TMI Blog2008 (6) TMI 261X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, 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 ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - H.L. Karwa Judicial Member And D.C. Agrawal Accountant Member For the Appellant : Debashish Chanda. For the Respondent : Kanchun Kaushal. ORDER D.C. AGRAWAL, A.M.: These are two appeals filed by the Revenue against the order of the learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 3. The AO further noted that assessee has not kept any vouchers or any account for purchase of raw material, day-to-day employment of labour, etc. Thus, the cost of construction is not open to verification. The AO proposed to make the addition of the difference arising on account of estimation of cost of construction by the DVO, in response to which the assessee submitted that the construction is not complete and therefore, proposed addition should not be made. Report of approved valuer was also filed which was not accepted by the AO. Since the AO did not find explanation satisfactory, he proposed to make the addition of the differential amount. 4. The AO further found that expenditures claimed in the P L a/c are exaggerated and are siphoned off for personal use of the founder member. As all the expenses are incurred in cash, they are not open to verification, their genuineness cannot be established, therefore, expenses to some extent could not be allowed as supportive evidences were not produced by the assessee. Out of expenditure incurred on cultural programmes, the AO considered that a sum of Rs. 69,450 is not allowable as there is no evidence and that cul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nursery School wherein it was observed that if the quantum of fees charged is not commensurate with the quality of education and the expenditure incurred is not for running the institution then it could not be said that institution is existing for the purposes of education. 6. The AO, accordingly, denied the benefit of exemption under s. 11 as well as under s. 10(22) and computed the income of the assessee trust at Rs. 5,63,970. 7. The learned CIT(A), on the other hand, considered that reference to Valuation Cell is irrelevant if proper books of account are kept. He referred to the decisions of Hon'ble Rajasthan High Court in the cases of CIT vs. Hotel Joshi (l999) 157 CTR (Raj) 369 : (2000) 242 ITR 478 (Ra)) and ITO vs. Smt. Santosh Khanna (1985) 20 Taxman 15 (Jp)(Mag). He also considered following submissions of the assessee: (a) The founder of the society is a widow who is running the school in loving memory of her husband to make him immortal is the sacred purpose of the lady. (b) The promoters have denoted their precious land for the purpose of society. (c) The purpose of the AO could not be ascertained on the contradictory facts of the cases. (d) That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment orders for the years under appeal, as framed by the AO are annulled. Since the income of the appellant is exempt, it is not considered necessary to deal with other disallowance as made by the AO. 9. Before us, the learned Departmental Representative submitted that the assessee has claimed expenses in the income and expenditure account which he is not able to explain and certainly there is diversion of funds and the founder being in control of entire affairs of the society, such inflated expenses are going to the benefit of the founder. This will hit the provisions of s. 13(2) of the Act as benefit is given to founder of the society who is in control of all the expenses. He also submitted that if benefit goes to the founder of the society or to his personal interest then it could not be said that institution is existing solely for the purposes of education as it is existing for the purposes of benefit of the founder. In view of this, the assessee also loses the benefit under s. 10(23C)(iiiad) [old s. 10(22)]. 10. In any case, the learned CIT(A) should not have annulled the assessment because in case the assessment has to be framed the income has to be either co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot have any receipt other than from education, its receipt is less than Rs. 1 crore in both the years. No other activity other than education has been carried out by the assessee. Under the facts and circumstances, the provisions of s. 13(2) are not applicable. For same reasons, the two judgments referred to by the AO are also not applicable to the facts of the present case. 12. On the other hand, he submitted that the Hon'ble Supreme Court has held in the case of Aditanar Educational Institution vs. Addl. CIT (1997) 139 CTR (SC) 7 : (1997) 224 ITR 310 (SC), that after meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution then it will not lose to be one existing solely for educational purposes as object is not one to make profit. He then referred to the decision of Hon'ble Supreme Court in the case of American Hotel Lodging Association Educational Institute vs. CBDT (2008) 216 CTR (SC) 377 : (2008) 301 ITR 86 (SC), for the proposition that once the facts of the case on record cover the case within the provisions of s. 10(23C)(iiiad) then no other condition regarding application of income was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only one or two controllers/supervisors/managers. It is not a case of AO that all the expenses are personally incurred by the founder member, and that he is at liberty to pocket a portion of the expenses debited in P L a/c. In an organization which employs several persons who for duty incur expenses, it cannot be alleged that it is only founder member who is responsible for expenses and hence pilferage. Though it is not proved that expenses are actually inflated in the present case, but even if it is so then inference that alleged extra expenditure has benefited the founder member is not substantiated and proved. Therefore, provisions of s. 13(2) could not be invoked. There has to be direct nexus of outflow of money with the interested members as it was in the case of Bal Bharti Nursery School or in Bharat Diamond Bourse's case. 17. In this regard, we refer to s. 13 as under 13. (1) Nothing contained in s. 11 or s. 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof-............ (c) In the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof- (i) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of any person falling in the prohibited category. Benefit here would mean some ex gratia expenditure without any contribution by such person to the society. The term 'benefit' exclude from its ambit a two way process. If the person in the prohibited category renders services and in lieu thereof a benefit is provided then the case does not fall in cl. (ii) of s. 13(1)(c). The expenditure incurred on those interested persons would be a compensation for such services. A benefit would be said to have been given to the persons of prohibited category, if they in return do nothing but only enjoy the fruits of the trust/society and take away the funds/income of the society for their personal benefit or discharging personal obligation, but where persons of prohibited category render services to the society and in turn, get some remuneration, salary and allowances etc. as a member then provisions of sub-s. (2) would be applicable and not of sub-so (1) and for applying the provisions of sub-s. (2) of s. 13, it has to be shown by the Revenue that amount paid to the persons of prohibited category was in excess of what may be reasonably paid for such services. In other words, the AO h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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'. Sec. 11(1) starts with subject to the provisions of ss. 60 to 63............ . It means that ss. 60 to 63 would have overriding effect if there is a conflict between ss. 11 to 13 and ss. 60 to 63. However, the application of s. 11 is not made subject to s. 68 to s. 69C. In other words, provisions of ss. 68 to 69C could not be applied overriding ss. 11 to 13. It means that in the event of conflict between ss. 11 to 13 and ss. 68 to 69C, the provisions of ss. 11 to 13 will prevail. Thus, 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act that assessee is an educational institution imparting education from Class KG to Class VIII. No other activities have been alleged. The argument of learned Departmental Representative that some benefit is imparted to the founder of the trust resulting from inflated expenditure would also disable the trust from getting exemption under s. 10(22) is outrightly rejected because firstly, there is no evidence that such benefit has been imparted to the founder member of the trust and secondly, even if it is so then such instances would only hit the case of the assessee within the meaning of ss. 11 to 13 and cannot be imported to deny exemption under s. 10(22)/10(23C)(iiiad) provided a clear finding on the basis of material on record is given that assessee trust is not existing solely for educational purposes. Here purpose is what described in the memorandum of objects of the trust. Some items of disallowances out of expenses claimed cannot be held to be a separate object for which trust is existing thereby holding that trust is not existing solely for educational purposes. We agree with the learned Authorised Representative that exemption provisions must be strictly construed but if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er s. 10(22) of the Act and consequently, the benefit conferred under s. 10(22) cannot be denied on the ground of violation of s. 11 (5) of the Act. The said circular reads as follows: 'Circular No. 712, dt. 25th July, 1995 Subject: Investment of funds by educational institutions covered under s. 10(22) of the IT Act-Clarification regarding. Under s. 10(22) of the IT Act, any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit, is exempt from tax. 2. The Board have received representations from various institutions which fulfil the conditions laid down under s. 10(22) of the Act, but are denied exemption because their funds are not invested in accordance with the provisions of s. 11 (5) of the Act. It is hereby clarified that since s. 10(22) does not impose any restriction regarding mode of investment of funds, such institutions are not required to invest their funds in the modes specified under s. 11 (5) of the IT Act. This clarification will not apply to the institutions seeking exemption under s. 11 of the Act. (Sd) Under Secretary to the Government of India Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the institution existed during the relevant year solely for educational purposes and not for purposes of profit. After meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes since the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity.' Thus, the question of eligibility of exemption under the said section has to be determined with reference to the objects of the assessee (society) and the exemption cannot be denied merely because while the working of the society some surplus results. Similarly, in the context of exemption under s. 10(22), the conditions as stipulated in either s. 11 or 13 of the Act are irrelevant. 26. The Hon'ble Gujarat High Court in the case of Gujarat State Co-operative Union vs. CIT (1992) 103 CTR (Guj) 206 : (1992) 195 ITR 279 (Guj), held that exemption un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ole purpose of the existence of the institution should be educational. The very provision of exemption under s. 10(22) indicates that the income of such institutions is contemplated. Therefore, mere existence of profit will not disqualify the institution if the sole purpose of its existence is not profit making but is educational activities. Incidental activities connected with the educational purposes for which the institution exists which result in income will not disqualify the institution, for s. 10(22), by its very nature, contemplates income of such institutions which is to be exempted under that provision. 27. In the present case, mere disallowance of certain expenses can add to the surplus but cannot become basis for denying exemption under s. 10(22)/10(23C)(iiiad). Therefore, we hold that the learned CIT(A) was justified in granting exemption to the assessee under 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. 28. Regarding separate addition under s. 68/69 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
