2013 (7) TMI 519 - HC - Income Tax

Status of society - Artificial Juridical Person (AJP) or Association of persons (AOP) - Held that - The society while filing return is described the status as AJP - the Assessing Authority could not accept the said status and treated the assessee as AOP and has passed the order - the Tribunal has held that the assessee is to be treated as AJP. When the return is filed as AJP - the question of treating the assessee as AOP would not arise - the society would be an artificial juridical person other than the association of persons or body of individuals - the definition makes it clear that a person includes an association of persons or body of individuals whether incorporated or not and also every artificial juridical person, not falling within any of the preceding sub-clause - Once a body/society is incorporated under a statute, it becomes juridical person decided against revenue. Exemption u/s 10(23c)(iii)(ad) - Annual receipt (turnover) - prescribed limit - Held that - if the aggregate annual receipts of an educational institution is less than one crore, the income from such educational institution in the hands of the assessee, is not taken into consideration in computing the total income of the assessee. - Sub-clause (vi) provides that any University or other educational institution existing for educational purpose and not for the purpose of profit other than those mentioned in sub-clause (iii)(ab) and sub-clause (iii)(ad) and which may be approved by the prescribed Authority, they are also entitled to the said benefit. In other words, sub-clause (iii)(ab), sub-clause (iii)(ad) and clause (vi) applies to three categories of institutions. Meaning of term aggregate annual receipt - Held that - Each educational institution is a separate entity controlled under various statutes for various purposes. May be the Management of these educational institutions would be in the hands of the Societies or the Trust, but for all other purposes they are different, independent entities. Here any person refers to the assessee and on behalf of refers to such institutions. It may be an University, it may be an educational institution, it may be a hospital or other institutions of similar nature. As all such institutions are independent entity and they generate income and when that income is received by the assessee, it becomes the income in the hand of the assessee and it is such income which is sought to be excluded while computing the total income of the assessee under Section 10. Therefore, irrespective of the expenditure incurred by those institutions, the exemption is based on the total receipts. Even if the word aggregate has to be understood as suggested by the Revenue as the annual receipts of such educational institutions put together, probably, the said provision regarding exemption would be of no use at all. Clause (vi) makes it clear that if educational institution do not fall under either of those two categories and still such educational institutions are also entitled to the exemption, provided such institutions are approved by the prescribed authority. Therefore all these three provisions apply under three differed spheres. Otherwise, there was no necessity for the Legislature to introduce these three provisions. In that view of the matter, the finding recorded by the Tribunal that aggregate annual receipt of other educational institution means, total annual receipt of each educational institution, is correct and it does not call for any interference. - Decided in favor of assessee. Addition in respect of grant of subsidy and advancement of unsecured loans to persons connected with the Chairman of the society under various agreements - Whether the Tribunal is correct in deleting the interest amount in respect of interest Held that - free advances made to the relatives of the Chairman and the amounts in turn, are transferred to a firm whatever money had been paid earlier was sought to be adjusted as the subsidy amount thereby the partnership firm committed to provide hostel facility - Having regard to the nature of construction the extent of construction, the responsibilities and the advantages - tribunal rightly allowed the said amount as expenditure and deleted the additions made by the assessing authority - we do not see any error committed by the Tribunal - the disallowance of the notional interest on the said amount would also fall to ground Decided in favor of assessee. Addition towards funds collected towards construction of building as donation - donors had not been identified - section 11(1)(d) Held that - the questions are purely a question of fact - the proper thing would be to set aside the finding and remand the matter back to the Assessing Authority, giving an opportunity to the assessee to produce the ledger books and other accounts showing the receipt of such payment and utilization of the said amount for the purpose of construction, so that on the aforesaid material, the Assessing Authority can pass suitable orders on merits. Whether the Tribunal is correct in not appreciating that the assessee was independently claiming section 10(23C) (iii)(ad) exemption in respect of the entire trust as well as in respect of independent institutions when the management and the control of the same vested with its Chairman, who was running the same as a business concerns i.e. for profit -the assessee constructed a building on a leased property. It was treated as block asset and depreciation was allowed under Section 32(1) - the said building was discarded - the building was surrendered to the lessor on the expiry of the lease period. On the date of the expiry of the lease period, the written down value was mentioned in the balance sheet. It is that amount claimed as deduction under clause (iii) of sub-section (1) of Section 32 - the assessee is entitled to the said deduction - The lower authority by misreading the provisions of law had denied the said benefit decided against revenue.

Summary

Issues Involved:
1. Status of the assessee (Artificial Juridical Person vs. Association of Persons)
2. Exemption under Section 10(23C)(iii)(ad) of the Income Tax Act, 1961
3. Subsidy and notional interest
4. Interest-free advances to relatives
5. Building fund and infrastructure fund
6. Write-off of leasehold properties
7. Donations made by the society
8. Management and control of educational institutions
9. Corpus fund treatment under Section 11(1)(d) of the Income Tax Act, 1961

Detailed Analysis:

1. Status of the Assessee:
The court examined whether the assessee should be assessed as an "Artificial Juridical Person" (AJP) or an "Association of Persons" (AOP). The court concluded that since the society is incorporated under a statute, it becomes a juridical person. The business of the society is carried out in its name, not in the name of the persons forming the society. Therefore, the Tribunal's decision to treat the assessee as AJP was upheld.

2. Exemption under Section 10(23C)(iii)(ad):
The court discussed the interpretation of "aggregate annual receipts" under Section 10(23C)(iii)(ad). The Revenue argued that the aggregate annual receipts should include the total receipts of all educational institutions run by the assessee. However, the court held that the term "aggregate annual receipts" refers to the annual receipts of each educational institution individually, not collectively. Therefore, the Tribunal's interpretation that the exemption applies if the annual receipts of each educational institution do not exceed Rs. 1 crore was upheld.

3. Subsidy and Notional Interest:
The court examined the payment of Rs. 2.12 crores as a subsidy for hostel facilities and the subsequent notional interest. The Tribunal found that providing hostel facilities is essential for the society's educational purposes. The subsidy was considered an expenditure towards furthering the society's objectives, and thus, the Tribunal's decision to allow the subsidy and notional interest as deductions was upheld.

4. Interest-free Advances to Relatives:
The court noted that the Tribunal deleted the addition made in respect of interest-free advances to the Chairman's relatives. The Tribunal's decision was based on the understanding that these advances were not for personal benefit but were aligned with the society's objectives. The court upheld the Tribunal's decision.

5. Building Fund and Infrastructure Fund:
The court addressed the treatment of amounts received under the Building Fund and Infrastructure Fund. The Tribunal had granted exemption, considering these amounts as capital receipts for constructing educational buildings. However, the court noted that the Assessing Authority did not have sufficient particulars about the donors. Therefore, the matter was remanded back to the Assessing Authority to verify the receipts and their utilization for construction purposes.

6. Write-off of Leasehold Properties:
The court analyzed the write-off of Rs. 2.63 crores on leasehold properties. The Tribunal had allowed this as an expenditure under Section 32(1)(iii), considering it as a depreciation claim. The court upheld the Tribunal's decision, stating that the written-down value of the building surrendered on lease expiry is deductible.

7. Donations Made by the Society:
The court examined the eligibility of donations made by the society for deduction. The Tribunal had allowed these donations as they were made for charitable purposes. The court upheld the Tribunal's decision, recognizing the donations as legitimate expenses aligned with the society's objectives.

8. Management and Control of Educational Institutions:
The court discussed whether the management and control of educational institutions by the Chairman, who runs them as business concerns, affects the exemption under Section 10(23C)(iii)(ad). The Tribunal found that the educational institutions were run solely for educational purposes and not for profit. The court upheld the Tribunal's decision, affirming the exemption.

9. Corpus Fund Treatment under Section 11(1)(d):
The court addressed the treatment of Building Fund and Infrastructure Development Fund as corpus funds. The Tribunal had treated these amounts as corpus funds, exempt from tax. However, the court remanded the matter back to the Assessing Authority to verify the donors and the utilization of these funds for construction purposes.

Conclusion:
The appeals were dismissed except for the issue related to the Building Fund, which was remanded back to the Assessing Authority for further verification. The court upheld the Tribunal's decisions on the status of the assessee, exemption under Section 10(23C)(iii)(ad), subsidy and notional interest, interest-free advances, write-off of leasehold properties, and donations. The matter of the Building Fund and Infrastructure Fund was sent back for reassessment.