TMI Blog2018 (12) TMI 1553X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of Section 13(1). Hence, even if any part of the income or property which is found to be used or applied for the benefit of the persons specified to in sub-section (3) of Section 13, the benefit of Sections 11 and 12 is not available only to that extent and the claim of the assessee cannot be denied in toto. Accordingly we hold that the denial of exemption to the assessee U/s 11 and 12 of the Act is not justified except to the extent where the specific part of the income or property is found to be used or applied for the benefit of specified persons. Hence, the orders of the authorities below qua this issue are set aside and both the grounds of the assessee’s appeal are allowed. Addition on account of interest free advances to specified persons - Held that:- The assessee has clearly made out a case that the land in question was in the possession of the assessee and therefore, the payment made under the agreement for purchase of land. Once the possession of land was already transferred to the assessee then the payment in question was evidently for purchase of land. Therefore, merely because the conveyance deed was not registered as the assessee has not paid the balance payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d circumstances of the case, the ld Assessing Officer has erred in rejecting the claim of the assessee for exemption U/s 11 and 12 of the Income Tax Act, 1961. 2. Under the facts and circumstances of the case, the ld. Assessing Officer has erred in applying the provisions of Section 164(2) of the IT Act for assessing the income of the society as business income after denying the exemption U/s 11 of the Act. 3. Under the facts and circumstances of the case, the ld CIT(A) has erred in confirming the addition of ₹ 60,60,000/- made by the A.O. in violation of Section 13(1)(c) r.w.s. 13(2)(b) of the Income Tax Act, 1961 on account of interest free advances to the specified persons. 4. Under the facts and circumstances of the case, the ld. CIT(A) has erred in confirming the addition of ₹ 4,68,55,950/- by treating the development receipts as revenue receipts instead of capital receipts for development purposes without considering the earlier judgments of Hon ble ITAT. 5. Under the facts and circumstances of the case, the ld. CIT(A) has erred in confirming the addition of ₹ 71,18,248/- (Rs. 2997140/- of registration receipts, ₹ 27500/- of book ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and 12 of the Act cannot be denied so long the assessee is registered U/s 12AA of the Act. He has further contended that only to the extent of the excess payment to the specified persons can be treated as the income applied for non-charitable purposes and consequently the amount to the extent of excess payment or benefit given to the specified persons can be treated as income not eligible for exemption U/s 11 and 12 of the Act. The Assessing Officer has denied the claim of exemption U/s 11 and 12 of the Act in entirety which is not the spirit of provisions of Section 13 of the Act. Thus, the ld AR has submitted that once the Tribunal has allowed the claim for the A.Y. 2013-14 and 2014-15 then the denial of exemption U/s 11 and 12 of the Act is not justified and the same may be allowed to the assessee for the year under consideration. 4. On the other hand, the ld CIT-DR has relied upon the orders of the authorities below and submitted that the Assessing Officer has clearly made out a case of violation of provisions of Section 13(1) and 13(3) of the Act and consequently the assessee is not eligible for exemption U/s 11 and 12 of the Act so as to exclude the income from total inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3),- (a) if any part of the income or property 47 of the trust or institution is, or continues to be, lent 47 to any person referred to in sub-section (3) for any period during the previous year without either adequate security 47 or adequate interest or both; (b) if any land, building or other property 47 of the trust or institution is, or continues to be, made available for the use of any person referred to in sub-section (3), for any period during the previous year without charging adequate rent or other compensation; (c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services; (d) if the services of the trust or institution are made available to any person referred to in sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sections 11 and 12 is not available only to that extent and the claim of the assessee cannot be denied in toto. Accordingly we hold that the denial of exemption to the assessee U/s 11 and 12 of the Act is not justified except to the extent where the specific part of the income or property is found to be used or applied for the benefit of specified persons. Hence, the orders of the authorities below qua this issue are set aside and both the grounds of the assessee s appeal are allowed. 6. Ground No. 3 of the appeal is regarding the addition of ₹ 60,60,000/- on account of interest free advances to specified persons. The ld AR of the assessee has submitted that the assessee Trust advanced a sum of ₹ 5,05,00,000/- to M/s Perennial Real Estate Pvt. Ltd. for purchase of land vide agreement dated 27/8/2012. The Assessing Officer held that the provisions of Section 13(2) of the Act are attracted on such advances as the trustees of the assessee are also Director in the said company. The ld AR has submitted that since it is not a loan or advance given to the company but the money was paid for purchase of the land and it was not either used or applied directly or indirectly for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to the company in which the trustees of the assessee are also Director and therefore, they are having substantial interest in the said company. However, since the advance in question was given under an agreement dated 27/08/2012 for purchase of land measuring 26,720 Sq. Meters for a total consideration of ₹ 8.0. crores then it is not a simple case of applying the income or property for the benefit of the specified persons. It is part consideration for purchase of land and in absence of any allegation that the consideration was more than the fair market rate or the prevailing price of the land, payment made under the agreement for purchase of land cannot be considered as the income or property of the trust is used or applied for the benefit of the specified persons. The assessee has clearly made out a case that the land in question was in the possession of the assessee and therefore, the payment made under the agreement for purchase of land. Once the possession of land was already transferred to the assessee then the payment in question was evidently for purchase of land. Therefore, merely because the conveyance deed was not registered as the assessee has not paid the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs. Union of India in Civil Appeal No. 2699 of 2001 dated 27/04/2004 and submitted that the Hon'ble Supreme Court has held that as per the recommendation of the Duggal Committee, development fees can be charged from 10 to 15% of tuition fee and the same shall be treated as capital receipt. The said fee shall be collected only if the school maintained the depreciation reserve fund. The Hon'ble Supreme Court has further held that the development fee for supplementing resources for purchase, upgradation and replacement of furniture and fixtures as well as equipments is justified. Thus, the ld AR has submitted that even the Hon'ble Supreme Court has held that the development fee is a capital receipt to be used by the institutions for supplementing the resources for purchase of the requisite furniture, fixtures, up-gradation etc. He has relied upon the decision of the Hon ble Karnataka High Court in the case of CIT Vs. Children s Education Society 358 ITR 373 and submitted that the Hon'ble High Court has held that building fund received from students is a capital receipt in nature and therefore, it is created directly to the corpus fund. The ld AR has then relied upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipt by the trust, the development fees is regarded as capital receipt for no specific reason; (b) As per the ledger of Development Reserve, there are no amounts debited against the reserves, which shows that the entire development fee receipts are treated separately only for the purposes of claiming the same as capital receipts and not for expenditure purposes. The capital expenditure incurred for infrastructure development and on fixed assets is not debited to the Development reserve account which shows that the assessee has itself not utilized the amount in the development reserve for the development purposes as claimed. (c) Further, this also shows that on one hand, the assessee intends to claim depreciation as well as investment/purchase of fixed assets towards application of fund as allowed u/s 11, however, at the same time the assessee intends to immune the funds received as development fees from the tax liability by directly taking them to the balance sheet in the form of development reserve. (d) The assessee claims that such funds were not utilized for operational purposes but only for the development of the institution. However, the books of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntains the depreciation reserve fund equivalent to the depreciation charged in the revenue accounts and collected under the revenue head as well as income generated from the investments made out of this fund. Thus, the State Govt. vide these orders dated 18/7/2012 and 04/9/2012 has allowed the technical institutions to charge development fee not exceeding 15% of total tuition fee and further the said fee should be treated as capital receipt and can be utilized only for specific purposes such as purchase or replacement of infrastructure, up-gradation of institution, special amenities to students etc. Hence, the assessee is having no discretion about utilization of the development fee charged from the students but the said fee has to be utilized for the specific purpose as allowed by the Government. The Hon'ble Supreme Court in the case of Modern School Vs Union of India (supra) while considering the provisions of Delhi School Education Act, 1973 as well as the Delhi Education Rules has observed as under: The judgment in TMA Pai Foundation's case was delivered on 31.10.2002. The Union of India, State Governments and educational institutions understood the majority jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ructure must be fixed keeping in mind the infrastructure and facilities available, investment made, salaries paid to teachers and staff, future plans for expansion and/or betterment of institution subject to two restrictions, namely, non-profiteering and non- charging of capitation fees. It was held that surplus/profit can be generated but they shall be used for the benefit of that educational institution. It was held that profits/surplus cannot be diverted for any other use or purposes and cannot be used for personal gains or for other business or enterprise. The Court noticed that there were various statutes/regulations which governed the fixation of fee and, therefore, this Court directed the respective State Governments to set up committee headed by a retired High Court Judge to be nominated by the Chief Justice of that State to approve the fee structure or to propose some other fee which could be charged by the institute. In the light of the judgment of this Court in the case of Islamic Academy of Education (supra) the provisions of 1973 Act and the rules framed thereunder may be seen. The object of the said Act is to provide better organization and development of sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferring the funds from the Recognized Unaided School Fund to the society or the trust or any other institution and, therefore, clause (8) was in conflict with rule 177. We do not find merit in the above arguments. Before analyzing the rules herein, it may be pointed out, that as of today, we have Generally Accepted Accounting Principles (GAAP). As stated above, commercialization of education has been a problem area for the last several years. One of the methods of eradicating commercialization of education in schools is to insist on every school following principles of accounting applicable to not-for-profit organizations/ non- business organizations. Under the Generally Accepted Accounting Principles, expense is different from expenditure. All operational expenses for the current accounting year like salary and allowances payable to employees, rent for the premises, payment of property taxes are current revenue expenses. These expenses entail benefits during the current accounting period. Expenditure, on the other hand, is for acquisition of an asset of an enduring nature which gives benefits spread over many accounting periods, like purchase of plant and machinery, building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be a charge on the savings. Therefore, capital expenditure cannot constitute a component of the financial fees structure as is submitted on behalf of the schools. It also shows that salaries and allowances are revenue expenses incurred during the current year and, therefore, they have to come out of the fees for the current year whereas capital expenditure/capital investments have to come from the savings, if any, calculated in the manner indicated above. It is for this reason that under Section 17(3) of the Act, every school is required to file a statement of fees which they would like to charge during the ensuing academic year with the Director. In the light of the analysis mentioned above, we are directing the Director to analyse such statements under section 17(3) of the Act and to apply the above principles in each case. This direction is required to be given as we have gone through the balance- sheets and profit and loss accounts of two schools and prima facie, we find that schools are being run on profit basis and that their accounts are being maintained as if they are corporate bodies. Their accounts are not maintained on the principles of accounting applicable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recognised unaided schools are entitled to set up a Development Fund Account? In our view, on account of increased cost due to inflation, the management is entitled to create Development Fund Account. For creating such development fund, the management is required to collect development fees. In the present case, pursuant to the recommendation of Duggal Committee, development fees could be levied at the rate not exceeding 10% to 15% of total annual tuition fee. Direction no.7 further states that development fees not exceeding 10% to 15% of total annual tuition tee shall be charged for supplementing the resources for purchase, upgradation and replacement of furniture, fixtures and equipments. It further states that development fees shall be treated as Capital Receipt and shall be collected only if the school maintains a depreciation reserve, fund. In our view, direction no.7 is appropriate. If one goes through the report of Duggal Committee, one finds absence of non-creation of specified earmarked fund. On going through the report of Duggal Committee, one finds further that depreciation has been charged without creating a corresponding fund. Therefore, direction no.7 seeks to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cational institutions run by the assessee have received substantial donations. The amount so received from the Building Fund is not included in the income and expenditure account of the society. The amounts received are accounted under the Building Fund. Building is to be constructed only for the educational institution run by the society. The object of donation is charity in nature. Therefore the Tribunal granted the benefit of exemption. Accordingly, it was held by the Hon'ble Supreme Court as well as the Hon'ble High Court that the building fund is a capital in nature and therefore is credited directly to the corpus fund and the same will not be included in the income and expenditure account of the Trust/Institution. Having considered the facts and circumstances of the case as well as the decisions relied upon by the ld AR, we hold that the development fee received by the assessee from the students as per the guidelines fixing the fee structure by the State Government for the technical institutions and applying the other conditions as specified in the orders of the State Govt. is capital in nature and not revenue. The decision as relied upon by the ld CIT-DR in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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