9911796707
TMI Blog2021 (2) TMI 528X X X X Extracts X X X X X X X X Extracts X X X X ..... rust Deed dated 01.04.2001 for the predominant charitable object of imparting education. The assessee-trust was initially declared/ setup in the name of `Ram Krishan Kulwant Rai Charitable Trust' and subsequently, the name of the trust was changed to 'IILM Foundation' vide amendment Deed dated 26th July, 2007. The assessee was duly registered under section 12A of the Income Tax Act, 1961 ("the Act") vide registration granted on 01.02.2001 read with modification dated 02.06.2008. In furtherance of its predominant object of imparting education, during the year under consideration, the assessee was running the following educational institutions: * Banyan Tree World School at Gurgaon. * IILM Under Graduate Business School at Lodhi Road. * IILM Early College at Lodhi Road. 3. We will now take up the appeal for the assessment year 2007-08, wherein the assessee has challenged the impugned order of CIT(A)-XII, New Delhi vide order dated 31.12.2010 on the following grounds of appeal: "1. That on the facts and circumstances of the case, the order, dated 31.12.2010, having been passed by the Commissioner of Income Tax (Appeals) without affording adequate opportunity of being heard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls) erred on facts and in law in upholding the action of the assessing officer in assessing the income of the appellant as a business entity, after holding the activities of the appellant to be non-charitable under section 2(15) of the Act. 5. That the Commissioner of Income Tax(Appeals) erred on facts and in law in not adjudicating the alternative ground raised by the appellant that, assuming without admitting, there were violation(s) of section 13, still exemption under section 11/12 of the Act should not have been denied with respect to the entire income. 6. While computing income of the appellant as a business entity after denying exemption under sections 11/12 of the Act, the Commissioner of Income Tax (Appeals) erred on facts and in law in: (a) affirming the action of the assessing officer in making addition of Rs. 34,41,987 out of refundable security deposit of the students. (b) observing that although appellant's obligation to refund the above security deposits existed, but since the appellant did not refund the same, suo moto, the appellant was running on commercial principles. 7. While computing income of the appellant as a business entity after denying exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d which again was without offering any opportunity of hearing. Thus, he submitted the additional evidences filed by the assessee is critical for substituting the salary payment to Mrs. Malvika Rai, being the Chairperson of IILM Under- Graduate Business School (in short `IILM UBS') and the same should be admitted in terms of Rule 29 of ITAT Rules,1963. 5. The assessing officer on perusal of the bank book maintained by the Banyan Tree School which falls under IILM Foundation, noted that following payments have been made to Smt. Malvika Rai and Smt. Aarti Rai, who falls within the category of a specified person within the meaning of Section 13(3):- Bank Book Page No. Date Narration as per bank book 834 29.05.2006 Salary - TDS Aarti Rai 30,000/- Dr. 835 29.06.2006 Salary - TDS Malvika Rai 1,01,250/- Dr. Salary - TDS Aarti Rai 30,000/- Dr. 836 29.07.2006 Salary - TDS Malvika Rai 48,750/- Dr. 839 29.09.2006 Salary - TDS Malvika Rai 37,750/- Dr. 841 28.11.2006 Salary - TDS Malvika Rai 37,750/- Dr. 833 26.04.2006 Salary - TDS Aarti Rai 29,750/- Dr. 6. From the above details, Assessing Officer inferred that these payments are in violation of Section 13(1)(c) read with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Refund Misc. Income 2000-03 6,05,226/- Nil Nil 6,05,226/- 2001-04 8,67,734/- 8,65,734/- 10,000/- 1,10,000/- 2002-05 790000 716075 20000 110000 2003-06 2810000 1607175 210000 1030000 2004-07 3700000 3449625 - 270000 2005-08 3390000 3180000 - 240000 1999-2002 439564 419564 - 20000 Total 240000 2275226/- 9. The AO observed that the appellant has shown only Rs. 1,18,537/- as miscellaneous income, whereas income and amount narrated in the HDFC bank expenses without the name of the relevant student comes to Rs. 22,75,226/-. He also noted that perhaps the students who have graduated during this period have not claimed any refund. Therefore, he has worked out understatement of income of Rs. 34,41,987/- in the following manner. "As per table Rs. 22,75,226/- Students Security 1999-2002 (closing balance) Rs. 4,19,564/- Students Security 2001-04 (closing balance) Rs. 8,65,734/- Total Rs. 35,60,524/- Less Misc. Income as per schedule A/c Rs. 1,18,537/- Understatement of Income Rs. 34,41,987/- 10. Further, Assessing Officer has also made ad hoc disallowance of Rs. 7,09,468/- being maintenance and fuel expenses on car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the CIT(A), the appellant, not only explained the profile alongwith justification for paying salary to Mrs. Malvika Rai, but also produced salary sheets of the appellant for various months for verification by the CIT(A). The appellant, also submitted details of salary paid to various other senior faculties, etc., of the appellant, on sample basis as follows: Mr. B. Bhattacharya Director 90,000 June, 2007 1,20,000 December, 2008 1,20,000 February, 2009 Mrs. Sapna Popli Assistant Director 1,01,166 October, 2007 1,35,331 January, 2007 1,31,786 February, 2009 1,01,166 October, 2007 85,670 October, 2007 13. Learned counsel further submitted that Mrs. Malvika Rai being Chairperson of IILMF was responsible for all the institutions run by the appellant and was in relation to diverse nature of services performed by her which was at par with salary paid to other faculty members, and therefore, it cannot be held salary was excessive/ unreasonable to tax the provision of Section 13(1)(c) read with section 13(3). Learned CIT (A) has decided this issue against the appellant after observing and holding as under: "9.2 The submission given by the appellant and the object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the salary paid. It has not been appreciated that Mrs. Rai had experience of over two decades in the educational field. The CIT(A) has conveniently ignored all other factors, more particularly her diverse experience in the field of education, which adds to her educational qualification. 15. Apart from that. appellant has also placed on record following additional evidences under Rule 29 of ITAT Rules, 1963. * Copies of extracts from the brochure of IILM -UBS (refer page Nos. 1-4 @ 2); * Compilation of various editions of quarterly journal of the applicant Institute, namely 'The Edge' (page Nos. 5-193); * Documentary evidences of various events of the applicant being organized under the guidance of Mrs. Malvika Rai (page Nos.194-229 @ 208, 210, 212, 213, 215, 216, 217, 218, 219) 16. On a perusal of the aforesaid additional evidence placed on record, it was submitted that being Chairperson of 'IILM' as a whole, Mrs. Malvika Rai has been actively engaged in the working of the Institutes and managing the day to day affairs of the schools and colleges run by the appellant. She was a part of the events organized by the schools and has represented IILM before distinguished guests ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l qualification and further stated that the additional evidence pertains to magazine "Edge" published by IILM institute of Higher Education, without realizing that the said educational institute is also part of the appellant. 18. Importantly, the assessing officer in none of the subsequent years has placed on record any material/ evidence to controvert any of the submissions of the appellant. In fact, in the subsequent years, the assessing officer made ad-hoc disallowance as tabulated hereunder: A.Y. Remuneration Paid Disallowed by AO Remarks 2007-08 16,20,000 2,25,000 Subject matter of present appeal 2008-09 16,63,200 16,63,200 Deleted by CIT(A) 2009-10 16,20,000 4,86,000 Deleted by CIT(A) 2010-11 19,08,646 5,72,594 Deleted by CIT(A) 2011-12 16,20,000 NIL No disallowance by AO. 19. In view of the aforesaid profile/ roles and responsibilities and contributions/ services of Mrs. Malvika Rai, it has been submitted that the aforesaid salary paid to her was very much justified and not at all unreasonable/ excessive and cannot, in any manner, be considered as giving of any undue benefit by the appellant. It was further submitted that under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of salary, rent, etc., to Mrs. Sudha Tewari, Chief Executive Officer and Project Coordinator, rent of the house to Mr. G.K. Tewari, husband of Mrs. Sudha Tewari, loan to Tyagi Foundation and expenditure incurred on conferences and clinics. The ld. CIT(A) has discussed all the items in his impugned appellate order at length and held that salary, rent, etc., paid to Mrs. Sudha Tewari was reasonable and for valuable services rendered by her as Chief Executive Officer and Project Coordinator and that the rent of the house paid to Mr. G.K. Tewari was also reasonable considering the location of the house in Green Park, New Delhi. No material has been brought before us to rebut the factual findings of the ld. CIT(A). On consideration of the materials on the file, the past record of the society, the year to year services rendered by Mrs. Sudha Tewari from its inception, we are satisfied that the salary, rent, etc., paid to her was reasonable and was not excessive and the ld. CIT(A) was justified in rejecting these as not valid grounds for rejecting the claim of exemption under section 11 of the Act. ................ ............." 3. For the assessment year 1996-97, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lternative-I: To serve the institution for a minimum period of 5 years at 50% salary as compared to the market norms * Alternative-II: To serve the institution at an Honorarium of Rs. 10,000 per month for atleast 3 years. * In the present case, Ms. Aarti Rai was given scholarship for pursuing higher education in management course from London School of Econmocs, under Alternative-II (supra). * Total fees of the programme was Rs. 10.95 lakhs and hostel expenses were Rs. 2,40,863, which were paid by the appellant as part of the scholarship programme. Ms. Aarti Rai incurred expenses of around Rs. 1 to 1.25 lakh out of her own resources. * Pursuant to the aforesaid, after completing her management programme of around 9 months, she rendered services to the appellant since 1st July, 2007. She worked with Banyan Tree School of the appellant. 23. Ld. Counsel submitted that the CIT(A) while upholding the order of the AO has held that appellant has failed to mention the name of the person who has extended similar scholarship; and also that scholarship amount was incurred by Mrs. Aarti Rai in UK and same was in violation of section 13(1)(c) of the Act. He submitted that it was specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C) [pg. 240-243 of case law PB] 18 * St. Lawrence Educational Society (Regd). vs. CIT: 197 Taxman 504 (Del) [pg. 244-247 of case law PB] * Pinegrove International Charitable Trust vs. UOI: 327 ITR 73 (P&H) The Delhi Bench of the Tribunal in the case of United Education Society vs. JCIT: 178 ITD 716 (Del Trib) categorically been held that capital expenditure incurred during the year has to be considered as application of income for that year. Relevant finding of the Tribunal at para 46 of the said decision are reproduced under: "46. Ground No.21 is regarding not considering capital expenditure incurred during the year as application of income towards charitable purposes while computing income of the assessee society. As per section 11 income of a eligible institution to the extent of which such income is applied to charitable purposes in India is not be included in the total income. The application of the income towards charitable purposes include application towards acquisition of assets i.e. capital expenditure. As we have already held hereinabove that income of the society is to be computed in accordance with the provision of section 11 and 12 of the Act, we direct the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laborately dealt with the decision of the Uttarakhand HC and specifically reversed the said decision [refer para 19 & 20 on page 260]; (c) concurred with the decisions of the Delhi HC in the case of Lawrence Educational Society (Regd.) V. CIT 353 ITR 320 (Del) which followed the decision of the Hon'ble apex Court in the case of Surat Art Silk Cloth Mfrs. Association: 121 ITR 1 (SC) [refer para 24 on page 265]. 29. Without prejudice to submissions made above, he alternatively submitted that even assuming there was a violation of section 13 then entire exemption under section 11 and 12 cannot be forfeited and the exemption should have been denied only to this extent of expenditure/ income amount of alleged violation under section 13. He also referred to CBDT circular no. 387 dated 6.7.1984, which is reproduced hereunder:- "28.6 It may be noted that new sub-section (1A) inserted in section 161 of the Income-tax Act, which provides for taxation of the entire income received by trusts at the maximum marginal rate is applicable only in the case of private trusts having profits and gains of business. So far as the public charitable and religious trusts are concerned, their business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer made addition of Rs. 34,41,987, out of the security deposit, which was computed as under: Particulars Amt. (Rs.) Reason by AO Amount under the heading "Misc. Income" in Table on pg.14 of AO 22,75,226 This is misc. income but only misc. income of Rs. 1,18,537 show in P&L A/c. Student Security 1999-2002 4,19,564 Source and nature unexplained Student Security 2001-2004 8,65,734 Total 35,60,524 Less: Misc. income shown 1,18,537 Understatement of income 34,41,987 32. He submitted that, firstly, the assessing officer failed to appreciate that Rs. 22,75,226 represented repayment/ adjustment out of the student security amount of various years and therefore, the same could not have been treated as income [refer extracts of ledger account attached as Annexure C to the Assessment order]. Secondly, the assessing officer further failed to appreciate that deposits for the batches 2001-04 and 1999-2002 represented refundable security deposit from various students and grossly erred in holding that the appellant failed to explain the source of such deposits. Since the entire amount is refundable by the appellant, in view of the legal obligation up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d person in terms of Section 13. Thus, such an expenditure or application of income cannot be held to be for charitable purposes. Regarding payment/ remuneration made to Mrs. Malvika Rai, he submitted that same has been made from the account of Banyan Tree School where she is not an employee, this goes to show that the fund from the Banyan Tree School has been utilized for making the payment without rendering any services to that school because admittedly she is not an employee of the school nor on the payrolls of the school. Regarding other issues, she has referred to the various observations made by the Assessing Officer and CIT (A) and has strongly relied upon and submitted that all these discrepancies shows that Trust was misused for personal benefit and therefore Assessing Officer and CIT(A) were justified in denying exemptions to the Assessee trust. 35. We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material referred to before us. The main issues involved are; firstly, remuneration paid to Mrs. Malavika Rai in violation of section 13(1)(C) read with section 13(3); secondly, scholarship payment to Mrs. Aarti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itional evidences which were filed in the subsequent year and also analysed by the Assessing Officer and CIT (A) the remuneration paid to Malvika Rai for same set of services has been by and large accepted. Further from perusal of subsequent year's record, it is seen that Smt. Malvika Rai is a Chairperson of ILM group as a whole and her activity engaged in the working of managing the day to day affairs of the school and colleges run by the appellant trust. She was part of various events organised by schools and has represented IILM before various forums. The gist of events and activities carried out has been highlighted in the additional evidence of paper book as incorporated above. Thus, entire activities and services have been duly considered based on same very evidence in the subsequent years from 2008-09 to 2011-12, wherein Ld. CIT(A) has given a categorical finding that there is no violation of section 13(1)(c) after taking into consideration the same material evidence placed before us. Interestingly in 2009-10 and 2010-11 the Assessing Officer has disallowed only part of the remuneration and even in this year the Assessing Officer has only disallowed Rs. 2,25,000/- out of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts made outside India, because if it is reckoned that the appellant Trust has given the scholarship in India but the same has been utilized and applied outside India. Even though she might have rendered services after completing her management program from London school of Economics, that does not justify a payment of huge amount of scholarship for getting the education especially to a category of specified person. For rendering of services for any institution or school affiliated to the appellant Trust a person is compensated by the salary/remuneration and not by incurring any expenditure for sponsorship of higher education from foreign University. Thus, to the extent of Rs. 13.36 lakhs towards the scholarship payment for Ms. Aarti Rai, the same cannot be treated as application of income, and therefore, Assessing Officer and Ld. CIT (A) are justified in disallowing the payment as non application of income. 39. However, we agree with the other contention of the learned counsel that, only to the extent of expenditure incurred on scholarship of Rs. 13.36 lakhs for which there is a violation under section 13, same should alone be disallowed and entire exemption under section 11 canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inal rate of tax' on following event: i. If any fund of the organization has been invested or deposited, for any part of the year, as per section 13(1)(d) read with section 11(5) of the Act; ii. If any part of income has been applied directly or indirectly for the benefit of any of the excluded persons under section 13(1)(c) r.w.s. 13(3) of the Act. However, the section categorically provides that tax shall be charged on the 'relevant income' or 'part of relevant income' which has forfeited exemption at the maximum marginal rate. 41. Thus, on a conjoint reading of section 13(1) and section 164 of the Act, it can be seen that taxability of the income of an organization forfeiting exemption under section 13(1)(c) or 13(1)(d), shall be charged at maximum marginal rates of tax only on that part of income which has forfeited exemption. Thus, where the trust contravenes the provisions of section 13(1)(c) or (d) of the Act, the maximum marginal rate will apply only to that part of the income which has forfeited exemption. 42. Further, the language of section 13(1)(c) and (d) also supports this view which provides to exclude from the total income, 'any income thereof' which as a wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come and taxing of surplus by the Assessing Officer assuming that net profit of 44.4% of the gross income is wholly erroneous and incorrect, because both Assessing Officer and Ld. CIT (A) has failed to consider acquisition of fixed assets and other capital expenditure shown in the utilisation of income as application of income for charitable purposes. During the year, as per the income expenditure account, the total amount actually spent comes to 92.83% which is far less than a statutory limit of 85%. It is no longer res integra that capital expenditure is tantamount to application of income for charitable purposes as held by the Hon'ble Supreme Court and various other High Courts as relied upon by the Ld. Counsel above. Thus, the taxing of the surplus by the Assessing Officer is not justified on facts and in law. 46. In so far as the observation of the Assessing Officer that the assessee cannot be held to be carrying out charitable activity simply because the appellant Trust is not given any concession to the poor/ EWS category students, we do not subscribe to such view. There is no concept under the scheme of the Act that education must be given to the poor. Only th education p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Year 2007-08 is partly allowed. A.Y. 2008-09 51. Coming to the the appeal for the Assessment Year 2008- 09 which has been filed by the Revenue, following issues are involved. Gr. No. Issue Involved Remarks 1 Amendment of objects to include Buddhism - Section 13(1)(b) AO accepted in regular assessments for A.Y.'s 2005-06 and 2006-07. Issue raised for first time in A.Y. 2007- 08 and decided in favour of assessee by CIT(A); no further ground raised by Revenue before ITAT. 2 Remuneration to Mrs. Malvika Rai [Section 13(1)(c)] Decided in favour by CIT(A) in AY's 2008-09 to 2010-11. 3 Ad-hoc disallowance on maintenance and fuel expenses - Computation of income pursuant to denial of exemption AO denied complete exemption and recomputed the income by treating the assessee as a business entity 52. In so far as amendments in the objects made through supplementary Trust Deed dated 19.04.2004, wherein certain clauses in clause of the Trust was inserted for enabling the assessee to teach Buddhism and Buddhist way of living, the Assessing Officer has held that the new clause inserted is in violation of Section 13(1)(b). It has been submitted by the ld. counsel that this iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit to the specified person then only to this extent exemption should be denied will become infructuous, because, we have already held that the payment/remuneration made to Smt. Malvika Rai is not in violation of Section 13(1)(c). 57. So far as ad hoc disallowance of 50% of the maintenance and fuel expenses of Rs. 562194, it is similar to the ground raised in the assessment year 2007-08 and the same is thus, directed to be deleted. A.Y. 2009-10 & 2010-11 58. The appeals for the assessment years 2009-10 and 2010-11 have been filed by the Revenue against separate impugned orders of even date 24.02.2014, passed by CIT(A) wherein CIT(A) has upheld the assessee's claim under section 11. The grounds for both the years are reproduced hereunder:- "Assessment Year 2009-10 & Assessment Year 2010-11 1. On the facts and in the circumstances of the case/and in law, the Ld. CIT(A) has erred in allowing violation of provisions of section 2(15) and 13(1)(c) w.r.t. 13(3) of the Income tax Act 1961 and thereby availing the benefits of exemptions u/s. 11 & 12 without considering the facts as stated by the AO and giving reasons for the same. 2. On the facts and in the circumstances of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing officer has denied the exemption under section 11 to the assessee on the ground that assessee runs an institution for elite class of the society her sole purpose is to make profit and no charitable intention which could be seen its operation and application of fund and in addition to that alleged violation of section 13(3) and was computed the income of Smt. Malvika Rai at Rs. 17,82,060 as against the Nil income disclosed to the assessee which included estimated disallowance of 50% of the expense of maintenance and fuel expenses and 50% of donation from tax exemption. CIT (A) held that once the assessee is carrying out educational activities which is charitable in nature and also granted restriction under section 12A, therefore, the assessee cannot be treated as involved in any trading, commerce or business. As regards adhoc disallowance of 50% of expenses and remuneration paid to Smt. Malvika Rai, he has followed the appellate order for assessment year 2009-10 and 2010-11. 64. Lastly on the issue of 50% of donation relying upon the judgement of Hon'ble Supreme Court in Queen Educational Society vs. CIT (supra) he held that there is no violation of section 11 or 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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