G. MANJUNATHA, Accountant Member:-This appeal filed by the Revenue is directed against the order of Commissioner of Income –Tax (Appeals)-11, Mumbai, Camp at Visakhapatnam and it pertains to the Asst. Year 2009-10.
2. The Brief facts of the case are that the assessee is a Society, registered under Andhra Pradesh Societies Registration Act and also registered under sec. 12A of the Income Tax Act, 1961. The Society has filed its return of income for the A.Y. 2009-10, declaring nil total income by claiming exemption under sec. 11 of the Income tax Act, 1961. The Case has been selected for scrutiny assessment and accordingly, notice under sec. 143(2) and 142(1) of the Income Tax Act, 1961 were issued. In response to notices, the authorised representative of the assessee appeared from time to time and furnished books of accounts. During the course of assessment proceedings, the A.O. noticed that the assessee deriving income from various sources, such as fees from students, income from hospital, income from pharmacy, rent from premises and interest income from bank deposits, against which various expenditures such as salaries of faculty and administrative staff, college maintenance and administrative expenses have been claimed. The A.O. further observed that there is perceptible and gradual increase in receipts from Rs. 1,58,84,406/- to Rs. 22,57,55,509/- over a period of four years starting from A.Y. 2005-06 to 2008-09. The Society has availed term loans from banks which have been used for construction of college buildings etc. Though, the objects are not under dispute, nor any case is being made out for reconsidering the exemption by virtue of registration under sec. 12A of the Act, the assessee’s activities are akin to any commercial activity, therefore, assessed the income of the assessee under the head “income from business” and made disallowances to various expenditures by invoking the provisions of sec. 40(a)(ia) for non deduction of TDS and sec. 43B for unpaid liabilities.
3. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before CIT(A), the assessee submitted that the assessee is a Society, registered under sec. 12A of the Income tax Act, 1961 with the main object of imparting education. The assessee further submitted that the A.O. has never doubted the objects and genuineness of its activities and also not made out any case of violations of section 13(1)(c) or 13(1)(d) of the Act, so as to deny the benefit of exemption under sec. 11, which is evident from the assessment order, wherein the A.O. himself made observations about the genuineness of the activities of the society. The only point on which, the A.O. came to the conclusion that the activity of society is akin to any commercial activity, is increase in receipts of society. It was further submitted that unless, prove the objects are not genuine and the activities are not in accordance with the objects of the trust, exemption cannot be denied. The A.O. without pointing out any violations referred to in section 13(1) (c) or 13(1)(d), simply assessed the income under the head income from business and disallowed the expenditures, by invoking sec. 40(a)(ia) and 43B, which is not correct. In support of its arguments, relied upon the judgment of ITAT, Mumbai Bench decision in the case of Mahatma Gandhi Seva Mandir vs. DDIT (2012) 52 SOT 26. The CIT(A), after considering the submission of assessee and also considering the decision of ITAT, Mumbai Bench, in the case of Mahatma Gandhi Seva Mandir vs. DDIT (2012) 52 SOT 26, deleted the additions. The CIT(A), further held that the provisions of sec. 40(a)(ia) and 43B are not applicable, when income is computed under the provisions of sec. 11 of the Act.
4. The Ld. D.R. submitted that the CIT(A) ought to have sustained the additions made u/s 40(a)(ia) and 43B of the Act, as the A.O. has assessed the income under the head income from business and not income from other sources. It was submitted that once, income is assessed under normal provisions of income from business or profession, by denying the exemption u/s 11, the provisions of sec. 40(a)(ia) and sec. 43B are applicable. The CIT(A) erroneously relied upon the judgment of ITAT, which is rendered under different facts. 5. Per contra, the Ld. A.R. submitted that the CIT(A) rightly held that the provisions of sec. 40(a)(ia) and 43B are not applicable to trust/society claiming exemption under sec. 11. The A.R. further submitted that the income of trust registered under sec. 12A is to be computed under the provisions of sec. 11, 12 & 13 of Act, which are fall under chapter III which deals with ‘incomes which do not form part of the total income’. It was further submitted that sec. 40(a)(ia) and sec. 43B are falls under chapter IV D, which deals with computation of profits and gains from business or profession. The profits and gains from business or profession are computed under sec. 28. Section 29 provides for manner of computation of income under the head profits and gains of business or profession, which states that the income referred to in sec. 28 shall be computed in accordance with the provisions of sec. 28 to 43D. Therefore, the provisions of sec. 40(a)(ia) and 43B are relevant, if income is computed under the head profits and gains of business or profession. The A.O. has not doubted the genuineness of the activities of the trust and without pointing out any violations referred to in section 13(1)( c) or 13(1)(d), simply assessed the income under the head income from business and disallowed the expenditures, by invoking sec. 40(a)(ia) and 43B which is not correct. In support of his arguments, the A.R. relied upon the judgments of ITAT, Mumbai Bench decision in the case of Mahatma Gandhi Seva Mandir vs. DDIT (2012) 52 SOT 26.
6. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. denied the benefit of exemption under sec. 11 and computed the income under the head profits and gains of business or profession. The A.O. was of the opinion that though, its objects are charitable in nature and activities are genuine, the activities carried out by the assessee are akin to any commercial activity and hence, computed the income under the head profits and gains of business or profession. It was the contention of assessee that the A.O. has never doubted the objects and genuineness of its activities and also not made out any case of violations of section 13(1)(c) or 13(1)(d) of the Act, so as to deny the benefit of exemption under sec. 11, which is evident from the assessment order, wherein the A.O. himself made observations about the genuineness of the activities of the society. The only point on which, the A.O. came to the conclusion that the activity of society is akin to any commercial activity is based on increase in receipts of society. The assessee further submitted that the provisions of section 40(a)(ia) and 43B are not applicable, when income is computed under section 11, 12 & 13 of the Act.
7. The A.O. computed the income under the normal provisions of profits and gains of business and profession. The A.O. gave his own reasons for not applying the provisions of sec. 11, 12 & 13 of the Act. On perusal of reasons, the reasons given by the A.O. for denying the exemptions, appears to be quite contrary to the law. Admittedly, The Society is registered under sec. 12A of the Act and it is imparting education. It is not a case of A.O. that the objects are not charitable in nature and the activities of the assessee are not genuine. The A.O., one side admitted that the objects of the society are not under debate, nor any case is being made out for reconsideration of exemption allowable to assessee, but on the other hand, denied the exemption for the reason that the assessee gross receipts have increased over a period. On perusal of assessment order we find that the A.O. neither doubted the genuineness of the activities of the society, nor pointed out any violation referred to sec. 13(1)(c) or 13(1)(d), which are pre conditions for denying exemption u/s 11 of the Act. Therefore, we are of the opinion that the A.O. was not correct in denying exemption under sec. 11 and assessed income under the head profits and gains of business of profession.
8. Having said that let us examine, whether the provisions of sec. 40(a)(ia) and 43B are applicable, when income is computed under sec. 11, 12 & 13 of the Act. Chapter III deals with incomes which do not form part of total income. Sce. 11, 12 & 13 deals with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax, if such conditions are fulfilled. Sc. 40(a)(ia) and sec. 43B are falls under chapter IV D, which deals with computation of profits and gains from business or profession. The profits and gains from business or profession are computed under sec. 28. Section 29 provides for manner of computation of income under the head profits and gains of business or profession, which states that the income referred to in sec. 28 shall be computed in accordance with the provisions of sec. 28 to 43D. Therefore, the provisions of sec. 40(a)(ia) and 43B are relevant, if income is computed under the head profits and gains of business or profession. In the present case on hand, the income of the assessee is eligible for exemption under sec. 11 of the Act by virtue of registration under sec. 12A. The income of any trust/society, enjoying exemption u/s 11, is exempt from tax, subject to certain conditions. If, such conditions are fulfilled, the whole income of such trust is exempt from tax. The concept of computation of income under section 11 is real income concept, which is computed on the principles of real income generated from property held under trust and not notional income like under other provisions of the Act. Section 11(1)(a) provides for application of income for charitable purpose, therefore, the question of application of income arise only when income is available for application. If any expenditure is disallowed by invoking the provisions of section 40(a)(ia) and 43B, it leads to a situation where assessee income available for application is enhanced without being any real income for application for charitable purpose, which leads to an absurd situation where the trusts/societies enjoying exemption u/s 11 have to pay taxes. This is because, the assessee claiming exemption u/s 11, shall apply 85% of income for the purpose of objects of the Trust. The legislature in its wisdom has kept separate provisions which are independent from any other provisions of the Act for computation of income of trusts claiming exemption u/s 11 of the Act. Therefore, we are of the opinion that, when income is computed under sec. 11 of the Act, the provisions of sec. 40(a)(ia) & 43B are not applicable. Hence, the A.O. was not correct in disallowing the amounts by invoking the provisions of sec. 40(a)(ia) and 43B for failure to deduct TDS and failure to remit the unpaid liabilities.
9. Now, it is pertinent to discuss the case laws relied upon by the assessee. The assessee relied upon the judgment of ITAT, Mumbai Bench, in the case of Mahatma Gandhi Seva Mandir vs. DDIT (Exemptions) (2012) 52 SOT 26. The Coordinate bench of this tribunal, held that provisions of sec. 40(a) are not applicable, when income is computed under sec. 11 of the Act. The relevant portion is reproduced hereinunder.
“Section 40 is applicable only when deductions under Sections 30 to 38 are being made in computing the income chargeable under the head “profits and gains of business or profession” under section 28. The exception in Section 40 is carved out, only for the purpose of Section 28 and not for computing the exemption of income of a charitable trust under Section 11. The disallowance made under Section 40(a) will only go to enhance the business profit of an assessee whose income is assessable under section 28 and not otherwise. Hence, provisions of section 40(a) are not applicable in case of charitable trust or institution where income and expenditure is computed in terms of section 11.”
10. Considering the facts and circumstances of this case and also applying the ratio of co-ordinate bench decision, in the case of Mahatma Gandhi Seva Mandir vs. DDIT (Exemptions) (2012) 52 SOT 26, we are of the opinion that sec. 40(a)(ia) and 43B are not applicable, when income is computed under sec. 11 of the Act. The CIT(A) has rightly deleted the additions. We do not see any error or infirmity in the order of CIT(A). Hence, we inclined to upheld the CIT(A) order and dismiss the revenue appeal.
11. In the result, the appeal filed by the revenue is dismissed.