2008 (7) TMI 984 - AT - Income Tax

Taxability of corpus donation - Validity of reopening of the assessments u/s 147 - registration not done u/s 12A was not disclosed at the time of assessmen t - HELD THAT - The mere fact that the assessee is registered u/s 25 of the Companies Act 1956 by itself is not sufficient to prove that the assessee is a charitable organization. It is true that section 25 of the Companies Act gives certain privileges and these privileges are frequently used by bodies which pursue charitable objects as identified in the section. It was made clear that the assessee is not holding property for charitable or religious purposes. It was incorporated solely for the benefit of the employees of Pentafour group of companies. As such the assessee was under no obligation to make registration u/s 12A. In view of this it is not correct to apply the prescription of section 11(1)(d). Section 11 can only be applied when property is held for charitable or religious purposes and the assessee avails the advantage of exemption contemplated for charitable trust. The definition of the word 'income' as given u/s 2(24) is inclusive. It is not exhaustive. Donations towards corpus are not falling within the ambit of the definition of income. This is a capital receipt and not exigible to tax. The department did not doubt the nature or veracity of the receipt. In the case of CIT vs. SRMT Staff Association 1995 (7) TMI 12 - ANDHRA PRADESH HIGH COURT the registered society of employees got voluntary contributions. It was not a charitable institution. The Hon'ble High Court has held that voluntary contributions received by the society of employees cannot be treated as income or trading receipt within the meaning of section 2(24) of the Income- tax Act. Therefore, we are of the opinion that the donations received by the assessee towards corpus from its employer are not exigible to tax. As such it cannot be said that the income of the assessee escaped assessment. Resultantly jurisdiction u/s 147 was not correctly assumed. Accordingly we decide this issue in favour of the assessee and against the Revenue. In the result the appeals and the cross objection failed by the assessee stand allowed and the appeal filed by the Revenue stands dismissed as infructuous.

Summary

Issues:
Validity of reopening assessments under section 147 of the Income-tax Act, 1961.

Analysis:
The judgment revolves around the validity of reopening assessments under section 147 of the Income-tax Act, 1961. The appeals and cross objection were consolidated and disposed of together due to identical issues. The common issue raised in the appeals was the validity of reopening assessments beyond four years. The assessee, a company formed primarily for providing medical aid and other facilities, derived income from investing corpus funds in shares and securities. The Assessing Officer issued a notice for reopening assessments, alleging non-disclosure of registration under section 12A of the Act to claim exemption on income received as corpus funds.

The Tribunal examined whether the assessee, registered under section 25 of the Companies Act, was a charitable organization. It was clarified that the assessee did not claim benefits under section 11 and was not obligated to register under section 12A. The Tribunal emphasized that section 11 applies when property is held for charitable or religious purposes, and the assessee avails exemption for charitable trusts. The nature of income received as donations towards corpus funds was deliberated, concluding that such receipts were capital receipts and not taxable income.

Additionally, the Tribunal referred to a case where voluntary contributions received by a society of employees were not treated as income under the Income-tax Act. Considering the entire case, the Tribunal held that donations received by the assessee towards corpus were not taxable income, and jurisdiction under section 147 was incorrectly assumed. Consequently, the issue was decided in favor of the assessee.

In a cross objection, the inclusion of a specific amount received towards corpus fund was objected to by the assessee, which was decided in favor of the assessee based on the non-taxability of corpus donations. As a result, other grounds raised in the cross objection became irrelevant. In a departmental appeal, the Revenue contended that proportionate expenditure should be allowed as revenue expenditure since the corpus fund had been taxed as a revenue receipt. However, due to the finding that corpus donations were not taxable, the appeal was deemed irrelevant and dismissed as infructuous.

In conclusion, the appeals and cross objection filed by the assessee were allowed, while the appeal by the Revenue was dismissed as infructuous.