2018 (8) TMI 596 - AT - Income Tax

Exemption u/s 11 - Application of income for charitable purposes - deduction of donations paid to various charitable institutions registered u/s 12A - CIT (A) went step further in analysing each and every heads of expenses so as to conclude that most of these expenditures incurred cannot be held to be spent for charitable activities at all and hence would not fall within the utilisation limit of 85% as provided in section 11(1). Held that - We are unable to fathom as to how giving of such donations to schools and colleges for scholarship of students; amount given for activities like marathon race, tree plantation; distribution of prizes to the students; donations given in kind like donating of school furniture, school buses, solar water heating system / solar street lights, rain water harvesting systems, RO system etc. to schools; motor car to mobile cr ches; donation of sweaters to Schools; to literacy India; donation to Mumbai Mobile Creches etc.; can be held for noncharitable activities. Where in the law has it been provided that a trust has to incur expenditure on its own and cannot give donation in kind to institutions who in turn have given to the needy which otherwise are for charitable purposes? The contention of Ld. CIT (A) that donations made in kind or in cheques to charitable organisation which are registered u/s 12A are deemed to not allowable as per section 13(3)(d) is completely misunderstanding of the said provision, because disallowance under this clause can only be of the payment made to another charitable institution out of accumulated funds and there is no embargo of payment / application of current year income. All will fall within the category of advancement of general public utility and we were unable to appreciate that how these expenditures can be held to be for noncharitable purposes. Hence, we allow such expenditures as application of income for charitable purposes. Regarding administrative expenses - Held that - these are being incurred for day to day activities for the assessee trust and running of the trust and without such expenditure no charitable trust can carry out these activities. The entire addition and disallowance made by the Ld. CIT (A) is deleted - Decided in favor of assessee.

Summary

Issues Involved:
1. Treatment of donations to various charitable organizations under Section 11(1)(a) of the Income Tax Act.
2. Enhancement of quantum of disallowance by CIT(A).
3. Treatment of donations to government-financed colleges for educational purposes.
4. Application of income for other charitable activities like tree plantation, distribution of prizes, etc.
5. Treatment of administrative and general expenses as application of income for charitable purposes.

Detailed Analysis:

1. Treatment of Donations to Various Charitable Organizations:
The assessee, a public charitable trust, contested the disallowance of donations amounting to ?69,14,593 made to various charitable organizations registered under Section 12A of the Income Tax Act. The CIT(A) held that these donations could not be treated as application of income for charitable purposes under Section 11(1)(a). The Tribunal noted that the donations were supported by documentary evidence and were used for charitable purposes, thus qualifying as application of income under Section 11(1)(a).

2. Enhancement of Quantum of Disallowance by CIT(A):
The CIT(A) enhanced the disallowance, adding ?85,15,743 to the total disallowed amount. The Tribunal found that the CIT(A)'s reasoning was flawed, particularly in interpreting Section 13(3)(d) and the application of current year's income. The Tribunal emphasized that disallowance under Section 13(3)(d) applies only to accumulated funds, not current income, and cited the Delhi High Court's judgment in the case of Bagri Foundation [192 Taxmann 309].

3. Treatment of Donations to Government-Financed Colleges:
The CIT(A) disallowed donations of ?36,82,865 made to various government-financed colleges, arguing that these could not be linked to any specific beneficiary and the colleges were not registered under Section 12A. The Tribunal disagreed, noting that the donations were for educational purposes, including scholarships and solar installations, and thus constituted application of income for charitable purposes.

4. Application of Income for Other Charitable Activities:
The CIT(A) disallowed ?12,59,155 spent on activities like tree plantation, marathon participation, and distribution of prizes among students, claiming they were not charitable. The Tribunal found this reasoning untenable, stating that these activities fell under the category of advancement of general public utility and thus qualified as application of income for charitable purposes.

5. Treatment of Administrative and General Expenses:
The CIT(A) disallowed ?17,39,164 claimed as administrative and general expenses, arguing that these were not connected to the trust's charitable activities. The Tribunal held that these expenses were necessary for the day-to-day functioning of the trust and were thus legitimate applications of income for charitable purposes.

Conclusion:
The Tribunal allowed the appeal, holding that all the disallowed expenditures were indeed applications of income for charitable purposes. The entire addition and disallowance made by the CIT(A) were deleted, and the grounds raised by the assessee were allowed. The judgment emphasized that donations in kind, administrative expenses, and contributions to educational and public utility activities are valid applications of income under Section 11(1)(a).