Tied-up grants received from donor for specific purpose do not form part of total income of the charitable institution/trust u/s 11-ITAT

In a recent judgment, Hyderabad ITAT has held that grants or contribution in the nature of tied-up grants cannot be taken into consideration for the purpose of computing total income of the charitable institution/trust u/s 11 of the Income Tax Act, 1961.

Case Law Details:
ITA No. 1443/Hyd/2014 Assessment Year: 2011-12
Dy. Director of Income-tax (Exemptions) vs. Centre for World Solidarity
date of Judgment/Order: 29/04/2016

Important Case Laws Referred:
Nirmal Agriculture Society Vs ITO (71 ITD 152)

Brief facts of the Case:
The assessee was a society registered u/s 12A. It filed return of income declaring NIL income after claiming exemption u/s 11 of the Act.  The objectives of the society were as below:
1. To work with the people living below poverty line, women, dalits, adivasis and deprived sections towards a just and equitable society.
2. To work towards clean and healthy environment as necessary condition for our survival as a people.
3. To work towards an education relevant to our objectives and also to strive to build the necessary educational material and information for dissemination.

The case was selected for scrutiny. The Assessing Officer asked the society  why grants made to the other NGOs be not disallowed being in contravention to the objectives of the society. The assessee society submitted that the society had formulated activities as mentioned in the memorandum of association (MOA) and the activities mentioned therein support the act of the society. However the AO did not accept the contention of the assessee on the ground that the objects on the basis of which the registration was granted u/s 12A did not support the contention of the assessee. Even the society was not having control over the funds transferred to the other NGOs which was in contravention to the agreements made with the donor agencies as it was not mentioned anywhere that the society could partner with other NGOs to execute the projects. Consequently, the AO disallowed the portion of income which was given by way of grants to the other NGOs.

Aggrieved with assessment order, assessee preferred an appeal before CIT(A) who gave the findings that the grants received from the donors were not to be taken into consideration for the purpose of computing the total income of the assessee u/s 11 as they were tied up grants.

Against the order of CIT(A), the Revenue went to ITAT

ITAT observed the following facts:

1. As per the budget proposals for grant and relevant Agreement of Co-operation  there were three agencies involved, namely:
   (a) The Assessee society (Facilitating Agency),
   (b) the donors (Resource Agency) and
   (c) the NGOs (Implementing Agency).
2. This 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.
3. The projects which were implemented through the assessee society instead of NGOs, the agreements were entered into with assessee as implementing Agency.
4.  Co-operative documents clearly demonstrated that these grants were sanctioned for the specific purpose and the Assessee and NGOs were required to submit the audit financials and progress reports to the Resource agency.
5. Projects were driven in the direction of the resource agency and accordingly the grants sanctioned, were clearly tied up grants.

Important Excerpts from ITAT Judgment:

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 (supra). For the sake of clarity, we reproduce the ratio laid down in the above decision:

The grants received from BW were for specific purposes. The grants which are for specific purposes do not belong to the assessee-society. Such grants do not form corpus of the assessee or its income. Those grants are not donations to the assessee so as to bring them under the purview of s. 12. Voluntary contributions covered by s. 12 are those contributions freely available to the assessee without any stipulation which the assessee could utilise towards its objectives according to its own discretion and judgment. Tied-up grants for a specified purpose would only mean that the assessee, which is a voluntary organisation, has agreed to act as a trustee of a special fund granted by BW with the result that it need not be pooled or integrated with the assessee’s normal income or corpus. In this case, the assessee is acting as an independent trustee for that grant, just as same trustee can act as a trustee of more than one trust. Tied-up amounts need not, therefore, be treated as amounts which are required to be considered for assessment, for ascertaining the amount expended or the amount to be accumulated. Any non-refundable credit balance in the personal account of BW will be treated as income in the year in which such non-refundable balance was ascertained.

Conclusion:
Tied up grants received from donor for specific purpose did not form part of assessee society’s income.”