Allowed

M/S Kammavari Sangham v. the Deputy Director of Income Tax

Karnataka HC6 Sept 2022ITA/595/2016

Case brief

AI extract

What is this about?

This appeal challenged the High Court Tribunal's order denying income tax exemption under Section 11 to a charitable trust. The court approved the appeals, holding that the distinction between voluntary and involuntary contributions is not material if funds are applied for charitable purposes, and an AO cannot deny exemption based on alleged violation of other laws without investigation.

What did the court decide?

Appeals allowed. Questions of law answered in favour of the assessee and against the Revenue.

M/S Kammavari Sangham Vs the Deputy Director of Income Tax — Income Tax | Karnataka HC (2022)

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IN THE HIGH COURT OF KARNATAKA AT

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BENGALURU

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DATED THIS THE 6^TH DAY OF SEPTEMBER, 2022

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PRESENT

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THE HON'BLE MR. JUSTICE P.S.DINESH KUMAR

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AND

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THE HON’BLE MR. JUSTICE UMESH M. ADIGA

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ITA No.595 OF 2016

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C/W

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ITA No.596 OF 2016

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C/W

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ITA No.597 OF 2016

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IN ITA No.595 OF 2016

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BETWEEN

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M/S. KAMMAVARI SANGHAM REPRESENTED BY ITS PRESIDENT, SRI. Y. RAMACHANDRA NAIDU, NO. 145/4, MOUNT JOY EXTENSION, HANUMANTHANAGAR, BANGALORE - 560 019.

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...APPELLANT

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(BY SRI. V. CHANDRASHEKAR, ADVOCATE FOR M. LAVA, ADVOCATE)

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AND

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THE DEPUTY DIRECTOR OF INCOME TAX (EXEMPTIONS), CIRCLE 17(1),

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C.R. BUILDING, QUEEN'S ROAD, BANGALORE - 560 001.

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PRESENTLY: THE ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTIONS) CIRCLE 1, UNITY BUILDING ANNEXE, MISSION ROAD, BANGALORE - 560 027.

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…RESPONDENT

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(BY SRI. E.I. SANMATHI, STANDING COUNSEL)

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THIS ITA / INCOME TAX APPEAL UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 17/06/2016 PASSED IN ITA NO.206/BANG/2014, FOR THE ASSESSMENT YEAR 2009-2010 PRAYING THIS HON'BLE COURT TO 1. TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AS STATED ABOVE AND ANSWER THE SAME IN FAVOUR OF THE APPELLANT AND ETC.,

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IN ITA No.596 OF 2016

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BETWEEN

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M/S. KAMMAVARI SANGHAM REPRESENTED BY ITS PRESIDENT, SRI. Y. RAMACHANDRA NAIDU, NO. 145/4, MOUNT JOY EXTENSION, HANUMANTHANAGAR, BANGALORE - 560 019. ...APPELLANT (BY SRI. V. CHANDRASHEKAR, ADVOCATE FOR M. LAVA, ADVOCATE)

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AND

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THE DEPUTY DIRECTOR OF INCOME TAX (EXEMPTIONS), CIRCLE 17(1), C.R. BUILDING, QUEEN'S ROAD, BANGALORE - 560 001.

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PRESENTLY: THE ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTIONS) CIRCLE 1, UNITY BUILDING ANNEXE, MISSION ROAD, BANGALORE - 560 027.

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…RESPONDENT

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(BY SRI. E.I. SANMATHI, STANDING COUNSEL)

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THIS ITA / INCOME TAX APPEAL UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 17/06/2016 PASSED IN ITA NO.207/BANG/2014, FOR THE ASSESSMENT YEAR 2010-11. PRAYING THIS HON'BLE COURT TO A) TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AS STATED ABOVE AND ANSWER THE SAME IN FAVOUR OF THE APPELLANT AND ETC.,

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IN ITA No.597 OF 2016

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BETWEEN

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M/S. KAMMAVARI SANGHAM REPRESENTED BY ITS PRESIDENT, SRI. Y. RAMACHANDRA NAIDU, NO. 145/4, MOUNT JOY EXTENSION, HANUMANTHANAGAR, BANGALORE - 560 019.

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...APPELLANT

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(BY SRI. V. CHANDRASHEKAR, ADVOCATE FOR M. LAVA, ADVOCATE)

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AND

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THE DEPUTY DIRECTOR OF INCOME TAX (EXEMPTIONS), CIRCLE 17(1), C.R. BUILDING, QUEEN'S ROAD, BANGALORE - 560 001.

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PRESENTLY:

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THE ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTIONS) CIRCLE 1, UNITY BUILDING ANNEXE, MISSION ROAD, BANGALORE - 560 027.

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…RESPONDENT

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(BY SRI. E.I. SANMATHI, STANDING COUNSEL)

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THIS ITA / INCOME TAX APPEAL UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 17/06/2016 PASSED IN ITA NO.1099/BANG/2015, FOR THE ASSESSMENT YEAR 2011-2012 PRAYING THIS HON'BLE COURT TO A) TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW AS STATED ABOVE AND ANSWER THE SAME IN FAVOUR OF THE APPELLANT AND ETC.,

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THESE ITAs COMING ON FOR FINAL HEARING, THIS DAY P.S. DINESH KUMAR J. , MADE / DELIVERED THE FOLLOWING:

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JUDGMENT

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These appeals by the assessee challenging the common order dated 17.06.2016 in ITAs No.206 & 207/Bang/2014 and 1099/Bang/2015 for the AYs-2009-10, 2010-11 and 2011-12 respectively, have been admitted to consider the following questions of law:

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"a. Whether the Tribunal is justified in law in holding that the Appellant is not engaged in charitable activities which is

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contrary to material on record and consequently passing perverse order and thereby denying the Appellant the exemptions u/s. 11 of the Act on the facts and circumstances of the case?

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b. Whether the Tribunal is correct in law in reversing the well-reasoned order of the CIT(A) and holding that the donations received by the Appellant are in the nature of capitation fees and therefore taxable in the hands of the Appellant on the facts and circumstances of the case?

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c. Without prejudice, whether the tribunal erred in not holding that if at all the donations received by the Appellant amounted to capitation fee, such amount alone could be brought to tax and the exemption u/s.11 cannot be denied in respect if the entire income of the Appellant on the facts and circumstances of the case?"

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Heard Shri. V. Chandrashekar, learned

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advocate for the assessee and Shri. E.I. Sanmathi, learned standing counsel for the Revenue.

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Brief facts of the case are, assessee is a charitable Trust. It has received money as donation and shown the same in Income and Expenditure account. For the Assessment Years 2009-2010 and 2010-2011, the Assessing Officer has denied the

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benefit of Section 11 of the Income Tax Act 1961 ('the Act' for short) to the assessee. On appeal, the CIT(A)¹ granted relief. The Revenue challenged CIT(A)'s order before the ITAT² and the ITAT has reversed the findings. Resultant position is, the assessee has been denied the benefit under Section 11 for the Assessment Years 2009-2010 and 20102011.

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So far as A.Y.2011-2012, all three authorities namely Assessing Officer, Commissioner of Income Tax(A), Income Tax Appellate Tribunal have denied the benefit of Section 11 of the Income Tax Act.

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Sri. Chandrashekar for the assessee, adverting to Section 12(1) of the Act submitted that any voluntary contribution received by the Trust for charitable or religious purposes, (not being

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1 Commissioner of Income Tax(Appeals)

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2 Income Tax Appellate Tribunal

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contributions made with a specific direction that they shall form part of the corpus of the Trust or institution) shall, for the purpose of Section 11 of the Act must be construed as income. He further submitted that if contributions are received with a specific direction for a particular purpose, the same shall be treated as capital receipt and the other income shall be shown in the Income and Expenditure account; and that the question whether the contributions were made voluntary or involuntary was considered by the Madras High Court in the case of Commissioner Of Income-Tax, Central-III, Chennai -Vs- Balaji Educational & Charitable Public Trust³ and the Madras High Court has held that so long as the contribution received are brought to tax, it makes no difference as to whether it is voluntary or involuntary.

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3 [2015] 56 TAXMANN.COM 182 (PARA 4.8 AND 4.9)

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He further submitted that the reasons

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recorded by the tribunal is that the money received by the trust are in the form of capitation fees and on this premise, exemption under Section 11 of the Act has been denied.

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In substance Shri. Chandrashekar's, arguments is, so long as the Trust enjoys the benefit of certificate under Section 12(A) of the Act, the money received whether voluntary or not would not make any difference so long as the same is shown in Income and Expenditure account.

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In reply, Shri. Sanmathi, adverting to Section 11(1)(d) of the Act contended that

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• Only voluntary contributions can be considered to give exemption under Section 11 and not involuntary contributions;

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• So far as the certificate under Section 12(A) of the Act is concerned, he submitted that this Court has considered the same in assessee's case in ITA 421/2013 in Director of Income Tax -vsM/S. Kammavari Sangham⁴ which is based on Director of Income Tax (Exemption) and another vs. Karnataka Badminton Association⁵ wherein it is held that the issue is with regard to the contribution will have to be considered by the assessing authority in respect of each year; and

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The tribunal has recorded finding at para 21 that assessee is running a commercial organization and not a charitable organization.

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4 ITA No.421/2013 presided on 16.12.2015

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5 (2015) 378 ITR 0700 (KARNATAKA)

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9. We have carefully considered the rival

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contentions and perused the records.

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Assessee claims to be a charitable

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society and obtained certificate under Section 12(A) of the Act.

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The assessee has received donations and shown it in the Income and Expenditure account. By the impugned order, the ITAT has denied the benefit under Section 11 of the Act.

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Section 11(1)(d) of the Act relied upon by Shri. Sanmathi, makes it clear that the voluntary donation made with a specific direction shall form a part of the corpus. The person who makes a contribution can make such contribution either with a specific direction or without any direction. Section 11(1)(d) of the Act refers to only such contribution which are made for a specific purpose. For example,

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the donor may desire that his donation be used for construction of a building. If no direction is given by the donor, the money received by the assessee shall be taxable subject to such exemption which may be claimed under Section 11 of the Act.

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In the instant case, it is not in dispute that the entire amount received as 'contribution' has been shown in the Income and Expenditure account . The denial of benefit under Section 11 of the Act is on the premise that the donations received are not voluntary in nature. This precise question was considered by Madras High Court in BALAJI EDUCATION CASE (supra) and it is held as follows:

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"4.7. The question, as has been posed by the Tribunal, is whether the contributions or donations are voluntary or involuntary and what is the effect of such donation. The Tribunal was of the view that there is no concept of involuntary contributions and went on to hold that voluntary contributions should be treated as income under Section 12 of the Act and that corpus donations to be treated as capital receipt under Section

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11(1)(d) of the Act and corpus donations are not generally in the nature of income. It further held that voluntary contributions are taxable only if not applied for charitable purposes. The emphasis is on, not applying the same for charitable purposes.

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4.8. Whether contribution is voluntary or involuntary and its implication in relation to these provisions was considered by the Tribunal in the following manner:

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"35. To proceed further, we have to examine the (30) scheme of law of charities provided under the Income-tax Act, 1961. There is no concept of involuntary contributions in that scheme. The only distinction recognized by law is the voluntary contributions to be treated as income under section 12 and the corpus donations to be treated as capital receipt under section 11(1)(d). The corpus donations are not generally in the nature of income. The voluntary contributions are taxable only if not applied for charitable purposes. In the present case, the assessee-trust itself has treated the contributions as voluntary contributions in the nature of income. The assessee claims exemption under section 11 not on the basis of the nature of contributions but for the reason that the contributions were applied for charitable purposes. When the assesseetrust itself has treated the contributions as voluntary contribution in the nature of income, which is the best situation that

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the Revenue would always welcome, what is the relevance of arguing whether the contributions were voluntary or not?

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36. Even if the contributions are treated as not voluntary what could be the legal consequence of that finding? Whether the Revenue will treat such (31) involuntary contributions as capital and give exemption from taxation? No, it will not. The Revenue will still find such involuntary contribution as income liable for taxation. If so, what is the real distinction between voluntary contribution and involuntary contribution as far as the taxation of charities is concerned? In both cases, it will be brought for taxation if the assessee has not utilised the contributions for charitable purposes.

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37. The expression "voluntary contributions" is used in the Act instead of "contributions" to highlight the principle of non-compulsion in matters of participating in charitable activities and to underline the gratuitous nature of donations and charitable activities. There is no compulsion in making contributions to charities. If the expression was "contributions" there could be a naunce of compulsion like contribution to provident fund and the like.

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38. Therefore, we find that whether it is treated as voluntary or involuntary, the only course of action available before law is to see whether such contributions have been treated by

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the assessee as the income and also applied for charitable (30) purposes."

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This reasoning of the Tribunal, we are inclined to accept.

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4.9. The finding of the Tribunal is that the department has not established a case that the assessee had in this case not utilized the donations or income for charitable purpose. The clear finding of the Tribunal is that if the assessee had not utilized the amount for charitable purpose, it would automatically become taxable and the assessee would not be entitled to exemption. But, on the contrary, without there being a finding of violation of Section 13 of the Act, an inference is drawn on an alleged receipt of donation and consequently, the allegation is made that there is a violation of Section 13(1)(d) of the Act. A hypothetical finding is given that because capitation fee is charged, it is not an income in terms of Section 11 of the Act and, therefore, there is a violation of Section 13(1)(d) of the Act. The Tribunal held that such a reasoning cannot be accepted because if the donations are offered for income and if the department wants to disprove the nature of income on the basis of material, as has been pointed (33) out by the Commissioner of Income Tax (Appeals), it should be borne out by records based on investigation, which the Assessing Officer failed to do, except falling back on a statement which is not supported by materials".

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We are in respectful agreement with the view taken by the Madras High Court.

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Sri. E.I. Sanmathi, learned advocate is

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also right in his submission that in each year of assessment, the Assessing Officer will have to examine the case independently. In the case on hand, the Assessing Officer for the A.Y. 2011-2012 has held that he has made enquiry with the parents and collected information that the amount was not made voluntarily.

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It was argued by Shri. Chandrashekar that Assessing Officer's view that capitation fee was collected in violation of the Karnataka Educational Institution (Prohibitions of Capitation Fee) Act, 1984, is not sustainable because it is for the appropriate authority, which deals with the said Act to investigate into the matter. In substance, his

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contention is, the Assessing Officer under the Income Tax Act cannot deny the exemption under Section 11 of the Act on the assumption that there is violation of any other statutory provision. He also adverted to Section 12(AA) (4) (b) of the Act and contended that the said provision has been substituted with effect from 01.09.2019, giving power to the Principal Commissioner or the Commissioner of Income Tax to cancel the registration of a trust or institution. Thus, it is clear that should there be any violation with regard to receipt of capitation fee, the Assessing Officer could not have denied the benefit under Section 11 of the Act so long as the certificate is in force. Admittedly, assessee's certificate was in force. Though it was cancelled by the Revenue it has been restored by an order passed by this Court in ITA.No.421/2013.

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