2014 (1) TMI 880 - AT - Income Tax

Disallowance on account of business promotion and entertainment expenses Entitlement for Benefit of section 11 & 12 of the Act Held that -The two actions are mutually intrinsically exclusive and the disallowance need not necessarily lead to holding the assessee disentitled to the benefits of Sections 11 and 12 of the Act Relying upon Assistant Commissioner of Income-tax, Circle -II, Faridabad Versus Idicula Trust Society 2012 (5) TMI 137 - ITAT DELHI - if an assessee has extended any undue benefit to a person mentioned in Section 13 (3),that amount would not be considered as application of income for the purpose of fulfillment of objects of the Society and the benefit under Sections 11 and 12 would not be available of such amount - There is nothing on record to dispute the charitable nature of the assessee trust, as envisaged in its Trust Deed - The element of profit would not render such charitable nature otiose - there is no paradox in the findings recorded by the CIT (A) in firstly upholding the disallowance of business promotion and entertainment expenditure and then, holding the assessee entitled to the benefits of Sections 11 and 12 of the Act Decided against Revenue. Disallowance of Advertisement expenses Expenses incurred for commercial activities or not Held that - The object of the assessee trust is education - The expenditure in question has been incurred for inviting applications for the Hotel Management course and the Business Administration course, besides for the enhancement of the IMT brand name - the Assessing Officer observed that this expenditure indicated the commercial and non- charitable motive of the assessee, this observation formed the sole basis for the disallowance, without anything having been brought by the Assessing Officer on record as to how such expenditure was not in line with the object of the assessee trust thus, there was no occasion for making any ad hoc disallowance Decided against Revenue. Allowability of Exemption u/s 11/12 of the Act Assessee not recognized in India Held that - As held in Delhi Music Society vs. DGIT 2011 (12) TMI 124 - DELHI HIGH COURT education does not mean schooling only and it is not confined to scholastic instruction only, but other forms of education are also included within its definition - The assessee has been show caused by the AICTE - the assessee s proposal for registration under the AICTE Regulations, 2005, stands considered by the Hearing Committee of the AICTE and the institution has been advised to submit the documents regarding the completion of the institutional building and other facilities as per the norms within six months time - This combined with the fact that the application of the Trust is hitherto pending disposal with the AICTE, goes to show that nothing material hinges on the non-registration with the AICTE and the programmes conducted with the OBU are perfectly in order Decided against Revenue.

Summary

Issues Involved:
1. Disallowance of business promotion and entertainment expenses and its impact on benefits under Sections 11 and 12 of the IT Act.
2. Allowance of advertisement expenses and its alignment with the trust's objectives.
3. Entitlement to exemption under Sections 11/12 of the IT Act despite non-recognition of the trust's courses in India.

Issue-wise Detailed Analysis:

1. Disallowance of Business Promotion and Entertainment Expenses:
The department contended that the CIT (A) erred in allowing benefits under Sections 11 and 12 of the IT Act to the assessee despite upholding the disallowance of business promotion and entertainment expenses. The assessee, a trust formed for educational purposes and registered under Section 12A, had claimed exemptions under Sections 11/12. The Assessing Officer (AO) disallowed Rs. 10,29,404/- on account of business promotion and entertainment expenses, suggesting the trust was involved in commercial activities. The CIT (A) upheld this disallowance, noting such expenses are not typical for an educational institution. However, the CIT (A) still granted benefits under Sections 11 and 12, reasoning that the disallowance alone does not negate the charitable nature of the trust. The tribunal agreed, stating the disallowance and entitlement to benefits under Sections 11 and 12 are mutually exclusive actions. The tribunal found no merit in the department's challenge and rejected ground No.1.

2. Allowance of Advertisement Expenses:
The AO disallowed 50% of the advertisement expenses amounting to Rs. 21,67,468/-, arguing these were for commercial activities. The CIT (A) deleted this disallowance, noting the expenses were for inviting student applications and enhancing the institute's brand, aligning with the trust's educational objectives. The tribunal upheld this view, emphasizing that the AO did not provide evidence showing the expenses were not in line with the trust's objectives. The tribunal found no merit in the department's contention and rejected ground No.2.

3. Entitlement to Exemption under Sections 11/12:
The department argued that the CIT (A) erred in allowing exemptions under Sections 11 and 12, as the trust's courses were not recognized in India and were conducted in a commercial manner. The tribunal noted that the CIT (A) relied on the Delhi High Court's decision in 'Delhi Music Society vs. DGIT', which expanded the definition of 'education' beyond traditional schooling. The tribunal observed that the trust's collaboration with OBU for educational programs, despite lacking AICTE recognition, did not negate its charitable status. The tribunal acknowledged the pending AICTE registration and found no material impact from the non-recognition. The tribunal upheld the CIT (A)'s decision, rejecting ground No.3.

Conclusion:
The tribunal dismissed the department's appeal, affirming the CIT (A)'s decisions to uphold the disallowance of business promotion and entertainment expenses, allow the advertisement expenses, and grant exemptions under Sections 11 and 12 of the IT Act. The order was pronounced in the open court on 28.06.2013.