IN THE ITAT HYDERABAD BENCH ‘A’
Hyndavi Educational Society
Assistant Director of Income-tax (Exemption)
IT APPEAL NOS. 660 AND 661 (HYD.) OF 2009
[ASSESSMENT YEARs 2003-04 and 2004-05]
OCTOBER 5, 2012
Chandra Poojari, Accountant Member
These two appeals by the assessee are directed against different orders of the CIT(A) for the above assessment years. Since facts of both the cases are similar and belong to same assessee, these are clubbed together, heard together and are being disposed of by this common order for the sake of convenience.
2. The main grievance in these appeals is with regard to non-granting of exemption u/s. 11 of the Income-tax Act, 1961 in both the years. In addition to this, in assessment year 2003-04 the assessee also has a grievance for considering the alternate claim u/s. 10(23C)(vi) of the Act. We will consider the facts of assessment year 2003-04.
3. Brief facts of the case are that the assessee is a society engaged in running educational institutions. During the course of assessment proceedings for the A.Y. 2003-04, the Assessing Officer noticed that an amount of Rs. 1.80 lakhs had been paid to Shri V. Srinivas Reddy, a founder member, out of the corpus fund. Similarly, Shri P.V. Ranganath, son of another founder member was also paid Rs. 1,57,217 from out of the corpus fund. The Assessing Officer observed that this constituted a clear violation on the part of the assessee society and attracted the consequences of section 13(1)(c)(ii) of the Act read with section 13(3). He found that the assessee had no explanation to offer in this regard. Accordingly, the Assessing Officer proceeded to compute the income of the Assessee-society by applying the provisions of section 13(1)(c) and denying the exemption u/s. 11. He also opined that in view of such violation, the income from the educational institutions run by the society was also not eligible for exemption as the condition laid down in section 10(23C)(iiiiad)/vi that the educational institution should not exist for profit was not met. Accordingly, besides the excess of income over expenditure of Rs. 19,66,261, donations received during the year amounting to Rs. 42,19,611 were brought to tax, as section 11(1)(b) was no longer applicable to the assessee society.
4. On appeal, the CIT(A) observed that voluntary contribution received by the assessee is with a specific direction which is forming part of the corpus fund shall not be included in the total income. According to the CIT(A) the assessee failed to substantiate that donation received by the assessee is in the nature of corpus donation or that even Rs. 38,82,394 out of total donation of Rs. 42,19,611 was of the nature of corpus donation whereas the remaining sum of Rs. 3,32,217 was not to be adjusted towards corpus fund and was to be refunded to the donor. The assessee made a plea before the lower authorities that a sum of Rs. 3,32,217 which was refunded to the respective donors i.e., to Sri V. Srinivas Reddy and Sri P.V. Ramana is not part of the corpus fund and wrongly taken into corpus fund and the same was refunded. However, the CIT(A) not agreed with the assessee and observed that the assessee is not entitled for exemption u/s. 11 as well as exemption u/s. 10(23C) of the Act for the A.Y. 2003-04. Similarly for the A.Y. 2004-05, there is a transfer of Rs. 12,42,515 out of corpus fund to three members of the society through journal entry and paid to Sri V. Srinivas Reddy through their individual ledger account. The assessee taken same plea before the lower authorities that it is a clerical error. However, the CIT(A) has not agreed with the assessee and exemption u/s. 11 was rejected for the A.Y. 2004-05 also. Against this the assessee is in appeal before us.
5. The learned AR submitted that in the assessment order the Assessing Officer mentioned that the assessee repaid the corpus fund of Rs. 1,80,000 to Sri V. Srinivasa Reddy and Rs. 1,57,217 to Sri P.V. Ramana during the A.Y. 2003-04. Copies of the accounts of the unsecured loans by the members of the Society are submitted before us. Copies of the final accounts and consolidated receipts and payments account are also submitted before us in a Paper Book. It can be seen therefrom that during the year under consideration, the assessee received corpus fund of Rs. 38,82,394 and the aggregate of the corpus fund as on the last date of the previous year was Rs. 69,21,994. Copy of the corpus fund account is also placed on record. Therefore, there was an increase in the corpus fund compared to the earlier year. This is also clear from the consolidated Balance Sheet as on 31.3.2003. In so far as repayments to Mr. P.V. Ramana are concerned, the AR submitted that he introduced Rs. 19,45,000 of additional corpus fund during the year. Further, the AR submitted that in the account of P.V. Ramana, there are unsecured loans to the extent of Rs. 15,26,620/- as per the details of the unsecured loans shown in the Balance Sheet. Even with regard to Mr. Srinivas Reddy, the said person introduced Rs. 2,66,497 during the year. The details of the corpus fund would clearly indicate that these two persons have introduced corpus fund even during the year and they did not withdraw any existing corpus fund.
6. The AR submitted that with regard to Sri P.V. Ramana, it can be seen that on 13.7.2002, he introduced Rs. 3,71,327 but only an amount of Rs. 2,14,110 is credited to the Corpus fund account and the balance is returned. Similarly, in the case of Srinivas Reddy on 10.4.2002 he introduced Rs. 2,78,497 – and only an amount of Rs. 98,497 is credited to the corpus fund out of this amount and the balance amount was not credited to the corpus fund. The only place where repayment was noted is in the details submitted before the Assessing Officer, a copy of which is placed on record. Therefore, it is not correct for the Assessing officer to mention that the amount deposited towards corpus fund is withdrawn by the members of the society. Therefore, the Assessing Officer is not justified in rejecting the claim for exemption u/s 11 of the Act or claim u/s. 10(23C)(vi) of the Act.
7. The DR relied on the orders of the lower authorities.
8. We have heard both the parties and perused the material on record. The main contention of the assessee’s counsel before us is that the fund to whom it was refunded, the recipients were not founder members of the society and provisions of section 13(1)(c) are not applicable to the facts of the present case. To this effect, he drew our attention to the list of founder members and submitted that Sri V. Srinivas Reddy and Sri P.V. Ramana are not founder members. He submitted that the recipients of the amount have not made any substantial contribution to the trust in the assessment years under consideration and also pleaded that the payments were made for the benefit of the trust rather than for the benefit of the recipients. Had the assessee not made these payments the very existence of the assessee trust is affected. We find merit in the argument of the assessee’s counsel. The misconduct of the office bearers, if any, could not have rendered the assessee as non charitable organisation and the assessee could not be made to lose the benefit of exemption u/s. 11 on that count. The fact whether defaulting office bearers are the founder members of the assessee trust or not has to examined. If they have no managerial power and payment to these defaulting office bearers is thrust upon the assessee due to circumstances beyond the control of the assessee and that payment itself cannot be considered to cancel the benefit u/s. 11 or 10(23C) of the Act. For the wrong doings of some office bearers, the assessee cannot be blamed or penalised. If the payment was made to the defaulting officer bearers on good and sufficient reason it cannot be said that there is a violation of provisions of section 13(1)(c) of the Act.
9. The person referred to in sub-section (2) of section 13 is the founder member of the trust. The condition mentioned in section 13(1)(c)(ii) of the Act is that the income of the trust should not be used or applied directly or indirectly for the benefit of any person falling in the prohibited category. Benefit here would mean any payment without any contribution by such person to the trust. If a person in the prohibited category renders services, in view of such services a payment is made, then that case cannot fall in clause (ii) section 13(1)(c) of the Income-tax Act. The expenditure incurred on those interested persons would be a compensation for such services. A benefit would be said to have been given to the persons of prohibited category if they in return do nothing but only enjoy the benefit/fruits of the rust and take away the funds or income of the society for their personal benefit or without doing or discharging any services to the trust, but where persons of prohibited category render services to the society and in turn, get some remuneration, salary or benefit as a member then provisions of section 13(2) would be applicable and not of sub-section (1) of section 13 and for applying the provisions of section 13(2), it has to be shown by Revenue that the amount so paid to the persons of prohibited category was in excess of what may be reasonably paid for the services rendered by them. In the present case, the assessee taken a plea before us that the amount was paid to the non-founder members on account of a dispute between the assessee society and them and there was a practical problem to keep these recipients of the amount within the committee of office bearers and the situation so warranted that had the assessee not paid this amount, the society could not have continued and non-continuation of the society would affect the interest of larger number of students of the assessee society thereby creating bigger problem than this. Being so, the assessee refunded this portion of money contributed by these two persons, viz., Sri V. Srinivas Reddy and Sri P.V. Ramana and that refund of money cannot be considered as a benefit given to these persons and rather benefit to the society itself and it resulted in perpetual existence of assessee society. Being so, the Assessing Officer is directed to examine the practical situation which warranted the assessee to make payments and decide the issue in accordance with law.
10. Regarding allowability of exemption u/s. 10(23C)(iiiad)/(vi), we are of the opinion that there is no allegation that the assessee is not imparting education. The argument of the Department is that some benefit given to the founder member of the trust disables the trust from getting exemption u/s. 10(23C)(iiiad)/(vi). In our opinion, this cannot be done. Firstly, there is no evidence that such benefit has been given to the founder member of the trust. Secondly, even if it is so, such instances would only hit the case of the assessee within the meaning of sections 11 to 13 and cannot be imported to deny exemption u/s. 10(23C)(iiiad) of the Act provided a clear finding on the basis of material on record is given that the assessee trust is not solely for the purpose of imparting education. Some disallowances of expenses or payments claimed by the assessee cannot be held to be a separate object for which the trust is existing thereby holding that the trust is not existing solely for education purposes. Exemption provisions must be strictly construed but if the case of the assessee falls within the ambit of exemption then they should be applied liberally. Mere certain lapses and disallowances cannot become basis for denying exemption u/s. 10(23C)(iiiad) of the Act. Therefore, the matter is restored to the file of the Assessing Officer to have a fresh look on the entire subject and decide the issue in the light of the observations made by us for both the years. The appeal of the assessee is allowed for statistical purposes.
11. In the result, appeals of the assessee are allowed for statistical purposes only.