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M/s. Sundaram Medical Foundation Versus Deputy Director of Income Tax (Exemptions) I, Chennai

2016 (2) TMI 188 - ITAT CHENNAI

Denial of the benefit of Section-11 of the Act and thereby taxing the corpus donation received - Held that:- The assessee trust engaged in running of hospitals would be entitled for the benefit of Section-11 of the Act even though it is incidentally generating surplus, since it is running a hospital and thereby providing medical relief, however subject to the compliance of the other provisions of the Act. Thus this issue is decided in favour of the assessee. Since we have held that the assessee .....

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eing heard.

Disallowance of the carry forward and set off of excess application of income - Held that:- The claim of the assessee for carry forward of excess application of fund to subsequent years is not permissible as per the provisions of the Act. See case of The Anjuman-E-Himayath-E-Islam [2015 (7) TMI 594 - ITAT CHENNAI] - Decided against assessee

Denial of treating the loss on sale of assets as application of income - Held that:- We are in agreement with the view take .....

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ust as provided under the provisions of the Act. Therefore the action of Ld. Assessing Officer is justified - Decided against assessee

Disallowance of the depreciation while computing the income of the assessee trust - Held that:- The claim of depreciation made by the assessee cannot be entertained as per the provisions of the Act. See case of The Anjuman-E-Himayath-E-Islam [2015 (7) TMI 594 - ITAT CHENNAI] - Decided against assessee.

Disallowance of claim of bad debts as a .....

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. - S.P. Nos.389/Mds./2015, I.T.A.No1295/Mds./2015 - Dated:- 1-1-2016 - Shri A. Mohan Alankamony, Accountant Member and Shri Duvvuru RL Reddy, Judicial Member For The Appellant by : R.Vijayaraghavan, Advocate For The Respondent : Dr.B.Nischal, JCIT, D.R ORDER PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: The Stay Petition and the connected appeal are filed by the assessee, aggrieved by the order of the Learned Commissioner of Income-Tax(A)-VII, Chennai dated 31/03/2015 in ITA No.334/13-14 passed u .....

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donation received by the assessee trust will become the income of the assessee trust since the assessee trust is not treated as a charitable institution. iii) The Ld. CIT(A) had erred by holding that the assessee trust would not be eligible to carry forward excess application of income of ₹ 6,22,83,776/-. iv) The Ld. CIT(A) had erred by not treating the loss on sale of assets for ₹ 14,31,181/- as application of income. v) The Ld. CIT(A) had erred by not allowing depreciation of S .....

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tiny and assessment was completed U/s.143 (3) of the Act on 21.03.2013 wherein the ld. Assessing Officer disallowed the claim of depreciation, carried forward of excess application of funds, bad debts written off as application of fund, and loss on transfer of assets as application of income. While doing so, the Ld. Assessing Officer allowed the benefit of Section-11 of the Act to the assessee trust. On appeal, the Ld. CIT (A) went a step forward and disallowed the benefit of Section-11 of the A .....

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ty price unblended with the tinge of charity ii) Charity and commerce cannot co-exist. In the case of the assessee medical relief is provided for a price consideration leading to commercial activity. iii) The activity of medical relief provided by the assessee is akin to the character of hotelier providing food to hungry people. iv) If charity is not the motive for the services provided, then it will open the floodgate to everyone to sell anything on the pretext of providing some relief or the o .....

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ced by the Ld. CIT (A) in the decision of the CUT Vs. Surat Art silk cloth Mfrs association 121 ITR (SC) wherein it was held that fulfilling charitable purposes must be unsullied by profit making interest . ix) The assessee was carrying out its objectives for the purpose of making profit. x) Discounts to patients were provided only to the extent of 1.6% of the operating revenue of the assessee s trust. Similarly free treatment is given to the patients only to the extent of 3% of the operating re .....

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ide charitable medical relief, charitable education etc., and not for commercial operations. 5.2 Ld. A.R. submitted before us that even though there is surplus derived from providing medical relief, the benefit of Section-11 cannot be denied subject to the fulfillment of other conditions provided in the Act, because the provisions of section 2(15) specifically provides that any services in the nature of medical relief ought to be considered as charitable in nature. The Ld. A.R. further relied in .....

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rd. Section-2(15) of the Act clearly provides that any activity in the nature of providing medical relief would be considered as a charitable activity. Further the proviso clarifies that only activities that are in the nature of advancement of any other object of general public utility shall not be considered to be for charitable purpose if it involves in carrying of any activity in the nature of trade, commerce or business etc., generating revenue exceeding a specified limit. Thus, the activity .....

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ry and secondary schools and colleges for arts, science, commerce and technical courses in Mumbai since 1929 and in Surat since 1940. Nor is there any dispute before the Court that save and except for conducting these educational institutions, the petitioner has not carried on any other activities right since 1929. In this background, it would be necessary to advert to the objects set out in the memorandum of association. Clause III(b) spells out as the object, amelioration of the condition of G .....

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he education of this class of women. The means by which this object is sought to be achieved is by conducting Ashrams or homes for women and girls, particularly for widows and orphaned girls either as free or as paying inmates and by conducting schools for imparting religious, secular and industrial education and training in fine arts. A number of ancillary objects have been adverted therein including provision of libraries and gymnasiums, publication of books and by means of pecuniary and other .....

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een carried out by the trust ever since its inception is the conduct of educational institutions. The Court, it must be emphasized, is not dealing with an institution which has sought approval for the first time or which has been set up in the proximate past. The trust has a history of over eighty years during the course of which the only activity is of conducting educational institutions. The fact that the trust exists solely for educational purposes is evidenced from the assessment orders for .....

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s Court dt. 29th June, 2005 in a reference under s. 256(1) to which the petitioner was the applicant. The issue before the Court in the reference was whether the assessee was entitled to exemption under s. 10(22) on interest earned on surplus funds of the school run by the trust for asst. yrs. 1979-80 and 1980-81. The Division Bench observed that merely because a certain surplus arose from the operations of the trust, it could not be held that the institution was run for the purpose of profit, s .....

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ally from an activity lawfully carried on by the educational institution, the institution would not cease to be one which is existing solely for educational purposes since the object is not to make profit. The Division Bench also observed that if the trust exists solely for educational purposes and conducts an educational institution, the fact that it had other objects would not disentitle it to the exemption so long as the activity carried out by it in that assessment year was that of running a .....

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s the record demonstrates that the assessee only conducts educational institutions, it must be regarded as existing solely for the purpose of education. No other activity is carried on. Secondly, the fact that a surplus may incidentally arise from the activities of the trust, after meeting the expenditure incurred for conducting educational activities would not disentitle the trust of the benefit of the provisions of s. 10(23C). Insofar the aspect of surplus is concerned, one must in addition, a .....

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er cent, shall in no case exceed five years. This provision would establish that Parliament did not regard the accumulation of income by a university or educational institution governed by sub-cl. (vi) as a disabling factor, so long as the purpose of accumulation is the application of the income wholly and exclusively to the objects for which the institution has been established. Parliament has, however, prescribed that where more than fifteen per cent of the income is accumulated after 1st Apri .....

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and) 395: 5.4 The Hon ble Delhi High Court in the case of Deputy Director of Income Tax Vs. Shanti Devi Progressive Education Society reported in (2012) 340 ITR 0320 held as follows:- In the absence of any finding or allegation that the assessee society running schools has diverted its funds for non-educational activities and anything on record to show existence of profit motive, exemption u/s.10(22) could not be denied on the ground that the assessee was collecting money by way of admission fee .....

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ubject to the compliance of the other provisions of the Act. Thus this issue is decided in favour of the assessee. Since we have held that the assessee trust would be eligible for the benefit of Section-11 of the Act, consequently we hereby hold that the Corpus donations received by the assessee trust shall not be included in the total income of the previous year in which such donation is received by the trust, as provided U/s.11 (1)(d) of the Act. Further we make it clear that the Ld.CIT(A) has .....

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on of fund claimed by the assessee trust was not from the income earned by the assessee trust during the previous year. Therefore it was clear that excess application of fund was either sourced from the loan obtained by the assessee trust or from the accumulation of funds during the earlier years. It was further observed that only ₹ 3,75,02,118/- was applied from the income derived during the relevant previous year and the balance amount of ₹ 3,07,92,656/- was actually spent from the .....

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isallowed the claim of carry forward of excess application of funds for ₹ 6,24,83,776/-. On appeal, since the Ld. CIT (A) withdrew the benefit of Section-11 of the Act to the assessee, this issue was not addressed as it was not relevant. 6.2 After hearing the both the parties, we find that this issue is squarely covered by the decision of this Tribunal in the case of The Anjuman-E-Himayath-E-Islam for the assessment year 2009-10 in I.T.A.No.2271/Mds./2014 vide order dated 02.06.2015. The r .....

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part, then that shall also not be included in the total income. Further Section-11(1)(d) of the Act provides that income in the form of voluntary contribution made with specific direction that they shall form part of the corpus of the trust or institution will also not be included in the total income. By virtue of Section-2(24) of the Act the definition of income includes any voluntary contribution received by the trust created wholly or partly of charitable or religious purposes . Further expla .....

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ived with specific directions and the income derived from property held under trust , then such income shall not be included in the total income of the Trust. Further the balance 15% of such income even if accumulated or set apart shall also not be included in the total income of the Trust. Therefore, what is provided under the Act is with respect to application of income from the income derived from the property held under the Trust and any voluntary contributions received by the Trust other th .....

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Trust towards its corpus, ii) Other voluntary contributions, iii) Accumulated fund, iv) Amount received by way of loan, v) Sundry creditors, vi) Income derived from the Property held under the Trust. [Hon ble Calcutta High Court has held in the case DCIT VS. Girdharilal Shewnarain Tantia Trust reported in [1993] 199 ITR 15(Cal.) that The income contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable . Further, Hon ble Apex High Court has held .....

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Trust, then such funds which are applied cannot be said to be funds applied from the income of the Trust. Therefore, there cannot be a case where the trust can apply its income more than the income received by it for the purpose of Section-11(1)(a)&(b) of the Act. Thus excess application of fund over and above the income of the Trust can arise only when funds are applied from the Corpus of the Trust, accumulated fund, Loan obtained by the Trust or goods and services received from Sundry Cre .....

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which it is received or such amount is set aside and therefore once again treating the same as application of fund will amount to double deduction. Similarly voluntary contribution received toward Corpus is exempt from income of the trust in the year in which it is received and therefore when it is utilized for the objects of the Trust it cannot be considered as application of fund otherwise it will amount to double deduction. From the above factual and mathematical matrix it is evident that ca .....

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nd the assessee trust have spent ₹ 5,35,57,149/- which shows that the assessee trust has spent ₹ 23,96,355/- more than its income received during the relevant year. This amount of ₹ 23,96,355/- may have been taken out from the corpus funds , accumulated funds , loan obtained by the assessee trust or arising out of Sundry Creditors . Therefore it is obvious that there is no excess application of income over and above the income received by the trust, hence the question of carry .....

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fund it would amount to double deduction. Therefore the claim of the assessee to carry forward the excess application of fund cannot be entertained applying the commercial principles. However if the excess amount of ₹ 23,96,355/- is applied from the borrowed fund or from Sundry Creditors, the same shall be allowed as application in the year in which such Loan or Sundry Creditors are repaid from the income of the Trust as discussed herein above. Needless to mention that the income of the T .....

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cess application of fund to subsequent years is not permissible as per the provisions of the Act. It is ordered accordingly. 7.1 Ground No.(iv): Denial of treating the loss on sale of assets of ₹ 14,31,181/- as application of income. It was noticed by the Ld. Assessing Officer from the income & expenditure statement that the assessee trust had claimed ₹ 14, 31,55,182/- as loss on transfer of assets. The Ld. Assessing Officer was of the view that the same cannot be treated as appl .....

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of funds in the year in which the assets were purchased. Therefore, the loss on sale of these assets cannot be treated as application of funds once again. It would amount to double deduction. Further the facts remain that the sale proceeds of ₹ 5,81,000/- is the income of the assessee because there is a cash inflow to that extend which has to be applied for the objects of the trust as provided under the provisions of the Act. Therefore the action of Ld. Assessing Officer is justified. It .....

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herefore such claim would amount to double deduction. On appeal, the Ld. CIT (A) having withdrawn the benefit of Section-11 of the Act to the assessee did not adjudicated this issue as it had become irrelevant. 8.2 At the outset we find that on the earlier occasion, the Chennai Bench of the Tribunal in the case of The Anjuman-E-Himayath-EIslam for the assessment year 2009-10 in I.T.A.No.2271/Mds./2014 vide order dated 02.06.2015 had adjudicated the issue in favour of the Revenue. The relevant po .....

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of depreciation cannot be considered as application of income. On appeal, the Ld. CIT (A) was also of the view of the Ld. Assessing Officer and therefore confirmed Ld. Assessing Officer s order. 5.2 We find this issue is elaborately discussed in the case of Lissie Medical Institution Vs. CIT reported in [2012] 348 ITR 344(Ker.) and held the issue against the assessee. While doing so, the Hon ble Kerala High Court had considered the Circular No.5P(LLX-6) dated 19.06.1968 which has not been consi .....

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f its total income, for religious or charitable purposes. In other words, it was not permitted to accumulate more than 25 per cent of its total income. The question has been reconsidered by the Board and the correct legal position is explained below. 2. Section 11(1) provides that subject to the provisions of sections 60 to 63 "the following income shall not be included in the total income of the previous year . . . ". The reference in sub-section (a) is invariably to "income" .....

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ust, its "income" will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the Incometax Officer in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed by the account will be eligible fo .....

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xpenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption und .....

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g off the full value of the capital expenditure on acquisition of assets as application of income for charitable purposes and when the assessee again claimed the same amount in the form of depreciation, such notional claim became a cash surplus available with the assessee, which was outside the books of account of the trust unless it was written back which was not done by the assessee. It was not permissible for a charitable institution to generate income outside the books in this fashion and th .....

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at The income contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable. Respectfully following the decision of the Hon ble Kerala High Court and taking cue from the decision of the Hon ble Calcutta High Court, we do not find any hesitation to confirm the order of the Ld. CIT(A) and also the views expressed by him in his order. Accordingly this appeal is held in favour of the Revenue. 8.3 Following the ratio of the above decision of the Chennai .....

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