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TMI Blog2018 (2) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... al schools & institutions, in spite of the appellant is existing for charitable (education) purposes and complying with all the applicable provisions of section 11 of the Act. 3. The learned Commissioner Of Income Tax (Appeals) is erred in fact and in law in confirming the action of the Assessing Officer in coming to conclusion that the Appellant has earned unreasonable profit and thereby it is existing for purposes of profit; and hence ineligible to claim exemption under section 11, in spite the Appellant got only reasonable surplus. 4. The learned Commissioner Of Income Tax (Appeals) is erred in fact and in law in confirming the action of the Assessing Officer in coming to conclusion that only 15% of net educational income (gross educational income less expenditure towards educational purpose) is to be taken into consideration for accumulation under section 11(1)(a); as against Appellant's contention for accumulation is that of 15% of gross educational income." 5. The learned Commissioner Of Income Tax (Appeals) is erred in fact and in law in confirming the action of the Assessing Officer in denying the alternate exemption under section 10(23C)(vi) in spite the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the pre-dominant object of the activity is making profit, whereas its objects are primarily for serving the charitable purpose. Here, the purpose of the assessee is submerged by profit making motive in the guise of charitable trust. If the profit/surplus arises as a result of incidental, it can be accepted that the assessee is not engaged in profit making. d) Having regard to the facts and circumstances, of the case, one can come to the conclusion that the dominant object of the assessee is profit making, as can be seen that the assessee is making systematic profit year after year. 20. As observed by the Hon'ble courts, in the cases referred, the crucial condition is that surplus should result only incidentally and should not be aimed for. If substantial profits are earned in year if (it) would be the duty of the institution to lower its fees for the subsequent year so that such profits are not intentionally generated. If profits continue year after year, then it cannot be said that the surplus are due to incidental. 21. The Hon'ble Supreme Court's order in the case of Queen's Educational Society Vs. Commissioner of Income Tax (CA No.5167 of 2008-SC), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come to wrong conclusion that the appellant was making huge profits without appreciating the fact that after deduction of the depreciation from the surplus generated, the profits would only 18% of the gross receipts. He further submitted that the decision of the Hon'ble Karnataka High Court in the case of Visvesvaraya Technological University Vs. ACIT (2014) 362 ITR 279 (Kar) relied upon by the Assessing Officer came to be over-ruled by the Hon'ble Apex Court in the case of Visvesvaraya Technological University Vs. ACIT (384 ITR 37). He further submitted that carry forward of excess income over expenditure should be calculated on the gross receipts not on the net receipts and reliance was placed on the decision of the co-ordinate bench of the Tribunal in the following cases:- i. DCIT, Bangalore Vs. M/s Peoples Education Society (9-6-2017) ii. The Capuchin Friar Services Society Vs. DCIT (9-10-2015) iii. Jyothy Charitable Trust Vs. DCIT (14-8-2015) 5.2 On the other hand, ld DR placed reliance on the orders of the lower authorities. 5.3 We heard rival submissions and perused the material on record. The only issue in the grounds of appeal is whether the Assessing Officer wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pril, 2002, the period of the accumulation of the amount exceeding fifteen per cent of its income shall in no case exceed five years; and] 17[(b) does not invest or deposit its funds, other than- (i) any assets held by the fund, trust or institution 18[or any university or other educational institution19 or any hospital or other medical institution] where such assets form part of the corpus of the fund, trust or institution 20[or any university or other educational institution or any hospital or other medical institution] as on the 1st day of June, 1973; 21[(ia) any asset, being equity shares of a public company, held by any university or other educational institution or any hospital or other medical institution where such assets form part of the corpus of any university or other educational institution or any hospital or other medical institution as on the 1st day of June, 1998;] (ii) any assets (being debentures issued by, or on behalf of, any company or corporation), acquired by the fund, trust or institution 22[or any university or other educational institution23 or any hospital or other medical institution] before the 1st day of March, 1983; (iii) any accretion to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitution], being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business: Provided also that any 30[notification issued by the Central Government under sub-clause (iv) or sub-clause (v), before the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President*, shall, at any one time31, have effect for such assessment year or years, not exceeding three assessment years] (including an assessment year or years commencing before the date on which such notification is issued) as may be specified in the notification:] 32[Provided also that where an application under the first proviso is made on or after the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President,* every notification under sub-clause (iv) or sub-clause (v) shall be issued or approval under 33[sub-clause (iv) or sub-clause (v) or] sub-clause (vi) or sub-clause (via) shall be granted or an order rejecting the application shall be passed within the period of twelve months from the end of the month in which such application was rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educational institution or hospital or other medical institution, as the case may be, is established : Provided also that where the fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) is notified by the Central Government 40[or is approved by the prescribed authority, as the case may be,] or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via), is approved by the prescribed authority and subsequently that Government or the prescribed authority is satisfied that- (i) such fund or institution or trust or any university or other educational institution or any hospital or other medical institution has not- (A) applied its income in accordance with the provisions contained in clause (a) of the third proviso; or (B) invested or deposited its funds in accordance with the provisions contained in clause (b) of the third proviso; or (ii) the activities of such fund or institution or trust or any university or other educational institution or any hospital or other medical institution- (A) are not genuine; or (B) are not being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional purpose and without any profit motive. In the present case, the Assessing Officer had come to conclusion that the appellant existed for only for profit motive as accorded to him, it derived profit of more than 26%. The appellant had disputed the calculation of the percentage of profit by submitting that depreciation should also be considered as part of expenditure. Be that as it may, the Assessing Officer had to come this conclusion drawing support from the decision of Hon'ble Karnataka High Court in the case Visvesvaraya Technological University Vs. ACIT (362 ITR 279). In this decision, the Hon'ble Karnataka High Court held that so long as the institution is making a reasonable surplus, the institution would not cease to be one existing solely for educational purpose with object not to make profit. The Hon'ble High Court, while dealing with the issue what could be 'reasonable surplus' held that an institution making a profit 500 crores with a span of about 10 years cannot be termed as a 'reasonable surplus'. This principle was reiterated by the Hon'ble Apex Court Visvesvaraya Technological University Vs. ACIT (Supra), wherein the Hon'ble Apex Court, after referring to its e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ascertain whether the institute is carried on with the object of making profit or not it is the duty of the prescribed authority to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established." (Paragraph 37) The above principle has been specifically reiterated in paragraph 19 of the decision in Queen's Educational Society (supra) in the following terms:- "The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall out of Section 10(23C) is to ignore the language of the section and to ignore the tests laid down in Surat Art Silk Cloth case [CIT v. Surat Art Silk Cloth Manufacturers' Assn.[1980] 2 SCC 31], Aditanar case [Aditanar Educational Institution v. CIT [(1997) 3 SCC 346] and American Hotel & Lodging case [American Hotel & Lodging Assn. Educational Institute v. CBDT [(2008) 10 SCC 509]. It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit." 8. In the present case, we find that during a short period of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accumulation for application in future has to be calculated on gross receipts or net receipts after deduction of revenue expenditure. The Assessee claimed accumulation of income for application for charitable purpose at 15% of the gross receipts. The AO was of the view that accumulation will be allowed only to the extent of 15% of the income after revenue expenditure. In other words income to be set apart u/s.11(1)(a) of the Act has to be computed at 15% of the net income i.e., gross receipts minus revenue expenditure and not on the gross receipts as claimed by the Assessee. Since in the case of the Assessee, the gross receipts after revenue expenditure was nil, the AO denied the benefit of accumulation to the Assessee. 16. On appeal by the Assessee, the CIT(A) confirmed the order of the AO. Hence ground No.4 raised by the Assessee before the Tribunal. 17. The issue to be decided is therefore as to whether for the purpose of computing accumulation of income of 15% under Sec.11(1)((a) of theAct, one has to take the gross receipts or gross receipts after expenditure for charitable purpose i.e., the net receipts. This is issue is no longer res integra and has been decided by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 ITR 620 (Ker) (supra) wherein it is held as under : "At the outset, the statutory language of s. 11(1)(a) of the IT Act, 1961, relates to the income derived by the trust from property. The trust is required to be wholly for charitable or religious purposes, and the income is expected to have relation to the extent to which such income is applied to such purposes in India. It is thereafter the statutory provision proceeds further that such income is not to be understood to be in excess of 25 per cent of the income from such properties. In other words, the very language of the statutory provision under consideration sets apart 25 per cent of the income from the source of property with reference to the extent to which such income is applied for such purposes, charitable or religious. In other words, for the purpose of s. 11(1)(a) of the Act, the income in terms of relevance would be the income of the trust from and out of which 25 per cent is set apart in accordance with the spirit of the statutory provision." This means that, when it is established that trust is entitled to full benefit of exemption under s. 11(1), the said trust is to get the benefit of twenty-five per cent an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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