2017 (10) TMI 828 - AT - Income Tax

Cancelling registration of society u/s 12AA - assessee has borrowed some amount from the bank and given the same for purchase of the land through bearer cheques amounts to utilization of the fund for non educational purposes - contention of the CIT that it is necessary that assessee should charge fees or exempt fees to the poor students or charge fees at the concessional rate, then only it can be said that it is existing for the charitable purposes - Held that - We do not find that assessee is not engaged in the educational activities as merely charging of the fees does not make it existing for the purposes of the profit. This fact is also fortified for the reason that assessee has earned very meager amount of sum and which is also not alleged to have been applied for non-educational purposes. The assessee is running an educational institute but that does not mean that assessee must run it for free. Further it is also not alleged that the fees charged by the assessee is exorbitant and the primary motive of the assessee is to earn the profit. If the assessee does not charge the fees from student then it would not be possible for trust to carry on its activities for which it is established as the excess would not be available for ploughing back for development of the educational facility for the students. Hence, we do not find that the order of the Ld. CIT in cancelling the registration to the trust is sustainable. Further, merely because of the reason that assessee has borrowed some amount from the bank and given the same for purchase of the land through bearer cheques amounts to utilization of the fund for non educational purposes. It is an application of the fund for the objects of the trust. It is not the case of the revenue that the above loans given by the assessee are for altogether different purposes. We do not approve of such finding of CIT-A for the reason as assessee is carrying on educational activity, section 2 (15) does not also prescribe such condition, the assessee does not derive any profit looking at the excess of income or expenditure which is also meager, and All the fees charged by the assessee are for attainment of the ultimate object of the assessee of educational activities. In view of the above facts we direct the Ld. CIT to restore the registration granted to the assessee trust under section 12A A of the income tax act. - Decided in favour of assessee.

Issues Involved:
1. Cancellation of registration under section 12AA(3) of the Income Tax Act.
2. Denial of exemption under sections 11 and 12 of the Income Tax Act.
3. Reopening of assessment under section 147 of the Income Tax Act.
4. Disallowance of salary expenses.
5. Disallowance of depreciation on buildings.
6. Addition on account of interest.

Detailed Analysis:

1. Cancellation of Registration under Section 12AA(3):
The primary issue in ITA No. 4554/Del/2012 was the cancellation of the assessee’s registration under section 12AA(3) by the Commissioner of Income Tax (CIT) with effect from 01/04/2007. The CIT argued that the activities of the society were not charitable, citing that the income from fees did not qualify for exemption under sections 11 and 12. The Tribunal referred to the Supreme Court's judgment in Queen’s Education Society vs. CIT, which clarified that an educational institution making a surplus that is ploughed back for educational purposes still exists solely for educational purposes and not for profit. The Tribunal found that the assessee’s activities were indeed educational and not profit-oriented, thus restoring the registration under section 12AA.

2. Denial of Exemption under Sections 11 and 12:
For the assessment years 2006-07 and 2007-08 (ITA Nos. 4555/Del/2012 and 4556/Del/2012), the Assessing Officer (AO) denied exemption under sections 11 and 12, arguing that the society was running on commercial lines. The Tribunal noted that the assessee's surplus was minimal and used for educational purposes. It referenced the Supreme Court’s ruling that charging fees does not imply a profit motive if the surplus is used for educational activities. Consequently, the Tribunal directed the AO to reconsider the exemption claims.

3. Reopening of Assessment under Section 147:
The reopening of the assessment for the year 2006-07 was contested by the assessee on the grounds of non-compliance with mandatory conditions under sections 147 to 151. The Tribunal found no arguments advanced against the reopening and dismissed this ground.

4. Disallowance of Salary Expenses:
In both assessment years 2006-07 and 2007-08, the AO disallowed significant salary expenses, alleging inflation and lack of Provident Fund contributions. The Tribunal found that similar issues had been set aside in previous years for reconsideration by the AO. It directed the AO to re-examine the salary disallowances in line with the directions given in earlier judgments.

5. Disallowance of Depreciation on Buildings:
For the assessment year 2007-08, the AO disallowed depreciation on buildings. The Tribunal observed that the facts and circumstances were similar to those in the previous year and set aside the issue for fresh consideration by the AO, following the same directions as in the earlier assessment.

6. Addition on Account of Interest:
The AO added interest to the income, alleging that the loan amount was used for non-educational purposes. The Tribunal found that the loan was used for the trust’s objectives and not for unrelated purposes. It directed the AO to re-evaluate this addition, ensuring alignment with the trust’s educational objectives.

Conclusion:
The Tribunal allowed the appeals in part, restoring the registration under section 12AA, directing reconsideration of exemptions under sections 11 and 12, and setting aside disallowances and additions for fresh examination by the AO. The Tribunal emphasized that charging fees and generating a surplus did not negate the charitable nature of the educational institution, provided the surplus was used for educational purposes.

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