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Sri Koundinya Educational Society Versus Addl. CIT, Rajahmundry Range, Rajahmundry

2016 (7) TMI 455 - ITAT VISAKHAPATNAM

Exemption u/s 11 denied - Eligibility for exemption u/s 10(23C) - whether society is existed for profit motive? - A.O. denied the benefit of exemption for the sole reason that the assessee society has diverted its funds to other societies and violated the provisions of section 13(1)(d) - Held that:- On perusal of the documents available on record, we find that the assessee has advanced loans to other societies under the same management having similar objects and also registered under the provisi .....

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A of the Act, is not a violation of the provision of section 13(1)(d) of the Act. - A.O. cannot borrow the findings of the Chief Commissioner of Income Tax in the order cancelling the registration u/s 10(23C) of the Act to deny the benefit of exemption u/s 11 of the Act, unless he had specifically points out the activities carried out by the assessee are not in accordance with the objects of the trust. As far as the observation of A.O. with regard to letting out of properties on commercial l .....

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iced that the A.O. without pointing out any specific violations referred to in section 13(1)(c) or 13(1)(d) of the Act, simply rejected benefit of exemption. A.O. was erred in denying exemption u/s 11 of the Act. The CIT(A) without appreciating the facts has confirmed the order passed by the A.O - Decided in favour of assessee - Disallowance of expenditure under the provisions of section 40(a)(ia) - A.O. was of the opinion that once assessee looses benefit of exemption u/s 11 of the Act, the .....

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/Vizag/2012 - Dated:- 17-6-2016 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER For The Appellant : Shri C. Subrahmanyam,AR For The Respondent : Shri K. Ravi, DR ORDER PER G. MANJUNATHA, Accountant Member: This appeal filed by the assessee is directed against the order of CIT(A), Visakhapatnam dated 25.1.2012 and it pertains to the assessment year 2008-09. 2. The brief facts of the case are that the assessee is a registered society engaged in the activity of impart .....

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granted u/s 10(23C)(vi) of the Act. Thereafter, the case has been selected for scrutiny. During the course of assessment proceedings, the assessee has put up alternate claim of exemption u/s 11 of the Act, as assessee is not eligible for exemption u/s 10(23C) of the Act. During the course of assessment proceedings, the A.O. after considering the plea of the assessee held that the assessee is not eligible for exemption u/s 11 of the Act, as it cannot claim exemption u/s 11 of the Act as an alter .....

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versity students and also deriving rental income by providing its terrace to telecom operators for installation of telecom towers. It was further observed that there is a clear deviation from the objects of the society, therefore, the income derived by the society by letting out its premises on rental basis cannot be considered as income derived by carrying out the activity of imparting education. The A.O. further observed that establishing educational institution can be regarded as an activity .....

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sed only for furthering of society s objectives, the said explanation is held to be not convincing as deriving of such rental income is not in line with the main objectives of the society. The A.O. further observed that the assessee is not eligible for exemption u/s 11 of the Act in view of the violations of section 13(1)(d) of the Act as pointed out by the Chief Commissioner of Income Tax, in his order of withdrawal of exemption u/s 10(23C) of the Act. The A.O. further observed that the society .....

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s not eligible for claiming exemption u/s 11 of the Act and hence denied the exemption and brought to tax excess of income over expenditure of ₹ 97,32,851/-. Similarly, the A.O. observed that the assessee society is held to be not eligible for exemption u/s 11 of the Act, the provisions of chapter IVD are applicable and accordingly, disallowed the expenditure incurred under the head advertisement expenses and interest on loans for non-deduction of tax at source under the provisions of sec. .....

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ovisions according to the circumstances of the case. To support his arguments relied upon the decision of Hon ble Supreme Court in the case of CIT Vs. Bar Council of Maharashtra (1981) 130 ITR 28 and also the decision of Hon ble High Court of Karnataka in the case of CIT Vs. Saraswat Poor Students Funds (1984) 150 ITR 143 and submitted that when assessee is registered under the Provisions of section 10(23C)(vi) and section 12A of the Act, the assessee can claim benefit of exemption under any of .....

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income from business or profession . When income of the society is assessed under the head income from other sources , the disallowance provided under chapter IVD of the Act, for non-deduction of the TDS provisions are not applicable, therefore, the A.O. was not correct in disallowing the expenditure for non-compliance of TDS provisions of the Act. 4. The CIT(A) after considering the explanations furnished by the assessee, held that in view of the overwhelming judicial opinions, I am unable to .....

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ax, Visakhapatnam while withdrawing the exemption granted u/s 10(23C) of the Act, the assessee is not eligible to claim exemption u/s 11 of the Act. The CIT(A) further held that the assessee society has diverted its funds to confer benefit on the related persons/interested persons. The society has given loans and advance to another society in which the founder members of the assessee society are having substantial interest. The CIT(A) further observed that the society by advancing loans to its s .....

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luxury vehicles. 5. The CIT(A) further observed that in addition to the above, the assessee society is letting out its property to the telecom companies and is maintaining hostels on commercial lines for the purpose of accommodating other college students which shows that the society properties are being used on commercial lines. These activities clearly shows that the assessee society is running totally on commercial lines and its claim that its activities are of charitable nature is without an .....

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re coming under the normal business provisions. Therefore, the A.O. was right in disallowing the expenditure u/s 40(a)(ia) of the Act for non-compliance of TDS provisions. Aggrieved by the CIT(A) order, the assessee is in appeal before us. 6. The Ld. A.R. for the assessee submitted that the Ld. CIT(A) was erred in holding that the assessee is not eligible for claiming exemption u/s 11 of the Act. The A.R. further submitted that the amount advanced to sister concerns are not in violation of the p .....

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charitable in nature, advancing interest free temporary loans by assessee society to another society is not violation of section 13(1)(d) r.w.s. 11(5) of the Act. The said loans are neither investment nor deposit to come to the conclusion that the assessee has violated the provisions of section 11(5) of the Act. To this effect, relied upon the decision of Hon ble Delhi High Court in the case of Director of Income Tax (Exemption) Vs. ACME Educational Society reported in (2010) 326 ITR 146 and sub .....

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o the sister concerns in violation of the provisions of section 13(1)(d) of the Act. 7. The A.R. further submitted that as regards the observations of the Chief Commissioner of Income Tax, Visakhapatnam while withdrawing the exemption granted u/s 10(23C) of the Act, the Chief Commissioner has made a general observation with regard to the violations referred to in section 13(1)(c) of the Act without any specific violations for the year under consideration. The A.O. cannot deny exemption u/s 13(1) .....

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oss receipts from the property held under trust and the loan is given out of 15% surplus which can be utilized in accordance with the objects. Even assuming for a moment that the assessee has given loans to sister concerns, the loans have been given out of the 15% surplus available with the assessee, therefore, the A.O. was totally incorrect in holding that the assessee has violated the provisions of section 13(1)(d) of the Act. As regards the CIT observations with regard to the advance given to .....

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u/s 11 of the Act. The society is maintaining vehicles for the purpose of activities of the society to provide these vehicles when officials/dignitaries visit the colleges and for such other activities of the society. When the vehicles are exclusively used for society s activities, the A.O. was not correct in holding that members of the society has benefitted from the funds of the society without referring to any of the fact that the person specified u/s 13(1)(c) of the Act are using the vehicle .....

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er failed to prove the satisfaction of the A.O. that the use of such vehicles for the activity of the society. The D.R. further submitted that the assessee is letting out its property to the telecom companies and also maintaining hostels on commercial lines for the purpose of accommodating other college students which shows that the society properties are being used on commercial lines. When the society is running with a profit motive, the A.O. has rightly denied the benefit of exemption u/s 11 .....

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vation that the society is existed for profit motive. The CIT further observed that the society has diverted its funds to other sister concerns, wherein the founder members of the society are having substantial interest. From the findings of the Chief Commissioner of Income Tax, Visakhapatnam, the A.O. was of the opinion that the assessee is existed for profit motive and also the activities of the assessee are not genuine. The A.O. further was of the opinion that the activities carried out by th .....

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advancing loans to other societies having similar objects and also registered under the provisions of section 12A of the Act is not a violation as referred under the provisions of section 13(1)(d) of the Act. 10. The A.O. denied the benefit of exemption for the sole reason that the assessee society has diverted its funds to other societies and violated the provisions of section 13(1)(d) of the Act. According to the A.O., advancement of loans to other societies whether or not registered under the .....

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e of Director of Income Tax (Exemption) Vs. ACME Educational Society (supra), held that advancing interest free temporary loan by assessee society to another society having similar objects is not an investment or a deposit, hence there is no violation of the provisions of section 13(1)(d) r.w.s. 11(5) of the Act to render withdrawal of exemption u/s 11 of the Act. In the present case on hand, on perusal of the documents available on record, we find that the assessee has advanced loans to other s .....

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that advancing loans to other societies having similar object whether or not registered u/s 12A of the Act, is not a violation of the provision of section 13(1)(d) of the Act. 11. Coming to the other observations of the Assessing Officer. The A.O. observed that the society s activities are not in accordance with the objects of the society. The society is existed for the purpose of imparting education, however, involved in the activity of let out of properties on commercial lines to telecom comp .....

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ed that the A.O. has not made out any specific observations with regard to the genuineness of the activities of the society for the period under consideration. The assessment of any trust/society claiming exemption under sec. 11 is to be examined in each year, so as to come to the conclusion that the entity has committed any violations referred to in any of the provisions of sec. 13 of the Act to deny the exemption. Therefore, we are of the opinion that without pointing out any specific violatio .....

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ties carried out by the assessee are not in accordance with the objects of the trust. As far as the observation of A.O. with regard to letting out of properties on commercial lines is concerned, we noticed that the assessee has let out its place to telecom companies for erection of telecom tower and used the proceeds for the objects of the society. Similarly, the assessee society has maintaining a hostel for the benefit of the students. Maintaining hostels for the benefit of the students and let .....

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rector of Income Tax (Exemption) Vs. ACME Education Society (2010) 326 ITR 146. The Hon ble Delhi High Court, under similar circumstances held that advancing interest free temporary loan by assessee society to another society having similar objects is not an investment or a deposit, hence there was no violation of provisions of section 13(1)(d) of the Act. The relevant portion of the order is reproduced hereunder: Advancing of interest-free temporary loan by assessee society to another society h .....

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of the order is reproduced hereunder: The expressions used in both the provisions i.e. ss. 11(5) and 13(1)(d) are 'investment' and deposit . Former expression means to lay out money in business with a view to obtain income on profit. Deposit, on the other hand, means that which is placed anywhere, as in any one's hands for safe-keeping, something entrusted to the care of another. These two expressions have been used in cognate sense and have to be understood as such. In order to cons .....

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rary accommodation. The words "investment" "deposit" and "loan" are certainly different. The word 'deposit' does not cover transaction of loan which can be more appropriately described as direct bailment. The essence of deposit is that there must be a liability to return it to the party by whom or on whose behalf has been made on fulfilment of certain conditions. In the commercial sense the term is used to indicate the aforesaid transaction as deposit of mon .....

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deposit as has been factually found by the Tribunal. The conclusion being essentially factual, no question of law arises out of the order of the Tribunal. 14. The assessee relied upon the decision of Hon ble High Court of Allahabad, in the case of CIT Vs. M/s. Kanpur Subhash Shiksha Samiti in (2013) Tax Pub (DT) 2655 (All HC). The Hon ble High Court, while deciding the issue held that when loan given from out of 15% of income, section 13(1)(d) of the Act cannot be applied. The relevant portion .....

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he assessee. 15. Considering the facts and circumstances of this case and also following the judicial precedents, we are of the opinion that the A.O. was erred in denying exemption u/s 11 of the Act. The CIT(A) without appreciating the facts has confirmed the order passed by the A.O. Therefore, we set aside the order passed by the CIT(A) and direct the A.O. to allow the exemption u/s 11 of the Act. 16. The next issue that came up for our consideration is disallowance of expenditure under the pro .....

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the Act are applicable. It is the contention of the assessee that the income of the society has to be computed under the head income from other sources. The disallowance of expenditure u/s 40(a)(ia) for non-deduction of TDS is not applicable, when income is computed under the head income from other sources. 17. The A.O. computed income under normal provisions of profits & gains of business or profession. The A.O. gave his own reasons for not applying the provisions of section 11 of the Act. .....

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assessee is eligible for exemption u/s 11 of the Act. Having said that let us examine whether the provisions of section 40(a)(ia) of the Act are applicable when income is computed u/s 11, 12 & 13 of the Act. Chapter III deals with income, which do not form part of total income. Section 11, 12 & 13 deals with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or soc .....

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e with provisions of section 28 to 43D of the Act. Therefore, the provisions of section 40(a)(ia) of the Act is relevant if income is computed under the head Profits & Gains of business or profession . In the present case on hand, we held that the assessee is eligible for exemption u/s 11 of the Act by virtue of registration u/s 12A of the Act. The income of any society enjoying benefit of exemption u/s 11 of the Act is exempt from tax subject to certain conditions. If such conditions are fu .....

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d by invoking the provisions of section 40(a)(ia) of the Act, it leads to a situation where assessee income available for application is enhanced without being any real income for application for charitable purpose, which leads to an absurd situation where the trust/society enjoying exemption u/s 11 of the Act have to pay taxes. Therefore, we are of the opinion that when income is computed u/s 11 of the Act, the provisions of section 40(a)(ia) of the Act is not applicable. 18. The assessee relie .....

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ome chargeable under the head profits and gains of business or profession under section 28. The exception in Section 40 is carved out, only for the purpose of Section 28 and not for computing the exemption of income of a charitable trust under Section 11. The disallowance made under Section 40(a) will only go to enhance the business profit of an assessee whose income is assessable under section 28 and not otherwise. Hence, provisions of section 40(a) are not applicable in case of charitable trus .....

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sec. 40(a)(ia) and 43B are applicable, when income is computed under sec. 11, 12 & 13 of the Act. Chapter III deals with incomes which do not form part of total income. Sce. 11, 12 & 13 deals with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax, if such conditions are fulfilled. Sc. 40(a)(ia) and sec. 43B are falls under chapter IV .....

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ad profits and gains of business or profession. In the present case on hand, the income of the assessee is eligible for exemption under sec. 11 of the Act by virtue of registration under sec. 12A. The income of any trust/society, enjoying exemption u/s 11, is exempt from tax, subject to certain conditions. If, such conditions are fulfilled, the whole income of such trust is exempt from tax. The concept of computation of income under section 11 is real income concept, which is computed on the pri .....

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