Ss. 40(a)(ia) and 43B – When income is computed under section 11 of the Act, the provisions of section 40(a)(ia) and 43B are not applicable.
FACTS
The assessee society, registered under Andhra Pradesh Societies Registration Act and also registered under section 12A of the Act, filed its return of income declaring total income to be Nil by claiming exemption under section 11 of the Act. In the course of assessment proceedings the AO noticed that assessee was deriving income from various sources such as fees from students, income from hospital, income from pharmacy, rent from premises and interest on bank deposits against which various expenses such as salaries of faculty and administrative staff, administrative expenses, college maintenance, etc were claimed. The AO observed that the receipts of the society increased from Rs. 1,58,84,406 to Rs. 22,57,55,509 over a period of four years from AY 2005-06 to 2008-09. He also noticed that the society had availed term loans from banks for construction of college buildings, etc.
The AO observed that though the objects are not under dispute, not is any case being made out for reconsidering the exemptions by virtue of registration under section 12A of the Act. However, he held that since the assessee’s activities are akin to any commercial activity income needs to be assessed under the head `income from business’. While assessing income under the head `Income from Business’, he disallowed various expenditures by invoking provisions of sections 40(a)(ia) and 43B of the Act.
Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee.
Aggrieved, the revenue preferred an appeal to the Tribunal.
HELD
The Tribunal observed that the AO has neither doubted the genuineness of the activities nor pointed out any violations referred to in sections 13(1)(c) or 13(1)(d), which are preconditions for denying exemption u/s. 11. The Tribunal held that the AO was not correct in denying exemption under section 11 and having assessed income under the head `profits and gains of business or profession’.
The Tribunal noted that Chapter III of the Act deals with incomes which do not form part of total income. Sections 11, 12 and 13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax, if such conditions are fulfilled. Sections 40(a)(ia) and 43B fall under Chapter IVD, which deals with computation of profits and gains from business or profession. The provisions of sections 40(a)(ia) and 43B are relevant if income is computed under the head `profits and gains of business or profession’.
The Tribunal held that the concept of computation of income under section 11 is real income concept, which is computed on the principles of real income generated from property held under trust and not notional income like under other provisions of the Act. Section 11(1)(a) provides for application of income for charitable purpose, therefore, the question of application of income arises only when income is available for application. If any expenditure is disallowed by invoking the provisions of section 40(a)(ia) and 43B, it leads to a situation where assessee income available for application is enhanced without there being any real income for application for charitable purpose, which leads to an absurd situation where the trusts / societies enjoying exemption u/s 11 have to pay taxes. This is because, the assessee claiming exemption under section 11 shall apply 85% of income for objects of the trust. The legislature in its wisdom has kept separate provisions which are independent from any other provisions of the Act for computation of income of trusts claiming exemption u/s 11 of the Act. The Tribunal held that when income is computed under section 11 of the Act, the provisions of section 40(a)(ia) and section 43B of the Act are not applicable. This was also the ratio of the decision of the co-ordinate Bench in the case of Mahatma Gandhi Seva Mandir v. DDIT (Exemption) (2012) 52 SOT 26 (Mum.).
The Tribunal held that the CIT(A) had rightly deleted the additions.
The appeal filed by the revenue was dismissed.
