2024 (12) TMI 1057 - AT - Income Tax

Exemption u/s. 11 - assessee organisation is doing all the infrastructure development/creation work on behalf of the government - HELD THAT - As per the proviso to section 12(2) of the Act it has been specifically written that the benefit of exemption can be granted for the preceding year if on the date of grant of registration u/s. 12A to an institution the assessment for a preceding year was pending before the AO and the objects and activities of such trust or organisation remained the same for such preceding year. The assessment year under consideration is AY 2012-13. The assessee organisation for the first time applied for registration u/s. 12A of the Act in the year 2019 the assessment for the AY 2012-13 by then stood completed and was not pending before the AO. Secondly the said provision stood omitted as on 01.04.2023. As on today when we are adjudicating upon this appeal and claim of the assessee for grant of benefit of proviso to section 12(2) of the Act the said proviso is no more on the statute. It is settled law that the effect of omission of a provision from the said statute is that it never existed on the statute. Nevertheless the said proviso is not in existence in the statute as on today. Hence in our view the assessee organisation cannot be granted benefit of the said provision by us while adjudicating upon appeal of the assessee in the year 2024 when such proviso already stood omitted w.e.f. 01.04.2023. Action of the AO in treading the expenditure incurred by the assessee organisation as capital in nature is concerned we do not find any infirmity in the order of the Assessing Officer to the extent that expenditure incurred on creation of infrastructure would be capital in nature. However expenditure incurred on maintenance of the infrastructure would be revenue in nature. Office Administration expenditure would also be revenue in nature. The assessee will be entitled to claim depreciation as per law on the infrastructure which has been admittedly booked as asset by the assessee in the balance sheet. So far as the flaws in accounting method applied by the assessee are concerned it is to be noted that the assessee organisation is regularly booking notional interest expenditure payable to the government on the first/initial grant received by it by treating the same as a loan in its account. As per assessee it was not a loan but a grant only. He has submitted that due to some advise given at that time the assessee has treated it as a loan in its account and has also booked the notional interest expenditure upon it. The same however has never been paid to the government. If this contention of the assessee is to be accepted then certainly any interest expenditure booked by the assessee is not an allowable expenditure. However the fact on the file is that the said amount was wrongly treated by the assessee as loan in its account whereas the claim of the assessee organisation is that the said amount was a grant received from the government prior to 1992 and that has been incurred by the assessee organisation on infrastructure projects and that the said projects are booked as assets in the Balance sheet of the assessee. Under this scenario the said grant is required to be treated as income of the assessee and the assessee of course would be entitled to claim depreciation on such assets as per law. However in fairness to the assessee organisation we give an opportunity to the assessee organisation to correct/rectify its account and show the clear picture of accounts to the Assessing Officer and the Assessing Officer to decide the issue accordingly after considering the submissions of the assessee in this respect. Appeal of the revenue is treated as partly allowed.

Summary

Issues Involved:

1. Treatment of government grants as income.
2. Applicability of exemption under sections 11/12 of the Income Tax Act, 1961.
3. Reliance on a precedent case by the Ld. CIT(A).
4. Classification of project expenses and interest on loan as capital or revenue in nature.

Detailed Analysis:

1. Treatment of Government Grants as Income:

The primary issue is whether the grants received from the government should be considered as income. The assessee, a statutory corporation, argued that it receives grants for specific infrastructure projects, which are then handed over to the government, and any surplus is refunded. The Assessing Officer (AO) treated these grants as income, while the Ld. CIT(A) ruled in favor of the assessee, stating that the organization operates on a no-profit-no-loss basis as an instrument of the government. However, the Tribunal disagreed with the Ld. CIT(A), concluding that the assessee's model, which includes collecting toll charges, constitutes a business model. Therefore, the grants should be considered income, as the organization is authorized to generate its own income through toll collection.

2. Applicability of Exemption under Sections 11/12:

The assessee sought exemption under sections 11/12, arguing that it was registered as a charitable organization under section 12A in 2019, and the appeal for AY 2012-13 was pending at the time of registration. The Tribunal noted that the proviso to section 12(2), which allowed such retrospective benefits, was omitted effective 01.04.2023. Moreover, the assessment proceedings for AY 2012-13 were not pending before the AO at the time of registration. Hence, the exemption under sections 11/12 was not applicable for AY 2012-13.

3. Reliance on a Precedent Case:

The Ld. CIT(A) relied on a decision from the Hon'ble High Court of Punjab and Haryana. The Tribunal found this reliance inappropriate, as the facts of the precedent case were distinguishable from the current case. The Tribunal emphasized that the assessee's activities and authority to collect toll charges signify a commercial activity, contrasting with the precedent case.

4. Classification of Project Expenses and Interest on Loan:

The AO classified the project expenses and interest on loan as capital in nature. The Tribunal upheld this classification, stating that infrastructure creation expenses are capital, while maintenance expenses are revenue. The Tribunal also addressed the issue of notional interest on the initial grant treated as a loan, advising the assessee to rectify its accounts to reflect the true nature of the transactions. The Tribunal allowed the assessee to claim depreciation on infrastructure assets as per law.

In conclusion, the Tribunal partly allowed the revenue's appeals for both AY 2012-13 and AY 2013-14, affirming the treatment of grants as income and the capital nature of project expenses, while denying the applicability of section 12A exemption for the assessment years in question.