2021 (11) TMI 382 - HC - Income Tax

Denying exemption u/s 11 - violation of Section 13(1)(c) of the Act has been alleged is based mainly on the salary/remuneration paid to two trustees of the assessee trust, not in proportionate to service rendered by them but a device designed to divert the income of the assessee - HELD THAT - It is well settled that the revenue cannot sit in the armchair of an assessee and decide the pattern of working, methodology to be adopted for whole administration of the educational trust including the payment structure of salary/remuneration to be paid to the professors/administrative staffs - department cannot manage or control the managerial affairs of the educational trust. These aspects would not come within the purview of the authorities to decide the income tax liability merely on suspicion that the assessee is claiming huge expenditures to get the corresponding benefits of allowable deductions. No grounds are raised by the revenue relating to the deletion of the additions made by the CIT (Appeals) before the Tribunal, whereas reference was made to the provisions of Section 13(1)(c) of the Act only to draw support for denying exemption under Section 11 of the Act. The Tribunal has rightly rejected the plea of the revenue as bereft of merit. The alleged breach of Section 13(1)(c) of the Act based on these factors is baseless, wholly untenable. Whether collection of capitation fees in the name of voluntary contribution and general of huge surplus would tantamount to commercialization of education by the assessee and, therefore, the assessee institution was rightly not considered by the Assessing Officer as existing solely for educational purposes within the meaning of Section 2(15) or Section 10(23)(c) ? - It is not in dispute that the assessee is imparting education, as such proviso to Section 2(15) of the Act introduced by the Finance Act, 2008 would not be applicable. At this juncture, it would be profitable to refer to the Circular No.11/2008 dated 19.12.2008 issued by CBDT. Having regard to the proviso inserted to Section 2(15) amended vide Finance Act, 2008 wherein, it has been clarified that the newly inserted proviso to Section 2(15) will not apply in respect of the first three limbs of Section 2(15) i.e., relief of the poor, education and medical relief. Consequently, where the object of trust or institution is, relief to the poor, education or medical relief, it will constitute charitable purpose even if it incidentally involves in carrying of commercial activities. The breach of Section 13(1)(c) of the Act as alleged by the department is based on the remuneration paid to the two trustees namely, Sri. Suresh Nagpal and Smt. Geetha Nagpal treating that the amounts were diverted by the assessee trust to the said trustees in the guise of commission and professional income of the trustees. Similarly, the assessing officer has regarded the income of the trust being diverted and the cash deposits in the bank accounts of the trustees namely, Sri. Suresh Nagpal and Smt. Geetha Nagpal have remained unexplained which has been deleted by the CIT (Appeals) relating to the assessment years in question which was the subject-matter of the appeals before the Tribunal filed by the Revenue. Tribunal has confirmed the finding of the CIT (Appeals) that the two trustees namely, Sri. Suresh Nagpal and Smt. Geetha Nagpal have filed the returns of income reflecting their salary etc., paid to them by the trusts and the same is in accordance with the pay-scale of a Professor and Administrative Officer respectively. As regards the cash deposits found in account of the two trustees, CIT(Appeals) has rightly held that no explanation could be expected from the assessee - trust to explain the source of its deposits and in case of Smt. Geetha Nagpal, it was satisfactorily explained. Merely to deny the exemption under Section 11 of the Act, reference made to Section 13(1)(c) of the Act by the Revenue is held to be unjustifiable. These factual aspects being considered by the CIT (Appeals) and the Tribunal, we are not inclined to sit in re-appreciation of factual aspects which is impermissible while exercising the power under Section 260A of the Act. We do not find any infirmity or irregularity in the order passed by the Tribunal. Assessee appeal allowed.

Summary

Issues Involved:
1. Violation of Section 13(1)(c) of the Income Tax Act, 1961.
2. Commercialization of education and entitlement to exemption under Section 11 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Violation of Section 13(1)(c) of the Income Tax Act, 1961:

The primary contention of the revenue was that the assessee trust violated Section 13(1)(c) by paying excessive remuneration to its trustees, thereby diverting income. The revenue argued that the payments to the trustees were not proportionate to the services rendered and were designed to divert funds.

The court analyzed Section 13(1)(c), which disallows exclusion from total income if any part of the income is used for the benefit of specified persons, including trustees. The court found that the revenue's allegation lacked basis and emphasized that the revenue cannot dictate the management or payment structures of the trust. It held that the revenue cannot manage the trust's affairs or decide the pattern of working and methodology for administration, including salary payments.

The court concluded that the alleged breach of Section 13(1)(c) was baseless and untenable. It upheld the Tribunal's decision rejecting the revenue's plea and answered the substantial question of law in favor of the assessee and against the revenue.

2. Commercialization of Education and Entitlement to Exemption under Section 11 of the Income Tax Act, 1961:

The revenue argued that the collection of capitation fees and generation of surplus indicated commercialization of education, thus disqualifying the trust from being considered as existing solely for educational purposes under Sections 2(15) and 10(23)(c) of the Act.

The court referred to Section 2(15), which defines "charitable purpose" and includes education. The proviso to Section 2(15) excludes activities involving trade, commerce, or business from being considered charitable unless they are incidental and the aggregate receipts do not exceed 20% of total receipts.

The court noted that the proviso to Section 2(15) introduced by the Finance Act, 2008, would not apply to the assessee's case as it was engaged in education. It referenced Circular No.11/2008, which clarified that the proviso does not apply to trusts engaged in education, medical relief, or relief to the poor, even if they incidentally involve commercial activities.

The court cited various judgments, including those from the Bombay High Court and the Gujarat High Court, which held that incidental generation of surplus does not disqualify a trust from being considered charitable. It emphasized that the trust's activities should not be viewed as commercial merely because they generate surplus.

The court found that the remuneration paid to the trustees was accounted for and reflected in their returns, and the cash deposits in the trustees' accounts were satisfactorily explained. It concluded that the reference to Section 13(1)(c) by the revenue to deny exemption under Section 11 was unjustifiable.

The court upheld the Tribunal's decision, confirming the CIT (Appeals) findings that the trust's activities were in line with its charitable purpose and that the remuneration paid to the trustees was justified. It answered the substantial question of law in favor of the assessee and against the revenue, subject to the result of ITA No.47/2013.

Conclusion:

The appeals were disposed of with both substantial questions of law answered in favor of the assessee and against the revenue. The court found no violation of Section 13(1)(c) and held that the trust was entitled to exemption under Section 11, as its activities were charitable and not commercial.