2016 (5) TMI 1131 - AT - Income Tax

Charitable trust - whether the assessee is to be assessed as a charitable trust deriving income from property held under trust wholly for charitable purposes and more specifically for the object of general public utility or to be assessed as a trust carrying on business activities? - Held that - CIT vs. Gujarat Maritime Board reported in (2007 (12) TMI 7 - SUPREME COURT OF INDIA ) wherein the Hon ble Apex Court has observed that the appellant is established for the predominant purposes of development of minor ports within the State of Gujarat the management and control of the Board is essentially with the State Government and there is no profit motive as indicated by the provisions of section 73 74 and 75 of the 1981 Act. The income earned by the Board is deployed for the development of minor ports in the State of Gujarat and therefore they are entitled to be registered as charitable trust u/s 12A of the Income-tax Act 1961. Therefore respectfully following the decision of Hon ble Apex Court and the Co-ordinate Bench Ahmedabad in assessee s own case we are inclined to believe that the assessee is a charitable trust carrying on activity of advancement of public utility without any profit motive and is required to be assessed as per the provisions of Section 11(1) of the Income-tax Act 1961. - Decided in favour of assessee Revenue expenditure as application of income by way of payment to the Gujarat Government towards waterfront/royalty charges - Held that - the assessee being a charitable trust u/s 12A was certainly under legal obligation to make payment to the State Government towards waterfront/royalty charges which was inevitable for the functioning of the assessee-trust and such payment was made towards the object of the trust embedded in the Gujarat Maritime Board Act 1981 and certainly these payments which have been made to the State Government have been applied for the public welfare projects which in this case is waterfront project. Therefore the assessee is eligible to claim as application of income against the gross income received and the same should be accounted while calculating 85% of the gross income which needs to be applied for charitable activities by the assessee-trust. Applacabilty of provision of sec 43B - Held that - As profit earned by the assessee are not subject to tax being out of the ambit of provisions of Section 11(4) of the Income-tax Act and the income of the organization being exempt as per the provisions of Section 11(1) of the Incometax Act this ground has become redundant and accordingly the provisions of Section 43B of the Act are not applicable on the payment above Clubbing income under two provisions of Section 22(1) of the Act and also u/s 11(4) - Held that - From going through the above referred provisions of Section 11(1) and Section 11(4) of the Act we are able to understand that Section 11(4) of the Act is applicable when the property held under trust includes a business undertaking so held and the Assessing Officer have power to determine the income of such business undertaking in accordance with the provisions of the Act and where any such income so determined is in excess of income as shown in the accounts of the undertaking then such excess income shall be deemed to have been not applied for charitable purposes. However in the case of the assessee we have already decided that the assessee is carrying on charitable activities without profit motive and the income is to be calculated as per the provisions of Section 11(1) of the Act and therefore ld. CIT(A) has erred in calculating the income u/s 11(1) and 11(4) of the Act and therefore in our view subject to our adjudication of other grounds of this appeal the income of the assessee is to be assessed as per the provisions of Section 11(1) of the Act. Addition as notional income on account of premium of Alang plots - Held that - As already held that the assessee is not carrying on any business activity rather carrying on charitable activities in the form of providing services relating to general public utility which in the case before us relates to maintaining of ports in the State of Gujarat. We further observe that both the lower authorities have not appreciated the fact that the accounts of the assessee were being maintained on cash basis upto Financial Year 2001-02 and certainly in the case of the assessee who carries on cash basis of accounting of what is received in a year has to be accounted for and there is no concept of bifurcating or apportioning any advance premium received. Further it is also undisputed fact that the appellant-Board was covered under the provisions of Section 10(20A) of the Act as a Local Authority upto Assessment Year 2002-03 and the income was exempt under this section and certainly whatever amount which have been received prior to 01.04.2002 gets covered therein. Therefore in our view no addition was called for of 12, 92, 00, 000/- on account of Revenue recognition of the premium received on allotment of plots by way of spreading the revenue for a period of 10/20-25 years on the basis of AG(Audit) Report. Granting deduction for accumulation u/s 11(1) of the Act only on net surplus and not on its gross receipts - Held that - From going through the decision of the Hon ble Apex Court in the case of CIT vs. Programme for Community Organization (2000 (11) TMI 4 - SUPREME Court ) it is crystal clear that calculation of 15% as mentioned in provisions of Section 11(1A) have to be applied on the gross income of the assessee and not the net surplus. Therefore in our view in the case of the assessee 15% has to be calculated on gross income for the year i.e. 221.19 crores and not on the net surplus of 64.96 crores. Disallowance of deduction in relation to increase in the fixed assets being application of income - Held that - There remains no dispute because the ld. CIT(A) while determining the income u/s 11(1) of the Act has himself allowed the addition to fixed assets at 20, 68, 73, 986/- as deduction towards application of income and therefore this substantive ground needs no further adjudication on this ground relating to allowability of deduction in relation to increase in the fixed assets being application of income amounting to 20, 68, 73, 968/- as it has already decided in favour of the assessee by ld. CIT(A) and therefore no interference is called for in the ld. CIT(A) s order for this ground. Eligibility for deduction of depreciation as per Income-tax Act while determining the income under the provisions of Section 11(1) - Held that - If the depreciation is not allowed as a necessary deduction in computing the income of the charitable/religious trusts then there would be no way to preserve the corpus of the trust and therefore a charitable/religious trust is entitled to depreciation in respect of the assets owned by it. In the present case due to the variation of figures of depreciation as per Income-tax Act in between the assessee as well as Department it will be appropriate to set aside the matter to the file of the ld. Assessing Officer for the limited purpose of calculating the correct amount of deprecation as per Income-tax Act for the year under appeal. It is needless to mention that proper opportunity of being heard to be given to the assessee and both the parties should arrive at a consonance on the correct figure of depreciation as per Income-tax Act and the same should be allowed as application of income for the purposes of determining income u/s 11(1) of the Act.

Summary

Issues Involved:
1. Nature of activities as business or charitable.
2. Disallowance of ?44,38,23,000/- as application of income.
3. Application of Section 43B on royalty/waterfront charges.
4. Double assessment under Sections 11(1) and 11(4).
5. Addition of ?12,92,00,000/- as notional income.
6. Deduction for accumulation under Section 11(1) on net surplus vs. gross receipts.
7. Deduction for increase in fixed assets.
8. Depreciation allowance under Section 11(1).

Issue-wise Detailed Analysis:

1. Nature of Activities as Business or Charitable:
The Tribunal examined whether the assessee's activities were charitable or business-related. The assessee argued that similar issues had been settled in its favor for previous years, where it was held as a charitable trust under Section 12A. The Tribunal, relying on the Supreme Court's decision in the assessee's own case, confirmed that the assessee is a charitable trust engaged in public utility without profit motive. Therefore, the income should be assessed under Section 11(1) of the Income-tax Act, 1961.

2. Disallowance of ?44,38,23,000/- as Application of Income:
The Tribunal reviewed the disallowance of ?44,38,23,000/- paid to the Government of Gujarat as waterfront/royalty charges. It was contended that this amount should be considered as application of income under Section 11(1). The Tribunal, referencing previous decisions, held that such payments are essential for the functioning of the trust and should be treated as application of income. Thus, the disallowance was overturned.

3. Application of Section 43B on Royalty/Waterfront Charges:
The Tribunal addressed the applicability of Section 43B, which mandates certain payments to be allowed only on actual payment basis. Given that the assessee is a charitable trust and not a business entity, the Tribunal ruled that Section 43B does not apply. The Tribunal cited the case of Gujarat Industrial Development Corporation vs. ACIT to support this conclusion.

4. Double Assessment under Sections 11(1) and 11(4):
The Tribunal examined the CIT(A)'s action of clubbing income under Sections 11(1) and 11(4), resulting in double assessment. It was clarified that Section 11(4) applies to business undertakings held under trust, whereas the assessee's activities were charitable. Therefore, the Tribunal ruled that income should be assessed solely under Section 11(1), avoiding double assessment.

5. Addition of ?12,92,00,000/- as Notional Income:
The Tribunal reviewed the addition of ?12,92,00,000/- as notional income based on the AG(Audit) report. It was noted that the assessee had maintained accounts on a cash basis until FY 2001-02, and the premium received was accounted as capital receipt. Since the assessee was exempt under Section 10(20) until 31.03.2002, the Tribunal concluded that no addition was warranted for the notional income.

6. Deduction for Accumulation under Section 11(1) on Net Surplus vs. Gross Receipts:
The Tribunal addressed whether the 15% accumulation under Section 11(1) should be calculated on gross receipts or net surplus. Citing the Supreme Court's decision in CIT vs. Programme for Community Organization, it was held that the accumulation should be based on gross receipts. Thus, the Tribunal ruled in favor of the assessee, allowing the calculation on gross income.

7. Deduction for Increase in Fixed Assets:
The Tribunal noted that the CIT(A) had allowed the deduction for the increase in fixed assets amounting to ?20,68,73,986/- as application of income. Since there was no dispute, this ground required no further adjudication.

8. Depreciation Allowance under Section 11(1):
The Tribunal considered whether depreciation as per the Income-tax Act should be allowed as application of income. It was concluded, based on precedents from the Madhya Pradesh High Court and Gujarat High Court, that depreciation should be allowed to preserve the corpus of the trust. However, due to discrepancies in the depreciation figures, the matter was remanded to the Assessing Officer for recalculating the correct depreciation amount.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions to the Assessing Officer to recalculate the depreciation amount. Other grounds were decided in favor of the assessee, affirming its status as a charitable trust and allowing relevant deductions and applications of income.