2024 (3) TMI 425 - AT - Income Tax

School loses exemption claim for mandatory student development fees under section 11(1)(d) but qualifies under 11(1)(a)

The ITAT Cochin ruled against a school's claim for exemption under section 11(1)(d) for student contributions towards development and welfare funds. The ... Exemption u/s. 11(1)(d) - contributions received from students towards development and welfare funds of the school - voluntary contribution or otherwise - corpus donation - onus to prove. - Alternative claim towards exemption as regular school fee receipt. HELD THAT:- The assessee’s case before us, as before the Revenue authorities, who found it a wholly unsubstantiated, was that there is nothing to infer that the contributions, received once a year, are not voluntary and, further, there is nothing in law to indicate that the direction accompanying the contribution is to be in writing. We are wholly unimpressed. Going by it’s version, the assessee means to say that all the students or, more correctly, their parents, come together, once a year, at a specified time, and agree to contribute a specific sum toward corpus donation to the assessee, one each for the school building and EWS, and of course de hors the assessee, who has therefore no role therein. The amount fixed may, further, vary from (say) lower to middle to senior school students. Further, they do this religiously each year, without fail, and irrespective of financial standing of the recipient-society, their individual financial position at the relevant time, the number of their school/college going wards and the need for the funds by the assessee for these two avenues of investment. This becomes all the more quizzical, considering that the contributions are stopped immediately on a student graduating from the school, the same is constant across years and irrespective of the number of students studying (during the relevant period) in the assessee’s school and the need for funds by the school for these two avenues of investment. This is as bizarre as it can get, and the assessee’s case, clearly a make-believe, only needs to be stated to be rejected. There is nothing voluntary about the said contributions, and there is quid pro quo; the students paying the same as a part of their annual charge to the assessee, which allocates the same to different heads of account or, rather, specifies the same, as it does the other elements of the school fee, viz. tuition fee, laboratory fee, sports fee, extra-curriculum activity fee, etc. The onus to show that it’s claim/s falls within the four corners of the exemption provision is on the assessee, which agrees with the latest decision by the constitutional bench decision of the Apex Court in Dilip Kumar & Co [2018 (7) TMI 1826 - SUPREME COURT]. They have no hesitation in confirming the impugned orders and, accordingly, uphold the disallowance of exemption u/s. 11(1)(d) of the Act. The impugned receipts would nevertheless form part of the assessee’s regular receipt, i.e., from the activity of running the school and, accordingly, liable for exemption u/s. 11(1)(a), i.e., if otherwise exigible, in accordance with law. Toward this, we find the AO has considered the same, including the impugned sum as part of income derived from property held under trust. He computes exemption u/s. 11(1)(a), i.e., on account of application of income. Addition of income u/s. 2(24)(x) r/w s. 36(1)(va) - As there is, no scope, therefore, in computing income of a charitable or religious institution, which is to be u/s. 2(24)(iia), applying the principles of commercial accounting inasmuch as the exemption there-from is with reference to the application of income, implying real income. The same is accordingly deleted. Issues Involved:1. Validity of exemption claim under section 11(1)(d) of the Income Tax Act, 1961.2. Computation of exemption under section 11(1)(a) following denial of exemption under section 11(1)(d).3. Addition of income under section 2(24)(x) read with section 36(1)(va).Summary:1. Validity of exemption claim under section 11(1)(d):The principal issue in this appeal is the validity of the assessee's claim for exemption under section 11(1)(d) of the Income Tax Act, 1961. The assessee, a charitable institution, claimed exemption for voluntary contributions received towards the corpus of the trust. The contributions were collected as part of the school fees under the heads of Development Fund (DF) and Employee Welfare Fund (EWF). The Revenue denied the claim on the grounds that the contributions were not voluntary and lacked a written direction from the donors specifying their use as corpus donations. The Tribunal upheld the Revenue's decision, stating that the contributions were mandatory and part of the fee structure, thus not qualifying as voluntary contributions under section 11(1)(d).2. Computation of exemption under section 11(1)(a):Following the denial of exemption under section 11(1)(d), the Tribunal addressed the computation of exemption under section 11(1)(a). The assessee contended that the Assessing Officer (AO) should have considered additions to fixed assets and the carry forward of excess expenditure over income from previous years. The Tribunal noted that the CIT(A) had misunderstood the assessee's grievance regarding depreciation and had allowed it. However, the Tribunal remanded the matter back to the CIT(A) for proper adjudication of the claims related to capital expenditure and carry forward of excess expenditure, emphasizing the need for proper substantiation by the assessee.3. Addition of income under section 2(24)(x) read with section 36(1)(va):The Tribunal addressed the addition of income under section 2(24)(x) read with section 36(1)(va), which pertains to the treatment of employee contributions to welfare funds. The Tribunal held that in computing the income of a charitable or religious institution, the principles of commercial accounting should be applied, implying real income. Consequently, the addition was deleted.Conclusion:The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the stay petition, directing the CIT(A) to re-examine the claims related to capital expenditure and carry forward of excess expenditure. The addition under section 2(24)(x) read with section 36(1)(va) was deleted.