2015 (6) TMI 290 - AT - Income Tax

Exemption u/s.11 denied - AO disallowing capital expenditure and also making addition on account of gratuity under Sec. 40(a)(ia) - not carrying on activities which can be considered as charitable purpose within the meaning of section 2(15) - Held that - The entire expenses of the assessee were directed towards providing services to donors who are affluent section of the society and wish to make donation for charitable purposes. The above activity of the assessee of providing services to affluent section of the society cannot be, in our considered view held as activity of general public utility also. Thus we find that no part of the income of the assessee company was actually utilised for any charitable activity during the year. Further no material was brought before us to show that any asset of the assessee-company was utilised to carry out education, medical relief, relief of poor and preservation of environment (including watersheds, forests and wildlife) or extending financial help for such activities. Rather we find that the assessee received the amount from the donor and before disbursing the same utilised the same for earning interest income. The interest income so earned by the assessee was also not utilised for payment to any charitable trust or for any other charitable activities. Simply because the assessee was registered under section 12 AA of the Act does not entitle it to claim its entire income as exempt under section 11 of the act but for getting that exemption the assessee is required to further satisfy condition of applying 85% of its income for charitable activities. In absence of the same only the amount which is utilised by the assessee for doing charitable activities can only be allowed as deduction to the assessee. In the present case as it is observed that no part of the assessee s income was actually applied for any charitable activities as defined in section 2(15) of the Act, the assessee was not entitled for deduction under section 11 of the Act for application of income towards charitable activities. - Decided against assessee. Software expenditure - Revenue or Capital expenditure - Held that - No relevant facts were brought on record by the A.O. and no reason was given by the AO for not accepting the claim of the assessee of software expenses being of revenue in nature. In our considered view such an unreasoned order is not sustainable - Decided in favour of assessee.

Issues Involved:
1. Whether the appellant trust carried on activity in the nature of business and profession under the guise of a Section 25 Company.
2. Whether the income of the appellant trust should be assessed at Rs. 48,61,533/- by invoking the proviso to Section 2(15) and denying exemption under Section 11.
3. Whether the surplus income over expenditure amounting to Rs. 31,93,755/- is taxable, denying the benefit of Section 11 and 12.
4. Whether the proposal by AO to DIT (Exemption) to cancel registration under Section 12AA(3) should be quashed.
5. Whether the refusal to grant exemption under Section 11 and assessing income under Sections 28 to 44 was justified.
6. Whether the appellant was engaged in any commercial/business activity or purely charitable activity as per its objects under Section 12AA.
7. Whether software expenditure of Rs. 19,25,285/- should be treated as capital in nature and allowing depreciation of 30% thereon.
8. Whether the levy of interest under Sections 234A, 234B, and 234C is justified.
9. Whether the initiation of penalty proceedings under Section 271(1)(c) is justified.

Detailed Analysis:

1. Nature of Activity:
The CIT(A) and AO concluded that the appellant trust was engaged in activities in the nature of business and profession under the guise of a Section 25 Company. The trust was found to be acting as a consultant or facilitator to donors, providing data of trusts for donations and charging consultancy fees, which was deemed professional services. The trust's activities were not directly charitable but rather facilitating donations for various causes, thus falling under the "advancement of any other object of general public utility."

2. Assessment of Income:
The AO assessed the income of the appellant trust at Rs. 48,61,533/- by invoking the proviso to Section 2(15), which denies exemption under Section 11 if the activities involve trade, commerce, or business. The CIT(A) upheld this assessment, noting that the trust's activities involved charging fees for services rendered to donors and donee organizations, classifying such receipts as "income from charity advice."

3. Surplus Income Taxability:
The surplus income over expenditure amounting to Rs. 31,93,755/- was held taxable by the AO and CIT(A), denying the benefit of Sections 11 and 12. The CIT(A) observed that the appellant's activities were not charitable as defined under Section 2(15) but were professional services rendered for a fee.

4. Proposal to Cancel Registration:
The DIT (Exemption) had previously held that there was no ground for invoking Section 12AA(3) for the purpose of withdrawal of registration. However, the AO and CIT(A) took a contrary view, suggesting that the trust's activities were not charitable.

5. Exemption Refusal:
The AO and CIT(A) refused to grant exemption under Section 11, assessing the income under Sections 28 to 44. They concluded that the trust's activities were in the nature of business and not charitable, thus falling under the first proviso to Section 2(15).

6. Nature of Engagement:
The appellant argued that its activities were charitable, involving relief to the poor, education, medical relief, and preservation of the environment. However, the AO and CIT(A) found that the trust's primary activities were providing advisory services for a fee, thus not qualifying as charitable under Section 2(15).

7. Software Expenditure:
The AO treated software expenditure of Rs. 19,25,285/- as capital in nature, allowing depreciation of 30% and disallowing Rs. 13,47,700/-. The Tribunal found that the AO did not provide sufficient reasoning for this treatment and deleted the disallowance, allowing the expenditure as revenue in nature.

8. Levy of Interest:
The levy of interest under Sections 234A, 234B, and 234C was held to be consequential. No specific arguments were made by the appellant on this ground, and it was dismissed.

9. Penalty Proceedings:
The initiation of penalty proceedings under Section 271(1)(c) was deemed premature and dismissed.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the assessment of income and denial of exemption under Sections 11 and 12, confirming the trust's activities were in the nature of business. However, the Tribunal deleted the disallowance of software expenditure, treating it as revenue in nature. The levy of interest was held consequential, and the initiation of penalty proceedings was dismissed as premature.

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