Orissa High Court
The Commissioner Of Income Tax, ... vs M/S. Silicon Institute Of Technology, ... on 10 November, 2014
Author: I.Mahanty
Bench: I.Mahanty
ORISSA HIGH COURT: CUTTACK
I.T.A.No.11 OF 2012
In the matter of an application under Section 260A of the Income Tax
Act, 1961.
The Commissioner of Income Tax,
Ayakar Bhawan, Rajaswa Vihar,
Bhubaneswar, Dist: Khurda ... Appellant
-Versus-
M/s Silicon Institute of Technology,
Silicon Hills, Patia, Bhubaneswar,
Dist: Khurda ... Respondent
For Appellant : Mr.Akhil K. Mohapatra
Sr. Standing Counsel,
Income Tax
For Respondents : Mr.J.Sahoo, Sr. Advocate
M/s. H.M.Dhal, P.K.Mohanty,
& B.B.Swain
P R E S E N T:
THE HONOURABLE SHRI JUSTICE I.MAHANTY
AND
THE HONOURABLE SHRI JUSTICE B.N. MAHAPATRA
Date of Judgment: 10.11.2014
B.N.Mahapatra,J. The present Income Tax Appeal under section 260A of the
Income Tax Act, 1961 (hereinafter referred to as the "IT Act"), which
arises out of the order passed in ITA No.316/CTK/2011 and C.O.
No.18/CTK/2011 dated 23.09.2011 passed by the Income Tax
Appellate Tribunal, Cuttack Bench, Cuttack for the assessment year
2007-08, has been filed at the instance of the Commissioner of Income
Tax, Ayakar Bhawan, Rajaswa Vihar, Bhubaneswar, Dist. Khurda.
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2. According to the appellant, the following substantial
questions of law are involved in the present Income Tax Appeal:
(i) Whether in the facts and circumstances of the case
and in view of the decision of the Hon'ble High Court
of Uttarakhand in the case of CIT Vs. Queens
Educational Society reported in 319 ITR 160, the
learned Income Tax Appellate Tribunal is correct in
law in holding that the assessee Trust is not running
with profit motive and is eligible for exemption under
Section 11 of the I.T. Act, 1961?
(ii) Whether in the facts and circumstances of the case
and when the assessee Trust is not eligible for
exemption under Section 11 of the Act, the learned
ITAT is correct in law in holding that capital
expenditure incurred by the assessee Trust shall be
allowed as application of income?
3. The facts leading to filing of the present appeal are that the
assessee is a Trust registered under Section 12A of the IT Act with
effect from 02.09.2002. It filed its return of income on 31.10.2007 for
the assessment year 2007-08 disclosing its total loss at
Rs.3,96,54,653/-. On 03.12.2009, the Assessing Officer completed the
assessment under Section 143(3) of the IT Act determining the total
income at Rs.03,06,53,610/-. In the assessment order, the Assessing
Officer did not allow the benefit of exemption under Section 11 of the IT
Act to the Trust on the ground that the assessee-Trust is making
systematic profit year after year; incurred capital expenditure of
Rs.51,24,483/- and diverted income to capital funds amounting to
Rs.28,75,204/- which did not amount to application of income as per
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Section 11(1) of the IT Act. Depreciation of Rs.95,90,956/- was also
added to the income of the Trust. To support his view, the Assessing
Officer relied upon the decision of Uttarakhand High Court in the case
of Queens Education Society (supra).
4. Being aggrieved by the assessment order, the assessee went
in appeal before the Commissioner of Income Tax (Appeal), who after
considering the submissions of the assessee, allowed the appeal by
deleting all the additions made in the assessment order and directed the
Assessing Officer to allow the benefit of exemption to the trust under
Section 11 of the IT Act.
5. Against the order of CIT(A), the Department went in appeal
before the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (for
short, 'ITAT') and the learned ITAT in its order dated 23.09.2011 in ITA
No.316/CTK/2011 has upheld the order of the CIT(A). Hence, the present
appeal.
6. Mr. A. Mohapatra, learned Senior Standing Counsel for the
Income Tax Department, submitted that the Trust deed of the assessee
never had the condition that the assessee will run the institution and
invest the surplus to expand its activity out of the fees collected from the
students who are pursuing their course. Assessee's activity of collecting
the fees from the students as their course fee for studying in the
assessee's institution do not find place in the Trust deed, aims and
objectives or the notes on the activity, which had been submitted to the
CIT for the purpose of registration under Section 12AA. Therefore, the
registration granted in favour of the assessee by the CIT on the premise of
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the Trust deed, aims and objectives and notes on the activity has no
relevance regarding the real activity carried on by the assessee after
obtaining the registration. Year after year, the assessee had been
generating profit and creating fixed assets. For the said purpose, huge
amount of loans have been availed from Banks and financial charges had
been claimed as expenditure out of the students' fees. As the assessee
had been collecting fees much more than the amount required for
imparting education, collection of the said excess amount fits to the
definition of capitation fees, which is illegal. The Hon'ble Supreme Court
held that the Educational Institutions are set up for charitable purpose
and banned the collection of capitation fees and such decision of the
Hon'ble Supreme Court is binding on all authorities. The order of the ITAT
is not based either on facts or correct application of law. Placing
reliance on the judgment of Jharkhand High Court in the case of Queens
Education Society (supra), Mr. Mohapatra submitted that the reasons
given by the Tribunal for granting exemption to respondent Educational
Institution is not sustainable in law. Therefore, Mr. Mohapatra prayed to
admit the Tax Appeal for adjudication on the substantial questions of law
as stated hereinabove.
7. Mr.J. Sahoo, learned Senior Advocate appearing for the
respondent-Educational Institution submitted that no substantial
question of law is involved in the case. The Tribunal is fully justified in
granting exemption under Section 11 of the IT Act, 1961 for the
assessment year 2007-08 for the reasons stated therein. The learned
Assessing Officer is not correct in applying the ratio of Queens Education
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Society (supra), as that case is not in the context of the Organizations
registered under Section 11 of the IT Act. The said judgment was rendered
in the context of Section 10(23C) of the IT Act. Non-applicability of the
ratio of Queens Education Society (supra) has been considered and
decided by a number of High Courts and Tribunals and the Revenue has
not been able to sustain its plea even in a single judgment in the light of
plethora of decisions in favour of the assessee. There is strong reason for
not applying the ratio of Queens Education Society (supra) in the case of
the appellant. In support of the above contentions, Mr. Sahoo relied upon
the decisions of different High Courts, viz., Pinegrove International
Charitable Trust vs. Union of India, (2010) 188 Taxman 402 (Punj & Har);
S.T. Lawrence Educational Society (Regd.) vs. CIT, (2011) 197 Taxman 504
(Delhi); Vanita Vishram Trust vs. Chief CIT, (2010) 327 ITR 121
(Bombay); Maa Saraswati Educational Trust vs. Union of India, (2010) 194
Taxman 84 (Himachal Pradesh); Kashtriya Sabha Maharana Pratap
Bhawan vs. Union of India, (2010) 194 Taxman 442 (Punj & Har.); Sanatan
Dharam Shiksha Samiti vs. Chief Commissioner of Income Tax, Panchakula
(Writ Petition No.4155 of 2011 disposed of on 03.10.2011 by Punjab &
Haryana High Court); Commissioner of Income Tax vs. Manav Mangal
Society, (2009) 184 Taxman 502 (Punj & Har.)
Placing reliance upon the judgment of the Hon'ble Supreme
Court in the case of CIT Bangalore Vs. B.C. Srinivas Setty and others
(1981) 128 ITR 294 (SC) and CIT Vs. P J Chemicals (1994) 210 ITR 830
(SC), it was submitted that the pre-ponderance of judicial views in favour
of the assessee should be honoured. Placing reliance upon the judgment
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of Punjab & Haryana High Court in the case of Pinegrove International
Charitable Trust (supra), Mr. Sahoo submitted that the assessee having
valid registration under Section 12AA is required to be assessed by
applying all the provisions of Section 11 and 13 of the IT Act. The
Assessing Officer having not done so, the order is bad in law. Mr.Sahoo
further submitted that since the registration was not withdrawn on the
date of assessment order, the income of the assessee was exempted in
entirety. The learned Assessing Officer is wrong in holding that the capital
expenditure is not applicable for charitable purpose. Concluding his
argument, Mr. Sahoo submitted for dismissal of the appeal.
8. Before proceeding to examine whether Question Nos. (i) and
(ii) as raised by the Revenue in the present case are substantial questions
of law or not, it would be appropriate to know as to what is
"substantial question of law".
9. The Hon'ble Supreme Court in the case of Sir Chunilal V.
Mehta and Sons Ltd. v. Century Spinning & Manufacturing Co.
Ltd., AIR 1962 SC 1314, held as under:
"6. .....The proper test for determining whether a
question of law raised in the case is substantial would,
in our opinion, be whether it is of general public
importance or whether if directly and substantially
affects the rights of the parties and if so whether it is
either an open question in the sense that it is not finally
settled by this Court or by the Privy Council or by the
Federal Court or is not free from difficulty or calls for
discussion of alternative views. If the question is settled
by the highest court or the general principles to be
applied in determining the question are well settled and
there is a mere question of applying those principles or
that the plea raised is palpably absurd the question
would not be a substantial question of law."
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10. The Hon'ble Supreme Court in the case of Kondiba Dagadu
Kadam v. Savitribai Sopan Gujar and others, (1999) 3 SCC 722,
held as under:
"6. If the question of law termed as a substantial
question stands already decided by a larger Bench of
the High Court concerned or by the Privy Council or
by the Federal Court or by the Supreme Court, its
merely wrong application on the facts of the case
would not be termed to be a substantial question of
law. Where a point of law has not been pleaded or is
found to be arising between the parties in the
absence of any factual format, a litigant should not
be allowed to raise that question as a substantial
question of law in second appeal. The mere
appreciation of the facts, the documentary evidence
or the meaning of entries and the contents of the
document cannot be held to be raising a substantial
question of law. But where it is found that the first
appellate court has assumed jurisdiction which did
not vest in it, the same can be adjudicated in the
second appeal, treating it as a substantial question
of law. Where the first appellate court is shown to
have exercised its discretion in a judicial
manner, it cannot be termed to be an error either of
law or of procedure requiring interference in second
appeal. This Court in Reserve Bank of India v.
Ramkrishna Govind Morey2 held that whether the
trial court should not have exercised its jurisdiction
differently is not a question of law justifying
interference."
11. Now coming to the case at hand, undisputed facts are that
the assessee is a Trust registered under Section 12A of the IT Act with
effect from 02.09.2003. The main object of the respondent is to impart
education. Year after year the respondent-assessee has been generating
profit and creating fixed assets. The assessee claims capital
expenditure as application of income in terms of Section 11 of the IT
Act. On the date of assessment, registration granted under Section
12AA was not withdrawn. The learned Assessing Officer held that the
8
respondent-educational institution is not entitled to exemption under
Section 11 of the I.T. Act but both the first appellate authority and the
learned ITAT held that the respondent-educational institution is eligible
for exemption under Section 11 of the Act.
12. In this context, it would be relevant to refer to the following
decisions of the Hon'ble Supreme Court.
A five-Judge Constitution Bench of the Hon'ble Supreme
Court in the case of Addl. CIT Vs. Surat Art Silk Cloth Manufacturers
Association, (1979) 13 CTR (SC) 378, dealt with the question of
interpretation of clause (15) of Section 2 of the Act. In the said case it has
been held as follows:
".... The test which has, therefore, now to be applied is
whether the predominant object of the activity involved in
carrying out the object of general public utility is to
subserve the charitable purpose or to earn profit.
Where profit making is the predominant object of the
activity, the purpose, though an object of general public
utility, would cease to be a charitable purpose. But where
the predominant object of the activity is to carry out the
charitable purpose and not to earn profit, it would not lose
its character of a charitable purpose merely because some
profit arises from the activity. The exclusionary clause
does not require that the activity must be carried on in
such a manner that it does not result in any profit. It
would indeed be difficult for a person in charge of a trust
or institution to so carry on the activity that the
expenditure balances the income and there is no resulting
profit. That would not only be difficult of practical
realization but would also reflect unsound principle of
management. We, therefore, agree with Beg, J. when he
said in Sole Trustee, Loka Shikshana Trust Vs. CIT 1975
CTR (SC) 281 : (1975) 101 ITR 234 (SC), 256 that: 'If the
profits must necessarily feed a charitable purpose under
the terms of the trust, the mere fact that the activities of
the trust yield profit will not alter charitable character of
the trust. The test now is, more clearly than in the past,
the genuineness of the purpose tested by the obligation
created to spend the money exclusively or essentially on
charity'."
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13. The aforesaid view has been cited with approval by the
Hon'ble Supreme Court in the case of American Hotel & Lodging
Association Educational Institute Vs. CBDT & Others, (2008) 301 ITR
86 (SC).
14. The Hon'ble Supreme Court in the case of Aditanar
Educational Institution etc. vs. Add. CIT (1997) 139 CTR (SC) 7 held
that in case of an educational institution, after meeting the expenditure, if
any surplus results incidentally, then the institution will not cease to be
one existing solely for educational purposes and when the surplus is
utilized for educational purpose, i.e., for infrastructure development it
cannot be said that the institution was having object to make profit. Thus,
surpluses used for management and betterment of institution could
not be termed as profit.
15. Strong reliance has been placed by the Revenue on the
judgment of the Uttarakhand High Court in Queens Education Society
(supra) by the learned Senior Standing Counsel for the appellant to
canvas that the Trust is running with profit motive and therefore it is not
eligible for exemption under Section 11 of the IT Act.
The decision in the case of Queens Education Society (supra)
is misplaced by the Department. The said case is not applicable to the
case of respondent-educational Society claiming exemption under Section
11 as the judgment in the case of Queens Education Society (supra) was
delivered in the context of Section 10 (23C) (iii ad) and not in the context
of availing exemption under Section 11 of the I.T. Act by the institutions
registered under Section 12A/12AA of the I.T. Act.
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16. It may be profitable to extract here the following relevant
observations of Punjab and Harayana High Court in the case of Pinegrove
International Charitable Trust (supra):-
"We have not been able to persuade ourselves
to accept the view expressed by the Division Bench of
the Uttarakahand High Court in the case of Queens
Educational Society (supra). There are variety of
reasons to support our opinion.
Firstly, the scope of the third proviso was not
under consideration, in as much as, the case before
the Uttarakhand High Court pertained to section
10(23C)(iii ad) of the Act. The third proviso to section
10(23C)(vi) is not applicable to the cases falling
within the purview of section 10(23C) (iii ad).
Secondly, the judgment rendered by the
Uttarakhand High Court runs contrary to the
provisions of section 10(23C)(vi) of the Act including
the provisos thereunder. Section 10(23C)(vi) of the
Act is equivalent to the provisions of section 10(22)
existing earlier, which were introduced w.e.f. 1-4-
1999 and it ignores the speech of the Finance
Minister made before the introduction of the said
provisions, namely, section 10(23C) of the Act
[See observations in American Hotel & Lodging
Association, Educational Institute's case (supra)].
Thirdly, the Uttarakhand High Court has not
appreciated correctly the ratio of the judgment
rendered by Hon'ble the Supreme Court in the case
of Aditanar Educational Institution (supra) and while
applying the said judgment including the judgment
which had been rendered by the Hon'ble Supreme
Court in the case of Children Book Trust (supra), it
lost sight of the amendment which had been carried
out w.e.f. 1-4-1999 leading to the introduction of the
provisions of section 10(23C) of the Act. Lastly, that
view is not consistent with the law laid down by
Hon'ble the Supreme Court in American Hotel &
Lodging Association, Educational Institute (supra)."
17. Apart from the above, perusal of the assessment order
reveals that, for withdrawal of exemption, the Assessing Officer
assigned various reasons, viz., (i) Limitation in the objects of the Trust
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Deed; (ii) Assessee generating profit year after year; (iii) Capital
expenses are not application of income; (iv) Income or property of the
trust is applied/used for the benefit of persons specified in Section
13(3) [section 13(1)(c) read with section 13(2) and 13(3)]; (v) Valuation of
old vehicles purchased; (vi) Collection of fees out of canteen expenses of
students; (vii) Miscellaneous placement expenses; (viii) Claim of
transport expenses against outside vehicle; and (ix) Collection from
students over and above the prescribed fees.
The CIT (Appeal) has considered every aspect of the
assessment order with reference to the reasons given by the learned
Assessing Officer for disallowing exemption and relying upon the latest
judicial pronouncements expressed in similar facts that are involved in
the present case, came to the conclusion that the Assessing
Officer's approach denying exemption to the respondent-educational
institution is not in accordance with law and held that the respondent-
educational institution is entitled to claim exemption under Section 11
of the Act.
18. The learned Tribunal, which is the final fact finding
authority, after hearing the appeal filed by the Department did not
incline to interfere with the order of the first appellate authority, inter
alia, with the following observations and findings:
"Apart from that on going through the impugned order,
it is found that the learned CIT(A) has thread bare
considered the issues in question with reference to the
admitted facts that the assessee is registered under
Section 12A of the Act and running the educational
institution, imparting education in the fields of
technical engineering and computer applications with
the parameters laid down by the AICTE and the
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guidelines given by Ministry of Human Resource
Development, Government of India, New Delhi and the
fees collected by the assessee from the students for
imparting such education having been approved by the
AICTE. The assessee is spending the amount received
by it by way of collection of tuition fees or collection of
hostel fees is being spent for building necessary
infrastructure for imparting the education in various
fields which is the charitable purpose for which the
trust was established. The assessee has also spent the
said amount for raising the infrastructure necessary
for carrying out the object of imparting education and
thereby the assessee was found to be entitled for
exemption under Section 11 of the I.T. Act and the
view of the Assessing Officer that there is
contravention of Section 13 of the I.T. Act is found to
be baseless by the CIT(A) after thread bare considering
all the relevant facts. On the overall consideration of
the impugned orders, we found that the order of the
leaned CIT(A) is in accordance of the majority views of
judicial pronouncements that were rendered by
various judicial forums stated in the impugned order.
Hence, we find no infirmity in the order of the learned
CIT(A) requiring no interference."
19. In view of the above, question No.(i) is not a substantial
question of law.
20. Question No. (ii) is also not a substantial question of law as
the respondent -Educational Institution is eligible for exemption under
Section 11 of the IT Act for the reasons stated hereinabove and it is a
settled position of law that capital expenditure incurred by an Educational
Institution is the basic necessity if such expenditure promotes the object
of the Trust.
21. The Hon'ble Supreme Court in the case of S.RM. M.CT.M.
Tiruppani Trust Vs. CIT, (1998) 230 ITR 636 (SC) and the High Court
of Delhi in the case of CIT Vs. Divine Light Mission, (2005) 196 CTR
(Del) 135 have held that capital expenditure incurred by a Trust for
acquiring/ constructing capital asset would be application of money
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and the assessee would be entitled to exemption under Section 11(1) of
the Act.
22. The Madras High Court in the case of CIT Vs. Kannika
Parameswari Devasthanam & Charities, (1982) 133 ITR 779 (Mad.)
held as under:-
"The income from the trust properties has to be
applied on the objects of the trust. As far as objects
of the trust are concerned, the application of the
amount can be for revenue or capital purposes. So
long as the expenditure had to be incurred out of the
income earned by the trust, even if such expenditure
is for capital purposes on the objects of the trust, the
income would be exempt. The Tribunal is, therefore,
wrong in proceeding on the basis that improvement
of a property held under the trust would by itself
come within the scope of application of the income
for charitable purposes. However, facts will have to
be investigated to find out whether the assessee had,
in incurring the expenditure of a capital nature,
promoted the objects of the trust by applying the
income to those objects. The ITO will have to
go into this question, as the assessment itself has
been set aside by the Tribunal and restored to his
file. The result is that the question referred to us
would have to be answered as follows: So long as the
income derived from the property held under the
trust had been expended on the objects of the trust,
the income would be exempt under section 11 of the
Act. If this was not done, then the income would not
be exempt."
23. The High Court of Uttarakhand in the case of CIT Vs. Jyoti
Prabha Society, (2009) 177 Taxman 429 (Uttarakhand) has held that
the educational society which had utilized rental income for the
purposes of imparting education by maintaining the buildings and
constructing new building for the same purpose, would be entitled to
the exemption claimed under Section 11 of the Act. Section 11(1)(a) is
pari materia to the third proviso to Section 10(23C)(vi) of the Act and
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the only difference is with regard to the percentage of income and the
period for which it can be carried forward.
24. The Allahabad High Court applied the legal ratio of the
Hon'ble Supreme Court in CIT Vs. Mool Chand Sharbati Devi
Hospital Trust, (2010) 190 TAXMAN 338 and held that capital
expenditure on building and infrastructure are basic necessity and
therefore, it should be treated as expenditure under Section 11(1) of the
IT Act.
25. In view of the above, capital expenditure if incurred by an
Educational Institution for attainment of the object of the Society, it would
be entitled to exemption under Section 11 of the I.T. Act.
26. For the reasons stated above, issues involved in the present
case are no more res integra and therefore, no question of law arises
for adjudication in the present appeal.
27. In the result, the appeal is dismissed.
................................
B.N. Mahapatra, J.
I. Mahanty, J.I agree .............................. I. Mahanty, J.
Orissa High Court, Cuttack Dated 10th November, 2014/bks/ss/skj