TMI Blog2005 (1) TMI 327X X X X Extracts X X X X X X X X Extracts X X X X ..... on 14th May, 2001 as is apparent from page 1 of the paper book. According to the Assessing Officer, it was not accompanied by the statement of accounts for the financial year 2000-01. Accordingly, an enquiry notice was issued by the Assessing Officer on14th June, 2001asking the assessee to furnish information/details regarding (a) source of income of the members of the society and their assessment details; (b) details of charitable activities carried on by the society; and (c) the fee structure regarding each classes. (Page 37 of the paper book). There was no response from assessee. Thereafter, the application of the assessee was forwarded to the CIT, Dehradun through the Addl. CIT which was received by the CIT on26-3-2002. On27th March, 2002, a show cause notice was issued by the CIT as to why the application of the assessee be not rejected as application in Form No. 10A was not accompanied by the copies of accounts maintained by the assessee for the financial year 2000-01. The reply of assessee along with the statement of accounts was received by the CIT on4-4-2002. The CIT forwarded the reply of the assessee to the concerned Assessing Officer and sought a report thereon. The rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of education. From the perusal of Income Expenditure accounts filed by the society for the period ending31-3-2002and31-3-2003following picture emerges: ---------------------------------------------------------------- 31-2-2003 31-3-2003 Fee from students 66,39,012 17,27,352 Donations received 1,54,000 2,51,000 Membership fee - 4,518 Misc. income 71,296 36,173 -------------- -------------- Total: 68,64,308 20,19,043 Expenditure 33,69,884 18,22,419 Surplus 34,94,424 1,61,076 ---------------------------------------------------------------- It is clear from the above figures that the society's income from fees received from student is Rs. 17,27,352 and Rs. 66,39,012 respectively and the expenditure on students is Rs. 18,22,419 and Rs. 33,69,884 respectively. In the first year of the school the expenses were bound to be more but the real picture of profitabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation is actually carrying out charity as contemplated under section 2(15) rests on the Assessing Officer, who is vested with sufficient authority to reject the exemption from year to year. In view of the above, we request you to grant the registration to the assessee society and oblige. We would also like to request us to give us an opportunity of being heard in person before your goodself disposes the application." In support of the above submissions, the assessee had also relied on certain decisions mentioned below: 1. Thiagarajar Charities v. Addl CIT [1997] 140 CTR (SC) 295. 2. Addl CIT v.SuratArt Silk Cloth Mfrs. Association [1980] 121 ITR 1(SC) 3. Secondary Board of Education v. ITO [1972] 86 ITR 408 (Ori.) 4. CIT v. Sivakasi Hindu Nadars Uravinrmurai [1996] 217 ITR 118 (Mad.) 5. Governing Body ofRangarayaMedicalCollegev. ITO [1979] 117 ITR 284 (AP) 6. CIT v. Pulikkal Medical Foundation (P.) Ltd. [1994] 210 ITR 299 (Ker.) 7. Fifth Generation Education Society v. CIT [1990] 185 ITR 634 (All.) 8. Industrial Credit Investment Corporation of India Ltd v. Dhanesh D. Ruparelia [2000] 99 Comp. Cas. 181 (Bom.) 9. Universal Ferro Allied Chemicals Ltd. v. P.G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n educational institution must be subsidized in order to avail exemption under section 11 of the Act. (iv) That there is no evidence that any part of profit is utilized for any private gain. On the contrary, facts on record disclose that in the first year, there is deficit while in the second year, the surplus had been utilized only for the purpose of acquiring assets for running school. (v) The fee structure of assessee cannot be said to be abnormal considering the nature of education and facilities provided by the assessee society. The reasonableness of fee would depend on the facts of each case and cannot be decided by just comparing the same with the fees charged in government schools. (vi) That the judgment of Hon'ble Supreme Court in the case of MCD v. Children Book Trust [1992] 3 SCC 390 relied upon by the CIT is distinguishable on facts and in law in as much as the apex court itself has observed that provisions of Delhi Municipal Corporation Act, 1957 (in short DMC Act) and provisions of Income-tax Act are not in pari materia. (vii) That present case is covered by judgment of Hon'ble Supreme Court in the case of Surat Art, Silk Cloth Mfrs. Association. He also rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contributions. (iii) On facts, it has been found that high fee structure has been provided by the society and its earnings are huge. May be that in first year, there was loss but in subsequent year, huge profits i.e. more than Rs. 19 lakhs have been earned by the school. Further, no voluntary contribution had been received by it. Hence, it cannot be said that school was run with charitable purpose. (iv) That is not a public institution but is a closely held institution in as much as it is governed by a family. Attention was drawn to the constitution of the society. The emphasis was to show that object was to earn profit by a family. (v) That unsecured loans were taken from trustees/relatives on which interest was paid and thus, trustees and their relatives were benefited. (vi) That element of altrusion must be present Chamber of Commerce v. CIT [1936] 4 ITR 397 (All.). Therefore, if dominant purpose is making of profit and element of charity is absent, then registration can be refused. It is not necessary for the revenue to prove that funds have been actually diverted for private gains. (vii) That judgment of Supreme Court in the case of Surat Art Silk Cloth Mfrs. Asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axes AIR 1992 SC 152 for the proposition that procedural provisions cannot be considered as mandatory. 5. Rival submissions of the parties have been considered carefully in the light of case law referred to and the material placed before us. First question arising in this appeal relates to the scope of enquiry by CIT under section 12AA. We are in agreement with the learned DR that after insertion of Section 12AA w.e.f.1-4-1997, the CIT is empowered to enquire about the activity carried on by the assessee before passing the order. There may be cases where application is made after the commencement of activity by assessee trust/institution. In such cases, the CIT is justified to enquire about such activity. However, where no activity had commenced, the question of making any enquiry regarding any activity by the CIT would not arise. The nature of enquiry would depend on the facts of each case. Hence, the contentions of ld. counsel for assessee that scope of enquiry by CIT is limited to ascertaining whether objects are charitable or not, cannot be accepted. The decision ofAllahabadHigh Court relied on by him is distinguishable as it was not rendered with reference to Section 12AA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also pertinent to note that the word 'not involving the carrying on of any activity for profit' have been omitted from this definition by the legislature by Finance Act, 1983 w.e.f.1-4-1983. Therefore, after such omission, the element of profit cannot be excluded from the definition of 'charitable purpose' in Section 2(15) of the Act. 8. The above view is also supported by the legislative intent disclosed in Section 10(22) wherein it has been clearly provided that income of any educational institution cannot be exempted unconditionally if such institution also exists for the purpose of profit. According to this provision, if any educational institution is running on commercial basis then income of such educational institution cannot be exempted from taxation. However, such institution can claim exemption under sections 11 and 12 as element of profit is not excluded by the legislature. The reason is obvious because financial affairs of such institution are well controlled by the provisions of Sections 11 and 13 of the Act. Section 11 clearly provides that in order to claim exemption, such institution must apply 75% of its income for the charitable purpose. The surplus, if any, has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court in para 76 clearly held that rulings in the Income-tax Act would not be helpful in deciding the issue under section 115(4) of DMC Act. Be that as it may, the constitution bench of Hon'ble Supreme Court has specifically construed the definition of the words 'charitable purpose' in Section 2(15) of the Act and held that profit element is not excluded from the words, "relief of poor, education or medical relief" and the words "not involving the carrying on of any activity for profit" was relevant only to the last category i.e. advancement of any other object of general public utility. Even in case of any conflict between two judgment, the judgment of constitution bench, that too delivered in the context of Section 2(15) of Income-tax Act, 1961, would prevail. Hence, the ratio of judgment of Supreme Court in the case of Children Book Trust cannot be applied to the present case. 10. In view of the above discussion, it is held that element of profit is not excluded from the definition of 'charitable purpose' in Section 2(15) of the Act for the purpose of granting exemption under sections 11 and 12 of the Act. So long as the provisions of Section 11, 12 and 12A are complied ..... X X X X Extracts X X X X X X X X Extracts X X X X
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