2011 (7) TMI 393 - AT - Income Tax

Provision under section 11(4A) - the assessee has brought to our notice the guidelines issued by the Ministry of Human Resources, IGNOU, AICTE and submitted that in the light of the same, it cannot be construed that a finishing school programme is a separate activity and takes the nature of normal coaching class - Running of the finishing school is an integral part of the whole educational curriculum of the trust. Finishing school cannot be equated with a coaching class - The Revenue is of the view that in order to claim exemption of income, the activity should be incidental to the main activity - As per section 11(4A) separate books are to be maintained for this activity - As we have held that finishing school is not an incidental activity but a part of the activity of imparting education by the trust, the provisions contained in section 11(4A) does not apply. Regarding the collection of fees - collection of fees is implicit in its objects when a trust is required to establish, set up, promote and run educational institution, for which registration was granted - The charitable nature of expenses incurred by the trust out of the fees having not been found for non-charitable purpose, the same cannot be viewed adversely against the assessee the Revenue cannot take advantage of the same as the activities of the assessee are found to be in accordance with the objects for which registration was granted - This objection of the Revenue is only technical in nature and cannot be considered at all - Accordingly,uphold the finding of the learned CIT(A) in this regard finding the grounds raised by the Revenue as devoid of merit.

Issues Involved:
1. Whether generation of surplus out of fees collected indicates a profit motive.
2. Whether capital expenditure should be treated as application while arriving at the surplus under section 11.
3. Whether the fees collected by the assessee could be considered as excessive or capitation fees.
4. Whether the activity of running a 'finishing school' can be treated as a distinct business activity.
5. Whether the assessee violated section 13 by paying remuneration to its Trustee and whole-time director.
6. Whether adequate opportunity was afforded by the CIT(A) to the Assessing Officer.
7. Whether CIT(A) should have considered the administrative CIT's observation regarding the assessee's entitlement to registration.

Detailed Analysis:

1. Generation of Surplus and Profit Motive:
The Tribunal held that the generation of surplus by the assessee trust does not indicate a profit motive. The Assessing Officer (AO) had incorrectly reworked the surplus by disallowing capital expenditure, which was not in line with the provisions of section 11. The Tribunal emphasized that the income of a trust should be computed on commercial principles, and the mere existence of a surplus does not disqualify a trust from exemption under section 11. The AO's method of computing surplus without considering capital expenditure was deemed incorrect.

2. Capital Expenditure as Application:
The Tribunal affirmed that capital expenditure incurred for the advancement of the trust's objects should be treated as an application of income under section 11. The AO's reliance on the decision in Queen's Educational Society was found to be misplaced. The Tribunal referenced several judicial precedents, including S.RM. M.CT. M. Tiruppani Trust and St. George Forane Church, to support the view that capital expenditure is deductible for working out the surplus or deficit.

3. Fees Collected and Capitation Fees:
The Tribunal found no evidence to support the AO's claim that the assessee collected capitation fees. The fees charged by the assessee were comparable to those of similar institutions, and there was no indication of excessive or unreasonable fees. The Tribunal rejected the AO's presumption of capitation fees, noting that the fees collected were accounted for and audited, and no irregularities were found.

4. Running a 'Finishing School':
The Tribunal held that the 'finishing school' was an integral part of the assessee's educational curriculum and not a distinct business activity. The finishing school added value to the management education provided by the trust and could not be equated with a coaching class. The Tribunal rejected the AO's contention that separate books of account should have been maintained under section 11(4A).

5. Payment of Remuneration to Trustee:
The Tribunal found that the payment of reasonable salary to the trustee, Prof. Bishwajit Patnaik, was permissible under section 13(2)(c), as it was not excessive or unreasonable. The AO had failed to show that the payment was a burden on the trust's resources. The Tribunal cited several judicial decisions to support the view that reasonable remuneration for services rendered by an interested person is allowable.

6. Adequate Opportunity to AO:
The Tribunal noted that the AO was given sufficient opportunity to present his case during the appeal proceedings before the CIT(A). The AO had submitted a comprehensive remand report and appeared during the hearing. The Tribunal found no merit in the Revenue's claim that the AO was not afforded adequate opportunity.

7. Administrative CIT's Observation:
The Tribunal dismissed the Revenue's contention that the CIT(A) should have considered the administrative CIT's observation regarding the assessee's entitlement to registration. The Tribunal emphasized that the CIT(A) is not bound by the observations of another authority of equal rank and must exercise independent judgment.

Conclusion:
The Tribunal upheld the order of the CIT(A), dismissing the Revenue's appeal and allowing the assessee's cross-objection. The Tribunal found no infirmity in the CIT(A)'s decision, which correctly addressed all issues based on factual and legal analysis. The assessee's activities were found to be in line with its charitable objects, and the exemption under section 11 was rightly allowed.

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