2021 (7) TMI 906 - AT - Income Tax

Exemption u/s 11 - Corpus Donation as added with the income of the assessee - HELD THAT - Donors/Trusts/entities have paid the amount by the mode of RTGS/cheque the details of which are given in the aforesaid documents/receipts. So, from this fact it is evident that the corpus donation were not given by the students by way of fees which has been segregated by the assessee in the form of building fund or capitation fee etc. Therefore, we note that the Ld. CIT(A) misdirected himself by wrongly assuming the facts which is contrary to the material placed on record and, therefore, his findings are perverse. For the purpose of this proviso, income of the funds or trust or institution shall not include income in the form of voluntary contributions made with specific direction that they shall form part of the corpus of that institution. Here in this case, as we have noted the donors have specifically given direction to use the fund towards corpus and since the explanation is for removal of doubts and it is being clarified it is retrospective in operation and, therefore, the corpus fund donated to the assessee cannot be included in the income and expenditure account but has been rightly shown by the assessee in its liability side of the Balance Sheet since the nature of the receipt is capital in nature. Therefore, the assessee succeeds and we allow the claim of the assessee and overturn the decision of the authorities below. Thus, this ground of appeal of the assessee is allowed. Provision for gratuity payable (determined by way of actuarial valuation) -Whether it would not constitute application of income in terms of the provisions of sec. 10(23C)(vi)? - HELD THAT - We agree that the gratuity to the employees is a statutory obligation, and therefore is obliged by law to disburse the same when the employees demit office or superannuate. In this case, the assessee has booked provision for gratuity as per the actuarial valuation and the manner and determination of the same is a scientific process adopted by expert professionally trained in the valuation and as such it cannot be compared with mere estimate of expenses to be incurred in future. We are of the opinion that the assessee s claim in respect of provision for gratuity as per the actuarial valuation should have been allowed in the facts and circumstances of the case; and, consequently, the impugned order of the Ld. CIT(A) is set aside and the AO is directed to allow the provision for gratuity as application of income - Appeal of the assessee is allowed.

Summary

Issues Involved:

1. Treatment of corpus donations as income under Section 10(23C)(vi) of the Income Tax Act, 1961.
2. Treatment of provision for gratuity payable as application of income under Section 10(23C)(vi) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Treatment of Corpus Donations as Income:

The first issue concerns whether corpus donations received by the appellant trust should be considered part of gross income required to be applied towards the objects of the trust under Section 10(23C)(vi) of the Income Tax Act, 1961. The Assessing Officer (AO) observed that the assessee received corpus donations amounting to ?2,40,00,000, which were not recognized as income in the Income & Expenditure Account but were reflected on the liability side of the Balance Sheet. The AO contended that there is no specific exemption for corpus donations under Section 10(23C)(vi), unlike Section 11(1)(d), and thus treated the corpus donation as income of the assessee.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that all receipts under Section 10(23C) should be considered as revenue, including donations. The CIT(A) erroneously assumed that the donations were received from students as part of fees, which was contradicted by the evidence showing that the donations were from specific entities.

The Tribunal noted that the CIT(A) misdirected himself by wrongly assuming facts contrary to the material on record. The Tribunal referred to the explanation inserted by the Finance Act, 2020, to Section 10(23C), which clarifies that voluntary contributions made with a specific direction to form part of the corpus shall not be included in the income. The Tribunal concluded that the corpus donations, being capital in nature, should not be included in the Income & Expenditure Account but rightly shown on the liability side of the Balance Sheet. Thus, the Tribunal allowed the assessee's claim and overturned the decisions of the lower authorities.

2. Treatment of Provision for Gratuity Payable:

The second issue pertains to whether the provision for gratuity payable, determined by actuarial valuation, constitutes the application of income under Section 10(23C)(vi). The AO disallowed the provision for gratuity amounting to ?33,16,214, stating that only actual expenditures made during the year can be treated as application, relying on the Supreme Court decision in Nachimuthu Industrial Association vs. CIT.

The CIT(A) confirmed the AO's decision, noting that the provision for gratuity was not paid during the year and thus cannot be treated as application of income. The CIT(A) upheld the AO's view that payments and receipts are acknowledged on an actual basis for exempt entities.

The Tribunal, however, agreed with the assessee's contention that the provision for gratuity, determined by actuarial valuation, is an ascertained liability and should be considered as application of income. The Tribunal referred to the Supreme Court decision in Bharat Earth Movers vs. CIT, which held that liability accrued, though to be discharged at a future date, is a proper deduction. The Tribunal concluded that the provision for gratuity, being a statutory obligation and determined through a scientific process, should be allowed as application of income. Therefore, the Tribunal set aside the CIT(A)'s order and directed the AO to allow the provision for gratuity as application of income.

Conclusion:

The appeal of the assessee was allowed on both grounds. The Tribunal held that corpus donations should not be treated as income under Section 10(23C)(vi) and that the provision for gratuity payable determined by actuarial valuation should be considered as application of income. The decisions of the lower authorities were overturned, and the assessee's claims were allowed.