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TMI Blog2011 (7) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... on, for which registration was granted - The charitable nature of expenses incurred by the trust out of the fees having not been found for non-charitable purpose, the same cannot be viewed adversely against the assessee the Revenue cannot take advantage of the same as the activities of the assessee are found to be in accordance with the objects for which registration was granted - This objection of the Revenue is only technical in nature and cannot be considered at all - Accordingly,uphold the finding of the learned CIT(A) in this regard finding the grounds raised by the Revenue as devoid of merit. - 127 (CTK.) OF 2011 C.O.No .14/CTK/2011 - - - Dated:- 29-7-2011 - K.K. GUPTA, K.S.S. PRASAD RAO, JJ. P.C. Mohanty for the Appellant. P.C. Panda and Kamal Agarwalla for the Respondent. ORDER Per Bench. The appeal is preferred by the Revenue having been aggrieved by the order of the learned Commissioner of Income-tax (Appeals), Bhubaneswar dated 3-12-2010 for the assessment year 2007-08. The assessee has filed the Cross objection. 2. The Revenue has raised the following grounds of appeal. "1. On the facts and in the circumstances of the case, the ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrive at profit of the assessee, capital expenditure is also to be deducted which is against normal accounting principles. 10. On the facts and in the circumstances of the case, the ld. CIT(A) has failed to distinguish between the growth of City Montessory School which is more than 50 years old and the assessee which is only 3 years old. 11. On the facts and in the circumstances of the case, the ld. CIT(A) was not correct in holding that capital expenses are also application of income in this case since students start reading only after basic infrastructures are put in place as per AICTE norms. 12. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in accepting salary paid to a trustee without authorization of the Trust Deed. 13. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in allowing collection of money from the beneficiary of the trust for education without authorization of the Trust Deed and without intimation to the CIT. 14. On the facts and in the circumstances of the case, the ld. CIT(A) was not correct in observing that the Assessing Officer had no basis to say that fees collected were excessive inspite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar courses in management. The courses offered by the assessees are approved by AICTE and other regulatory bodies. The assessee trust was constituted as per trust deed dated 8-8-2005. The Department has given registration under section 12AA of Income-tax Act vide CIT's order dated 28-3-2007 with retrospective effect from 1-4-2006. The registration is still continuing. As per the Trust Deed, the main object of the trust is running of educational institutions. The return of income for assessment year 2007-08 is filed, enclosing thereto the audit report in form No. 10B disclosing the total deficit of Rs. 5,70,49,834. This deficit was arrived at on the basis of receipt and payment account. In the said account, all receipts by way fees received from students, donations, bank interest, misc. income etc. were taken as receipts and all outgoings towards expenditure incurred for educational purposes including capital expenditure on buildings and other infrastructure of the trust were taken as application. This return of the assessee was taken up for scrutiny consideration u/s. 143(3) and order of assessment was passed on 31-12-2009 on a total income of Rs. 4,03,74,030. While doing so, the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollected fees of Rs. 2,18,00,000 during the previous year. On this aspect, the Assessing Officer has opined that running a 'finishing school' is a distinct commercial activity unconnected with the object of imparting education. He was of the view that the profit generated out of this activity should have been in conformity with the provisions of section 11(4A) and hence, separate books should have been maintained. He fortified this view by placing reliance on the decision rendered in the case of Bihar Institute of Mining and Mine Surveying v. CIT [1994] 208 ITR 608/76 Taxman 455 (Pat.). The learned Assessing Officer further pointed out that the trust is collecting capitation fees from the students which is prohibited in case of educational institutions. He considered the said fees collected as excessive and unreasonable. Accordingly, he came to the conclusion that there is a taint of commerciality in the activities of the assessee. For this, he relied on the observation of the Hon'ble Apex Court in the case of T.M.A. Pai Foundation v. State of Karnataka [2002] 8 SCC 481 and Vodithala Education Society v. Asstt. DIT (Exemptions) [2008] 20 SOT 353 (Hyd.). He further observed in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions enunciated by the Apex Court in the case of S.RM. M.CT. M. Tiruppani Trust v. CIT [1998] 230 ITR 636/96 Taxman 635, CIT v. St. George Forane Church [1998] 170 ITR 62/36 Taxman 42 (Ker.) and CIT v Mool Chand Sharbati Devi Hospital Trust [2010] 190 Taxman 338 (All.), wherein it was held that capital expenditure is an allowable expenditure for working out the surplus/deficit of a Trust. Accordingly, the learned CIT(A) has differed with the view expressed in the case of Queens' Educational Society (supra), as relied on by the Assessing Officer. The learned CIT(A) has relied on the decisions rendered subsequent to the said decision rendered in the case of Pinegrove International Charitable Trust v. Union of India [2010] 327 ITR 73/188 Taxman 402 (Punj. Har.), in which the ratio of the decision in Queens' case (supra) was deliberated and distinguished. The learned CIT(A) has not accepted the view of the Assessing Officer that the assessee is collecting capitation fees from the students and, therefore not entitled to exemption of its surplus. According to the learned CIT(A), the fees collected are reasonable and comparable with other similar institutions. The learned CIT(A) differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see before him. 7. The learned DR has vehemently argued supporting the order of the Assessing Officer on all issues and pressed that order passed by the learned CIT(A) is nothing but out of incorrect appreciation of facts and not being in accordance with the provisions of law and accordingly he sought for setting aside the same. The learned DR has mainly argued that the activities of the assessee in not fully applying the fees collected towards objects of the trust for imparting education and applying the surplus towards capital assets points out towards expansion of its activities and a profit motive. He further contended that the trust should solely exist for charitable purposes for which registration under section 12AA was granted to it. In support of this contention, the learned DR strongly relied on the decision in the case of Queens' Education Society (supra), wherein it was held that the capital expenditure is not an application towards the objects of the trust under section 11 of the Income-tax Act. He further pointed out that the assessee was collecting capitation fees, which is not permissible under law. The crux of his argument is that the activities of the assessee tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned order of the learned CIT(A) as well as the order passed by the Assessing Officer, the basic issues require our adjudication in the light of the factual background of the case and legal aspects thereof are as follows: (i) Whether generation of surplus out of the fees collected would indicate a profit motive and the activity of a trust can be said to be tainted with an element of commerciality to disentitle the trust from claiming exemption under section 11 of the Act? "(i) Whether generation of surplus out of the fees collected would indicate a profit motive and the activity of the assessee can be said to be tainted with an element of commerciality to disentitle the trust from claiming exemption under section 11. (ii) Whether capital expenditure is required to be treated as application while arriving at the surplus under section 11 of the Income-tax Act, more so in the light of the decision in the case of Queens' Educational Society (supra). (iii) Whether fees collected by the assessee during the year could be considered as excessive to ascribe the same as 'capitation fee' disentitling the institution the benefits of section 11 of the Income-tax Act? (iv) Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse of hearing, the learned AR of the assessee has vehemently argued that the method of computation of surplus by the Assessing Officer amounts to transgressing the mandates of provisions of section 11 of the Income-tax Act. The Assessing Officer is not entitled for such an exercise except relying on the book results. This method is repugnant to the provisions of the Act. He further pointed out that the provisions of section 11 is a departure from the head-wise computation of income as provided under section 14 of the Act. As per section 14 of the Act, the computation on commerciality principles is provided in contradistinction to the computation of income under the provisions of the Income-tax Act. He further objected to the observation of the Assessing Officer that the assessee should apply all its receipts by way of fees received for the students who contributed the same stating that the assessee is not governed by the principle of mutuality where there should be complete identity between the contributors and participants. Elaborating his argument, the learned AR of the assessee has submitted that merely because there is surplus, the same would not point to a profit motive of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption under section 11 and attributing a commercial motive would not arise. In the second situation, there may be a deficit in computation of income for similar reasons as pointed in situation number one and in such a situation benefit of exemption under section 11 cannot be denied on the ground of commercial motive. In the third situation, the application may fall short of required 85 per cent stipulated to be applied towards the objects of the trust. In this situation, the Act permits accumulation of the same for being utilised in the subsequent year(s) under section 11(2). The scheme of the Act is not permitting to accept a proposition that the trust is required to spend the entire receipts for the students, during the year, who contributed the same. It is not equally possible to subscribe to a view that if any surplus remains after application, the same would indicate a profit motive. Generation of surplus/deficit, during a previous year is envisaged in the statute inasmuch as the section 11(2) permits a trust to accumulate its surplus in excess of 15 per cent for being applied for the purposes of the trust within a period of 5 years, provided the trust has made an applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o look at the profits of each year, but the nature of the activities undertaken in India are to be considered. If it is found that the Indian activity has no correlation with education, exemption has to be denied. In the result, the character of the recipient of income must have character of educational institution in India to be ascertained from the nature of the activities. Simply because, after meeting expenditure, surplus remains from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes. In a way, existence of surplus from the activity will not mean absence of an educational purpose. In this view of the matter, the Assessing Officer committed wrong in assuming that there is an element of commerciality only for the reason that the assessee-trust had surplus in course of advancing its object of education. In other case of Surat Art Silk Cloth Manufacturers (supra), while interpreting the expression 'activity of profit', Hon'ble Apex Court has held that it is not enough that if an activity results in profit it can be assumed that such an activity was carried on with the object of earning profit. In order to ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Court observed that if the profit is proved by an educational society then that will be income to the society as the surplus amount remains in the account books of the society after meeting all the expenses incurred towards imparting the education. That the investment in the fixed assets like furniture and buildings are the properties of the society and may be connected with the imparting of education but the same has been constructed and purchased out of income from imparting the education with a view to expand the institution and to earn more income. Application towards capital expenditure to arrive at the surplus is not permissible under law. Hon'ble Court seems to have rested above conclusions on the observation of the Hon'ble Supreme Court in the case of Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310/90 Taxman 528. Therefore, it is found necessary to examine the relevant paragraphs of the Hon'ble Apex Court. Hon'ble Apex Court has observed that after meeting the expenditure, if any surplus result incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one, existing solely for educational purposes sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the judgment in the case of Aditanar Educational Society (supra) and Childrens Book trust in the correct perspective. The view taken is not consistent with the law laid down by the Apex court in the case of American Hotel Association (supra), wherein it was held by the Apex Court that once the applicant comes within ambit of the phrase 'exist solely for educational purposes and not for profit', no other condition like application of income are required to be complied with. It was observed further that capital expenditure incurred by an educational institution for acquiring capital asset for the purpose of education is an application. 14. Hon'ble Delhi High Court in the case of St. Lawrence Educational Society (supra), has held that the opinion expressed in the case of Queens' Educational Society (supra) for the proposition that the educational institutions seeking exemption should not generate any quantitative surplus is legally untenable and incorrect. In the case of Vanita Vishram Trust (supra), it was held that where record demonstrated that assessee-trust conducted educational institutions and no other activity was carried on, it must be regarded as existing solely for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mption. It is the view of the revenue that capital expenditure is not deductible in working out the surplus/deficit. The Revenue has based this conclusion relying on the ratio of the decision in the case of Queen's Educational Society (supra). The learned AR of the assessee has submitted before us that this view of the Revenue is erroneous inasmuch as the application under section 11 include capital expenditure so long as the same is towards the objects of the trust. He submitted that the trust which has the object of advancement of education and which is in the nascent years of its existence, has to necessary apply its receipts in developing infrastructural facilities. Otherwise, the very purpose for which registration was granted under section 12AA would be defeated. Growth of an educational institution for translating its objects cannot be viewed from profit motive angle. He pointed out that there is no profit motive in the activities carried out by the assessee, as can be seen from the material made available to the Department regarding the activities of the assessee. The Department is not able to show that the income of the assessee is enjoyed by one who manages his own enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... totally ignored the ratio of these decisions. In the assessment order, the Assessing Officer has sought to distinguish the case of S. RM. M. CT. M. Tirupanni Trust (supra) on the ground that in the case before the Apex Court, application towards capital asset was out of surplus of earlier year shown as an advance in the Balance sheet which was subsequently utilised for construction of a hospital building which was one of the objects of the trust. On the other hand, in the case of the present assessee trust it has applied current year's receipts towards capital expenditure. In that view of the matter, distinction brought out by the Assessing Officer cannot advance the case of the revenue. In our considered view, Hon'ble Court has held that construction of a hospital building, which is a capital expenditure, is an application. Therefore, in the present case of the assessee, there would be no bar if it applies the receipts of the current year towards cost of a capital asset for advancing the objects of the trust. The Assessing Officer has not made out any material to depict that the asset acquired is not in furtherance of the object but as an investment to enhance the income. After co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowable as an application. The application of the ratio of this decision by the learned CIT(A) was not at all wrong though it was rendered while interpreting section 10(23C)(vi), as the activities of the assessee are genuine and without any personal gain while sending the surplus/income towards capital expenditure. However, this would not make any difference in view of our observation on the issue that capital expenditure is an allowable deduction under section 11. Accordingly, we uphold the order of the learned CIT(A) on this issue finding the grounds raised by the Revenue in this regard as devoid of merits. 18. The next issue relates to collection of capitation fees. The Department has derived a conclusion that the trust existed for 'profiteering' but not for the purpose of charity. The learned AR of the assessee vehemently objected to such a view on the ground that collection of capitation fee cannot be presumed. Such an inference can only be founded on evidence. To support his contention, the learned AR of the assessee brought our attention to the details of fees collected by various similar institutions in the Country as mentioned para 16.9 of the order of learned CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of hearing before us, the Revenue has not at all showed as to how the collection of fees by the trust was unreasonable or excessive. In a subsequent decision in the case of Islamic Academy of Education v. State of Karnataka (14/08/2003) and P.A. Inamdar v. State of Maharashtra (12/08/2006) rendered by the Apex Court, the above view regarding fees structure and application thereof as mentioned in TMA Pai Foundation's case (supra) were reiterated. It was further observed that unaided institutions can have their own admission policy provided if it is fair, transparent, non-exploitative and based on merit, since they are not deriving any aid from the said funds. The assessment order of the Assessing Officer does not have any discussion that fee structure of the assessee trust suffers from any such infirmities. For the proposition that collection of capitation fee cannot be presumed, the learned AR of the assessee has relied on the decision of Hon'ble Punjab and Haryana High Court in the case of CIT v. Khalsa Rural Hospital Nursing Training Institute [2008] 304 ITR 29/173 Taxman 180. On going through the said decision, it is found that Hon'ble Court has found nothing on rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducation but a training to add value to management education. Therefore, the assessee should have maintained separate books of account as required under section 11(4A). Assailing this contention, the learned AR of the assessee submitted that the revenue has fully misunderstood the concept of finishing school. 'Finishing school', though named so, is not a distinct activity but a part and parcel of the regular curriculum of imparting education in management courses which is the object of the trust. It was not an incidental activity as the entire activity of the trust is integrated with the main objective of imparting education. All the activities are intertwined and interlaced and no business motive can be interpreted requiring the assessee to maintain separate books of account as required under section 11(4A). On careful analysis of the order of the Assessing Officer and the detail submissions of the Revenue as well as the assessee, we are of the considered view that the Revenue has relied on the decision in the case of Sole Trustee Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) for the proposition that education should not be liberally understood to include all types of acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncipal projects of the institution was the object of coaching and preparing the students for appearing in various examinations conducted by the Board of Mining Examination. In these circumstances, it was opined by the Hon'ble Court that a coaching institute cannot be said to be an institution where normal schooling is done and therefore, the same cannot be a charitable purpose. But here as can be seen from the above discussions, running of the 'finishing school' is an integral part of the whole educational curriculum of the trust. 'Finishing school' cannot be equated with a coaching class. Therefore the Revenue cannot claim the support of the said decision of Hon'ble Patna High Court. The Revenue is of the view that in order to claim exemption of income, the activity should be incidental to the main activity. As per section 11(4A) separate books are to be maintained for this activity. As we have held that finishing school is not an incidental activity but a part of the activity of imparting education by the trust, the provisions contained in section 11(4A) does not apply. 23. The other issues raised by the Revenue relates to payment of salary of Rs. 6,16,500 to Prof. Bishwajit Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake out any material on record to show that the payment to Prof. Shri Patnaik was excessive or unreasonable vis- -vis the services rendered by him. While coming to this conclusion, the learned CIT(A) has also observed that no show-cause notice was issued to the assessee on this account requiring its explanation. As can be seen from the decision in the case of Kamla Town Trust (supra), the onus lies on the revenue to bring on record, cogent material to establish that the trust/charitable institution is hit by the provisions of section 13. In the present case on hand the revenue had failed to bring any material on record to establish that the trust in question fell within the prohibited category enumerated in section 13. A benefit in common parlance denotes something which is not due to a person. The benefit to interested persons cannot be inferred by any stretch of imagination. Accordingly, we are of the considered view that the finding reached by the learned CIT(A) on this issue is well reasoned one and therefore uphold the same finding the grounds raised by the Revenue in this regard as devoid of merit. 24. The other issue raised by the Revenue relates to collection of fees from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) while disposing of the case. On this issue the learned AR pointed out that CIT(A), being an appellate authority in the departmental hierarchy, is not bound by the observation of another authority who is of equal rank. Therefore, the contention of the Revenue that the learned CIT(A) should have taken note of the observation of the learned CIT(Admin.) is not sustainable for legal scrutiny as they would negate the statutory power. On careful consideration of the rival submissions, we are of the considered view that it is an acceptable principle that the authority in which jurisdiction is vested can only exercise that power. In a way, the power must be exercised only by the authority to which it is committed. That authority must genuinely address itself to the matter before it; it must not act under the dictates of another body or disable itself from exercising discretion in individual cases. If the view expressed by the Department is accepted then it would amount to negation of these principles. This would destroy the basic structure of the Act and its integrity. Hence, we are of the considered view that such an argument of the Revenue is not acceptable under law and accor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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