Exemption u/s 11 Allowable as Exceeding Limit of ‘Funds Pending Utilization’ was For Charitable Purpose: Himachal Pradesh HC upholds Order of ITAT [Read Order]

The Himachal Pradesh High Court has held that exemption under section 11 of the Income Tax Act,1961 is allowable as exceeding limit of ‘Funds Pending Utilization’ was for Charitable Purpose. The Revenue challenged the order of the Appellate Tribunal stating it as contrary to the evidence and material on record of the case of the Tibetan Children’s Village Dal Lake, the Respondent-assessee. The assessee filed Income Tax return for the assessment years 2004-05 and 2005-06 after claiming exemption under Section 11 of the Income Tax Act, 1961. The Case of assessee was re-opened under Section 147 of the Act for the said assessment years on the ground that the assessee had earmarked funds amounting toRs.20,66,74,263/- for the assessment year 2004-05 under the head ‘Fund Pending Utilization’ and had not included in receipts. The Assessing Officer observed that if the said amount was routed through the Income & Expenditure account, the application of income would have fallen Short of the statutorily required 85%, and hence income had Escaped assessment within the meaning of Section 147 of the Act. He held that the deficiency in application of fund for charitable Purposes during the year under assessment comes to Rs.5,55,50,896/- and the same is added back to the taxable income of the assessee-trust. The assessee filed an appeal before the Commissioner of Income Tax (Appeals), Shimla against the re-opening of the case as well as against the additions made by the Assessing Officer. The CIT(Appeals)dismissed the appeals filed by the assessee, and while doing so enhanced the taxable income of the assessee on the ground that the assessee was not entitled to the benefit of Exemption of 15% under Section 11(1)(a) and (d) of the Act as they were unable to spend 85% of its income during the year in question. He enhanced the income of the assessee to Rs.9,97,09,788/-. The assessee then preferred appeals before the Income Tax Appellate Tribunal (ITAT), which passed the order on 20.01.2016 allowing the appeals of the assessee. The Tribunal accepted the plea of the assessee that the re-opening had been sought to be resorted to on an issue which had already been dealt with and discussed during regular assessment proceedings and copy of reasons recorded for reopening reveal that proceeding under Section 147 of the Income Tax Act was resorted to since the Assessing Officer believed that funds amounting to Rs.20,66,74,263/- shown in the balance sheet of the assessee as earmarked funds under the head “Fund Pending Utilization” ought to have been included in the income of the Assessee, and there was a shortfall in utilization of income to the extent of 85% resulting in taxability of income of the assessee which had allegedly escaped assessment. It held that in regular assessment proceedings, the assessee had been specifically asked why earmarked funds had not been included in the income of the assessee for determining 85% utilization of the same; and the assessee had also been specifically asked to state the amount of corpus donations received along with evidence through a questionnaire. Evidences in the form of letter of the donees’ had also been submitted, thereafter assessment order under Section 143(3) of the Act was passed without making any addition on account of corpus funds, meaning thereby that after examining the issue of corpus/funds, the Assessing Officer had formed an opinion that they were corpus Funds, and hence were not to be included in the income of the assessee. The Tribunal held that having thus formed an opinion on the treatment of earmarked funds shown as “Funds Pending Utilization”, the Assessing Officer could not have resorted to re- opening the case of the assessee on the same issue, since it amounts to change of opinion which cannot be resorted to in re-assessment Proceedings. The Tribunal held that proceedings for re-opening of assessment on the ground of income escaping assessment are an exception to the finality of proceedings arrived at under Section 143(3) of the Act during the regular assessment proceedings of the assessment Years; the Assessing Officer, having applied his mind to the issue of Corpus funds, after the assessee explained the same with evidences the assessee utilized the fund for the purpose of achieving its objective, and that the utilization was more than the prescribed limit, consequent upon which there was no reason to make additions against the assessee. After considering the facts and circumstances and the contentions of the Revenue, the division bench comprising of Chief Justice M.S. Ramachandra Rao and Justice Ajay Mohan Goel held that “no question of law much less substantial question of law arises for consideration in these appeals and we hold that the findings recorded by the Tribunal cannot, in the facts and circumstances, be said to be perverse.” Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates