2017 (1) TMI 999 - AT - Income Tax

Disallowance of deduction u/s 10(23C)(iiiad) - assessee society is an educational institution, also registered u/s 12A - Held that - The exemption u/s 10(23C)(iiiad) of the Act is available to an institution, which is solely exists for educational purposes. Therefore, the phrase used as solely means that not for the purposes of profit. Therefore, plain reading of the said Section means that an educational institution, which is engaged solely for the purpose of imparting education is solely for the purpose of imparting education is qualifies for the exemption u/s 10(23C)(iiiad). In the case of the assessee, we find that the assessee society has not carried out any other activity other than education, therefore, the assessee is eligible for deduction u/s 10(23C)(iiiad) of the Act. - Decided in favour of assessee Rejection of registration u/s 12AA - the assessee has failed to file return of income u/s 139(4A) read with section 121 to Section 139(1) - Held that - for making eligible to exemption u/s 11 in accordance with the certificate granted u/s 12A by the CIT, Bhopal, the assessee should have filed its return of income within the due date as prescribed u/s 139(1) of the Act read with Explanation 2 to Section 139(1) of the Act and in accordance with the provisions of Section 139(4) of the Income-tax Act, 1961. Since the assessee has failed to furnish the return as per the terms and conditions laid down while granting the registration to the Society, the AO has correctly rejected and held that the assessee is not eligible to exemption u/s 11 as its registration has been ceased to exist for the assessment year under consideration for non-compliance of the terms and conditions stipulated while granting certificate u/s 12AA by the Commissioner of Income-tax, Bhopal. - Decided against assessee Addition as surplus on sale of land as short term capital gain - Held that - We have considered the facts and find that the assessee is found to be eligible for exemption u/s 10(23C)(iiiad) of the Act, hence surplus earned on account of sale of land at ₹ 58.68 lakhs has been applied for purchase of construction of land amounting to ₹ 276 lakhs. Hence, the surplus earned on this transaction by the Society not taxable, as the income of the society is held as exempt in our finding as given in ground no.1 above. This ground is, therefore, allowed in favour of assessee Addition on account of unsecured loan - Held that - We find that the Society is eligible for exemption u/s 10(23C)(iiiad) as held in ground no.1 above. Further, the assessee has filed the confirmations of the creditors explaining the source of source, who in turn, obtained loans from the persons, who are also facing Court cases for non return of such loans. Further, the amount has been invested by the Society in land and building. Hence, the borrowed funds have been utilized for the benefit of the Society. Therefore, the finding of the lower authorities are without any basis and not in accordance with law. Therefore, the addition made on account of unexplained cash credit is deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of deduction u/s 10(23C)(iiiad) of the Income-tax Act, 1961.
2. Rejection of registration u/s 12AA of the Income-tax Act, 1961.
3. Addition of ?58,63,000 as surplus on sale of land as short-term capital gain.
4. Addition on account of unsecured loan amounting to ?62,67,200.

Issue-wise Detailed Analysis:

1. Disallowance of deduction u/s 10(23C)(iiiad):
The assessee, an educational institution, claimed exemption under Section 10(23C)(iiiad) as its gross receipts were less than ?1 crore. The AO denied this exemption, stating that the institution did not exist solely for educational purposes due to other objects listed in its memorandum, despite the fact that only educational activities were pursued. The CIT(A) upheld the AO's decision, emphasizing the term "solely" means exclusively. The Tribunal, however, found that the assessee solely carried out educational activities and had not pursued any other objects. Citing various case laws, it concluded that the presence of other objects in the memorandum does not disqualify the institution from claiming the exemption if it is solely engaged in educational activities. Thus, the Tribunal directed the AO to allow the exemption under Section 10(23C)(iiiad).

2. Rejection of registration u/s 12AA:
The AO rejected the assessee's claim for exemption under Section 11, stating that the registration u/s 12A ceased to exist due to the late filing of the return. The CIT(A) upheld this decision. The Tribunal noted that the assessee failed to file the return within the prescribed time, which was a condition for maintaining the registration u/s 12A. Consequently, the Tribunal agreed with the lower authorities that the assessee was not eligible for exemption u/s 11 for the assessment year under consideration.

3. Addition of ?58,63,000 as surplus on sale of land:
The AO treated the surplus from the sale of land as short-term capital gain due to the rejection of the assessee's claim for exemption. The CIT(A) directed the AO to compute long-term capital gain instead. The Tribunal found that the assessee was eligible for exemption u/s 10(23C)(iiiad), and the surplus from the sale of land was applied towards the purchase of land and building for educational purposes. Therefore, the Tribunal held that the surplus was not taxable as the income was exempt.

4. Addition on account of unsecured loan amounting to ?62,67,200:
The AO made an addition for unsecured loans, questioning the creditworthiness and genuineness of the creditors. The CIT(A) upheld this addition, noting that the funds seemed to be diverted for personal benefit. The Tribunal, however, found that the assessee provided confirmations and explained the sources of the loans. The funds were utilized for the benefit of the society, and the Tribunal concluded that the addition was not justified and deleted it.

Conclusion:
The Tribunal allowed the appeal partly, granting the exemption u/s 10(23C)(iiiad), deleting the addition of the surplus on the sale of land and the unsecured loans, but upheld the rejection of the exemption u/s 11 due to the failure to comply with the conditions for maintaining registration u/s 12A.