2017 (5) TMI 1598 - HC - Income Tax

Benefit of section 11(1) as charitable trust - charitable activity - Held that - Any educational institution which is required to be run they have to have a surplus fund for educational activity to sustain the consistency in the efficiency and very purpose of collecting donation is to sustain activity of institution. Merely because surplus fund it cannot be envisaged as profit the institution has not crossed one crore limit and they are well within their prescribed limit. The income was received by the trust which is reflected in the books of accounts. In our view the view taken by the authority is required to be reversed and it is required to be looked into the foundation of the ratio laid down by the Supreme Court in the case of Queen s Education Society (2015 (3) TMI 619 - SUPREME COURT) where funds which has been surplus is within a corpus fund and it has been kept as reserve fund which is not in dispute and they have not crossed the limit of one crore. Taking into consideration the aforesaid we are of the opinion that the contention raised by Mr. Jhanwar is required to accepted. Therefore the first question we answering in favour of the assessee that it is an income entitled for exemption under Section 10(23C)(iiiad) of the Act - Decided in favour of assessee

Issues Involved:
1. Justification of benefit under Section 11(1) of the IT Act.
2. Allowability of depreciation on assets under Section 32.
3. Deletion of addition for foreign traveling expenses under Section 37.
4. Deletion of disallowance of interest under Section 36(1)(iii).
5. Approval under Section 80G(5) for charitable activities.
6. Reasonableness of payments to persons covered under Section 13(3).

Detailed Analysis:

1. Justification of Benefit under Section 11(1):
The primary issue was whether the Tribunal was justified in allowing the benefit of Section 11(1) as a charitable trust despite the huge surpluses being withdrawn by payments to persons referred to under Section 13(3) of the IT Act. The Tribunal noted that the appellant society was granted registration under Section 12A as a charitable institution, and this registration was in force. The Tribunal emphasized that the AO could examine the application of income for charitable purposes but could not question the existence of the trust for charitable purposes. The Tribunal relied on the decision of the Hon'ble Rajasthan High Court in Deputy Commissioner Income-Tax v. Cosmopolitan Education Society, affirming that misutilization of funds or mismanagement could not be the basis for rejecting the claim of exemption.

2. Allowability of Depreciation on Assets under Section 32:
The issue was whether the Tribunal was justified in allowing the depreciation on assets under Section 32 even when the same had already been claimed as an application of income in previous years. The Tribunal upheld the decision of CIT(A), allowing the depreciation, stating that the legislative intent was to provide fiscal incentives to charitable institutions that reinvest their earnings into charitable purposes.

3. Deletion of Addition for Foreign Traveling Expenses under Section 37:
The Tribunal had to decide if it was justified in deleting the addition made for foreign traveling expenses under Section 37 despite the assessee failing to prove the justification for these expenses. The Tribunal found that the expenses were incurred for charitable purposes and were thus allowable. The Tribunal's decision was supported by the observation that the AO's disallowance was not sustainable in law.

4. Deletion of Disallowance of Interest under Section 36(1)(iii):
This issue revolved around whether the Tribunal was justified in deleting the addition of disallowance of interest under Section 36(1)(iii) despite the assessee failing to furnish evidence of the use of assets. The Tribunal concluded that the disallowance was not justified as the interest expenses were incurred for purposes related to the charitable activities of the trust.

5. Approval under Section 80G(5) for Charitable Activities:
The Tribunal had to determine if it was justified in directing the grant of approval under Section 80G(5), holding that the activities of the society were charitable despite being controlled and managed by one family with a profit motive. The Tribunal relied on the Supreme Court's judgment in Queen’s Education Society vs. CIT, which held that surplus ploughed back for educational purposes does not negate the charitable nature of the institution.

6. Reasonableness of Payments to Persons Covered under Section 13(3):
The final issue was whether the Tribunal was justified in holding that payments made to family members and trustees covered under Section 13(3) were reasonable despite a sharp rise in payments compared to earlier years. The Tribunal found that the payments were reasonable and necessary for the functioning of the trust and thus did not violate the provisions of the IT Act.

Conclusion:
The High Court dismissed all the appeals, answering all issues in favor of the assessee and against the Department. The Court upheld the Tribunal's findings, emphasizing the charitable nature of the trust's activities and the legislative intent to provide fiscal incentives to such institutions. The judgment reinforced the principle that surplus funds reinvested in charitable activities do not negate the charitable status of an institution.

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