2022 (3) TMI 1192 - AT - Income Tax

Exemption u/s 11 - Claim denied Government grants holding that it is corpus fund received towards specific projects to achieve objects of the trust without appreciating the fact that the case of the assessee is clearly falling under the proviso (1) (2) of section 2(15) - assessee, in the present case, is a trust which is established with the main object to provide facilities for testing, calibration and consultancy for achieving quality of electronic products and equipments including computers, communication equipment instrumentation, process, control instruments and electrical equipments - HELD THAT - CIT(A) allowing the claim of the assessee for the grants received from the Government of Gujarat as its Corpus Fund is upheld by the Tribunal while deciding Ground No.1 of the Revenue s appeal, the direction given by the learned CIT(A) to the Assessing Officer on this issue of his impugned order is fully justified as a necessary corollary. Assessee has also agreed with this proposition. As contended that the Revenue, as a matter of fact, cannot be said to have any grievance by the direction given by the learned CIT(A) on this issue to the Assessing Officer as the CIT(A) has not given any material relief to the assessee by giving this direction. In any case, since the impugned order of the learned CIT(A) on the main issue in allowing the claim of the assessee that the grants issued by the Government of Gujarat represented its Corpus Fund is upheld by us, we are of the view that the direction given by him on this consequential issue is fully justified and there is no infirmity in the same calling for any interference. We accordingly uphold the impugned order of the learned CIT(A) on this issue and dismiss Ground No.2 of the Revenue s appeal Depreciation on assets whose cost had been allowed as application of income for charitable purposes under Section 11(1)(a) of the Act - HELD THAT - As agreed by the learned representatives of both the sides, this issue is squarely covered in favour of the assessee by the decision in the case of CIT Vs. Rajasthan Gujarati Charitable Foundation Poona 2017 (12) TMI 1067 - SUPREME COURT wherein it is held that the assessee is entitled to depreciation under Section 32 of the Act on assets whose cost has been allowed as application of income for charitable purpose under Section 11(1)(a) of the Act. As further held by the Hon ble Supreme Court, the amendment in Section 11(6) of the Act brought by Finance (No.2) Act, 2014, which became effective from the Assessment Year 2015-16, prohibiting the allowance of depreciation in such case is prospective in nature. Since the Assessment Year involved in the present year is AY 2014-15, we respectfully follow the decision of the Hon ble Supreme Court in the case of CIT Vs. Rajasthan Gujarati Charitable Foundation Poona. 2017 (12) TMI 1067 - SUPREME COURT and direct the Assessing Officer to allow the claim of the assessee for deduction on depreciation. - Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of Government Grants as Corpus Fund.
2. Disallowance of Expenditure Incurred for Acquisition of Capital Assets.
3. Claim for Depreciation on Assets.

Issue-wise Detailed Analysis:

1. Treatment of Government Grants as Corpus Fund:
The primary issue was whether the government grants amounting to ?6,18,22,000 received by the assessee-trust should be treated as corpus fund or revenue receipts. The Assessing Officer (AO) treated the grants as revenue receipts, arguing that they were not specifically directed to be corpus donations and were meant for certain expenditures, thus falling under the purview of Section 2(24)(iia) of the Income-tax Act, 1961. The AO also contended that the assessee's activities were commercial in nature due to the fees charged for services, invoking the proviso to Section 2(15) and Section 13(8) of the Act, which disallows benefits under Sections 11 and 12.

The assessee argued that the grants were for specific projects and should be treated as corpus funds, citing various judicial precedents, including the Hon'ble Gujarat High Court's decision in CIT vs. Gujarat Safai Kamdar Vikas Nigam, which held that grants for specific purposes should not be treated as income. The CIT(A) accepted the assessee's contention, emphasizing that the grants were for specific projects aligned with the trust's charitable objectives and thus formed part of the corpus fund. The ITAT upheld the CIT(A)'s decision, referencing the Hon'ble Gujarat High Court's ruling and the principle that grants for specific purposes should be treated as corpus funds.

2. Disallowance of Expenditure Incurred for Acquisition of Capital Assets:
The AO disallowed the deduction of ?1,10,04,394 incurred by the assessee for acquiring capital assets, arguing that the assessee was not entitled to deductions under Sections 11 and 12 due to the application of the proviso to Section 2(15). The CIT(A) directed the AO to verify whether the expenditure was incurred from the corpus or the income of the trust, allowing deduction only for the expenditure incurred from the income. The ITAT upheld the CIT(A)'s direction, noting that the decision on the corpus fund issue directly impacted this issue, and the AO's verification was necessary to determine the correct application of income.

3. Claim for Depreciation on Assets:
The assessee claimed depreciation of ?5,58,37,346 on assets whose cost had been allowed as application of income for charitable purposes. The AO disallowed the claim, but the CIT(A) allowed it. The ITAT confirmed the CIT(A)'s decision, citing the Hon'ble Supreme Court's ruling in CIT vs. Rajasthan & Gujarati Charitable Foundation Poona, which held that depreciation is allowable on such assets, and the amendment in Section 11(6) prohibiting this allowance is prospective, effective from AY 2015-16. Since the assessment year in question was AY 2014-15, the ITAT directed the AO to allow the depreciation claim.

Conclusion:
The ITAT dismissed the Revenue's appeal and allowed the assessee's appeal, affirming that the government grants were to be treated as corpus funds, the expenditure for capital assets should be verified and allowed if incurred from income, and the depreciation on assets was allowable for AY 2014-15.