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2021 (2) TMI 528 - AT - Income TaxExemption u/s 11 - violation of the provision of Section 13(1)(c) on account of payment of remuneration to specified person -opportunity of being heard to the appellant on various issues - Incurring expenses versus generation of surplus - institution for elite class of the society - HELD THAT - Assessing Officer has to bring something on record or carry out any comparative analysis to show that services rendered by her are not in commensurate with the payments made. We agree with the contention of the learned counsel which is well supported by the various judgments that while making such allegations the onus is on the Revenue to prove that payment made to the person specified in section 13(3) is excessive or unreasonable by placing material on record and the services rendered or not in commensurate with the payments made. In so far as the payment of remuneration made to Mrs. Malvika Rai is not excessive and does not violate the provision of section 13(1)(c) and accordingly the entire payment made to her is treated as application of income. Payment of scholarship and salary to Mrs. Aarti Rai - In so far as payment of salary is concern there is no reason for making any part disallowance for the reason that firstly; because she has been actively involved in set up of Banyan Tree School and has been rendering services; and secondly no adverse material has been brought on record that her services and other contribution is not in commensurate with the payment of salary. Payment of scholarship - For rendering of services for any institution or school affiliated to the appellant Trust a person is compensated by the salary/remuneration and not by incurring any expenditure for sponsorship of higher education from foreign University. Thus to the extent of 13.36 lakhs towards the scholarship payment for Ms. Aarti Rai the same cannot be treated as application of income and therefore Assessing Officer and Ld. CIT (A) are justified in disallowing the payment as non application of income. We agree with the other contention of the learned counsel that only to the extent of expenditure incurred on scholarship of 13.36 lakhs for which there is a violation under section 13 same should alone be disallowed and entire exemption under section 11 cannot be denied. In the event of any violation of provision of section 13 the entire exemption under section 11 cannot be denied and would be restricted only to this extent of income misused by the Trust. Accordingly we hold that the Assessing Officer was not justified in completing denying exemption under section 11.Thus in view of our finding given above the exemption of section 11 in the case of the appellant Trust shall be denied to the extent of 13.36 lakhs only. Computation of income and taxing of surplus by the Assessing Officer assuming that net profit of 44.4% of the gross income is wholly erroneous and incorrect because both Assessing Officer and Ld. CIT (A) has failed to consider acquisition of fixed assets and other capital expenditure shown in the utilisation of income as application of income for charitable purposes. During the year as per the income expenditure account the total amount actually spent comes to 92.83% which is far less than a statutory limit of 85%. It is no longer res integra that capital expenditure is tantamount to application of income for charitable purposes as held by the Hon ble Supreme Court and various other High Courts as relied upon by the Ld. Counsel above. Thus the taxing of the surplus by the Assessing Officer is not justified on facts and in law. Only the education per se has been treated as charitable in section 2(15); and if Appellant trust is imparting education for which it has been granted registration under section 12A then Assessing Officer cannot deny benefit of section 11 and treat the Appellant trust as a business entity on this ground alone. Accordingly such an observation and finding of the Assessing Officer and CIT (A) is reversed. Addition on account of security deposit refundable to the students - As on 31st March 2007 the refundable deposit was 1, 17, 62, 966/- whereas the Assessing officer has erroneously taken 22, 75, 226. As pointed out by the learned counsel and is also evident from the record that 22, 75, 226/- represented repayment/ adjustment out of student security amount on various years and the same could not have been treated as income since the entire amount is refundable by the appellant as per its mandate and very nature of security. It cannot be treated as income because there was an obligation of the part of the trust to refund as and when necessary claim is made by the student. Thus such an addition is unwarranted. Disallowance of 50% of maintenance and fuel expenses - As clearly stated that the cars have been utilised purely for the use of the Appellant Trust and for various high positioned faculty members then adhoc disallowance cannot be made for personal use or it can be inferred or presumed to be not utilised for the activities of the Trust. Once the car is used for officials like Dean Professors and other faculty members then usage of car for such officials of the Trust cannot be held to be for personal benefit or for non-official purposes. Accordingly such an adhoc disallowances is directed to be deleted. Donation - we find that no details have been provided and the purpose for making such donation. Therefore no interference is called for in the finding of the Assessing Officer and CIT(A) as nowhere it has been explained about the nature of donation and its purpose. Exemption under section 11 to the assessee on the ground that assessee runs an institution for elite class of the society her sole purpose is to make profit and no charitable intention which could be seen its operation and application of fund - HELD THAT - CIT (A) held that once the assessee is carrying out educational activities which is charitable in nature and also granted restriction under section 12A therefore the assessee cannot be treated as involved in any trading commerce or business. 50% of donation relying upon the judgement of Hon ble Supreme Court in Queen Educational Society vs. CIT 2007 (9) TMI 347 - UTTARAKHAND HIGH COURT he held that there is no violation of section 11 or 12. Since already the issue of Smt. Malvika Rai and ad hoc disallowance fuel expenses have been dealt by us in the earlier appeals therefore these grounds raised by the revenue are dismissed. Disallowance of 50% of donation is concern we agree with the finding of the CIT (A) that there is no violation of section 11 or 12. Accordingly we hold the CIT ( A) has rightly allowed the exemption under section 11 of the Act. - Decided against revenue.
Issues Involved:
1. Violation of principles of natural justice. 2. Denial of exemption under Sections 11 and 12. 3. Payments to specified persons and their justification. 4. Scholarship payments and their compliance with Section 13. 5. Profit motive and charitable purpose. 6. Treatment of refundable security deposits. 7. Ad-hoc disallowance of repairs and car maintenance expenses. 8. Disallowance of scholarship expenses and salary. 9. Disallowance of donations. 10. Imposition of interest under Sections 234B and 234C. Issue-wise Detailed Analysis: 1. Violation of Principles of Natural Justice: The appellant argued that the Commissioner of Income Tax (Appeals) (CIT(A)) passed the order without affording an adequate opportunity of being heard, violating the principles of natural justice. The Tribunal acknowledged that the assessing officer and the CIT(A) did not consider various documents filed during the appellate proceedings. 2. Denial of Exemption under Sections 11 and 12: The CIT(A) upheld the assessing officer's action in denying the benefit of exemption under Sections 11 and 12 on the grounds of payments to specified persons in violation of Section 13(1)(c). The Tribunal found that the exemption should be denied only to the extent of the alleged violation and not the entire income. 3. Payments to Specified Persons and Their Justification: The Tribunal analyzed the payment of salary to Mrs. Malvika Rai, concluding that the salary was justified based on her extensive experience and contributions. The CIT(A) erroneously considered the salary as ?16,20,000 per month instead of per annum. The Tribunal held that the remuneration was not excessive or unreasonable and did not violate Section 13(1)(c). 4. Scholarship Payments and Their Compliance with Section 13: The Tribunal found that the scholarship payment to Ms. Aarti Rai for studying abroad violated Section 13(1)(c) as it was a benefit to a specified person and involved application of funds outside India. However, the Tribunal held that the violation should result in denial of exemption only to the extent of ?13.36 lakhs and not the entire income. 5. Profit Motive and Charitable Purpose: The assessing officer concluded that the appellant existed for profit-making rather than charitable purposes, citing a high profitability percentage. The Tribunal disagreed, noting that the appellant applied 92.83% of its income for charitable purposes, including capital expenditures, which should be considered as application of income for charitable purposes. 6. Treatment of Refundable Security Deposits: The assessing officer added ?34,41,987 to the income, treating refundable security deposits as income. The Tribunal held that these deposits were liabilities and not income, as the appellant was obligated to refund them upon students' completion of formalities. 7. Ad-hoc Disallowance of Repairs and Car Maintenance Expenses: The assessing officer made an ad-hoc disallowance of 50% of car maintenance expenses due to the absence of log books. The Tribunal directed the deletion of this disallowance, noting that the cars were used for official purposes by faculty members. 8. Disallowance of Scholarship Expenses and Salary: The Tribunal upheld the disallowance of scholarship expenses to Ms. Aarti Rai but allowed the salary paid to her, finding no reason for partial disallowance. 9. Disallowance of Donations: The Tribunal upheld the disallowance of ?37,900 in donations due to the lack of details and purpose provided by the appellant. 10. Imposition of Interest under Sections 234B and 234C: The Tribunal did not specifically address the imposition of interest under Sections 234B and 234C in the detailed analysis. Conclusion: The Tribunal partly allowed the appeal for the assessment year 2007-08, holding that the exemption under Section 11 should be denied only to the extent of ?13.36 lakhs. The Tribunal also directed the deletion of ad-hoc disallowances and the addition of refundable security deposits, while upholding the disallowance of donations. Appeals for subsequent years were decided based on similar findings.
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