2015 (7) TMI 521 - AT - Income Tax

Exemption of income under the provision of Section 11 denied - Computation of income of assessee society - CIT (A) held that the activities of the assessee fall within the purview of the proviso to section 2(15) - whether the appellant society is engaged in the activities which are in the nature of educational or advancement of any other objects of general public utility? - Held that - .The mere fact that the appellant society had generated surplus, during the course of carrying on the ancillary objects, shall not alter the character of the main objects so long as the predominant object continues to be charitable and not to earn the profit. Please refer to the judgments rendered by the Hon ble Apex Court in the cases of Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association 1979 (11) TMI 1 - SUPREME Court and CIT v. A.P. State Road Transport Corporation 1986 (3) TMI 1 - SUPREME Court . As viewed from any angle, we hold that the Appellant society is entitled from exemption of income under the provision of Section 11 of the Act and the proviso to Section 2(15) of the Act cannot be applied to the appellant society as it is not engaged in any activity which are in the nature of trade, commerce and business. Accordingly, we direct the Assessing Officer to allow the exemption under the provisions of Sec. 11 of the Act. - Decided in favour of assessee. Disallowance of prior period expenses, deferred tax liability and provision for income-tax - Held that - If the commercial principles for determining the income are applied, it is but natural that the adjustment of the expenses incurred by the appellant society for charitable purposes in the earlier year against income earned by the appellant society in the subsequent year will have to be regarded as application of income of the appellant society for charitable purpose in the subsequent year in which such adjustment has been made having regard to the benevolent provisions contained in section 11 and will have to be excluded from the income of the appellant society under section 11(1)(a) Reliance in this regard is placed on the decision in the case of CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal, (1993 (11) TMI 17 - GUJARAT High Court ). Further, we also note that the provisions of section 11(1)(a) of the Act does not prescribe that income of the year should have been applied only in the year in which income has arisen. Therefore, we hold that the pre-operative expense should be allowed as deduction. The Assessing Officer had adopted the excess of income over expenditure for taxation and further addition of provision for income tax was made. For the purpose of computation of income available for application for charitable purposes, it is only the actual receipts and payments which are all alone to be considered. Therefore, we direct the Assessing Officer to allow the provision for taxation only in the year in which actual payment is made. Allowability of depreciation - Held that - We direct the Assessing Officer to allow the depreciation as an application of income. See case of A.P. Olympic Association 2014 (2) TMI 988 - ITAT HYDERABAD - Decided in favour of assessee.

Issues Involved:
1. Applicability of Proviso to Section 2(15) of the Income Tax Act, 1961.
2. Denial of Exemption under Section 11 of the Income Tax Act, 1961.
3. Computation of Income on Mercantile Basis vs. Cash Basis.
4. Disallowance of Prior Period Expenses, Deferred Tax Liability, and Provision for Income Tax.
5. Disallowance of Depreciation on Assets.

Detailed Analysis:

1. Applicability of Proviso to Section 2(15) of the Income Tax Act, 1961:
The core issue was whether the activities of the appellant society fell within the ambit of "education" or "advancement of any other objects of general public utility" under Section 2(15) of the Act. The Tribunal examined the objects of the society and concluded that the primary objective was to promote the study, dissemination of knowledge, and conduct research in Information Technology in the Banking and Financial sectors. The society also offered M.Tech and Ph.D. programs, but these were deemed incidental to its main objective. The Tribunal referred to the Supreme Court decision in Sole Trustee, Lok Shikshana Trust v. CIT, which defined "education" as systematic instruction, schooling, or training given to the young in preparation for the work of life. The Tribunal concluded that the society's primary objective did not fall within this definition and was instead aimed at improving technology in the banking sector, thus falling under "advancement of any other objects of general public utility."

2. Denial of Exemption under Section 11 of the Income Tax Act, 1961:
The Tribunal held that the society's activities were charitable in nature and did not carry on any activity in the nature of trade, commerce, or business. It was noted that the society was set up by the Reserve Bank of India, which does not operate with a profit motive. The Tribunal cited the Supreme Court decision in CIT vs. Andhra Chamber of Commerce, which stated that if the primary purpose of an institution was the advancement of objects of general public utility, it would remain charitable even if some incidental activities were profitable. Consequently, the Tribunal directed the Assessing Officer to allow the exemption under Section 11 of the Act.

3. Computation of Income on Mercantile Basis vs. Cash Basis:
The Tribunal noted that the income of the appellant society should be computed on commercial principles, as held by the Supreme Court in CIT v. Programme for Community Organization. The Tribunal emphasized that the adjustment of expenses incurred for charitable purposes in earlier years against income earned in subsequent years should be regarded as application of income for charitable purposes in the subsequent year.

4. Disallowance of Prior Period Expenses, Deferred Tax Liability, and Provision for Income Tax:
The Tribunal held that prior period expenses and deferred tax liability should be allowed as deductions. It was noted that the provisions of Section 11(1)(a) do not prescribe that income of the year should have been applied only in the year in which income has arisen. Therefore, the Tribunal directed the Assessing Officer to allow the prior period expenses and deferred tax liability as deductions.

5. Disallowance of Depreciation on Assets:
The Tribunal referred to various High Court decisions, including the Delhi High Court in Vishwa Jagriti Mission, which held that depreciation on assets held by a charitable institution should be allowed to arrive at the income available for application to charitable purposes. The Tribunal concluded that the appellant society was entitled to claim depreciation as an application of income and directed the Assessing Officer to allow the depreciation.

Conclusion:
The Tribunal allowed the appeal partly, holding that the appellant society's activities were charitable in nature and not in the nature of trade, commerce, or business. The society was entitled to exemption under Section 11 of the Act, and the disallowances made by the Assessing Officer were directed to be reconsidered. The Tribunal emphasized the importance of computing income on commercial principles and allowing deductions for prior period expenses, deferred tax liability, and depreciation.

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