2009 (8) TMI 860 - AT - Income Tax

Summary

Issues Involved:

1. Denial of exemption under section 10(23C)(iiiab) of the Income-tax Act, 1961.
2. Validity of revised return filed by the assessee.
3. Disallowance of expenditure of Rs. 14,61,000 as not for educational purposes.
4. Requirement of audit report under section 12A(b) for claiming exemption.
5. Assessment of surplus income of Rs. 46,97,349 as taxable.

Detailed Analysis:

1. Denial of Exemption under Section 10(23C)(iiiab):

The assessee claimed exemption under section 10(23C)(iiiab) for the income of K.S. Saket PG College, asserting that it is an educational institution existing solely for educational purposes and not for profit, and is substantially financed by the Government. The Assessing Officer (AO) disallowed this claim, stating that the college did not exist solely for educational purposes due to the unverifiable nature of certain expenditures. The CIT(A) upheld this decision, agreeing that the expenditure of Rs. 14,61,000 was not substantiated and thus, the institution did not qualify for the exemption.

2. Validity of Revised Return:

The AO did not consider the revised return filed by the assessee as valid because the original return was filed under section 139(4), not under section 139(1). The revised return included the income of the college and claimed exemption under section 10(23C)(iiiab). The Tribunal did not specifically address the validity of the revised return but focused on the substantive issues regarding the exemption claims.

3. Disallowance of Expenditure of Rs. 14,61,000:

The AO disallowed the expenditure of Rs. 14,61,000 claimed to have been paid to testing agencies for conducting entrance examinations, citing lack of details and supporting evidence. The assessee argued that the principal handled these payments to maintain confidentiality, and thus, the college did not have detailed records. The Tribunal accepted the assessee's explanation, noting the necessity of maintaining confidentiality in entrance examinations and the principal's certification of the expenditure. Consequently, the Tribunal deleted the addition of Rs. 14,61,000.

4. Requirement of Audit Report under Section 12A(b):

The AO also disallowed the exemption under section 11 for the college's income due to the absence of an audit report under section 12A(b). The Tribunal clarified that the assessee claimed exemption under section 10(23C)(iiiab), not section 11, and thus, the requirement of an audit report under section 12A(b) was not applicable.

5. Assessment of Surplus Income of Rs. 46,97,349:

The AO assessed the surplus income of Rs. 46,97,349 as taxable, arguing that the college was run for profit. The Tribunal found that the surplus was due to substantial grants from the State Government and UGC, without which the college would have incurred losses. The Tribunal concluded that the college was not run for profit and existed solely for educational purposes. Therefore, the surplus income was exempt under section 10(23C)(iiiab).

Conclusion:

The Tribunal held that the college was substantially financed by the Government, existed solely for educational purposes, and was not for profit. Therefore, the surplus income of Rs. 46,97,349 was exempt under section 10(23C)(iiiab). The disallowance of Rs. 14,61,000 was also deleted, and the requirement of an audit report under section 12A(b) was deemed irrelevant. The appeal was partly allowed in favor of the assessee.