IMPACT FOUNDATION (INDIA),MUMBAI vs. ASST DIT (E) II (1), MUMBAI

The present appeal filed by the assessee for assessment year 2009-10 is directed against the order passed by the CIT(A)-1, Mumbai, dated 29.4.2014, which in turn has arisen out of order passed by the Assessing officer (in short ‘A.O’) under section 143(3) of the income tax ‘Act’ 1961 (in short ‘Act’), dated 30.12.2011.The grounds of appeal raised by the assessee read as under:

“1. The learned CIT(A) erred in confirming the denial of exemption u/s 11 to the appellant trust without appreciating the nature of the activities of the appellant trust.

2. The learned CIT(A) erred in coming to a conclusion that the sum of Rs.44,42,353/- spent for/through M/s Unlimited India cannot be considered as "application of income" for charitable purposes. The action of the learned CIT(A) was erroneous for the following reasons: a) The expenditure aggregating to Rs.44,42,353/- was charitable in nature but was treated as not being for charitable purposes for the solitary reason that Unlimited India whose projects were being incubated and supported, was not granted registration under section 12A / I2AA of the Income Tax Act. b) The CIT(A) erred in observing that the findings of the assessing officer were not dispelled, though sufficient explanations were provided during the course of the appellate proceedings. c) The CIT(A), did not appreciate that the expenditure incurred was in consonance with the objects of the appellant and as per its Memorandum to which recognition had been granted under section 12A/12AA, and the same had not been disturbed.

4. In the alternative and without prejudice to the above grounds the learned CIT(A), failed to appreciate that exemption under section 11 was granted extent of application of income of a trust, and when the threshold of 85% was reached the entire income was exempt. The learned CIT(A) erred in turning the provision on its head and coming to a conclusion that if 85% of the income was not applied the entire exemption was to be denied.

5. In the alternative and without prejudice to the above grounds of appeal, the learned CIT(A), erred, in not appreciating that if the exemption under section 11 was not granted the income is to be computed on commercial principles which would result in allowance of all the expenditure, which was otherwise allowable under the Income Tax Act.

6. The appellant craves to add, alter or amend any of the grounds of appeal at any time or at the time of hearing.”

3. The assessee being aggrieved with the assessment carried the matter in appeal before the CIT(A). That during the course of the appellate proceedings, the CIT(A) finding favour with the application filed by the assessee U/rule 46A(1)(d) of the Income-tax rules, 1962 (for short ‘Rules’), seeking permission for placing on record certain documents by way of additional evidence, admitted the same. The CIT(A) took cognizance of the adverse inferences drawn by the A.O as regards the expenses incurred by the assessee w.r.t different NGO’s, namely M/s Going to School, M/s Dream Catcher and M/s Un limited India and certain other issues, as well as the exhaustive submissions furnished by the assessee by way of rebuttal of the said adverse inferences, in light of the additional evidence placed on his record. The CIT(A) after recording his observation that the NGO’s M/s Going to School and M/s Dream Catcher Foundation were registered u/s 12A of the ‘Act’, did neither dislodge the claim of the assessee pertaining to the said respective NGO’s, nor proceeded with and drew any adverse inferences as regards the expenses incurred by the assessee w.r.t the said NGO’s. The CIT(A) however did not find favour with the claim of the assessee that an expense of Rs. 44,42,353/-was incurred in respect of the NGO M/s Unlimited India (supra), which as conceived by the CIT(A) being an amount paid by the assessee to M/s Un limited India (an unregistered trust), thus could not be considered as an application of income by the assessee towards furtherance of its objects. The CIT(A) being of the view that after excluding the amount of Rs. 44,42,353/-(supra) from the sum total of the amounts claimed by the assessee to have been applied in furtherance of its objects, the assessee was found to have neither complied with the statutory requirement of applying 85% of its income towards its objects,as the application of its income in furtherance of its objects was found to belower than Rs. 1,84,81,854/- (i.e 85% of the income of Rs. 2,17,43,358/-),nor had it given any notice to the department for accumulation of its income in excess of the stipulated 15% limit, therefore the income of the assessee was liable to be computed in a ‘Commercial manner’, i.e without allowing any exemption u/s 11 and restricting the expenses only upto the extent the same were found relatable to earning of such income. The CIT(A) restricting himself to drawing of adverse inferences as regards the claim of the assessee w.r.t application of the amount of Rs. 44,42,353/-(supra) towards its objects, therein without adjudicating the other issues which were assailed before him by the assessee by way of independent grounds of appeal, dismissed the appeal of the assessee ,in toto, as such.

4.1 The Ld. A.R had further during the course of hearing therein averred that as the assessee was registered u/s 12A of the Income-tax act, 1961 (for short ‘Act’), with the Director of Income-Tax (Exemption), Mumbai, consequent whereto its objects were recognized by the latter authority as being charitable as per the definition of ‘Charitable purposes’ provided in Sec. 2(15) of the ‘Act’, therefore the A.O had gravely erred in law by exceeding his jurisdiction and declining to allow exemption to the assessee u/s. 11, on the ground that the objects of the assessee, as per him, were not found to be charitable in nature. The Ld. A.R further alternatively assailed the finding of the CIT(A) that in case the assessee fails to satisfy the parameters of applying 85% of its income towards its objects, as contemplated u/s 11(1)(a) of the ‘Act’, then the same would disentitle the assessee of its entire claim of exemption u/s 11, i.e. even the amount of income applied by the assessee in furtherance of its objects would not be eligible for claim of exemption u/s 11 of the ‘Act’. It was further submitted by the Ld. A.R that even otherwise as the aforesaid findings of the CIT(A) partook the colour and character as that of enhancement of the income of the assessee, which exercise had been carried out by the CIT(A) absolutely at the back of the assessee, without affording a reasonable opportunity of being heard to the latter, therefore the same even on the said count was liable to be struck down. The Ld. Departmental representative (for short ‘D.R’) on the other hand strongly supported the orders of the lower authorities, and therein submitted that the order of the CIT(A) may be upheld.

(i). We have perused the object of the assessee in the ‘Memorandum of association’ placed at Page 15 - 21of the assesses paper book (for short ‘APB’), and are of the considered view that incubation and support of social entrepreneurs can safely be held to be one of the objects of the assessee, therefore expenses, if any, as claimed by the assessee to have been incurred by way of payments to professionals whose services had been availed by the assessee to facilitate such incubation and support of social entrepreneurs, would therein partake the colour and character as that of an expense incurred in furtherance of the objects of the assessee.

(ii).We have further given a thoughtful consideration to the facts of the case, perused the material available on record and the submissions of both the parties before us and are of the considered view that the assessee during the course of the assessment proceedings did not furnish with the A.O the requisite explanation as regards the nature of the expenditure of Rs.44,42,353/-(supra), which was claimed as amount spent in furtherance of the charitable objects of the assessee, pursuant whereto the A.O too proceeded with in haste and without making proper verifications drew adverse inferences as regards both the genuineness, and the application of the said amount, as claimed by the assessee. However, we find that thereafter the assessee during the course of the appellate proceedings had furnished with the CIT(A) an explanation as regards the expenses aggregating to Rs. 44,42,353/- (supra) so incurred by it, and had clarified that the same were in the nature of payments to professionals who were hired for rendering their services in furtherance of the objects of the assessee for incubation and support of social entrepreneurs. We further find that the assessee dispelling the observation of the A.O that payments were made to M/s Un limited India, had therein clarified in its submissions before the CIT(A) that no part of the said payments were ever made to M/s Un limited India, and except for the fact that the professionals hired by the assessee had also provided their services inter- alia to M/s Un limited India, there was no direct relation/association between the assessee and M/s Un limited India. We find that though the said written submissions were filed by the assessee before the CIT(A), which also forms part of the order of the CIT(A), i.e at Page 4 - 9 , but the peculiar absence of even a whisper of any finding/observation by the CIT(A) as regards the said claim of the assessee, much the less a rebuttal on his part while drawing adverse inferences in the hands of the assessee, therein clearly reveals that the CIT(A) had acted in a mechanical manner, and had absolutely failed to advert to and take due cognizance of the submissions of the assessee in the true spirit. However, at the same time we find that even the assessee had not lagged behind in failing to discharge the ‘Onus’ as stood cast upon him as regards proving the genuineness and veracity of the expenses of Rs. 44,42,353/-(supra), as were so claimed to have been incurred in furtherance of its objects of incubation and support of social entrepreneurs. We find that the A.O during the course of the assessment proceedings had categorically drawn adverse inferences as regards the genuineness of the expenditure of Rs. 44,42,353/-(supra) claimed to have been incurred by the assessee in furtherance of its charitable objects, and had even alleged that in the garb of the said expenses, the assessee had diverted its income. We find that the assessee had not placed on record any material during the course of the assessment proceedings, which could go to substantiate the genuineness and veracity of the expenses claimed to have been incurred in furtherance of its objects, failing which a serious allegation of diversion of income in the garb of expenses was levelled by the A.O against the assessee, which therein did indispensably cast a very heavy ‘Onus’ on the assessee, both to prove the facts as were averred by it, as well as dislodge the serious allegation so raised by the A.O. However, we find that the assessee at no point of time during the course of the appellate proceedings, except for flaunting an unsubstantiated explanation, which is nothing better than a hollow claim in the thin air, with respect to the nature of the expenses of Rs. 44,42,353/- (supra), which was attempted to be supported and substantiated on the basis of a ‘Chart’ projected as the ‘details of expenses disbursed for incubation and support for social entrepreneurs’ (Page 46 of ‘APB’), had absolutely failed to place on record any material, much the less any concrete material in support of the genuineness and veracity of the aforesaid expenses which were claimed to have been incurred in furtherance of the objects of the assessee. Thus the conduct of the assessee who had absolutely failed to discharge the heavy ‘Onus’ as was so cast upon it, as regards proving the authenticity of the expenses so claimed to have been incurred in furtherance of its objects, and thus allowing the serious allegation levelled against it by the A.O, to perpetuate as such, thus does not inspire any confidence. We would not hesitate to say that in light of the absolute failure on the part of the assessee to prove the genuineness and veracity of the expenses claimed to have been incurred in furtherance of its objects, the absolutely dumb and unsubstantiated explanation which the assessee had throughout chosen to stick to, was inescapably destined to have called for a rejection of the same at the very threshold, on our part, but then as observed by us hereinabove, we are also not oblivious of the fact that the CIT(A) who except for mechanically recording the submissions of the assessee in the body of his order, had also blatantly violated the basic principles of ‘Natural justice’ by failing in his duty to adjudicate the issues before him after duly addressing and appreciating the submissions of the assessee. We thus in light of the aforesaid facts as they so remain, in all fairness restore the matter to the file of the A.O for fresh adjudication of the same after taking due cognizance of the submissions of the assessee. That as the matter is being restored to the file of the A.O, therefore we herein allow liberty to the assessee to substantiate its claim as regards the genuineness and veracity of the expenses as claimed by it to have been incurred in furtherance of its objects, during the course of the said set aside proceedings. That needless to say, the A.O while adjudicating the issue afresh shall afford a reasonable opportunity of being heard to the assessee.

(iii).We are further of the considered view that where an assessee is registered u/s 12A of the ‘Act’, then such a registration would though not ipso facto lead to an automatic vesting of exemption u/s. 11 of the ‘Act’ with the assessee, and it is open to the A.O to find out that as to whether the income of the assessee has been applied for its objects, and whether the statutory conditions as contained under ss. 11 to 13 are fulfilled by the assessee, or not, but at the same time, it is beyond the province of the A.O to reject the claim of exemption under s. 11 by looking into the objects of the assessee and holding the same as non-charitable in nature. The reason beyond such a restriction on the powers of the A.O is that grant for registration by the CIT u/s 12A does not constitute an empty formality which is to be completed in a routine and a mechanical fashion by the CIT without any scrutiny regarding the charitable nature of the trust or institution required to be registered under the ‘Act’. It goes without saying that registration under s. 12A is to be granted only if the CIT is satisfied that the trust or institution is a charitable institution and its objects are covered as charitable as per the definition of “charitable purposes” contained under s. 2(15) of the ‘Act’. We are thus persuaded to accept the contention of the assessee that after allowing registration u/s 12A, it is not for the A.O to deny exemption u/s. 11 on the ground that the objects of the assessee are not charitable in nature.

(iv). We have further given a thoughtful consideration to the contention of the Ld. A.R as regards the eligibility of an assessee towards claim of exemption u/s 11 of the ‘Act’, in case of deficit application of income towards its objects during a year, i.e. below the stipulated parameters of 85%, and find substantial force in the same. That for the sake of clarity, we herein reproduce the provisions of Sec. 11(1)(a) of the ‘Act’, which read as under:

“11(1). Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India , and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen percent of the income from such property.”

Thus a bare perusal of Sec. 11, which though has to be read alongwith and in the background of Sec. 12A of the ‘Act’, therein reveals that to the extent the income derived from the property held under trust wholly for charitable or religious purposes is applied for such purposes, then the assessee shall be entitled to claim exemption, to such extent. Thereafter the latter part of the section, which only goes to broaden the scope and gamut of the said statutory provision, therein liberalising the requirement for entitling an assessee to claim exemption u/s 11 of the ‘Act’, thus merely provides that even if the person has accumulated or set apart for application for such charitable and religious purposes in India, amount not being in excess of fifteen percent of the income from such property, even then the assessee would stand entitled for claiming exemption of the entire amount of its income. Thus the liberalizing of the requirements by the legislature in all its wisdom, for enabling an assessee to claim exemption u/s 11 of the ‘Act’, even where he had applied not less then 85% of its income for such charitable or religious purposes, in no way can be interpreted to so mean that in case if such application of the income of the assessee falls short of the stipulated 85% (supra), then the same would go to divest the assessee as regards its entitlement towards exemption u/s 11 pertaining to the amount as had been applied by him in furtherance of its charitable or religious objects. We would not hesitate to observe that the liberalisation of the requisite conditions by the legislature by providing for exemption of the total income of the assessee, on satisfying of the requirement of applying at least 85% of its income for such charitable and religious objects during the year, had been absolutely misconceived by the CIT(A). Thus the order of the CIT(A) therein observing that in case the application of the income of the assessee towards its charitable or religious objects, falls short of 85%, then the assessee shall be deprived of its claim of exemption u/s 11 of the ‘Act’, even as regards the amount which had been applied in furtherance of its object, being found to be absolutely misconceived and illogical, is thus vacated.

(v). We further find that the CIT(A) for reasons best known to him, had gravely erred in law and facts of the case by merely restricting himself to Ground of appeal No. 6so raised before him on the issue of adverse inferences drawn by the A.O as regards the expenses of Rs. 44,42,353/- (supra) claimed by the assessee to have been incurred in furtherance of its objects of incubation and support of social entrepreneurs, while for the remaining grounds of appeal specifically raised by the assessee before the CIT(A) in context of the other issues and in backdrop of the written submissions filed as regards the same with the CIT(A), did never see light of the day and had remained unadjudicated. We are unable to come to terms with the method of disposal of appeal so adopted by the CIT(A), who after reproducing the grounds of appeal and the written submissions of the assessee in the body of his appellate order, had however refrained from recording his findings and adjudicating the same by way of a clear and a speaking order. We are unable to subscribe to the non speaking order of the CIT(A), as a fall out of which we are sad to observe that the assessee who is left guessing as to the reasons for dismissal of his appeal, being left with no other alternative is thus pushed into litigation for no fault on his part and had been compelled to approach the Tribunal for adjudication of the issues which the CIT(A) had refrained from adjudicating. We are of the considered view that in the backdrop of the fact that the CIT(A) had basically only adjudicated the Ground of appeal No. 6 raised before him, which too in terms of our directions as recorded hereinabove have been restored to the file of the A.O for fresh adjudication, therefore in all fairness the remaining issues, which too were assailed by the assessee by way of specific grounds of appeal before the CIT(A), but however did never see the light of the day and had remained unadjudicated are also restored to the file of the A.O, who is directed to adjudicate the same afresh after keeping in view the additional evidence which was admitted by the CIT(A) U/rule 46A w.r.t the said issues, and as on date forms part of the record. That needless to say, the A.O in the course of the set aside proceedings shall be guided by our aforesaid observations, as well as afford sufficient opportunity of being heard to the assessee.

7. In the result the appeal of the assessee is allowed for statistical purposes, in light of our aforesaid observations. Order pronounced in the open court on 25thNovember, 2016. Sd/- Sd/- (G.S. PANNU) (RAVISH SOOD) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date :25thNovember, 2016 Copy to : 1) The Appellant 2) The Respondent 3) The CIT(A) concerned 4) The CIT concerned 5) The D.R, “I” Bench, Mumbai 6) Guard file By Order