2020 (1) TMI 559 - AT - Income Tax

Exemption u/s 11 - AO treated the receipt of development fees as undisclosed income - case was selected for scrutiny vide CASS - HELD THAT - No material brought on record by the lower authorities or before us by the Ld. DR to substantiate that the contribution towards development fund was not voluntary or that it was in exchange for the services provided by the assessee society to the payers. In this regard we may gainfully refer to the decision of Hon'ble Delhi High Court in case of DIT (Exemption) v. National Association of Software Services Co's. 2012 (5) TMI 204 - DELHI HIGH COURT wherein the Hon'ble High Court has held that onetime fee paid by members who are aware that it could be spent by assessee only towards capital purposes was in the nature of corpus donation and not taxable as income. The Court also took note of the fact that apart from the one time fees, the association was collecting fees separately for the services rendered to the members and therefore the one-time fee could not be linked with the services rendered to the members. For the reasons set out above, we therefore hold that the assessee society had received contribution towards development fund from the students, apart from the tuition fees, with the clear understanding that it shall be solely used for creation of capital asset necessary for achieving the educational objects of the assessee society and therefore formed part of the corpus and therefore, not in the nature of revenue receipts. The AO is accordingly directed to re-compute the income of the assessee society after excluding the development fees from the purview of Section 11. Disallowing the claim of depreciation by way of application of income of the assessee society - HELD THAT - We do not countenance the action of Ld. CIT(A) on the simple ground that the claim made by the assessee for depreciation for the year under consideration is no longer resintegra since the Hon'ble Supreme Court in the decision in CIT Vs. Rajasthan Gujarati Charitable Foundation 2017 (12) TMI 1067 - SUPREME COURT upheld the action of the Hon'ble High court, which in turn upheld the action of Tribunal, allowing the depreciation claimed by the assessee on the assets acquired/expenditure made, which has been allowed as application of income as well. In the said judgment, the Hon'ble Supreme Court had also taken specific note of the amendment brought in by the Legislature in section 11(6) of the Act by Finance Act (No. 2) of 2014 and held that the amendment is prospective and is therefore effective from AY 2015-16 and onwards. We direct the AO to allow the depreciation as claimed by the assessee society.

Summary

Issues Involved:
1. Treatment of development fees as undisclosed income.
2. Denial of benefit under Section 11 of the Income-tax Act, 1961.
3. Disallowance of depreciation claim.

Detailed Analysis:

Issue 1: Treatment of Development Fees as Undisclosed Income
The primary grievance of the assessee was the treatment of development fees amounting to ?19,39,000/- for AY 2010-11 and ?34,12,500/- for AY 2014-15 as undisclosed income by the AO and the confirmation of this action by the CIT(A). The AO considered the development fees as revenue in nature, arguing that the fees were collected regularly and were not voluntary donations. The AO further stated that the development fees did not meet the criteria for corpus donations under Sections 12(1) and 11(1)(d) of the Act, as there was no specific direction from the students to treat these fees as corpus donations. The CIT(A) upheld the AO's decision but noted that since the receipts were disclosed in the annual accounts, they could not be treated as 'undisclosed receipts'.

Upon appeal, the Tribunal noted that the development fees were collected as per a resolution dated 03.01.2000, which specified that the funds were for the development of the school building and capital equipment and were not to be used for revenue purposes. The Tribunal found that the lower authorities were factually incorrect in stating that the fees were collected monthly along with tuition fees. It was established that the contributions were made voluntarily by the students at any time during the year. The Tribunal concluded that the development fees were intended to form part of the corpus of the society and were thus capital receipts, not revenue receipts. Consequently, the AO was directed to exclude the development fees from the income of the assessee society.

Issue 2: Denial of Benefit Under Section 11
The AO denied the benefit under Section 11, arguing that the development fees were not applied for charitable purposes as they were not included in the income and expenditure account. The CIT(A) confirmed this view, stating that the development fees lacked the essential character of "voluntary and declaration of direction" and were thus not corpus donations.

The Tribunal, however, held that the development fees were collected with the clear understanding that they would be used solely for capital purposes, as evidenced by the resolution and the manner in which the fees were accounted for in the balance sheet. The Tribunal emphasized that there is no legal requirement for a written direction from the donor for a contribution to be considered a corpus donation. The intention of the parties, as evidenced by the resolution and the receipts issued, was sufficient to establish that the contributions were for the corpus. Therefore, the Tribunal directed the AO to re-compute the income of the assessee society, excluding the development fees from the purview of Section 11.

Issue 3: Disallowance of Depreciation Claim
For AY 2014-15, the AO disallowed the depreciation claim of ?25,40,795/- without providing any reasons. The CIT(A) upheld this disallowance, relying on a decision of the ITAT Chennai. The assessee argued that the depreciation should be allowed, citing the Supreme Court's decision in CIT Vs. Rajasthan & Gujarati Charitable Foundation, which held that depreciation on assets acquired through expenditure already treated as application of income should be allowed.

The Tribunal agreed with the assessee, noting that the Supreme Court had upheld the allowance of depreciation even when the capital expenditure had been treated as application of income. The Tribunal criticized the CIT(A) for not following the binding precedent set by the jurisdictional Calcutta High Court in CIT Vs. Siliguri Regulated Market Committee, which allowed the claim of depreciation. The Tribunal directed the AO to allow the depreciation as claimed by the assessee society.

Conclusion:
The Tribunal allowed both appeals of the assessee, directing the AO to exclude the development fees from the income of the assessee society and to allow the depreciation claim. The Tribunal emphasized the importance of following binding precedents and ensuring that factual inaccuracies do not influence judicial decisions.