2018 (12) TMI 1553 - AT - Income Tax

Exemption U/s 11 and 12 rejected - specific part of the income or property is found to be used or applied for the benefit of specified persons - AO applying the provisions of Section 164(2) for assessing the income of the society as business income after denying the exemption U/s 11 - Held that - Denial of benefit of Section 11 and 12 is not automatic merely because some payments made to the some specified persons but the said payment should be in the nature of benefit of such specified persons. Therefore, if the payment is made without any service by the specified persons then to the extent of payment, which is excessive or without any service, the same will be treated as the income applied or used for the benefit of the specified person not eligible for exemption U/s 11 and 12 of the Act. In the case in hand, CIT(A) has already considered that the salary and interest paid to the specified persons was not in excess of what may be reasonably paid, therefore, to that extent the payment of salary and interest will not attract the provisions of Section 13(1). Hence, even if any part of the income or property which is found to be used or applied for the benefit of the persons specified to in sub-section (3) of Section 13, the benefit of Sections 11 and 12 is not available only to that extent and the claim of the assessee cannot be denied in toto. Accordingly we hold that the denial of exemption to the assessee U/s 11 and 12 of the Act is not justified except to the extent where the specific part of the income or property is found to be used or applied for the benefit of specified persons. Hence, the orders of the authorities below qua this issue are set aside and both the grounds of the assessee s appeal are allowed. Addition on account of interest free advances to specified persons - Held that - The assessee has clearly made out a case that the land in question was in the possession of the assessee and therefore, the payment made under the agreement for purchase of land. Once the possession of land was already transferred to the assessee then the payment in question was evidently for purchase of land. Therefore, merely because the conveyance deed was not registered as the assessee has not paid the balance payment of purchase consideration would not lead to the conclusion or any inference that the said payment was made for the benefit of the specified persons. The assessee is in possession of the land of ₹ 8.00 crores against which only ₹ 5,05,00,000/- was paid, therefore, we do not find any substance in the opinion of the AO as well as the ld. CIT(A) holding that the said payment is falling in the category of application of income or property for the benefit of specified persons. Even otherwise AO has made the addition of notional interest whereas there was no corresponding expenditure incurred by the assessee. In any case when the payment was made as a consideration for purchase of land, possession of which was already transferred to the assessee under the agreement dated 27/08/2012 then the said amount will not partake the character of income or property of the Trust applied or used for the benefit of specified persons. - decided in favour of assessee Addition of development receipt/fee treating the same as revenue receipt - Held that - The development fee received by the assessee from the students as per the guidelines fixing the fee structure by the State Government for the technical institutions and applying the other conditions as specified in the orders of the State Govt. is capital in nature and not revenue. The decision as relied upon by the ld CIT-DR in the case of ACIT Vs. M/s Scholars Education Trust of India 2017 (12) TMI 354 - ITAT JAIPUR is based on different set of facts and it was not either pleaded or brought on record by the assessee in the said case that the development fee was to be used for specific purpose. Hence, the Tribunal has given the finding based on the fact that the said fee was not part of the corpus fund of the assessee Trust. Accordingly, we delete the addition made by the Assessing Officer on this account. - decided in favour of assessee

Issues Involved:

1. Denial of exemption under Sections 11 and 12 of the Income Tax Act, 1961.
2. Application of Section 164(2) of the Income Tax Act for assessing the income as business income.
3. Addition of ?60,60,000 on account of interest-free advances to specified persons.
4. Addition of ?4,68,55,950 by treating development receipts as revenue receipts instead of capital receipts.
5. Addition of ?71,18,248 on account of registration receipts, book bank receipts, and late fees receipts.
6. Non-allowance of capital expenditure as application of income for computing the income of the trust.

Detailed Analysis:

1. Denial of Exemption under Sections 11 and 12:
The assessee, a society running an educational institution, claimed exemptions under Sections 11 and 12 of the Income Tax Act. The Assessing Officer (AO) denied these exemptions, citing violations of Section 13, specifically regarding interest payments and advances to specified persons, as well as salary payments. The Tribunal noted that while some payments to specified persons were excessive, the entire exemption under Sections 11 and 12 should not be denied. Only the excess payments should be treated as income not eligible for exemption. The Tribunal allowed the appeal, holding that denial of exemption in toto was not justified.

2. Application of Section 164(2):
The AO applied Section 164(2) to assess the income of the society as business income after denying the exemption under Section 11. The Tribunal's analysis under the first issue also covered this aspect, as the denial of exemption was found to be unjustified.

3. Addition of ?60,60,000 on Account of Interest-Free Advances:
The AO added ?60,60,000 as notional interest on an advance of ?5,05,00,000 given by the assessee to a company for land purchase, where trustees had substantial interest. The Tribunal found that the advance was part of the consideration for land purchase, and the land was in possession of the assessee. Therefore, it was not a benefit to specified persons. The Tribunal deleted the addition, noting that the notional interest was unjustified as no actual interest expenditure was incurred.

4. Addition of ?4,68,55,950 by Treating Development Receipts as Revenue Receipts:
The AO treated development fees as revenue receipts. The Tribunal referred to government guidelines and Supreme Court judgments, which stipulated that development fees are capital receipts meant for specific purposes such as infrastructure development. The Tribunal held that the development fees should be treated as capital receipts, not revenue receipts, and deleted the addition.

5. Addition of ?71,18,248 on Account of Registration Receipts, Book Bank Receipts, and Late Fees Receipts:
The assessee did not press this ground during the hearing. The Tribunal dismissed this ground as not pressed.

6. Non-Allowance of Capital Expenditure as Application of Income:
Similar to the fifth issue, the assessee did not press this ground during the hearing. The Tribunal dismissed this ground as not pressed.

Conclusion:
The Tribunal partly allowed the appeal, granting relief on the denial of exemptions under Sections 11 and 12, and on the additions related to interest-free advances and development receipts. The other grounds were dismissed as not pressed.

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