2015 (11) TMI 119 - AT - Income Tax

Reopening of assessment - eligibility for exemption under section 11 & 12 denied - existence of the assessee society for charitable purposes in the assessment years under appeal - Held that - It is an established position in law that a proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the section as a whole and accordingly the said insertion of first proviso to section 12A(2) of the Act with effect from 1.10.2014 should be read as retrospective in operation with effect from the date when the condition of eligibility for exemption under section 11 & 12 as mentioned in section 12A provided for registration u/s 12AA as a pre-condition for applicability of section 12A. A receipt which is by birth, capital in nature, cannot change its character merely for want of registration of society u/s 12AA of the Act. It is not the case of the revenue that the donations received are meant for general functioning of the charitable objects of the society, in which event, the donations received thereon would take the character of revenue receipts requiring to be credited in the income and expenditure account for utilization towards charitable objects thereon. Hence we hold that in any case, the donations received by the assessee society cannot be brought to tax in the assessment. We hold that since the only reason for denial of exemption u/s 11 was absence of registration u/s 12AA (which was granted to assessee society on 29.10.2010 with effect from 1.4.2010) for the relevant assessment years and on no other ground, the benefit of change in law as above by Finance Act 2014 should be available and for all the years, the benefit of exemption should be available on the date of registration as all the assessments were pending as shown above. In this connection, it requires mention specifically that all the receipts of the donation were proved on enquiry to have been received from the claimed donors and utilized for the specific purpose (construction of old age home) for which they were received.In conclusion, we hold that the insertion of the proviso to section 12A(2) of the Act has to be construed as retrospective in operation. - Decided in favour of assessee.

Issues Involved:
1. Jurisdiction and sanction for the issuance of notice under Section 148 of the Income Tax Act.
2. Non-supply of reasons recorded for reopening the assessment.
3. Eligibility for exemption under Section 11 of the Income Tax Act due to non-registration under Section 12AA.
4. Nature of donations received and their taxability.
5. Retrospective application of the first proviso to Section 12A(2) of the Income Tax Act.

Detailed Analysis:

1. Jurisdiction and Sanction for Issuance of Notice under Section 148:
The assessee did not press the grounds related to jurisdiction and sanction for the issuance of notice under Section 148 of the Income Tax Act and non-supply of reasons recorded for reopening the assessment. Consequently, these grounds were dismissed as not pressed.

2. Non-Supply of Reasons Recorded for Reopening the Assessment:
Similar to the first issue, the assessee did not press this ground, leading to its dismissal.

3. Eligibility for Exemption under Section 11 Due to Non-Registration under Section 12AA:
The primary contention was that the assessee society was not registered under Section 12AA of the Income Tax Act during the relevant assessment years, leading to the denial of exemption under Section 11. The assessee argued that the donations received were capital in nature and should not be taxed as revenue receipts. It was further argued that the first proviso to Section 12A(2), introduced by the Finance Act 2014, should be applied retrospectively, thereby deeming the society registered under Section 12AA for the earlier years.

4. Nature of Donations Received and Their Taxability:
The donations received by the assessee society were specifically meant for the construction of an old age home and were treated as capital receipts. The Assessing Officer (AO) initially brought these donations to tax as income from other sources, but the assessee contended that such donations, being capital in nature, should not be taxed as revenue receipts. The AO accepted the genuineness of the donations in the remand proceedings.

5. Retrospective Application of the First Proviso to Section 12A(2):
The Tribunal held that the first proviso to Section 12A(2) should be construed as retrospective in operation. This proviso allows the benefits of Sections 11 and 12 to apply to any income derived from property held under trust for any assessment year preceding the assessment year in which the registration was granted, provided the assessment proceedings were pending before the AO as on the date of such registration. The Tribunal relied on various judicial precedents and the explanatory notes to the Finance Act 2014 to conclude that the proviso was intended to prevent genuine hardship to charitable organizations and should be applied retrospectively.

Conclusion:
The Tribunal concluded that the insertion of the proviso to Section 12A(2) of the Act should be construed as retrospective in operation. Consequently, the assessee society was eligible for exemption under Section 11 for the relevant assessment years, and the donations received for the construction of the old age home were to be treated as capital receipts, not subject to tax. The appeals of the assessee were partly allowed, and the expenditure incurred by the society was treated as application of income for charitable objects. The ground related to the status of the assessee society and its eligibility to claim exemption under Section 11 was allowed, rendering the adjudication of ground no. 9 infructuous. The appeals were partly allowed, and the order was pronounced in open court on 9.10.2015.

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