2018 (1) TMI 1712 - HC - Income Tax

Revenue receipts - income of cane society - Anshdan Nirman Yojna Fund received for the sanctioned project and spent by the assessee - Tribunal come to the conclusion that grant in aid that was extended is for a specific purpose and expenditure, therefore, could not be termed as a revenue receipt so as to form part of the total income - HELD THAT - As decided in UP. UPBHOKTA SAHKARI SANGH LIMITED. 2006 (8) TMI 148 - ALLAHABAD HIGH COURT the amount in question was given by the State Government for specific purpose. It did not partake of the nature of income of the respondent-assessee. Even if it is to be treated as an income, it would not be liable to be taxed as it is stated that there was diversion of the income by way of overriding title on the said amount by way of a condition to distribute it as the salary to the employees of the bhandars. The assessee in that case was also Cane Cooperative Society. In view of above, the questions of law are answered in favour of the assessee.

Summary

Issues:
1. Whether funds received for a specific project by the assessee should be considered as part of total receipts.
2. Whether funds given for a specific project but not utilized should be treated as income.
3. Whether the generation of surplus without distribution constitutes profit under Section 11 of the Income Tax Act.

Analysis:

Issue 1:
The High Court addressed the first issue concerning the treatment of funds received by the assessee for a sanctioned project. Both the CIT and the Tribunal concluded that the money provided by the State Government to the Cane Cooperative Society was in the form of grant in aid for road construction. The funds were utilized for the intended purpose, and no surpluses were generated. The Court held that such grants in aid did not constitute revenue receipts under Section 2(24) of the Act. It was established that the construction of roads was not part of the normal business activities of the Cane Cooperative Society, and hence, the funds were not considered as income forming part of the total income.

Issue 2:
The second issue revolved around funds given for a specific project of road construction but not spent on that project, resulting in a surplus of income. The Court referred to a previous judgment involving a similar scenario with a Cane Cooperative Society. It was emphasized that funds provided for a specific purpose did not qualify as income, and even if treated as such, they were not taxable due to the condition of distributing the amount as salaries to employees. The Court upheld that the funds, if not utilized for the designated project, did not constitute income liable to taxation.

Issue 3:
Regarding the third issue, the Court deliberated on whether the mere generation of surplus without distribution could be deemed as profit under Section 11 of the Income Tax Act. The Tribunal and the CIT concurred that the surplus, in this case, did not amount to profit as long as it remained undistributed. The Court highlighted that the specific project of road construction and the non-exempt nature of the assessee's income under Section 11 further supported the conclusion that the surplus did not qualify as taxable profit.

In conclusion, the High Court ruled in favor of the assessee, dismissing the appeal filed by the department under Section 260A of the Income Tax Act for the assessment year 2006-07. The judgment provided a detailed analysis of the issues raised, emphasizing the specific nature of the funds received, their utilization for designated projects, and the non-taxable status of surplus amounts in the given context.