2012 (10) TMI 254 - AT - Income Tax

Claim of exemption u/s. 11 - denial on violating the provision of section 13(1)(c)/2 (c) - Held that - As regards the interest free loans/advances, it was found that same have been given in earlier years on which exemption has already been granted by the AO. There were no fresh loan/advances given in the assessment year under appeal. Whatever loans were given in earlier year have been given with adequate securities against the properties and same were also authorized by the resolution of the assessee society. Thus, the CIT(A) rightly found that there were no violation of section 13. Therefore, the AO should not have denied the claim of exemption u/s. 11 in favour of the assessee. Since the assessee exists wholly and exclusively for the education and all the amounts have been spent for educational purposes and for aims of the society, therefore, the assessee was entitled for exemption u/s. 11. It is well settled law that though principle of res judicata does not apply in the Income-tax proceedings, but rule of consistency should have been maintained and followed by the Income-tax Authorities while finalizing the assessment - in favour of assessee. Amount written off treating the same as capital expenditure - Held that - It is well settled in law that in the case of charitable institutions, any expenditure whether revenue or capital in nature, incurred for the furtherance of its objects is an application of income to the objects of the institution and, therefore, allowable as per provisions of section 11(1) - The amount on account of bad debt was spent by the assessee as per AO for capital purposes for the object of the assessee-society and in case, it was not returned, even after the matter was settled by the Civil Court, the writing off the debt are normally to be noted in the books of account as per law. Therefore, the assessee was entitled for deduction of the same on account of application of income towards the objects of the assessee society. Therefore, addition of Rs. 11,37,483/- is hereby deleted - in favour of assessee. Disallowance of honorarium - marginal increase as compared to earlier years - Held that - The AO has nowhere doubted the payment of honorarium to the office bearers of the society for bona fide services rendered by them. The honorariums have been paid in earlier year also and have been accepted by the Revenue department in the proceedings u/s. 143(3). All the amounts have been made for wholly and exclusively for the purpose and benefit of assessee society as all the persons have rendered actual services to the assessee and even in the statement of Shri Narendra Singh, he has explained the details of the services rendered by him against the payment. There is only marginal increase in the case of some of the officer bearers, which have been duly approved by the resolution of the society. CIT(A) also found that the total number of students in the educational institution run by the assessee have increased. Therefore, the increase in the honorarium was justified as compared to the earlier years. The CIT(A), thus, rightly found that there were no violation of provisions of exemption claimed in this case - in favour of assessee. Donations - non-business expenses OR Business - Held that - Assessee gave donations through banking channels to the trusts having similar objects, which is recorded in the books of account of both the concerns. CBDT vide Instruction No. 1132 noted by the CIT(A) in the appellate order clearly clarified and decided that the payment of sum by one charitable trust to another for utilization by the donee trust towards its charitable objects is proper application of income for charitable purpose in the hands of the donee trust and donor trust would not lose exemption u/s. 11 - in favour of assessee.

Summary

Issues Involved:
1. Entitlement to exemption under Section 11 of the Income Tax Act.
2. Deletion of addition on account of amount written off as capital expenditure.
3. Deletion of addition on account of disallowance of honorarium.
4. Deletion of addition on account of donations treated as non-business expenses.

Issue-wise Detailed Analysis:

1. Entitlement to Exemption under Section 11 of the Income Tax Act:
The core issue was whether the assessee was entitled to exemption under Section 11 despite alleged violations of Sections 13(1)(c) and 13(2)(c). The AO denied the exemption claiming excessive honorarium payments and interest-free loans to office bearers and related parties. The CIT(A) found that the honorariums were reasonable, duly approved, and consistent with previous years, and the loans were secured and approved by the managing committee. The Tribunal upheld the CIT(A)'s decision, emphasizing the principle of consistency, and found no violation of Section 13(1)(c).

2. Deletion of Addition on Account of Amount Written Off as Capital Expenditure:
The AO added Rs.11,37,483/- as capital expenditure, treating it as a business expense. The CIT(A) deleted the addition, stating that any expenditure, whether revenue or capital, incurred for the furtherance of the institution's objects is an application of income under Section 11(1). The Tribunal agreed, noting that the write-off was a legitimate application of income towards the institution's objectives.

3. Deletion of Addition on Account of Disallowance of Honorarium:
The AO disallowed Rs.12,47,450/- out of the honorarium paid, alleging it was excessive and violated Section 13(2)(c). The CIT(A) found the honorariums reasonable and commensurate with the services rendered, noting that similar payments were accepted in previous assessments. The Tribunal upheld the CIT(A)'s decision, finding no evidence of excessive or undue payments.

4. Deletion of Addition on Account of Donations Treated as Non-Business Expenses:
The AO added Rs.10,00,000/- as non-business expenses, arguing that the donations were not allowable. The CIT(A) deleted the addition, stating that donations to another charitable trust are an application of income under Section 11. The Tribunal supported this view, referencing CBDT instructions and judicial precedents that validate such donations as proper applications of income for charitable purposes.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s findings that the assessee was entitled to exemption under Section 11, and the additions made by the AO on account of capital expenditure, honorarium disallowance, and donations were unwarranted. The Tribunal emphasized the principle of consistency and the proper application of income towards the institution's charitable objectives.