AO Disallows 85% Accumulation Claim on Grounds that Form 10 Lacks Specific Purpose of such Claim: ITAT directs Re-adjudication [Read Order]

The Bangalore Bench of Income Tax Appellate Tribunal (ITAT) has  directed re-adjudication  of  85% accumulation claim disallowed by the Assessing Officer (AO) on the ground of no specific purpose for which such accumulation was  mentioned in Form 10.

The assessee Centre for e-Governance, is a registered society It functions as a nodal agency for e-Governance established by Government of Karnataka. Assessment Year 2018-19 assessee filed return of income at Rs Nil  after claiming exemption under Section 11 of the Income Tax Act. The case was selected for complete scrutiny and assessment was completed under section 143(3) r.w.s 144B of the Income Tax Act

In the said Assessment Order, the claim of exemption under section 11 was also denied and total income was computed as per the Income and Expenditure accounts after disallowing the claim of depreciation.

The claim of accumulation of the 85% of the income under section 11(2) of the Income Tax Act was  disallowed on the ground that no specific purpose for which such accumulation was mentioned in Form 10.

Aggrieved by the order assesee filed an appeal before the Commissioner of Income Tax(Appeals) [CIT(A)], who held that assessee is hit by proviso to section 2(15) of the Income Tax Act since the gross receipts from the activities which are of commercial nature exceeds the prescribed limit.

Thus, the CIT(A)  dismissed the appeal of the assessee. Therefore, the assessee filed a second appeal before the tribunal.

When the matter was considered before the bench, Nikhil S Pathak, the counsel for the assessee submitted that  assessee is a nodal agency set up by Government of Karnataka  and the gross receipts of the assessee society would not exceed 20% if interest income is to be excluded.

Further, the assessee received grants from government and the funds which are not required are placed in fixed deposits and interest income earned. Thus, such interest income earned could not be taken as income generated out of commercial activity of the assessee society.

Further the counsel submitted that assessee is set up by Government of Karnataka and are doing state functions, the assessee society though registered under the Karnataka Societies Registration Act, ought to be considered as a State under article 289 of the Constitution

M.G. Jasnani, the Counsel for the revenue submitted that the activities of the assessee society fall in the last limb of the definition of charitable purposes under proviso to section 2(15) of the Income Tax Act and since assessee is receiving income from a commercial activity above the threshold limit, proviso to section 2(15) of the Income Tax Act would be applicable to the facts of the instant case

The tribunal noted that  Since Apex Court has laid down principles as regards the interpretation to proviso to sections 2(15) and 11 of the Income Tax Act, we are of the view that the entire issue raised before us needs to be reexamined by the CIT(A).

It was also observed that assessee society is established by Government of Karnataka vide GO dated 29.09.2005 for implementing various e-Governance initiatives in the State to facilitate rapid and effective use of information technology for the benefit of the common man.

The two member bench of Chandra Poojari (Accountant Member) and George George K (Judicial Member) restored  the matter  to the file of CIT(A) for readjudication.

To Read the full text of the Order CLICK HERE

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