2018 (6) TMI 1054 - HC - Income Tax

Approval u/s. 80G(5) - entitlement to benefit of exemption u/s. 11 - Whether the assessee Trust had fulfilled the terms of section 80G(5C)(iv) by depositing 1 crore of rupees in Prime Minister s National Relief Fund on 31.12.2004 - whether the amount was not applied for the earthquake relief - Held that - The principal requirement of section 80G(5C) is the donations made to the Trust are applied for providing relief to the earthquake victims of Gujarat before 31.03.2004. The legislature has advisedly used the expression applied and not actually spent - relying upon the judgement in case of commissioner of Income Tax vs. Thanti Trust 1996 (3) TMI 10 - SUPREME COURT Supreme Court approved the judgement of the High Court in which it was held that the assessee having made the credit entry in favour of educational institution had not retained any control over the monies and thus funds were made available to the institution by the Trust. The Supreme Court therefore held that the assessee could claim benefit of exemption u/s. 11 of the Act. The record would suggest that the assessee having committed to spend total of ₹ 3.19 crores for construction of the school buildings ended up paying ₹ 1 crore short to the contractor for the reasons which are neither clear nor very important for us. Had the assessee retained such amount, a serious question of its taxability would have arisen. However, the assessee almost, as soon as it becomes clear that the amount is not to be actually paid, transferred the same to the Prime Minister s National Relief Fund - this was done on 31.12.204 as against the prescribed deadline of 31.03.2004 contained in section 80G(5C) - It was not possible for the assessee to foresee and transfer any part of such amount in the Prime Minister s National Relief Fund. In such a situation, the deadline on 31.03.2004 contained in section 80G(5C)(iv) must be held to be directory and not mandatory. Hence Tribunal committed an error in holding that sum of ₹ 1 crore was not applied for earthquake relief before 31.03.2004 and in view of the fact that such sum remained unspent after 31.03.2004 was also transferred by the assessee to the Prime Minister s National Relief Fund though after 31.03.2004, the adverse consequence of section 12(3) would not apply - Decided in favor of assessee.

Issues Involved:

1. Whether ?1 crore was applied for earthquake relief in Assessment Year 2004-05 and thus, whether it was income of the assessee Trust in terms of section 80G(5C)(iv) read with section 12(3) of the Income Tax Act, 1961.
2. Whether the assessee Trust fulfilled the terms of section 80G(5C)(iv) by depositing ?1 crore in the Prime Minister's National Relief Fund on 31.12.2004, making it non-taxable as income.

Issue-wise Detailed Analysis:

Issue 1: Application of ?1 crore for Earthquake Relief

The appellant, a registered charitable Trust approved under section 80G(5) of the Income Tax Act, 1961, was created to provide relief to earthquake victims in Gujarat. The central legislature provided tax concessions to encourage rehabilitation activities. Section 80G(5C) required that donations be applied for providing relief to earthquake victims by 31.03.2004 or transferred to the Prime Minister's National Relief Fund by the same date. Section 12(3) stated that any unutilized donation not transferred by the deadline would be deemed income and taxed.

The assessee filed a return for Assessment Year 2004-05, claiming that ?3.89 crores were applied for earthquake relief. The Assessing Officer doubted this claim, noting that ?3.19 crores were neither applied for relief nor transferred to the Prime Minister's National Relief Fund by 31.03.2004. The assessee contended that the committed funds amounted to application, and the remaining ?1 crore was transferred to the Prime Minister's National Relief Fund on 31.12.2004. The Tribunal accepted that application of funds, not actual spending, was required but distinguished between the ?2.19 crores actually spent and the ?1 crore remaining unutilized, denying exemption for the latter.

Issue 2: Fulfillment of Section 80G(5C)(iv) Terms

The assessee argued that awarding a contract for school construction and crediting the contractor's account by 31.03.2004 constituted application of funds. The Tribunal accepted this for ?2.19 crores but not for the ?1 crore surplus, which was transferred to the Prime Minister's National Relief Fund on 31.12.2004. The Tribunal's bifurcation was challenged by the assessee, arguing that the legislative intent was to ensure application of funds, not necessarily actual spending by the deadline. The assessee relied on precedents where credit entries and commitments were deemed sufficient for application of funds.

Judgment Analysis:

The court noted that the principal requirement of section 80G(5C) was the application of donations for relief by 31.03.2004, not actual spending. The court cited precedents where credit entries and commitments were deemed sufficient for application. The court found that the assessee had committed ?3.19 crores for school construction, made credit entries, and deducted tax at source, constituting application of funds. The Tribunal's distinction between the spent and unspent amounts was deemed erroneous.

The court held that the deadline of 31.03.2004 for transferring unutilized funds to the Prime Minister's National Relief Fund was directory, not mandatory. The assessee, having committed the funds, could not foresee the surplus by the deadline. The subsequent transfer of the ?1 crore surplus to the Prime Minister's National Relief Fund on 31.12.2004 was deemed compliant with the legislative intent.

Conclusion:

The Tribunal's decision was reversed. The court held that the ?1 crore was applied for earthquake relief before 31.03.2004 and the subsequent transfer to the Prime Minister's National Relief Fund, though after the deadline, did not attract adverse tax consequences under section 12(3).

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