2016 (4) TMI 1432 - AT - Income Tax

Exemption u/s 11 - grants/contribution received by the assessee from different organisations are in the nature of tied-up grants and thus cannot be taken into consideration for the purpose of computing total income of the assesses u/s 11 - HELD THAT - As tri - partied agreements clearly states the budgets sanctioned the responsibilities of Resource implementing and Facilitating Agencies in the case of projects which are meant to be implemented thru partner NGOs. Whereas the projects which are implemented through the Assessee the agreements are entered into with Assessee as implementing Agency along with the budget proposals sanctioned. These co-operative documents are clearly demonstrate that these grants are sanctioned for the specific purpose and the Assessee and NGOs are required to submit the audit financials and progress reports to the Resource agency. These transactions are subject to ethical audits. Since these projects are driven in the direction of the resource agency and accordingly the grants are sanctioned are clearly demonstrate that these are tied up grants. Since the tied up grants cannot be treated as the income of the society as per the ratio laid down in the case of Nirmal Agricultural Society 1998 (12) TMI 106 - ITAT HYDERABAD-B We are inclined to hold that the above grants are in the nature of tied up and Assessee has no control over the funds except facilitating to implement the projects. Hence Ground raised by the revenue are dismissed.

Summary

Issues: Determination of taxable income for a society registered under section 12A of the Income Tax Act, 1961 based on grants given to other NGOs, whether grants received are tied-up grants, admissibility of additional evidence under Rule 46A, and the control over funds transferred to other NGOs.

Analysis:

1. Taxable Income Determination: The society, registered under section 12A, filed a return of income claiming exemption under section 11 of the Act. The Assessing Officer (AO) determined the taxable income after disallowing a portion of income given as grants to other NGOs, stating it was against the society's objectives. The AO emphasized that the activities should support the society's objects and not overtake them. The society's reliance on partners for implementing its objectives was also questioned by the AO.

2. Disallowance of Grants: The AO disallowed the grants given to other NGOs as the society failed to prove control over the funds transferred, indicating blind transfers without any control. The society's inability to substantiate control over funds and lack of mention in agreements with donor agencies led to the disallowance.

3. CIT(A) Order: The CIT(A) held that grants received from donors should not be considered for computing total income under section 11, deeming them as tied-up grants. The CIT(A) considered the nature of grants and the agreements with donors in reaching this decision.

4. Appeal Before ITAT: The revenue appealed against the CIT(A) order, challenging the acceptance of additional evidence and the treatment of grants as tied-up. The revenue raised grounds questioning the legality of the CIT(A) decision and the justification for not considering the grants as part of the society's income.

5. Additional Evidence and Rule 46A: The revenue contended that the additional evidence submitted by the society before the CIT(A) violated Rule 46A as the AO was not given an opportunity to examine it. However, the society argued that the AO had already considered the relevant agreements with donors, indicating that the documents were not fresh material.

6. Tied-Up Grants: The society presented budget proposals and cooperation agreements showing that grants were sanctioned for specific purposes, with clear responsibilities outlined for all parties involved. These documents demonstrated that the grants were tied-up and subject to ethical audits, aligning with the principle that such grants do not form part of the society's income.

7. ITAT Decision: Considering the arguments and case laws presented, the ITAT concluded that the grants were indeed tied-up and that the society had no control over the funds except for facilitating project implementation. The ITAT dismissed the revenue's appeal and partly allowed the society's cross-objection.

In conclusion, the ITAT upheld the CIT(A) decision, emphasizing the nature of tied-up grants and the lack of control by the society over the funds transferred to other NGOs. The judgment highlights the importance of aligning activities with the society's objectives and the treatment of specific grants as not forming part of the society's income.