2020 (10) TMI 713 - AT - Income Tax

Tribunal grants exemption under Section 11, overturning salary disallowance for Managing Trustee.

Indus Educational And Charitable Trust Versus ITO, Ward 2 (1), Bhubaneswar.

The Tribunal allowed the appeal, directing the AO to grant exemption under Section 11 and remove the disallowance of the Managing Trustee's salary. The ... Exemption u/s 11 - charitable activity u/s 2(15) - extra fees collected over and above prescribed fees - AO further noted that the notwithstanding the fact that the surplus of funds arising out of receipts from students are utilized for expansion of infrastructure by the Trust, for carrying of educational activities cannot be considered solely for charitable purposes being education but for commercial activities where education is sold for a price - HELD THAT:- Undisputedly, assessee trust enjoys registration u/s.12AA of the Act and it is also not a case of the AO that the activities of the assessee are not in accordance with its objects stated in the trust deed or assessee is doing or conducting any activities beyond its objects which is in the nature of commercial activities for profit motive. In view of interim orders passed by Hon’ble High Court of Orissa, no hesitation to hold that the Hon’ble High Court has allowed the assessee to retain extra amount of fees from prescribed limit till disposal of writ petitions. Even if assessee does not succeed in the said writes, then also, excess or extra charged fees has to be adjusted towards the fees of the respective students from whom it has been collected during completion of their courses. We refrain from making any observations regarding allegation of the AO about charging of extra fees from prescribed limit as the issue is pending for adjudication before the Hon’ble High Court of Orissa in the respective writ petitions filed by the assessee. Therefore, benefit of section 11 of the Act cannot be denied to the assessee only on the allegation of charging of extra fees from prescribed limit by taking respectful cognizance of the interim orders of Hon’ble High Court of Orissa. Denial of benefit of section 11 is not correct and sustainable. Consequential disallowance of salary paid to Mrs Sujata cannot be held as justified and sustainable. - Decided in favour of assessee. Issues Involved:1. Legality of the CIT(A)'s order confirming the assessment order.2. Justification of the addition of Rs. 31,68,430/- (excess income over expenditure and disallowance of salary paid to the Managing Trustee).3. Rejection of the exemption status of the appellant Trust and treating it as an Association of Persons (AOP).4. Disallowance of salary paid to the Managing Trustee after rejecting the benefit of exemption under Section 11 of the Income Tax Act.5. Denial of exemption under Section 11 without adequate opportunity, violating the principle of natural justice.Detailed Analysis:1. Legality of the CIT(A)'s Order:The assessee contested the CIT(A)'s order dated 18.09.2019, confirming the assessment order dated 01.03.2013, which they claimed was not just and legal. The Tribunal found that the CIT(A) had erred in confirming the assessment order without adequately considering the facts and circumstances of the case.2. Addition of Rs. 31,68,430/-:The assessee, a registered charitable educational trust, was denied exemption under Section 11 of the Income Tax Act by the Assessing Officer (AO) on the grounds that it collected fees in excess of the prescribed limits. The AO treated the excess income over expenditure of Rs. 26,06,930/- and disallowed the salary of Rs. 5,61,504/- paid to the Managing Trustee. The Tribunal noted that the AO's decision was based on the observation that the trust collected excess fees and used the funds for infrastructure expansion, which the AO did not consider charitable.3. Rejection of Exemption Status and Treating as AOP:The AO rejected the exemption status of the appellant Trust, treating it as an AOP, based on the collection of excess fees. The Tribunal found that the AO's decision was not sustainable given the interim orders of the Hon’ble High Court of Orissa, which allowed the trust to retain the extra fees until the disposal of the writ petitions. The Tribunal emphasized that the AO did not establish any violation of Sections 11 to 13 of the Income Tax Act by the trust.4. Disallowance of Salary Paid to Managing Trustee:The AO disallowed the salary paid to the Managing Trustee, Smt. Sujata, on the grounds that the trust was treated as an AOP and not entitled to exemption under Section 11. The Tribunal held that since the denial of the benefit of Section 11 was not correct and sustainable, the consequential disallowance of the salary was also unjustified.5. Denial of Exemption under Section 11:The assessee argued that the exemption under Section 11 was denied without adequate opportunity, violating the principle of natural justice. The Tribunal observed that the AO's decision was based on the collection of excess fees, which was a matter pending adjudication before the Hon’ble High Court of Orissa. The Tribunal concluded that the benefit of Section 11 could not be denied solely on the allegation of charging extra fees, especially in light of the interim orders from the High Court.Conclusion:The Tribunal allowed the appeal of the assessee, directing the AO to allow the exemption under Section 11 and delete the disallowance of the salary paid to the Managing Trustee. The Tribunal emphasized the importance of adhering to the principle of natural justice and the interim orders of the Hon’ble High Court of Orissa.