Income Tax Appellate Tribunal - Chennai
Merit International Education, ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, CHENNAI
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND
SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
ITA No.35/Mds/2012
Asst. Year : 2003-04
The Dy.Commissioner of M/s.Merit International Education
Income Tax (Exemptions-I), Regus Citi Centre, Level - 6,
CHENNAI. v. 10/11, Dr. Radhakrishnan Salai,
CHENNAI - 600 004.
PAN : AAATM1512D.
(Respondent)
( Appellant )
Appellant by : Mr. R.B. Naik, CIT
Respondent by : None
Date of hearing : 11 Dec 2012
Date of Pronouncement : 11 Jan 2013
O R D E R
PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER :
This is an appeal filed by the Revenue against the order of Commissioner of Income Tax (Appeals)-XII, dated 24.10.2011.
2 ITA 35/Mds/12 The sole issue in the appeal of the Revenue is that the Commissioner of Income Tax (Appeals) erred in holding that the assessee is entitled to the benefit of sec.11 of the I.T.Act.
2. Facts of the case are that the assessee is an educational institution providing hotel management education and diploma course, registered under sec.12AA of the I.T. Act. The assessee filed return of income on 31.3.2004 admitting gross receipts of .8,89,55,437/- and Nil income after claiming exemption under sec.11 of the Act. The return was processed under sec.143(1) of the Act accepting the income returned. Later, the assessment was re-
opened under sec.147 of the Act and completed re-assessment on 21.12.2010, determining total income at .2,73,95,670/- by denying exemption claimed under sec.11 of the Act. The Assessing Officer re-opened the assessment based on the assessment made for the Asst. Year 2005-06 wherein the then Assessing Officer was of the view that the assessee society violated the provisions of sec.13 of the Act. In fact, the Assessing Officer, in para 7.2 of the order records that all the facts discussed in the order for the Asst. Year 2005-06 3 ITA 35/Mds/12 are recurring for the Asst. Year 2003-04, ie., the current Asst. Year also. The relevant observations are as under :-
"7.2 All the facts discussed in the order for the assessment year 2004-06 are occurring for the assessment year 2003-04 also. In other words, all the above facts started from even earlier period relevant to the assessment year 2001-02 and has been continuing beyond the assessment year 2005-06 also.
7.3 Further, it is to be noted that the investment made by the assessee in the form of lease rent advances with the company M/s Merit Resorts Pvt. Ltd. In which the trustees are interested as explained above, is not one of the approved securities u/s 11 (5) of the IT Act. Therefore, in the case of the assessee there is violation under section 11 of the IT Act also.
7.4 For the assessment year 2005-06, the CIT(A) XI, Chennai III order in ITA NO.567/07-08 dated 27-8-2008 has held that the trustees had certainly derived benefits and had received the, sum and this computed the interest in the said property - There is a clear violation of the provisions of sec. 13(2) r.w.s 13(3) The observation of the CIT(A) in paragraph 5.5 of the above referred appellate order is relevant to this year also. The CIT(A) sustained the assessment order of the Assessing Officer and has held that the assessee trust is not entitled to exemption u/s 11 of the IT Act.
7.5 On enquiry with the Canara Bank, Teynampet, Chennai, it reveals that the Canara Bank has auction sold the property to M/s Lakshmi Ammal Educational Trust, Chennai, and appropriated the proceeds towards the loan obtained by M/s Merit Resorts Pvt. Ltd, by the directors. It is also gathered that the purchaser has won in litigation and taken possession of the property sold by the Bank. Therefore, the submissions of the assessee are not tenable.
8. For the detailed reasons stated in the order for the assessment year 2005-06 and for the reasons stated in the preceding paragraphs, it is held that there is violation u/s 11 and 13 of the IT Act and hence the assessee is not entitled to exemption u/s 11 of the Act. Accordingly, the exemption u/s 11 is not allowed and the assessment is completed accordingly."
4 ITA 35/Mds/12 On appeal, the Commissioner of Income Tax (Appeals), following the order of the co-ordinate Bench of this Tribunal in assessee's own case for the Asst. Year 2005-06, vide ITA Nos.335/Mds/2010 dated 7.6.2010 and ITA No.2271/Mds/2008 dated 19.4.2011, held that there is no violation of the provisions of sec.13 of the Act and the assessee is eligible for deduction under sec.11 of the Act. Against this order of the Commissioner of Income Tax (Appeals) the Revenue is in appeal before us.
3. The Counsel for the Assessee filed an adjournment petition seeking time on the ground that he is away on official duty.
Since the issue in appeal was already decided by this Tribunal in assessee's own case for the Asst. Year 2005-06, we reject the adjournment petition and proceed with the hearing of the case on merits.
4. The Departmental Representative supported the order of the Assessing Officer in denying exemption under sec.11 of the Act to the assessee.
5 ITA 35/Mds/12
5. The co-ordinate Bench of this Tribunal had considered identical issue in its order in ITA No.2271/Mds/2008 dated 19.4.2011 for the Asst. Year 2005-06 in assessee's own case and held that there is no violation under sec.13 of the Act by the assessee and the assessee's institution is eligible for exemption under sec.11 of the Act. While holding so, this Tribunal observed as under :-
11. To cut the long story short, the trust was registered u/s 12AA of the Act and is providing Hotel Management Education. For the purpose of running the educational institution, the trust has taken on lease and occupied the premises owned by M/s MRPL; M/s Nilgiris Enterprises; and M/s Prince Palace. The assessee-trust has entered into lease agreements with the above parties as per law. The fact that the assessee had paid lease rental advance of . 9.40 crores to MRPL, in view of the terms of lease agreement and MoU entered into between them, over a period of time. The Assessing Officer has held that the assessee has violated the provisions of section 13(2) and section 13(3) of the Act and hence, is not eligible for exemption u/s 11 of the Act for the following two reasons:-
(i) the trustees are the directors of MRPL; and
(ii) the leased premises were taken over by CanaraBank under Securitization & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
12. But there is nothing on record to prove or suggest that the trustees were benefited from the lease rental advance paid to MRPL, rather only the trust was benefited because it had not paid 6 ITA 35/Mds/12 any lease rentals but at the same time, it was using 72,222 sq ft of built-up area on 10.34 acres of land owned by MRPL. Moreover, the lease rental advance of . 9.40 crores has been paid back to the trust in full by MRPL in the month of October 2006, well before the symbolic possession of the property taken by Canara Bank under Securitization and Reconstruction of Financial assets and Enforcement of Security Interest Act, 2002, on 30.8.2007.
13. Let us now examine as to what is the nature of rental advances as to whether it is an application of funds or it is a simplicitor investment? The facts narrated above are very clear and there is no dispute between the parties in regard to them except for the nature of lease rental advances. Undeniably, the assessee-trust has paid lease rental advances and has enjoyed the property, in the manner stated above, and that too without paying rent. Let us examine as to what is the nature of the lease rental advances, in the given facts and the circumstances of this case, the judicial precedents can guide us to arrive at a correct conclusion. The ld.AR placed reliance on the decision of Hon'ble Supreme Court rendered in the case of H.E.H Nizam's Religious Endowment Trust vs CIT, 59 ITR 582, in which it has been held that the words "applied" and "accumulated" therefore, meant "applied or finally set apart". It has been held that "applied" means that the income is actually applied for the said purposes in the taxable territories for the purposes for which the trust had been created. In the light of the above decision of Apex Court it was argued that this case directly applies to the facts of the given case. Reliance was also placed on the decision of the Hon'ble Kerala High Court rendered in the case of CIT vs St. George Forana Church, 170 ITR 62, wherein it has been held that the word "applied" in the context means that actually applied or actually spent. Such application may be by way of adding to the corpus of 7 ITA 35/Mds/12 the fund and not merely in the form of revenue expenditure for implementing the purpose of the trust. Further reliance was placed on the decision of Hon'ble Delhi High Court rendered in the case of Director of Income-tax(Exemption) vs Alarippu, 244 ITR 358. In this case, it has been held that in order to constitute an investment, the amount laid down should be capable of and result in any income, return or profit to the investor and in every cases of investment, the intention and positive act on the part of the investor should be to earn such income, return or profit. In order to constitute an investment, the money shall be laid out in such manner, as to acquire some species of property which would bring in an income to the investor. Finally, reliance was placed on the decision Hon'ble Jurisdictional High Court rendered in the case of DIT(E) vs Govindu Naicker Estate, 315 ITR 237, in which it has been clearly held that even though the expenditure incurred are capital in nature, if the expenditure incurred is for the purpose of promoting the object of the trust, the expenditure incurred would definitely be considered as application of the income for the purpose of the trust. Now, applying the above ratio and principles of law laid down as above by the Apex Court as well as various High Courts, we can safely hold that the lease rental advances in question are in the nature of "application" of funds for the purpose of pursuing the objects of the trust and not an "investment" as has been held by the Department. The application of funds becomes eligible for deduction u/s 11 Act. We are in agreement with the submission of the ld.AR in this regard and clearly hold that the trust has been benefited by this agreement and that too for the purpose of pursuing its main charitable objects. The company or to say, the trustees have not been at all benefited by these agreements. While deciding the appeal for assessment year 2004-05, in appeal No.335/Mds/2010, this Bench under similar facts and circumstances has treated the rental advance as of 8 ITA 35/Mds/12 "'application" and not "investment". Hence, by following above precedents, we are of the considered opinion that the rental advances given by the trust to MRPL cannot be treated as "investment" and are in the nature of "application" of funds only. Therefore, the provisions of section 13(1)(d) do not apply to the facts of the instant case.
14. The other reason taken by the Department is that the trustees were benefited by these transactions/agreements. It is found that the trust had utilized 72,222 sq ft of built-up area on the land spread over 10.34 acres which belong to the company, MRPL and the trust did not pay any lease rent though the lease agreement requires payment of rentals by the trust. It is an undeniable fact that the entire lease rental advance paid by the trust to MRPL has been repaid to the trust. This amount was repaid before the symbolic possession of the property taken by Canara Bank on 30.8.2007. Not only that, even after repayment of the entire rental advances, the trust continued to enjoy the property without paying any lease rentals. Nothing has come on record to suggest that any fund of the trust was utilized for the personal benefit of the directors of the company, MRPL, who are also the trustees of the assessee-trust. The duty is cast upon the Department to prove the misuse of the funds of the trust in the manner forbidden by section 13(3) of the Act. Support in this regard can be drawn of the decision of the Hon'ble Allahabad High Court rendered in the case of CIT vs Kamla Town Trust, 279 ITR 89. As stated above, it is only the trust, which has been benefited by taking the property on lease by utilizing the property belonging to the company and without paying any lease rental. We do not find any reason, whatsoever, to deny the benefit of section 11 to the assessee- trust. Concomitantly, we do not find any violation by the trust of any provisions of section 11 and/or of 9 ITA 35/Mds/12 section 13 of the Act. We, therefore, hold that the assessee is entitled to exemption as provided u/s 11 of the Act. Having held so, interest levied u/s 234A and 234B will also not survive. We, therefore, set aside the order of the ld. CIT(A) and allow the appeal of the assessee."
Since the facts of the case for the 2003-04 are identical to the facts for the Asst. Year 2005-06, respectfully following the decision of the co-ordinate Bench of this Tribunal (supra) in assessee's own case for the Asst. Year 2005-06, we hold that the assessee is entitled to exemption under sec.11 of the I.T. Act for the Asst. Year 2003-04 also. Thus, the order of the Commissioner of Income Tax (Appeals) is confirmed.
5. In the result, the appeal of the Department is dismissed.
6. Order pronounced on Friday, the 11th January 2013, at Chennai.
Sd/- sd/-
( N.S. SAINI ) (CHALLA NAGENDRA PRASAD)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Chennai,
Dated : 11th January 2013
10 ITA 35/Mds/12
Jls.
Copy to:-
(1) Appellant
(2) Respondent
(3) CIT-(A), (4) C.I.T.,
(5) D.R., (6) Guard file