Non Profit Organisations

[researcher]

Hi,

I am a researcher funning a voluntary organisation in AP. I had a delay registration of 12 A when we started the organisation and we have been filing IT returns with audited statements. The year in which we did not have the 12A was pick up by the asessment officer and demanded bribe from us. When refused he slapped a demand notice for more than 1.5 lakhs for the assessment year on the pretext that our research activities do not come under the purview of charitable purpose. However when we went to appeal we noticed that we had received an advance of Rs. 5 Lkahs for executing the work in the next financial year. Can we claim that advance can not be treated as income for that particular year?? Are there any specific ourt judgements on this??

Thanks
Researcher

[probal_shome]

Hi Researcher,

Welcome to the Forum.

There are a number of judgements laying down the law that an amount is assessable as income only when the assessee has dominion over it. If an amount is received subject to fulfilment of a condition, then the amount does not assume the charecter of income till the condition is satisfied.


See CIT vs. Punjab Tractors 234 ITR 105 where it was held:

"12. As has been seen from the facts arising in the case of the assessee in hand, the assessee had
made adjustment of the amount received from the PWS Advances Account to the Workshop
Income Account during the quarter in which the work of repairs and servicing was done. The
amount, received one year earlier, was thus not relevant to the assessee's income and was
dependent upon the services rendered by the assessee. The assessee did not become the owner of
the amount and could not appropriate it till service was rendered in lieu of which it was received in
advance. The assessee could legally claim the amount after rendering the services. Part of the
amount could be treated as income in the year under assessment on the basis of the accrual of
the right to appropriate the money. The deposited amount was transferred as income as soon as
service was rendered. The assessee treated the amount received as income by transferring it to
the Workshop Income Account. Thus, adjustment of the advance money towards income was
made, keeping in view the period in which actual services were rendered. The question is as to
when the money is to be treated as income. Since the receipt was relatable to a particular period
in future, it would fructify and mature into income during that period and not earlier. The assessee
was regularly following the system of adjustment. The money received from the buyers could not
be treated to be income unless right to appropriate it towards the services had accrued or arisen.
So long as the right did not exist, the money received from the buyers remained advance money.
It is the appropriation of the money towards the object and purpose for which it was received,
which is relevant.

13. Deposits or advances received by the assessee became trading receipts when the assessee
became entitled to appropriate the same to its income at the time of rendering the service."

Another useful judgement is that of the Guj HC in Ashaland Corp 133 ITR 55 where it was held:


"All receipts are not income. In order to partake of the character of income, receipt must be part of the profits earned
by the assessee. In other words, the receipt must assume the character of income before it
becomes exigible to income-tax. The assessee undoubtedly received a total sum of Rs. 2,13,772
in advance towards the sale price of the land which it had agreed to sell to the society, but can this
receipt be considered to be its income ? The answer must be emphatically "no". Business of the
assessee, as pointed out above, is to purchase and sell land. Unless the title of the assessee is
extinguished, the title of the purchaser cannot arise...".

However, the more difficult question is whether the amount received by you is at all in the nature of an advance. The relevant issues are:

(i) What are the conditions that you were required to comply? How many of those conditions were fulfilled during the year. How serious are the unfulfilled conditions and could they realistically have given the payer a claim for refund?

(ii) In which are the conditions fulfilled and the income offered to tax/claimed exempt u/s 11?

(iii) What is the accounting treatment?

(iv) Any other funds received from the payer and the treatment given to them?

Regards,

Probal.   

[researcher]

Thanks a lot probol. I need another clarification/assistance from you. In subsequent to my earlier query, the IT assessment officer held that our activities (which are conducting research and evaluation of governtment programs intended for mostly for poor people. The assignments are given to us from the governtment departments. We do not have any other income/activity from other private parties). are not charity in nature and can not be considered for exemption. In subsequent years we had 12 A registration. I want two things
a) Does the pronouncement of the IT assessment officer about our activities will have effect in future??
b) What is the position of law when comes to research activities of govt programs. I know of so many organisations whichst works as society have this as main activity. How can an IT assessment officer ignore all such established practices?
Thank you

[probal_shome]

It must be remembered that registration u/s 12A is a neceessary pre-condition to the grant of exemption u/s 11.

I assume the delay in filing the application has been condoned by the CIT. If not, the Q of exemption does not arise.

Whatever may be the fate of the first year (assumiong the delay has not been condoned), in the subsequent years, where you have s. 12A registration, you have very little to worry about. 12A confers jurisdiction upon the CIT to make enquiries and satisfy himself as to the nature and genuiness of activities before granting registration. Once he has done so, the AO has no jurisdiction to say that the same activities are not charitable. The decision of the CIT by way of granting registration is binding upon the AO. The AO's jurisdiction is confined to ensuring that the other requirements of ss 11 and 13 are complied with by the trust.

The CIT has power to cancel the jurisdiction but only if he comes to the conclusion that the activities are not "genuine" or are not "being carried out in accordance with the objects of the trust".

The ITO is definitely not justified in being so arbitrary in his approach - in ignoring the real nature of the activities of the trust and the record of the subsequent years.