Chartered Accountant Finance: [aaykarbhavan] Judgments and Information [3 Attachments]

India International Centre I T A T Delhi

PFA

S. 2(15)/11: Before any activity can be branded as being in the nature of trade or commerce, the AO has to demonstrate the intention of parties backed with facts and figures of carrying out activities with profit motive. Mere surplus from any activity which has been undertaken to achieve the dominant object does not imply that the same is run with profit motive. The intention has to be gathered from circumstances which compelled the carrying on the activity

(i) The third proviso to section 143(3), requiring the AO to examine the applicability of proviso to section 2(15) in case of institutions notified u/s 10(23C)(iv) in view of insertion of 17th proviso to section 10(23C), was not on statute book at the time when assessment order was passed and since the notification remained in force the invocation of section 263 by DIT(E) was not justified in view of the decision of Hon'ble Supreme Court in the case of Max India Ltd.

(ii) From the detailed submissions of assessee, reproduced earlier, which have not been controverted by department, we fail to understand as to how these activities can be said to have an iota of commercial/ trade colour. The dominant object of the assessee is definitely for the well being of public at large by organizing various seminars for the welfare of people by disseminating knowledge in various fields in order to uplift the social consciousness of the society at large. (The composition of membership clearly exemplifies the real intention of assessee. We fail to understand as to how the hostel accommodation provided to various invitees could be considered as a commercial activity. Before any activity can be branded as being in the nature of trade or commerce, the AO has to demonstrate the intention of parties Backed with facts and figures of carrying out activities with profit motive. Mere surplus from any activity, which undisputedly has been undertaken to achieve the dominant object, does not imply that the same is run with profit motive. The intention has to be gathered from circumstances which compelled the carrying on an activity. In the present case, ld. counsel has clearly demonstrated that surplus was generated from interest income and not from catering or hostel activities. Therefore, the objection of ld. DIT(E) does not survive on this count also.

(iii) The primary object of insertion of proviso to section 2(15) was to curb the practice of earning income by way of carrying on of trade or commerce and claiming the same as exempt in the garb of pursuing the alleged charitable object of general public utility. This proviso never meant to deny the exemption to those institutions, where the predominant object is undeniably a charitable object and in order to achieve the same incidental activities, essential in the given circumstances, are carried on (India Trade Promotion Organization Vs. Director General of incomew Tax (Exemptions) & Others (WP(C) no. 1872/2013 dated 22-1-2015) 2015-TIOL-227-HC-DEL-IT followed)

Related Judgements

Association of State Road Transport vs. CIT (ITAT Delhi)
The expression "trade", "commerce" or "business", as occurring in the first proviso of section 2(15) of the Act, must be read in the context of the intent in purported of Section 2(15) of the Act and cannot be interpreted to mean any activity which is carried on in an…
India Trade Promotion Organization vs. DGIT (E) (Delhi High Court)
The expression "charitable purpose", as defined in Section 2(15) cannot be construed literally and in absolute terms. It has to take colour and be considered in the context of Section 10(23C)(iv) of the said Act. It is also clear that if the literal interpretation is given to the proviso…
Indian Chamber of Commerce vs. ITO (ITAT Kolkata)
(i) The purpose for which the assessee association, i.e. The Indian Chamber of Commerce, was established is a charitable purpose within the meaning of S. 2(15) of the Act. The assessee is carrying out the said activities which are incidental…Read more ›
Himachal Pradesh Environment vs. CIT (ITAT Chandigarh)
The fact that the assessee is a regulatory body does not mean it cannot pursue an 'object of general public utility' which qualifies to be a charitable activity u/s 2(15). The scope of the expression 'any other object of general public utility' is very wide, though it excludes objects…
Delhi & District Cricket Association vs. DIT (E) (ITAT Delhi)
s.12AA(3) has no retrospective effect as it is neither explanatory nor clarificatory in nature and the CIT has no power to rescind the order passed by the CIT prior to 1st Oct.2004. For an assessee to be classified as charitable under the residuary category i.e. "advancement of any other…

I T O V Bharatiya Vidyamandir Trust

S. 11(1)(a): Charitable institutions are eligible to a blanket deduction of 15% of the gross receipts without being required to satisfy any condition

The decision of the Hon'ble Supreme Court in A.L.N Rao Charitable Trust reported in 216 ITR 697(SC) clearly held that there is a blanket exemption with regard to the 25% (now 15%) of gross receipts as per second part of Section 11(1)(a) of the Income Tax Act. This exemption of 15% is not dependent on any other condition except that the trust or society should be registered u/s 12AA of the Income Tax Act. The only issue to be examined here is whether the provisions of section 11(1) (a) and 11(2) have been since amended and if so, whether the aforesaid decision would apply to the amended provisions also? It is apparent from the reading of the provisions that section 11 (1)(a) was almost identical during the AY 69-70 and during AY 2010-11. As regards the provisions of section 11(2) are concerned, even the amended sub section (2) operates qua the balance of 85 per cent, of the total income of the previous year which has not got the benefit of tax exemption under sub-section (l)(a) of section 11. Section 11(2), as amended, does not operate to whittle down or to cut across the exemption provisions contained in section 11(1)(a)so far as such accumulated income of the previous year is concerned. As held by the Hon'ble Supreme Court in the case of A.L.N Rao Charitable Trust reported in 216 ITR 697(SC), it has to be appreciated that sub-section (2) of section 11 does not contain any non obstante clause like "notwithstanding the provisions of sub-section (1)". Consequently, it must be held that after section 11(l)(a) has full play and if still any accumulated income of the previous year is left to be dealt with, and to be considered for the purpose of income tax exemption, sub-section (2) of section 11 can be pressed into service and if it is complied with then such additional accumulated income beyond 15 per cent, can also earn exemption from income-tax on compliance with the conditions laid down by sub-section (2) of section 11. As such, this judgement of the Hon'ble Supreme Court is squarely applicable to the appellant's case. The appellant is thus eligible for exemption of 15% of gross receipts 11(l)(a) of the Income Tax Act.

Related Judgements

ACIT vs. The Tribune Trust (ITAT Chandigarh)
(i) The assessee trust is doing only one activity of printing and publishing of newspaper. This activity was held to be of charitable in nature by the Privy Council in the Trustees of The Tribune Press Lahore 7 ITR 415.…Read more ›
ITO vs. Sir Kikabhai Premchand Trust (ITAT Mumbai)
Though s. 12A (1)(b) provides that the exemption u/s 11 will be available only if the accounts are audited and audit report "furnished along with the return", the same is not mandatory but is directory. The audit report in Form 10B affirms the statements contained in the balance sheet…
Pinegrove International Charitable Trust vs. UOI (P & H High Court)
To decide whether an institution exists solely for education and not to earn profit the predominant object of the activity has to be seen. The mere fact that an educational institution generates surplus after meeting the expenditure over a period of time does not mean that it ceases to…
Arun Shungloo Trust vs. CIT (Delhi High Court)
The department's contention that in a case where s. 49 applies the holding of the predecessor has to be accounted for the purpose of computing the cost of acquisition, cost of improvement and indexed cost of improvement but not for the indexed cost of acquisition will result in absurdities….
Vanita Vishram Trust vs. CCIT (Bombay High Court)
The fact that a surplus incidentally arises from the activities of the assessee does not disentitle an assessee of the benefit of s. 10(23C). The third proviso to s. 10(23C) which permits accumulation of surplus up to limits shows that the generation of surplus is per se not a…

PFA

Natural Gas Company V D C I T

(i) S. 48: Interest paid on moneys borrowed to acquire assets cannot be treated as the 'cost of acquisition' of the asset, (ii) S. 41(1): Unclaimed liabilities are deemed to have been remitted/ ceased and are taxable in the year of discovery by AO

The interest cost is toward the retention of the borrowing and, concomitantly, the retention or the holding of the asset under reference, i.e., is a function of the holding period. It is, thus, rightly described as a holding cost or a period cost, depending upon how one may look at it. This difference is again of relevance in-as-much as the asset may be sold/realized without the repayment of the debt, so that the interest cost continues independent of the asset. Again, the debt may be repaid/liquidated, extinguishing the interest cost, while the holding of the asset continues. That is, even the holding cost relationship is not automatic or follows as a natural corollary. The two, i.e., the interest cost and cost of the asset, are in any case independent of each other

(i) The assessee has claimed the interest cost as a part of the cost of acquisition and/or improvement (without actually specifying the same), so that we shall, as was the Revenue, obliged to consider it under either category; the said two costs being specified as eligible deductions u/s.48(ii). The first question, therefore, that arises is as to how is the interest cost relating to borrowings made to finance the acquisition of a capital asset, could be considered as toward its acquisition, which is already complete on the passing of the property therein to its owner-holder. The question, as would be apparent, is broader, including within its ambit, all forms of capital assets. That is, how does it, in any manner, promote or is toward acquiring the asset/shares, which would be borrowing itself. The interest cost is toward the retention of the borrowing and, concomitantly, the retention or the holding of the asset under reference, i.e., is a function of the holding period. It is, thus, rightly described as a holding cost or a period cost, depending upon how one may look at it. This difference is again of relevance in-as-much as the asset may be sold/realized without the repayment of the debt, so that the interest cost continues independent of the asset. Again, the debt may be repaid/liquidated, extinguishing the interest cost, while the holding of the asset continues. That is, even the holding cost relationship is not automatic or follows as a natural corollary. The two, i.e., the interest cost and cost of the asset, are in any case independent of each other. So, however, it shall not be wrong to describe the interest cost as a period cost, chargeable against the income of the enterprise for the relevant period, against its income from the assets, including the asset under reference, deployed for its activity. Coming back to the acquisition, the said process or event is complete on the transfer of the relevant capital asset to the assessee. The interest cost for the post acquisition period, as would be apparent from the foregoing, does not in any manner contribute toward the same, which process stands completed on the transfer. The same is, at best, a holding cost of the asset and, therefore, revenue in nature, to be, as such, expensed as a period cost for the relevant period. That in fact is precisely what the assessee had done after acquiring the asset in the instant case as well (CIT vs. Maithreya Pai [1985] 152 ITR 247 (Kar.); Shri Mahendra C. Shah vs. Addl. CIT [2011] 140 TTJ 16 (Mum); S. Balan vs. Dy. CIT [2009] 120 ITD 469 (Pune) distinguished).

(ii) The deeming in the case of section 41(1)(a), applicable in the instant case, is qua the benefit by way of cessation or remission of a trade liability in respect of an expenses of business or profession, as the income of business or profession for the year of such cessation or remission. Our second observation is that the cessation or remission of liability is a matter of fact, and which would therefore require being proved. The onus to establish that the conditions of taxability stand satisfied is always on the Revenue. In the present case, the Revenue states of the liabilities continuing to outstand in the assessee's books from 3 to 25 years. Surely, the same raises considerable doubts as to the existence of the liability/s. True, they stand not written back and continue to outstand in the assessee's books, but that is precisely the reason for the same being questioned by the Revenue, or entertaining doubts about the same. The doubt can by no means be considered as not valid, being in accord with the common practice and, thus, discharging the onus that law places on the Revenue. The accounting entries or the treatment that the assessee accords to an asset or liability in its books is not determinative of the matter. Again, the presumption would only be of the same representing the true state of affairs, but the inordinate delay in discharging the same raises considerable and valid doubt as to the existence of those liabilities as at the relevant year-end, i.e., as a fact. The onus on the Revenue, thus, gets discharged and shifts to the assessee, who is in effect only being called upon to show that the position as stated in its accounts reflects the true and correct position. A trading liability would normally get settled within a period of one or two months of it's arising, while in the instant case years and years have passed. The same leads to the question: Why were the same not paid in the normal course and, rather, not paid at all? Is the matter disputed – if so, to what extent, and which shall again have to be demonstrated. In fact, after the lapse of considerable time, it becomes doubtful if the creditor exists, who may have moved to a different place; discontinued business, et. al. No material or evidence or even explanation is forthcoming from the assessee. The only inference under the circumstances is that the liability no longer exists. Per contra, the assessee has obtained a benefit by way of remission or as the case may be cessation of liability. An inference of fact is again only a finding of fact, drawn in consistence and in harmony with in the conspectus of the facts and circumstances of the case. The next question that arises is as to the year of taxability, and which is the year of remission or cessation of liability. The assessee having claimed it as a liability for the immediately preceding year as well, and which stood accepted by the Revenue, would preclude the assessee from contending that the liability was not existing, or was in fact not a liability even as at the end of the immediately preceding year. That is, it is not open for the assessee to turn back and say that you accepted my lie for the preceding year/s and, therefore, you are bound by it. The only consequence in law is that the cessation or remission has occurred during the relevant previous year. We are in this regard, with respect, unable to agree with the hon'ble high court in the case of Bhogilal Ramjibhai Atara (supra) that the law is not clueless in this regard; the said decision having been rendered without considering the decision by the said court in Hides & Leather Products Pvt. Ltd. [1975] 101 ITR 61 (Guj) It needs to be appreciated that when the knowledge of the facts is in the possession of a particular person, it is he alone who can, and whom the law contemplates to exhibit it, in the absence of which an adverse inference, as applicable under the circumstances, shall obtain.

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DCIT vs. Manjula Shah (ITAT Mumbai Special Bench)
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ITO vs. Shailesh D. Shah/ Yusuf R Tanwar vs. ITO (ITAT Mumbai)
S. 41(1): Liability outstanding for long period of time is assessable as income (despite no write-back in A/cs) if assessee unable to prove genuineness of liability

It is very improbable that payments to labour can remain outstanding for more than three years. The assessee has not been able…
Sulzer India Ltd vs. JCIT (ITAT Mumbai Special Bench)
The second requirement of s. 41(1) is also not satisfied because in paying the NPV of the sales-tax liability, the assessee has paid the equivalent of the Future Value of the sum. As the sum of Rs. 3,37,13,393 is the NPV of the future sum of Rs.7,52,01,378 and its…
NTPC SAIL Power Company Ltd vs. CIT (Delhi High Court)
In Indian Oil Panipat 315 ITR 255 (Del) it was held that if the interest received was "inextricably linked" with the setting up of the plant, it could not be treated as income from other sources. This reasoning is in line with Bokaro Steel Ltd, Karnataka Power Corp 247…
ACIT vs. Oil and Natural Gas Corporation Ltd (ITAT Mumbai)
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Posted by: Dipak Shah <djshah1944@yahoo.com>

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