addition holding that the section does not apply to the assessee since it is a society registered under Societies Act - HELD THAT - Plain reading of section 40(ba) of the Act clearly shows that the disallowance is applicable in case of an association of persons, body of individuals other than a company or a cooperative society registered under Societies Registration Act, 1860. Since the assessee is a registered cooperative society, section 40(ba) of the Act has no application. Accordingly, the orders of the CIT(A) on this ground is upheld and the appeals of the revenue are dismissed. Disallowance of notional interest @ 12% on the sums advanced and the same was reduced from the interest debited to the profit loss account - HELD THAT - We have gone through the balance sheet and found that sufficient interest free funds are available to the assessee in the current liabilities and the AO has not made out a case that the advances were given out of interest bearing fund. The assessee is free to give the interest free funds to make the advances as per the business requirements and contingencies. Hence we are of the view that the said advance was given out of interest free funds and for the purpose of business and accordingly, delete the disallowance made by the A.O. and set aside the orders of the lower authorities. Disallowance of notional interest on the amounts advanced to be Secretary of the institution - assessee argued that Mr. Narasimha Rao has advanced more funds to the assessee society and if interest is to be calculated, society would be liable to pay interest to Mr. Narasimha Rao. Therefore, no part of the interest payment was disallowed by the assessee - HELD THAT - While deciding the issue with regard to the notional interest on CALFPL we observed that the assessee is having interest free funds and the assessee is free to make use of the funds for giving advances. Therefore, we do not see any reason to sustain the addition. Accordingly, we set aside the order of the Ld. CIT(A) and allow the appeal of the assessee. Disallowance u/s 40(a)(ia) - assessee has made the payments without deduction of taxes - HELD THAT - Since the payment was already made, the CIT(A) placing reliance on the special bench decision in the case of Merilyn Shipping Transports 2012 (4) TMI 290 - ITAT VISAKHAPATNAM allowed the appeal of the assessee. Since the issue is settled by Hon ble Supreme Court in the case of Palam Gas Company 2017 (5) TMI 242 - SUPREME COURT in favour of revenue, we set aside the order passed by the CIT(A) and confirm he addition made by the assessing officer. The cross objection on this ground is dismissed. Disallowance being interest paid on capital work in progress u/s 36(1)(iii) - HELD THAT - The assessee has borrowed the funds and used for the work in progress for building the capital assets. Therefore, the interest accrued on the borrowing required to be capitalized to the concerned asset. Therefore, we do not find any infirmity in the order of the Ld. CIT(A) and the same is upheld. The cross objection of the assessee on this ground is dismissed.

Summary

Issues Involved:
1. Treatment of development fee received by the assessee.
2. Disallowance of salary paid to the Joint Secretary under section 40(ba).
3. Disallowance of notional interest on advances given to related parties.
4. Disallowance under section 40(a)(ia) for non-deduction of taxes on payments.
5. Disallowance of interest paid on capital work in progress under section 36(1)(iii).
6. Disallowance of expenses towards souvenir advertisement and festival mamools.

Detailed Analysis:

1. Treatment of Development Fee Received by the Assessee:
The core issue in all appeals was the treatment of development fees received by the assessee, a Society registered under the Societies Act, 1860, engaged in running educational institutions. The Assessing Officer (A.O.) found discrepancies during a survey, leading to the cancellation of the exemption under section 10(23C) of the Income Tax Act, 1961. Consequently, the income of the assessee became taxable. The A.O. identified a short admission of income and brought the difference to tax. The Commissioner of Income Tax (Appeals) [CIT(A)] held that voluntary contributions received for a specific purpose should be allowed as a deduction. The Tribunal, referencing previous judgments, concluded that contributions received for a specific purpose cannot be regarded as income under section 2(24) of the Act, thus upholding the CIT(A)'s order and dismissing the revenue's appeal.

2. Disallowance of Salary Paid to the Joint Secretary under Section 40(ba):
The A.O. disallowed the salary paid to the Joint Secretary, invoking section 40(ba) of the Act. The CIT(A) deleted the addition, stating that section 40(ba) does not apply to societies registered under the Societies Act, 1860. The Tribunal upheld the CIT(A)'s order, confirming that section 40(ba) disallowance is not applicable to the assessee, a registered cooperative society.

3. Disallowance of Notional Interest on Advances Given to Related Parties:
The A.O. disallowed notional interest on advances given to M/s. Chitturi Agro & Lactating Foods Private Limited (CALFPL) and Mr. Ch. V.K. Narasimha Rao, the Secretary. The CIT(A) confirmed the addition due to the lack of evidence of a nexus between the loans given and borrowed amounts. However, the Tribunal found that the assessee had sufficient interest-free funds to meet the advances and deleted the disallowance, setting aside the orders of the lower authorities.

4. Disallowance under Section 40(a)(ia) for Non-Deduction of Taxes on Payments:
The CIT(A) had allowed the appeal of the assessee based on the special bench decision in the case of Merilyn Shipping & Transports. However, the Tribunal, referencing the Supreme Court decision in the case of Palam Gas Company, set aside the CIT(A)'s order and confirmed the addition made by the A.O., as the issue was settled in favor of the revenue.

5. Disallowance of Interest Paid on Capital Work in Progress under Section 36(1)(iii):
The A.O. disallowed interest expenditure on funds used for capital work in progress, which was confirmed by the CIT(A). The Tribunal upheld the CIT(A)'s order, stating that interest accrued on borrowed funds used for building capital assets should be capitalized to the concerned asset.

6. Disallowance of Expenses Towards Souvenir Advertisement and Festival Mamools:
The assessee did not press this ground during the appeal hearing, leading to its dismissal as not pressed.

Conclusion:
The Tribunal dismissed all appeals filed by the revenue for the assessment years 2008-09 to 2011-12. The cross objections filed by the assessee for the assessment years 2008-09, 2010-11, and 2011-12 were partly allowed, while the cross objection for the assessment year 2009-10 was dismissed. The judgment was pronounced in the open court on 14th March 2018.