Home Case Index All Cases Income Tax Income Tax + AT Income Tax - 2017 (11) TMI AT This
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2017 (11) TMI 638 - AT - Income TaxDenying the benefit of exemption u/s. 11 and 12 - appellant had made payment to specified persons within the meaning of Sec. 13(3) in violation of Sec. 13(1)(c) - payment of salary to Mrs. Malvika Rai - Held that - Mrs. Malvika Rai is related to the Trustee and is being given a hefty salary of ₹ 16,20,000/- p.m. despite the fact that she is just a graduate and the assessee had not furnished any details as to how the educational qualification of Mrs. Malvika Rai is commensurate with the salary which she is drawing. Thus the Ld. CIT(A) was correct in upholding the action of the AO in invoking the provision of section 13 and denying the benefit of exemption u/s. 11 & 12 of the Act, which does not need any interference on our part, hence, we uphold the same and reject the grounds raised by the assessee. Treating the scholarship given to Ms. Aarti Rai, as being in violation of provisions of section 13(1)(C) - Held that - The assessee has failed to furnish the names of other students who had been sent abroad to pursue higher studies on scholarship being awarded by the trust. No such resolution of the trust has also been placed either before AO as well as Ld. CIT(A). It is futile exercise on the part of the assessee to justify the benefit given to the persons specified u/s. 13. If the conscience of the assessee was clear then why it had not disclosed this fact in the audit report. Hence, there is a clear cut violation of the provisions of section 13 and accordingly, AO as well as Ld. CIT(A) has rightly denied the benefit of section 11. We note that scholarship given to Ms. Aarti Rai has been incurred in foreign currency and has been paid in UK i.e. to say the application of money has taken place outside India. For claiming exemption u/s. 11 the application of funds has to take place within India. Otherwise the approval of the Board is required which can grant exemption on the facts of each case. Thus in any case this income has not been applied in India and therefore not exempt. Further the trust is also hit by the provision of Section 13(1)(c). In view of the above, we are of the considered view that action of the Ld. CIT(A) in upholding the action of the AO in treating the scholarship given to Ms. Aarti Rai, as being in violation of provisions of section 13(1)(c) of the Act is correct one and the same does not need any interference on our part, hence, we uphold the action of the Ld. CIT(A) and reject the ground raised by the assessee. Assessee exists for the sole purpose of profit making and not for the purpose of charity - Held that - Supreme Court in TMA Pai Foundation case 2002 (10) TMI 739 - SUPREME COURT held that every institution is free to advise its own fee structure subject to the limitation that there can be no profiteering and no capitation fee charged directly or indirectly, or in any form. The Court further held that no profiteering does not imply that the institutions cannot have reasonable surplus for future sustenance and expansion of the institute. It was held that upto 15% of profit could be considered as reasonable and legitimate. Thus, the Hon ble Supreme Court of India has observed that the profit rate upto 15% is reasonable for charitable organization. However, in this case it was observed that the profit rate is varying between 44.6% for the assessment year 2006-07 and 48.43% for the assessment year 2007-08. From this it goes to show that the organization is existing for the purpose of profit and not for charitable activities and therefore, the Ld. CIT(A) has rightly upheld the action of the AO by observing that assessee exists for the sole purpose of profit making and not for the purpose of charity, which does not need any interference on our part, hence, we uphold the same and reject the ground raised by the assessee. Addition of refundable security deposit of the students - Held that - It is true that the liability to refund the money does not cease and it is obligatory on the part of the assessee to return the money which is lying with it in the form of security deposit, hence, the same cannot be regarded as income of the assessee. But the fact remains that this attitude of the assessee in not returning the security deposit of former students goes to show that it is running the school/ institute on commercial principles. As a charitable institution the assessee should return the money suo-moto after adjusting the dues, but the assessee is not carrying out this exercise and retaining the fund over and above the fees which is due from the students. This again goes to show that the assessee is running the institute from a commercial angle, hence, it is also a ground for rejecting the benefit of section 11 of the Act. Addition of ₹ 34,41,987/- out of refundable security deposit of the students confirmed Adhoc addition of 50% of repairs and car maintenance expenses - no log book was maintained by the assessee - Held that - We find that AO observed that assessee is maintaining luxury cars like Toyoto Camry, Hyundai Sonata and Honda Accord and has claimed expenses of ₹ 14,18,836/-. No log book was maintained, which establish that the said cars were being used by the trustees for their own benefit, hence, 50% of such expenditure was rightly upheld by the Ld. CIT(A), which does not need any interference on our part, hence, we uphold the same and reject the ground raised by the assessee. Disallowing scholarship expenses paid to Ms. Aarti Rai - Held that - We find that this expenditure cannot be regarded as an expenditure incurred to run the business nor can the same be allowed as discussed in preceding paras in the case of Trust, hence, the addition of ₹ 13,35,905/- was rightly upheld by the Ld. CIT(A), which does not need any interference on our part, hence, we uphold the same and accordingly, reject the ground raised by the assessee. Affirming disallowance on account of donation paid - Held that - We find that since the assessee has already been disallowed the benefit of section 11 and the income has to be computed as business income therefore the donation of ₹ 37,900/- cannot be regarded as business expenditure and the action of the Ld. CIT(A) is a correct one and therefore, we uphold the same and reject the ground raised by the assessee.
Issues Involved:
1. Violation of principles of natural justice. 2. Denial of exemption under sections 11 and 12 due to payments to specified persons. 3. Treatment of scholarship given to Ms. Aarti Rai. 4. Determination of the assessee's purpose as profit-making or charitable. 5. Alternative ground regarding partial denial of exemption under sections 11/12. 6. Addition of refundable security deposits as income. 7. Ad-hoc addition of repairs and car maintenance expenses. 8. Disallowance of scholarship and salary expenses. 9. Disallowance of donation paid. 10. Imposition of interest under sections 234B and 234C. 11. Granting relief regarding payment for land purchase and interest-free loan to another trust. Detailed Analysis: 1. Violation of Principles of Natural Justice: The assessee argued that the assessment order was passed without affording adequate opportunity of being heard, violating principles of natural justice. However, this ground was deemed general and did not require specific adjudication. 2. Denial of Exemption under Sections 11 and 12: The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the Assessing Officer (AO)'s decision to deny the benefit of exemption under sections 11 and 12 due to payments made to Mrs. Malvika Rai, a specified person under section 13(3), which were deemed excessive and not commensurate with her qualifications. The Tribunal agreed with this decision, noting that the assessee failed to justify the salary payment adequately. 3. Treatment of Scholarship Given to Ms. Aarti Rai: The AO and CIT(A) treated the scholarship given to Ms. Aarti Rai as a violation of section 13(1)(c), as the payment was not disclosed and was incurred outside India without Board approval. The Tribunal upheld this view, emphasizing that the application of funds must occur within India to claim exemption under section 11. 4. Determination of Assessee's Purpose: The AO observed that the assessee's profit margins were significantly high, indicating a profit motive rather than a charitable purpose. The Tribunal agreed, referencing the Supreme Court's decision in P.A. Inamdar, which allows for reasonable surplus but not profiteering. The Tribunal upheld the view that the assessee existed for profit-making. 5. Alternative Ground on Partial Denial of Exemption: The Tribunal rejected the alternative ground that even if there were violations of section 13, the exemption under sections 11/12 should not be denied entirely. The Tribunal maintained that the violations justified the complete denial of exemption. 6. Addition of Refundable Security Deposits: The AO added refundable security deposits as income, noting that the assessee did not return these deposits, indicating a commercial operation. The Tribunal upheld this addition, agreeing that the failure to refund deposits showed the assessee was running the institution on commercial principles. 7. Ad-Hoc Addition of Repairs and Car Maintenance Expenses: The AO made an ad-hoc addition of 50% of car maintenance expenses due to the lack of logbooks. The Tribunal upheld this addition, noting that the luxury cars were likely used for personal benefit by trustees. 8. Disallowance of Scholarship and Salary Expenses: The AO disallowed scholarship expenses paid to Ms. Aarti Rai and salary to Mrs. Malvika Rai, treating them as non-business expenses. The Tribunal upheld these disallowances, consistent with its findings on sections 11 and 13 violations. 9. Disallowance of Donation Paid: The AO disallowed a donation of ?37,900, treating it as non-business expenditure. The Tribunal upheld this disallowance, as the income was computed as business income. 10. Imposition of Interest under Sections 234B and 234C: This issue was deemed consequential and did not require specific adjudication. 11. Relief Regarding Payment for Land Purchase and Loan to Another Trust: The AO observed that the assessee advanced ?2.72 crores for land purchase and ?2.19 crores as an interest-free loan to another trust, violating sections 11(5) and 13(1)(c). The CIT(A) granted relief, noting that the payment was for the assessee's land purchase and the loan was to another charitable trust registered under section 12A. The Tribunal upheld the CIT(A)'s decision, citing precedents that donations or loans to another charitable trust are considered applications of income for charitable purposes. Conclusion: The Tribunal dismissed the assessee's appeal and upheld the CIT(A)'s decisions on various grounds, affirming the denial of exemptions under sections 11 and 12 due to violations of section 13. The Tribunal also dismissed the Revenue's appeal, upholding the CIT(A)'s relief regarding the land purchase payment and loan to another trust.
|