2020 (5) TMI 379 - AT - Income Tax

Denial of exemption claimed u/s 11 12 - assessee is a trade association which was created for the cause of Indian Automobiles - assessee has generated some access of receipt over expenses in undertaking these activities - corpus donation was treated as income of the assessee - whether the assessee had shown any such corpus donation and also whether the assessee claimed any exemption under the provisions of the Act on account of such amounts? - HELD THAT - The perusal of the income expenditure account would reflect that after the income from various sources was shown and the expenditure was claimed under various heads, hence amounts were transferred. While drawing up the excess of expenditure carrying forward the amounts and the balance as excess income over expenditure. In the schedule to the balance sheet if we look at the corpus fund, the amounts of ₹ 90 Lakhs transferred to corpus funds and the narration is transfer from income and expenditure account i.e. for ₹ 90 Lakhs . Amounts have been transferred to the different funds as tabulated above. While drawing up the income for the year under consideration, the assessee has very clearly pointed out that that all these amounts which are transferred to funds are not to be considered as application of income and accordingly, the income has been computed in the hands of the assessee. We find no merit in the exercise undertaken by the AO, which has been confirmed by the CIT(A), we reverse the findings of the CIT(A) in this regard and direct the AO to delete the aforesaid addition made in the hands of the assessee. Thus, Ground No.4 raised by the assessee is allowed. Addition made on account of alleged foreign grants received during the year on account of pending approval under Foreign Contribution Regulation Act (in short FCRA ) - whether the said foreign grant received by the assessee and the interest on the same are taxable in the hands of the assessee? - HELD THAT - Bank interest earned on such deposits was in the form of foreign contribution and the same does not approve to the assessee till specific approval for utilization of funds was given by the Central Government. There is no merit in access the foreign grant received pending sanction as income of the assessee. Now coming to the second aspect of the issue that where the assessee has following cash system of accounting, can be added in the hands of the assessee. CIT vs Om Prakash Khaitan 2015 (7) TMI 785 - DELHI HIGH COURT had laid down the proposition that the characterization of a receipt could taxable only at the time of appropriation and not at the time of receipt which at best was advanced received, which did not bear in particular characterization for the purpose of treating it as income. Applying the said proposition to the issue in hand, we find no merit including the foreign grant as pending approval as income of the assessee. Ground raised by the assessee is allowed.

Issues Involved:
1. Denial of exemption claimed under Sections 11 and 12 of the Income-tax Act, 1961.
2. Treatment of corpus donations as income.
3. Addition of foreign grants received pending approval under the Foreign Contribution Regulation Act (FCRA).
4. Penalty levied under Section 271(1)(c) of the Income-tax Act, 1961.

Detailed Analysis:

1. Denial of Exemption Claimed Under Sections 11 and 12 of the Income-tax Act, 1961:
The assessee, a trade association with charitable objects, was denied exemption under Sections 11 and 12 for the assessment year 2010-11 due to the insertion of proviso 2 under Section 15. The Revenue argued that the assessee's activities were not for the benefit of the public at large and that the principle of mutuality did not apply as the income was not exclusively from its members. However, the Tribunal referenced its decision for AY 2009-10, upheld by the Delhi High Court and the Supreme Court, which ruled in favor of the assessee. The Tribunal reiterated that the assessee's activities were charitable, and the mere collection of fees did not change its charitable nature. Consequently, the exemption under Sections 11 and 12 was allowed.

2. Treatment of Corpus Donations as Income:
The assessee challenged the addition of corpus donations to its income. The assessee clarified that the amounts transferred to various funds were not received as corpus donations but were surplus profits of the year. These amounts were not claimed as exemptions but were included in the gross income. The Tribunal found no merit in the AO's addition and directed the deletion of the said addition, holding that the amounts transferred to funds were not to be considered as the application of income.

3. Addition of Foreign Grants Received Pending Approval Under FCRA:
The AO added foreign grants and interest thereon to the income, arguing that the assessee followed the cash system of accounting. The assessee contended that the grants were pending approval and could not be utilized, thus not taxable. The Tribunal noted that the grants were kept in a designated bank account pending approval from the Ministry of Home Affairs, and the assessee had no authority to utilize the funds. The Tribunal referenced FAQs from the Ministry and the Foreign Contribution (Regulation) Act, 2010, which required Central Government approval for utilizing foreign contributions. The Tribunal held that the foreign grants and interest were not taxable until approval was obtained, thus allowing the assessee's appeal.

4. Penalty Levied Under Section 271(1)(c) of the Income-tax Act, 1961:
The Revenue's appeal against the penalty levied under Section 271(1)(c) was dismissed. The Tribunal noted that with no quantum additions remaining in the hands of the assessee, there was no basis for the penalty.

Conclusion:
The Tribunal allowed the assessee's appeal regarding exemptions under Sections 11 and 12, treatment of corpus donations, and addition of foreign grants, while dismissing the Revenue's appeal concerning the penalty under Section 271(1)(c). The judgment was pronounced on 30th April 2020.

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