2011 (6) TMI 391 - AT - Income Tax

Charitable Trust - Exemption u/s 11 - Activity of education as a business - cancellation of registration u/s 12AA(3) - delayed furnishing of list of donors - collection of capitation fee for admission or voluntary donation - Held that - charging of higher fees from affluent students or raising funds for the laudable object of education, which is traditionally a State function, through donations, by an unaided self financing educational institutions cannot deter the charitable nature of the activity and in any view make such activity Commercial in nature. Regarding cancellation of registration - held that - contents of the show cause notice under section 12AA(3) proposing to cancel registration from assessment year 2004-05; the retracted statements of V. Sankar and R. Vijayakumar who were neither employed nor had any position in the assessee trust during the relevant year and therefore, could not have had knowledge of the assessee s affairs during the year relevant to assessment year 2001-02; or the letters from parents in 2004 and later, requesting for refund of money, can be relied upon by the revenue to deny the exemption under section 11 for assessment year 2001-02. Exemption u/s 11 - Held that - while section 10(22) had an express condition that the institution should exist not for purposes of profit section 11 does not impose any such condition. - the incidence of surplus during the course of activity of running the educational institution would not be a ground to state that the assessee is carrying on a business activity so as to forfeit exemption under section 11. Education versus Charitable - section 2(15) - Held that - education per se is a charitable purpose under section 2(15). - the revenue s attempt to categorize the educational institution as a business has to be rejected. Regarding donation - Held that - the donations received by the assessee towards corpus fund cannot be treated as capitation fees . - Further, even if the corpus donations received are in deed capitation fees, as more than 75 per cent of that amount has also been applied for charitable purposes, the said donations would still be exempt under section 11 (1)(a). Power of AO to decide the nature of trust in assessment proceedings - Held that - once the trust is registered under section 12A, the Assessing Officer has no locus standi to decide as to whether it is charitable or otherwise.

Issues Involved:

1. Eligibility of the Trust for exemption under section 11 of the Income-tax Act.
2. Characterization of surplus income and corpus donations.
3. Validity of reassessment proceedings under section 147.
4. Levy of tax at maximum marginal rates, surcharge, and interest under sections 234A and 234B.

Issue-wise Detailed Analysis:

1. Eligibility of the Trust for Exemption under Section 11:

The Trust, running an engineering college, claimed exemption under section 11, which was initially denied by the Assessing Officer (AO) on the grounds of profiteering and collection of capitation fees. The AO's reasons included the Trust showing huge surpluses, charging high fees, and collecting donations identified as capitation fees. The Commissioner of Income-tax (Appeals) [CIT(A)] reversed the AO's order, holding that the Trust is entitled to exemption under section 11. The CIT(A) observed that the Trust is engaged in education, which is a charitable purpose under section 2(15), and there was no evidence to support the AO's conclusion that the Trust was running education as a business. The Tribunal upheld the CIT(A)'s decision, emphasizing that the Trust's activities were regulated by AICTE and DOTE, and the fees charged were within the prescribed limits.

2. Characterization of Surplus Income and Corpus Donations:

The AO treated the surplus income and corpus donations as taxable, arguing that the donations were capitation fees collected in violation of laws. The CIT(A) disagreed, stating that the Trust had little discretion in admissions and fees, negating the possibility of collecting capitation fees. The Tribunal supported this view, noting that the surplus was due to regulated fees and not profiteering. The Tribunal also held that corpus donations, received with specific directions from donors, are capital receipts and not income. The Tribunal cited various cases to support that surplus from charitable activities does not disqualify the Trust from exemption under section 11.

3. Validity of Reassessment Proceedings under Section 147:

The Trust argued that the reassessment under section 147 was invalid as the original return was not processed. The Tribunal found that the return filed under section 139(4) was not acted upon, and the AO's claim of processing under section 143(1) lacked a specified date. The Tribunal upheld the CIT(A)'s confirmation of reassessment validity, noting that the AO's actions were within the scope of Explanation 2(b) to section 147.

4. Levy of Tax at Maximum Marginal Rates, Surcharge, and Interest under Sections 234A and 234B:

The Tribunal found the grounds on levy of tax at maximum marginal rates and surcharge to be academic, given the exemption under section 11 was upheld. The levy of interest under sections 234A and 234B was noted to have a consequential effect, and since no tax liability arose, these issues became infructuous.

Conclusion:

The Tribunal dismissed the revenue's appeal and the assessee's cross-objection, upholding the CIT(A)'s order granting exemption under section 11 to the Trust. The Trust's surplus income and corpus donations were not treated as taxable income, and the reassessment proceedings were deemed valid. The issues on levy of tax at maximum marginal rates, surcharge, and interest were rendered academic.

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