2019 (1) TMI 1052 - AT - Income Tax

Charitable activities - Denial of exemption u/s 11 - micro finance activities are held to be commercial in nature and therefore, the assessee society is not eligible for claiming exemption - Held that - AO noticed that the assessee society provided services to the SHGs in the name of charity by collecting service charges and higher interest from them for managing its own expenses. Though the assessee claims that it was offering services to the poor, AO observed that no services were provided to the poorer on free of cost . Therefore, by invoking the provisions of section 2(15) r.w.s. 13(8) AO denied the claim of exemption under section 11 of the Act. However, in the appellate order, the CIT(A) has not given any findings as to whether the assessee is eligible to claim exemption under section 11 of the Act since the assessee was carrying out micro finance activity. Under the above facts and circumstances, we remit the issue to the file of the ld. CIT(A) for adjudication and passing detailed speaking order keeping in mind the decisions of the Tribunal as relied on by the ld. DR. Thus, the ground raised by the Revenue is allowed for statistical purposes. Violation committed by the assessee society by spending more than 50% towards administrative expenses - As in the case of Maddi Venataraman & CO. (P.) Ltd. v. CIT 1997 (12) TMI 3 - SUPREME COURT , wherein, as held that it is against the public policy to allow the benefit of deduction under one statute of any expenditure incurred in violation of the provisions of another statute. In view of the above decision of the Hon ble Supreme Court, we find that the assessee has clearly violated the Foreign Contribution Regulations Rules, 2011 and thus, the ground raised by the Revenue is allowed. Rent paid by the assessee society to its accountant - Held that - Since the owner of the building insisted the rent in cash, the Financial Controller of the Society drew a cheque in his own favour, encashed the same and paid the same to the building owner. Moreover, it was submitted that the said rent was not paid from the resources of the society. On perusal of the appellate order, we find that without asking any details from the assessee, the ld. CIT(A) has simply sustained the addition. We find that the provision made for rental was duly agreed by the concern agency and accordingly, out of the foreign fund, the said expenditure was met out as contended by the assessee in its written submissions that the said rent was not paid from the assessee s fund. In view of the above facts, the addition made and sustained by the ld. CIT(A) stands deleted. Disallowance 50% of the salary paid to the Secretary of the assessee society - Held that - By considering the qualification, experience, etc. and since the Assessing Officer has not allowed any reasonable portion of salary claimed to have paid to the Secretary, the ld. CIT(A) has reasonably allowed 50% of the disallowance of salary paid to the secretary and the balance was rightly sustained. The above allowance of 50% of salary to the Secretary by the ld. CIT(A) was not at all disputed by the Department in its appeal before the Tribunal, we find no reason to interfere with the order passed by the ld. CIT(A) and accordingly, the ground raised by the assessee stands dismissed.

Summary

Issues:
1. Disallowance of rent paid
2. Disallowance of salary paid to the Secretary
3. Eligibility for exemption under section 11 of the Act
4. Violation of Foreign Contribution Regulations Rules, 2011

Disallowance of Rent Paid:
The Assessing Officer disallowed rent paid by the assessee society to its accountant, stating that the need for a separate rental building did not arise. The ld. CIT(A) sustained the addition. However, the Tribunal found that the rent provision was agreed upon by the foreign counterpart, and the rent was paid from foreign funds, not the society's resources. The addition was deleted as the rent was justified and not paid from the society's funds.

Disallowance of Salary Paid to the Secretary:
The Assessing Officer disallowed 50% of the salary paid to the Secretary of the assessee society. The ld. CIT(A) observed that as the salary was not included in the expenses allowed, there was no need to add it again. The Tribunal upheld the ld. CIT(A)'s decision, reasoning that 50% of the disallowance was reasonable, considering the Secretary's qualifications and experience.

Eligibility for Exemption under Section 11 of the Act:
The Assessing Officer denied exemption under section 11 of the Act to the assessee society, citing micro finance activities as commercial in nature. The ld. CIT(A) did not provide findings on exemption eligibility due to the micro finance activity. The Tribunal remitted the issue back to the ld. CIT(A) for a detailed order, considering relevant Tribunal decisions and allowing the Revenue's appeal for statistical purposes.

Violation of Foreign Contribution Regulations Rules, 2011:
The Assessing Officer noted that the assessee society violated the Foreign Contribution Regulations Rules, 2011 by spending over 50% on administrative expenses. The ld. CIT(A) held that this violation had no implication on income tax law. The Tribunal disagreed, citing a Supreme Court decision that expenditure violating one statute cannot claim deduction under another. The Tribunal allowed the Revenue's appeal, finding the violation clear and relevant to income tax law.

In conclusion, the Tribunal partially allowed the Revenue's appeal for statistical purposes and partly allowed the appeal filed by the assessee society. The judgment highlighted the importance of adhering to regulations and justifying expenses for exemption eligibility under the Income Tax Act.