2017 (5) TMI 291 - AT - Income Tax

Addition on account of interest earned on deposits - whether interest earned on deposits with banks and miscellaneous income earned by the assessee are eligible for exemption under section 10(20)- Held that - The assessee being engaged in the activity of promotion and development of market committees and in the process engaging in undertaking capital projects of the market committees, the income from sale of tender forms and enlistment fees of contractors has direct nexus with the main activity carried out by the assessee and therefore is to be treated as having been earned in the course of carrying out its activities. Further the activities of the assessee having been held to be falling in the purview of section 10(20) of the Act by the Income-tax Appellate Tribunal these incomes are also exempt under section 10(20) of the Act. The rest of the income, being miscellaneous in character is assessable as income from other sources, which is also exempt under section 10(20) of the Act. Therefore the entire miscellaneous income is held to be exempt under section 10(20) of the Act. Disallowance on account of contribution to pension fund - Disallowance on account of repair of godowns/boundary walls/roads - Held that - Where entire income of the assessee has been held to be exempt under section 10(20) of the Act, there is no case for making disallowance of any expenses at all. Any disallowance made will only result in enhancing the income of the assessee which in any case has been held to be exempt from tax. Further the entire income earned from rendering services has been held to be exempt at the threshold itself and, therefore, there is no requirement of resorting to computational provision relating to income under the head business and provision stipulated under sections 28 to 44 of the Income-tax Act, 1961. In view of the above, the disallowances are deleted and the ground raised by the assessee is allowed. Entitlment to exemption under sections 11 and 12 - Held that - Disallowance made on account of contribution of unapproved pension and gratuity funds, relate to the computational provisions of the income assessable under the head Income from business and profession more specifically under section 36 of the Act. Since the income of the assessee has been held to be exempt under sections 11 and 12 of the Act at the threshold itself, we hold that there is no occasion to apply the computational provision provided under Chapter IV of the Act running from sections 28 to 44, in computing the income since the same is attracted only if the income is brought to tax under the head Income from business and profession . Even the Central Board of Direct Taxes vide its Circular No. 5P(LXX-6) dated June 19, 1968 has stated that the word income for the purpose of claiming exemption under sections 11 and 12 of the Act should be understood in its commercial sense. In view of the above we hold that in the present case, the assessee being entitled to exemption under sections 11 and 12 of the Act, no disallowance on account of contribution to unapproved pension and gratuity funds can be made and the addition made on account of the same is, therefore, directed to be deleted.

Summary

Issues Involved:
1. Exemption under section 10(20) of the Income-tax Act, 1961.
2. Taxability of interest income and miscellaneous income.
3. Disallowance of contributions to an unapproved pension fund.
4. Penalty under section 271(1)(c) of the Income-tax Act, 1961.

Detailed Analysis:

1. Exemption under section 10(20) of the Income-tax Act, 1961:
The assessee, a body set up under section 3(1) of the PAPM Act by the Government of Haryana, claimed exemption under section 10(20) of the Income-tax Act, 1961. The Commissioner of Income-tax (Appeals) upheld the exemption for surplus earned from contributions received from market committees and rental income, but denied it for interest income and miscellaneous income. The Income-tax Appellate Tribunal (ITAT) held that the interest income and miscellaneous income are assessable under the head "Income from other sources" and are exempt under section 10(20) of the Act.

2. Taxability of interest income and miscellaneous income:
The interest income of ?7,43,56,181 and miscellaneous income of ?49,05,712 were initially treated as revenue receipts by the Assessing Officer. The ITAT, following the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT, held that interest earned on temporarily available funds is assessable under the head "Income from other sources" and thus exempt under section 10(20). Similarly, miscellaneous income from the sale of tender forms, enlistment fees, and other incomes was deemed to have a direct nexus with the main activity of the assessee and thus exempt under section 10(20).

3. Disallowance of contributions to an unapproved pension fund:
The disallowance of ?1,45,00,000 on account of contributions to an unapproved pension fund was upheld by the Commissioner of Income-tax (Appeals). However, the ITAT found that since the entire income of the assessee was exempt under section 10(20), there was no case for disallowing any expenditure, including contributions to the pension fund. Thus, the disallowance was deleted.

4. Penalty under section 271(1)(c) of the Income-tax Act, 1961:
Penalties were levied for the assessment years 2001-02 and 2002-03 on the grounds of furnishing inaccurate particulars of income. The ITAT found that since the additions on which the penalties were based had been deleted in the quantum proceedings, there was no basis for the penalties. Consequently, the penalties under section 271(1)(c) were deleted.

Separate Judgments:
1. I.T.A. No. 1103/Chd/2008:
- The appeal was allowed, holding that interest income and miscellaneous income are exempt under section 10(20).

2. I.T.A. No. 47/Chd/2009:
- Partly allowed. The issues of disallowance of miscellaneous income and contributions to the pension fund were covered by the decision in I.T.A. No. 1103/Chd/2008.

3. I.T.A. No. 1104/Chd/2008:
- Partly allowed. The disallowance of contributions to the pension fund and miscellaneous income was covered by the decision in I.T.A. No. 1103/Chd/2008. The disallowance of repair expenses was deleted.

4. I.T.A. No. 452/Chd/2010:
- Allowed. The assessee's income was exempt under sections 11 and 12, and no disallowance on account of contributions to unapproved pension and gratuity funds was warranted.

5. I.T.A. Nos. 1245 and 1246/Chd/2012:
- Allowed. Penalties under section 271(1)(c) were deleted as the additions in the quantum proceedings were deleted.

Conclusion:
The ITAT allowed the appeals, holding that the interest income and miscellaneous income are exempt under section 10(20) of the Income-tax Act, 1961. Disallowances on account of contributions to the pension fund were deleted, and penalties under section 271(1)(c) were also deleted.