2018 (7) TMI 575 - AT - Income Tax

Assessee trust entitlement for exemption u/s 11 or taxable as an AOP - whether Mr Manas Dasgupta would be entitled for 20% of profits of the said concern as per Explanation 3 to section 13 of the Act so as to state that he is holding substantial interest in the said trust - Held that - In the instant case, the two trusts i.e PCSD and Lok Kendra Trust are admittedly not registered u/s 12AA of the Act and hence they would be assessed to income tax only in the capacity of Association of Persons (AOP) and income would be assessed by applying the regular commercial business principles. Once it is determined, Mr Manas Dasgupta, being the President of those two trusts, would be entitled to share of profits of the said AOP and if the said share is more than 20%, then he would be deemed to be holding substantial interest in that AOPs as per Explanation 3. We find that the details of beneficiaries together with their respective holdings of other two trusts i.e PCSD and Lok Kendra Trust are not available on record - remand this limited aspect of the issue to the file of ld AO for factual verification - grounds raised in this regard by the revenue are allowed for statistical purposes. Receipt of Government Grants - Held that - CITA had merely stated that the grants received by the assessee trust had been utilized during the year. We hold that without examining the purpose of grant together with supporting evidences, the nature of grant cannot be understood. We find that there is no finding in this regard in the orders of the lower authorities. Hence we deem it fit and appropriate in the interest of justice and fairplay, to remand this issue to the file of ld AO for factual verification - appeal of the revenue is allowed for statistical purposes.

Summary

Issues Involved:
1. Entitlement of the assessee trust to exemption under Section 11 of the Income Tax Act.
2. Treatment of advances made to other trusts.
3. Classification of Government Grants as revenue receipts.

Issue-wise Detailed Analysis:

1. Entitlement to Exemption under Section 11:
The primary issue was whether the assessee trust was justified in claiming exemption under Section 11 of the Income Tax Act. The assessee, a society running an engineering college, filed its return declaring nil income after claiming exemption under Section 11. The Assessing Officer (AO) observed discrepancies in the balance sheet, specifically under 'Loans and Advances,' where amounts were advanced to two independent trusts. The AO contended that these payments violated provisions of Section 13, thereby denying the exemption. The Commissioner of Income Tax (Appeals) [CIT(A)] held that the term 'concern' in Section 13(3) does not include trusts, and thus, the advances did not violate Section 13 provisions. The Tribunal remanded the issue to the AO for factual verification to determine if the payments indeed benefited specified persons under Section 13(3).

2. Treatment of Advances to Other Trusts:
The AO observed that the advances made to People's Centre for Skill Development (PCSD) and Lok Kendra Trust were not in line with the objectives of the assessee trust and thus violated Section 13(1)(c) and Section 13(3)(cc)/(e). The CIT(A) disagreed, stating that the monies advanced to independent trusts did not constitute payments to specified persons under Section 13(3). The Tribunal noted that if Mr. Manas Dasgupta, Secretary of the assessee trust, held substantial interest in these trusts, the advances would fall under the ambit of Section 13(3). The Tribunal remanded the issue to the AO to verify if Mr. Dasgupta or his relatives were entitled to 20% of the profits of these trusts, which would confirm a violation of Section 13(1)(c) and Section 13(2)(a).

3. Classification of Government Grants:
The AO classified Government Grants received by the assessee trust as revenue receipts and included them in the total income, whereas the CIT(A) treated them as capital receipts utilized for specific purposes. The Tribunal found that both the AO and CIT(A) did not adequately examine the nature and purpose of the grants. The Tribunal remanded this issue to the AO for a detailed factual verification to determine the correct classification of the grants.

Conclusion:
The Tribunal concluded that the appeal by the revenue was allowed for statistical purposes, remanding the issues to the AO for further factual verification and determination. The decision emphasized the need for a thorough examination of the nature of advances and grants to ensure compliance with the provisions of the Income Tax Act.