Karnataka H.C : The assessee had inadvertently offered voluntary contributions to tax it can be linked to defraying legal expenses incurred to defend one of its members which should be partly allowed

High Court Of Karnataka

CIT & Anr. vs. IAS Officers Association

Section 11, 12A 

K.L. Manjunath & Mrs. B.V. Nagarathna, JJ.

IT Appeal No. 2422 of 2005

9th March, 2010

Counsel appeared :

K.V. Aravind, for the Appellant : S. Parthasarathi, for the Respondent

JUDGMENT

K.L. Manjunath, J. :

The Revenue has come up in this appeal being aggrieved by the order passed by the Tribunal, Bangalore in ITA No. 650/Bang/2001 dt. 19th Nov., 2004.

The assessee is a registered society registered under the provisions of the Karnataka Societies Registration Act, 1960. Members of the respondent-society are IAS officers. An application filed under s. 12A of the IT Act to grant exemption in respect of voluntary contributions received by it was rejected by the CIT. The assessee had not filed a return of income, therefore notice under s. 148 of the Act was issued. Thereafter, the return of income was filed by the respondent. The AO passed an order of assessment on 22nd Dec., 1999. Being aggrieved by the order of assessment, the respondent filed an appeal before the CIT(A) contending that the exclusion of the expenditure claimed by the respondent-assessee in a sum of Rs. 53,826 is illegal and erroneous. Appeal filed by the respondent came to be rejected against which the respondent filed an appeal before the Tribunal which appeal came to be allowed in part. Therefore, the present appeal is filed.

The appeal was admitted to consider the following substantial questions of law :

“1. Whether the Tribunal was correct in holding that the voluntary contributions received by the assessee in the nature of donation or gift cannot be charged to tax despite this issue having not arisen in these proceedings and the s. 12A application filed by the assessee having been rejected by the CIT and the same having reached finality in view of the jurisdictional High Court judgments reported in CIT vs. Bel Employees Death Relief Fund & Service Benefit Fund Association (1997) 137 CTR (Kar) 29 : (1997) 225 ITR 270 (Kar) and CIT vs. I.T.I. Employees Death & Superannuation Relief Fund (1999) 153 CTR (Kar) 530 : (1998) 234 ITR 308 (Kar). 2. Whether the Tribunal was correct in holding that since the assessee had inadvertently offered voluntary contributions to tax it can be linked to defraying legal expenses incurred to defend one of its members which should be partly allowed ?”

We have heard the counsel for the parties. Though two substantial questions are formulated, counsel for the parties submit that question No. 1 does not arise in the back ground of the case and therefore they requested the Court to consider only question No. 2. Accordingly, on the submission of the counsel for the parties, we have considered question No. 2.

It is not in dispute that the assessee claimed deduction of Rs. 53,826 said to have been incurred by the assessee as legal expenses to defend the case of one of its members Vasudevan before the Hon’ble Supreme Court who was involved in contempt proceedings for the disobedience of the orders of the Court. Therefore, the short question that arises for consideration is that if an IAS officer on disobedience of the orders of the Court was involved in a contempt proceedings, whether the association can pay legal expenses under the head legal expenses to defend the case of such member. On a perusal of the bye-laws of the association and back ground of Sri Vasudevan, we are of the opinion that the AO was justified in denying the claim made by the assessee under the head expenses. According to us, it was beyond the scope of the assessee to incur such expenditure contrary to the memorandum of association and rules and regulations of the respondent-association. The main object of the association is to promote the interests of its members to secure equitable service conditions for its members and to take up their grievance. Under the guise, to take up grievance of a member, the respondent-society is not expected to spend amount to defend a person who had violated the orders of the Court. Therefore it cannot be considered as legal expenses which can be incurred by the assessee to promote the objects of the association and it is also to be noted that the said amount is spent not for the benefit of the association or in connection with the membership of the person for whose benefit the amount has spent. In the circumstances, the question of law is answered in favour of the Revenue and against the assessee.

Accordingly, the appeal is allowed.

[Citation : 325 ITR 254]