Body of Individuals not eligibile to claim exemption under section 11 if not registered

Body of Individuals not eligibile to claim exemption under section 11 if not registered

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Body of Individuals not eligibile to claim exemption under section 11 if not registered

Body of Individuals not eligibile to claim exemption under section 11 if not registered 

Overview:

Provisions of sections 11, 12 and 13 would not apply unless registration is granted by the CIT. As return of income was filed by assessee in the capacity of body of individuals, therefore, invocation of section 167B(1) was justified even though registration stood granted by the CIT subsequently.

Assessee claimed exemption under section 11. AO denied this and taxed assessee’s income at maximum marginal rate as permanent account number of the assesee suggested that assessee was a body of individual and not ‘trust’. Assessee’s case was that registration as charitable trust stood granted to the assessee later on.

It is held that provisions of sections 11, 12 and 13 would not apply unless registration is granted by the CIT. As return of income was filed by assessee in the capacity of body of individuals, therefore, invocation of section 167B(1) was justified even though registration stood granted by the CIT subsequently.

Decision: Against the assessee.

(2018) 68 ITR (Trib) 394 (Del-HC)

IN THE ITAT, DELHI “SMC” BENCH

H.S. SIDHU, J.M.

Sri Guru Singh Sabha v. Dy. CIT

ITA Nos. 1037 & 1038/Delhi/2018

A.Ys. 2014-15 & 2015-16

30 October, 2018

Assessee by: V.K. Bindal and Sweety Kothari, Chartered Accountants

Depart­ment by: B.S. Anant, Senior Departmental Representative

ORDER

H.S. Sidhu, J.M.

These appeals are filed by the asses­see against the separate orders passed by the learned Commissioner (Appeals)-20, New Delhi relevant to the assessment years 2014-15 and 2015-16. Since the issues involved in these appeals are common and identical, except the difference in the figure, hence, the appeals were heard together and are being disposed of by this common order for the sake of convenience, by dealing with ITA No. 1037/Del/ 2018(assessment year 2014-15) wherein, the following common grounds have been raised :–

“1. The Commissioner (Appeals) erred in law and on facts in confirming various disallowances and application of maximum marginal rate while passing the order under section 143(1) of the Act which is not permissible under the Act. Thus the order so passed should be cancelled.

  1. The Commissioner (Appeals) erred in law and on facts in confirming the action of the assessing officer in not allowing the exemption under sections 11 and 12 of the Act for the year under consideration ignoring the first proviso to section 12A(2) of the Act providing for deemed registration of the society under section 12A and thus making it eligible to claim the said exemption for the year under consideration. Thus the exemption claimed under sections 11 and 12 should be allowed to the society.
  2. The Commissioner (Appeals) erred in law and on facts in holding that the income of the assessee-society is chargeable at the maximum marginal rate instead of slab rates by incorrectly applying the provisions of section 167B(1) of the Act though the same are not applicable on societies registered under the Societies Registration Act, 1860. Thus necessary directions should be given to compute tax by applying the slab rates on the assessee.
  3. The Commissioner (Appeals) erred in law and on facts in including the amount of Rs. 94,323 being interest earned on FDRs made out of corpus fund in the taxable income ignoring the fact that interest earned on corpus fund has to be treated at par with the corpus fund. Thus the said amount should be excluded from the taxable receipts.
  4. The Commissioner (Appeals) erred in law and on facts in holding the gross receipts as taxable income, without allowing the expenses of Rs. 3,22,837 incurred towards the said receipts and ignoring that only surplus is taxable as income and not the gross receipts. Thus the expenses should be allowed as deduction against the gross receipts.
  5. The appellant craves leave to add, substitute, modify, delete or amend all or any of the grounds of appeal either before or at the time of hearing.”
  6. The brief facts of the case are that the assessee filed its return of income for the assessment year 2014-15 at an income of Rs. 2,39,350 which was increased to Rs. 13,41,461 under section 143(1) (a) while processing the return by CPC, Bangalore. As per the claim of the assessee, the assessee is entitled for the deduction of Rs. 5,69,100 i.e. corpus fund of building account received for meeting capital expenditure as well as deduction of Rs. 3,22,837 i.e. expenses incurred towards the activities as per its objec­tives. Further, as per the assessee the interest earned on the building fund of Rs. 94,323 cannot be taxed which was appropriated for the specific purpose. Further, the assessee has also challenged the maximum marginal rate taken for taxation purpose and disallowance of the exemption under sections 11 and 12 of the Act disregarding the provisions of section 12A(2) first proviso for deemed registration. However, the learned Commissioner (Appeals) observed that CPC, Bangalore while processing the return of income has computed the total income of Rs. 13,41,461 against the income shown by the assessee of Rs. 2,39,350 and not allowed the above deduction and taxed the case of the assessee at the maximum marginal rate. Aggrieved with the learned Commissioner (Appeals) order, the assessee is in appeal before the Tribunal.
  7. The learned counsel for the assessee submitted that the learned Commissioner (Appeals) erred in law and on facts in confirming various disallowances and application of the maximum marginal rate while passing the order under section 143(1) of the Act which is not permissible under the Act. Thus the order so passed should be cancelled. He further submitted that the learned Commissioner (Appeals) wrongly confirmed the action of the assessing officer in not allowing the exemption under sections 11 and 12 of the Act for the year under consideration ignoring the first proviso to section 12A(2) of the Act providing for deemed registration of the society under section 12A and thus making it eligible to claim the said exemption for the year under consideration. Thus the exemption claimed under sections 11 and 12 should be allowed to the society. It was the further submission that the learned Commissioner (Appeals) wrongly held that the income of the assessee-society is chargeable at the maximum marginal rate instead of slab rates by incorrectly applying the provisions of section 167B(1) of the Act though the same are not applicable on societies regis­tered under the Societies Registration Act, 1860. Thus necessary directions should be given to compute tax by applying the slab rates on the assessee. It was further submitted that the lower authorities have erred in including the amount of Rs. 94,323 being interest earned on FDRs made out of corpus fund in the taxable income ignoring the fact that interest earned on corpus fund has to be treated at par with the corpus fund. Thus the said ‘ amount should be excluded from the taxable receipts. Lastly he submitted that the lower authorities have wrongly held that the gross receipts as taxable income without allowing the expenses of Rs. 3,22,837 incurred towards the said receipts and ignoring that only surplus is taxable as income and not the gross receipts. Thus the expenses should be allowed as deduction against the gross receipts. In view of the above, he requested that the appeal of the assessee may be allowed.
  8. On the other hand, the learned Departmental Representative relied upon the order of the learned Commissioner (Appeals) and stated he has passed a well reasoned order, which does not need any interference on our part. He further submitted the assessee’s claim is not acceptable due to the fact that the assessee has applied for registration under section 12AA of the Act on 27-11-2015 i.e. during the assessment year 2016-17 whereas the present case of the assessee relates to the assessment year 2014-15. He further submitted that the proviso to section 12A(2) will also not apply in the case of the assessee as the assessee has not shown any income derived from the property under trust. Beside this, the registration granted by the Commissioner does not grant exemption under sections 11, 12 and 13 automatic and it is conditional after the assessing officer satisfies himself about the genuineness of the activities claimed.
  9. I have heard both the parties and perused the records especially the impugned order. I find that CPC, Bangalore, while processing the return of income has computed the total income of Rs. 13,41,461 against the income shown by the assessee of Rs. 2,39,350 and not allowed the deduction and taxed the case of the assessee at the maximum marginal rate. In this behalf, the assessee before the learned Commissioner (Appeals) has also produced the evidence of building fund and copy of section 12AA registration granted by the Commissioner vide Order, dt. 15-3-2016. This order of registration under section 12AA read with section 12 mentioned the following facts :–

(i) An application in Form No. 10A seeking registration under section 12AA was filed by the assessee on 27-11-2015.

(ii) The trust/society/non-profit company was constituted by deed of trust, memorandum of association/instrument dated 10-2-1978 indicating its object.

(iii) After considering the material available on record the applicant trust/society/company is granted registration as general public utility. Trust/society/company and the provisions of sections 11 and 12 shall apply in the case from the assessment year 2016-17. The trust/society/ NPO is registered as S. No. DEL-SR24975-15032016 of the register maintained in this office. The registration was granted to the follow­ing conditions.

Conditions

  1. Order under section 12AA(l)(b) read with section 12A does not confirm any right of exemption upon the applicant under sections 11, 12, and 13 of the Income tax Act, 1961. Such exemption from taxation will be available only after the assessing officer is satisfied about the genuineness of the activities promised or claimed to be carried on each financial year relevant to the assessment year and all the provision of law acted upon. This will be further subject to the provisions of section 2(15) of the Income Tax Act, 1961.”

5.1 I further find that on a perusal of the aforesaid conditions and as per the provisions of section 12AA, the learned Commissioner (Appeals) has rightly held that the assessee’s claim was not found acceptable due to the fact that the assessee has applied for registration under section 12AA of the Act on 27-11-2015 i.e. during the assessment year 2016-17 whereas the present case of the assessee relates to the assessment year 2014-15. For the sake of convenience, the relevant conditions for the applicability of sections 11 and 12 are reproduced as under :–

12A. Conditions for applicability of sections 11 and 12.–(1) The provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely :–…

(aa) the person in receipt of the income has made an application for registration of the trust or institution on or after the 1-6-2007 in the prescribed form 26 and manner to the (Principal Commissioner or) Commissioner and such trust or institution is registered under section 12AA ;

(b) where the total income of the trust or institution as computed under this Act without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year, the accounts of the trust or insti­tution for that year have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.

(2) Where an application has been made on or after the 1-6-2007, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately following the financial year in which such application is made :–

Provided that where registration has been granted to the trust or institution under section 12AA, then, the provisions of sections 11 and 12 shall apply in respect of any income derived from property held under trust of any assessment year preceding the aforesaid assessment year, for which assessment proceedings are pending before the assessing officer as on the date of such registration and the objects and activities of such trust or institution remain the same for such preceding assessment year :”

5.2 On a perusal of the above provisions, it is clear that the provisions at section 12A(2) will apply from the assessment year immediately follow­ing the financial year in which such application is made. In this case, the application of registration is made on 27-11-2015, hence the exemption under sections 11 and 12 will be applicable not before assess­ment year 2016-17. Further, the proviso section 12A(2) will also not apply in the case of the assessee as the assessee has not shown any income derived from the property under trust. Beside this, the registration granted by the Commissioner does not grant exemption under sections 11, 12 and 13 automatic and it is conditional after the assessing officer satisfies himself about the genuineness of the activities claimed.

5.3 I further note that the claim of the assessee that it should not be taxed at the maximum marginal rate is also not tenable as the permanent account number of the assessee suggests that the assessee is a body of individuals and not “trust” as the fifth character of the permanent account number is “B” and not “T” which should be the case of trust. As the return of income was filed by the assessee in the capacity of body of individuals and automatically the provisions of sections 11, 12 and 13 will not apply in the case of the appellant unless the registration is granted by the Commissioner which was granted later. Hence, the provi­sions of section 167B (1) of the Act clearly suggests that under this situation the appellant has to be taxed at the maximum marginal rates. The provi­sions of section 167B(1) is as under :–

“167B. Charge of tax where shares of members in association of persons or body of individuals unknown, etc.–(1) Where the individual shares of the members of an association of persons or body of individuals other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of I860) or under any law corresponding to that Act in force in any part of India in the whole or any part of the income of such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate.”

5.4 In view of the above, I do not find any infirmity in the order of the learned Commissioner (Appeals) in upholding the action of the CPC Bangalore in taxing the assessee at the maximum marginal rate.

5.5 Further, I note that the learned Commissioner (Appeals) has relied upon the Order, dt. 16-5-2017 of the Income Tax Appellate Tribunal, Delhi Bench in the case of Divine Educational Institute and Social Development Society v. ITO passed in ITA No. 380/Delhi/ 2017 wherein, it has been held that corpus fund which is meant for specific purpose to meet out capital expenditure could not be part of annual receipts, even if the trust is not registered under section 12AA of the Income Tax Act. However, in the present case the assessee has shown the receipt of Rs. 5,69,100 towards corpus fund of building account which is a capital receipt which has been invested in FDR. Therefore, the learned Commissioner (Appeals) correctly followed the aforesaid decision of the Income Tax Appellate Tribunal and held that this receipt of Rs. 5,69,100 and treated as capital receipt to meet the capital expenditure and not chargeable to tax. However, no relief can be given on account of interest on FDR of building fund also which is a revenue receipt and income during the year. Further, other deductions claimed by the assessee were not allowed under sections 11 and 12 of the Act and there is no infir­mity in the intimation tinder section 143(1) of CPC Bangalore. In view of the above, I am of the considered view that the learned Commissioner (Appeals) has passed well reasoned order which does not need any interference, on my part, therefore, I uphold the same and reject the grounds raised by the assessee.

  1. In the result, both the appeals of the assessee are dismissed.

 

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