2016 (10) TMI 311 - AT - Income Tax

Validity of reopening u/s 147/148 - denial of exemption u/s 11 - violation of provisions of Section 13(3) - non charitable activities - Held that - The present case, it is an admitted fact that the relatives of the trustees were appointed as Principal, Vice- Principal and Administrative Director. However, their appointments were not illegal as the same were done by following the proper procedure, an advertisement was published in the National Newspaper for the post of Principal and Vice-Principal. In response to the said advertisement, the applications were received from the eligible person and after a proper scrutiny, those persons who fulfilled the requisite qualification and having the experience, persons were called for an interview. The Selection Board who conducted the interview included, two nominees of the Education Department of the Government and selection was done on merit. The remuneration paid was in accordance with the pay scale fixed by the Directorate of Education for the similar post. It is not the case of the AO that the remuneration paid was in excess of what may be reasonably paid for such services. It is also not the case that the expenses relating to telephone etc. were not incurred for furtherance of the objectives of the assessee society. In the present case, the AO has observed that the development charges were not shown in the income and expenditure account and reopen the assessment on the said basis. This observation of the AO was factually incorrect because the assessee had shown the development charges in its books of account which is evident from the various copies of the ledger account furnished by the assessee to the AO vide letter dated 19.12.2011 which are placed at page nos. 282 to 305 of the assessee s paper book. The assessee also furnished copies of the journal vouchers in respect of tuition fees and development fees along with student wise details which are placed at page nos. 306 to 314 of the assessee s paper book. In the present case, the AO has not brought anything on record to substantiate that the expenditure on salary or facilities provided to the relatives of the trustees of the assessee society were excessive having regard to fair market value of the services provided by them. Therefore, the AO wrongly invoked the provisions of Section 13(3) of the Act and the ld. CIT(A) was not justified in confirming the action of the AO. We, therefore, set aside the impugned order and direct the AO to allow the exemption u/s 11 of the Act to the assessee. Since we have decided the Ground in favour of the assessee on merits, therefore, no findings are being given on the issue relating to the reopening u/s 147 of the Act raised by the assessee vide . - Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of reopening under Section 147/148 of the Income Tax Act, 1961.
2. Denial of exemption under Section 11 of the Income Tax Act due to alleged violation of Section 13(3).
3. Allowance of depreciation on assets purchased in earlier years.

Issue-wise Detailed Analysis:

1. Validity of Reopening under Section 147/148:

The assessee challenged the reopening of the assessment on the grounds that the reasons for reopening were not provided despite requests, making the reassessment proceedings null and void. The assessee also contended that there were no valid reasons recorded for reopening, which is a condition precedent for invoking Section 147/148. The department argued that the reopening was based on specific information and was within the four-year limit. The Tribunal noted the procedural lapses but did not provide a conclusive finding on this issue since the appeal was decided on merits.

2. Denial of Exemption under Section 11 due to Alleged Violation of Section 13(3):

The AO denied the exemption under Section 11, alleging that the assessee violated Section 13(3) by paying unreasonable salaries to specified persons and providing undue benefits. The AO highlighted that the Principal, Vice-Principal, and Director (Administration) were relatives of the trustees and were paid hefty salaries. The CIT(A) upheld the AO's decision, citing a clear-cut violation of Section 13(3).

The assessee contended that the appointments were made following proper procedures, including advertisements and selection by a board with nominees from the Education Department. The salaries were in accordance with the pay scales fixed by the Directorate of Education, and there was no evidence to suggest that the salaries were excessive. The Tribunal agreed with the assessee, noting that the AO did not provide any material evidence to substantiate that the salaries were unreasonable. The Tribunal referred to several case laws, including DIT Vs. Manav Bharti Institute of Child Education & Child Psychology, which supported the assessee's position. Consequently, the Tribunal directed the AO to allow the exemption under Section 11.

3. Allowance of Depreciation on Assets Purchased in Earlier Years:

The department argued against allowing depreciation on assets purchased in earlier years, claiming it would result in a double deduction. The CIT(A) allowed the depreciation, relying on the Supreme Court judgment in Radha Swami Satsang. The Tribunal upheld the CIT(A)'s decision, citing the Jurisdictional High Court's ruling in Director of Income Tax Vs. Vishwa Jagriti Mission, which established that depreciation on fixed assets used for charitable purposes should be allowed to compute the income available for application to charitable purposes. The Tribunal dismissed the department's appeal on this issue.

Conclusion:

The Tribunal allowed the assessee's appeal and dismissed the department's appeal. The Tribunal directed the AO to allow the exemption under Section 11 and upheld the allowance of depreciation on assets purchased in earlier years. The Tribunal did not provide a conclusive finding on the validity of reopening under Section 147/148 due to the decision on the merits of the case.