Ahmedabad ITAT Deletes Addition Of Decentralized Govt Grants Merely Routed Through Assessee, Directly Utilized By Other Govt Agencies
Finding that assessee had followed a consistent and reasonable policy in recognizing income, and the amount in question was rightfully excluded from taxable income, the Ahmedabad ITAT deleted the addition made by AO on account of understatement of income.
The ITAT held so after emphasizing that said income was never accrued to assessee nor did it represent real income as the funds were never utilized by the assessee but were simply transferred to other government agencies as per State Government's directions.
The addition made by AO goes against the basic tenet of income tax law, which mandates that taxation must be based on income that has actually accrued or arisen, added the ITAT.
The Division Bench comprising T.R. Senthil Kumar (Judicial Member) and Makarand V. Mahadeokar (Accountant Member) observed that “pass-through funds did not impact TCGL's operational finances and, therefore, were not subject to the 15% charge. The assessee's treatment of these funds is in line with the established accounting practices and the terms of the GOG Resolution”. (Para 7)
Facts of the case:
The assessee / respondent company, engaged in the promotion & development of tourism in Gujarat, was originally assessed at an income of Rs.36.70 crore. However, the AO reopened the reassessment u/s 147, by observing that statutory auditors highlighted that the company consistently recognizes 15% of the grants received from the Government of Gujarat as income for administrative overheads, as authorized by Government Resolution. However, the assessee did not consider the amount paid to District Collectors and other implementing agencies while calculating the grant utilization, leading to an understatement of income by Rs.2 crore, which was added to assessee's income.
On appeal, the CIT(A) deleted the addition of Rs.2 crore and held that assessee had followed a consistent and reasonable policy in recognizing income, and the amount in question was rightfully excluded from taxable income. Hence, the AO approached the Tribunal.
Observation of the Tribunal:
The Bench observed that the addition made by AO goes against the basic tenet of income tax law, which mandates that taxation must be based on income that has actually accrued or arisen.
Considering the documentary evidence, including the Government of Gujarat resolution and audited financial statements, the Bench found that assessee had demonstrated consistent and appropriate application of only 15% charge to grants utilized by it.
The Bench also observed that the decentralized grants were merely routed through assessee and were directly managed and utilized by other government agencies, such as District Collectors.
These pass-through funds did not impact assessee's operational finances and thus were not subject to the 15% charge, added the Bench.
Thus, the Bench concurred with CIT(A)'s view that the AO's addition was based on assumptions and conjecture, without any substantive evidence to support the contention that assessee was obligated to charge 15% of the decentralized grants as income.
The AO did not undertake any independent verification to ascertain the nature of grants received from the Government of Gujarat, and solely relied on the statutory auditor's remarks, without conducting any factual inquiry, added the Bench.
Therefore, while concluding that AO's failure to establish the factual basis of alleged income renders the addition unsustainable, the ITAT dismissed Revenue's appeal.
Counsel for Appellant/ Revenue: Rignesh Das
Counsel for Respondent/ Assessee: Senior Advocate Tushar Hemani along with Advocate Parimalsinh B. Parmar
Case Title: The DCIT vs. Tourism Corporation of Gujarat
Case Number: ITA No.819/Ahd/2019