THE HANDLOOM EXPORT PROMOTION COUNCIL,CHENNAI vs. ASSISTANT DIRECTOR OF INCOME TAX, CHENNAI

आदेश / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER These appeals by the assessee are directed against different orders of the Commissioner of Income-tax (Appeals)-VII, Chennai for the above assessment years. Since the issue involved in these appeals are common in nature and only change in figures of disallowance,

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these appeals are combined, heard together, and disposed of by this

order for the sake of convenience.

The common grounds in these appeals are follows:- 2.

The assessee filed additional grounds as under:-

‘’1.1 The authorities below failed to appreciate that assessee received tied up grants of ₹1,43,76,117/- from GOI (which was credited to separate bank account for that purpose) and participation fees from Members to the extent of ₹3,60,68,121/- which are not income of the assessee and which can be utilsied only for the purpose for which it was granted and therefore they erred in bringing to tax the sum of ₹5,04,44,238/- 1.2 They failed to appreciate that the above being ‘’tied up grants’ are not part and parcel of its income from deductions and hence is outside the purview of Sec.11. 1.3 They failed to appreciate the proof, by way of grants Sanction letters of GOI, with rider that if such grants are not utilized for the purpose for which the sanction is i ntended, the appellant has to return back such grants to GOI and that utilization certification from CA has to be submitted to GOI. Assessee has fully complied

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with these conditions and hence the above sum is not income of assessee. Vide decisions reported in 288 ITR 106 & 306 ITR 153. The assessee also filed additional evidences under Rule 29 of Income Tax Rules (Appellate Tribunal) Rules 1963 read as under:-

‘’In connection with the above appeals, appellant, in support of its additional grounds, (filed in May,2014) that ‘’grants-in-aid’’ received by it from Government of India was for the specific purpose for which it was granted, that the said grants cannot be utilized for any other purpose other than the one for which it was granted and hene the same, being ‘’tied up grants’’ is not its income, filed evidence, covered by items (9) to 15 and (17) to (22) of Paper Book on 16.07.2014 for both the above assessment years Appellant prays that Hon’ble Bench may be pleased to admit the above items as the same are vital for deciding the question whether addition made under section 11(1)(a) of the Income Tax Act, 1961 is correct or not. 3. The ld. Authorised Representative for assessee at the time of

hearing requested to admit additional grounds as well as additional

evidences filed above as the assessee bonafidely not filed before the

lower authorities.

Considering the plea of the assessee and judgment of the 4.

Supreme Court in the case of National Thermal Power Co. Ltd vs. CIT,

229 ITR 383, ‘’wherein held that the Tribunal has jurisdiction to

examine a question of law which arises from the facts as found by the

authorities below and having a bearing on the tax liability of the

assessee, notwithstanding the fact the same was not raised before the

lower authorities’’, we inclined to admit the additional grounds as well

as the additional evidences for adjudication.

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2011, the assessee filed its return on 20.10.2010 admitting nil

income. The return was processed u/s 143(1) of the Act on

20.09.2011. The case was selected for scrutiny and notice u/s

143(2) of the Act was issued. In response, the authorized

representative of the assessee appeared before the Assessing

Officer. After considering the details of the case, the Assessing

Officer completed the assessment u/s 143(3) of the Act on

31.01.2013 determining the total income at �52,35,216/-.

During the course of assessment proceedings the Assessing

Officer found that the assessee was in receipt of participation

fees, membership fees, advertisement charges, service charges,

sale of publication and. news letters, etc. The Assessing Officer

was of the view that these receipts clearly fall within the ambit

of amended provisions of sec.2(15) of the Act as the assessee's

object was of general public utility and the activities of the

assessee was in the nature of trade, commerce or

business. Hence, the Assessing Officer held that the assessee

was not eligible for exemption u/s 11 of the Act for both the

assessment years. The Assessing Officer treated the assessee as

AOP and taxed accordingly. The Depreciation claimed for the

assessment year under consideration was disallowed by the

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Assessing Officer. Aggrieved, the assessee preferred an appeal

before the Commissioner of Income Tax (Appeals).

perusal of the assessment order and the arguments advanced

by the assessee against the denial of exemption u/s 11 of the

Act reveals that the assessee was entitled to exemption u/s 11

of the Act provided the assessee satisfies sec.11(1)(a) of the

Act. For the sake of clarity, sec.11(1)(a) of the Act was

reproduced as under: 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 ………………..

It means that exclusion from total income was granted in

respect of only that part of income was applied for charitable or

religious purposes in India as specified in the deed of trust or in

the memorandum of objects of the trust. The application should

be on such purposes in India. In the instant case, as seen from

the accounts of the assessee, the amount spent exceeds 85% of

the total income and hence minimum amount to be set apart

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u/s 11(2) of the Act was nil for AY 2009-10 according to the

assessee. The assessee therefore means that it spent its income

wholly for charitable or religious purposes and hence exempted

u/s 11(1)(a) of the Act. A perusal of accounts of the assessment

year 2009-10 reveals that the entire expenditure was not

spend/applied in India. During the assessment year 2009-10,

the assessee spent �5,61,90,847/- abroad as per Income and

Expenditure account as promotional expenses. The details are

as under:-

Advertisement & Publication : � 8,02,937/-

Exhibitions : � 2,89,78,549/-

Member Exports grant : � 2,43,81,500/-

Design studios at Handloom Clusters : � 20,27,861/- ------------------------- Total � 5,61,90,847/- --------------------------

Expenditure in foreign currency was �2,55,74,281/- towards other

promotional expense of Handloom exports during that period. The

above sums were spent outside India as revealed by the

annual reports of assessment 2009-10. It was in violation of

sec.11(1)(a) of the Act which stipulates that income shall not

be included in the total income to the extent such income was

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applied to charitable or religions purposes in India. Therefore,

the assessee was not entitled to exemption u/s 11(1)(a) of the

Act as claimed by it. But sec.11(1)(c) of the Act provides for

exemption in such type of cases. Therefore, the assessee was

asked to offer its reply regarding its eligibility u/s 11(1)(c) of

the Act vide letter dated 26.09.2013. The assessee was further

asked to clarify the applicability of sec.11(1)(c) of the Act by

this office letter dated 04.10.2013 also. The assessee in its

letter dated 14.10.2013 stated that it claimed exemption u/s

11(1)(a) and not u/s 11(1)(c)(ii) of the Act because only in

those cases where sec.11(1)(c) was applicable, the permission

of the Board has to be obtained in order to claim such income

exempt u/s. 11(1). Since neither the main section nor the

proviso there under was applicable to the assessee, there was

no necessity for the assessee to seek the permission of the

CBDT. It was also stated that the whole of expenditure were

not incurred outside India but only a part of it. To the extent of

expenditure incurred in India, the same is not attracted by any

of the sub-sections of sec. 11 of the Act. The assessee's objections was carefully considered by the Commissioner of Income Tax (Appeals) and found not tenable for the following reasons:-

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(a) The appellant itself admitted in its letter dated 14.10.2013 that some expenditure was incurred outside India in both the assessment year. 2009-10. The annual reports of the appellant also confirm the expenditure outside India. (b) Sec.11(1)(a) stipulates application of income in India or income accumulated or set apart for application in India. (c) As the appellant applied/spent outside India as per its own admission, it is not entitled to claim exemption u/s ll(l)(a) of the Act. (d) Regarding the contention that sec.11(1)(c)(i) of the Act is not applicable to the – appellant because CIT(A) himself did not invoke this sub- section. It is immaterial to the claim of exemption. (e) The appellant tries to argue that sec.11(1)(c) is not applicable to it and sec.11(1)(a) alone is applicable. This does not hold water as .sec.11(1)(a) clearly says that application /spending should be for charitable or religious purposes in India. (f) Sec.11(1)(c) was introduced with a view. to help the assessee who have to spend outside India who are otherwise not entitled to exemption u/s 11(1)(a) of the Act. Actually sec.11(1)(c) is a beneficial provision and the only. condition is to obtain the permission of the Board. (g) Since the assessee did not obtain the approval of the Board, it is in a cleft stick and tries to argue that there is no necessity to seek the permission of the Board. Governments do not forego their revenue in favour of charity

spent outside their countries as held in England vs Webb(LR)

1898 AC 758, 762(PC); Canille & Henry Dreyfus Foundation

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Inc. vs IRC (1954) 2 AN ER 466(CA). In conformity with this

policy, the exemption that was being granted before 1952 in

respect of charitable or religious expenditure outside India was

withdrawn by the IT Amendment Act 1953 w.e.f. 01.04.1952.

Contemporaneously with the withdrawal, power was, however,

granted to the Central Board of Revenue to exclude from total

income, incomes of trusts created before 01.04.1952 to the

extent to which they are applied i.e. spent for charitable or

religious purposes outside India, whatever be the kind of

charity. In respect of trusts created after 01.04.1952, a similar

power to exclude was granted to the Board by the I.T.

(Amendment) Act (XV of 1955) with effect from 01.04.1955.

But the power was restricted to such expenditure outside India

which was applied or spent for purposes which tended to

promote international welfare in which India was interested

and not for any other kind of charity. The exemption does not

operate in either of the above case unless the Board by a

general or special order has directed the exclusion of such

income from the total income of the assessee: These features

under the Act of 1922 are continued under the Act of 1961

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also. To sum up the position was this : ' i) No exemption is available in respect of trusts for charitable purposes outside India except under a general or special order of the Board. ii) The Board could grant exemption in respect of later deeds only in the limited cases where such purposes intended to promote international welfare.

In view of the above position, the Commissioner of Income

Tax (Appeals) has directed the assessee to

show cause as to why enhancement of income should not be

done as per sec.251(1) of the Act by this office letter dated

17.10.2013. In response, the ld. Authorised Representative for

assessee stated that the AO brought to tax the net profit after

allowing expenses for earning the net profit but without

allowing depreciation for the assessment year under

consideration. The ld. Authorised Representative for assessee

also stated that the amount spent abroad was allowable u/s

37(1) of the Act especially under the circumstances when

status of the assessee was changed to AOP from that of a trust

with advancement of any other object of general public utility

u/s 2(15) of the Act. It was also argued that the whole net

surplus was not taxable if the CIT(A) is inclined to treat the

assessee as trust with advancement of any other object of

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general public utility. The assessee’s letter dated 21.10.2013 in

response to this office letter dated 17.10.2013 was vague and

tangential to the issues raised. Sec.37(1) details with

deductions permissible under the head "profits and gains of

business or profession" and not related to the issues in

question. Since the assessee claimed the entire expenditure as

application, the question asked was how the expenditure

shown under the head "promotional expenses at abroad" in

their annual reports is allowable u/s.11 of the Act. For his

specific question, there was no answer from the assessee.

Therefore the arguments of the ld. Authorised Representative

for assessee are not relevant to the issues involved in the

appeals and hence rejected devoid of merit. The Commissioner

of Income Tax (Appeals) considered the assessee was not

entitled to exemption u/s.11(1)(a) of the Act to the extent such

income was not applied/spent for charitable purposes in India.

The assessee was also not eligible for exemption u/s.11(1)(c)

of the Act as the assessee did not obtained permission from the

Board. Therefore, the amount spent outside India both the

assessment year under consideration are to be brought to tax.

The Commissioner of Income Tax (Appeals) directed the

Assessing Officer to tax �5,61,90,847/- for the assessment year

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2009-2010. Against, this the assessee is in appeal before us.

We have heard both the parties and perused the material on 7.

record. The main contention of the asseseee’s counsel is that for the

above reasons exemption u/s.11 of the Act was denied to the

assessee which was overruled by the Commissioner of Income Tax

(Appeals). Further, he invoked provisions of section 11(1)(a) of the

Act so as to hold that assessee is not eligible for exemption as the

assessee spent the money outside India. Before us, the ld. Authorised

Representative for assessee filed a copy of grant sanctioned letter of

Ministry of Commerce & Industry, dated 30.12.2008 placed at paper

book at page No.184 and another letter dated 19.05.2005 placed at

paper book at Page No.188. Further, the assessee also filed the

following documents.

Sl. Particulars Paper book at No Page No. 1 Assessment year 2009-10, Annual report indicating 113 grants from 2 Ministries 2 Assessment year 2009-10, statement showing details 126 of grants from Ministry of Textiles 3 Assessment year 2009-10, grants-in-aid sanction 128,136, letters from Ministry of Textiles 140,146, 156, 166, 174 & 178 4 Assessment year 2009-10, Utilization certificates 142, 150, 152, 162, 172, 180 5 Assessment year 2009-10, statement showing details 182 of grants from Ministry of Commerce 6 Assessment year 2009-10, Grants – in-aid sanction 184, 188, 192 letters from Ministry of Commerce 7 Assessment year 2009-10, utilization certificate 186

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8 Assessment year 2009-10, Statement showing details 230 of grants from Ministry of Textiles 9 Assessment year 2009-10, grants-in-aid letters from 244 Ministry of Textiles 10 Assessment year 2009-10, utilization certificate 246, 254, 260, 268, 272, 280, 286, 294, 302, 312, 322, 330, 334, 338 & 342 11 Assessment year 2009-10, statement showing details 348 of grant received from Ministry of Commerce 12 Assessment year 2009-10, Grants in aid sanction 356, 360 letters from Ministry of Commerce 13 Assessment year 2009-10, utilization certificate 354

The above documents were not placed before the Commissioner of

Income Tax (Appeals) hence, it is appropriate to reconsider this issue

afresh in the light of the order of the Tribunal in the case Nirmal

Agricultural Society vs. ITO 71 ITD 153 (Hyd) wherein that

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activities. Houses are built on the land of poor agriculturists. The assessee-society has no legal title or right over the land or houses of those villagers/agriculturists who are the beneficiaries. The purpose and activity of the assessee-society is to engage in such charitable activities. Whatever amount has been spent on those programmes/projects, they were spent in the usual course of carrying on its acclaimed objects. Therefore, there is no basis whatsoever, factual or legal, to hold that the amounts spent by the assessee in constructing houses or reclaiming land are capital expenditure. As far as the assessee is concerned, those expenses are revenue expenses. The assessee has no right or title over those properties. Those expenses were incurred as part of its normal activities for which the society was formed. Therefore, the money spent by the assessee-society in constructing houses, reclaiming the land, for non-formal education, etc., has to be allowed as deduction in the computation of income. 10. The grants received from Bread for the World were for specific purposes. The grants which are for specific purposes do not belong to the assessee-society. Such grants do not form corpus of the assessee or its income. Those grants are not donations to the assessee so as to bring them under the purview of section 12 of the Act. Voluntary contributions covered by section 12 are those contributions freely available to the assessee without any stipulation which the assessee could utilise towards its objectives according to its own discretion and judgment. Tied-up grants for a specified purpose would only mean that the assessee, which is a voluntary organisation, has agreed to act as a trustee of a special fund granted by Bread for the World with the result that it need not be pooled or integrated with the assessee';s normal income or corpus. In this case, the assessee is acting as an independent trustee for that grant, just as same trustee can act as a trustee of more than one trust. Tied-up amounts need not, therefore, be treated as amounts which are required to be considered for assessment, for ascertaining the

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amount expended or the amount to be accumulated. 11. The assessee should have actually credited that grant in the personal account of the donor, Bread for the World and any amount spent against that grant should have been debited to that separate account of the donor. That incoming and outgoing need not be reflected in the income and expenditure account of the assessee. At the end of the project, the balance, if any, available to the credit of Bread for the World, the donor, could be treated as income of the assessee, if the donor did not insist for the repayment of the balance amount. 12. Therefore, in the light of the examination of the facts of the case, we direct the Assessing Officer to redo the assessments in the following lines : (1)The tied-up grants received from the donor, Bread for the World, will be taken out of the computation of income from the income-side. (2)All the money spent under the tied-up programmes directed by the donor also will be taken out of the computation of income from the expense-side. (3)Any non-refundable credit balance in the personal account of Bread for the World will be treated as income in the year in which such non-refundable balance was ascertained. (4)The expenses incurred by the assessee for house construction, reclamation of land, non-formal education programme (other than covered by the tied-up grants) will be deducted as revenue expenses.

Further, we make it clear that if the assessee already 8.

considered above grant as income of the assessee in its income and

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expenditure account, then the finding of the Tribunal in sub para 12 (supra) is not applicable.

In the results, the appeals of the assessee in ITA Nos.2130 & 10.

2131/Mds/2013 are partly allowed for statistical purposes.

Order pronounced on Friday, 28th day of August, 2015, at Chennai.

Sd/- Sd/- (चं� पूजार�) (एन.आर.एस. गणेशन)) (CHANDRA POOJARI) (N.R.S. GANESAN) लेखा सद�य /ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai �दनांक/Dated:28.08.2015 KV

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF