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TMI Blog2008 (6) TMI 261X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no material on record firstly to show that alleged inflated expenditure has gone to the persons of prohibited category, therefore, the case of the Revenue made out on the basis of s. 13(1) cannot be upheld. The question of invoking s. 13(2) in the present case also does not arise because s. 13(2) could be invoked only when there is a claim of expenses in the form of salary/allowances or perquisites to the persons of prohibited category for some services rendered. The AO has not made out a case on these premises. Thus, neither s. 13(1) nor s. 13(2) is applicable on the facts of the present case. Whether difference in cost of construction arising on account of valuation done by the DVO could be added as income - HELD THAT:- We are of the considered view that firstly, there is no case made out for referring the under construction of the school building to the DVO by rejecting the books and pointing out defects therein. Even otherwise, if an addition is proposed to be made u/s. 69 as unexplained investment in school building then same would be treated as application of funds for charitable purposes. This investment would, therefore, come within the ambit of 85 per cent of total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning and the exemption available u/s. 10(22) could cover the income chargeable u/s. 68 also. In this regard, we refer to relevant portion of the headnotes from the above judgment as under - The words derived from (or some other similar words) do not occur in s. 10(22) of the IT Act, 1961, and, therefore, the word income as occurring in s. 10(22) cannot be given a restrictive meaning and must be given its natural meaning or the meaning ascribed to it in s. 2(24). Hence, an assessee who is entitled to exemption u/s. 10(22) can claim the benefit thereof for the purpose of income deemed to be chargeable to tax u/s. 68. As a result, appeals filed by the Revenue are partly allowed and matter is restored to the file of the AO to compute the income/allow exemption in the light of observation made above for both the years. X X X X Extracts X X X X X X X X Extracts X X X X ..... filed which was not accepted by the AO. Since the AO did not find explanation satisfactory, he proposed to make the addition of the differential amount. 4. The AO further found that expenditures claimed in the P&L a/c are exaggerated and are siphoned off for personal use of the founder member. As all the expenses are incurred in cash, they are not open to verification, their genuineness cannot be established, therefore, expenses to some extent could not be allowed as supportive evidences were not produced by the assessee. Out of expenditure incurred on cultural programmes, the AO considered that a sum of Rs. 69,450 is not allowable as there is no evidence and that cultural programmes are part of educational activities. Out of expenditure of Rs. 26,665 on staff welfare, the AO disallowed a sum of Rs. 16,665 as assessee could not explain authenticity of expenses. Out of expenditure on food and nutrition amounting to Rs. 68,615, the AO disallowed a sum of Rs. 47,350 on the ground that the claim is excessive and there is no supportive evidence. Out of claim of Rs. 2,51,735 incurred on repair/alteration of school building, the AO disallowed a sum of Rs. 2,13,500 on the ground that det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irrelevant if proper books of account are kept. He referred to the decisions of Hon'ble Rajasthan High Court in the cases of CIT vs. Hotel Joshi (l999) 157 CTR (Raj) 369 : (2000) 242 ITR 478 (Ra)) and ITO vs. Smt. Santosh Khanna (1985) 20 Taxman 15 (Jp)(Mag). He also considered following submissions of the assessee: "(a) The founder of the society is a widow who is running the school in loving memory of her husband to make him immortal is the sacred purpose of the lady. (b) The promoters have denoted their precious land for the purpose of society. (c) The purpose of the AO could not be ascertained on the contradictory facts of the cases. (d) That additions as unexplained investment under s. 69 of the IT Act in building account on the excessive, ground and to tax the society as AOP. The purpose is ambiguous. (e) The society is running their work exactly the same as per their objects so the concluding remarks of AO that undisclosed sources cannot be categorized as proved head of receipt in contemplation of basic object of society. That the surplus cannot be used for the personal benefit of any person or his relatives are ambiguous and have no sense in the given si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are going to the benefit of the founder. This will hit the provisions of s. 13(2) of the Act as benefit is given to founder of the society who is in control of all the expenses. He also submitted that if benefit goes to the founder of the society or to his personal interest then it could not be said that institution is existing solely for the purposes of education as it is existing for the purposes of benefit of the founder. In view of this, the assessee also loses the benefit under s. 10(23C)(iiiad) [old s. 10(22)]. 10. In any case, the learned CIT(A) should not have annulled the assessment because in case the assessment has to be framed the income has to be either computed under ss. 11 to 13 or under ss. 28 to 43C of the Act i.e., under the head 'Income from business or profession'. 11. Against this, learned Authorised Representative submitted that there is no material or evidence before the AO to come to the conclusion that the inflated expenditure, if any, has been transferred to the interested members. Firstly, there is no inflation in expenditure. Even if there is any, it could not be said that it has benefited only the founder of the society as alleged by the AO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997) 139 CTR (SC) 7 : (1997) 224 ITR 310 (SC), that after meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution then it will not lose to be one existing solely for educational purposes as object is not one to make profit. He then referred to the decision of Hon'ble Supreme Court in the case of American Hotel & Lodging Association Educational Institute vs. CBDT (2008) 216 CTR (SC) 377 : (2008) 301 ITR 86 (SC), for the proposition that once the facts of the case on record cover the case within the provisions of s. 10(23C)(iiiad) then no other condition regarding application of income was required to be complied with. 13. The learned Authorised Representative finally referred to the decision of Hon'ble Supreme Court in the case of P.R. Prabhakar vs. CIT (2006) 204 CTR (SC) 27 : (2006) 284 ITR 548 (SC), for the proposition that exemption provision should be construed strictly but when they are found applicable then they are required to be interpreted liberally. He also submitted that once assessee's case is found covered under s. 10(22)/10(23C)(iiiad) then AO need not deny benefit on the pretext t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eged extra expenditure has benefited the founder member is not substantiated and proved. Therefore, provisions of s. 13(2) could not be invoked. There has to be direct nexus of outflow of money with the interested members as it was in the case of Bal Bharti Nursery School or in Bharat Diamond Bourse's case. 17. In this regard, we refer to s. 13 as under "13. (1) Nothing contained in s. 11 or s. 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof-............ (c) In the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof- (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-s. (3): (2) Without prejudice to the generality of the provisions of cl. (c) and cl. (d) of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f prohibited category, if they in return do nothing but only enjoy the fruits of the trust/society and take away the funds/income of the society for their personal benefit or discharging personal obligation, but where persons of prohibited category render services to the society and in turn, get some remuneration, salary and allowances etc. as a member then provisions of sub-s. (2) would be applicable and not of sub-so (1) and for applying the provisions of sub-s. (2) of s. 13, it has to be shown by the Revenue that amount paid to the persons of prohibited category was in excess of what may be reasonably paid for such services. In other words, the AO has to collect material to show that payment to the persons of prohibited category was unreasonable as compared to the market rates for the services rendered. In the present case, there is no material on record firstly to show that alleged inflated expenditure has gone to the persons of prohibited category, therefore, the case of the Revenue made out on the basis of s. 13(1) cannot be upheld. The question of invoking s. 13(2) in the present case also does not arise because s. 13(2) could be invoked only when there is a claim of expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be applied overriding ss. 11 to 13. It means that in the event of conflict between ss. 11 to 13 and ss. 68 to 69C, the provisions of ss. 11 to 13 will prevail. Thus, where it is claimed that unexplained investment is income out of property held under trust, then onus would shift to the AO to prove otherwise. Thus, it is for the AO to show with material on record that property held under the trust is not capable of generating excess income which is alleged to be invested in the construction of the property and therefore, beyond the scope of ss. 11 to 13 and provisions of ss. 68 to 69C would be applicable in addition to the computation of income under these sections. We, therefore, reject the argument of learned Departmental Representative that addition under s. 69 for excess investment has to be independently carried out notwithstanding exemption of income under ss. 11 to 13. 21. Now, we come to the main argument of the learned Authorised Representative that in a case where provisions of s. 10(23C)(iiiad) are applicable, the provisions of ss. 11 to 13 would not be applicable. 22. In this regard, we refer to the decision of Hon'ble Supreme Court in the case of America ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s would only hit the case of the assessee within the meaning of ss. 11 to 13 and cannot be imported to deny exemption under s. 10(22)/10(23C)(iiiad) provided a clear finding on the basis of material on record is given that assessee trust is not existing solely for educational purposes. Here purpose is what described in the memorandum of objects of the trust. Some items of disallowances out of expenses claimed cannot be held to be a separate object for which trust is existing thereby holding that trust is not existing solely for educational purposes. We agree with the learned Authorised Representative that exemption provisions must be strictly construed but if the case of the assessee falls within the ambit of exemption then they should be applied liberally. 24. In the case of CIT vs. Seethakathi Trust (2007) 295 ITR 520 (Mad), the AO had alleged that trust followed the provisions of s. 11 (5) and s. 13(1)(d) and therefore, it is neither eligible for exemption under ss. 11 to 13 nor under s. 10(22). In this regard, the Hon'ble Madras High Court held that once an educational institution is entitled to the benefit under s. 10(22) then it is not necessary to consider claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax. 2. The Board have received representations from various institutions which fulfil the conditions laid down under s. 10(22) of the Act, but are denied exemption because their funds are not invested in accordance with the provisions of s. 11 (5) of the Act. It is hereby clarified that since s. 10(22) does not impose any restriction regarding mode of investment of funds, such institutions are not required to invest their funds in the modes specified under s. 11 (5) of the IT Act. This clarification will not apply to the institutions seeking exemption under s. 11 of the Act. (Sd) Under Secretary to the Government of India Since the substantial questions of law raised in these appeals are centrifuged on the point whether the assessee is entitled to the benefit of s. 10(22) of the Act in view of the alleged violation of s. 11(5) r/w s. 13(1)(d) of the Act, in view of the above circular of the CBDT dt. 25th July, 1995 [(1995) 127 CTR (St) 2 : (1995) 215 ITR (St) 3], we do not see any substantial question of law that arises for our consideration." 25, The Hon'ble Delhi High Court in the case of CIT vs. Lagan Kala Upvan (2003) 179 CTR (Del) 243 : (2003) 259 ITR 489 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference between the corpus, the objects and the powers of the concerned entity.' Thus, the question of eligibility of exemption under the said section has to be determined with reference to the objects of the assessee (society) and the exemption cannot be denied merely because while the working of the society some surplus results. Similarly, in the context of exemption under s. 10(22), the conditions as stipulated in either s. 11 or 13 of the Act are irrelevant." 26. The Hon'ble Gujarat High Court in the case of Gujarat State Co-operative Union vs. CIT (1992) 103 CTR (Guj) 206 : (1992) 195 ITR 279 (Guj), held that exemption under s. 11 is only in respect of income derived from the property and to the extent provided under s. 11. However, no such limit is provided under s. 10(22) which only lay emphasis that sole purpose of the existence of the institution should be educational. Therefore, mere existence of profit will not disqualify the institution if its sole purpose is education and not making profit. In this regard, we refer to following portion of the judgment: "Under s. 10(22) of the IT Act, 1961, it is provided that, in computing the total income of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income of such institutions which is to be exempted under that provision." 27. In the present case, mere disallowance of certain expenses can add to the surplus but cannot become basis for denying exemption under s. 10(22)/10(23C)(iiiad). Therefore, we hold that the learned CIT(A) was justified in granting exemption to the assessee under s. 10(23C)(iiiad) on the basis that gross receipt of the society is less than rupees one crore and that there is no material to suggest that assessee is not existing solely for educational purposes. To this extent the order of the learned CIT(A) is confirmed. 28. Regarding separate addition under s. 68/69 on account of excess investment in the construction of property, we refer to the decision of Hon'ble Delhi High Court in the case of Director of IT vs. Raunaq Education Foundation (2007) 213 CTR (Del) 541 : (2007) 294 ITR 76 (Del), on which learned Authorised Representative has placed reliance. In this decision it is held that provisions of s. 10(22) cannot be given restricted meaning and the exemption available under s. 10(22) could cover the income chargeable under s. 68 also. In this regard, we refer to relevant portion of the head ..... X X X X Extracts X X X X X X X X Extracts X X X X
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