TMI Blog2021 (2) TMI 528X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as application of income. Payment of scholarship and salary to Mrs. Aarti Rai - In so far as payment of salary is concern, there is no reason for making any part disallowance for the reason that, firstly; because she has been actively involved in set up of Banyan Tree School and has been rendering services; and secondly no adverse material has been brought on record that her services and other contribution is not in commensurate with the payment of salary. Payment of scholarship - 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 ₹ 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. We agree with the other contention of the learned counsel that, only to the extent of expenditure incurred on scholarship of ₹ 13.36 lakhs for which there is a violation under section 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome because there was an obligation of the part of the trust to refund as and when necessary claim is made by the student. Thus, such an addition is unwarranted. Disallowance of 50% of maintenance and fuel expenses - As clearly stated that the cars have been utilised purely for the use of the Appellant Trust and for various high positioned faculty members, then adhoc disallowance cannot be made for personal use or it can be inferred or presumed to be not utilised for the activities of the Trust. Once the car is used for officials, like, Dean, Professors and other faculty members, then usage of car for such officials of the Trust cannot be held to be for personal benefit or for non-official purposes. Accordingly, such an adhoc disallowances is directed to be deleted. Donation - we find that no details have been provided and the purpose for making such donation. Therefore, no interference is called for in the finding of the Assessing Officer and CIT(A) as nowhere it has been explained about the nature of donation and its purpose. Exemption under section 11 to the assessee on the ground that assessee runs an institution for elite class of the society her sole purpose i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the appellant, is violative of the principles of natural justice and is, therefore, illegal and bad in law. 2. That the Commissioner of Income Tax (Appeals) erred on facts and law in upholding the action of the assessing officer in denying the benefit of exemption u/s. 11 and 12 of the Income Tax Act, 1961 ( the Act ) on the ground that the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 ₹ 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 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 ad-hoc addition of 50% of repairs and car maintenance expenses amounting to ₹ 7,09,468, on the ground that no log book was main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... `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 detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatus of an AOP. 8. Apart from that, Assessing Officer has noted that there is a miscellaneous income on account of student security which he noted for various years in the following manner:- Students Security Opening Balance Closing Balance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal training center, namely, Roshni , for the socially economically backward section of the society in Lodhi Institutional area, New Delhi. Mrs. Malvika Rai was awarded the Indira Gandhi Priyadarshini award for the year 1996 as acknowledgment of her services to the nation and the society. Mrs. Malvika Rai was Chairperson of the `IILM Under- Graduate Business School (in short `IILM UBS ), run by the appellant at Lodhi Road, offering various management programs in collaboration with the University of Bradford, U.K. Mrs. Malvika Rai was also chairperson of the academic council of IILM-UBS. Mrs. Malvika Rai was regularly gets involved in interaction with various academicians, educationists, Vice Chancellors and faculties of several Universities and Management Institutes of USA , UK and other countries, with a view to upgrade the level of providing education in the various educations institutions of which she is a part. Mrs. Malvika Rai was on the Editorial Board of the quarterly management magazine of the appellant, namely The EDGE . Mrs. Malvika Rai was a member of the Advisory Board of the School of Management, University of Bradford, U.K. Mrs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rai as ₹ 16,20,000 p.m. , whereas actual remuneration paid was ₹ 16,20,000 for the entire year and not ₹ 16,20,000 p.m. This fundamental mistake, it is submitted, vitiates the entire conclusion of the CIT(A) on the aforesaid issue; (b) Secondly, the CIT(A) proceeded on a flawed premise that the appellant did not justify how the educational qualification of Mrs. Malvika Rai is commensurate with the salary which she is drawing whereas the legal requirement is to examine the remuneration based on the services being rendered. The only requirement in law is that the salary paid should not be excessive or unreasonable having regard to services rendered. The services rendered have to be benchmarked not only with reference to the educational qualification of the person(s) specified in section 13 of the Act but also the requisite experience; (c) Thirdly, none of the comparative material/ instances placed on record and vital for adjudication of the issue have been considered by the CIT(A); (d) Fourthly, nothing has been brought on record to controvert any of the factual submissions of the appellant; (e) Fifthly, none of the authorities (the assessing officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alvika Rai is seen meeting with Mr. Patrich Rittee from International Baccalaureate Organisation 212-213 3 Alumni Association get-together meeting. 214-215 4 Orientation programme at IILM Undergraduate School 216 5 3 days festival Mosaic for IILM students. Mosaic, a platform for exchange of talent ranging from creativity of words to expression in writing attended by Finest Business Schools from India 217 7 Convocation ceremony wherein Mrs. Malvika Rai is seen with Kumari Selja, Union Minister of State, Ministry of Urban Employment and Prof. Badal Mukherji, Ex Director, Delhi School of Economics 218 9 Graduation ceremony of students of IILM UBS 219-222 11 Lecture to students by Dr E. Sreedharan being guided by Mrs Malvika Rai. 223 12 Spiritual lecture to students by Sant Shri Murari Bapuji, being guided by Mrs Malvika Rai 224 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 section 13(1)(c) read with section13(2)(c) there is no bar on payment of salary, etc., to the persons mentioned in section 13(3) of the Act for the services rendered by such persons. The law only provides that if payment is made to persons mentioned in section 13(3) of the Act in respect of services rendered by such persons, the same should not be unreasonable. 20. Emphatic reliance in this regard was placed on the decision of Hon ble Delhi High Court in the case of Pariwar Seva Sansthan: 254 ITR 268 (Del) . In that case, the Revenue filed appeal against the decision of the Tribunal holding that since payments made to parties specified under section 13(3) was reasonable and not excessive, there was no violation of section 13(1)(c) of the Act. Affirming the decision of the Tribunal as not given rise to any question of law, the Hon ble Court held as under: Heard. This is an appeal under section 260A of the Income-tax Act, 1961 ( the Act ). The ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonable 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 primarily challenged the question as to the reasonableness of salary. That plea was accepted in view of the conclusions for 1995- 96. The extracted portion of the order passed by the Tribunal goes to show that the conclusions are essentially factual giving rise to no question of law. Accordingly, we do not entertain this appeal. Dismissed. 21. Learned counsel further submitted that as per the judicial precedents the onus is on the Revenue to prove that payment to the person specified in section 13(3) is unreasonable by placing on record the matter to show the market value of the services rendered and how the payment is excessive and unreasonable. 22. Coming to the following payments made to Mrs. Aarti Rai in respect of services rendered by the institution; Salary of ₹ 2,57,000, out of which addition of ₹ 89,750 made by AO; and Scholarship of ₹ 13.36 lacs for pursuing higher education, the relevant facts as culled ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 specifically pointed out to the CIT (A) in the written submission that similar sponsorship has also provided to other faculties Ms. Meenu Bhatia and Ms. Sangeeta Yadav for the purpose of upgrading the skills which goes to support scholarship was also given to other faculty members. He further submitted that scholarship was granted in India and the expenditure was incurred in India and not outside India. Simply because the scholarship was utilised by Ms. Aarti Rai for education outside India, it does not mean that expenditure was incurred outside India. Regarding allegation of the Assessing Officer that payment to Mrs. Aarti Rai was not mentioned, is factually incorrect in as much as the scholarship expenditure was clearly declared as line item in the income expenditure account which is evident from page 50 of the paper book. Thus, there was no violation of section 13(1)(c) on account of payment of rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to consider capital expenditure incurred during the year as application of income towards charitable purposes while computing income under section 11 of the Act. Ground no.21 is accordingly allowed. (emphasis supplied) 26. Accordingly, he submitted that in the earlier assessment year, i.e., 2006-07, there has been over application of income and in this year almost 92.8% of the income was applied to charitable activities, which is more than 85%. In so far as the allegati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 profits are not exempt from tax, except in the cases falling under clause (a) or clause (b) of section 11(4A) of the Income-tax Act. As the maximum marginal rate of tax under the new proviso to section 164(2) applies to the whole or a part of the relevant income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the Income-tax Act in regard to investment pattern or use of the trust property for the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 ₹ 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 upon the appellant, even security deposit relating to students who have left the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 Rai in violation to section 13(1)(C) read with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled 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 ₹ 2,25,000/- out of the total remuneration paid o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yments 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 ₹ 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 ₹ 13.36 lakhs for which there is a violation under section 13, same should alone be disallowed and entire exemption under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le at maximum marginal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 13.36 lakhs only. 45. Coming to the computation of income 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... donation and its purpose. Thus, this issue is decided against. 50. Consequently, appeal for the Assessment 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 mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registration, then ld. Assessing Officer cannot questioning the charitable character of the assessee. Accordingly, the order of the ld. CIT (A) on this core is upheld and the Revenue s appeal is dismissed on this core. 55. Regarding salary payment to Mrs. Malvika Rai rendering services for running of educational institution of the appellant trust, we have already given our detail finding in the appeal for the Assessment Year 2007-08 above, and thus, our finding will mutatis mutandis in this year also. 56. Similarly, the other grounds that in case the remuneration paid to Smt. Malvika Rai is treated as a 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 ₹ 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 agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and in law, the Ld. CIT (A) has erred in law in ignoring the fact that luxury sedan cars were provided to the trustees and controlling persons of the trust. Assessee failed to justify that maintenance and fuel expenses of cars were exclusively incurred for the aims and objects of the assessee. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in law in ignoring the fact that due to the fact that assessee was denied benefits of exemptions u/s.11 12 of the I.T. Act for infringement of section 13(1)(c) of the Act, therefore, AO has rightly disallowed a sum of ₹ 10,08,25,000/- being 50% of donation. 63. 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 ₹ 17,82,060 as against the Nil income disclosed to the assessee which included estimated disallowance of 50% of the expense of maint ..... X X X X Extracts X X X X X X X X Extracts X X X X
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