IILM Foundation Vs. ADIT (ITAT Delhi)
We find that after the profit and loss A/c is prepared according to normal business practice it is observed that the profit margin of the assessee is 44.6% for the asstt. year 06-07 and 48.43% for the asstt. year. 07-08. Such high rate of profit clearly goes to establish that the appellant is existing for the purpose of profit and not for the purpose of charity. We further note that the Hon’ble Supreme Court of India delivered its decision on August 12, 2005 in the case of P A Inamdar Vs State of Maharashtra AIR 2005 SC 3226/ [2005] SCC 537 a unanimous judgment by a bench of 7 judges on various issues pertaining to educational institutes includes issues of fee structure, reservations, admission policies, etc. The Court based on an earlier landmark decision by the Supreme Court in TMA Pai Foundation case held that every institution is free to advise its own fee structure subject to the limitation that there can be no profiteering and no capitation fee charged directly or indirectly, or in any form. The Court further held that no profiteering does not imply that the institutions cannot have reasonable surplus for future sustenance and expansion of the institute. It was held that up to 15% of profit could be considered as reasonable and legitimate. Thus, the Hon’ble Supreme Court of India has observed that the profit rate up to 15% is reasonable for charitable organization. However, in this case it was observed that the profit rate is varying between 44.6% for the assessment year 2006-07 and 48.43% for the assessment year 2007-08. From this it goes to show that the organization is existing for the purpose of profit and not for charitable activities and therefore, the Ld. CIT(A) has rightly upheld the action of the AO by observing that assessee exists for the sole purpose of profit making and not for the purpose of charity, which does not need any interference on our part, hence, we uphold the same and reject the ground raised by the assessee.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
The Assessee has filed appeal in respect of assessment year 2007- 08 and Department has filed its Cross Appeal for AY 2007-08 and further the Department filed other 03 Appeals for the assessment years 2008-09 to 2010-11, all the appeals are emanated from the respective orders of the Ld. CIT(A-XII) New Delhi. Since the issues involved in these appeals are common, identical and inter-connected, hence, these appeals were heard together and are being disposed of by this common order for the sake of convenience. We first deal with Assessee & Revenue Appeals for the assessment year 2007-08.
2. The grounds raised in Assessee’s Appeal for AY 2007-08 read as under:-
“1. That on the facts and circumstances of the case, the order, dated 31.12.2010, having been passed by the Commissioner of Income Tax(Appeals) without affording adequate opportunity of being heard to the appellant, is violative of the principles of natural justice and is, therefore, illegal and bad in law.
2. That the Commissioner of Income Tax(Appeals) erred on facts and law in upholding the action of the assessing officer in denying the benefit of exemption uls. 11 and 12 of the Income Tax Act, 1961 (‘the Act’) on the ground that the appellant had made payment to specified persons within the meaning of Sec. 13(3) in violation of Sec. 13(1)(c) of the Act.
2.1 That the Commissioner of Income Tax(Appeals) erred on facts and law in upholding the finding of the assessing officer that payment of salary of Rs. 16,20,000/- to Mrs. Malvika RaiJa.J1tamounts to payment to specified persons within the meaning of Sec. 13(3) in violation of Sec. 13(1)(c) of the Act, despite the fact that the payment made to her was towards he services rendered.
2.2 That the Commissioner of Income Tax (Appeals) erred on facts and in law in observing that the appellant had failed to justify that the salary payment to Mrs. Malvika Rai was commensurate with her educational qualifications without considering the submissions made by the appellant and the services rendered by her.
3. That the Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in treating the scholarship given to Ms. Aarti Rai, as being in violation of provisions of Sec. 13(1)( c) of the Act.
3.1 That the Commissioner of Income Tax (Appeals) erred on facts and in law in alleging that the appellant had not mentioned the name of persons who had been extended similar scholarship facilities.
3.2 That the Commissioner of Income Tax (Appeals) erred on facts and in law in holding that the scholarship amount incurred by Ms. Aarti Rai in UK, was in violation of section 11 (1)( a) of the Act on the ground that exemption is allowed only for charitable purposes in India.
4. The Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the finding of the assessing officer that the appellant exists for the sole purpose of profit making and not for the purpose of charity.
4.1 The Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that the appellant had applied 92.83% of its income for charitable purposes, including acquisition of fixed assets for charitable purposes.
4.2 That the Commissioner of Income Tax(Appeals) erred on facts and in law in upholding the action of the assessing officer in assessing the income of the appellant as a business entity, after holding the activities of the appellant to be non-charitable under section 2(15) of the Act.
5. That the Commissioner of Income Tax(Appeals) erred on facts and in law in not adjudicating the alternative ground raised by the appellant that, assuming without admitting, there were violation(s) of section 13, still exemption under section 11/12 of the Act should not have been denied with respect to the entire income.
Without prejudice:
6. While computing income of the appellant as a business entity after denying exemption under sections 11/12 of the Act, the Commissioner of Income Tax (Appeals) erred on facts and in law in:
(a) affirming the action of the assessing officer in making addition of Rs. 34,41,987 out of refundable security deposit of the students.
(b) observing that although appellant’s obligation to refund the above security deposits existed, but since the appellant did not refund the same, suo moto, the appellant was running on commercial principles.
7. While computing income of the appellant as a business entity after denying exemption under sections 11/12 of the Act, the Commissioner of Income Tax (Appeals) erred on facts and in law in:
(a) affirming the action of the assessing officer in making ad-hoc addition of repairs and car maintenance expenses amounting to Rs.7,09,468/- on the round that no log book was maintained by the appellant.
(b) failing to appreciate that simply because no log book was maintained by the appellant, could not lead to the conclusion that the cars were not used for charitable purposes.
8. While computing Income of the appellant as a business entity after denying exemption under sections 11/12 of the Act, the Commissioner of Income Tax (Appeals) erred on facts and in law in:
(a) affirming the action of the assessing officer in disallowing scholarship expenses of Rs. 13,35,905/- paid to Ms. Aarti Rai.
(b) affirming the action of the assessing officer in disallowing salary of paid to Mrs. Malvika Rai.
9. While computing Income of the appellant as a business entity after denying exemption under sections 11/12 of the Act, the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming dis allowance of donation paid of Rs. 37,900/-.
10. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming imposition of interest under section 234B and 234C of the Act.
The appellant craves leave to add, alter, amend, or vary the above grounds of appeal at or before the time of hearing.”
3. The grounds raised in Revenue’s Appeal (AY 2007-08) read as under:-
”1. In the facts and in the circumstances of the case, the Ld. CIT(A) erred in granting relief to the assessee trust in r/o the payment of Rs. 2.72 crores for purchase of land for Ram Krishan & Sons Charitable Trust (RKSCT) and advancing of interest free loan of Rs. 2.19 crores to RKSCT while the fact is that the said fund has clearly been diverted to another family Trust & therefore is violation u/s. 13(3) of the I.T. Act.
2. The appellant craves leave to add, to alter or amend any ground of appeal raised above at the time of hearing.”
4. The grounds raised in Revenue’s Appeal for the assessment year 2008-09 read as under:-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing violation of provisions of section 13(1)(b) of the Act and thereby availing the benefit of exemption u/s. 11 & 12 of the Act, without considering the fact stated by the AO and giving reasons for the same.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in ruling against its own judgment in allowing the salary drawn by Ms. Malvika Rai to be commensurate with her educational qualification besides the salary drawn was not disclosed in annexure to Audit Report in payment to specified persons u/s. 13 of the Act, i.e. trying to conceal actual payment made thereby is the CIT(A) justified in allowing the assessee which has violated section 13(1)(c) w.r.t. section 13(3) of the Act? The same issue for the previous assessment year 2007-08 has been decided in favor of the revenue by the Ld. CIT(A).
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing exemption u/s. 11(1)(a) and 13(3) for usage of vehicles and other assets by trustees or specified persons u/s. 13(3) without assessee providing any evidence in form of log books as stated in the assessment order. No details of the remand report against the submission of the assessee has been stated in the order passed by the Ld. CIT(A).
4. The appellant craves to add, to alter or amend any ground of appeal raised above at the time of hearing.”
5. The following are common and identical grounds raised in Revenue’s Appeals for the assessment year 2009-10 & 2010-11:-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing violation of provisions of section 2(15) and 13(1)(c) of the Income Tax Act, 1961 and thereby availing the benefits of exemptions u/s. 11 & 12 without considering the fact stated by the AO and giving reasons for the same.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition made on account of salary paid to Ms. Malvika Rai, which is excessive in nature and not commensurate to her education, experience and duties and has been paid to the related party as she is chairperson of the trust.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the exemption u/s. 13(3) of the Income Tax Act, 1961 for usage of vehicles and other assets by trustees or specified persons u/s. 13(3) without assessee providing any evidence in the form of log books as stated in the assessment order.
4. The appellant craves leave to add, to alter or amend any ground of appeal raised above at the time of hearing.”
ASSESSEE & REVENUE APPEALS (A.Y. 2007-08)
6. The brief facts of the case are that return for the assessment year 2007-08 was filed on 31.10.2007 disclosing NIL income. The case was selected for scrutiny as per norms and notice u/s. 143(2) of the Income Tax Act, 1961 (hereinafter referred as the Act) was issued on 30.7.2008 and in response to the same and subsequent notices including notice u/s. 142(1) of the Act, the AR of the assessee society appeared from time to time and submitted details and particulars as requisitioned and also certain explanation and produced books of a/cs for examination. After examination of the records, the AO held that the assessee is not a charitable institution on account of infringement of provisions of section 13(1)(b) of the I.T. Act, 1961; the assessee violated provisions of section 13(1)(c) r.w.s. 13(3) of the I.T. Act, 1961; the assessee diverted fund within the meaning of section 13(2)(g) r.w.s. 13(3) of the I.T. Act, 1961; the institutions were operated by the assessee with a clear profit motive, and as business organization instead of a charitable one; the founders and controlling members have appropriated certain part of surplus fund for furtherance of their own need. In view of this, AO held that the activities of the assessee are held to be not charitable within the meaning of section 2(15) of the I.T. Act, 1961 from the nature of actual activities, accounts and transactions and as such the assessee is not entitled for exemption u/s. 11 & 12 of the I.T. Act, 1961 and accordingly, the AO processed to assess the income of the assesse as a business entity having a status of an AOP by making various other additions vide order dated 16.11.2009 passed u/s. 143(3) of the I.T. Act, 1961 and assessed the income of the assessee at Rs. 5,96,90,550/-.
5. Against the assessment order dated 16.11.2009 the assessee appealed before the Ld. CIT(A)-XII, New Delhi, who vide his impugned order dated 31.12.2010 has partly allowed the appeal of the assessee. Aggrieved with the impugned order, the Assessee as well as Revenue are in cross appeals before the Tribunal on some of the issues mentioned in their respective appeals.
6. Learned Counsel of the assessee has filed a copy of Synopsis in support of his arguments and relied upon the decisions mentioned in the Synopsis and also the decision of the Hon’ble Supreme Court of India in the case of Charanjiv Charitable Trust vs. DIT(E), New Delhi reported in [2014] 52 taxmann.com243 (SC), and he decision of the Hon’ble High Court of Delhi in the case of CIT vs. Text Hundred India (P) Ltd. reported as (2011) 197 Taxman 128 (Delhi). For the sake of convenience, we are reproducing the Synopsis submitted by the Ld. Counsel of the Assessee as under with regard to ITA No. 1142/Del/2011 (AY 2007-08) (Assessee’s appeal) :-
“The appellant seek to place on record synopsis in supplement to the arguments addressed during the course of hearing before the Hon’ble Bench.
Facts in brief are that the appellant is a charitable trust settled vide Trust Deed dated 1.02.2001 for the predominant charitable object of imparting education. The appellant-trust was initially declared/setup in the name of ‘Ram Krishan Kulwant Rai Charitable Trust’ and subsequently, the name of the trust was changed to IILM Foundation vide amendment of Trust Deed dated 26th July, 2007.
In furtherance of its predominant object of imparting education, during the year under consideration, the-appellant was running the following educational institutions:
(1) Banyan Tree World Schoolat Gurgaon: –
(2) IILM Under Graduate Business School at Lodhi Road.
(3) IILM Early College at Lodhi Road.
Apart from the aforesaid, the appellant was also contemplating setting up institute under the name and style of “IILM Academy of Higher Learning” at New Town, Kolkata and also ‘IILM Institute of Higher Education at Lodhi Road, New Delhi’.
For the previous year relevant to the assessment year 2007-08, the year under consideration, the appellant filed return of income declaring Nil income on 3151 October, 2007 after claiming exemption under sections 11112 of the Income Tax Act, 1961 (“the Act”).
