2017 (12) TMI 1475 - AT - Income Tax

Exemption u/s 10(23C)(vi) withdrawn - undue benefit to one person - expenditure incurred on this tour of group of teacher along with Director - payments as remuneration paid to the persons for rendering services and not merely payments for being the specified persons - Held that - When the qualification and experience of the persons who were managing the affairs of the society and also involved in the day to day affairs and teaching work is not denied then salaries and allowances or remuneration paid to these persons cannot be held as unreasonable or excessive. Thus we hold that the payment is made on account of salary against the services rendered by these persons and not merely on account of their status then the same cannot be said to be a undue benefit to attract the provisions of Section 13(3) of the Income Tax Act. Except one person,all others are the teachers of the assessee society and not falling in the category of specified persons as per section 13(3). When the expenditure was incurred for the tour of the entire group then it cannot be considered as undue benefit only one i.e. Director. It is not a case of the Department that all 23 persons are falling in the category of the specified persons. We find that only the Director namely Shri Vaibhav Singh was considered by the ld. CIT(E) as specified persons while raising the objection of payment of salary. Therefore, out of the group of 23 persons, the Director cannot be picked out to invoke the provisions of section 13(3) of the Income Tax Act. Further it is not the finding of the ld. CIT(E) that the tour was undertaken for their personal trip then the education tour by the teaching staff along with the Director has to be considered as one event and expenditure. Hence, we are of the view that the expenditure incurred on this tour of group of teacher along with Director cannot be held as undue benefit to one person. In view of the above facts and circumstances of the case as discussed above the impugned order passed by the ld. CIT(E) is set aside and consequently the approval u/s 10(23C)(vi) granted to the assessee is restored. - Decided in favour of assessee.

Issues Involved:
1. Validity of the show cause notice issued under Section 10(23C)(vi) of the Income Tax Act.
2. Withdrawal of approval granted under Section 10(23C)(vi) with retrospective effect.
3. Alleged violation of Section 11(5) due to investments/deposits in non-prescribed modes.
4. Alleged undue benefit given to specified persons under Section 13(3) by way of salary and foreign travel expenses.

Issue-wise Detailed Analysis:

1. Validity of the Show Cause Notice:
The assessee contended that the show cause notice dated 08.07.2016 was issued and signed by DCIT (Hqr.) and not by the CIT (Exemptions) (CIT(E)), thus rendering it invalid. The Tribunal noted that the power to withdraw approval under Section 10(23C)(vi) is vested in the prescribed authority, i.e., CIT(E), and the satisfaction of the prescribed authority is mandatory before issuing a show cause notice. The Tribunal found that the notice was issued by DCIT (Hqr.) as per the directions of CIT(E), and not directly by CIT(E), thus lacking the necessary satisfaction of the prescribed authority. Consequently, the Tribunal held the show cause notice invalid, rendering the subsequent proceedings and order void.

2. Withdrawal of Approval with Retrospective Effect:
The assessee argued that the CIT(E) erred in withdrawing the approval granted under Section 10(23C)(vi) with retrospective effect from A.Y. 2011-12 onwards. The Tribunal observed that the withdrawal of approval can only be prospective unless explicitly provided otherwise by the legislative Act. The Tribunal referred to the decision of the Hon’ble Supreme Court in the case of State of Rajasthan vs. Basant Agrotech India Ltd., which emphasized that subordinate legislation cannot be given retrospective effect unless the principal Act confers such power. Therefore, the Tribunal found the retrospective withdrawal of approval invalid.

3. Alleged Violation of Section 11(5):
The CIT(E) noted that the assessee had made certain advances and investments not in the prescribed modes under Section 11(5), which included:
- Advances to Trimurti Colonizers & Builders Pvt. Ltd. (?1,38,00,000)
- Advances to A.K. Education Welfare Society (?1,00,00,000)
- Advances to Ambience Land Developer (?60,07,953)
- Advances to Surendra Kumar Meena (?3,00,00,000)

The Tribunal analyzed each transaction and concluded:
- Trimurti Colonizers & Builders Pvt. Ltd.: The advance was made under an agreement to purchase educational land, which was later canceled, and the amount was refunded. This was not an investment but a payment for acquiring land for educational purposes.
- A.K. Education Welfare Society: The advance was given to another registered educational society for starting a school in Bharatpur. The school was eventually established, aligning with the assessee's educational objectives.
- Ambience Land Developer: The advance was for purchasing flats for office staff and the principal's residence. The Tribunal found this to be a legitimate expenditure for educational purposes.
- Surendra Kumar Meena: The advance was for purchasing land for a new school, which was later refunded due to non-conversion of land use. This was not considered an investment or deposit.

The Tribunal concluded that these transactions did not violate Section 11(5) as they were not investments or deposits but payments for achieving the assessee's educational objectives.

4. Alleged Undue Benefit to Specified Persons:
The CIT(E) alleged that the assessee provided undue benefits to specified persons through salaries and foreign travel expenses. The Tribunal found:
- Salaries: The salaries paid to specified persons were for services rendered, and their qualifications and roles justified the payments. There was no evidence that the salaries were excessive or unreasonable.
- Foreign Travel Expenses: The expenses were incurred for a study tour involving 23 staff members, including teachers and one director. The Tribunal noted that the tour was for educational purposes and not for personal benefit, thus not constituting undue benefit.

The Tribunal held that the payments and expenses were reasonable and aligned with the assessee's educational objectives, and did not violate Section 13(3).

Conclusion:
The Tribunal set aside the impugned order passed by the CIT(E) and restored the approval under Section 10(23C)(vi) granted to the assessee. The appeal filed by the assessee was allowed.

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