AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2014 (3) TMI 1014
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee was eligible for exemption u/s 11, if those funds were applied towards the object of the institution? (iii) Whether authorities were justified in denying the claim of depreciation as application of income u/s 11 of the Act. (iv) Whether, the assessee was liable to be charged interest u/s 234B of the Act when the levy was not in accordance with the provisions of the Act? II. ITA No.605/B/2011 - AY 2007-08: (i) Whether the assessee was eligible to claim exemption u/s 11 of the Act in respect of receipts of Rs. 58,21,800/- and Rs. 74,75,535/- (sic) Rs. 74,74,535/- towards building funds and development fees respectively? Alternatively - (ii) Whether the assessee was eligible for exemption u/s 11, if those funds were applied towards the object of the institution? (iii) Whether the amount of Rs. 49,02,517/-advanced to Kaveri Charitable Trust (which was also carrying on charitable activities) amounts to application of income for the purposes of s. 11 of the Act? (iii) Whether the depreciation of Rs. 24,20,012/-on assets amount to application of income for the purposes of s. 11 of the Act? (iv) Whether, the assessee was liable to be charged interest u/s 234B....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sion of students and the amounts collected from the students as voluntary contribution. It was the stand of the AO that the voluntary contributions/building fund/development funds were nothing but fees collected over and above the fee prescribed by the Government. 5. Aggrieved, the assessee took up the issues, among others, before the CIT (A) for the AYs. 2006-07, 2007-08 and 2008-09. 5.1. For the assessment years 2006-07 and 2007-08, the CIT (A) had, after taking into account the assessee's contentions, the statement of its Secretary recorded u/s 133A of the Act and extensively reproducing the findings of (i) the Hon'ble Mumbai Tribunal in the case of DCIT v. Hindustan Dorr Oliver Ltd [48 TTJ 555]; and (ii) Hon'ble Chennai ITAT in ACIT v. PS Govinda Swamy Naidu & sons Charities v. ACIT dated 21.10.2005, recorded his findings as under: "8. (On page 15)...............It is clear from the above discussion that similar payments made in the appellant's case are nothing but capitation fees and cannot be treated as voluntary donations. 9. The first issue is thus decided against the appellant and it is held that the amounts collected by the appellant from the students or their....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2007-TIOL-807-HC-Uttranchal- IT; (vii) M/s. P S Govindasamy Naidu & Sons Charities, Peelamedu v. ACIT - Tax case (Appeal) No.1307 of 2007 dt: 23.10.2007 - Madras HC and also distinguishing the case laws relied by the assessee, recorded his conclusions as under: "27........... (On page 60)In short, the appellant has not been able to cite any decision of any Court supporting capitation fee or profiteering from education. I will like to refer to a recent decision of the Hon'ble ITAT, Hyderabad Bench A in the case of M/s. Vasavi Academy [ITA No.1749/Hyd/2008 AY 2004-05] dated 4.2.2010. In its order, the Hon'ble Tribunal considered the issue of collection of capitation fee directly or indirectly and its effect on the charitable nature of the institution. The Hon'ble Tribunal held as under: 'We have heard..........................We make it clear that the assessee is not entitled for exemption either u/s 11 or u/s 10(23C) in case it collected any money by whatever name it is called i.e., donation, building fund, auditorium fund etc., etc., over and above the prescribed fee for admission of students.' This is a direct decision on the issue of collection of donations from stude....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., serve as it does the same purpose and is on the same footings, citing our reasons for the same in detail, drawing extensive support from the decision in the case of Escorts Ltd & Others v. UOI (supra) holding of the same as squarely covering the proposition. It follows as a corollary that where the cost of an asset has not been so allowed, depreciation thereon would be exigible for deduction in computing the income u/s 11(1) of the Act.' Accordingly, the AO will allow all the revenue expenditure incurred by the trust during the year and compute the trusts income on commercial principles. Depreciation shall be allowed on the assets whose cost has not been allowed as 'application' of income in the past. On the revenue side, all the receipts should be considered excluding loans and advances." 5.2. Likewise, for the assessment year 2008-09, the CIT (A) dismissed the assessee's appeal with the following reasoning, namely: "(On page 9) I have gone through the assessment order and the arguments of the appellant. Similar issue cropped up in appeal for the A.Y 2006-07and for the AY 2007-08. A very detailed common order was passed by my predecessor, vide ITA No.161/CIT (A)MYS/08-0....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the parents of the students out of their free will have made the voluntary contributions which were subsequently substantiated by way of confirmation letters. This fact is also finding a place in answer to Q.No.15 in the statement of the Secretary of the assessee recorded on oath at the time of survey; > that the primary purpose/object of the assessee was to impart education and in that process collected certain fees and voluntary contributions. The voluntary contributions so received were for the specific purpose of 'building' and the assessee had applied such contributions towards the construction of building; > distinguished the judgment of Hon'ble Madras High Court reported in 324 ITR 44 (Mad) relied on by the learned DR, since in the assessee's case, the voluntary contributions were received as 'Building Fund' specifically for the purpose of constructing building(s) which formed part of the corpus. The amount collected towards 'building fund' was voluntary and the fact that those funds were applied for the purpose for which they were received fortifies the contention of the assessee that it was eligible for exemption under the Act; > the findings of the Hon'ble ITAT,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee had earned a surplus out of the activity carried on. But such profits have been applied to the objects of the trust i.e., for imparting education; and merely there was surplus, it would not automatically disentitle the assessee from exemption or it cannot be held to be indulged in profiteering. The assessee had, in its Statement of total income, clearly appropriated and carried forwarded the surplus for application to the subsequent years which was subsequently applied to the objects of the trust and not used for the purpose of making profit in real-estate as alleged by the CIT (A); Relies on the following case laws: (i) Pinegrove International Charitable Trust v. UOI - 327 ITR 73 (P&H); (ii) Dy.DIT v. Shanti Devi Progressive Education Society (2011 52 DTR 225 [Del]; (iii) DCIT v. Vellore Institute of Technology (2011) 12 Taxmann.com 272 - ITAT, Chennai Application of the said funds towards object of the Institution would entitle exemption u/s 11 of the Act: > without prejudice that if it were to be held that the contributions were not voluntary, even then the assessee was eligible to claim exemption under the Act by virtue of sections 11 & 12 of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the assessee was eligible for exemption of the same u/s 11(1)(a) of the Act; (iii) Mere existence of profit/surplus does not change the character of educational institution to a profit making entity; (iv) Without prejudice, even if the contributions were considered as involuntary, but, if they were applied to the objects of the institution, it was sufficient compliance of s. 11 of the Act; & (v) Without prejudice, if the development fund and building fund, if held to be taxable, then, only the surplus i.e., excess of income over expenditure can be taxed and not on the gross amount of development fund. 6.1. On the other hand, the learned DR summed up his submission as under: - that the Secretary of the assessee-trust on oath submitted that it was the normal practice to collect the DDs from the parents of the aspirants before the admission and to keep such DDs with the management till the process of admission was completed and then the DDs received from the successful candidates were only deposited in the bank account and the remaining DDs related to the unsuccessful candidates were returned to them. Thus, it was clearly established that the donations were rec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the successful students in a pre-printed letters without giving the details of amount donated, date of contribution, receipt Numbers etc., This clearly demonstrated the actual nature of donations received by the assessee from the successful students in the guise of building funds. The fact of return of the DDs pertaining to unsuccessful candidates would clearly indicate that there was a direct nexus between securing admission in the educational institutions run by the assessee and payment of donation by such successful students to the assessee which is termed as 'building fund'. Accordingly, the basic parameters to treat the donation as voluntary donations were not fulfilled as explained below: (i) the donor had not paid the amount by exercising his own free will without expecting any return or privilege. The donors have actually paid the amount to the assessee for a consideration or return or privilege in the form of admission to their ward in the educational institution run by the assessee; (ii) the assessee had forced the students/parents to remit the donation for admission purpose and accepted the same from the successful students/parents establishing the quid-pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arb of voluntary contribution cannot be considered a charitable activity within the meaning of s. 2 (15) of the Act and once the institution/trust is considered as non-charitable organisation, it is not eligible for exemption u/s 11 of the Act; AY 2007-08: - that a loan of Rs. 49.02 lakhs was advanced to M/s. Kaveri Charitable Trust and as such the benefit of CBDT Circular No.100 was not applicable to the assessee's case, as the said Circular only addresses about the cases where scholarship loans were advanced to students for education purposes and not to the kind of loans which the assessee had made to another institution. As such, the advancement of loan cannot be considered as an application of income u/s 11(1)(ia) of the Act; - that the action of the AO in denying the claim of depreciation is correct in as much as the assessee had claimed deduction twice that is once at the time of acquisition of the asset and again depreciation in respect of the same asset. Since claiming of double deduction is impermissible under the Act, the stand of the AO requires to be sustained; - assuming that the provisions of s. 11(1)(a) are applicable to the facts of the case, however, it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee had resulted in huge amount of surplus i.e., more than 50% of the gross receipts implying that the assessee was in existence for generating profits through running the educational institution as against the main object of running the educational institution. The assessee had used the educational activities as a tool to attain its main motive of profit generation; & (iv) that the assessee had not only violated the objects as enshrined in the trust deed but also failed to comply with the provisions of sections 11, 12 & 13 of the Act. accordingly, the assessee is not entitled to claim exemption u/s 11 of the Act in respect of income received in the form of building fund and development fund. 7. We have carefully considered the rival submissions, perused the relevant materials on record, the voluminous documentary evidences produced by either of the party in the form of paper books and also the case laws. 7.1. It is a fact that the assessee - trust is a registered Society which runs several educational institutions in the city of Mysore starting from nursery to PUC. The assessee trust is also registered u/s 12A of the Act. According to the AO, some of the educational inst....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Hyderabad Tribunal in the case of M/s. Vasavi Academy [ITA No.1749/Hyd/2008 Asst. year 2004-05 dated 4.2.2010] sustained the additions made by the AO on the premise that "28. .....................I hold that the appellant is not entitled to claim exemption u/s 11 of the Act. All the grounds of appeal raised by the appellant are basically in the nature of arguments contending that the voluntary contributions collected by the appellant are not in the nature of capitation fee and that the appellant trust being an educational institution, is entitled to exemption u/s 11 of the Act. I have already discussed both the issues above. There is a direct nexus between the admissions granted under the management quota and the voluntary contributions collected by the appellant. It is nothing but capitation fee. The appellant is also held to be indulging in profiteering from education and, hence, it is not eligible for exemption u/s 11 of the Act." 7.2.3. However, during the course of hearing before us, the learned AR contradicted the stand of the authorities below by arguing that those contributions were received from the students for the specific purpose of being 'building fund....
X X X X Extracts X X X X
X X X X Extracts X X X X
....further establishes that the money collected over and above the prescribed fee for admitting students was paid to the Chairman and other interested persons of the society. Therefore, there is a clear violation of the provisions of s. 13(1)(c) of the IT Act. Under s. 13(1)(c), if any part of income of the institution, is used or applied directly/indirectly for the benefit of a person, i.e., the founder or any interested person, as referred to in s.13 (3) of the IT Act, then the assessee shall not be entitled to exemption under ss. 11 and 12 of the IT Act. Therefore, the assessee is not entitled for exemption under s. 11.' However, in the present case, even if the fees collected were in violation of the norms subscribed by the State Government, the application of the funds were towards the objects of the assessee trust and as such, there was no violation of s. 13 of the Act as ascribed by the Revenue. 7.3.1. We shall now take up the case laws, on which, the assessee placed reliance for consideration as below: (i) ACIT v. Balaji Educational and Charitable Public Trust (2011) 11 ITR (Trib) 179 (Mad): The Hon'ble Tribunal has held that - "There is no concept of involuntary c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g with the conditions laid down in section 12A or by falling within the mischief of section 13, corpus donations will be included in its income and taxed. Therefore, the question whether the donations were voluntary or not becomes irrelevant and what becomes relevant is the application of such contributions for the objects of the trust which are admittedly charitable. The application of such contributions for objects of the trust is not in dispute. 12. The decision of the Chennai Bench of ITAT In the case of Balaji Educational & Charitable Public Trust (supra) and the decision of the Hon'ble Karnataka High Court in the case of Sri Belimatha Mahasamasthana (supra) and Garden city Educational Trust (supra) emphasis only on the above aspect of application of income (contributions) for objects of the trust. The above judicial pronouncement makes it clear that the litmus test of charitable institution is the test of application of the funds and not the colour of donations received by the institution. In that view of the matter, we do not find any infirmity in the order of the CIT (A)...." 7.3.2. In the meanwhile, our reference was drawn to the judgment of the Hon'ble jurisdicti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....und and the donation may be treated as corpus fund. When the issue was carried by the revenue before the Hon'ble Court, the Hon'ble Court, after taking into account the facts of the case, has ruled as under: "9 (on Page 9)........... The assessee is running an educational institution and if philanthropic persons voluntarily donate funds for educational purpose and they have paid it by way of cash, the assessee has received the same and issued a receipt acknowledging the said amount. After receipt of the said amount, an entry is made in the account book of the trust. Thereafter, the amount is deposited in the bank. Therefore, it is not a case where the amounts received are not accounted for or there is any attempt not to disclose the income. The receipt issued clearly demonstrates that it is received for the purpose of building fund. Clause (d) of sub-section (1) of section 11 of the Act provides that income in the form of voluntary contribution made with a specific direction that they shall form part of the corpus of the trust or institution, shall not be included in the total income for the previous year of the person. Therefore, to be eligible for that exemption, the sai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itution' has been defined by the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984 as under: "2. Definitions.- In this Act, unless the context otherwise requires,- (a).............................................................................. (c) "Educational institution" means any institution by whatever name called, whether managed by Government, private body, local authority, trust, university or any other person carrying on the activity of imparting education in medicine or engineering leading to a degree...." 7.3.4. As per the assessee's assertion, it was running several Schools starting from nursery to PUC which has been endorsed by the AO in the assessment order for the AY 2006- 07 thus "4. Sadvidya Educational Institutions is a registered society which is running several education institutions in Mysore City starting from Nursery School to PUC." However, at para 22 of the said order, the AO had recorded that "22. As seen from the above, without having any sanction of the govt., the assessee has forcefully collected capitation fee in the garb of ''College Development Fee". The observation of 'the educational institution' by the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o that of the present one, held that "the interest-free loan given by the assessee-society to the other society did not violate section 13(1)(d) read with section 11(5) of Act, 1961, as the loan was neither an 'investment' nor a 'deposit'. Moreover, both societies had similar objects and were registered under section 12A of the Act and had approvals under section 80G.........." In conformity with the judgment of the Hon'ble Delhi High Court (supra), we are of the view that the assessee is entitled to exemption. In essence, this issue is decided in favour of the assessee. It is ordered accordingly. 10. The next identical ground raised by the assessee for all the assessment years is: Whether the authorities below were justified in denying the claim of depreciation as application of income u/s. 11 of the Act? 10.1. Incidentally, a similar issue to that of the issue under dispute came up for consideration before the earlier Bench of this Tribunal in the case of ACIT v. Sri Adichunchanagiri Shikshana Trust reported in (2013) 31 taxmann.com 157 (Bangalore - Trib.). After analysing the issue in depth, the Hon'ble Bench had recorded its findings as under: "13..........................