By TIOL News Service

AHMEDABAD, JUNE 22, 2018: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether application of fund for the benefit of earthquake victims and its communication to the donee before stipulated date, is sufficient for a charitable trust to avail benefit of exemption u/s 80G(5C). YES is the Verdict.

Facts of the case:

The assessee is a registered charitable Trust and is also approved u/s 80G(5). It was created for a specific object of providing relief to the earthquake victims of Gujarat. Therefore, to encourage the activity of rehabilitation of earthquake victims, the central legislature made certain tax concession provisions in the Income Tax Act and added Clause (d) to section 80G(2) providing exemption from tax in respect of any sums paid by the assessee during the period beginning on Jan 26, 2001 and ending on Sep 30, 2001 to any trust, institution or fund to which, the said section applies for providing relief to the victims of earthquake in Gujarat. Correspondingly, sub-section 5(C) of section 80G was inserted also w.e.f. Feb 03, 2001. Thereafter, for the A.Y 2004-05, the assessee had filed return and claimed exemption in terms of section 80G(5C) contending that a sum of Rs. 3.89 crores was applied for the relief to the earthquake victims during the period relevant to the said assessment year. During scrutiny assessment, the assessee pointed out to the AO that the Trust had undertaken the work of construction of schools for which, the contract was awarded to the construction contractors. In pursuence of the same, a sum of Rs. 2.17 lacs, Rs.1.59 crores, and Rs.3.89 was spent during A.Ys 2000-03. The AO however doubted the stand of assessee, as he was of the opinion that a sum of Rs. 3.19 crores was neither applied for the purpose of earthquake relief nor surrendered to the Prime Minister's National Relief Fund before stipulated date. He therefore, with the aid of section 12(3), added a sum of Rs. 3.19 crore to the income of assessee.

On appeal, the Tribunal accepted the assessee's contention that for the benefit of the statutory provisions in question, application of the fund was sufficient and not its actual spending before Mar 31, 2004. The Tribunal also believed that necessary entries made by assessee in the accounts amounted to application of fund. The Tribunal thereafter however made a distinction between the sum of Rs. 2.19 crores which was actually later on spent and Rs. 1 crore which remained unutilized. To the extent of Rs. 2.19 crores, the Tribunal granted the benefit of exemption. With respect to the remaining amount of Rs. 1 crore, the Tribunal was of the opinion that having not actually spent later on, such benefit could not be granted. The Tribunal was of the opinion that the assessee could have avoided these consequences only if the amount was transferred to the Prime Minister's National Relief Fund on or before Mar 31, 2004.

High Court held that,

++ the principal requirement of section 80G(5C) is of the donations made to the Trust are applied for providing relief to the earthquake victims of Gujarat before Mar 31, 2004. The legislature has advisedly used the expression "applied" and "not actually spent". In case of Commissioner of Income Tax vs. Thanti Trust - 2002-TIOL-2494-SC-IT, the Supreme Court approved the judgement of High Court in which it was held that assessee having made the credit entry in favour of educational institution had not retained any control over the monies and thus funds were made available to the institution by the Trust. The Supreme Court therefore held that the assessee could claim benefit of exemption u/s 11 of the Act. Similarly, in case of Commissioner of Income Tax, Andhra Pradesh-I vs. Trustees of H.E.H. The Nizams Charitable Trust, Division Bench of Andhra Pradesh High Court considered the question of exemption u/s. 11(1) which also used the expression "applied to". It was held that the act of assessee to debit the amount in accounts of donee and to make a communication to the donee amounted to application of funds. Actual spending was not necessary. The facts in the present case are very similar. The assessee, in the process of constructing schools, had awarded a contract. The contractor had raised the bill. The assessee had accepted the bill and also passed the credit entries in favour of the contractor. All these things happened on or before Mar 31, 2004. The assessee had simultaneously also deducted tax at source and in due course, deposited the same with the Government revenue. This was thus a clear case of application of fund for the benefit of victims of earthquake before Mar 31, 2004;

++ in fact the Tribunal also accepted the proposition to the extent the sum of Rs. 2.19 crores was concerned. Even though this amount was not actually spent or in strict terms, paid over to the contractor, the Tribunal referred to the judgement of Andhra Pradesh High Court in case of Trustees of H.E.H. The Nizams Charitable Trust and accepted the assessee's contention that it amounted to application of the fund. If that be so, we fail to see how the Tribunal could take a different view with respect to the remaining amount of Rs. 1 crore. This was part of entire amount of Rs. 3.19 crore for which, the bill was raised and credit entries were made. Merely because subsequently part of the amount was actually spent and rest remained unutilized, would not change the legal position. The record would suggest that the assessee having committed to spend total of Rs. 3.19 crores for construction of the school buildings ended up paying Rs. 1 crore short to the contractor for the reasons which are neither clear nor very important. Had the assessee retained such amount, a serious question of its taxability would have arisen. However, the assessee almost, as soon as it becomes clear that the amount is not to be actually paid, transferred the same to the Prime Minister's National Relief Fund. This was of-course on Dec 31, 2004 as against the prescribed deadline of Mar 31, 2004 contained u/s 80G(5C). However, the assessee would not have a hindsight on Mar 31, 2004 that a part of the amount already committed would remain unspent. It was therefore not possible for the assessee to foresee and transfer any part of such amount in the Prime Minister's National Relief Fund. In such a situation, the deadline contained in clause (iv) of section 80G(5C) must be held to be directory and not mandatory.

(See 2018-TIOL-1159-HC-AHM-IT)

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