TaxTMI 
TaxTMI 
2011 (7) TMI 393
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....lying cases of Amrican Hotel & Lodging Association Education Institution v. CBDT and the case of Pinegrove International Charitable Trust v. Union of India and other which were distinguishable on facts. 3. On the facts and in circumstances of the case, the ld. CIT(A) has erred in not correctly appreciating the profit motive of the assessee as illustrated in the case of Surat Art Silk Cloth Manufacturers Association and Followed by the other two cases cited supra. 4. The ld. CIT(A) erred in treating the activity of the assessee to derive income out of educational activity as the activity of charitable purpose there by failed to understand the predominant object of the institution in the light of dictum in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1. 5. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in holding that the issue of capitation fees/profiteering as defined by the Apex Court in the case of T.M.A. Pai Foundation and OPEL Act, 2007 was not applicable to the case of the assessee. The fact that the assessee collected the entire course fee in one year is cove....
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.... the order of the ld. CIT(A) that the assessment of a validly registered charitable organization has to be done by applying the provisions of sections 11 to 13. The Assessing Officer has no power to withdraw the charitable status and go beyond the scope of sections 11 to 13 during assessment under section 143(3). 2. That the Assessing Officer has erred in holding that capital expenses cannot be treated as application for charitable purposes without questioning the genuineness or relevance of such expenditures. 3. The Assessing Officer has erred in holding that even reasonable remuneration is not payable to the Trustee for services rendered. 4. That the ratio of the cases American Hotel and Lodging Association Education Institution v. CBDT and Pinegrove International Charitable Trust v. Union of India and Addl. CIT v. Surat Art Silk Cloth Manufacturers Associations [1980] 121 ITR 1 is relevant and has not been distinguished on facts or law. 5. That the revised grounds of appeal were shared to the Assessing Officer vide letter No. CIT(A)-II/BBSRJ2010-11/1093, dated 13-9-2010 no new grounds for fac....
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.... Officer by disallowing some capital expenditure of Rs. 8,47,44,796 claimed by the assessee as an application towards construction of building and other facilities required for advancing its objects of education. The Assessing Officer has opined that the assessee institution is not entitled to the benefits of exemption because of non-compliance to various provisions of sections 11 and 13 of the Act. This act of the Assessing Officer has resulted in computation of positive income of Rs. 4,03,74,030 as against the deficit of Rs. 5,70,49,834. Accordingly, the Assessing Officer has taxed the surplus of Rs. 4,03,74,030. In the assessment order, the Assessing Officer has observed that the trust deed has no specific condition that the assessee will run the institution, collect fees from students and invest the surplus to expand its activity for education. The Assessing Officer is of the view that the fees collected from the students should be only utilised for the education related expenses of the students who are the contributors. The Assessing Officer further pointed out that out of the total fees collected during the year amounting to Rs. 8.82 crores, the trust has utilised on Rs. 4.72....
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....aik. In this way, the assessee is found to have violated the provisions of section 13(2)(c) which disentitles a trust from claiming exemption under section 11, the trustee being an 'interested person' within the meaning of section 13(3) of the Act. Ultimately, the Assessing Officer has held that mere granting of registration under section 12AA would not entitle the assessee to claim exemption unless it complies with the provisions of sections 11 and 13. He further observed that at the time of granting registration the Commissioner is not required to examine the application of income. The exercise of discretion under section 12AA is limited to see whether the objects of the trust are charitable. He fortified this view by placing reliance on the decisions rendered in the case of Sanjeevamma Hanumatha Gowda Charitable Trust v. DIT (Exemptions) [2006] 285 ITR 327/155 Taxman 466 (Kar.), Fifth Generation Education Society v. CIT [1990] 185 ITR 634/[1991] 54 Taxman 237 (All.), and CIT v. Gujarat Maritime Board [2007] 289 ITR 139 (Guj.). 6. Aggrieved with the said order of assessment passed by the Assessing Officer, the assessee preferred appeal before CIT(A). The learned CIT(A) conside....
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....es of the assessee running of a 'finishing school', the learned CIT(A) has differed with the view of the Assessing Officer that this activity was in the nature of a business activity. While coming to this conclusion, the learned CIT(A) distinguished the case of Bihar Institute of Mining and Mine Surveying (supra) observing that the same was a distinct institute for being run for a specific purpose to prepare the students for appearing for various examination and it has no attributes of normal schooling. The learned CIT(A) considering the payment of salary to Sri Bishwajit Patnaik Trustee and Managing Director of the Institute amounting to Rs. 6,16,500, differed with the view of the Assessing Officer that this payment is in violation of the provisions of section 13(2)(c). The learned CIT(A) has observed that, payment of reasonable salary for services rendered is permissible as per the provisions of Income-tax Act. While considering the other objections of the Assessing Officer regarding the aspect of the Trust Deed not contemplating that the assessee would run the institute and invest surplus to expand its activity out of the fees collected from the students, the learned CIT(A) has ....
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....ontrary to this, the learned AR of the assessee vehemently argued assailing the order of the Assessing Officer on all counts, submitted that the order passed by the learned CIT(A) elaborately addresses to all issues both on facts and in law and hence, he sought for upholding the same. During the course of hearing, the learned AR of the assessee has brought to our attention to the Cross Objection filed by the assessee and the written submissions filed by him. On detail analysis of various facets of the order of the Assessing Officer and that of learned CIT(A), the learned AR identified five core issues and pointed out that if these issues are decided, the same would resolve the entire controversy. These issues are collection of fees from the students and generation of surplus, application of the same towards capital expenditure, issue of capitation fees, running of finishing school and payment of salary to the trustee viewed as violation of section 13 by Assessing Officer. He described the order of the Assessing Officer as lopsided inasmuch as the same is conceptually wrong, factually incorrect and legally not sustainable. While arguing on each of the issues, the learned AR of the a....
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....sp;(v) Whether the assessee has violated the provisions of section 13 to disentitle it from claiming the benefits of section 11 in view of paying remuneration to its Trustee and whole-time director? (vi) Whether adequate opportunity was afforded by the CIT(A) to the Assessing Officer to state his case in the course of hearing of appeal? (vii) Whether CIT(A) should have taken into account the observation of administrative CIT in the order passed under section 264 that the assessee is not entitled to registration?" 10. Now coming to the aspect of first point as above, it is found that the Assessing Officer has not only worked out the profit by disallowing capital expenditure for the period under consideration but has taken into account the book results for the subsequent period of the assessment years 2008-09 and 2010-11, basing on the amounts submitted by the assessee and reconstructed them as hereunder : Assessment year Deficit as per books of account of the trust after considering capital expenditure Surplus worked out by AO by disallowing capital expenditure 2007-08 Rs. 4,43,70,766 Rs. 4,03,74,030 2008-09 Rs. 10,08,68,784 Rs. 2,08,2....
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....thin the stipulated period. He further submitted that the decision in the case of Queens' Educational Society (supra), is not a good law as the principles laid down in this decision have been dissented in a number of decisions rendered by various High Courts and Tribunals. He fortified this submission by quoting decisions in the Pinegrove International Charitable Trust's case (supra), St. Lawrence Educational Society (Regd.) v. CIT [2010] 197 Taxman 504 (Delhi), Vanita Vishram Trust v. Chief CIT [2010] 327 ITR 121 (Bom.), Kashatriya Sabha Maharana Pratap Bhawan v. Union of India [2010] 194 Taxman 442 (Punj. & Har.) and Sunbeam English School Society v. CIT [2011] 129 ITD 299 (All.). He further pointed out that the decision in Queens' Educational Society case (supra) is the decision of non-jurisdictional High Court which has no binding precedent in the case of the assessee. For this proposition, he relied on the decision in the case of CIT v. Thane Electricity Supply Ltd. [1994] 206 ITR 727 (Bom.). Further, he pointed out that the theory of preponderance judicial preference supports the case of the assessee because of a number of contrary decisions. For this proposition, he relied o....
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....s collected or surplus arising out of the same should be applied towards the benefit of the contributors of fund is not acceptable in the light of the Scheme envisaged in the relevant provisions of the Income-tax Act. There is no such stipulation in the statute. So also the revenue's proposition that the fees collected or surplus arising out of the same should be applied for the benefit of the contributors of fund is not envisaged in the scheme of the Income-tax Act. Accordingly the Revenue's contention that 'systematic profit', therefore, has no legs to stand. Accordingly, no adverse conclusion against the assessee can be drawn to withdraw exemption under section 11 of the Income-tax Act. We are of the considered view that the Assessing Officer should only refer to income as per the books of account of the trust and not the total income computed under section 2(45). The computed income has no relevance to allow exemption under section 11. That Assessing Officer is required to rely on surplus as per books as was held in the cases of CIT v Trustees of H.E.H. Nizam's Supplemental Religious Endowment Trust [1981] 127 ITR 378 (AP), CIT v. Rao Bahadur Calavala Cunnon Chetty Charities [1....
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..... Therefore an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be correct to describe it as an activity for profit. If the activities are carried on with the predominant object of earning profit, it would be an activity for profit, though it may be carried on in advancement of the charitable purpose of the trust or institution. The act of charitable purpose should not be submerged by the profit-making motive. In the present case on hand, the assessee's main activity was charitable inasmuch as it was running educational institution which was its object for which it was registered under section 12AA. No material was made out by the Assessing Officer to indicate otherwise. As can be seen from the assessment order, the Assessing Officer has started examining the facts with a presumption that the activities of education to an assumed activity of profit on account of fees received from students basing on his own inferences. As can be seen from the material made out by the Department, the 'charitable purpose' of the trust was never affected as the fees collected from students was meant to feed charity but not for perso....
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....o bear in mind the distinct difference between the corpus, the objects and powers of the concerned entity. From this observation of the Hon'ble Apex Court, it is found that the principles enunciated in the above case do not support the inference derived in the case of Queens' Educational Society (supra). In Aditanar Educational Institution case (supra), the principles enunciated by the Apex Court confirms to the broad principle that so long as an institution exists for the purpose of education and its activities are lawful, if any profit/surplus results after application towards the educational purpose, the same would not be a factor to come to a conclusion that such society existed for profit. The decisive or acid test is whether on an overall view of the matter, the object is to make profit. This observation of the Hon'ble Apex Court makes it clear as to what are the principles to be followed in deciding the aspect of profit. In the present case on hand, the object of trust was never to make profit and it cannot be under the rules governing the institution. In these circumstances, we are of the considered view that mere accrual of surplus during a previous year would not characte....
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....or educational purposes would militate against an institution pursuing other objects. Consequently, the High Court was, in our view and with due respect, not correct in holding as a principle of law that the benefit of the exemption should be denied on the ground that the assessee has only pursued its main object of providing education and had not pursued the other objects for which the Trust was constituted. Where the assessee pursue other objects, it would clearly run a foul of sub-clause (vi). In the case of Kashatriya Sabha Maharana Pratap Bhawan (supra) it was held that when the facts of the various cases are examined in the light of the above discussion, the first thing which becomes evident is that capital assets acquired/constructed by the educational institutions have been treated as income in a blanket manner without recording any finding whether the capital assets have been applied and utilised to advance the purpose of education. It is obligatory on the part of the prescribed authority while considering the application for grant of exemption, whether expenditure incurred as capital investment is on the object of education or not. It was further observed that the compete....
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....iture as application under section 11, the Assessing Officer has imported a new condition in section 11, which is not there in the statute. While interpreting the statue one has to look merely at what is clearly said and there is no room for any intendment. The learned AR of the assessee also assailed the view of the Revenue on the ratio of the decision in the case of City Montessori School v. Union of India [2009] 315 ITR 48/[2010] 191 Taxman 208 (All.) has been wrongly applied by the learned CIT(A). He further submitted that the view of the revenue runs contrary to the principles settled by the Apex Court and in other judicial forums. In support of that, he relied on the decisions in the cases of S. RM. M. CT. M Thirupanni Trust (supra), St. George Forane Church (supra), Mool Chand Sharbati Devi Hospital Trust (supra). 17. After careful consideration of this issue basing on the principles and judicial precedents, we are of the considered view that the Assessing Officer was totally misconstrued the method of computation of surplus or deficit in the case of a trust which is based on the commercial principle. The vital aspect is that the income of a trust has to be understood in ....
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....r legal scrutiny. On careful reading of the provisions in sections 11 and 13 of the Income-tax Act will show that there is no bar, either specifically or by necessary implication, for application of capital expenditure towards the objects of the trust. The decisions of Courts would indicate that capital expenditure is deductible. Section 11 of the Income-tax Act stipulates 'application' but not 'expenditure'. The term "application" is a wider one. As can be seen from the assessment order the Assessing Officer has tried to import a new condition regarding application of capital expenditure under section 11(1). L.J. Denning in Sea Ford Court Estates v. Asher [1949] 2 All. ER 155 pointed out that a Judge must not alter the material of which the Act is woven. As can be seen from the assessment order, the Assessing Officer has attempted to innovate and add a new condition in the statute which militates against the statutory provision which is clear and unambiguous. Such an act is not permissible in law. Now considering the application of the ratio of the decision rendered in the case of City Montessori School (supra), it is the contention of the revenue that the principles of this decis....
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....ation carried out by various agencies. It was further submitted before us by the learned AR of the assessee that the books of account of the assessee trust were audited by qualified CA and inspected by various regulatory authorities. No instance of collection of excessive fees was pointed out by any one. In the absence of unreasonableness in the fees collected by the assessee from the students it cannot be termed as extortion and Department has not been able to demonstrate the presence of an ulterior motive to use the same for personal gains. On careful consideration of the contentions of the Revenue, the case of the assessee as discussed in the light of the impugned order passed by the learned CIT(A), we are of the considered view that it is an undisputed fact that the trust has maintained books of account and accounted for the regular fees collected by it. Therefore, it can never be presumed that the institution has collected 'capitation fees' which could either considered as surreptitious or excessive. From the details of fees mentioned in the order of the learned CIT(A), it cannot be said that the Trust has collected exorbitant fees in order to have a profit. The Revenue is not....
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....ent proceedings by the Managing Director of the Trust cannot be relied upon. Neither it can be presumed from mere assumptions that BDS seats are allotted after payment of capitation fee in the absence of any material. Even otherwise, the Assessing Officer has not found any irregularity in the accounts of the Trust. There is no document to show that the trust is being run for any purpose of profit except that for educational purposes. In the light of this decision, it is incumbant on the part of the Revenue to make out cogent material with regard to the aspect of capitation fees. As can be seen from the impugned order, we are of the considered view that the view of the Department is only a presumption and there is nothing material made out on record to corroborate such a conclusion. 20. The revenue has relied on the decision of Hon'ble ITAT in the case of Vodithala Educational Society (supra). On perusal of this decision, it is found that it is distinguishable on facts to the assessee's case. In this case a survey was carried out in the premises of the institution resulting in discovery of evidence regarding collection of capitation fees and siphoning off the same by the trustees....
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....nd character of students by normal schooling. On analysis of the activities of the assessee trust in running the educational institution including the 'finishing school' as a part of it in the light of the decisions of Hon'ble Supreme Court relied on by the Revenue, it cannot be interpreted that the activities of the assessee are contrary to the concept of education expounded by the Apex Court in the said decision and the activities of the finishing school cannot be termed as a separate business activity different from its main activity. 22. The issues raised by the assessee in its Cross Objection are entirely supporting the impugned order passed by the learned CIT(A). While doing so, the assessee has brought to our notice the guidelines issued by the Ministry of Human Resources, IGNOU, AICTE and submitted that in the light of the same, it cannot be construed that a finishing school programme is a separate activity and takes the nature of normal coaching class. On going through the guidelines issued by the AICTE it is seen that a finishing school is defined as "a private school for students that emphasize training in all round personality development, cultural and social activit....
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....y violates the provisions of section 13(2)(c). Hence, the provisions of section 11 will not apply to exempt the income of the trust. On hearing both sides on this issue, we find that the Assessing Officer has not properly appreciated the import of section 13. The provisions contained in section 13(1)(c) does not bar payment of reasonable salary for services rendered by an interested person. It is only when such payment is found unreasonable or excessive that stipulation of clause (c) of section 13(2)(c) would be attracted. As can be seen from the rival submissions as well as the material made available before the Tribunal, Prof. Patnaik is a full time director. He was a former Prof. in TIM Lucknow and IIM Indore with vast experience. He was also a director in IIBM under RBI. The salary of Shri Patnaik as a Director of IIBM in the year 2006-07 was Rs. 12,76,500. Had Sri Patnaik continued in the same assignment, he would have drawn double the salary as drawn by him from the assessee trust. The purpose in connection of this provision is that the payment should not be a burden on the resources of the Trust causing detriment to its property. In that view of the matter, the salary being ....
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....hat it is not a requirement inasmuch as the collection of fees and application thereof are in consonance with the charitable objects carried on by the trust which is its primary object as enshrined in the Deed. Absence of mentioning of collection of fees and application thereof could not be taken as a limitation. These aspects are implicit in the objects and other clauses of the deed and were carried out by the assessee. The observation of the Assessing Officer that the assessee trust has misused the registration granted by the Commissioner is not within his domain and powers. More so, when the Assessing Officer has not been able to brought on record that there was misuse of the registration under section 12AA by collection of fees and expending them for charitable purposes of the assessee. Nowhere in the assessment order, the Assessing Officer has questioned the nature of the expenses incurred by the assessee as not being charitable in nature. On careful consideration of the rival submissions of both the parties, we are of the considered view that the collection of fees is implicit in its objects when a trust is required to establish, set up, promote and run educational institutio....
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....se of deciding the case. The Revenue has pointed out that no sufficient opportunity was given to the Assessing Officer by the learned, while adjucating the appeal filed before him. The learned AR of the assessee has brought our attention to the proforma of the order wherein it has been mentioned that Sri M.K. Pati, Assessing Officer was present at the time of hearing. A copy of the appeal memo in Form No. 35 with statement of facts and grounds of appeal was also sent to Assessing Officer and he has offered his comments in a comprehensive reply. In that view of the matter, the contention of the Revenue is highly untenable under law. It was further pointed out by the learned AR of the assessee that the revised grounds were basically original grounds of appeal reworded and renumbered so that the narrative portions of the original grounds of appeal were omitted to make the ground more speaking. On careful consideration of the submissions of both the parties in the light of the impugned order passed by the learned CIT(A), it is found that as can be seen from para 6 of the impugned order, a remand report was called for from the Assessing Officer and same was submitted running into 40 pag....