2014 (7) TMI 91 - AT - Income Tax

Exemption u/s 11 - Revision u/s 263 - non application of 80% of income towards charitable purpose - Interest income on funds parked in FDs Failure to file Form 10 regarding accumulation of 15% of income - Held that - Following Commissioner of Income-Tax And Another Versus Karnataka Urban Infrastructure Development And Finance Corporation 2006 (2) TMI 114 - KARNATAKA High Court - the interest income ought to be excluded from the income - 85% of the income which was arrived by the CIT in his order u/s 263 of the Act will stand modified - The application of income by the assessee for charitable purposes has been accepted by the CIT - the amount determined by the CIT in the order as sum assessable u/s 11(2) of the Act will also stand revised - The AO is directed to do the revised computation. - Decided partly in favor of assessee. Regarding non submission of form 10 for accumulation of income - Held that - in CIT Vs. Nagpur Hotel Owner s Association 2000 (12) TMI 99 - SUPREME Court it has been held that it was abundantly clear from the wordings of sub-s. (2) of s. 11 that it is mandatory for the person claiming the benefit of s. 11 to intimate to the assessing authority the particulars required, under r. 17 in Form No. 10 - even assuming that there is no valid limitation prescribed under the Act and the Rules even then, it is reasonable to presume that the intimation required under s. 11 has to be furnished before the assessing authority completes the concerned assessment because such requirement is mandatory and without the particulars of this income the assessing authority cannot entertain the claim of the assessee under s. 11, therefore, compliance of the requirement of the Act will have to be any time before the assessment proceedings. - Form 10 can be filed before the conclusion of the assessment proceedings - the AO did not call upon the assessee to show cause regarding non-furnishing of Form 10 - Even the CIT in the proceedings u/s. 263 of the Act did not afford opportunity to the assessee to file Form 10 thus, the order of the CIT is set aside and the matter is remitted back to the AO for adjudication Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Application of income for charitable purposes under Section 11 of the Income-tax Act, 1961.
2. Non-filing of Form No. 10 for accumulation of income under Section 11(2) of the Income-tax Act, 1961.
3. Treatment of interest income from fixed deposits.

Issue-wise Detailed Analysis:

1. Application of income for charitable purposes under Section 11 of the Income-tax Act, 1961:
The assessee, a Town Development Authority, claimed exemption under Section 11 for the A.Y. 2008-09. The CIT, exercising powers under Section 263, found that the assessee had not applied 85% of its income towards charitable purposes and had accumulated income without submitting Form No. 10. The CIT noted deposits totaling Rs. 15,80,86,596 in various bank accounts, which the assessee claimed as application of income for charitable purposes. The CIT disagreed, stating that these deposits did not amount to application towards charitable objects and should be treated as income and brought to tax.

2. Non-filing of Form No. 10 for accumulation of income under Section 11(2) of the Income-tax Act, 1961:
The CIT observed that the assessee failed to submit Form No. 10, specifying the purpose and period for accumulation of income, as required under Section 11(2). The CIT held that without this form, the accumulated income should be taxed. The assessee argued that it acted as an agent of the Karnataka Government, and the funds were for a corpus fund directed by the government, which should be considered application for charitable purposes. However, the CIT maintained that the absence of Form No. 10 meant the accumulation could not be exempted.

3. Treatment of interest income from fixed deposits:
The assessee contended that interest income from deposits, which were again redeposited, should not be considered income, citing the Karnataka High Court decision in CIT v. Karnataka Urban Infrastructure Development & Finance Corporation. This decision held that interest income from government funds for specific purposes retains the character of the original funds and is not taxable. The Tribunal agreed with this view, stating that the interest income should be excluded from the total income for determining the amount to be accumulated under Section 11(2).

Tribunal's Decision:
The Tribunal modified the CIT's order, directing that the interest income of Rs. 3,10,86,586 be excluded from the total income of Rs. 47,66,36,982. Consequently, the amount to be applied for charitable purposes and the amount to be accumulated were recalculated. The Tribunal also addressed the non-filing of Form No. 10, noting that the assessee should have been given an opportunity to file the form before the assessment was completed. The Tribunal set aside the CIT's order on this issue and remanded it to the Assessing Officer to allow the assessee to file Form No. 10 and re-examine the matter.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the Assessing Officer to redo the assessment, considering the exclusion of interest income and allowing the assessee to file Form No. 10. The order under Section 263 was modified accordingly.