2008 (4) TMI 351 - AT - Income Tax

Definition Of voluntary contributions - charitable institution - Assessment of trust - grants to be considered as eligible income for section 11 - Whether grants received from various organisations are in the nature of voluntary contributions? - invoked provisions of section 13(1)(c) in respect of payments - HELD THAT - We find that the Ford Foundation had not asked for any favour in return for the grants provided by it to the assessee. The conditions stipulated in the letter were to see and ensure that the funds were utilized by the assessee for the purposes for which the funds were sanctioned. The sanction letter has also not specified or stipulated any condition according to which the funds were to be utilized proportionately in the period of 24 months. It is the assessee who has according to its convenience allotted funds in the period of two years. Therefore the funds were granted voluntarily for carrying out charitable objects of the assessee. Under these circumstances and in view of various judicial pronouncement regarding the meaning of terms voluntary contributions ; and corpus the grants given by the Ford Foundation were voluntary contribution given for the charitable objects of the assessee. Accordingly the authorities below were justified in treating the funds as voluntary contributions. The voluntary contributions are chargeable to tax as income of the assessee within the meaning of section 2(24)(iia) of the Act. Under section 11 the assessee is required to apply the income to the extent of 75 per cent for the objects of the trust. In a case where income is not applied the income can be accumulated or set apart in excess of 25 per cent of the income to be utilized subsequently. In the instant case the entire income from funds granted was not utilized in the year under consideration. Therefore the assessee was required to exercise option to accumulate the excess income for the purpose of applying the same in the subsequent year. No such option was exercised. Therefore the entire income will be assessable in the year under consideration. Invoked provisions of section 13(1)(c) in respect of payments - In case of a charitable institution the income derived from the property held under trust wholly for charitable or religious purposes shall be applied for the objects for which the institution was created. It is a settled law that income can be applied by way of donations to other charitable institutions having similar objects. It is not the case of the assessee that it got the magazines printed from a publishing house to which payments were made. The Little magazine is published by M/s. Indigo Publishing Pvt. Ltd. and owned by that company. The assessee has received 540 per issue magazines during the year. The balance issues were appropriated by M/s. Indigo Publishing Pvt. Ltd. The two members of the society own M/s. Indigo Publishing Pvt. Ltd. Therefore the funds have been diverted for the benefit of a company in which two members of the assessee are substantially interested. It is clear that Shri Prateek Kanjilal and Miss Antra Devsen are substantially interested persons within the meaning of section 13(3)(e) of the Act. The funds of the assessee-society were misappropriated for their benefits. It is immaterial whether the company earned profits in the year or not. The funds granted by the Ford Foundation are governed by the provisions of Income-tax Act 1961 and not by the laws of a foreign country. Also reference to accounting standard 12 made by the Ld. AR of the assessee is not relevant and will have no impact on accounting of the funds in the absence of specific direction of the donor to use the funds in a particular manner. The funds were used to further the objects of the company and of the assessee. Therefore the activities of the society are caught by the provisions of section 13 of the Act. Accordingly the Assessing Officer as well as the ld. CIT (Appeals) were justified in invoking the provisions of section 13(1)(c) of the Act. In the result the appeal filed by the assessee is dismissed.

Summary

Issues Involved:
1. Treatment of the total amount of grant as income of one year.
2. Invoking of provisions of section 13(1)(c) in respect of payments made to M/s. Indigo Publishing Pvt. Ltd.

Detailed Analysis:

1. Treatment of the Total Amount of Grant as Income of One Year:
The primary issue concerns whether the total grant received by the assessee from the Ford Foundation should be treated as income for the year or proportionately over the project period. The assessee received a grant of US $150,000 (Rs. 68,19,000) for a two-year project but declared only Rs. 19,88,875 as income for the year, treating the balance as a liability. The Assessing Officer (AO) treated the entire grant as voluntary contributions under section 2(24)(iia) of the Income-tax Act, 1961, and considered it as income for the year.

The AO relied on the decisions of the Hon'ble Bombay High Court in CIT v. Gem & Jewellery Export Promotion Council and the Hon'ble Delhi High Court in National Institute of Immunology v. MCD, which held that grants subject to conditions are voluntary contributions. The AO also dismissed the applicability of accounting standard 12 from the Institute of Chartered Accountants of India.

On appeal, the assessee argued that the grant was solicited for a specific project with terms and conditions, and only the proportionate amount should be considered income. The CIT(A) rejected this, stating that the full grant was for charitable activities and should be treated as income for the year under section 2(24)(iia).

Before the tribunal, the assessee reiterated that the grant was for two years and proportionate income should be recognized. The tribunal found that the Ford Foundation's sanction letter did not specify the funds were to be utilized over two years. The tribunal concluded that the grant was a voluntary contribution and should be treated as income for the year received. The tribunal also noted that the assessee did not exercise the option to accumulate the unutilized income under section 11(2) of the Act, making the entire amount assessable in the year received.

2. Invoking of Provisions of Section 13(1)(c) in Respect of Payments Made to M/s. Indigo Publishing Pvt. Ltd.:
The second issue involves the application of section 13(1)(c) due to payments made to M/s. Indigo Publishing Pvt. Ltd. The AO noted that the assessee paid Rs. 11,00,000 to M/s. Indigo Publishing Pvt. Ltd. for sponsorship charges. Members of the assessee society had substantial interest in this company, which raised concerns about the diversion of funds for personal benefit.

The AO found that the assessee received only 540 out of 2,000 printed copies of the magazine, with the balance appropriated by M/s. Indigo Publishing Pvt. Ltd. The AO concluded that the funds were utilized for the benefit of persons specified under section 13(3) of the Act, denying the exemption under section 11.

On appeal, the assessee argued that the support to "Little Magazine" was in line with its charitable objectives and was approved by the Ford Foundation. The CIT(A) upheld the AO's decision, noting that the funds were used to develop the brand name of "Little Magazine," benefiting the members of the assessee society who owned M/s. Indigo Publishing Pvt. Ltd.

Before the tribunal, the assessee contended that the computation was made without an opportunity to be heard and that the expenditure was for charitable purposes. The tribunal noted that M/s. Indigo Publishing Pvt. Ltd. was a commercial entity and not a charitable institution. The tribunal found that the funds were diverted for the benefit of a company in which the members of the assessee society had substantial interest, violating section 13(1)(c).

The tribunal cited cases such as Action for Welfare & Awakening in Rural Environment (AWARE) v. Dy. CIT and CIT v. Chandrika Educational Trust to support its decision. The tribunal concluded that the funds were misappropriated for the benefit of persons specified under section 13(3)(e), justifying the denial of exemption under section 11 and 12.

Conclusion:
The appeal filed by the assessee was dismissed, with the tribunal upholding the AO's and CIT(A)'s decisions on both issues. The entire grant from the Ford Foundation was treated as income for the year received, and the provisions of section 13(1)(c) were invoked due to the diversion of funds for the benefit of members of the assessee society.