2024 (10) TMI 259 - AT - Income Tax

Addition made on account of 15% grants utilized as income of assessee as per GOG resolution which the assessee offered in the previous years - HELD THAT - The assessee furnished documentary evidence, including the GOG resolution dated 27.05.1998 and audited financial statements, to demonstrate the consistent and appropriate application of the 15% charge only to grants utilized by TCGL. The records clearly indicate that the decentralized grants, were merely routed through TCGL and were directly managed and utilized by other government agencies, such as District Collectors. These passthrough funds did not impact TCGL s operational finances and, therefore, were not subject to the 15% charge. We find that the assessee s treatment of these funds is in line with the established accounting practices and the terms of the GOG Resolution. CIT(A) conducted a thorough examination of the facts, submissions, and relevant financial records. CIT(A) rightly observed that the AO s addition was based on assumptions and conjecture, without any substantive evidence to support the contention that TCGL was obligated to charge 15% of the decentralized grants as income. CIT(A) s findings are well-reasoned and supported by the consistent policy followed by the assessee in recognizing income. The principle that only real income can be taxed, and not notional or hypothetical income, is well-settled in law. The alleged income was never accrued to TCGL, nor did it represent real income as the funds were never utilized by TCGL but were simply transferred to other government agencies as per GOG s directions. The addition made by the AO goes against the basic tenet of income tax law, which mandates that taxation must be based on income that has actually accrued or arisen. Appeal filed by the Revenue is dismissed.

Summary

Issues:
1. Recognition of 15% of grants as income for administrative overheads.
2. Treatment of funds passed through to District Collectors.
3. Delayed payment of employees' EPF contributions.

Analysis:
Issue 1: Recognition of 15% of grants as income for administrative overheads
The case involved the assessment of M/s Tourism Corporation of Gujarat Ltd. (TCGL) for AY 2012-13. The AO contended that TCGL understated income by not including the amount paid to District Collectors in the calculation of grants utilized, resulting in an addition of Rs. 2,00,98,747 to the total income. The AO relied on the consistent recognition of 15% of grants utilized as income in prior years without differentiating between direct and indirect utilizations. The CIT(A) directed the AO to delete the addition, stating that TCGL followed a consistent policy in recognizing income, and the amount in question was rightfully excluded from taxable income. The ITAT upheld the CIT(A)'s decision, emphasizing that the AO failed to establish the factual basis for the alleged income and that TCGL's treatment of the funds passed through was in line with established practices and the Government of Gujarat's resolution.

Issue 2: Treatment of funds passed through to District Collectors
The AO also noted a delay in the payment of employees' EPF contributions, adding the delayed payment to the income. However, the ITAT's focus was primarily on the treatment of funds passed through TCGL to District Collectors. The AR argued that TCGL acted as a pass-through agency for decentralized projects, transferring funds without incurring overhead expenses. The ITAT agreed with the AR, stating that the funds passed through TCGL did not impact its operational finances and were not subject to the 15% charge, as they were managed and utilized by other government agencies. The ITAT found that the AO's addition lacked substantive evidence and was based on assumptions, ultimately dismissing the Revenue's appeal.

Issue 3: Delayed payment of employees' EPF contributions
While the delayed payment of employees' EPF contributions was noted by the AO, the ITAT did not delve into this aspect extensively in its judgment. The focus remained on the treatment of grants as income and the pass-through nature of funds to District Collectors. The ITAT's decision to dismiss the Revenue's appeal was primarily based on the lack of factual verification by the AO regarding the nature of the grants passed through TCGL and the consistent policy followed by TCGL in recognizing income.

In conclusion, the ITAT upheld the CIT(A)'s decision to delete the addition of Rs. 2,00,98,747 to TCGL's income, highlighting the importance of establishing the factual basis for income additions and adhering to consistent income recognition policies.