Delhi High Court: Mere TDS Deduction On Grants by A Donor Doesn't Disqualify Assessee-NGO from Section 11 Income Tax Act Exemption

Delhi High Court: Mere TDS Deduction On Grants by A Donor Doesn't Disqualify Assessee-NGO from Section 11 Income Tax Act Exemption

The Delhi High Court has ruled that the mere deduction of TDS by a donor on grants does not disqualify the assessee-NGO from exemption under Section 11 of the Income Tax Act.

The bench, comprising Justices Yashwant Varma and Purushaindra Kumar Kaurav, while granting the petition, overturned the assessment order. They determined that the receipt of Rs. 5.90 crore would not be treated as income and upheld the assessee's claim under Sections 11 and 12 of the Income Tax Act.

The petitioner/assessee is a non-governmental organization registered as a charitable institution under Sections 12A, 12AA, and 80G. It claims to be dedicated to uplifting the poor, aiding underprivileged children and women, improving health, conserving the environment, and supporting other social causes. To fulfill its charitable objectives, the assessee receives grants from both the government and the private sector, which are tax-exempt under Sections 11 and 12.

Except for the Assessment Year (AY) 2017–18, the charitable status of the assessee was never questioned by the respondent department. For all previous AYs, including 2011–12, 2012–13, 2013–14, and 2015–16, under similar circumstances, the assessee was granted exemption under Sections 11 and 12. Even for the subsequent AY, i.e., AY 2018–19, similar benefits were extended. However, for the relevant AY in question, these benefits were denied solely on the basis that the donor had deducted tax at source under Sections 194C and 194J of the Act while providing grants to the assessee.

The assessee contended that neither the assessment order nor the subsequent revisional order, which resulted in dismissal, provided any legitimate reason to deny benefits under Sections 11 and 12 of the Act. The assessee emphasized that the deduction of TDS by the donor under a specific category is beyond its control. Additionally, the assessee highlighted that benefits under Sections 11 and 12 had been consistently granted for similar donations or receipts in the past. Therefore, there was no justification for deviating from the department's own established practice.

The department contended that TDS had indeed been deducted from the fees and receipts by the respective entities under Sections 194C and 194J of the Income Tax Act, categorizing them as professional or contractual fees paid to the assessee. Therefore, according to the department, these receipts cannot be treated as being in the nature of the voluntary contribution of the assessee.

The court observed that the receipts in question did not involve any activity related to trade, commerce, or business, nor were any services rendered in connection with such activities. Without any compelling justification, the receipts in question could not be categorized as advancements of any other object of general public utility.

The writ petition was allowed by the court, resulting in the challenged orders being set aside.