2017 (11) TMI 1421 - HC - Income Tax

Eligibility of benefit of section 11(1) - huge surpluses earned was withdrawn by way of payments to the persons referred u/s 13(3) - corpus fund - Held that - In the present case, the Assessee is not claiming any benefit Under Section 11(2) as it cannot; because in respect of this assessment year, the Assessee has not complied with the conditions laid down in Section 11(2). The Assessee, however, is entitled to claim the benefit of Section 11(1)(a). In the present case, the Assessee has applied ₹ 8 lakhs for charitable purposes in India by purchasing a building which is to be utilised as a hospital. This income, therefore, is entitled to an exemption Under Section 11(1). In addition, under Section 11(1)(a), the Assessee can accumulate 25% of its total income pertaining to the relevant assessment year and claim exemption in respect thereof. Section 11(1)(a) does not require investment of this limited accumulation in government securities. The balance income of ₹ 1,64,210.03 constitutes less than 25% of the income for Assessment Year 1970-71. Therefore, the Assessee is entitled to accumulate this income and claim exemption from income tax Under Section 11(1)(a). Any educational institution which is required to be run they have to have a surplus fund for educational activity to sustain the consistency in the efficiency and very purpose of collecting donation is to sustain activity of institution. Merely, because surplus fund it cannot be envisaged as profit, the institution has not crossed one crore limit and they are well within their prescribed limit. The income was received by the trust which is reflected in the books of accounts. In our view, the view taken by the authority is required to be reversed and it is required to be looked into the foundation of the ratio laid down by the Supreme Court in the case of Queen s Education Society (supra) where funds which has been surplus is within a corpus fund and it has been kept as reserve fund which is not in dispute and they have not crossed the limit of one crore. Depreciation claim - Held that - In the present case, the assessee is not claiming double deduction on account of depreciation as has been suggested by learned Counsel for the Revenue. The income of the assessee being exempt, the assessee is only claiming that depreciation should be reduced from the income for determining the percentage of funds which have to be applied for the purposes of the trust. There is no double deduction claimed by the assessee as canvassed by the Revenue. Judgment of the Hon'ble Supreme Court in Escorts Ltd. and Anr. (1992 (10) TMI 1 - SUPREME Court) is distinguishable for the above reasons. It cannot be held that double benefit is given in allowing claim for depreciation for computing income for purposes of Section 11. The questions proposed have, thus, to be answered against the revenue and in favour of the assessee.

Issues Involved:

1. Whether the Tribunal was justified in allowing the benefit of section 11(1) as a charitable trust to the assessee despite huge surpluses being withdrawn by payments to persons referred to in section 13(3) of the I.T. Act.
2. Whether the Tribunal was justified in the allowability of depreciation of assets under section 32 even where the same had already been claimed as an application of income in previous years.
3. Whether the Tribunal was justified in deleting the addition made for foreign traveling expenses under section 37 of the Act despite the assessee failing to prove the justification of these expenses.
4. Whether the Tribunal was justified in deleting the addition of disallowance of interest under section 36(1)(iii) despite the assessee failing to discharge its onus of furnishing evidence of the use of the assets.
5. Whether the Tribunal was justified in holding that the provisions of Section 60 of the Income Tax Act, 1961, cannot be invoked despite the referred society not filing returns of income and not being registered under Section 12A of the Act.
6. Whether the Tribunal was justified in directing to grant approval under section 80G(5) holding that the activities of the society as charitable despite the society being controlled and managed by one family with a profit motive.
7. Whether the Tribunal was justified in confirming the decision of CIT(A) in allowing salary expenses to a family member which is higher than reasonable.
8. Whether the Tribunal was justified in allowing contributions made to Jaipur National University as an application of income under section 11 despite it being a violation of the society's bye-laws and provisions of section 13(1)(c) and 13(2) of the IT Act.

Issue-wise Detailed Analysis:

1. Benefit of Section 11(1) as Charitable Trust:
The Tribunal allowed the benefit of section 11(1) to the assessee, recognizing it as a charitable trust despite the huge surpluses earned and withdrawn by payments to persons referred to in section 13(3) of the I.T. Act. The Tribunal's decision was based on the premise that the assessee was consistently pursuing charitable activities, and the registration under section 12A/12AA was in force. The Tribunal emphasized that the AO could examine the application of income for charitable purposes but could not question the existence of the trust for charitable purposes, which only the Commissioner had the authority to do. This was supported by the Rajasthan High Court's decision in Deputy Commissioner Income-Tax v. Cosmopolitan Education Society, which stated that misutilization or mismanagement by members could not be the basis for rejecting the claim of exemption of the educational society.

2. Allowability of Depreciation of Assets:
The Tribunal justified the allowability of depreciation under section 32, even where the same had already been claimed as an application of income in previous years. The Tribunal's decision was supported by various High Court judgments, including the Rajasthan High Court in Commissioner of Income Tax-II, Jodhpur vs. Krishi Upaj Mandi Samiti and the Punjab and Haryana High Court in Commissioner of Income Tax vs. Market Committee, Pipli. These judgments established that depreciation on assets used for charitable purposes should be allowed as a deduction to compute the income of a charitable institution on commercial principles. The Tribunal also noted that the amendment to section 11(6), which disallowed such depreciation, was prospective and applicable only from 1st April 2015.

3. Deletion of Addition for Foreign Traveling Expenses:
The Tribunal deleted the addition made for foreign traveling expenses under section 37 of the Act, despite the assessee failing to prove the justification of these expenses. The Tribunal concluded that the foreign trips were part of a student exchange program and were covered under the trust's objectives, thus benefiting the educational institution and its students. The Tribunal's decision was supported by the Rajasthan High Court's judgment in Jhunjhunu Academy Sammittee Vs. Income Tax Officer Jhunjhunu, which recognized the necessity of surplus funds for sustaining educational activities and infrastructure development.

4. Deletion of Disallowance of Interest:
The Tribunal deleted the addition of disallowance of interest under section 36(1)(iii), despite the assessee failing to discharge its onus of furnishing evidence of the use of the assets. The Tribunal's decision was based on the factual findings and appreciation of evidence, which indicated that the expenses were incurred for the trust's charitable purposes. This decision was supported by the Rajasthan High Court's judgment in Commissioner of Income Tax, Jaipur-II vs. Consulting Engineering Group Ltd., which emphasized that such findings of fact by the Tribunal should not be interfered with unless they were perverse or unreasonable.

5. Provisions of Section 60:
In Appeal No. 235/2012, the Tribunal held that the provisions of Section 60 of the Income Tax Act, 1961, could not be invoked in the present case, despite the referred society not filing returns of income and not being registered under Section 12A of the Act. The Tribunal's decision was based on the specific facts and circumstances of the case and the interpretation of the relevant statutory provisions.

6. Approval under Section 80G(5):
In Appeal No. 101/2014, the Tribunal directed to grant approval under section 80G(5), holding that the activities of the society were charitable despite the society being controlled and managed by one family with a profit motive. The Tribunal's decision was supported by the Supreme Court's judgment in Queen's Education Society vs. CIT, which held that surplus ploughed back for educational purposes did not negate the charitable nature of the institution.

7. Reasonableness of Salary Expenses:
In Appeal No. 262/2017, the Tribunal confirmed the decision of CIT(A) in allowing salary expenses to a family member, which was higher than reasonable. The Tribunal's decision was based on the factual findings that the salary expenses were justified and necessary for the trust's operations. This decision was supported by the Rajasthan High Court's judgment in Murari Lal Khandelwal vs. CIT, which emphasized that the reasonableness of salary expenses was a question of fact and should not be interfered with unless the findings were perverse.

8. Contributions to Jaipur National University:
The Tribunal allowed contributions made to Jaipur National University as an application of income under section 11, despite it being a violation of the society's bye-laws and provisions of section 13(1)(c) and 13(2) of the IT Act. The Tribunal's decision was based on the interpretation that the contributions were for educational purposes and did not violate the charitable nature of the trust. The Tribunal emphasized that the control by the same trustees did not automatically invoke section 13, and the contributions were within the trust's objectives.

Conclusion:
The Rajasthan High Court upheld the Tribunal's decisions on all the issues, emphasizing the charitable nature of the assessee's activities and the factual findings supporting the allowability of expenses and depreciation. The Court dismissed the appeals, affirming the Tribunal's interpretation of the relevant statutory provisions and the application of judicial precedents.

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