2017 (3) TMI 1471 - AT - Income Tax

Denial of claim of exemption u/s 10(23C)(iiiad) - Held that - We find that the assessee society is engaged in the running of school and amount of surplus has also been utilized by the assessee for construction of school building, which was also used by the assessee, hence, the society is engaged in the charitable purpose u/s 2(15) of the Act. Since the gross receipts of society is less than ₹ 1 crore, therefore, it is eligible for exemption u/s 10(23C)(iiiad) of the Act. We also find that the facts of the present case are squarely covered by the above decisions discussed above. Therefore, we are of the considered opinion that the lower authorities were not justified in not allowing the deduction to the assessee u/s 10(23C)(iiiad) of the Income-tax Act, 1961. Accordingly, the AO is directed to treat the Society as covered by Section 10(23C)(iiiad) of the Act and allow the relief accordingly. Addition u/s 40(a)(ia)- Held that - Since, the claim of assessee that the recipient has paid due tax in the light of second proviso to Section 40(a)(ia), we deem fit to restore this issue to the file of the AO for verification and if found correct allow the same as the ratio laid down in the case of Ansal Land Mark Township P.Ltd. 2015 (9) TMI 79 - DELHI HIGH COURT Disallowance out of kitchen expenses - Held that - The assessee has claimed kitchen expenses of ₹ 5,75,486/- out of which ₹ 1,89,000/- were claimed as reimbursement to Imperial Academy and for balance of ₹ 2,86,484/- only ledger copy was filed. On spot inquiry, the Inspector found that no meal was provided to students, considering the genuineness, the AO disallowed ₹ 28,648/- being 10% of expenses of ₹ 2,86,480/- as income for non- education activity.

Issues Involved:
1. Denial of exemption under Section 10(23C)(iiiad) of the Income-tax Act, 1961.
2. Disallowance of kitchen expenses under Section 40(a)(ia) of the Act.
3. Disallowance of ?28,648 out of kitchen expenses.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 10(23C)(iiiad):
The assessee, a society running an educational institution, claimed exemption under Section 10(23C)(iiiad) of the Income-tax Act, 1961. The AO denied the exemption, stating that the society did not exist solely for educational purposes as it had advanced a loan of ?1.25 crores to M/s. Sheetu Educational Services Pvt. Ltd. (SESPL) and had not utilized its funds exclusively for educational purposes. Additionally, the AO observed that the society's buses were used for hire, not solely for educational purposes.

The CIT(A) upheld the AO's decision, referencing a previous assessment year where similar claims were denied. The assessee argued that the loan was for constructing a school building used by the society and not a diversion of funds. The society's buses were used for student transportation, and the bus fees were part of the educational activities.

The Tribunal found that the society had utilized the loan for constructing a school building on leasehold land and used the building for educational purposes without paying rent. The Tribunal also noted that the buses were used solely for student transportation. The Tribunal concluded that the society existed solely for educational purposes, and its receipts were less than ?1 crore, qualifying it for exemption under Section 10(23C)(iiiad). The Tribunal directed the AO to allow the exemption.

2. Disallowance of Kitchen Expenses under Section 40(a)(ia):
The AO disallowed ?4,75,486 claimed as kitchen expenses, including ?1,89,000 reimbursed to Sheetu Educational Society for services rendered by Imperial Academy, on the grounds that TDS was not deducted as required under Section 194C.

The CIT(A) upheld the disallowance, stating that the payment was not a reimbursement but a lump sum payment for services, necessitating TDS deduction. The CIT(A) also noted that the assessee did not file Form 26A to claim the benefit of the second proviso to Section 40(a)(ia).

The assessee argued that the expenses were reimbursements and that the recipient had paid the due tax. The Tribunal restored the issue to the AO for verification, directing that if the recipient had paid the due tax, the disallowance should be allowed as per the decision in Ansal Land Mark Township P. Ltd.

3. Disallowance of ?28,648 out of Kitchen Expenses:
The AO disallowed ?28,648 out of ?2,86,484 claimed as kitchen expenses, citing that no meals were provided to students based on an inspector's spot inquiry. The CIT(A) confirmed the disallowance.

The assessee contended that the kitchen expenses related to mess facilities for students, teachers, and staff, and the books of accounts were audited. The Tribunal found the AO's ad hoc disallowance unjustified, given the audited accounts and vouchers, and deleted the disallowance.

Conclusion:
The Tribunal allowed the appeal partly, granting the exemption under Section 10(23C)(iiiad) and deleting the disallowance of ?28,648 out of kitchen expenses. The issue of kitchen expenses disallowed under Section 40(a)(ia) was remanded to the AO for verification. The judgment was pronounced on 28th February 2017.

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