2020 (9) TMI 874 - HC - Income Tax

Exemption u/s 11 - assessee is a charitable institution registered under Section 12A - Charitable activity u/s 2(15) - Whether AO had no locus standi to examine the activities of the assessee trust in order to find out whether they were carrying charitable activity as the assessee had already been granted exemption under Section 11 of the Act? - HELD THAT - CIT (Appeals) has held that the AO has ignored the submission made by the assessee that the assessee provides free meals to the general public on every Sunday morning in free distribution hall and therefore, the finding recorded by the AO that assessee has not carried any charitable activity is perverse. The aforesaid finding has also been affirmed by the Income Tax Appellate Tribunal by holding that all the pilgrims who visit ISKON Temple are served with 'Prasadam' without probing into their caste, creed, religion and nationality. Thus, the expenditure has definitely been incurred on a section of the society and therefore, the same would tantamount to a charitable purpose. The aforesaid concurrent findings of fact have been recorded by the CIT(Appeals) as well as Income Tax Appellate Tribunal on the basis of meticulous appreciation of evidence on record. No perversity could be pointed out in the aforesaid concurrent findings of fact. Therefore, in the fact situation of the case, the first substantial question of law in fact, does not arise for consideration as the assessee was carrying on charitable activity. Provisions for doubtful debts allowed as a expenditure even though the same is not written off and the same is continued as a provision in the assessee's books - HELD THAT - It is well settled in law that income of the trust has to be computed in a normal commercial manner and only the real income has to be taken into account. The loss of sale of investment is not allowable in computing the income for the purposes of Section 11 of the Act. See 'COMMISSIONER OF INCOME TAX- III vs. RAJASTHANI AND GUJARATI CHARITABLE FOUNDATION, POONA 2017 (12) TMI 1067 - SUPREME COURT . As submitted a remand report, however, AO did not offer any comment with regard to additional evidence adduced by the assessee before the CIT (Appeals). The purchase of immovable properties for the purposes of objects of the Trust is the application of income and even if the assessee has earned income from selling the land for achieving objects of the Trust, the same would be allowable under Section 11 of the Act. The Tribunal has also held that as per prevalent accounting principles which clearly lay down that loss on sale of investment should be taken into account while determining the commercial income, the assessee is entitled to expenditure in respect of provision for doubtful debt. Accordingly, the aforesaid substantial question of law is answered against the revenue and in favour of assessee.

Summary

Issues:
1. Locus standi of Assessing Officer to examine activities of assessee trust for charitable status.
2. Allowability of provision for doubtful debts as expenditure.
3. Justification for re-opening assessment under Section 147 when time limit under Section 143(3) not expired.

Issue 1: Locus standi of Assessing Officer:
The appeals involved questions regarding the Assessing Officer's authority to scrutinize the charitable activities of an assessee trust granted exemption under Section 11 of the Income Tax Act. The Tribunal held that once exemption is granted, the Assessing Officer is bound by it. The High Court affirmed this, emphasizing that the trust's activities, like providing free meals to the public, were indeed charitable, benefiting a section of society, fulfilling the legal requirement for a charitable purpose. The court found no perversity in the concurrent findings supporting the charitable nature of the trust's activities.

Issue 2: Allowability of doubtful debts provision:
The second issue revolved around the allowance of a provision for doubtful debts as expenditure, even if not written off. The Tribunal held that such provisions are necessary as per accounting principles and should be allowed. The court reiterated that income of a trust must be computed in a commercial manner, and loss on the sale of investment is not deductible under Section 11. The court upheld the Tribunal's decision, emphasizing that the trust was entitled to the provision for doubtful debts as per accounting principles.

Issue 3: Re-opening assessment under Section 147:
Regarding the re-opening of assessment under Section 147 when the time limit under Section 143(3) had not expired, the court analyzed the procedural aspects. The court noted that the notice issued under Section 148(1) without completing the assessment was without jurisdiction. The court highlighted that the Finance Act amendment with a prospective effect did not apply to the assessment years in question. The court also emphasized that the trust's activities, even if benefiting a section of society, were charitable and should be allowed as expenditure, citing relevant legal precedents.

Conclusion:
The High Court dismissed the appeals, finding no merit in challenging the Tribunal's decisions. The court upheld the charitable nature of the trust's activities, the allowance of the provision for doubtful debts, and the procedural irregularity in re-opening the assessment. The court emphasized the importance of assessing trust income in a commercial manner and upheld the principles of charitable deductions as per the Income Tax Act.