2017 (3) TMI 578 - AT - Income Tax

Exemption u/s 11 - educational activity huge surpluses being earned by the society - Expenditure for the benefit of persons covered u/s 13(3) - Held that - it is clear that over the period of 11 years, it is no doubt that the assessee society has generated surplus of ₹ 50.76 Crores but at the same time, the whole of the said surplus has been plouged backed and utilised on infrastructure to the tune of ₹ 60.19 Crores (including borrowings). Even for the two years under consideration, there is surplus of ₹ 16.97 Crores and out of that, ₹ 9 crores have already been spent on the infrastructure. - given that the assessee society is generating surplus year after year is not the deciding factor to determine whether it is eligible for exemption under section 11 of the Act. And on this ground alone, the exemption claimed by the assessee society under section 11 can not be denied. - Decision in the case of Queens s educational society 2015 (3) TMI 619 - SUPREME COURT Expenditure for the benefit of persons covered u/s 13(3) - financial assistance provided to Jaipur National University (JNU) - Held that - It is only now that the Finance Bill 2017 has proposed w.e.f 1 April 2018 that where such donations are made with specific directions to form part of corpus of the recipient entity, it will not be considered as application of income in the hands of the donor entity. However, the donations with no specific directions to the recipient entity continue to be eligible as application of income. - In the instant case, Jaipur National University is registered under section 12AA as a charitable entity undertaking educational activity and thus qualify as an eligible entity for receiving contributions from the assessee society. - the contribution so made is not made out of past accumulated profits. Nature of contribution to JNU - Held that - it is clear that amount advanced by the assessee society to Jaipur National University is in accordance with its objectives of setting up of educational institutions and managing and operating them for promotion of education and spreading of systematic education to students. The contribution so made is also in consonance with the Jaipur University Act which require the assessee society to contribute and support the University in its activities, as a sponsoring body on a regular basis. Further Jaipur National University doesn t qualify as a specified person u/s 13(3) - Accordingly, the contribution to Jaipur National University will qualify as due application of income in the hands of the assessee society and the same cannot be a basis for denial of exemption under Section 11 to assessee society. Salary paid to person specified u/s 13(3) - excessive salary - Held that - given the qualification and the experience of these persons and the fact that these persons have managed the affairs of the society since its inception and they are closely and actively involve in management and day to affairs of the assessee society, the salary and allowances paid to them is reasonable vis-a-vis legitimate needs of the assessee society and benefit derived or accruing to the assessee society - the reasonableness has to be seen vis-a-vis legitimate needs of the assessee society and benefit derived or accruing to the assessee society and as determined by the assessee society - Claim allowed. Expenditure on foreign travel - Held that - in no case, Section13(3) or 13(1)(c) of the Act can be invoked on account of disallowance of foreign travel expenses because even if such travel is considered to be perquisites to the persons at the helm of applicant societies affairs, the same commensurate with the fair value of the services provided by them to the assessee society particularly, keeping into consideration that their dedicated services have led to significant growth and popularity of the educational institutions run by the assessee societysociety - Claim allowed. Depreciation u/s 32 admissibility in respect of the assets on which exemption has been allowed u/s 11 - Held that - As decided in Krishi Upaj Mandi Samiti, Jaisalmer case 2015 (3) TMI 11 - RAJASTHAN HIGH COURT the depreciation is held admissible to the assessee society under the provisions of section 32 of the Act in respect of assets on which exemption has been allowed under section 11 of the Act. Benefit of exemption u/s 11 allowed - Decided in favor of assessee.

Issues Involved:
1. Entitlement to exemption under Section 11 of the IT Act.
2. Allowance of salary expenses to specified persons under Section 13(3).
3. Deletion of addition made on account of foreign travel expenses.
4. Treatment of contribution to Jaipur National University as application of income under Section 11.
5. Admissibility of depreciation under Section 32 for assets on which exemption has been allowed under Section 11.

Detailed Analysis:

1. Entitlement to Exemption under Section 11 of the IT Act:
The Tribunal examined whether the assessee society is entitled to exemption under Section 11. The society is registered under the Rajasthan Society Registration Act, 1958, and Section 12AA of the IT Act. The assessee filed its return showing NIL income after claiming exemption under Section 11(1)(a).

The Tribunal noted that the assessee society's primary objective is the promotion of education through various educational institutions, including Seedling Public School and Jaipur National University. The society's activities fall within the definition of "charitable purpose" under Section 2(15). The Tribunal referred to the Supreme Court's decision in Queen's Education Society, which clarified that the existence of surplus does not negate the charitable purpose if the surplus is ploughed back into educational activities. The Tribunal concluded that the assessee society meets the conditions for exemption under Section 11, as the surplus generated is used for educational purposes.

2. Allowance of Salary Expenses to Specified Persons under Section 13(3):
The Revenue challenged the allowance of salary expenses to specified persons under Section 13(3), arguing that the salaries were higher than reasonable. The Tribunal examined the qualifications, responsibilities, and salaries of the individuals in question, noting that the salaries were commensurate with their roles and responsibilities. The Tribunal found no violation of Section 13 and upheld the allowance of salary expenses, emphasizing that the reasonableness of the expenditure should be judged from the perspective of the assessee society.

3. Deletion of Addition Made on Account of Foreign Travel Expenses:
The Revenue disallowed foreign travel expenses, arguing that they were not incurred for the society's objectives. The Tribunal reviewed the tour reports and found that the visits were related to educational purposes, such as exploring student exchange programs and collaborating with foreign institutions. The Tribunal noted that similar expenses had been allowed in previous years and found no basis for the disallowance. The Tribunal upheld the deletion of the addition made on account of foreign travel expenses.

4. Treatment of Contribution to Jaipur National University as Application of Income under Section 11:
The Revenue argued that the contribution to Jaipur National University (JNU) violated the society's byelaws and Section 13(1)(c) and 13(2)(a). The Tribunal referred to its earlier decision for AY 2009-10, where it held that JNU is not a specified person under Section 13(3) and that the contribution was within the society's objectives. The Tribunal reiterated that the contribution to JNU qualifies as an application of income under Section 11, as it is in line with the society's objective of promoting education.

5. Admissibility of Depreciation under Section 32 for Assets on which Exemption has been Allowed under Section 11:
The Tribunal addressed whether depreciation is allowable for assets on which exemption has been claimed under Section 11. The Tribunal noted the amendment to Section 11(6) by the Finance (No. 2) Act, 2014, which applies prospectively from AY 2015-16. The Tribunal referred to various judicial precedents, including the Karnataka High Court's decision in Al-Ameen Charitable Fund Trust, which held that depreciation is allowable up to AY 2014-15. The Tribunal concluded that depreciation is admissible for the years under consideration.

Conclusion:
The Tribunal upheld the assessee society's entitlement to exemption under Section 11, allowed the salary expenses to specified persons, deleted the addition made on account of foreign travel expenses, treated the contribution to Jaipur National University as an application of income, and allowed depreciation for the relevant assessment years. The appeals filed by the Revenue were dismissed, and the appeals filed by the assessee society were allowed.

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