1996 (4) TMI 156 - AT - Income Tax

Assessing Officer, Charitable Institution, Earnest Money, Income From Property, Religious Trust

Issues Involved:
1. Taxability of Entrance Fees.
2. Taxability of Earnest Money Deposit (EMD) Forfeiture.
3. Denial of Exemption under Section 11 of the Income-tax Act.
4. Enhancement of Income by CIT(A).

Issue-wise Detailed Analysis:

1. Taxability of Entrance Fees:

The assessee, the Apparel Export Promotion Council, argued that the entrance fees of Rs. 8,57,000 received from its members were of a capital nature and thus not taxable. The CIT(A) rejected this claim, noting that the benefits accruing to members were temporary and that membership ceased if annual subscriptions were not paid. The CIT(A) referred to the Council's Memorandum and Articles of Association, which required members to pay entrance fees and annual subscriptions. The CIT(A) also relied on the decision in CIT v. Bar Council [1943] 11 ITR 1 (Mad.) to conclude that the entrance fees were taxable receipts. The assessee's argument that entrance fees were not charged for specific services and thus not taxable was not accepted by the CIT(A). The Tribunal noted that while the assessee admitted that membership subscriptions were taxable, it claimed the entrance fees were capital receipts, a stance the Tribunal found contradictory. The Tribunal directed the Assessing Officer to re-determine the taxability of the entrance fees in light of the finding that the assessee is a public charitable institution.

2. Taxability of Earnest Money Deposit (EMD) Forfeiture:

The Council collected Rs. 2,93,47,205 on account of EMD forfeiture, which the CIT(A) and Assessing Officer treated as taxable income. The Council argued that this amount was collected on behalf of the Central Government and deposited in a Public Deposit Account, thus not taxable. The CIT(A) noted that the Council had not deposited the forfeited amount in the P.D. account as directed by the Government and concluded that the Council was using the funds for its own purposes. The Tribunal found that the forfeited amount belonged to the Central Government and was collected as per the export policy. The Tribunal held that the Council had no dominion over these funds, and thus, the forfeited amount was not the income of the assessee. The Tribunal directed the Assessing Officer to re-compute the income, excluding the forfeited amount.

3. Denial of Exemption under Section 11 of the Income-tax Act:

The CIT(A) and Assessing Officer denied the Council exemption under Section 11, holding that its activities were commercial in nature. The Council argued that it was a non-profit institution established to promote exports from India and was entitled to exemption. The Tribunal noted that the Council's primary object was to promote exports and that its activities, such as organizing fairs and exhibitions, were directed towards achieving this goal. The Tribunal referred to the Supreme Court decisions in Surat Art Silk & Cloth Mfgs. Association and Andhra Pradesh State Road Transport Corpn., which held that an institution's charitable status is determined by its predominant object, not by incidental profits. The Tribunal concluded that the Council was a charitable institution and not engaged in business for profit. Therefore, the provisions of Section 28(iii) and Section 11(4A) were not applicable, and the Council was entitled to exemption under Section 11.

4. Enhancement of Income by CIT(A):

The CIT(A) issued an enhancement notice to add Rs. 44,27,987 as interest on the forfeited EMD amount kept by the Council in the bank. The Council objected, but the CIT(A) held that the interest on the forfeited amount was taxable. The Tribunal noted that the interest was earned due to the time lag between the recovery of the earnest money and the final order of forfeiture. While the interest may or may not be the Council's income, the Tribunal emphasized that the forfeited amount itself was not the Council's property. The Tribunal did not address the interest issue directly, as it was not an appeal point, but directed the Assessing Officer to re-compute the income, considering the Council as a public charitable institution.

Conclusion:

The Tribunal allowed the assessee's appeal, directing the Assessing Officer to re-compute the Council's income as a public charitable institution, excluding the forfeited EMD amount and re-determining the taxability of entrance fees. The Tribunal emphasized the Council's charitable status and its primary object of promoting exports, rejecting the revenue authorities' characterization of its activities as commercial.

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