2021 (6) TMI 401 - AT - Income Tax

Exemption u/s.10(23C)(vi) - exemption denied as Appellant did not solely exist for education purposes because there were several objects of non-education nature and was making huge surplus - Appellant had contravened the provisions of S.13(1)(c) in as much as it had paid lease rent to two of trustees of the Appellant - HELD THAT - We find that assessee trust had derived income only from educational activity and not otherwise. Hence even the financial statements of the assessee support the contention of the ld. AR that the trust is existing solely for the purpose of education only and not of any other purpose. Even otherwise during the year under consideration i.e. F.Y.2018-19 relevant to A.Y.2019-20 for which claim of 10(23C)(vi) is sought by the assessee trust the assessee trust had carried all activities only with respect to education and not otherwise at all. Other incidental objects provided in the Memorandum of Association for smooth attainment and fulfilment of the main objects was not even carried out by the assessee during the year under consideration. Hence the objection of the ld CIT(E) that the objects contain other irrelevant activities (though factually it is not) deserve to be dismissed in limine Assessee trust had derived surplus in its income and expenditure account - What is to be seen is the computation of income which are applicable to charitable trusts which works completely on a different principle wherein even the amounts invested in fixed assets are allowed as application of income. This has been conveniently ignored by the ld. CIT(E) while arriving at the conclusion that assessee has earned surplus. If the said investment made in fixed assets are considered as an application of income excluding depreciation thereon we find that for the A.Y.2019-20 the assessee had only incurred a deficit . Hence the observation of the ld CIT(E) that the assessee trust had made surplus during the A.Y. 2019-20 and thereby existing for profit is factually incorrect. Hence there is no question of any surplus earned by the assessee as per the computation of income asper the provisions applicable to charitable trusts for the A.Y.2019-20. Even otherwise we find that the surplus in the income and expenditure account has not been distributed by the assessee to any trustees or their relatives as profits or as dividend. The said surplus has been re-deployed regularly for the educational objects of the trust. Hence it could be safely concluded that the assessee trust is existing solely for the purpose of education and not for the purpose of profit. Hence the second objection raised by the ld. CIT(E) for rejecting the claim of exemption u/s. 10(23C)(vi) of the Act is hereby dismissed as baseless. Assessee trust has paid lease rent to trustees of the trust for lease of the land on which assessee s school is functioning - We find that the ld. CIT(E) had stated that this payment of lease rent is in violation of provisions of Section 13 (1)(c) of the Act. It is pertinent to note that assessee trust had only sought claim of exemption u/s. 10(23C)(vi) of the Act for which the provisions of Section 13(1)(c) need not be looked into as it is only applicable if exemption is claimed u/s.11/12 Reliance placed on the provisions of Section 13(1)(c) of the Act by the ld. CIT(E) is not applicable to the issue under consideration. Even assuming the provisions u/s.13(1)(c) of the Act are to be brought into operation in the instant case then the ld. CIT(E) ought to have brought evidence on record by bringing comparative quotations to prove the fact that the lease rent paid in the sum of 2 lakhs per month to the trustees is excessive or unreasonable and beyond the fair market value thereon. On the contrary we find that the ld. AR placed on record that market value of the land is 13, 03, 76, 400/- as per the registered lease deed and the payment of lease rent of 24 lakhs works out to hardly 1.86% thereon. Hence it could be safely concluded that the rent paid by the assessee trust to the trustees is not excessive or unreasonable. Thus third objection raised by the ld. CIT(E) for exemption u/s. 10(23C)(vi) of the Act is hereby dismissed. Accordingly the grounds raised by the assessee are allowed

Summary

Issues Involved:
1. Whether the assessee trust exists solely for educational purposes.
2. Whether the surplus generated by the assessee trust indicates it exists for profit.
3. Whether the payment of lease rent to trustees contravenes the provisions of Section 13(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Existence Solely for Educational Purposes:
The primary issue was whether the assessee trust existed solely for educational purposes. The Commissioner of Income Tax (Exemptions) [CIT(E)] argued that the trust had several non-educational objects. However, upon review, it was found that the predominant objects listed in the Memorandum of Association (MoA) from para ‘a’ to ‘e’ were solely for educational purposes. The objects in para ‘f’ to ‘k’ were deemed incidental to the main educational objectives, necessary for the attainment of the primary goal of running a school. The Tribunal concluded that these incidental objects did not detract from the trust's primary educational purpose. Consequently, the first ground for rejection by the CIT(E) was dismissed as baseless.

2. Surplus Indicating Profit Motive:
The second issue was whether the surplus generated by the trust indicated it existed for profit. The CIT(E) argued that the trust's surplus in its income and expenditure account suggested a profit motive. However, the Tribunal noted that generating a surplus does not automatically imply a profit motive, provided the surplus is used for the trust's charitable purposes and not distributed to private individuals. The Tribunal referenced several judicial precedents, including the Supreme Court's ruling in the case of *Queens Educational Society vs. CIT*, which clarified that an educational institution could generate a surplus without being considered as existing for profit. The Tribunal also highlighted that the trust had incurred a deficit when considering the application of income as per the provisions applicable to charitable trusts. Therefore, the second objection by the CIT(E) was dismissed.

3. Payment of Lease Rent to Trustees:
The third issue was whether the payment of lease rent to trustees violated Section 13(1)(c) of the Income Tax Act. The CIT(E) contended that the payment of ?24 lakhs as lease rent to trustees was excessive and contravened the provisions. However, the Tribunal noted that the trust sought exemption under Section 10(23C)(vi), not Sections 11/12, making Section 13(1)(c) inapplicable. Even if Section 13(1)(c) were applicable, the CIT(E) failed to provide comparative evidence to prove that the lease rent was excessive. The Tribunal found that the lease rent was reasonable, constituting only 1.86% of the market value of the land. Thus, the third objection was also dismissed.

Conclusion:
The Tribunal allowed the appeal of the assessee, concluding that the trust existed solely for educational purposes, the surplus generated did not indicate a profit motive, and the lease rent paid to trustees was reasonable and did not contravene the provisions of the Income Tax Act. The appeal was pronounced on 11/06/2021.