2018 (2) TMI 1692 - AT - Income Tax

Eligibility for exemption u/s 11 and 12 - Educational institution - charging fees from the students - CIT(A) observed that assessee is not eligible for exemption u/ss.11 and 12, once the provision of Section 10(23C)(iv) and (v) are applicable - According to CIT(A), since sources of income are students, therefore, students cannot be reckoned as property held under the trust and activity of imparting education also cannot be reckoned as property. - Held that - Legislature did not intend to Rule out Section 11 when exemption was claimable under specific provision of Section 10. See CIT vs. Bar Council of Maharashtra, (1981 (4) TMI 8 - SUPREME Court). Section 11(1)(d) refers to voluntary contribution received by the charitable trust which forms part of the corpus which legislature has considered to be capital receipt not chargeable to tax. Section 11 refers to voluntary contribution other than the ones falling u/s. 11(1)(d) thereby treating it as property held under the trust. Further, Section 11 envisages that revenue consideration shall be deemed to be income derived from property held under the Trust. CIT (A) was incorrect in law in holding that contribution received by way of fees from the beneficiaries is not an income from the property held under the trust. The assessee school has been charging fees only from its students and there is no capitation fee at all. Such fees have been charged from the students for the running of the school and has been applied for its dominant purpose/object of carrying out educational activity. In this case one of the main objection raised on behalf of the department was that said Board was not entitled for the benefit of Section 11 as it was not a trust under the Public Trust Act and therefore, it was not entitled to claim registration u/s. 12A. Since it was not held under the trust therefore, it is not entitled for exemption u/s. 11(1)(a). The assessee society which has been registered under Registration of Societies Act, 1860 with the sole object of providing education and has a legal obligation for applying its income for such charitable purpose, then for the purpose of Section 11 it has to be treated as trust and income derived from carrying out such obligation has to be reckoned as income derived from property under the trust and therefore, on the ground also as raked by the CIT (A), exemption u/s.11 cannot be denied. Accordingly, we hold that none of the observations and the finding of the CIT(A) are sustainable and the grounds taken and the reasoning given by him to deny the benefit/exemption u/s.11 to the assessee cannot be upheld either in law or on facts. Accordingly the entire receipts which has been taxed under the head income from other sources is set aside and we direct the AO to grant exemption u/s.11 as per the income and expenditure account submitted by the assessee. - Decided in favour of assessee.

Issues Involved:
1. Validity of notice issued under section 251(2) of the Income Tax Act, 1961.
2. Eligibility of educational institution for exemption under section 10(23C) versus sections 11 & 12 of the Income Tax Act.
3. Determination of income derived from property held under trust and eligibility for exemption under section 11.
4. Legality of educational institutions recovering costs from students by way of fees.
5. Eligibility of donations received for exemption under section 11(1)(d).
6. Assessment of income under the head "Profits & gains from business or profession" if exemption under sections 10 or 11 is not allowed.
7. Assessment of income under the residual head "Income from other sources" and deductibility of expenditure under section 57.

Detailed Analysis:

1. Validity of Notice Issued Under Section 251(2):
The Tribunal did not specifically address this issue in the detailed analysis, focusing instead on the substantive grounds of appeal related to the eligibility for exemption under sections 11 and 12.

2. Eligibility of Educational Institution for Exemption:
The Tribunal held that there is no bar or disharmony between Section 10(23C) and Section 11. It cited the Hon'ble Supreme Court in CIT vs. Bar Council of Maharashtra, which clarified that exemption under Section 11 cannot be denied even when a specific provision under Section 10(23C) exists. This principle was also upheld by the Hon'ble Jurisdictional High Court in CIT vs. Indian Institute of Engineering Society and the Punjab and Haryana High Court in CIT vs. Mahasabha Gurukul Vidhyapeeth.

3. Determination of Income Derived from Property Held Under Trust:
The Tribunal rejected the CIT (A)'s view that income from running a school cannot be considered income derived from property held under trust. It emphasized that Section 12 of the Act deems voluntary contributions as income derived from property held under trust. The Tribunal referenced the Supreme Court's judgment in CIT vs. Gujarat Maritime Board, which established that an entity under legal obligation to apply its income for charitable purposes is entitled to be registered as a charitable trust.

4. Legality of Educational Institutions Recovering Costs from Students by Way of Fees:
The Tribunal disagreed with the CIT (A)'s assertion that charging fees amounts to uncharitable activities. It noted that charging fees is essential for carrying out educational activities and referenced the Supreme Court's judgment in TMA Pai Foundation, which allowed educational institutions to charge reasonable fees to cover costs and generate surplus for furthering educational purposes.

5. Eligibility of Donations Received for Exemption:
The Tribunal did not specifically address this issue in detail, focusing instead on the broader issue of eligibility for exemption under sections 11 and 12.

6. Assessment of Income Under "Profits & Gains from Business or Profession":
The Tribunal did not specifically address this issue, as it upheld the assessee's eligibility for exemption under section 11.

7. Assessment of Income Under "Income from Other Sources" and Deductibility of Expenditure:
The Tribunal rejected the CIT (A)'s decision to tax the entire receipts as "income from other sources" and disallow any deductions under section 57. It directed the Assessing Officer to grant exemption under section 11 based on the income and expenditure account submitted by the assessee.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the CIT (A)'s decision to tax the entire receipts and directing the Assessing Officer to grant exemption under section 11. The Tribunal emphasized the legal principles established by higher courts, confirming that educational institutions can claim exemption under section 11 even if they are eligible under section 10(23C), and that charging reasonable fees does not negate their charitable status.

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