TaxTMI 
TaxTMI 
2008 (6) TMI 261
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....construction of building for the benefit of the person engaged with the society. (ii) The DVO has rightly disallowed the claim of the assessee when confronted accordingly for excessive value of construction. (iii) Mere vouching of expenses without concrete evidences of expenses or suppressing of expenses in shape of routed investment of undisclosed income is not considered by the learned CIT(A), Bareilly. (iv) Order of the CIT(A) is erroneous of law as well as facts of the case, hence, may cancelled and order of the AO may be restored." 2. The assessee is held to be a charitable trust as per assessment order. However, the AO invoked the provisions of s. 13(2) of the Act and denied the exemption otherwise available to the society under s. 11 of the Act. It had filed return of income declaring nil income in the status of 'society'. The case was picked up for scrutiny. During the course of assessment proceedings, the AO noted that assessee has constructed a sing1e storey school building at Karanpur Chaudhary Nainital Road, Bareilly. Believing that investment in the construction is more than what is declared, the AO referred the matter to the DVO, ....
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.... 5. Further, out of claim of Rs. 75,215 in bus expenses, the AO disallowed a sum of Rs. 9,970 on the ground that supportive evidences for salary payment, diesel expenses and bus maintenance expenses were not provided. Out of claim of Rs., 48,035 on printing and stationery, the AO disallowed a sum of Rs. 15,700 on the ground that no supportive evidences were furnished to prove the genuineness of the expenses. Thereafter, the AO, referring to the decision of Hon'ble Supreme Court in the case of Director of IT vs. Bharat Diamond Bourse (2003) 179 CTR (SC) 225 : (2003) 259 TTR 280 (SC), held that benefit of exemption under s. 11 could not be given as income of the trust has been utilized for the benefit of the founder of the trust within the meaning of s. 13(2) of the Act read with s. 13(1)(c). According to the AO, incomes/funds of the trust have been misutilized in the form of excessive claim of various expenses debited in the income and expenditure account for the purposes of use by a person having interest in the institution. The AO also referred to the decision in Asstt. CIT vs. Bal Bharti Nursery School (2002) 76 TTJ (All) 602 : (2002) 82 ITD 71 (All) for the proposition tha....
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....rdingly, annulled the assessment by observing as under: "I have carefully considered the issue and perused the assessment order, as well as written submissions of the Authorised Representative for the appellant. It is noticed that the appellant is duly registered under s. 12A and its gross receipts are below Rs. one crore and as per s. 10(23C)(iiiad) its income is not liable to be taxed. Further the submissions of the Authorised Representative in respect of estimating of cost of contract support the view that the estimate of cost of construction if any, is to be done on the basis of rates of UP PWD rates. However, in the case of Madhya Pradesh Madhyam vs. CIT (2002) 175 CTR (MP) 92 : (2002) 125 Taxman 382 (MP) : (2002) 256 ITR 277 (MP). Hon'ble Madhya Pradesh High Court on the issue of registration (held that registration) once granted cannot be reviewed in assessment proceedings. Scope of the proceedings of registration and its cancellation are different from the assessment proceedings. The IT authorities are bound by the registration. Once they have registered an institution as charitable one, they cannot go behind registration in assessment proceedings. They are pri....
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....any specific expenditure which has not been incurred towards the object of the society in spite of the fact that all the expenses are properly vouched. He submitted that allegation of the AO that expenses have also been diverted to other activities is not supported by any material or evidence. The AO has not pointed out as to how the alleged inflated expenditure was not relatable to the activity of education or how it has resulted in the benefit to the interested members or the founder member. He submitted that reliance of the AO on the decision of Hon'ble Supreme Court in the case of Director of IT vs. Bharat Diamond Bourse is misplaced because in that case the nexus of money lent to the interested members was established and hence, s. 13 was invoked. In the present case, the AO has not been able to establish the nexus between the disallowance made and the alleged benefit transferred to the interested persons. He submitted that reliance of the AO on the decision in Bal Bharti Nursery School's case is also misplaced because there was a finding of fact in that case that surplus/fund generated was utilized on repairs of the building owned by secretary and his mother. Huge amo....
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....ion is proposed to be made on the basis of DVO's report then the same would be considered as application of funds and therefore, would not be taxable separately. 15. We have considered the rival submissions and perused the material on record. 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. 16. Now, it is an undisputed fact that various expenses claimed by the society are not verifiable and therefore, could be inflated. But the AO has not pointed out any instance out of various expenses as to whether it was not at all incurred or it was incurred excessively or the funds or money relating to such expenses was diverted to other persons and in particular, to the founder member of the society. Thus, rest of the inferences other than the expenditure being not verifiable/proved are hypotheti....
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....en used or applied for the benefit of a person referred to in sub-s. (3),-............. (e) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-s. (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services;............ (g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub-s. (3):............. (3) The persons referred to in cl. (c) of sub-s. (1) and sub-s. (2) are the following, namely: (a) the author of the trust or the founder of the institution; (b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution upto the end of the relevant previous year exceeds fifty thousand rupees; (c) where such author, founder or person is an HUF, a member of the family; (cc) any trustee of the trust or manager (by whatever name called) of the institution; (d) a....
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....s 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. 19. Now coming to the question as to whether difference in cost of construction arising on account of valuation done by the DVO could be added as income 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 under 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. 20. The learned Departmental Representative has argued that excess cost of construction could not be held to be covered within the limit of 85 per cent of income being applied for charitable purposes because such excess investment is not coming out of or derived from property held....
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....ational institution then its income is excluded from the total income. In this regard, we refer to the following part of the headnotes of that decision: "Actual existence of the educational institution was the precondition for the application for initial approval under s. 10(22) of the IT Act, 1961 (which was omitted w.e.f. 1st April, 1999). On the grant of approval ss. 11 and 13 did not apply. Once an applicant institution came within the phrase 'exists solely for educational purposes and not for profit' no other condition like application of income was required to be complied with. The prescribed authority was only required to examine the nature, activities and genuineness of the institution. The mere existence of profit/surplus did not disquality the institution. Therefore, when exemption was given to an institution there was no assessment or demand. Sec. 10(22) had an automatic effect. Under s. 10(22), the test was restricted to the character of the receipt of the income, viz., whether it had the character of an educational institution of India. Its character outside India was irrelevant for deciding whether its income would be exempt under s. 10(22). In decidi....
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....uly, 1995 [(1995) 127 CTR (St) 2] wherein it is also explained that if an educational institution is entitled to exemption under s. 10(22) then benefit conferred under this section cannot be denied on the ground of violation of s. 11(5). In this regard, we refer to following portion from that judgment as under: "Aggrieved by the said orders of the AO dt. 31st March, 2003, the assessee preferred appeals before the CIT(A), who, by order dt. 12th Feb., 2004, held that the assessee is entitled to exemption under s. 10(22) of the Act since the educational institutions are entitled to the benefit under s. 10(22), 10(22A) and 10(23C) of the Act and for the said purpose, it is not necessary to consider the assessee's claim for deduction under s. 11 of the Act. Against the said order of the CIT(A), the Revenue went in appeal and the Tribunal, by order dt. 8th March, 2006, confirmed the order of the CIT(A) taking note of its earlier order dt. 5th Jan., 2004, in the assessee's own case for the asst. yr. 1998-99, wherein it was held that since the assessee trust had been maintaining separate statement of accounts for educational and charitable activities and were not mingle....
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....ss. 11 and 13 are not relevant for the purposes of applying the provisions of s. 10(22). In that case it was found by the AO that interest-free loan was given to interested persons. The interested person was given a portion of the house of the trust and loan was given to another society for construction. The trust was running an educational institution and was covered under s. 10(22). The AO invoked the provisions of ss. 11 to 13 and denied the benefit to the assessee under s. 10(22). The Hon'ble Court, referring to the decision of apex Court in the case of Aditanar Educational Institution vs. Addl. CIT held that exemption under s. 10(22) has to be determined with reference to the objects of the society and exemption cannot be denied merely because during the course of working of the society, there was some surplus. In this context, the conditions contained in s. 11 or 13 were considered irrelevant. We refer to the relevant portion of the judgment from the above case as under: "We are of the view that the contentions urged on behalf of the Revenue are without any substance. In fact, the main ground, viz., violation of s. 13 of the Act, on which the exemption was denied....
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....y income falling within the said clause, i.e., any income of a university or other educational institution existing solely for educational purposes and not for purposes of profit shall not be included. Though in the context of the provisions of s. 10(22), the concept of education need not be given any wide or extended meaning, it surely would encompass systematic dissemination of knowledge and training in specialised subjects. The question whether an educational institution is existing solely for educational purposes can be decided with reference to the activities actually carried on by it. Advancement of knowledge brings within its fold suitable methods of its dissemination and though the primary method of sitting in a classroom may remain ideal for most of the initial education it may become necessary to have a different outlook for further education. It is not necessary to nail down the concept of education to a particular formula. Its progress lies in acceptance of new ideas and development of appropriate means to reach them to the recipients. Sec. 11 (a) applies to income derived from property held under trust wholly for charitable or religious purpose while s. 10(22) covers a....