2014 (11) TMI 588 - HC - Income Tax

Trust eligible for tax exemption under Section 11 despite profits used for charity

The Commissioner of Income Tax Versus M/s. Silicon Institute of Technology

The Trust, registered under Section 12A of the IT Act, was held eligible for exemption under Section 11 despite generating profits, as its surplus was ... Eligibility for exemption u/s 11 – Assessee trust running with profit motive or not – Held that:- The assessee is a Trust registered u/s 12A of the Act with effect from 02.09.2003 - The main object is to impart education - assessee has been generating profit and creating fixed assets - The assessee claims capital expenditure as application of income in terms of Section 11 of the IT Act - The CIT (A) has considered every aspect of the assessment order with reference to the reasons given by the AO for disallowing exemption – the Tribunal, which is the final fact finding authority, after hearing the appeal filed by the Department did not incline to interfere with the order of the first appellate authority - CIT(A) has thread bare considered the issues in question with reference to the admitted facts that the assessee is registered u/s 12A of the Act and running the educational institution, imparting education in the fields of technical engineering and computer applications with the parameters laid down by the AICTE and the guidelines given by Ministry of Human Resource Development, Government of India, New Delhi and the fees collected by the assessee from the students for imparting such education having been approved by the AICTE - The assessee is spending the amount received by it by way of collection of tuition fees or collection of hostel fees is being spent for building necessary infrastructure for imparting the education in various fields which is the charitable purpose for which the trust was established - The assessee has also spent the said amount for raising the infrastructure necessary for carrying out the object of imparting education and thereby the assessee was found to be entitled for exemption u/s 11 and the view of the AO that there is contravention of Section 13 is found to be baseless by the CIT(A) after thread bare considering all the relevant facts – Decided against revenue. Application of income - Whether the Tribunal is correct in law in holding that capital expenditure incurred by the assessee Trust shall be allowed as application of income – Held that:- Educational Institution is eligible for exemption u/s 11, capital expenditure incurred by an Educational Institution is the basic necessity if such expenditure promotes the object of the Trust - iIn CIT Vs. Jyoti Prabha Society [2008 (8) TMI 203 - UTTARAKHAND HIGH COURT] it has been held that the educational society which had utilized rental income for the purposes of imparting education by maintaining the buildings and constructing new building for the same purpose, would be entitled to the exemption claimed u/s 11 - Section 11(1)(a) is pari materia to the third proviso to Section 10(23C)(vi) of the Act and the only difference is with regard to the percentage of income and the period for which it can be carried forward - capital expenditure if incurred by an Educational Institution for attainment of the object of the Society, it would be entitled to exemption u/s 11 – Decided against revenue. Issues Involved:1. Eligibility of the assessee Trust for exemption under Section 11 of the IT Act, 1961.2. Allowance of capital expenditure as application of income under Section 11 of the IT Act, 1961.Issue-wise Detailed Analysis:1. Eligibility of the Assessee Trust for Exemption Under Section 11 of the IT Act, 1961:The primary issue was whether the assessee Trust, registered under Section 12A of the IT Act, was eligible for exemption under Section 11 despite generating profits year after year. The Assessing Officer denied the exemption, arguing that the Trust was operating with a profit motive, referencing the Uttarakhand High Court decision in CIT Vs. Queens Educational Society. However, both the Commissioner of Income Tax (Appeal) and the Income Tax Appellate Tribunal (ITAT) upheld the Trust's eligibility for exemption. The ITAT emphasized that the Trust was engaged in imparting education, and its surplus was used for infrastructure development, which aligns with the charitable purpose. The court noted that the decision in Queens Educational Society pertained to Section 10(23C) and was not applicable to Section 11 cases. The court also referenced several Supreme Court and High Court judgments, including Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association and Aditanar Educational Institution vs. Add. CIT, which supported that incidental profits do not negate the charitable purpose if the surplus is used for educational purposes.2. Allowance of Capital Expenditure as Application of Income Under Section 11 of the IT Act, 1961:The second issue was whether the capital expenditure incurred by the Trust could be considered as the application of income under Section 11. The Assessing Officer had disallowed the capital expenditure, but both the CIT(A) and ITAT allowed it. The court upheld this view, citing multiple judgments, including S.RM. M.CT.M. Tiruppani Trust Vs. CIT and CIT Vs. Divine Light Mission, which held that capital expenditure for acquiring or constructing assets for educational purposes qualifies as application of income under Section 11. The court reiterated that capital expenditure is essential for the attainment of the Trust's objectives and thus should be treated as an application of income.Conclusion:The court concluded that no substantial question of law arose in the present appeal. The Trust was entitled to exemption under Section 11, and the capital expenditure incurred was correctly treated as an application of income. The appeal was dismissed, affirming the decisions of the CIT(A) and ITAT.