2007 (9) TMI 446 - AT - Income Tax

Pending the registration under section 10( 23C )( vi ) the assessee claimed exemption under sections 11 and 12 of the Act - Charitable Or religious trust - Profit earning activity and not entirely for educational purposes - violation of the provisions of section 13(1)( c ) restrict to claim exemption of section 11 or 12? - denial of benefit of accumulation for delayed filing of Form No.10 - HELD THAT - The first thing to be noted is that all along the assessee has been claiming and being allowed exemption under section 10( 22 ) of the Act which can be allowed only when the assessee is an educational institution and existing solely for educational purposes and not for the purpose of profit. Thus the contention of Assessing Officer that huge surplus is accruing to the assessee and exemption u/s 11 and 12 is not admissible is devoid of merits. So long as the objects are charitable purposes merely because there is some surplus in the activities carried out by the assessee will not disentitle it to claim exemption u/s 11 and 12 of the Act. Such exemption u/s 11 and 12 can be denied provided there is violation as contemplated in section 13 of the Act. Under section 13(1)( c ) only where the income or property is used for applying directly or indirectly for the benefit of any person like author of the trust or the person who has made substantial contribution or any trustee or manager or any relative of such aforesaid person etc. is given. As found by learned CIT(A) the payments made to person referred to in sub-section (3) of section 13 are for the services rendered by those persons and which is commensurate with the nature of services rendered. There is no prohibition in the Act to remunerate the interested person but such remuneration should be commensurate with the services rendered by them. If so found it cannot be said that provisions of section 13(1)( c ) are attracted so as to deny benefit of exemption u/s 11 and 12 of the Act. Since it is found by learned CIT(A) that payment is not undue or unreasonable the exemption u/s 11 and 12 cannot be denied. Accordingly there is no ground to deny the benefit of sections 11 and 12 of the Act. We are in agreement with the submissions of learned counsel for assessee. The assessee could not envisaged that application for registration u/s 10(23)(vi) would be delayed. Thus the assessee was required to make alternate claim u/s 11 and 12 of the Act. As held by Hon ble Gujarat High Court in the case of Mayur Foundation 2004 (12) TMI 48 - GUJARAT HIGH COURT assessment proceedings are complete when appeal against order of assessment is decided by the Tribunal. Various courts have time and again held that though filing of Form No. 10 is mandatory to claim exemption u/s 11 and 12 of the Act the same can be filed at any time during the pendency of assessment proceedings. If so filed the benefit of accumulation of income for charitable purpose cannot be denied. We accordingly direct the Assessing Officer to compute the income after allowing exemption u/s 11 and 12 of the Act and also considering the application in Form No. 10 regarding accumulation of surplus income for the purpose of objects of trust. In the result the appeal is dismissed and cross-objection is treated as allowed.

Issues Involved:
1. Eligibility for exemption under sections 11 and 12 of the Income-tax Act.
2. Alleged infringement of section 13(1)(c) of the Income-tax Act.
3. Treatment of surplus income.
4. Filing of Form No. 10 for accumulation of surplus income.

Detailed Analysis:

1. Eligibility for Exemption under Sections 11 and 12:
The primary issue was whether the assessee, running an educational institution, was eligible for exemption under sections 11 and 12 of the Income-tax Act. Historically, the assessee had been granted exemption under section 10(22) of the Act, which was upheld by the ITAT and the Delhi High Court for several years. During the relevant year, the assessee's application for registration under section 10(23C)(vi) was pending, prompting a claim for exemption under sections 11 and 12. The CIT(A) upheld the exemption, noting that the institution's primary objective was educational and the surplus generated was used for educational purposes, consistent with past judgments.

2. Alleged Infringement of Section 13(1)(c):
The Assessing Officer (AO) contended that financial benefits provided to relatives of the governing body members constituted a violation of section 13(1)(c), thus disqualifying the institution from exemptions under sections 11 and 12. Specific instances included salaries paid to Shri Prasant Pandey, Smt. Bharti Pandey, and Shri Nikhil Pant, as well as expenses on cars and telephones. However, the CIT(A) found that these payments were reasonable and commensurate with the services rendered, and thus did not constitute undue benefits. The CIT(A) emphasized that the AO failed to provide evidence of personal use of the cars and telephone, and that the facilities provided were necessary for the administration of the institution.

3. Treatment of Surplus Income:
The AO argued that the surplus income indicated a profit-earning motive, contrary to the charitable purpose required for exemptions. The CIT(A) and the Tribunal rejected this argument, citing precedents from the Supreme Court and other courts that a surplus does not negate the charitable nature of an institution if the surplus is used for the institution's objectives. The Tribunal reiterated that the predominant object of the institution was educational, and the surplus was utilized for educational purposes, thus maintaining its eligibility for exemptions.

4. Filing of Form No. 10 for Accumulation of Surplus Income:
The assessee's cross-objection involved the filing of Form No. 10 for the accumulation of surplus income. The assessee argued that due to the delay in the approval of section 10(23C)(vi), they had to claim exemptions under sections 11 and 12, and thus could not foresee the need to file Form No. 10 earlier. The Tribunal agreed, referencing the Gujarat High Court's decision in the case of CIT v. Mayur Foundation, which allowed the filing of Form No. 10 during the pendency of assessment proceedings. The Tribunal directed the AO to consider the Form No. 10 and compute the income accordingly, allowing the accumulation of surplus for charitable purposes.

Conclusion:
The Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection, affirming the CIT(A)'s decision to grant exemptions under sections 11 and 12 and to consider the accumulation of surplus income as per Form No. 10. The judgment emphasized the consistent educational purpose of the institution and the reasonableness of the payments made to related individuals, rejecting the AO's claims of profit motive and undue benefits.

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