2018 (6) TMI 1228 - AT - Income Tax

Exemption u/s 11 - assessee trust has been carrying out substantial percentage of activities with non members - Taxing the bank interest as income from other sources - Section 2(15) application - Held that - As decided in assessee s own case 2016 (5) TMI 1179 - ITAT MUMBAI activity of the assessee depositing money in the bank does not constitute trade, commerce or business. The Assessing Officer has in fact gone much beyond and held that the interest itself constitutes taxable income falling foul of the proviso to section 2(15). These Sections require an entity seeking the shelter of Sections 11 to 13 to deposit its surplus funds in specified assets and it cannot be that the mandate requirement and object of Section 11 (5) which serves to put in place a mechanism to regulate the funds of the charitable institutions are overcome, overridden and nullified by an interpretation so that the very mandate of Section 11 (5) if complied with results in the institutions being declared to be non-charitable. This is a contradiction in terms and therefore must be rejected. The interest earned on fixed deposit with banks complying with the provisions of Section 11 (5) is exempt and the proviso to Section 2( 15) has no application to the facts of the assessee s case. - Decided in favour of assessee.

Issues Involved:

1. Deletion of addition by CIT(A) ignoring the ratio laid down by the Bombay High Court.
2. Applicability of proviso to section 2(15) and its impact on the charitable status of the trust.
3. Taxability of interest income earned from non-members under section 11 and the principle of mutuality.
4. Substantial activities with non-members and its coverage under the proviso to section 2(15).
5. Reliance on the ITAT's previous decision in the assessee’s own case for A.Y. 2009-10.
6. Deduction of capital expenditure of ?2,18,50,357/-.

Issue-wise Detailed Analysis:

1. Deletion of Addition by CIT(A) Ignoring the Ratio Laid Down by the Bombay High Court:
The Revenue contended that the CIT(A) erred in directing the Assessing Officer (AO) to delete the addition, ignoring the precedent set by the Bombay High Court in CIT v/s Common Effluent Treatment Plant (2010) 328 ITR 362. The Tribunal upheld the CIT(A)'s decision, noting that the issue was already decided in favor of the assessee in a previous ITAT order for A.Y. 2009-10, which the department had not accepted and was pending appeal.

2. Applicability of Proviso to Section 2(15) and Its Impact on the Charitable Status of the Trust:
The AO had taxed the interest income on the grounds that the proviso to section 2(15) applied, which the CIT(A) reversed. The Tribunal observed that the proviso denies benefits to entities engaged in trade, commerce, or business. However, it concluded that interest earned from bank deposits is not an activity in the nature of trade, commerce, or business but is income earned on application of moneys mandated under section 11(5)(iii) of the Act. Therefore, the proviso to section 2(15) was not applicable.

3. Taxability of Interest Income Earned from Non-members Under Section 11 and the Principle of Mutuality:
The AO argued that interest income from non-members could not be exempted under section 11 or the principle of mutuality. The Tribunal noted that the assessee did not claim the interest income as exempt under mutuality but offered it as taxable income and then claimed deductions under section 11. The Tribunal found the AO's application of the Bombay High Court's decision in Common Effluent Treatment Plant case to be incorrect.

4. Substantial Activities with Non-members and Its Coverage Under the Proviso to Section 2(15):
The AO had brought on record that the assessee trust carried out substantial activities with non-members, allegedly earning income covered by the proviso to section 2(15). The Tribunal dismissed this ground, reiterating that the interest earned on bank deposits does not constitute trade, commerce, or business.

5. Reliance on the ITAT's Previous Decision in the Assessee’s Own Case for A.Y. 2009-10:
The CIT(A) relied on the ITAT's decision in the assessee’s own case for A.Y. 2009-10. The Tribunal upheld this reliance, maintaining consistency with the earlier year and dismissing the Revenue's appeal.

6. Deduction of Capital Expenditure of ?2,18,50,357/-:
The assessee contended that the CIT(A) erred in not allowing the deduction of capital expenditure. The Tribunal noted that the CIT(A) dismissed the appeal without adjudicating the issue, stating it did not arise from the assessment order. The Tribunal, after considering additional evidence, restored the issue to the AO for examination and verification, directing the AO to decide as per facts and law.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, directing the AO to re-examine the issue of capital expenditure deduction. The order was pronounced in the open court on 22.06.2018.

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