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Income Tax Appellate Tribunal, BANGALORE BENCH “ B ”
Before: SHRI VIJAYPAL RAO & SHRI JASON P. BOAZ
Appellant By : Shri H. V. Gouthama, C.A. Respondent By : Dr. P. K. Srihari, Addl. CIT (D.R.) Date of Hearing : 8.7.2015. Date of Pronouncement : 14.8.2015. O R D E R Per Shri Jason P. Boaz, A.M. : These appeals by the assessee are directed against the orders of the Commissioner of Income Tax (Appeals) – V, Bangalore dt.22.8.2014 for Assessment Year 2008-09 and dt.20.8.2014 for Assessment Year 2010-11. Since common issues are involved, these appeals were heard together and are being disposed off by way of this common order.
The facts of the case, briefly, are as under :-
2 & 1431/Bang/2014 S.P. Nos19 & 20/Bang/2015 2.1 The assessee is a registered society engaged in assisting its members for data generation and other related technical issues. The assessee was Registered as a society on 12.2.2008 under the Karnataka Society Registration Act under the directions from Govt. of Karnataka with the main object of strengthening the quality of urban local government through e-governance. Members are enrolled as per the rules and bye-laws of the society. The assessee made an application for grant of registration under Section 12A of the Income Tax Act, 1961 (in short 'the Act') to the Director of Income Tax (Exemption), Bangalore. On perusal of the objects of the society, as contained in the Memorandum of Association dt.13.2.2008, the DIT (Exemption) concluded that the assessee did not exist for charitable purposes and accordingly rejected the assessee's application for registration under Section 12A of the Act vide order dt.22.1.2010. The assessee had initially filed return for the impugned Assessment Years 2008-09 and 2010- 11 in the status of ‘Trust’. However, after rejection of the assessee's application for registration under Section 12A of the Act, the assessee filed revised returns in the status of Association of Persons (‘AOP’) (Members Club) claiming its income to be exempt on the principle of mutuality in respect of the amount generated by the society through its members. 2.2 The assessee received grants from the Govt. of Karnataka (‘GOK’ in short) amounting to Rs.1,97,00,000 and Rs.25,00,000 in the period relevant to Assessment Years 2008-09 and 2010-11 respectively, with the specific direction that the assessee, as a 3 & 1431/Bang/2014 S.P. Nos19 & 20/Bang/2015 custodian of the grants, the grants so given are to be spent only for the purpose of assisting its members in developing self-governance activities till the amount has been expended towards its objects. The assessee was to create a fund out of the grants given and together with the accrued interest, was to utilise the funds for assisting member bodies in implementation of e-governance. GOK also directed that any assets created out of the above funds shall belong to the GOK and the unspent amount of grant shall be returned to GOK together with accrued interest. 2.3 The assessee received Rs.1,97,00,000 and Rs.25,00,000 as grants from GOK in the period relevant to Assessment Years 2008-09 and 2010-11 respectively. The grants received in the period Assessment Years 2008-09 and thereafter were all invested in Fixed Deposits (‘FD’) and this yielded interest income of Rs.29,25,518 in the period relevant to Assessment Year 2010-11. The question for consideration before the Assessing Officer was regarding the taxability of the Govt. grants received from GOK and the interest income accrued on FDs, which was also claimed as exempt on the principle of mutuality. The Assessing Officer after examining the matter rejected the assessee's claim for treating the treating the above income as exempt on the principle of mutuality. The Assessing Officer accordingly completed the assessments for Assessment Years 2008-09 and 2010-11 under Section 143(3) rws 147 of the Act vide separate orders dt.21.3.2013 wherein the assessee's income was computed as under :-
4 & 1431/Bang/2014 S.P. Nos19 & 20/Bang/2015 For Assessment Year 2008-09 Income as per return of income : NIL. Add Additions as discussed above – Govt. Grants treated as income : Rs.1,97,00,000. Total assessed income : Rs.1,97,00,000. For Assessment Year 2010-11. Income as per return of income : Rs.50,090. Add : Additions are considered as income as discussed above. Government Grant received : Rs.25,,00,000. Interest Income : Rs.29,25,518. Total : Rs.54,75,608. Less : Expenses Claimed. Man Power Expenses : Rs.23,35,776. Rs.25,58,708. Advertisement expenses : Rs.2,22,932 Total Assessed Income : Rs.29,16,900.
3. Aggrieved by the orders of assessment for both Assessment Years 2008-09 and 2010-11 dt.21.3.2013, the assessee preferred appeals before the CIT (Appeals)-V, Bangalore. The learned CIT (Appeals) dismissed the assessee's appeals vide order dt.22.8.2014 for Assessment Year 2008-09 and vide order dt.20.8.2014 for Assessment Year 2010-11. In doing so, the learned CIT (Appeals) followed the decision of the co- ordinate bench of the Bangalore Tribunal in the assessee's own case in dt.9.5.2014. 4.1 Aggrieved by the orders of the CIT (Appeals) – V, Bangalore dt.22.8.2014 for Assessment Years 2008-09 and 20.8.2014 for Assessment Year 2010-11, the assessee has preferred these appeals before this Tribunal raising the following identical grounds for both the assessment years involved.
5 & 1431/Bang/2014 S.P. Nos19 & 20/Bang/2015 “ 1. The learned CIT (Appeals), erred in confirming the order passed by ld. Assessing Officer in bringing the amount of specific grant given by Government of Karnataka to the appellant society as taxable.
2. The learned CIT (Appeals), erred in ignoring the direction of Government of Karnataka, whereby it is stated that, even the interest earned on the deposit made out of specific grant was required to be added on to the original grant and therefore, cannot be taxed as income.
The learned CIT (Appeals),ought to have considered that, the appellant society was formed by Govt of Karnataka for implementing e-Governance initiatives to various member Municipal Authorities and said Govt. of Karnataka has given specific grant to the appellant society’s various project with the direction that, amount of grant shall be kept in escrow by the appellant society and shall be used ony for the purpose for which the grant has been released by Govt. of Karnataka and in case, there is any amount left over under each grant, the same shall be returned back to the Government and therefore, the appellant only holds the fund as a Trustee and when the diversion of income is determined before it reaches the appellant the “Principle of Diversion of Income by overriding title” is applicable and as such, the same cannot be considered as taxable income of the appellant society.
The learned CIT (Appeals) was wrong in holding that, since the appellant society has not spent the amount even after 3 years, therefore, the amount is required to be included as taxable income. For the above and any other grounds that may be advanced at the time of hearing, the appellant prays that, appeal be allowed.” 4.2 Before us, the learned Authorised Representative reiterated the contentions put forth before the learned CIT (Appeals). It was contended that the Govt. of Karnataka by an Addendum dt.2.2.2010 had specifically directed that the grant money and any accrued interest on FDs out of the grant money was to be utilized only for the purpose of assisting the member bodies in implementation of e-governance and that the interest on grant would stand on the same footing as the grant itself. The assessee contended that because of the conditions imposed by the Addendum, the grant as well as the interest income on FDs cannot be considered as the assessee's income by virtue of there being an overriding title 6 & 1431/Bang/2014 S.P. Nos19 & 20/Bang/2015 to the income even before it reaches the assessee and the principle of diversion of income by overriding title is applicable. 4.3 Per contra, the learned Departmental Representative supported the impugned orders of the learned CIT (Appeals) as being in order. It was contended that both the assessee's appeals on these issues are liable to be dismissed in view of the decision of the co-ordinate bench of this Tribunal in the assessee's own case in ITA No.1843/Bang/2013 dt.9.5.2014 for Assessment Year 2009-10, wherein on identical issues, the Tribunal has decided the matter in favour of Revenue and against the assessee. 4.4.1 We have heard the rival submissions of both the learned Authorised Representative for the assessee and the learned Departmental Representative for revenue and perused and carefully considered the material on record including the decision of the co-ordinate bench in the assessee's case for Assessment Year 2009-10 (supra). We find that identical issues were before the co-ordinate bench of this Tribunal or consideration in the assessee's own case for Assessment Year 2009-10. In its order in ITA No.1843/Bang/2013 dt.9.5.2014 the co-ordinate bench adjudicated these issues in favour of Revenue and against the assessee holding as under at paras 12 to 14 :-
“ 12. We have given a careful consideration to the rival submissions. At pages 58 & 59 of the assessee’s paperbook are copies of the English translation of the Government Order dated 17.1.2009 releasing grants to the assessee society for the year 2008-09. The order in vernacular is placed at pages 60 to 61 of the assessee’s paperbook. The operative portion of the Government Order reads thus:-
7 & 1431/Bang/2014 S.P. Nos19 & 20/Bang/2015 “Government order No.UDD 15 SFC 2008 Bangalore, dated 17/01/2009 As explained in the Preamble, Government has released a sum of Rs.274.00 lakhs to Directorate of Municipal Administration for the Operational Cost of Rs.77.O0 lakhs for the year 2008-09 to Karnataka Municipal Data Society and to reimburse a sum of Rs.197.00 lakhs, which was released for the year 2007-08. This grant should be incurred for the year 2008-09 under the Account Head “3604- 00-193-0-01”(l00)(Plan). In the Government Order, Director, Directorate of Municipal Administration has been authorised to draw from State Huzur Treasury and to recover a sum of Rs.197.00 lakhs, which was released to Karnataka Municipal Data Society for the year 2007-08, and the remaining amount of Rs.77.00 lakh to Karnataka Municipal Data Society for the Operational Cost and pay through cheque.”
It is seen from the above Government Order that the purpose for which the grant is to be utilized and the utilization of interest income out of the grant have not been specifically spelt out. However, in the addendum dated 2.2.2010, this lacunae has been filled up. This was done apparently after the rejection of the assessee’s application for grant of registration u/s. 12A of the Act, pursuant to order of the DIT(E) dated 22.1.2010. This addendum reads thus:- “Preamble: Government has released a total sum of Rs. 299 lakhs as under, for meeting the expenditure of the Karnataka Municipal Data Society; 1) Government order No. 15 SFC 2008 dated 07/03/2008 Rs.197 lakhs 2) Government order No. 15 SFC 2008 dated 17/01/2009 Rs. 77 lakhs 3) Government order No. 15 SFC 2008 dated 27/08/2009 Rs. 25 lakhs However, the Government has not specified the purposes for which the grant is to be utilized nor quantified the amounts to be utilized against such purposes. It is felt necessary to issue an addendum to the above Government orders specifying the conditions of the grants released. After careful consideration the following addendum. Addendum to GO No. UDD/ 15/SFC/2008 Bangalore, Dated: 02-02-2010 As explained in the preamble it is here by directed that the amounts aggregating Rs. 299/- lakhs granted to Society be utilized by the Society after prior approval of the Government for specific purpose. The Government also reserves the right to direct Society to use the funds in a manner it may deem fit. The Society shall hold the money as a custodian for the Government. It shall create a fund out of the grant money and any accrued interest and 8 & 1431/Bang/2014 S.P. Nos19 & 20/Bang/2015 utilize the funds for assisting the member bodies in implementation of e-Governance. If any asset is created out of this fund shall belong to the Government. Utilization certificate shall be submitted to Government after spending the funds. Further in case the amount is unspent the same shall vest in such an institution or body which Government prescribes together with any accretion thereto.”
It can thus be seen from the above that the addendum, if at all, would operate only for the previous year relevant to A.Y. 2010-11 and not to an earlier period viz., A.Y. 2009-10. In other words, during the previous year relevant to A.Y. 2009-10, there were no restrictions whatsoever on the use of the grant by the assessee. It cannot therefore be said that there was diversion of income by overriding title. Whatever the assessee does out of the grant and the interest accrued on the grant can only be said to be application of income and it cannot be said that there was diversion of income by overriding title. Taking note of the above factual position for the A.Y. 2009-10, the plea of the assessee that there was diversion of income by overriding title cannot be accepted. Accordingly, the order of the CIT(Appeals) is confirmed. ……...” 4.4.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in ITA No.1843/Bang/2013 dt.9.5.2014 in the assessee's own case for Assessment Year 2009-10, we hold that in the factual matrix of the case, it is clear that even after the Addendum of GOK dt.20.2.20210, whatever the assessee does out of the grant and interest accrued can only be said to be application of income for the stated objects and activity of the assessee society and therefore reject the assessee's plea that there was diversion of income by overriding title. Consequently, the grounds at S. Nos. 1 to 4 raised by the assessee are dismissed.
In view of the assessee's appeals for Assessment Year 2008-09 & 2010-11 being disposed off as above, the Stay Petition Nos.19 & 20/Bang/2015 are rendered infructuous and are accordingly dismissed.
9 & 1431/Bang/2014 S.P. Nos19 & 20/Bang/2015 6. In the result, the assessee's appeals and Stay Petitions for Assessment Years 2008- 09 and 2010-11 are dismissed. Order pronounced in the open court on 14th August, 2015.