IT: Where assessee-society was formed at instance of Government with object to create world class automotive testing, validation etc., advances given by assessee towards implementation of project had to be treated as application of income and not as an investment out of grant received by assessee
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[2013] 40 taxmann.com 119 (Delhi - Trib.)
IN THE ITAT DELHI BENCH 'E'
Additional Director of Income-tax ( Exemption)
v.
Natrip Implementation Society*
S.V. MEHROTRA, ACCOUNTANT MEMBER
AND I.C. SUDHIR, JUDICIAL MEMBER
IT APPEAL NO. 1385 (DELHI) OF 2011
CO NO. 257 (DELHI) OF 2012
[ASSESSMENT YEAR 2006-07]
JUNE 28, 2013
Section 11, read with section 13, of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under [Application of income] - Assessment year 2006-07 - Assessee-society was formed at instance of Government of India with object to create world class automotive testing, validation etc. - It had given advance for purchase of land and upgradation of existing facilities - Assessing Officer held that said advance given was not according to section 11(5) and therefore violated provisions of section 13(1)(d) - Whether reasoning given by Assessing Officer was not correct inasmuch as advances given by assessee towards implementation of its project had to be treated as application of income and not as an investment out of grant received by assessee - Held, yes - Whether word 'applied' need not necessarily imply 'spent'; even if an amount is irretrievably earmarked and allocated for charitable or religious purpose or purposes, it may be said to have been 'applied' to said purposes - Held, yes - Whether further, grant received was on capital account and not a recurring grant towards revenue expenses and, hence, project grant was neither income nor corpus of assessee-society - Held, yes - Whether as regards interest on fixed deposit, since same related to unutilised project grant on which Government had overriding title, such interest could not be treated as income of assessee - Held, yes [Para 16] [In favour of assessee]
Words & Phrases : Word 'applied' as occurring in section 11(1)(a) of the Income-tax Act, 1961
FACTS
■ The assessee was an autonomous body incorporated as society under the Societies Registation Act, 1860 formed at the instance of Ministry of Heavy Industries, Government of India with pre-defined objectives and project outlay. The assessee-society was being managed by the nominee of various Government Department and representative of automobile industry. The main objective of the assessee was to create world class automotive testing, validation etc.
■ The Assessing Officer noticed that the assessee had given advance for purchase of land and upgradation of existing facilities aggregating to Rs. 59.63 crores. The Assessing Officer also examined the details of other advances aggregating to Rs. 1,36,31,418 and observed that advance given was not according to section 11(5) and, therefore, violated the provision of section 13(1)(d). Further, he observed that the assessee purchased the land but the land was purchased in the name of department of Heavy Industries. This was also not in accordance with section 11(5). The Assessing Officer, after examining the income and expenditure account, concluded that only Rs. 24 lakhs was incurred towards expenses and, therefore, determined the assessee's income at certain sum, inter alia, observing that the assessee had not utilised the amount to the extent of 85 per cent of the receipts.
■ Before the Commissioner (Appeals) the assessee had, inter alia, stated that the assessee was acting only as a trustee of Government funds and that it received project grant from Government with conditions that all lands purchased leased out of these funds would belong to the Government.
■ The Commissioner (Appeals) allowed the assessee's appeal, inter alia, observing that:
(a) project grant was neither income nor corpus of the assessee-society;
(b) Interest received on fixed deposit receipts made out of unutilised project grant received by the assessee-society was not an income of society.
■ On second appeal:
HELD
■ The reasoning given by the Assessing Officer is not correct inasmuch as the advances given by the assessee towards implementation of its project have to be treated as application of income and not as an investment out of the grant received by the assessee. The word 'applied' need not necessarily imply 'spent'. Even if an amount is irretrievably earmarked and allocated for the charitable or religious purpose or purposes, it may be said to have been 'applied' to the said purposes, CIT v. Radhaswami Satsang Sabha [1954] 25 ITR 472 (All.). Therefore, the Assessing Officer was wrong in observing that the application of funds by the assessee was not according to section 11(5) and the advance was not utilization of the funds. Therefore, the advance to the tune of Rs. 59.63 crores and Rs. 1.36 crores was to be treated as application of income.
■ Further, the Assessing Officer held that purchase of land at Silchar for Rs. 11,25,297 was in violation to section 11(5) as property purchased was in the name of Department of Heavy Industry and not in the name of the assessee. Considering the terms of the grant, this objection is not sustainable. Therefore, the purchase of land is also to be considered as application of income. Accordingly, there was no violation of section 11(5). Therefore, the very premise on which the Assessing Officer had proceeded, was wrong and the same cannot be sustained. Further the grant received was on capital account and not a recurring grant towards revenue expenses. Hence it could not be taken to income and expenditure account as per Accounting Standards 12 issued by the Institute of Chartered Accountants of India. Therefore, the Commissioner (Appeals) rightly held that the project grant was neither income nor corpus of the assessee-society. [Para 16]
■ As far as interest on fixed deposit receipt is concerned, the same related to the unutilised project grant on which the Government had overriding title. Further, this interest was also at par with the grant received from the Government of India and, therefore, the same reasoning would apply to the interest on fixed deposit receipt as to the grant. Therefore, interest on fixed deposit receipt amounting to Rs. 2,20,21, 847 could not be treated as income of society. [Para 17]
■ In view of the above discussion, there was no reason to interfere with the order of the Commissioner (Appeals). [Para 19]
CASES REFERRED TO
Asstt. DIT (Exemption) v. A.P. Forest Development Corpn. [2012] 52 SOT 216/23 taxmann.com 24 (Hyd.) (para 12) and CIT v. Radhaswami Satsang Sabha [1954] 25 ITR 472 (All.) (para 16).
Gunjan Prasad for the Appellant. K.R. Manjani and Prakash Gupta for the Respondent.
ORDER
S. V. Mehrotra, Accountant Member.-The appeal filed by the Revenue is directed against the order of the learned Commissioner of Income-tax (Appeals) dated December 24, 2010, for the assessment year 2006-07. The assessee has filed cross-objection.
2. The brief facts of the case are that the assessee is a registered society under the Societies Registration Act, 1860. It is also registered under section 12A of the Income-tax Act and also notified under section 80G(5)(vi) of the Income-tax Act. The main objective of the assessee-society is to create world class automotive testing, validation etc.
3. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee had given an advance to the following parties:
(Rs.)
1. SIPCOT 6,00,00,000
2. ARAI, Pune 21,80,00,000
3. VRDE 32,75,00,000
Total 59,63,00,000
4. The Assessing Officer noticed that the assessee had given advance for purchase of land and upgradation of existing facilities aggregating to Rs.59.63 crores. He required the assessee to explain as to how these investments were as per requirements of section 11(5) of the Income-tax Act, 1961. After examining the assessee's reply, the Assessing Officer observed that the same had no force because the assessee simply stated that the advance was given out of the Government of India grant which was meant for utilisation according to terms and conditions of the release of Government funds. The Assessing Officer also examined the details of other advances aggregating to Rs. 1,36,31,418 and observed that advance given was not according to section 11(5) and, therefore, violated the provision of section 13(1)(d). Further, he observed that the assessee purchased the land at Silchar at Rs. 11,25,297 but the land was purchased in the name of Department of Heavy Industries. This was also not in accordance with section 11(5) of the Act. The Assessing Officer, after examining the income and expenditure account, concluded that only Rs. 24 lakhs was incurred towards expenses and, therefore, determined the assessee's income at Rs.3,99,85,170, inter alia, observing that the assessee had not utilised the amount to the extent of 85 per cent. of the receipts.
5. Before the learned Commissioner of Income-tax (Appeals) the assessee had, inter alia, stated that the assessee was acting only as a trustee of Government funds. It was further submitted that the assessee-society had earned interest amounting to Rs. 2,20,71,587 on the fixed deposit made out of the unutilised project grant received by it during the year for implementation of the project on behalf of the Government of India. It was further clarified that the assessee-society was under obligation to refund the interest so earned on unutilised grant to the Government of India as per the General Financial Rules and Ministry of Finance Directives. The assessee further pointed out that it had received project grant as per grant release letter dated September 27, 2005, December 29, 2005, April 23, 2006 and letter dated September 27, 2006. Sanction letters of the grant included the following conditions :
"All the lands purchased/leased out of these funds shall belong to the Government. The assets, if any acquired out of these funds should not without the prior sanction of the Government be disposed of, encumbered or utilised for the purpose other than for which the funds have been released."
6. The release of funds to the appellant-society is subject to fulfilment of the following terms and conditions :
(a) In terms of the approval of the Department of Heavy Industry, NATIS, will subject its accounts to the statutory audit as well as the audit by the Comptroller and Auditor-General of India in terms of rule 211(1) of the General Financial Rules.
(b) NATIS will furnish to this Department certificate to the effect that the grant has been utilised for the specific purpose for which it was sanctioned. It will also furnish the Utilisation Certificate in Form GFR 19A as required under the General Financial Rules 212(1).
(c) NATIS will spend this fund in accordance with the rules and regulations framed by it within the framework of the general principles laid down in the General Financial Rules and the conditions detailed out in the annexure.
7. The learned Commissioner of Income-tax (Appeals) further noted as under :
The minutes of cabinet committee meeting dated July, 25, 2005 (confidential) comprises the following clause, which clearly establish that the appellant-society is working at the instance of Government of India as "trustee".
8. Clause 7.2 (page 77 written submission dated September 15, 2009) is reproduced below :
"Department of Heavy Industry proposes to endow full implementation responsibility on NATIS and would enable it comprehensively for taking required decisions on project implementation. The PIB, being the Governing Council of NATIS, will accordingly be empowered to take all necessary decisions concerning the implementation of NATRIP except that it will require prior permission of the Government in the Department of Heavy Industry for following :
(i) Change in location of centers.
(ii) Nomination of additional members on the PIB representing the interests of the Government.
(iii) Replacement of global consultants.
(iv) Change in financing pattern of project.
(v) Fundamental change in Governance structure of the centers.
(vi) Change in incumbency of project director of the chief executive Officer of NATIS."
9. The learned Commissioner of Income-tax (Appeals) allowed the assessee's appeal, inter-alia, observing that :
(a) project grant is neither income nor corpus of the assessee-society ;
(b) interest received on fixed deposit receipts made out of unutilised project grant received by the assessee-society was not an income of society.
10. Being aggrieved with the order of the learned Commissioner of Income-tax (Appeals), the Department is in appeal before us and has taken following grounds of appeal :
"On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in allowing the assessee's appeal because the investment made by the assessee-society is not according to section 11(5) of the Act and had violated the provisions of section 13(1)(d) of the Income-tax Act."
11. The learned Departmental representative relied on the order of the Assessing Officer.
12. Learned counsel submitted that this issue is squarely covered by the decision of the Tribunal in Asstt. DIT (Exemption) v. A.P. Forest Development Corpn. [2012] 52 SOT 216/23 taxmann.com 24 (Hyd.).
13. We have considered the rival submissions and have perused the record of the case. Before the learned Commissioner of Income-tax (Appeals) the assessee had stated that the assessee is an autonomous body incorporated as society under the Societies Registration Act, 1860 formed at the instance of Ministry of Heavy Industries, Government of India with pre-defined objectives and project outlay. The assessee-society is being managed by the nominee of various Government Department and representative of automobile industry. It was further stated that the assessee-society will be included as an autonomous organisation under the Department of Heavy Industry, Government of India (Allocation of Business) Rules, 1961 after receiving appropriate Government approval and its accounts will be laid on the table of both the houses of Parliament on annual basis.
14. Admittedly, the assessee had received specific purpose grant for being spent in accordance with the objects formulated by the Government of India within a specified time. The assessee's contention is that grant can neither be construed as corpus nor income of the society. The second issue is regarding interest received on fixed deposits receipts where the contention of the assessee is that interest received on fixed deposits, if remained unutilised, had to be returned to the Government. Thus, the contention is that there is overriding title over the interest on fixed deposits receipts.
15. Section 11 exempts income from property held for charitable or religious purposes. Clause (a) of section 11(1) exempts income to the extent the income is applied for charitable or religious purposes. In case the application of income is less than 85 per cent. of the income derived during the year from property held under trust then as per section 11(2) the assessee is required to make an application before the Assessing Officer for accumulating the income. The requirement is that the money so accumulated or set apart will remain invested or deposited in the forms and modes as specified under section 11(5).
16. The contention of the Assessing Officer is that the advances given out of the grant received by the assessee could not be treated as an investment as per section 11(5). In our opinion the reasoning given by the Assessing Officer is not correct inasmuch as the advances given by the assessee towards implementation of its project have to be treated as application of income and not as an investment out of the grant received by the assessee. The word "applied" need not necessarily imply "spent". Even if an amount is irretrievably earmarked and allocated for the charitable or religious purpose or purposes, it may be said to have been "applied" to the said purposes. (CIT v. Radhaswami Satsang Sabha [1954] 25 ITR 472 (All)). Therefore, the Assessing Officer was wrong in observing that the application of funds by the assessee was not according to section 11(5) and the advance was not utilisation of the funds. Therefore, the advance to the tune of Rs.59.63 crores and Rs. 1.36 crores was to be treated as application of income. Further, the Assessing Officer held that purchase of land at Silchar for Rs. 11,25,297 was in violation to section 11(5) as property purchased was in the name of Department of Heavy Industry and not in the name of the assessee. Considering the terms of the grant, this objection is not sustainable. Therefore, the purchase of land is also to be considered as application of income. Accordingly, there was no violation of section 11(5). Therefore, the very premise on which the Assessing Officer had proceeded, was wrong and the same cannot be sustained. Further the grant received was on capital account and not a recurring grant towards revenue expenses. Hence it could not be taken to income and expenditure account as per Accounting Standards 12 issued by the Institute of Chartered Accountants of India. Therefore, the learned Commissioner of Income-tax (Appeals) rightly held that the project grant was neither income nor corpus of the assessee-society.
17. As far as interest on fixed deposit receipt is concerned the same related to the unutilised project grant on which the Government had overriding title. Further, this interest was also at par with the grant received from the Government of India and, therefore, the same reasoning would apply to the interest on fixed deposit receipt as to the grant. Therefore, interest on fixed deposit receipt amounting to Rs. 2,20,21,847 could not be treated as income of society which is also evident from the following details given in the statement of facts filed before the learned Commissioner of Income-tax (Appeals) :
"During the year under review, the appellant-society received grant-in-aid to the extent of Rs. 182.33 crores in four instalments. The said grant has been released to the appellant-society with the undertaking that entire money of the grant so released shall be spent on specified projects as per the grant sanction letter issued by the Government of India in persuasion of office memorandum dated August 31, 2005. The appellant-society invariably keeps this money in fixed deposits with the bank till it is needed for the purpose for which it is being sanctioned and released by the sanctioning authority on behalf of the Government of India. The income in the shape of interest on such fixed deposit receipts with the bank cannot be considered as income of the appellant-society, in view of the fact that as per the terms and conditions of release of grant-in-aid, either the interest amount will be subtracted from the overall grant amount sanctioned to the appellant-society for the project or the appellant-society is under an obligation to refund this money to the Government of India as per the General Financial Rules (GFR's) and Ministry of Finance (MOF) directives. Thus the interest on fixed deposit receipt's earned by the society belongs to the Government of India and is not an income of the appellant-society.
The learned Assessing Officer, while drafting the impugned assessment order has failed to understand the true nature of the grant-in-aid received from the Government of India and income thereon in the shape of interest on fixed deposit receipt. The alleged income of the appellant-society is per se a grant made by the Government of India with specific direction that they shall form part of the corpus of the society. Likewise, the alleged income on fixed deposit receipt amounting to Rs. 2,20,21,847 is not the income of the appellant-society at all as the same has to be refunded back to the Government of India or alternatively the interest income or any other income on the grant money earned by the appellant-society shall be adjusted towards total approved grant for the project, as per letter dated March 5, 2007. Copy of which was supplied to the Assessing Officer during the course of assessment proceedings."
18. Thus, in sum and substance, the interest on fixed deposit receipt could not be treated as the assessee's income.
19. In view of the above discussion, we do not find any reason to interfere with the order of the learned Commissioner of Income-tax (Appeals).
20. The cross-objection filed by the assessee is in support of the learned Commissioner of Income-tax (Appeals)'s order and, thus, has become infructuous in the light of the above findings in the appeal filed by the Department.
21. In the result, the Department's appeal is dismissed and the cross-objection filed by the assessee is dismissed as infructuous.
USP
*In favour of assessee.
Regards
Prarthana Jalan
__._,_.___
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