Case Law Details
Brief of the Case
ITAT Bangalore held In the case of DDIT (Exemptions) vs. Ohio University Christ College that it is not disputed that the services have been rendered by the faculty members from Ohio University in India as the classes were taken in Bangalore. The services have been utilized for the purposes of the Trust’s objectives in India, viz. of imparting higher education in India. Ohio University has also offered the income earned by it from the assessee trust to tax in India. Merely because the payments are made outside India, it cannot be said that the charitable activities were also conducted outside the country. Hence exemption u/s 11 cannot be denied.
Facts of the Case
The assessee, is a public charitable trust registered under Section 12A of the Income Tax Act, 1961 (in short ‘the Act’), established for the purpose of promoting education without any profit motive. The assessee reportedly conducts MBA programmes in India in collaboration with Ohio University, USA. For the Assessment Years 2008-09 & 2009-10, the assessee had filed the returns of income declaring NIL income after application of income under Section 11 of the Act. The returns were processed under Section 143(1) of the Act and subsequently the case was selected for scrutiny. The assessments were concluded under Section 143(3) of the Act vide orders dt.22.12.2010 for Assessment Year 2008-09 and dt.15.12.2011 for Assessment Year 2009-10, wherein additions/disallowances under various heads were made.
Disallowance of Faculty Teaching Charges payable to Ohio University
In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed application of income under Section 11 which included the faculty teaching charges to Ohio University towards academic expenses. The Assessing Officer disallowed the assessee’s claim for the following reasons :- (i) Merely making an entry in the books of accounts cannot be considered as application of income for charitable purposes as contemplated in section 11. The word ‘applied’ in section 11 implied ‘spending or utilization of income.’ This principle has been affirmed by the Hon’ble Apex Court in Nachimuthu Industrial Association V CIT (1999) 235 ITR 190 (SC). (ii) The assessee has to apply the income for charitable purposes only in India. If the income of the Trust is applied outside India, the income is exigible to tax. After 31.3.1952, the income applied outside India by Trusts is exempt only under a general or special order of CBDT; (iii) The assessee did not prove that the payments made to Ohio University resulted in charitable purposes in India.
Set off of brought forward excess application of income/loss of income/loss of earlier years
In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed application of income on account of expenditure of earlier years, which has been brought forward and set off in the year under consideration. The Assessing Officer disallowed the same on the ground that there is no express provision in the Act permitting the adjustment of earlier years brought forward expenses as application of income in the current year. According to the Assessing Officer, the application of income for charitable purposes must be during the relevant previous year. Since the income of the trust is exempt from tax, the question of deficit does not arise and also the trust is required to utilize 85% of the income of the previous year for charitable purposes during the year. In this view of the matter and for the above reasons, the Assessing Officer disallowed the assessee’s claim of expenditure of earlier years being brought forward and set off during the year.
Loss on account of foreign exchange fluctuation
In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed application of income on account of foreign exchange fluctuation of an amount of Rs.70,58,026. The Assessing Officer was of the view that when the application of programme fee itself was denied exemption under Section 11 of the Act, the exchange fluctuation expenditure cannot be allowed and disallowed the assessee’s claim.
Disallowance of Accumulation of Income
In the course of assessment proceedings, the Assessing Officer observed that the assessee has shown accumulation of income under Section 11(2) of the Act. According to the Assessing Officer, the purpose of accumulation of income as declared in Form No.10 is not specific since the assessee has only stated that these were for fulfillment of the objectives of the Trust. The Assessing Officer disallowed the said accumulation on the ground that the assessee did not mention the specific purpose of the accumulation.
Contention of the Assessee
Disallowance of Faculty Teaching Charges payable to Ohio University
The ld counsel of the assessee submitted that the assessee has actually incurred the said expenditure towards factulty teaching charges payable to Ohio University, USA and therefore it should be considered as having been applied under Section 11(1)(a) of the Act. In support of its contention, reliance was placed on the decision in the case of CIT Vs. Trustees of HEH Nizam’s Charitable Trust (1981) 131 ITR 497 (A.P.) wherein it was held that the term ‘applied’ does not mean ‘spent’. It was also submitted that the decision rendered in the case of CIT V Trustees of HEH Nizam’s Religious Endowment Trust (1977) 108 ITR 229 is distinguishable on facts and is not applicable to the assessee.
He also submitted that the Assessing Officer had misdirected himself in holding that the amounts have to be actually spent in the year under consideration, to be considered for application of income. It was submitted that even if the payment is ear-marked and allocated for charitable purpose, it should be taken to be applied for charitable purpose. In support of the assessee’s contention, the learned Authorised Representative for the assessee placed reliance on the decisions in the case of CIT V. Radhaswami Satsang Sabha (1954) 25 ITR 472 (All) and CIT V. Thanthi Trust (1999) 239 ITR 502 (SC).
Further submitted that merely because the payment was made outside India, this does not mean that the charitabale purpose was outside India. It was submitted that the charitable activities were rendered in India and just because the payment was made to parties outside India, it does not change the fact that the charitable activities were carried out in India. In support of this contention, the learned Authorised Representative placed reliance on the decision of the various Tribunals in the cases of Gem and Jewellery Export Promotion Council V ITO in (1999) 69 ITD 95 (Mum) and National Association of Software and Services Companies (‘NASSCOM’) V DDIT, reported in 130 TTJ 377 (Del).
Contention of the Revenue
Disallowance of Faculty Teaching Charges payable to Ohio University
The ld counsel of the revenue submitted that the assessee has only made entries in the books of accounts in the relevant periods and had not utilized or spent the amount during the year and the actual payment of the same had happened in the subsequent year only and as such there was no application of income during the relevant year under consideration. It was submitted that the phrase “such income is applied to such purposes in India” appearing in Section 11(1) (a) connoted “actual payment” and since it has not happened, the assessee is not entitled for application of income. In support of Revenue’s contentions, the learned Departmental Representative placed reliance on the decision of the Hon’ble Apex Court in the case of Nachimuthu Industrial Association (235 ITR 190) (SC).
Held by CIT (A)
Disallowance of Faculty Teaching Charges payable to Ohio University
CIT (A) upheld the assessee’s claim and deleted the disallowances made by the Assessing Officer by relying on the decision rendered by the CIT (Appeals) in the assessee’s own case for Assessment Year 2007-08. The learned CIT (A), while allowing the assessee’s claim, observed that the application should be for charitable purposes in India and if the payment is made outside the country in furtherance of charitable purpose in India, it can be counted as application for charitable purposes in India. The learned CIT (A) also noted that the Permanent Establishment of Ohio University in India has offered these payments as income in India and has paid taxes thereon in India.
Set off of brought forward excess application of income/loss of income/loss of earlier years
CIT (A) allowed the amortization of the expenditure as claimed by the assessee and deleted the disallowance made by the Assessing Officer by placing reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Society of the Sisters of St. Anne reported in 146 ITR 28 (1984) and CBDT Circular No.5-P(LXX)-6 of 1968.
Loss on account of foreign exchange fluctuation
CIT (A) held that since programme fee payments by the assessee to Ohio University, USA has been allowed as application of income, the connected exchange fluctuations are also to be allowed and consequently deleted the disallowance made by the Assessing Officer.
Disallowance of Accumulation of Income
CIT (A) deleted / cancelled the disallowance made by the Assessing Officer in respect of accumulation of income and allowed the assessee’s claim. While doing so, the CIT (A) observed that there are conflicting decisions in this regard and therefore the view in favour of the assessee is held to be applicable.
Held by ITAT
Disallowance of Faculty Teaching Charges payable to Ohio University
The basic facts, not in dispute, are that the assessee has entered into an agreement with Ohio University, USA, whereby Ohio University sends its faculty to the assessee’s premises in India for teaching purposes, for which the assessee makes payment to Ohio University for providing the faculty and other support services. In terms of the agreement, the assessee is required to pay a sum of USD 9,000 per student for the 18 month duration of the course (i.e. USD 3,000 per student for 6 months period.) At the end of the year, as the payments had not yet been made, the assessee had accrued the amount in its books of account and the actual remittance was made in the subsequent year. The assessee had deducted tax at source on the amounts so credited towards faculty teaching charges on the basis of income accruing/arising to Ohio University in India by virtue of a PE in India. Further Ohio University had filed returns of income in India offering this income to tax and paid taxes accordingly.
It is also not disputed that the services have been rendered by the faculty members from Ohio University as the classes were taken in Bangalore. The services have been utilized for the purposes of the Trust’s objectives in India, viz. of imparting higher education in India. Ohio University has also offered the income earned by it from the assessee trust to tax in India. In the light of the above mentioned facts, it is clear that the activities of the assessee trust were conducted in India in accordance with its objects.
As regards the payments being made out of India, we concur with the view of the learned CIT (Appeals) that merely because the payments are made outside India, it cannot be said that the charitable activities were also conducted outside the country. In this regard, the judicial decisions of the ITAT, Mumbai and Delhi Benches, cited by the assessee, squarely apply to the case on hand.
We also do not concur with the Assessing Officer’s view that a specific exemption is required from CBDT for making claim of application of income. This requirement has been specified only for those trusts that have as its objects, the promotion of international welfare. In the case of the assessee in the case on hand, the objects of charitable activities for imparting higher education in India, has already been approved by the Department while granting the assessee trust registration.
We are also unable to concur with the view of the Assessing Officer that mere credit entries in favour of Ohio University in the assessee’s books of account cannot be taken by the assessee as being for charitable purposes as contemplated in Section 11 of the Act. In this regard, the decision in the case of Trustees of HEH Nizam’s Charitable Trust cited by the assessee squarely applies to the assessee’s case. In the cited case, it was held that The Tribunal was right in holding that the actual payment is irrelevant for purposes of finding out whether there has been an application of the funds. We also find in the cases of CIT V Radhaswami Satsang Sabha (1954) 25 ITR 472 and CIT Vs. Thanthi Trust (1999) 239 ITR 502 (SC), it has been held that the word ‘applied’ does not mean ‘spent’ and even if the income has been earmarked and allocated for the purpose of carrying out the objects of the institution, it might be deemed to be applied for that purpose.
Set off of brought forward excess application of income/loss of income/loss of earlier years
The facts of the issue before us is that the assessee had incurred certain preliminary expenditure in the year of setting up of the trust. The same is amortised by the assessee trust over a period of 5 years from the year of incurring of expenditure. The fact of amortization was not disputed by the Assessing Officer in the assessment proceedings for Assessment Year 2007-08 where the entire amount was added back claiming 1/5 th of the expenditure. The un-amortised expenditure has been brought forward and set off as application of income in subsequent years, including the assessment years, 2008-09 and 2009-10 which are under consideration.
We find that the issue before us is directly related to the issue decided by the Hon’ble Karnataka High Court in the case of Sisters of St. Anne 146 ITR 28 (1984) cited by the assessee. Further, the CBDT Circular No.5-P (LXX) – 6 of 1968 cited by the assessee makes it clear that income should be understood in its commercial sense; in the case of trusts also and therefore the commercial principle enunciated by the Hon’ble Karnataka High Court in the above referred case of Sisters of St. Anne applies to trusts as well. In view of the factual and legal matrix of this issue in the case on hand as discussed above, we concur with the decision of the learned CIT (A) in cancelling the disallowance made by the Assessing Officer and in allowing the amortization of expenses.
Loss on account of foreign exchange fluctuation
The basic facts of the matter on this issue are not in dispute. In the year under consideration, the assessee had incurred expenditure towards programme fees payable to Ohio University, USA, we have already held that these payments come under the purview of application of income for charitable purpose in India. Having held so, we have no hesitation in holding that foreign exchange fluctuation expenses related to the programme fee is also a deductible expenditure as held by the Hon’ble Apex Court in the case of Woodward Governor India (P) Ltd. 312 ITR 254 (2009) (SC).
Disallowance of Accumulation of Income
The purposes mentioned by the assessee trust in Form No.10 were ‘for use in purchase of fixed assets’ and for use in other purposes, ‘for fulfillment of the objects of the trust.’ The Assessing Officer disallowed the assessee’s claim for accumulation of income on the grounds that the purposes mentioned in Form NO.10 was not specific. As pointed out by the learned CIT (Appeals), there are divergent decisions by various High Courts in the matter. While the Assessing Officer has relied on the decision of the Hon’ble Kerala High Court, the assessee has relied on the decision of the Hon’ble Delhi High court.
The learned Authorised Representative for the assessee submitted that the Hon’ble High Court of Karnataka, the jurisdictional High Court, has since decided the issue in the case of DIT (E) V Envisions in ITA No.752/2009 dt.13.3.2015 (reported in 58 taxmann.com 184) (Kar) is squarely on the subject. It was held that merely because more than one purpose has been specified and details about the plan of such expenditure has not been given, the same would not, in our view, be sufficient to deny the benefit under Section 11(2) to the assessee.
Respectfully following the aforesaid decision of the Hon’ble High Court of Karnataka in the case of DIT (Exemptions), Bangalore V. Envisions, we decide the issue in favour of the assessee.
Accordingly appeal of the revenue dismissed.
