DIT v. National Association of Software and Services Companies (2012) 345 ITR 362 / 208 Taxman 178 (Delhi) (High Court)

S.11 : Charitable or religious purposes – Application of income – Commercial principles – Annual subscription – One time admission fees – Accumulation of income – Provision for doubtful debts- Taxes paid was treated as application of income – Amount spent in Germany could not be considered as application of income of the Trust in India for charitable purposes. Annual subscription fee paid to keep the membership alive cannot be assessable as business income. One time admission fee paid by members is corpus donation hence not assessable as income. Option to accumulate the income has to be applied before expiry of time allowed under section 139(1) there is no provision to condone the delay.

[S. 28(iii), 36(i)(vii), 36(2)(i),139(1)]

The assessee is a trust registered under section 12A of the Act. Assessee had filed declaration on income and paid the taxes under Voluntary Disclosure of Income Scheme, 1997. The assessee claimed the payment of taxes as application of income. The assessee also incurred the expenses outside India (Hanover, Germany), the assessee claimed the said expenses as application of income. The Assessing Officer held that the expenditure incurred outside India cannot be considered as application of income in India for charitable purpose. The view of Assessing Officer was confirmed by the Commissioner of income –tax (Appeals). On appeal to the Tribunal, the Tribunal held that, the payment of taxes under VDIS should be treated as application of income of the trust. As regards the expenditure incurred in Germany is concerned, the Tribunal was of the view that the words “is applied to such purpose in India” appearing in section 11(1)(a) of the Act only mean that the purpose of the Trust should be in India and that application of the Trust need not be in India. The Tribunal has accepted the contention of assessee. On appeal by revenue, the court after referring the Circular no 5 dated June 19, 1968 held that taxes paid under the VDIS 1997 was to be deducted before arriving at the commercial income of the Trust available for application of income. As regards the amount spent at Germany the Court held that the requirement of provision is that the income of the trust should be applied not only to charitable purposes, but also applied in India to such purposes. Therefore, on a proper interpretation of section 11(1)(a) of the Act, the amount spent by assessee – trust in Germany could not be considered as application of income of the Trust for charitable purpose. 
As regards the option to accumulate the income for future application to charitable purpose has to be exercised by the trust in writing before the expiry of the time allowed under section 139(1) for furnishing the return of income, as provided in Explanation (iib) below section 11(1) of the Act. In respect all years under consideration the time has expired and there was no provision to condone the delay. As the assessee has not made the application within time the assessee could not be granted time to make good the shortfall in the application of the income of the  trust by permitting the assessee to apply for accumulation of the amount in shortfall for future application.

As regards the receipt of annual subscription fees, the assessee trust had not been shown to have performed any specific services to the members. Whereas the annual subscription fee were recurring receipt, receivable by the assessee –trust by mere efflux of time irrespective of whether any services were rendered or not to the members, what is contemplated in section 28(iii) is the receipt of fees from particular members to whom specific services have been rendered by trust. The annual subscription fee was paid merely to keep the membership alive on yearly basis. The distinction between the two being clear, and in the absence of any evidence to show that the assessee received fees from members as “quid pro quo” for specific services rendered to them, the tribunal was right in holding that the annual subscriptions fees were not assessable under the section. 
As regards the one-time admission fee paid by members they were aware that it could be spent by the assessee only for the purpose of acquiring a capital asset therefore the amount must be held to be a corpus donation, not taxable as income .Income of the trust available for application to charitable purposes in India should be computed not in accordance with the strict provisions of the Act but should be computed in accordance with commercial principles. Under commercial principle it has always been reognised that a provision reasonably made for a loss or an outgoing, can be deducted from the income if there is apprehension that the debt might became bad. As there was nothing on record to show that the provision was not made bonafide, therefore while computing the income available to the trust for application to charitable purpose in India in accordance with section 11(1)(a) the provision for doubtful debts must be deducted. (A. Ys. 1988-89, 2002-03 to 2006-07)