45% profit from educational activities establishes profit motive of trust and exemption U/s. 11 cannot be allowed

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”).

• Assessment has, however, been completed vide order dated 16th November, 2009 under section 143(3) of the Act, assessing the income of the appellant at Rs. 5,96,90,549. In the assessment order, the appellant has primarily been denied exemption claimed under sections 11112 of the Act and assessed the income treating the appellant as a business entity, after making various additions/ dis allowance to the income (before claiming exemption) as declared by the appellant.
• In the aforesaid background facts, the appellant’s ground-wise contentions are briefly stated here under: Re: Ground of Appeal No. 1.
  
• In this ground the appellant has challenged the order of the CIT(A) affirming the assessment order dated 16.12.2009, which was passed without affording adequate opportunity of being heard to the appellant, in gross violation of principles of natural justice.
• In support of the aforesaid, your Honour’s kind attention is invited to the following:

a) In the assessment order, the assessing officer alleged that the appellant violated the provisions of section 13(1)(c) of the Income-tax Act, 1961 (“the Act”) on account of payment of remuneration to Mrs. Malvika Rai, without affording any opportunity of being hear a to the appellant [Issue specifically raised vide grounds of appeal Nos. 2 to 2.2].

On further appeal, the CIT(A), too, failed to take into consideration various documents filed during the course of appellate proceedings (elaborately discussed infra). Since the impugned order(s) have been passed without affording adequate opportunity of being heard, the appellant filed application for admission of additional evidences) before the Hon’ble Bench on 2nd March, 2017.

b) The assessing officer also alleged that the appellant violated the provisions of section 13(1)(c) of the Act on account of payment of remuneration and scholarship to Ms. Aarti Rai, without affording any opportunity of being heard to the appellant, in violation of principles of natural justice [Issue specifically raised vide grounds of appeal Nos. 3 to 3.2].

c) The assessing officer, while making addition on account of refundable security deposit, proceeded to draw adverse inference on the basis of details available on record, without affording any opportunity of being heard to the appellant [Issue specifically raised vide ground of appeal No. 6]

It is submitted that on account of the aforesaid violation of principles of natural justice, the impugned orders passed by the AOI CIT(A) alleging violation of provisions of section 13(1)(c) of the Act and affirming the addition of refundable security deposit is illegal and bad in law.

In the aforesaid circumstances, it is further respectfully submitted that the appellant has filed application filed by the appellant for admission of additional evidences in support of grounds of appeal Nos. 2 to 2.2. It is respectfully submitted that for reasons elaborately set out in the said application; the additional evidences now being filed before-the Hon’ble bench may kindly be admitted and taken into consideration in terms of Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963. Emphatic reliance in this regard is placed on the decision of the jurisdictional Delhi High Court in the case of CIT vs. Text Hundred India Pvt. Ltd.: 239 CTR263. In that case, their Lordships held that Rule 29 of ITAT Rules, enables the Tribunal to admit any additional evidence which would be necessary to do substantial justice in the matter. Their Lordships further observed that the various procedures, including that relating to filing of additional evidence, is handmade for justice and justice should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead; evidence. The relevant observations of the Court are reproduced here under:

“13. The aforesaid case law clearly lays down a neat principle of law that discretion lies with the Tribunal to admit additional evidence in the interest of justice once the Tribunal affirms the opinion that doing so would be necessary for proper adjudication of the matter. This can be done even when application is filed by one of the parties to the appeal and it need not to be a suo motto action of the Tribunal. ‘ The aforesaid rule is made enabling the Tribunal to admit the additional evidence in its discretion if the Tribunal holds the view that such additional evidence would be necessary to do substantial justice in the matter. It is well settled that the procedure is handmade of justice and justice should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence at the appropriate stage. Once it is found that the party intending to lead evidence before the Tribunal for the first time was prevented by sufficient cause to lead such an evidence and that this evidence would have material bearing on the issue which needs to be decided by the Tribunal and ends of justice demand admission of such an evidence, the Tribunal can pass an order to that effect.” (emphasis supplied)

• Your Honour’s kind attention in this regard is also invited to the decision of the Hon’ble Delhi High Court in the case of CIT v. Virgin Securities & Credits (P) Ltd.: 332 ITR 396-(Del), wherein ‘the High Court held that the CIT(A) may admit additional evidence, after obtaining a remand report from the assessing officer, if the evidence sought to be adduced by the appellant is crucial to the disposal of the appeal. The relevant observations of the Court are as under:

“8. The, aforesaid contention appears to be devoid of any merit. It is a matter of record that before-admitting the additional evidence; the CIT (A) had obtained ‘remand report from the AO. While submitting his report, the AO had not objected to the admission of the additional evidence, but had merely, reiterated the contentions in the assessment orders. It is only after considering the remand report, the CIT (A) had admitted the additional evidence. It cannot be disputed that this additional evidence was crucial to the disposal of the appeal and had a direct bearing on the quantum of claim made by the assessee. Plea of the assessee which was taken before the AO remains the same. The AO had taken adverse note because of non-production of certain documents to support the plea and it was in these circumstances, the additional evidence was submitted before the CIT (A). It cannot, be said not is It the case of the Revenue that additional evidence is not permissible at all before the first appellate authority. On the contrary, Rule 46A of the Act permits the CIT (!\.) to admit additional evidence if he finds that the same is crucial for disposal of the appeal. In the facts of this case, therefore, we are of the opinion’ that on this aspect, no substantial question of law arises.” [Emphasis supplied]

• It has similarly been held in the following decisions:

CIT vs. Hewlett Packard India: 314 ITR 55 (Del)

CIT vs. Chandra Kant Sahu Bhai: 202 Taxman 262 (Del)

CIT vs. Betterways Finance: ITA 995 of 2009 (Del)

CIT vs. Chittosoh Motors: 11 taxmann.com 81 (P&H)

Atlas Cycle Industries Ltd vs. CIT : 133 ITR 231 (P&H)

Jatia Investment Co vs. CIT: 206 ITR 718 (Cal)

Electra (Jaipur) Ltd vs. lAC: 26 ITD 236 (Del Tri.)

Y. W. C. A: of India vs. lAC: 29 ITD 620 (Del Tri.)

• In the light of the aforesaid, it is respectfully prayed that in terms of Rule 29 of the ITAT Rules, the aforesaid additional evidences may kindly be admitted and taken into consideration while disposing the appeal.

Re: Grounds of Appeal Nos. 2 to 2.2

The assessing Officer however, ‘on the basis of entries in the bank book incorrectly inferred/alleged that payments were made in violation of the provisions of section 13(1)( c) of the Act. Before drawing adverse inference conclusion, the assessing officer never allowed any opportunity of being heard to the appellant, nor confronted the appellant with any such inference sought to be drawn by him.

Before the CIT(A), the appellant submitted following brief profile alongwith justification for paying salary to Mrs. Malvika Rai [refer pages 86-87 of paper book]:

“Re: Salary paid to Mrs. Malvika Rai

The appellant paid aforesaid salary to Mrs. Malvika Rai, in respect of the services rendered by her to the institution. The assessing officer failed to appreciate that, Mrs. Malvika Rai is the Chairperson of the ‘IILM Under Graduate Business’ School (in-short ‘IILM UBS’), run by the appellant at Lodhi Road; offering various management programs in collaboration with the University of Bradford, U.K. She is also chairperson of the academic council of IILM-UBS. Mrs. Malvika Rai is regularly involved in the interaction with various academicians, educationists, Vice Chancellors and faculties of several Universities and Management Institutes of USA , UK and other countries, with a view to upgrade the level of providing education in the various educations institutions of which she is a part.

Furthermore, it is respectfully submitted that Mrs. Malvika Rai, after completing her Graduation from Jesus & Marry College, Delhi University, has been actively involved in the field of education for more than 2 decades.

That apart, Mrs. Malvika Rai is amongst the few Indian women, who have pioneered the cause of education in the Country. Mrs. Malvika Rai has also launched a primary school and vocational training centers, namely, “Roshni”, for the socially & economically backward section of the society in Lodhi Institutional area, New Delhi. Mrs. Malvika Rai was awarded the Indira Gandhi Priyadarshini award for the year 1996 as acknowledgment of her services to the nation and society.”

The CIT(A) however decided the issue against the’ appellant observing as under:

“9.2 The submission given by the appellant and the objections of the assessing officer has been perused. It is seen that Mrs. Malvika Rai is related to the trustee’ and is being given a hefty salary of Rs. 16.20,000 p.m. despite the fact that she is just a graduate and the appellant had not furnished any details as to how the educational qualification of Mrs. Malvika Rai is commensurate with the salary which she is drawing. Thus the assessing officer was correct in invoking the provision of section 13 and denying the benefit of exemption under section 11 and 12. This ground is decided against the appellant.”

The aforesaid observations of the CIT(A) are without judicious appreciation of the facts of the case and position in law for the reasons stated here under:

• It is, at the outset, submitted that the CIT(A) inadvertently decided the above issue by considering the salary amount of Rs. 16,20,000 on per month basis, whereas the fact was that the said amount represented salary paid to Mrs. Malvika Rai annually and not monthly.
• Further, the CIT(A) upheld the above dis allowance primarily oil the ground that he appellant has not furnished any details as to how the educational qualification of Mrs. Malvika Rai is commensurate with the salary which she is drawing.
• In this regard, it is respectfully submitted that the appellant had submitted before the CIT(A) the profile of Mrs. Malvika Rai and various duties & responsibilities performed by her, discussed supra.

Furthermore, during the course of appellate proceedings, the appellant also produced salary sheets of the appellant for various months for verification by the CIT(A) [refer pages 109- 110 of paper book]. The appellant, also submitted details of salary paid to various senior faculties etc. of the appellant, on sample basis as follows:

Name	Designation	Gross salary (In Rs.)	Month
Mr. B. Bhattach arya	Director	90,000	June, 2007
		1,20,000	December, 2008
		1,20,000	February, 2009
Mrs. Sapna Popli	Assistant Director	1,01,166	October, 2007
		1,35,331	January, 2009
		1,31,786	February, 2009
Mrs. Sandhya Prakash	Principal, Banyan Tree School	85,670	October, 2007

On the basis of the aforesaid, it was submitted that the aforesaid senior faculty members of the appellant were getting almost equal salary/ remuneration. It was further submitted that the aforesaid persons were merely looking after a particular institution, whereas Mrs. Malvika Rai, being Chairperson of the appellant, was responsible for all the institutions run by the appellant.

In view of the aforesaid profile/ roles and responsibilities and contributions/ services of Mrs. Malvika Rai, it was submitted that the aforesaid salary paid to her was very much justified and not at all unreasonable/ excessive and cannot, in any manner, be considered as giving of any undue benefit by the appellant.

It may also be pertinent to mention here that the CIT(A) did not take into consideration the aforesaid details/ information filed by the appellant, during the appellate proceedings, to substantiate the fact that Mrs. Malvika Rai had actually rendered services to the appellant. The CIT(A) has, however, observed that the appellant was unable to show that the salary paid was commensurate with the educational qualification of Mrs. Malvika Rai.

In this regard, it is respectfully submitted that the only requirement in law is that the salary paid should not be excessive or unreasonable having regard to services rendered. The services rendered have to be bench marked not only with reference to the educational qualification of the persons) specified in section 13 of the Act but-also the requisite experience. The CIT(A), it appears, was influenced by the fact that Mrs. Malvika Rai was only a graduate. But that fact, by itself, it is respectfully submitted, cannot be the basis to hold that services were not rendered by Mrs. Malvika Rai to the appellant and / or such services were not commensurate with the salary paid, if the same is received against the experience of over two decades of Mrs. Rai in the educational field.

• To further. buttress the aforesaid contentions, the appellant has placed on record the following additional evidences under Rule 29 of the ITA T Rules, to demonstrate actual rendering of services by Mrs. Malvika Rai :-

– Copies of extracts from the brochure of IILM -UBS (refer page Nos. 1-4 @ 2);

– Compilation of various editions of quarterly journal of

the applicant Institute, namely” J

‘The Edge’ (page Nos. 5-193);

Documentary evidences of various events of the applicant being organized under the guidance of Mrs. Malvika Rai (page Nos.l94-229 @208, 210,212,213,215,216,217, 218,219) It is submitted that under section 13(1)(c) read with sectionI3(2)(c) there is no bar on payment of salary, etc., to the persons mentioned in section 13(3) of the Act for the services rendered by such persons. The law only provides that if payment is made to persons mentioned in section 13(3) of the Act in respect of services rendered by such persons, the same should not be unreasonable.

Emphatic reliance in this regard is placed on the decision of Hon’ble Delhi High Court in the case of Pariwar Seva Sansthan: 254 ITR 268 (Del) (refer pages 38 – 39 of Paper Book of case laws). In that case, the Revenue filed appeal against the decision of the Tribunal holding that since payments made to parties specified under section 13(3) was reasonable and not excessive, there was no violation of section 13(1)(c) of the Act. Affirming the decision of the Tribunal as not given rise to any question of law, the Hon’ble Court held as under-

“Heard. This is an appeal under section 260A of the Income-tax Act, i 961 (‘the Act’). The appeal relates to the assessment years 1995-96 and 1996-97. The following question has been posed:

“Whether, on the facts and in the circumstances of the case and in law the Tribunal was correct in allowing the benefit under section 11 of the Income Tax Act, 1961 without appreciating that the assessee had violated the provisions of section 13(I)(c) and 13(1)(d) of the Act?”

2. We find that the Commissioner (Appeals) decided in favor of the assessee on all aspects in the revenue’s appeal for the assessment year 1995-96. The Tribunal affirmed conclusion of the Commissioner (Appeals) with the following observations:

“We have considered the rival submissions and the materials on the file. We are of the view that on the facts and in the circumstances of the case and for the detailed reasons given in the impugned appellate order, the ld. CIT(A) was justified in holding that the assessee was entitled to exemption under section 11 of the Act for the assessment year 1995-96. As noted above, the) assessee is a registered society under section 12A(a) of the Act. It is providing services in the field of family planning, family welfare, birth control, etc. It was in existence since 1981 and it was allowed exemption under section 11 of the Act in earlier years. The reasons given for refusing exemption under section 11 by the Assessing Officer for the assessment year in question have been given hereinbefore. These reasons were payment of salary, rent, etc., to Mrs. Sudha Tewari, Chief Executive Officer and Project Coordinator, rent of the house to Mr. G.K. Tewari, husband of Mrs. Sudha Tewari, loan to Tyagi Foundation and expenditure incurred on conferences and clinics. The ld. CIT(A) has discussed all the items in his impugned appellate order at length and held that salary, rent, etc., paid to Mrs. Sudha Tewari was reasonable and for valuable services rendered by her as Chief Executive Officer and Project Coordinator and that the rent of the house paid to Mr. G.K. Tewari was also reasonable considering the location of the house in Green Park, New Delhi. No material has been brought before us to rebut the factual findings of the ld. CIT(A). On consideration of the materials on the file, the past record of the society, the year to year services rendered by Mrs. Sudha Tewari from its inception, we are satisfied that the salary, rent, etc., paid to her was reasonable and was not excessive and the ld. CIT(A) was justified in rejecting these as not valid grounds for rejecting the claim of exemption under section 11 of the Act.

……………… …………………

3. For the assessment year 1996-97, the assessee primarily challenged the question as to the reasonableness of salary. That plea was accepted in view of the conclusions for 1995-96. The extracted portion of the order passed by the Tribunal goes to show that’ the conclusions are essentially factual giving rise to no question of law. Accordingly, we do not entertain this appeal Dismissed,”

* Further reliance is placed on the following –

decisions wherein various Benches of the Tribunal have consistently held that so long as payment made in the form of remuneration/ salary/ allowance, etc., to parties covered under section 13(3) are for the services rendered, there is no benefit so as to hold violation of section 13 (1 )( c) of the Act, It has further been held the onus is on the Revenue to prove that the payment made to the persons specified in section 13(3) of the Act is unreasonable by placing on record the material to show the market value, the services rendered and how the payment made is excessive and unreasonable:-

– ITO vs. Virendra Singh Memorial Shiksha Samiti: (2009) 18 DTR (Luck) 502 (refer paras 17 and 18)

– Dr. D.Y. Patil Pratisthan: (2014) 61 SOT 48 (Pune) (refer paras 35 – 37)

– ITO v. Human Resource Development and Management Trust: (2011) 47 SOT 85 (Cuttack) (refer para 23)

* On perusal of the aforesaid, it is respectfully submitted that merely because payment is made to persons specified in section 13(3), it cannot be alleged that there is violation of section 13(I)(c) of the Act. The onus is on the assessing officer to show how the remuneration! payment made is excessive and reasonable.

* Pertinently, the CIT(A) in the appellant’s own case for assessment years 2008-09 and 2009-10 held that there is no violation of section 13(1)(c) of the Act, after taking into consideration the entire material! evidences placed on record:

– CIT(A) for AY 2008-09 – refer pgs. 1-31 of PB of Case Laws @ 17-22,31

CIT(A) for A Y 2009-10 – refer pgs. 32-37 of PB of Case Laws @ 36-37

• It is also pertinent to note that even the assessing officer, in the impugned order, disallowed added remuneration to the extent of Rs. 2,25,000 out of remuneration of Rs. 16,20,000. Further, the assessing officer has not brought on record any material to justify how the remuneration paid is excessive/ unreasonable. It will kindly be appreciated that since remuneration paid to Ms. Malvika Rai was commensurate with the services rendered by her, there was no violation of provisions of section 13(1)(c) of the Act.

As regards the contention of the Ld. DR that clause No. 28 of the Trust Deed (refer page 9 of the Paper Book) prohibits payment of remuneration, it is submitted that the said clause only prohibits any payment in the capacity of Trustee; simpliciter. There is, in fact, no payment of remuneration! salary for services rendered to the trustees in the capacity as such. On the contrary, payment has been made to Ms. Malvika Rai for rendering services in various capacities mentioned supra. It is reiterated that so long as such payment is commensurate with the services rendered, there is no violation of section 13 of the Act.

In view of the aforesaid, it is submitted that the assessing officer/ CITCA) erred in holding that the appellant violated the provision of section 13(1)Cc) on account of payment of remuneration to Ms. Malvika Rai. Re: Grounds of Appeal Nos. 3 to 3.2

• The appellant, during the year under consideration, paid salary ofRs.2,57,OOO to Ms. Aarti Rai, in respect of the services rendered by her to the institution. Apart from the salary, the appellant gave scholarship of Rs. 13.36 lacs to Ms. Aarti Rai for pursuing higher education, as part of arrangement to engage her after pursuing the education for rendering services to the appellant-trust.
• The facts relating to the aforesaid, as pointed before the CITCA) [refer pages 88-89 of paper book] are as under:
• Aarti Rai was first appointed in July’2003 in IILM-UBS. Thereafter, she worked in World School, Gurgaon (now known as ‘Banyan Tree school’) of the appellant. In fact, it is Ms. Arti Rai who conceptualized the setting up 9fthe World School at Gurgaon.

The appellant has the system of providing scholarships to the student /employees based on the following pattern:

A. Scholarships to Students’

Scholarships are given to the merit holder students and also to other students-who after passing out from the college intends to pursue higher studies from abroad. Such scholarships are provided subject to the condition that these students would serve the institution, for a minimum period of 5 years after completion of their studies abroad, at reduced salary which would be decided by the Director of the Institute.

B. Scholarships to Employees/Faculties for Higher Studies

Scholarships are given to the employees of the appellant who intends to pursue higher studies from abroad, Such scholarships are provided subject to the condition that these employees would serve the institution, after completion of their studies abroad, under either of the following two alternatives:

Alternative- I : : To serve the institution for a minimum period of 5 years at 50% salary as compared to the market norms

Alternative –II To serve the institution at an Honorarium of Rs.10,000 per month for at least 3 years.

In the present case, Ms. Aarti Rai, it is respectfully submitted, was sent abroad for pursuing higher education under Alternative-II (supra). After completing her studies abroad, she worked Honorary for the appellant.

On perusal of the aforesaid, it will be kindly appreciated that the aforesaid scholarship paid to Ms. Aarti Rai is very much justified and not at all unreasonable/ excessive and cannot, in any manner, be considered as giving of any undue benefit to her by the appellant.

CIT(A)’s findings

While upholding the order of the assessing officer, the CIT(AJ held that the appellant failed to mention the name of persons who has been extended similar scholarship and also, that since the scholarship amount was incurred by Ms. Aarti Rai in UK, the same was, therefore, in violation of section 11(1)(a) of the Act

• In this regard, it is respectfully submitted as under: –

As regards name of other persons who has been accorded similar scholarship, the CIT(A) lost sight of the following submissions made before him (refer page- 89 of the paper book):

“It is further respectfully submitted that, during the year under consideration, the appellant had also extended similar sponsor ships to various other faculties like Ms. Meena Bhatia and Ms. Sangeeta Yadav, who are not persons specified under section 13(3) of the Act, for upgrading their educational skills, which further supports the contention of the appellant that scholarship is given to aspiring faculty members.”

On perusal of the aforesaid, it will kindly be appreciated’ that there is no violation of section 13(1)(c) of the Act on account of payment of remuneration and scholarship to Ms. Aarti Rai.

• As regards allegation of the CIT(A)/ Ld. DR that the expenditure was incurred outside India without any approval from the Board, it is respectfully submitted that insofar as the appellant is concerned, the scholarship was granted in India and hence, the expenditure was incurred in India and not outside India. Merely because scholarship was utilized by Ms. Aarti Rai for her education outside India does not, it is respectfully submitted, mean that the expenditure was incurred outside India. In any case, payment of expenditure outside India would not result in violation of section 13(l)(c) of the Act, as alleged by the lower authorities.

Further, the allegation of the Ld. DR! AO that payment made to Ms. Aati Rai was not disclosed, is, it is .submitted; factually incorrect inasmuch as scholarship expenditure was clearly declared as a separate line ‘item in the Income and Expenditure Account (refer page 50 of Paper Book).

For the aforesaid reasons, it is respectfully submitted that there was. no violation of section 13(1)(c) of the Act merely on account of payment of remuneration and scholarship to Ms. Aarti Rai.

Re: Grounds of Appeal Nos. 4 to 4.2

In the assessment order, the assessing officer observed that during the year under consideration the net profit as per income and expenditure account was Rs. 4,75,83,039/- and gross income of Rs. 9,82,41,290/-meaning thereby that net profit was 48.43% of the gross income. Similar observation has also been made with regard to the profitability of the immediately preceding assessment year 2006-07.

In this regard, it is submitted that while coming to the aforesaid conclusion, the assessing officer failed to notice. that -the appellant, in fact, applied 92.83% of its income for charitable purposes during the year under consideration (refer page 52 of the paper book).

Kind attention is further invited to the following table reproduced in the order of the CIT(A) for assessment year 2008-09 to demonstrate the position of actual surplus after taking into consideration various capital expenditure incurred by the appellant:-

A.Y.	Total income	Application towards revenue purposes	Application towards capital purposes	Total application of income spent	%of total amount actually
2006-07	86,043,803	39,240,739	58,856,879	98,097,61	11.01%
2007-08	92,798,002	41,556,750	44,586,357	86,143,107	92.83
2008-09	153,883,440	91,946,213	35,307,637	127,253,851	82.69

The assessing officer/ CIT(A), it is submitted, failed to consider acquisition of fixed assets and other capital expenditure, which were shown in the statement of utilization of income filed along with the return of income, as application of income for charitable purposes, contrary to the settled legal position that amount spent towards capital expenditure also tantamount to application of income for charitable purposes, as has been held in the following decisions:

S. RM M.CT.M Tiruppani Trust vs. CIT: 230 ITR 637 (SC) [refer pg. 240-243 of case law PB]

St. Lawrence Educational Society (Regd). V. ClT: 197 Taxman 504 (Del) [refer pg. 244-247 of case law PB]”J

Pine grove International Charitable Trust vs. VOl: 327 ITR 73 (P&H)

DIT (Exemption) vs. Lilavati Kirtilal Mehta Medical Trust: Income Tax Appeal (L) No. 2990 of2009 (Born. HC)

CIT vs. St. George Forana Church: 170 ITR 62 (Ker)

CIT vs. Kannika Parameswari Devasthanam and Charities: 133 ITR 779 (Mad.)

Satya Vijay Patel Hindu Dharamshala Trust vs. CIT: 86 ITR 68J (Guj.)

In view of the aforesaid, the conclusion drawn by the AO/ CIT(A) on the basis of the profits, without taking into consideration capital expenditure incurred for charitable purposes, is incorrect and legally unsustainable. As regards the allegation of the assessing officer that there is no iota of evidence of charitable intent of the appellant, and that the appellant has been catering only to the elite class of the society, and that nothing has been submitted to show that poor/ EWS category of students were given concessional education, it is respectfully submitted as under:

It is submitted that the aforesaid findings/ allegations of the assessing officer are without any basis. It is respectfully submitted that under the scheme of the Act ‘education’, per se, is charitable. It is, therefore, not at all necessary that education must be imparted to the poor only; what is required is benefit must be given to a section of the public as distinguished from specified individuals by imparting education.

Reference, in this regard, may be made to the following decisions:

• CIT vs. Krishi Utpadan Mandi Samiti, Purva, Unnao: 231 CTR 505 (All.)
• CIT vs. Surji Devi Kunji Lal Jaipuria Charitable Trust (No.1): 186 ITR 728 (All.)
• Hiralal Bhagwati vs. CIT: 246-ITR 188 (GJlj.)
• Gaur Brahmin Vidya Pracharini Sabhavs .. CIT: 129 TTJ 627 (Del) [refer pg. 211-220 @219 of case law PB]
• Indo American Society vs. ADIT: 96 ITD 61 (Mum.) [refer pg. 221225 @224 of case law PB]
• Don Bosco’ Educational Society V. CIT: 84 TTJ 805 (Luck) [refer pg. 233-239 @239 of case law PB]

The CIT(A), while confirming the findings of the assessing officer, however, observed as under:

“11.4 The submissions given by the appellant has been perused. It is to be seen that net profit rate has to be calculated according to common business parlance where application towards procurement of fixed assets are not to be considered. In the case of CIT vs. Queen Educational S?ciety [2009] 177 Taxman 326 (Uttarakhand), it was held that the society was not entitled to exemption under section 1O(23)(iiiad) as there was surplus in its account books after meeting all expenses incurred towards imparting education and it had invested said surplus in fixed assets like furniture and buildings with a view to expand institution and to earn more income.

• On perusal of the aforesaid, it will kindly be noticed that the CIT(A) relied upon the decision of the CIT vs. Queen Educational Society: [2009] 177 Taxman 326 (Uttarakhand). In the said decision, their Lordships also considered the profits of the assessee, without taking into consideration the capital expenditure incurred by the assessee for charitable purposes.

• The aforesaid decision has been reversed by the Hon’ble Supreme Court in the case reported as Queen’s Educational Society v. CIT: 372 ITR 699 [refer pg. 251-266 @258260, 265 of case law PB] The Supreme Court:

(a) held that where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes ‘surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit [refer para 11 on page 258];

(b) elaborately dealt with the decision of the Uttarakhand HC and specifically reversed the said decision [refer para 19 & 20 on. page 260]; (c) concurred with the decisions of the Delhi He in the case of Lawrence Educational Society (Reg d.) V. CIT 53 ITR 320 (Del) which followed the decision of the Hon’ble Apex Court in the case of Surat Art Silk Cloth Mfrs. Association: 121 ITR 1 (SC) [refer para 24 on page 265].

Further reliance is placed on the following decisions wherein it has consistently been held that exemption under sections 11112 of the Act cannot be denied merely on the ground of the above surplus:

– CIT v. St. Peter’s Educational Society: 385 ITR 66 (SC)

– Queen’s Educational Society v CIT: 372 ITR 699 (SC) – American Hotel Lodging Association Education Institute v. CBDT: 301 ITR 86 (SC)

– CIT v Delhi Kannada Education Society: 246 ITR 731(Del.)

– Tolani Education Society v. Dy. Dl’I'(Exemptions)-351 ITR 184 (Born.) – (approved by SC Queen’s Educational Society v CIT in 372 ITR 699) Shree Karndar Education trust v, ITA: 243 Taxman 76 (Guj.)

In view of the aforesaid, it is respectfully submitted that the AO/ CIT(A) erred in holding that the appellant was not entitled to exemption under sections 11/12 of the Act merely on account of surplus in the books of account and on account of the appellant charging fees for imparting education.

Re: Ground of appeal No. 5

• Without prejudice to the aforesaid, it is respectfully submitted that the AO/ CIT(A) further failed to appreciate that even -assuming {without admitting) that there was violation of section 13, then too, there was no-warrant to deny complete exemption under sections 11/12 -and the exemption should have been denied only to the extent of expenditure/ income to the extent of alleged violation under section 13 of the Act, for the reasons elaborated here under.-
• Section 13 of the ACJ spells out certain circumstances in which. the exemption provided under sections 11/12 will not be available. Further section 164(2) and 164(3) of the Act reads as under:

“[(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, or which is of the nature referred to in, sub-clause (iia) of clause (24) of section 2. or which is of the nature referred to in sub-section 4A) of section 11, tax shall be charged on so much of the relevant income as is not exempt under section 11 or section 12,as if the relevant income not so exempt were the income of an association of persons:

Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.

(3) In a case where the relevant income is derived from property held under trust in part only for charitable or religious purposes or is of the nature referred to in sub-clause (iia) of clause {24) of section 2 or is of the nature referred to in sub-section (4A) of section 11, and either the relevant income applicable to purposes other than charitable or religious purposes (or any part thereof) is not specifically receivable on behalf or for the benefit of anyone person or the individual shares of the beneficiaries in the income so applicable are indeterminate or unknown, the tax chargeable on the relevant income shall be the aggregate of-

(a) the tax which would be chargeable on that part of the relevant income which is applicable to charitable or religious purposes (as reduced by the income, if any, which is exempt under section 1 J)as if such part (or such part as so reduced) were the total income of an association of persons; and

(b) the tax on that part of the relevant income which is applicable to purposes other than charitable or religious purposes, and which is either not specifically receivable on behalf or for the benefit of anyone person or in respect of which the shares of the beneficiaries are. indeterminate or unknown, at the maximum marginal rate.

……..”(emphasis supplied) ……..

The aforesaid sections provide that income of trust will be taxable at maximum marginal rate of tax’:

1. If any fund of the organization has been invested or deposited, for any part of the year, as per section H(1)(d) read with section 11(5) of the Act;

2. If any part of income has been applied directly or indirectly for the benefit of any of the excluded persons under section 13(1)© r.w.S. 13(3) of the Act.

• However, the section categorically provides that tax shall be charged on the ‘relevant income’ or ‘part of relevant income’ which has forfeited exemption at the maximum .” marginal rate.

Thus, on a conjoint reading of section 13(1) and section 164 of the Act, it may be observed that tax ability of the income of an organization forfeiting exemption under section 13(1)© or 13(1)(d), shall be charged at maximum marginal rates of tax only on that part of income which has forfeited exemption. Thus, where the trust contravenes the provisions of section 13(1)© or (d) of the Act, the maximum marginal rate will apply only to that part of the income which has forfeited exemption.

• Further, the language of section 13(1)(c) and (d) also supports this view which provides to exclude from the total income, ‘any income thereof’ which as a whole or in part has forfeited exemption.

Thus, on a conjoint reading of section 13(1) and section 164 of the Act, it may be observed that tax ability of the income of an organization forfeiting exemption under section 13(1)(c) or 13(1)(d), shall be charged at maximum marginal rates of tax only on that part of income which has forfeited exemption. Thus, where the trust contravenes the provisions of section 13(1)(c) or (d) of the Act, the maximum marginal rate will apply only to that part of the income which has forfeited exemption.

Further, the language of section 13(1)© and (d) also supports this view which provides to exclude from the total income, ‘any income thereof’ which as a whole or in part has forfeited exemption.

In this regard, it is further submitted that the word “such” used in the section 13(l)(c)(ii) is important and refers to only that part of income which goes to the benefit of specified persons. Further, similar treatment should be given in respect of cases covered under clause (d ) of section 13(2) providing for dis allowance in respect of services of the trust given to specified persons.

Your Honour’s kind attention 10 this regard is invited to Circular No. 387 dated] 06.07.1984 [(1985) 152 ITR (Sat.) 1 at 20) which clarifies the aforesaid position:. The relevant extracts of the said circular has been reproduced as under:

“28. 6. It may- be, noted that new sub-section (l A) inserted in section 161 of the Income-tax Act, which provides for taxation of the entire income received by trusts at the maximum marginal rate is applicable only in the case of private trusts having profits and gains of business. So far as the public charitable and religious trusts are concerned, their business profits are not exempt from tax, except in the cases falling under clause (a) or clause (b) of section 11(4A) of the Income-tax Act. As the maximum marginal rate of tax under the new proviso to section 14(2) applies to the whole or a part of the relevant income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the Income-tax Act in regard to investment pattern or use of the trust property for the benefit of the settlor, etc., contained in section J3(l)(c) and (d) of that Act, the said rate will not apply to the business profits of such trusts which are otherwise chargeable to tax. In other words. where such a trust contravenes the provisions of section 13(1)(c) or (d) of the Act, the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provisions.” (emphasis supplied)

In this regard, your Honour’s kind attention is further invited to various judgments/ decisions wherein it has been held that instances of violation of any provision of section 13 could not result in complete-denial of exemption under sections 11/12 of the Act.

• The Delhi Bench of the Tribunal in the case of Span Foundation vs. ITO: 2008 TIOL 108 ITAT Del [refer pages 449-454 of Case Law Paper Book- II] held that even in a case of alleged violation under section 13, benefit under section 11 would not be available only to the extent of application of income or property for the benefit of person referred to in section 13(3) of the Act. The same could not, however, the Tribunal further held, result in total denial of exemption under section 11 of the Act. The pertinent observations of the Tribunal read as under:

“8. We have considered the rival submissions. Section 13 operates as an exception to section 11 of the Act. Section 13 treats only the difference between the adequate rent chargeable for the building and the actual rent charged by an assessee as attracting the provisions of section 13 of the Act. In other words, the benefit of section 11 could not be available only to the extent of application of the property or income of the trust directly or indirectly (or the benefit of persons referred in sub-section(3) of section 13 o[the Act. The benefit of section 11 could not be totally denied. The question that arises for consideration is as to whether the rent charged by the assessee from its sister concern was adequate rent “( emphasis supplied).

Further appeal preferred by the Revenue against the aforesaid decision of the Tribunal has been dismissed by the Delhi High Court in the case reported as DIT V. Span Foundation: 178 Taxman 436 [refer pages 121122 of Case Laws PB].

• You Honour’s kind attention, in this regard, is also invited to the decision of the Calcutta High Court in the case of Birla Vidhya Vihar: 136 ITR 445 wherein the Court held that solitary fact of diverting! application of income from the school for non-educational purposes was not very material for completely denying exemption under section 10(22) of the Act.

The Hon’ble Karnataka High Court in the case of CIT vs. FR Muliers Charitable Institutions: 363ITR 230 (Karn.) [refer Pages 110-115 @ 114 of Case law paper book] similarly held that for violation under section 13( 1)( d) entire exemption under section 11 of the Act cannot be withdrawn.

Pertinently, SLP filed by the Revenue against the aforesaid judgment of the High Court has been dismissed by the Hon’ble Supreme Court in SLP No. 22223 of 2015 (Refer page 116 of case laws paper book).

• Similarly, the Hon’ble Madras High Court in the case of CIT vs. Working Women’s Forum: 365 ITR 353 (Mad) (refer pages 117-119 @ 118 of Case Law Paper book) held that on account of violation of section 13 (1) entire exemption under section 11 of the Act cannot be denied.

SLP filed by the Revenue against the aforesaid decision has also been dismissed and is reported in 235 Taxman 516 (refer page 120 of case law paper book).

• Further reliance is placed on the following decisions:

DIT (E) vs Sheth Mafatlal Gagalbhai Foundation Trust: 249 ITR 533 (Born) [refer Pages 123-125 124, 125 of Case law paper book]

CIT vs. S.P. Mehta Memorial Trust: ITA No. 187 2005 (Guj) [refer pages 126-130 @ 130 of Case law paper book]

CIT vs. Orpat Charitable Trust: 230Taxman 66 (Guj) [refer Pages 131-133 @ 132 of Case law paper book]

Manockjee Cowasjee Petit Charities vs. DIT(E): 148 TTJ 181 (Mum. TM) [refer Pages 134-152 @ 148, 151 of Case law paper book]

ACIT vs. Idicula Trust Society: 52 SOT 1 (Del)”•

 …. .Jamsetji Tata Trust vs. JDIT (Exemption) ITAT : 161 TTJ 742 (Mum) [refer Pages 173 193 @188 of Case law paper book]

Reliance placed by the Ld. DR on the decision of the Hon’ble Delhi High Court in the case of DIT (Exemption) v. Charanjiv Charitable Trust: 223 Taxman 71 is misplaced on account of following:

a) Firstly, the aforesaid decision is distinguishable on facts inasmuch as in that case the assessee advanced substantial amount for purchase of land which was subsequently cancelled and such cancellation was recorded in the books of the assessee after considerable time. In these facts the Hon’ble High Court held that the assessee violated the provisions of section 13(1)( c) of the Act;

b) Secondly, it is pertinent to note that Hon’ble Supreme Court has been pleased to admit SLP filed by the assessee against the aforesaid decision of the Hon ‘ble High Court, which is reported in 228 Taxman 58 (SC);

c) Thirdly, the Hon’ble High Court has not taken into consideration its earlier decision in the case of Span Foundation (supra) wherein the Hon’ble Court affirmed the decision of the Tribunal holding that in case of violation of section 13, entire exemption under section 11 of the Act cannot be denied;

d) Fourthly, the Hon’ble High Court has not considered CBDT Circular No. 387 dated 6.7.1994 {supra) wherein it is clearly noticed by the Board that if the Trust contravene the provision of section 13(1)(c) of the Act, marginal rate of tax shall apply only to that part of the income which is exempt.

It is trite law that circulars issued by the Board are binding on the Revenue authorities [refer Navnit Lal C. Javeri v. KK. Sen, AAC: 56 ITR 198) Ellerman Lines Ltd vs. CIT: 82 ITR 913 (SC), UCO Bank V CIT: 231 ITR 889 (SC)].

e) Fifthly, the Hon’ble Karnataka High Court and Hon’ble Madras High Court after taking into consideration circular issued by the Board held that the entire exemption cannot be withdrawn on account of violation under section 13 of the Act and against the said decisions SLP filed by the Revenue stands dismissed by the Hon’ble Supreme Court [referred supra].

For the aforesaid cumulative reasons, it is submitted that reliance placed by the Ld. DR on the decision of the Hon’ble Delhi High Court in the case of Charanjiv Charitable Trust (supra), more particularly in view of the series of judicial precedents referred (supra) and also the circular issued by the CBDT, which is binding on the Revenue.

• It is, thus, respectfully submitted that the assessing officer/CIT(A) failed to appreciate that on account of alleged violation of the section 13, entire exemption under sections 11/12 of the Act cannot be denied.

Re: Ground of Appeal No. 6

• Without prejudice to grounds of appeal Nos. 1 to 5, it is submitted as under:
• In this ground, the appellant has challenged the addition of Rs.34,41,987 made by the assessing officer out of the security deposit refundable to the students, which is unsustainable for the reasons stated as under:

The appellant received refundable security deposit from the students taking admission in various institutes/ schools run by the appellant. As and when the student leaves the institute/ school and, clears all the dues and also completes all the formalities, the entire security deposit, after adjusting any pending dues; is refunded to, the student.

As on 31^st March, 2007, the appellant had refundable security deposit of Rs. 1,17,62,966, which was shown as liability in the books of account and the audited financial statements.

In the assessment order, the assessing officer made addition of Rs. 34,41,987, out of the security deposit, which was computed as under:

Amount (Rs.) Reason

The assessing officer, failed to appreciate that debit in the student security account aggregating to Rs. 22,75,226, which has been treated as income, were, in fact, repayment! adjustment out of the student security amount.

The assessing officer further failed to appreciate that the deposits for the batches 2001-04 and 1999-2002 represented refundable security deposit from various students and grossly erred in holding that the appellant failed to explain the source of such deposits. Since the entire amount is refundable by the appellant, in .view of the legal obligation upon the appellant, even security deposit relating to students who have left the school cannot be recognized- as income of the appellant as such students could claim the security deposit at any time after leaving the school.

• The CIT(A) held that although the appellant’s ‘obligation to – refund-the above security deposits exist, but since the appellant did not refund the same, suo-motu, the appellant was running on commercial principles.
• The aforesaid observations of the CIT(A) are contradictory and without judicious appreciation of the facts of the case inasmuch it has not been appreciated that appellant was under an obligation to refund the security deposit as and when necessary claim is made by the students and completing the formalities. The CIT(A) further failed to appreciate that no instance has been brought on record to suggest that claim made by the students, if any, regarding refund of security deposit has actually not been honored.
• In, view of the aforesaid, addition of Rs. 34,41,987 made by the assessing officer call for being deleted in toto.

Re: Ground of Appeal No.7

In this ground, the appellant has challenged ad-hoc dis allowance Rs. 7,09,468, being 50% of the maintenance and fuel expenses on cars amounting to Rs. 14,18,936, on the ground that log books were not maintained by the appellant.

• It is submitted that the aforesaid expenses were incurred in respect of the three cars, being Honda Accord, Camry and Sonata owned by the appellant, which were utilized by officials of the appellant in order to discharge various official duties.

During the course of assessment proceedings the appellant produced books of accounts, which were duly examined by the assessing officer [refer page and para 71 pg 15 of AO].

• Despite the aforesaid, the assessing officer, without bringing any evidence on record to substantiate that the aforesaid cars were not utilized by the appellant for the official purposes and without pointing out any specific instance of misuse of the above cars, simply made ad-hoc disallowance @50% of the total expenditure, which is not-permissible in law.

Reliance is placed on the following decisions wherein it has been held that no ad-hoc disallowance could be made by the assessing officer out of expenditure- claimed by the assessee:

– Friends Clearing Agency V. CIT: 332 ITR 269 (Del) [refer Pages 303-306 @-305/ para 10 of case law paper book]

– Dwarka Prasad Agarwal v. ITO:_ 52 ITD 239 (Cal) [refer Pages 312-316 @ 31-61 para 15 of Case law paper book]. , _ – —

Mahendra Oil Cake Industries Pvt. Ltd; v, ACIT: 55 TTJ n 1 (Ahd.)

ACIT v. Amtek Auto Ltd.: 112 TTJ 455(Del.) __ Rattah Mechanical Works Ltd. v ITa: 87 Taxman 288 (Mag)(Chd.)

Shriram Pistons and Rings Ltd. v IAC: 39 TTJ 132(Del.) [refer Pages 307-311 of Case law pape rbook]

As regards requirement of maintaining the above cars, it is respectfully submitted that there is no bar in the charitable trust owing cars for its officials, like Dean, Professors and other faculty. It needs to be appreciated that officials, like Dean, Professors and other faculty are highly qualified people, commanding huge respect and substantial demand in the education sector. To attract and retain good faculty, it is thus, necessary for the appellant to make available good resources for discharging official duties.

• The CIT(A) apart from upholding the findings of the assessing officer also held that since no log book was maintained by the appellant, it is therefore inferred that the same has been used by the trustees of the appellant for their personal benefit.

In this regard, it is submitted that the aforesaid expenses were incurred in respect of the cars owned by the appellant. The said cars were utilized by officials of the appellant in order to discharge various official duties. It is further submitted that the aforesaid cars are being used wholly & exclusively for the purpose of running the school and, therefore, no separate log book is being maintained by the appellant.

In view of the aforesaid, the action of the AO in disallowing 50% of repair and car maintenance expenses on conjectures and surmises is erroneous and is liable to be set aside.

Re: Ground of Appeal No. 8

• The assessing officer, in view of findings given in the context of payment of salary to Mrs. Malvika Rai and also scholarship expenses of Ms. Aarti Rai, proceeded to disallow the same while computing the income of the appellant- holding that such expenses were attributable to the members of the Rai family.

• The aforesaid action of the assessing officer, as upheld by the CIT(A), is erroneous and legally unsustainable and is liable to be reversed in view of our detailed submissions made above with respect to grounds of appeal Nos. 2 to 3.

Re: Ground of Appeal No. 9

The assessing officer, purely on conjectures and surmises, held that donation of Rs. 37,900 by the appellant was nothing but payment of certain expenditure of some other institutions and proceeded to disallow the same.

Re: Ground of Appeal No. 10:

This ground is consequential in nature.”

6.1 We are also reproducing the Synopsis submitted by the Ld. Counsel of the Assessee as under, with regard to ITA No. 1214/Del/2011 (AY 2007-08) (Revenue’s appeal) :-

• The .assessee-respondent 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 have already been set out in the synopsis filed in the assessee’s appeal, which are not repeated here for the sake of brevity.
• The assessee’s ground-wise contentions are briefly stated hereunder:

Re: Ground of Appeal No. 1

• In this ground, the Revenue has challenged the Older of the CIT(A) granting relief on the, following two issues:

(a) Payment of Rs. 2.72 cr. for purchase of land for Ram Krishan & Sons Charitable Trust (RKSCT) in violation of section 13(3) of the Income Tax Act, 1961 (“the Act”);

(b) interest free loan of Rs.2.19 cr. to Ram Krishan & Sons Charitable Trust (RKSCT), in violation of-section 13(3) of the Act.

• The aforesaid issues are-discussed hereunder:

Re (a): Payment of Rs. 2.72 cr for purchase of land

• As stated in synopsis filed in assessee’s ‘appeal, during the year under consideration, the assessee was running the following three schools:

(1) Banyan Tree World School at Gurgaon.

(2) IILM Under Graduate Business School at Lodhi Road.

(3) IILM Early College at Lodhi Road.

Apart from the aforesaid, the assessee was also contemplating setting up institute under the name and style of “IILM Academy of Higher Leaning” at New Town, Kolkata and also ‘IILM Institute of Higher Education at Lodhi Road, New Delhi’.

• For the purpose of setting up the institute at New Town, Kolkata, the assessee purchased land from West Bengal Housing Infrastructure Development Corporation Limited (WBHIDCO) admeasuring about 5 acres for total consideration of Rs. 10.89 crores and out of the same, the assessee paid Rs. 2.72 crores.
• In the assessment order, the assessing officer mixed the aforesaid two separate and independent transactions of payment for purchase of land for its own purpose and payment of loan to RKSCT and incorrectly held that the assessee had made payment of Rs. 2.72 crores to WBHIDCO, Kolkata for acquisition of land in the name of IILM Academy of

Higher Learning being run by RKSCT.

• As stated above, the aforesaid, for the-purpose of setting up institute in the name of IILM Academy of Higher Learning” at New Town, Kolkata the assessee purchased land from WBHIDCO and paid Rs.2.72 crores; the said amount was not at all paid – on behalf of RKSCT.
• The aforesaid contention is supported-by the following:

(a) Lease deed dated 22.09.2010 executed by the assessee and- WBHIDCO [refer pages 111-125 @ 1120fthe paper book]

(b) In the audited financial statements for the year ended 31st March, 2007, the year under consideration, the above land -has been shown as addition to fixed assets III the ‘schedule of fixed assets’ [refer Schedule B @page 47 of the paper book];

(c) The amount due to WBHIDCO was shown as liability [refer Schedule A @ pages 48 of the paper book].

• It will thus, kindly be appreciated that payment of Rs.2. 72 crares for purchase of land to WBHIDCO, was, in fact, made for acquisition of land by the assessee itself and was not made on behalf of RKSCT, as incorrectly inferred by the assessing officer.
• The contention of the assessing officer that the assessee had utilized funds for acquiring assets on behalf of another trust is, thus, factually incorrect.

Re (b): Loan to RKSCT

• As regards loan of Rs. 2.19 crares, it is submitted that the said loan was given by the assessee to Ram Krishan & Sons Charitable Trust (,RKSCT’), another charitable trust having similar objects.
• The aforesaid-loan was given merely to assist the said trust in construction of school building, which was under progress during therelevant year, which has not at all been disputed by the assessing officer. The said loan was received back by the assessee within the year under consideration.
• Pertinently, ‘RKSCT’ is also a charitable trust engaged primarily in the field of education activities and duly registered under section 12A of the Act. Kind attention, in this regard, is invited to the following:

Copy of registration certificates under sections 12A and 80G the Act issued to RKSCT [refer pages 134-137 of the paper book];

– Trust Deed of RKSCT [refer pages 126-133 @127 of the paper book];

3

• It may also be pertinent to mention here that the assessee is duly empowered under the Trust Deed to aid and assist any other charitable trust [refer clause 5(a)(i), (iii) and (xiii) at j pages 2-3 of paper book).

In the aforesaid facts, there was no violation of section 13 of the Act on account of advancing loan to another charitable trust having similar objects.

• Reference, in this regard, may be made to the following decisions wherein it has been consistently held that giving of loan one charitable trust to another charitable trust amounts to application of income for charitable purposes-DIT(E) vs. Pariwar Sewa Sansthan: 254 ITR 268 (Del.) [refer pages 38 – 39 of Paper Book of case laws].

DIT (E) vs. Acme Educational Society: 326 ITR 146 (Del.) [refer pages 373 – 377 of Paper Book of case laws- II].

• It may also be pertinent to mention here that donations given by the assessee to RKSCT in the earlier years has been allowed as application of income in the assessee’s own case in earlier assessment years, which has also been affirmed by the Hon’ble Delhi High Court [refer pages _ – _ of Paper Book of case laws- II].
• Reference may also be made to the following decisions wherein it has been consistently held that donation given by one charitable trust to another charitable trust tantamount to application of income for charitable purposes:

– CIT vs. Thanthi Trust: 239 ITR 502 (SC),

– CIT vs. Hindustan Charity Trust: 139 ITR.913 (Cal.)

– CIT vs. Shri Ram Memorial Foundation : 269 ITR 35 (Dei.) ‘.’

– DIT (E) vs. Bagri Foundation: 233 CTR 538 (Del.)

– CIT vs. Nirmala Bakubhai Foundation: 226 ITR 394 (Guj.)

– CIT V. HPS Social Welfare Foundation: 235 CTR 330 (Del.)

– ITO vs. RKKR Foundation: ITA No. 253/Luc./09(Luck.)

• Moreover, it is further respectfully, submitted that even otherwise RKSCT, being a charitable trust, could not be regarded as a person falling within the definition of specified person as given in section 13(3) of the Act since in case of a charitable trust, beneficiaries is public at large and not any individual person! entity. Pertinently, finding of the CIT(A) – in para 8.21 page 6 that RKSCT, being a charitable trust, cannot be regarded as person specified in section 13(3) of the Act, has not been challenged by the Revenue.

Even otherwise, under the provisions of the Act there is no bar in giving loan / donation to another trust/ institution, which are run by the same trustees (refer Sarladevi Sharabahai Trust vs. CIT 172 ITR 698 (Mad.)

As regards the so called violation of section 11(5) of the Act on account of non-investment / deposit of funds in the modes prescribed in the said section, it is respectfully submitted that:

(a) the aforesaid requirement is only applicable to income accumulated under section 11 (2) of the Act (i.e., accumulation on account of non-application to the extent of 85%), which is not the present case since during the year under consideration, the application of income was more than 90%;

(b) when the amount advances itself is application of income, where is the question of further deposit! investment in the modes/ manner specified in section 11(5) of the Act.

In view of the aforesaid, it is respectfully submitted that there was no violation of any of the conditions contained in section 13 of the Act, as held in the assessment order.”

6.2 On the contrary, Ld. DR relied upon the orders of the AO. Ld. DR also filed the written submissions and relied upon the decision of the Hon’ble Delhi High Court in the case of DIT(E) vs. Charanjiv Charitable Trust reported in [2014] 43 taxmann.com 300 (Delhi). The contents mentioned in the Written Submissions are reproduced here under:-

“1. It is undisputed that

i) Shri Kulwant Rai is founder{setter} of the Trust. He is also life time Trustee by virtue of clause 7{e} of the trust. By virtue of clause 7{c} of the Trust, he has all the powers not only regarding appointment and terms and conditions of service of trustees but deciding maximum and minimum no. of trustees. As per clause 8 of the trust deed, he also has the powers to appoint chairman of the Board of trustees and 7nted himself as the ‘Chairman’.

ii) Malvika Rai is wife of Shri Anil Rai s/o Shri Kulwant Rai. She is, therefore, falls under category of ‘specified persons’ u/s 13{3}.

iii) Aarti Rai is daughter of Shri Anil Rai and Smt. Malvika Rai. She is, therefore, falls under category of ‘specified persons’ u/s 13{3}.

iv) As per clause 30 of the trust deed, no expenditure outside India is allowed without prior approval of CBDT.

v) No approval (prior or otherwise) has been taken for spending the trust money for payment of fee of Ms. Aarti Rai to London School of economics and stay charges at London(UK).

2. There was attempt to conceal the vital information regarding spending the trust money for payment of fee of Ms. Aarti Rai to London School of economics and stay charges at London(UK).It is evident from the following:

i) As per P&L alc, these expenses are booked under heading as ‘Other Expenses’ (Schedule-N)(ref. page # 46 PB). The Schedule-N puts it under sub-head ‘Scholarship Expense’ (ref. page # 50 PB). However, as per the ‘broad submissions’ before CIT(A) (ref. page # 57 on wards- specific page # 88 of PB), Ms Aarti Rai was a faculty and for these expenses should have reflected under the specific head ‘personnel expenses’ -Schedule-K.

ii) As per Report in form lOB, there are specific columns (nos. 3,4 and 8)(ref. page # 43/44 of PB) for reporting expenditure to or for benefit of persons specified uls 13(3). However, negative answer has been mentioned therein to show that no such expenditure is made.

iii) Last para on page # 12 of the assessment order shows that only minimum information was provided in this respect and only name ‘Aarti’ was disclosed and no further information was provided. In fact AO had to guess that she could be ‘Aarti Rai’ and a member of Rai Family.

3.1 Regarding loan advanced to another trust, it is submitted that certainly it is not ‘application’ of income. All the case laws cited by the AR deal with the issue if ‘donation’ to other ‘trust’ being ‘application’ of income or not. By way of loan the title of money is not parted with.

3.2 The loan is also not ‘specified’ mode of investment in section 11(5). Therefore, if 85% is not applied for objects of the trust and given as a loan, exemption u/s 11 and 12 is not available.

3.3 It is stated that the loan is given for ‘purpose’ of school building but no supporting evidence is furnished.

3.4 In the trust deed, there is no clause of extending loan. The reliance of assessee on ‘assistance’ is far-fetched.

3.5 As per clause 5 (a) (iii) of the RK & Sons Charitable trust is having objects to open, found (sic), establish, equip, finance, assist, maintain, or contribute to technical, industrial, or commercial concerns, institutions, associations, or bodies imparting any type of training or providing employment to persons. (ref: page #127 of PB filed in ITA No. 1214/Del/2011).

4. The CIT(A) accepted new evidence in form of lease lead executed by WBHICO- dated 22.09.2010 (which is after assessment is over) without regard to Rule 46A(ref. page # 79 of PB).

5. The cited information in annual account i.e. schedule A & B (ref page# 47 & 48 of PB) does not provide definite link of the land in the books with the land in question i.e. taken from WBHIDCO Ltd. at Kolkata.

6. As regards to employment and remuneration to Smt. Malvika Rai and Ms. Aarti Rai and scholarship to Ms. Aarti Rai, it is submitted that even providing employment and selecting for any kind of scholarship, in today’s scenario is a benefit. It is not the case of the assessee that these employment and scholarship were provo ed by open competition.

7. Regarding remuneration, there is no whisper of any specific service rendered by Smt. Malvika Rai or Ms. Aarti Rai. No Resolution or any other document is produced showing any requirement of the posts held by them and job profile and suitability of the incumbent.

8. In fact, the post occupied by Smt. Malvika Rai (Chairperson IILM-ref: page 3 4 of PB) not attached to any institution run by the trust. Therefore, it has to be held within the trust only. No justification, whatsoever or supporting documents in form of need of the post and resolution for creation and filing of the said post is produced. The trust has chairman and other trustees to look after the affairs of the trust. As per the trust deed their services or supposed to be without any remuneration. (ref: clause 28 of the trust deed- page #9 of PB).

9. Provision of income tax act as well as proprietary demands transparency, ‘arms length approach’ is to be adopted in dealing with persons covered u/s 13(3) and the establishment connected to such person. However, here the case is reverse.”

10. We have heard both the parties and perused the records, especially the written submissions filed by both the parties and the impugned order. The Assessee and Revenue has contested their respective additions before us.

7.1 We first adjudicate the grounds taken by the Assessee. As regards the ground no. 1 raised in the Assessee’s appeal is concerned, which is relating to violation of natural justice is concerned, we find that this ground is general in nature and therefore needs no adjudication.

7.2 Apropos ground no. 2 to 2.2 raised in Assessee’s appeal is concerned, we find that Mrs. Malvika Rai is related to the Trustee and is being given a hefty salary of Rs. 16,20,000/- p.m. despite the fact that she is just a graduate and the assessee had not furnished any details as to how the educational qualification of Mrs. Malvika Rai is commensurate with the salary which she is drawing. Thus the Ld. CIT(A) was correct in upholding the action of the AO in invoking the provision of section 13 and denying the benefit of exemption u/s. 11 & 12 of the Act, which does not need any interference on our part, hence, we uphold the same and reject the grounds raised by the assessee.

7.3 Apropos ground no. 3 to 3.2 raised in Assessee’s appeal is concerned, which is relating to upholding the action of the AO in treating the scholarship given to Ms. Aarti Rai, as being in violation of provisions of section 13(1)© of the Act, we find that AO invoked the provisions of section 13(1)© and observed that the trust had granted scholarship of Rs. 13.36 lakhs to Mr. Aarti Rai for pursuing a course in London School of Economics and the assessee also could not furnish the details of the expenditure incurred on her stay in UK. The details regarding the payment of scholarship of to Ms. Aarti Rai were also not disclosed and it was only after the AO asked the detail of the persons to whom scholarship had been paid that the name of Ms. Aarti Rai was revealed. The assessee has failed to furnish the names of other students who had been sent abroad to pursue higher studies on scholarship being awarded by the trust. No such resolution of the trust has also been placed either before AO as well as Ld. CIT(A). It is futile exercise on the part of the assessee to justify the benefit given to the persons specified u/s. 13. If the conscience of the assessee was clear then why it had not disclosed this fact in the audit report. Hence, there is a clear cut violation of the provisions of section 13 and accordingly, AO as well as Ld. CIT(A) has rightly denied the benefit of section 11. We note that scholarship given to Ms. Aarti Rai has been incurred in foreign currency and has been paid in UK i.e. to say the application of money has taken place outside India. For claiming exemption u/s. 11 the application of funds has to take place within India. Otherwise the approval of the Board is required which can grant exemption on the facts of each case. Thus in any case this income has not been applied in India and therefore not exempt. Further the trust is also hit by the provision of Section 13(1)(c). In view of the above, we are of the considered view that action of the Ld. CIT(A) in upholding the action of the AO in treating the scholarship given to Ms. Aarti Rai, as being in violation of provisions of section 13(1)© of the Act is correct one and the same does not need any interference on our part, hence, we uphold the action of the Ld. CIT(A) and reject the ground raised by the assessee.

7.4 Apropos ground no. 4 to 4.2 raised in Assessee’s appeal is concerned, which is relating to upholding the finding of the AO that the assessee exists for the sole purpose of profit making and not for the purpose of charity, 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.

7.5 Apropos ground no. 5, relating to not adjudicating the alternative ground raised by the assessee is concerned, as we have alreadyup the action of the Ld. CIT(A) in the preceding paragraphs that there is clear cut violation of section 13 and hence, the assessee was rightly denied the benefit of exemption u/s. 11& 12 of the Act. In view of the above, this ground is also decided against the assessee.

7.6 Apropos ground no. 6, relating to affirming of addition of Rs. 34,41,987/- out of refundable security deposit of the students is concerned, we find that AO observed that the assessee has not been refunding the security deposit taken from the students which in many cases go back to assessment years between 1999 to 2002. Since the assessee has not refunded the security deposit therefore he treated the amount which was still in possession of the assessee as its income under the head miscellaneous income. It is true that the liability to refund the money does not cease and it is obligatory on the part of the assessee to return the money which is lying with it in the form of security deposit, hence, the same cannot be regarded as income of the assessee. But the fact remains that this attitude of the assessee in not returning the security deposit of former students goes to show that it is running the school/ institute on commercial principles. As a charitable institution the assessee should return the money suo-moto after adjusting the dues, but the assessee is not carrying out this exercise and retaining the fund over and above the fees which is due from the students. This again goes to show that the assessee is running the institute from a commercial angle, hence, it is also a ground for rejecting the benefit of section 11 of the Act. In view of the above, we uphold the action of Ld. CIT(A) in affirming the addition of Rs. 34,41,987/- out of refundable security deposit of the students and reject the ground raised by the assessee.

7.7 Apropos ground no. 7, relating to affirming of action of AO in making adhoc addition of 50% of repairs and car maintenance expenses amounting to Rs. 7,09,468/-, on the ground that no log book was maintained by the assessee is concerned, we find that AO observed that assessee is maintaining luxury cars like Toyoto Camry, Hyundai Sonata and Honda Accord and has claimed expenses of Rs. 14,18,836/-. No log book was maintained, which establish that the said cars were being used by the trustees for their own benefit, hence, 50% of such expenditure was rightly upheld by the Ld. CIT(A), which does not need any interference on our part, hence, we uphold the same and reject the ground raised by the assessee.

7.8 Apropos ground no. 8 relating to affirming the action of the AO in disallowing scholarship expenses of Rs. 13,35,905/- paid to Ms. Aarti Rai is concerned, we find that this expenditure cannot be regarded as an expenditure incurred to run the business nor can the same be allowed as discussed in preceding paras in the case of Trust, hence, the addition of Rs. 13,35,905/- was rightly upheld by the Ld. CIT(A), which does not need any interference on our part, hence, we uphold the same and accordingly, reject the ground raised by the assessee.

7.9 Apropos ground no. 9 relating to affirming disallowance on account of donation paid amounting to Rs. 37,900/- is concerned, we find that since the assessee has already been disallowed the benefit of section 11 and the income has to be computed as business income therefore the donation of Rs. 37,900/- cannot be regarded as business expenditure and the action of the Ld. CIT(A) is a correct one and therefore, we uphold the same and reject the ground raised by the assessee.

7.10. The ground no. 10 relating to confirming imposition of interest u/s 234B and 234C of the Act is concerned, we find that this issue consequential in nature, hence need not be adjudicated.

7.11 In the result, the ITA No. 1142/Del/2011 (AY 2007-08) stands dismissed.

ITA NO. 1214/DEL/2011 [2007-08] (REVENUE’S APPEAL)

8. With regard to issue relating to granting of 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 is concerned, we note that AO observed that during the year the assess has advanced a sum of Rs. 2.72 crores for allotment of land at New Town Kolkatta allotted by West Bengal Housing Infrastructure Development Ltd. (WBHIDCO). However, the allotment letter was not in the name. of the appellant. It was further seen that IILM Academy of Higher Learning was the actual beneficiary of this loan advanced to WBHIDCO and that this institute was owned by Ram Krishan and Sons Charitable Trust. Since the assessee had advanced money to another trust controlled by the same family therefore the assessing officer was of the opinion that it violated the provisions of section 11 (5) as well as section 13(1)( c )(ii). However, the assessee on the other hand has stated that the Ld. AO mixed up two separate and independent transactions and that the assessing officer incorrectly held that the assessee had made payment of Rs. 2.72 crores to WBHIDCO Kolkata for acquisition of land in the name of IILM Academy of Higher Learning being run by another trust RKSCT whereas in fact the said sum was advanced to WBHIDCO, Kolkata for acquisition of land by the assessee itself and not for any other trust. As regards advancing of interest free loan of Rs. 2.l9 crores to RKSCT the assessee had stated that the said trust is also a charitable trust registered u/s. 12A and thus advancing this amount to the said trust in any case does not violate the provisions of section 13(l)(c)and 13(2)(g). We note that the fact remains that RKSCT is a charitable trust which is registered u/s. 12(A) of the IT Act and in fact in the assessment order it was observed that the assessee had stated the same before the AO. In fact there is no bar for one charitable trust donating or advancing loan to another charitable trust registered u/s.12(A). It has been held by various courts that when one charitable trust donates to another charitable trust the same should be regarded as an application of income towards the object of trust. Thus in view of the above, Ld. CIT(A) has rightly granted the relief in dispute, which does not need any interference on our part, hence, we uphold the same and reject the ground raised by the Revenue. Accordingly, the Appeal filed by the Revenue stands dismissed.

ITA NOS. 2675/DEL/2013 (AY 2008-09); 2871&2872/DEL/2014 (AY 2009-10 & 2010-11) (REVENUE APPEALS)

9. Since all the issues involved in the aforesaid Appeals are common and identical hence, these appeals are being taken up together. We note that exactly similar and identical issues have already been dealt by us in the preceding paragraphs while dealing with ITA No. 1142/Del/2011 (AY 20078-08) in Assessee’s Appeal wherein we have dismissed the appeal of the Assessee, therefore, following the consistent view as taken by us in the preceding paragraphs, all the issues involved in the present Appeals filed by the Revenue are allowed and accordingly Appeals filed by the Revenue stand allowed.

10. In the result, the ITA No. 1142/Del/2011 (AY 2007-08) of the assessee & ITA No. 1214/Del/2011 (Ay 2007-08) of the Revenue stand dismissed and ITA NOS. 2675/DEL/2013 (AY 2008-09); 2871 & 2872/DEL/2014 (AY 2009-10 & 2010-11) of the Revenue stand allowed.

Order pronounced on 08/11/2017.