2017 (1) TMI 935 - AT - Income Tax

Disallowance of exemption claimed by the assessee u/s 11(1)(d) - AO treating the receipts of voluntary contribution and corpus donation as taxable income there being violation of provision of section 13(3) - addition on advances - Held that - In respect of advance of 22, 16, 000/-to M/s Rajkala Industries (P) Ltd. the assessee s submission regarding advance of 20 lacs has already been accepted by the AO to the extent that 20, 00, 000 is the opening balance at the beginning of the year under consideration and it is only an amount of 2, 16, 000/- which pertains to the year under consideration. As far as 20 lacs is concerned the same was subject matter before Coordinate Bench in A.Y. 2011-12 and it was held therein that there is no income generated on the said amount of 20 lacs in A.Y. 2011-12 and there is nothing which can be brought to tax in the hands of the trust in A.Y. 2011-12. Regarding balance amount of 2, 16, 000/- which pertains to the year under consideration the same has already been offered to tax in the return of income for the year under consideration and there is nothing further which can be brought to tax in the hands of the assessee s trust. Coming to the advance advanced to Smt. Madhu Adukia is concerned it is not in dispute that the class rooms were actually constructed in F.Y. 2012-13 out of the said advance the class rooms were constructed on premises provided by Smt. Madhu Adukia without any charges to Gyan Sindhu Girls college and the advance has subsequently been refunded. The intent of such an advance is clearly for promoting and supporting the girls education and which has been demonstrated through building of class rooms. Merely because the money has been routed through Smt Madhu Adukia it cannot be said that she has benefitted out of such advances in any manner. Further there is no income which has been generated in the hands of the assessee s trust out of such advances which can be brought to tax. AO is directed to allow the exemption u/s 11 to the assessee trust and the additions made by the AO are hereby deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition made by AO treating voluntary contributions and corpus donations as taxable income.
2. Violation of provisions of Section 13(3) of the Income Tax Act.
3. Applicability of maximum marginal rate of tax under Section 164(2) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made by AO Treating Voluntary Contributions and Corpus Donations as Taxable Income:
The Revenue contested the deletion of ?1,46,09,448/- made by the AO, arguing that the receipts of voluntary contributions and corpus donations were taxable due to a violation of Section 13(3). The AO observed that the assessee, a public charitable trust, had advanced ?17,76,000/- to a trustee and ?22,16,000/- to a company where the trustee was a director. The AO deemed this as income applied for the benefit of prohibited persons under Section 13(2)(a), leading to disallowance of exemption under Section 11.

2. Violation of Provisions of Section 13(3) of the Income Tax Act:
The AO's findings were based on:
- An advance of ?17,76,269/- to Smt. Madhu Adukia, a trustee, for building rooms on her land, which was not directly transferred to "Gyan Sindhu Girls College."
- An advance of ?22,16,000/- to M/s Rajkala Industries Pvt. Ltd., where ?20,00,000/- was an opening balance from the previous year, already considered a violation under Section 13, and the remaining ?2,16,000/- was interest earned on the advance.

The CIT(A) deleted the addition, noting that the advance of ?20,00,000/- was from the previous year and already held for trust purposes by ITAT in A.Y. 2011-12. The ?2,16,000/- was interest earned and offered in the return for A.Y. 2012-13. Similarly, the ?10,00,000/- advance was for classroom construction, and any violation should only tax the income generated from such advances, not the entire trust income.

3. Applicability of Maximum Marginal Rate of Tax under Section 164(2) of the Income Tax Act:
The AR argued that even if there was a violation of Section 13, only the income that violated the section should be taxed at the maximum marginal rate (MMR) per the proviso to Section 164(2). The AR cited several judicial precedents supporting this view, including decisions from the Supreme Court and various High Courts.

The Tribunal agreed with the AR, stating that the Coordinate Bench in A.Y. 2011-12 had already ruled that only the income violating Section 13 should be taxed at MMR. The Tribunal found no new material to deviate from this ruling. Regarding the advance to M/s Rajkala Industries Pvt. Ltd., the Tribunal noted that the ?20,00,000/- was an opening balance, and the ?2,16,000/- interest was already taxed. For the advance to Smt. Madhu Adukia, the Tribunal accepted that the advance was for constructing classrooms for charitable purposes, and the amount was refunded, with no benefit to the trustee.

Conclusion:
The Tribunal directed the AO to allow the exemption under Section 11 and deleted the additions made by the AO. The appeal by the Revenue was dismissed, and the order was pronounced in the open court on 11/01/2017.