2013 (8) TMI 45 - HC - Income Tax

Institution established for charitable purposes - Entitlement for Exemption u/s 11 - benefit of statutory accumulation u/s 13 - Nature of donations/grants to organizations - Word benefit - exgratia expenditure - huge expenditure on non-charitable activities - misappropriation of funds. HELD THAT - There is no basis for assuming it for the reasons that the amounts passed on to other organizations were in nature of donations/grants to organizations carrying on charitable activities of which the members of the Governing Council of the Sansthan would not be beneficiaries. The establishment expenditure incurred at the Head Office was only a fraction of the total of such expenditure a major portion of which had been incurred on the units carrying on charitable activities. The conclusion of the AO that the bulk of the expenditure was on non-charitable activities is therefore by no means sustainable. Further the beneficiaries i.e. the President and the Treasurer who got the accommodation were also the office bearer of the Motilal Memorial Society. Thus if at all there is a case of providing benefit to the persons of prohibited category then it should be invoked in the case Motilal Memorial Society and certainly not in the case of the assessee. Needless to mention that the Hon ble Allahabad High Court in the case of CIT vs. Kamla Town Trust- 2005 (8) TMI 90 - ALLAHABAD HIGH COURT has held that it has to be shown by the Department that trust has provided land and building or other property of the trust for use of the persons of prohibited category for any period during the previous year without charging adequate rent or other compensation. Therefore the term benefit would cover a case of one way flow of privilege and advantages to the persons of prohibited category out of the funds property or income of the trust. In the instant case it has not been mentioned that the funds were misappropriated and were not utilized for the purpose according to the objects of the society so the registration cannot be cancelled. The registration was not cancelled but the benefit of exemption was not given by the AO which is not allowable as per the ratio laid down in the case of American Hotel and Lodging Association vs. CBDT 2008 (5) TMI 17 - SUPREME COURT . On the plain language of Section 11(1)(i) of the Act the assessee was entitled to accumulate 25% of the donation received should be the income of the trust. Thus the assessee-society is entitled to accumulate 25% of its income from the property/donation etc. held in the trust as rightly observed by the Tribunal. Hence we do not find any reason to interfere with the impugned order passed by the Tribunal. The same is hereby sustained along with reasons mentioned therein. The answer to the substantial question of law is in favour of the assessee and against the revenue. In the result the appeals filed by the appellant-Department are hereby dismissed.

Summary

The issues presented and considered in the judgment are as follows:1. Whether the assessee society is entitled to exemption under Section 11 and not hit by the provisions of Section 13 of the Income Tax Act, 1961.2. Whether the Income Tax Appellate Tribunal erred in allowing the benefit of statutory accumulation without a specific resolution for accumulation.3. Whether the finding of the Income Tax Appellate Tribunal that the assessing officer failed to prove the case of the assessee falling under Section 13(1)(c) of the Income Tax Act is perverse.4. Whether the accumulated amount was for charitable purposes and in compliance with the provisions of Section 11(2)(a) of the Income Tax Act.The Court considered the submissions of both parties and analyzed the relevant legal framework and precedents. The Department argued that the assessee society provided benefits to prohibited categories under Sections 13(2)(c) and 13(3) of the Act, and the expenditures claimed as charitable were not genuine. The Department also highlighted discrepancies in the audit report and misuse of funds by the society.On the other hand, the assessee's counsel argued that the AO did not specify the section under which the case fell and that the benefits provided were not in violation of Section 13. The counsel emphasized that the funds were used for charitable purposes and relied on legal interpretations to support their arguments.The Court examined the evidence and found that the AO's conclusions regarding the misuse of funds were not substantiated. It was noted that the expenses incurred were for charitable activities, and the benefits provided were not in violation of the law. The Court also referred to previous judgments to support its reasoning.In conclusion, the Court held that the assessee was entitled to accumulate 25% of its income for charitable purposes as per Section 11(1)(i) of the Act. The Court dismissed the appeals filed by the Department, ruling in favor of the assessee and upholding the decision of the Income Tax Appellate Tribunal.The significant holdings of the judgment include the Court's interpretation of the provisions of the Income Tax Act regarding exemptions for charitable organizations and the application of funds for charitable purposes. The Court established that the benefits provided by the assessee were not in violation of the law and upheld the Tribunal's decision in favor of the assessee.