Even if a society is not established, according to Section 12A, expenses incurred for earning income must be permitted
Fact and issue of the case
The present group of six appeals is directed at the instance of assessee against separate orders of ld. Commissioner of Income Tax (Appeals), Guwahati-2, Guwahati dated 11.03.2020 passed on the respective ITA Nos. 119-124/GAU/2020 Assessment Years: 2012-2013 to 2017-2018 State Health Society Assam appeals of the appellant in Assessment Years 20 12-13 to 20 17-18.
These appeals were listed for hearing on 13.10.2022 and fixed for hearing on 20.10.2022. Thereafter on the request of assessee, hearing was adjourned on three occasions and on one occasion, Bench did not function. Today also, ld. Counsel for the assessee has filed an application for grant of some more time. However, after going through the record, we do not deem it necessary to grant further time and proceed to decide the appeals on merit. The basic reason is that the very small issue is involved in all these years, which does not call for a substantial material for consideration.
Before adverting the grounds of appeal raised by the assessee in each year in seriatim, we deem it appropriate to take note of the brief facts and the controversy. Brief facts are that the assessee is a Society. It is engaged in implementing various Schemes of the Government of India and State Government of Assam on health for which it gets grant-in-aid, Scheme-wise. At the end of the year, the surplus on such Scheme either returned to the Government or is kept in the Bank, which earned interest income. The assessee had not filed its return of income. Therefore, a survey under section 133A was carried out at the premises of the assessee and during the course of survey it reveals that assessee has a taxable income, which has escaped assessment. Accordingly, notice under section 148 was issued inviting the return of income for these years. At this stage, for the sake of brevity of repetition, we deem it appropriate to take note the complete assessment order, which is running into four pages only. The assessment order will exhibit the background of the litigation and the issues involved therein. The assessment order is identically worded in all these years except some variation in the quantum of additions determined by the ld. Assessing Officer in each year. Therefore, for the facility of reference, we are taking up the assessment order for A.Y. 20 12-13, which reads as under:-
“A survey was conducted on 27.02.2019 in the premises of the assessee. During the course of survey, it was found from the audited balance sheet for the F.Y. 2011-12, that the assessee had a significant surplus/income as excess of income over expenditure amounting to Rs. 7,42,81,687/- But the assessee did not file any return of income during the relevant F.Y.. In view of the above it is believed that the amount of Rs. 7,42,81,687/- (Seven crore forty two lakhs eighty one thousand six hundred and eighty seven only) has escaped assessment for the A. Y. 2012-13 and accordingly the case was reopened u/s 147 of the Income tax Act, 1961.
Accordingly, notice u/s 148 of the Income tax Act, 1961 was issued on 27.03.2019 and served on the same day asking for filing correct return within 30 days of receipt of the notice. The assessee did not file the return of income and subsequently notice under section 142(1) of the Income-tax Act, 1961 was issued and served on 27.09.2019 through e-mail to furnish or cause to be furnished on or before 10.10.2019, the accounts and documents specified as per Annexure attached with the notice. Another letter was issued and served upon the assessee on 21.10.2019 for failing to file the return of income and also to comply with the notice u/s 142(1). The reasons recorded for reopening was duly provided to the assessee in response to their letter dated 04.11.2019. The assessee finally filed its return of income on 05.12.2019 in response to notice u/s 148 of the Income tax Act, 1961 with NIL income.
In response to the above notice and letter, the assessee-Society submitted detailed reply to the Annexure of the notice u/s 142(1) along with relevant documents through online on 20.12.2019 which were examined.
The assessee is- a Society and engaged in implementing various schemes of Govt. of India and State Govt. of Assam on health for which it gets grant-in-aid, scheme-wise. At the end of the year the surplus on such schemes either returned to the Govt. or is kept in the bank which earns interest. This interest component is also utilized for the purposes of such schemes or which the money was given and surplus generated. The 3rd category of receipt is ‘Other income’ which includes sale of bidding documents and miscellaneous income. The miscellaneous income attributes recovery of penalty from the contractor for delayed completion of work, etc. 5. Now, the question is
(i) whether the Grant-inaid(Voluntary Contribution)of Rs. 12,43,20,32,108/- is income and part of gross receipt or not.
(ii) 2ndly, whether Interest income of Rs.8,08, 79,854/- is taxable and form part of gross receipt, and
(iii) 3rdly, whether the ‘Other income’ comprising of sale of bidding documents and Misc. receipts amounting to Rs. 19,53,089/- is taxable and form pay! of gross receipt or not.
As regards Grant-in-aid received from Govt. of India and State Govt. of Assam for implementation of various scheme on health, since it is with a specific direction hence it is not voluntary contribution and does not form part of income and gross receipt. Consequently no expenditure shall also be allowed. The said receipts being restricted grant to be shown in the balance sheet directly.
Regarding whether interest income is taxable and form part of gross receipt or not. In view of the letter of National Health Mission, Assam, dated 15.6.2015 and Schedule-VlII of audited account, it is seen that the assessee in its audit report has shown the scheme wise allocation and interest component earned for the surpluses kept in bank is also considered as restricted grant which partake the character of corpus donation as it comes with specific direction and to be shown in the balance sheet directly and not to be considered as gross receipt and hence not taxed. Consequently no expenditure shall also be allowed.
Lastly, whether the ‘Other income’ of Rs. 19,53,089/- which includes sale of bidding documents and miscellaneous income, is taxable and form part of gross receipt or not. I am of the considered view that income received by way of ‘other income’ are not in the restricted grant for the following reasons:
From the assessee’s submission No.NHM-15021/7/2018- Finance & Account- NHM/2521 6 dated 20.12.2019 nowhere it is mentioned that ’other income’ also form grant-in- aid but only submitted that the same need to be utilized towards implementation of govt. schemes and administration thereof. The letter so submitted from appropriate authority of Govt. of India dated 15.6.2015 does not say anything about ‘other income’ like character of ‘interest income’ which is grant-in-aid. The said letter is totally silent about the ‘other income’.
Secondly in ‘other incomeç the sale of bidding documents is nothing but commercial activities and miscellaneous income is receipt in the nature of penalty recovered for late execution of work, etc.
Therefore, the ‘other income’ of Rs. 19,53,089/- is considered as gross receipt and taxable as the same is not grant-in-aid as evident from the letter so submitted and also on its nature of receipt.
The assessee claimed that since the entire surplus is not their income the proceeding initiated u/s 147 is ab initio void and liable to be dropped. In this regard it is to be pointed out that surplus determined by the assessee includes Grant-in-aid, Interest income and Other income. Out of which as per discussion in foregoing paras first two items have been taken out of purview of gross receipt being capital in nature which are balance sheet items and goes directly to balance sheet without rooting it through Income & Expenditure account. But the ‘other income’ cannot be treated as grant-in-aid or restricted grant and hence treated as gross receipt as discussed above para and surplus out of it above 15% is taxable in absence of form 10 which the assessee was required to file along with the return before the due date of filling return. The assessee neither filed any return nor form 10 within the stipulated time, therefore, it is not entitled to get benefit of setting apart of surplus amount over and above 15% of such surplus income and be taxed accordingly.
The assessee vide letter dated 20.12.2019 pointed out the proviso to section 12A(2) of the I. T. Act 1961 and claimed that provision of section 11 and 12 shall apply in its case and no action u/s 147 can be initiated in view of the said proviso. In this regard it is pointed out here that in the assessee’s case the said proviso is not applicable. The proviso to section 12A(2) reads as under- [Provided that where registration has been granted to the trust or institution under section 12AA, then, the provisions of sec 11 and 12 shall apply in respect of any income derived from property held under trust of any assessment year preceding aforesaid assessment year, for which assessment proceedings are pending before the assessing officer as on the date of such registration and the objects and activities of such trust or institution remain the same for such preceding assessment year: Provided further that no action u/s 147 shall be taken by the assessing officer in case of such trust or institution for any assessment year preceding the aforesaid assessment year only for non-registration of such trust or institution for the said assessment year:]
From the plain reading of the said proviso it transpire that the provisions of sec 11 and 12 shall apply in respect of any income derived from property held under trust for any assessment year preceding aforesaid assessment year, for which assessment proceedings are pending before the assessing officer as on the date of such registration and the objects and activities of such trust or institution remain the same for such preceding assessment year. But that is not the case here. The assessee never filed its return prior to issuance of notice u/ s 148 and hence the question of pending proceeding does not arise to get benefit under those section. Secondly, notice u/s 148 was issued based on the finding during the course of survey operation u/s 133A not for non-registration u/sl2AA of the I.T. Act 1961 for the said assessment year.
In view of the above the gross receipt and income of the assessee is computed as below:
|Gross Receipt of the Trust other Income||Rs. 19,53,089|
|Less: Amount of Income allowed as set apart for application to Charitable or religious purpose to the extent of 15% is||is Rs. 2,92,963 s 16,60,126|
|Income chargeable to tax:||Rs. 16,60,126|
|Rounded off to:||Rs. 16,60,130|
Appeal to the ld. CIT(Appeals) did not bring any relief to the assessee. Now we take the grounds of appeal in seriatim.
The assessee has taken seven grounds of appeal in A.Y. 20 12-13. Identical grounds are taken in other years except some variation of the quantum involved in each year. In the first common ground in all these years, the assessee has pleaded that ld. CIT(Appeals) has decided the appeal without giving adequate opportunity of hearing. A perusal of the order of the ld. CIT(Appeals) would reveal that notice was issued to the assessee but it did not attend the proceedings. Multiplication of notice is not required under the law once proper service was affected, then, it was incumbent for the ld. CIT(Appeals) to adjudicate the issue. We have perused the orders of the ld. CIT(Appeals) in all these years and the ld. CIT(Appeals) has decided the issues on merit.
In Ground No. 2, the assessee has pleaded that assessment proceedings are bad-in-law as the proceedings were initiated without arriving at the proper satisfaction that income chargeable to tax has, in fact, escaped assessment and without considering and disposing the objection of the assessee against initiation of re-assessment proceedings.
Observation of the court
We have duly considered this ground of the asses see with the assistance of ld. Representatives. We do not find any merit in this plea because during the course of survey, it revealed to the revenue that the assessee had a significant surplus/income as excess of income over expenditure. It was not filing the return of income hence basically it is not a case of re-assessment. Rather, the time limit to issue 142 was over therefore, a notice under section 148 was issued to invite the assessee for filing the return. The recording of specific reasons and disposal of objection are not a mandatory procedure in this type of cases. Had the assessee been filing the return, which was processed under section 143(1). Probably it would be justified to raise the plea that reasons were not recorded for reopening of assessment and the objections raised by the assessee were not disposed off. But, in the present case, the assessee is a Society, which is not registered under section 12AA of the Income Tax Act. It does not enjoy the benefit of sections 11 & 12 under which it can claim that its income is not taxable. In such situation, even for verification of record to find out whether income is taxable or not, notice under section 148 could be issued. 8. In the next ground of appeal, assessee has submitted that reassessment is bad because no notice under section 143(2) was issued and served. A notice under section 143(2) is being served for providing an opportunity to the assessee that its income has been selected for scrutiny assessment or reassessment, what the assessee wants to say in support of such return, but here is a case where the assessee did not file return inspite of notice served under section 148. The ld. Assessing Officer has set the machinery in motion and it is not dependent upon the assessee to file return only, thereafter he can proceed for an assessment after issuance of a notice under section 143(2). Therefore, we do not find any merit in this ground of appeal also.
Ground No. 7 is general in nature, which does not call for recording of any finding.
Under Grounds No. 4 to 6, the common issue is being raised by the assessee. The grievance pleaded in these grounds of appeal is that income earned by the assessee on sale of bidding documents etc. does not deserve to be assessed as income from other sources, rather it is to be treated at par with grant-in-aid.
With the assistance of ld. Representatives, we have gone through the record carefully. A perusal of the assessment order extracted supra, it would reveal that there are three categories of income in the hands of the assessee, namely- (a) grant-in-aid; (b) interest on surplus of the above grant-in-aid deposited in the Banks etc.; (c) Other income comprising of sale of bidding documents and miscellaneous receipts.
As far as the first two categories of income, i.e. grant-in-aid (voluntary contribution) is concerned, the ld. Assessing Officer observed that this is a grant given by the Government for specific implementation of the projects. Thus the assessee was required to act upon specific directions of the State Government as well as the Government of India. The ld. Assessing Officer has observed that this grant does not form the character of income in the hands of the assessee. Therefore, he did not tax it. For example in A.Y. 2012-13, assessee received a grant of Rs.1243,20,32,108/-. Similarly on surplus or unutilized portion of this grant deposited in the Bank and assessee has received interest income. The ld. Assessing Officer has treated this interest also at par with the grant and did not tax it.
There is a third category of income, which has been earned by the asses see by sale of bidding documents and miscellaneous income. According to the ld. Assessing Officer, this income will fall in the category of other income. Since the assessee was not having registration under section 12AA in these years, therefore, ld. Assessing Officer has held that beyond 15% of the gross receipts under this head would be taxable. However, ld. CIT(Appeals) has held that since the assessee does not enjoy registration under section 12A, then it is not entitled the deduction of even 15% of these receipts. Accordingly, ld. CIT(Appeals) has directed the ld. Assessing Officer not to grant any deduction of 15%.
On due consideration of all these facts, we are of the view that gross receipts under the third category, namely ‘other income’ does not deserve to be taxed. The ld. Assessing Officer is required to estimate the expenditure incurred by the assessee for earning this other income also. For example, if on account of bidding, etc. it has earned some income, then, it must have published bidding documents given, advertisement etc. and it must have incurred expenditure on all these activities. These expenditures are to be set off against gross receipts, even if an assessee is not registered under section 12A, then also, its income is to be determined at net and not on gross. Therefore, this part of the directions given by the ld. CIT(Appeals) are set aside in all these years along with the orders of the ld. Assessing Officer. We remit this issue to the file of ld. Assessing Officer to re-adjudicate this aspect in all these years and allow the deduction of expenditure incurred by the assessee for earning this other income. In view of the above, the orders of the ld. CIT(Appeals) in all these years are set aside on this issue and restore to the file of ld. Assessing Officer. The ld. Assessing Officer shall re-examine this aspect in all these years. He will allow the expenditure incurred by the assessee on earning other income and only thereafter determine the taxable income under this head only. Qua other heads, the findings of the revenue authorities are confirmed. In other words, other two categories of income will not be re-examined again. In view of the above, all these appeals are disposed off.
In the result, the appeals of the assessee are treated as partly allowed for statistical purposes.
Order pronounced in the open Court on 20.07.2 023.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee