2025 (4) TMI 1477 - AT - Income Tax

Denying the benefit of exemption claimed u/s 10(23C) (iiiad) - funds collected by the assessee trust towards building and repair development expenditure - HELD THAT - We find that the issue as to whether the funds collected by the assessee trust towards building and repair development expenditure has already been decided in the case of Vidya Bharati Society for Education Scientific Advancement 2020 (1) TMI 559 - ITAT KOLKATA Thus we set aside the order passed by CIT(A) and direct the AO to recomputed the income of the assessee after excluding the building and repair development expenditure from the gross receipts and allow exemption u/s.10(23C)(iiiad) of the Act. Thus appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

- Whether the assessee trust is entitled to exemption under Section 10(23C)(iiiad) of the Income Tax Act, given its annual receipts;

- Whether the inclusion of amounts received towards building and repair development fund in the annual receipts disqualifies the assessee from claiming exemption under Section 10(23C)(iiiad);

- Whether the development fund contributions received by the assessee constitute capital receipts (corpus donations) or revenue receipts;

- Whether the denial of exemption on the ground of the assessee filing Form 10B instead of Form 10BB is justified;

- Whether the addition of depreciation to the total income, when not claimed as expense by the assessee, is justified;

- Whether the turnover of the assessee exceeds Rs. 1 crore for the purpose of exemption eligibility;

- The correctness of the lower authorities' factual and legal appreciation of the nature of receipts and exemption claim.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Entitlement to exemption under Section 10(23C)(iiiad) despite annual receipts exceeding Rs. 1 crore due to inclusion of development fund contributions

Relevant legal framework and precedents: Section 10(23C)(iiiad) exempts income of an educational institution from taxation, subject to certain conditions including limits on annual receipts. The term "corpus donation" or capital receipts is not explicitly defined in the Act but has been judicially interpreted. The Karnataka High Court in DIT Vs Sri Ramakrishna Seva Ashrama held that corpus donations are amounts given for capital purposes and not for revenue use. The Rajasthan High Court in Sukhdeo Charity Estate v. ITO held that contributions forming part of corpus kept as capital in books are not taxable income. The Delhi High Court in DIT (Exemption) v. National Association of Software & Services Companies recognized one-time fees intended solely for capital purposes as corpus donations, not taxable as income.

Court's interpretation and reasoning: The Tribunal relied heavily on a coordinate bench decision involving a similar issue where the development fund contributions were held to be corpus donations and not revenue receipts. The Tribunal examined the resolution passed by the trustees which clearly stipulated that the development fund was to be used solely for capital development of school infrastructure and purchase of capital equipment, prohibiting its use for revenue purposes. The Tribunal found that the lower authorities' factual premise-that development fund contributions were collected monthly along with tuition fees-was factually incorrect. The contributions were voluntary and made at any time during the year, not as a recurring monthly fee.

Key evidence and findings: The Tribunal considered the trustees' resolution dated 03.01.2000, sample receipts issued to students showing voluntary contributions towards development fund, and the accounting treatment where these contributions were credited to a separate 'Development Fund' account. The absence of evidence that the development fund was collected as a fee for services rendered was noted. The Tribunal also found no material to suggest that the contributions were not voluntary or were consideration for services.

Application of law to facts: The Tribunal applied the judicial interpretations of corpus donations to the facts, concluding that the development fund contributions were intended as capital receipts forming part of the corpus of the trust and hence not includible in the annual receipts for the purpose of exemption under Section 10(23C)(iiiad). The Tribunal held that the inclusion of such corpus donations in the annual receipts was erroneous and led to wrongful denial of exemption.

Treatment of competing arguments: The Revenue argued that the development fund contributions were revenue receipts because they were collected along with tuition fees and thus should be included in annual receipts exceeding Rs. 1 crore, disqualifying the exemption. The Tribunal rejected this argument based on factual inaccuracies and lack of evidence that the contributions were fees for services. The Tribunal also dismissed the Revenue's contention that absence of express written direction from donors excluded corpus characterization, holding that intention can be inferred from conduct and accounting treatment.

Conclusions: The Tribunal concluded that the development fund contributions are capital receipts forming part of the corpus and must be excluded from annual receipts. Consequently, the assessee's annual receipts fall below the Rs. 1 crore threshold, entitling it to exemption under Section 10(23C)(iiiad).

Issue: Denial of exemption on the ground of filing Form 10B instead of Form 10BB

Relevant legal framework: Form 10BB is a procedural requirement for certain trusts claiming exemption under Section 10(23C). Filing of the correct form is a procedural formality and does not determine substantive eligibility for exemption.

Court's interpretation and reasoning: The Tribunal held that the denial of exemption merely on the ground that the assessee filed Form 10B instead of Form 10BB was incorrect. The filing of Form 10BB is procedural and the exemption claim cannot be denied solely due to delay or incorrect filing of the form.

Application of law to facts: The Tribunal found that the lower authorities failed to appreciate that procedural lapses should not defeat substantive rights to exemption.

Conclusions: The Tribunal allowed the exemption claim despite the procedural irregularity in filing the form.

Issue: Addition of depreciation to total income when not claimed as expense

Relevant legal framework: Depreciation is an allowable deduction if claimed; however, if not claimed, adding it back to income is not justified.

Court's interpretation and reasoning: The Tribunal observed that the AO erred in adding depreciation of Rs. 19,73,235 to the total income when the assessee had not claimed such expense.

Conclusions: The Tribunal directed that the depreciation amount should not be added to the total income.

Issue: Whether the turnover of the assessee exceeded Rs. 1 crore

Court's interpretation and reasoning: The Tribunal accepted the assessee's submission that the amount of Rs. 47,37,278 included as receipts was actually building and repair development fund, a capital receipt. Excluding this amount, the turnover was Rs. 84,18,183, below the threshold limit.

Conclusions: The Tribunal held that the turnover did not exceed Rs. 1 crore for exemption purposes.

3. SIGNIFICANT HOLDINGS

"The development fees contribution received from the students were intended to provide corpus or capital of the assessee society which was to be solely used for specific capital purposes and there was embargo on the assessee society to utilize it for revenue purpose."

"There is no such requirement prescribed in law mandating a written direction from the donor so as to constitute any voluntary payment to form part of the corpus. By the conduct of the parties as also the entries in books of accounts, one can reasonably infer the intention of the donor as well as donee and determine whether or not the parties had intended to use the donation amounts for capital purposes or any purpose for which the trust is established."

"The basic premise on which the lower authorities proceeded i.e. the development fund contributions were compulsorily collected by the assessee society from each student along with monthly tuition fees on monthly basis being factually wrong, the conclusions drawn based on assumption of wrong facts is therefore unsustainable."

"The filing form 10BB is procedural formality and claim of exemption cannot be denied merely on the basis of delay of filing such form."

"The AO is accordingly directed to re-compute the income of the assessee society after excluding the development fees of Rs. 19,39,000/- from the purview of Section 11 of the Act."

The Tribunal set aside the orders of the CIT(A) and AO, directing recomputation of income excluding building and repair development fund receipts and allowing exemption under Section 10(23C)(iiiad).