2008 (6) TMI 261 - AT - Income Tax

Tribunal Confirms Tax Exemption for Educational Entity; Remands Case to AO for Income Recalculation.

The Tribunal upheld the CIT(A)'s decision to grant the assessee exemption under Section 10(23C)(iiiad), as its gross receipts were below Rs. 1 crore and ... Eligibility of exemption u/s 10(22) and 10(23C) - Powers Of CIT(A) - annulment of assessment - activity of educational purposes - ex gratia expenditure - where in a case where provisions of s. 10(23C)(iiiad) are applicable, the provisions of ss. 11 to 13 would not be applicable? - HELD THAT:- In our considered view, the judgment of learned CIT(A) in annulling the assessment is basically incorrect. An assessment order is annulled only when AO passes the order without jurisdiction. Once AO has acquired a valid jurisdiction on the basis of return filed by the assessee then assessment cannot be annulled. It can only be modified. Thus, the order of the learned CIT(A) is set aside and the assessment order is not treated as annulled. Whether case of the Revenue falls under cl. (2) of s. 13(1)(c) or under s. 13(2) - person referred to in sub-s. (3) is the founder member of the trust - HELD THAT:- In the present case, there is no material on record firstly to show that alleged inflated expenditure has gone to the persons of prohibited category, therefore, the case of the Revenue made out on the basis of s. 13(1) cannot be upheld. The question of invoking s. 13(2) in the present case also does not arise because s. 13(2) could be invoked only when there is a claim of expenses in the form of salary/allowances or perquisites to the persons of prohibited category for some services rendered. The AO has not made out a case on these premises. Thus, neither s. 13(1) nor s. 13(2) is applicable on the facts of the present case. Whether difference in cost of construction arising on account of valuation done by the DVO could be added as income - HELD THAT:- We are of the considered view that firstly, there is no case made out for referring the under construction of the school building to the DVO by rejecting the books and pointing out defects therein. Even otherwise, if an addition is proposed to be made u/s. 69 as unexplained investment in school building then same would be treated as application of funds for charitable purposes. This investment would, therefore, come within the ambit of 85 per cent of total income applied for charitable purposes within the meaning of s. 11(1), if the case of assessee is to be considered for exemption under that section. Therefore, the AO has not made out any case that excess investment in property to be added u/s. 69 is not coming out of property held under the trust or is not income from such property. For taxing excess investment u/s. 69, he has to prove that the property held under the trust is not capable of yielding income to the extent excess investment is made out. Since the case of the assessee is also covered under ss. 11 to 13 as held by the AO, by virtue of it being registered under s. 12A/12AA, its income is to be computed as per income and expenditure account under ss. 11 to 13 and not under ss. 28 to 430 under the head 'Income from business and profession'. Where it is claimed that unexplained investment is income out of property held under trust, then onus would shift to the AO to prove otherwise. Thus, it is for the AO to show with material on record that property held under the trust is not capable of generating excess income which is alleged to be invested in the construction of the property and therefore, beyond the scope of ss. 11 to 13 and provisions of ss. 68 to 69C would be applicable in addition to the computation of income under these sections. We, therefore, reject the argument of l/d DR that addition u/s. 69 for excess investment has to be independently carried out notwithstanding exemption of income under ss. 11 to 13. In the present case, mere disallowance of certain expenses can add to the surplus but cannot become basis for denying exemption u/s. 10(22)/10(23C)(iiiad). Therefore, we hold that the learned CIT(A) was justified in granting exemption to the assessee u/s. 10(23C)(iiiad) on the basis that gross receipt of the society is less than rupees one crore and that there is no material to suggest that assessee is not existing solely for educational purposes. To this extent the order of the learned CIT(A) is confirmed. Separate addition u/s. 68/69 on account of excess investment in the construction of property - HELD THAT:- Reference made to decision of Hon'ble Delhi High Court in the case of Director of IT vs. Raunaq Education Foundation [2007 (4) TMI 61 - HIGH COURT, DELHI], on which ld AR has placed reliance. In this decision it is held that provisions of s. 10(22) cannot be given restricted meaning and the exemption available u/s. 10(22) could cover the income chargeable u/s. 68 also. In this regard, we refer to relevant portion of the headnotes from the above judgment as under - 'The words 'derived from' (or some other similar words) do not occur in s. 10(22) of the IT Act, 1961, and, therefore, the word 'income' as occurring in s. 10(22) cannot be given a restrictive meaning and must be given its natural meaning or the meaning ascribed to it in s. 2(24). Hence, an assessee who is entitled to exemption u/s. 10(22) can claim the benefit thereof for the purpose of income deemed to be chargeable to tax u/s. 68.' As a result, appeals filed by the Revenue are partly allowed and matter is restored to the file of the AO to compute the income/allow exemption in the light of observation made above for both the years. Issues Involved:1. Applicability of Section 13(2) and denial of exemption under Section 11.2. Validity of reference to the Valuation Officer (DVO) and estimation of the cost of construction.3. Verification and authenticity of expenses claimed by the assessee.4. Applicability of Section 10(23C)(iiiad) and exemption from income tax.5. Annulment of the assessment order by CIT(A).Issue-wise Detailed Analysis:1. Applicability of Section 13(2) and Denial of Exemption under Section 11:The AO invoked Section 13(2) and denied the exemption under Section 11, alleging that the funds of the trust were misutilized for the benefit of the founder member. The AO cited excessive claims of various expenses and referenced the decision in Asstt. CIT vs. Bal Bharti Nursery School, arguing that the surplus/profit was diverted for personal benefit. The CIT(A) found no material evidence to support the AO's allegations and held that the income was exempt under Section 10(23C)(iiiad) as the gross receipts were below Rs. 1 crore. The Tribunal agreed that there was no material evidence to prove that the alleged inflated expenditure resulted in a benefit to the founder member, thus provisions of Section 13(2) could not be invoked.2. Validity of Reference to the Valuation Officer (DVO) and Estimation of the Cost of Construction:The AO referred the matter to the DVO, who estimated the cost of construction higher than what was declared by the assessee. The CIT(A) considered the reference to the Valuation Cell irrelevant if proper books of account were kept. The Tribunal noted that there was no case made out for referring the construction to the DVO by rejecting the books and pointing out defects therein. Even if an addition was proposed under Section 69 as unexplained investment, it would be treated as an application of funds for charitable purposes within the meaning of Section 11(1).3. Verification and Authenticity of Expenses Claimed by the Assessee:The AO disallowed various expenses claimed by the assessee, citing lack of supportive evidence and alleging that the expenses were exaggerated and siphoned off for personal use. The CIT(A) found that all expenses were properly vouched and there was no evidence to support the AO's allegations. The Tribunal agreed that the AO had not pointed out any specific instance of expenses being not incurred or excessively incurred. The Tribunal held that mere suspicion of inflated expenses without material evidence could not substantiate the AO's claims.4. Applicability of Section 10(23C)(iiiad) and Exemption from Income Tax:The CIT(A) held that the assessee's gross receipts were below Rs. 1 crore, thus its income was not liable to be taxed under Section 10(23C)(iiiad). The Tribunal referred to the decision in American Hotel & Lodging Association Educational Institute vs. CBDT, which stated that once an institution exists solely for educational purposes and not for profit, no other condition regarding the application of income was required. The Tribunal confirmed that the assessee was an educational institution and its income was exempt under Section 10(23C)(iiiad).5. Annulment of the Assessment Order by CIT(A):The CIT(A) annulled the assessment order, stating that the assessee was a trust duly registered under Section 12A and its income was exempt under Section 10(23C)(iiiad). The Tribunal found that annulling the assessment was incorrect as the AO had valid jurisdiction. The assessment could only be modified, not annulled. The Tribunal set aside the CIT(A)'s order of annulment but confirmed the exemption under Section 10(23C)(iiiad).Conclusion:The Tribunal concluded that the CIT(A) was justified in granting exemption under Section 10(23C)(iiiad) as the gross receipts were below Rs. 1 crore and there was no material evidence to suggest that the assessee was not existing solely for educational purposes. The appeals filed by the Revenue were partly allowed, and the matter was restored to the AO to compute the income and allow exemption in light of the Tribunal's observations.