Income Tax Appellate Tribunal - Amritsar
Jyoti Province Sacred Heart ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AMRITSAR BENCH; AMRITSAR.
BEFORE SH. H.L. KARWA, VICE PRESIDENT AND
SH. MEHAR SINGH, ACCOUNTANT MEMBER
I.T.A. No.376(Asr)/2010
Assessment year:2002-03
PAN :AAATJ0517B
The Dy. Commr. of Income-tax, Vs. M/s. Jyoti Province Sacred Heart
Range-1, Jalandhar. Congregation, Jalandhar.
(Appellant) (Respondent)
Department by:Sh. Amirk Chand, DR
Assessee by:Sh. Nitin Gandhi, CA
ORDER
Per Mehar Singh, AM,
The present appeal filed by the revenue is directed against the order of the CIT(A), Jalandhar, dated 29.06.2010, passed under section 250(6) of the Income-tax Act, 1961 (hereinafter referred to in short 'the Act') for the assessment year 2002-03.
2. The Revenue has raised following grounds of appeal:
1. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred I law in allowing exemption u/s 11 of the Act. 1.1. While doing so, the Ld. CIT(A) has failed to appreciate the facts.
(i) That the trust could not establish that it is working wholly for charitable purposes and applying its income to achieve the charitable purposes of the trust.
(ii) That the activities of the trust are not charitable though the trust deed refers to charitable objects. For example, trust deed no where mentions of charging fee of any amount for any of its 2 services (objects) and this aspect has not been approved by the CIT while granting registration u/s 12AA(1)(b)(i) of the Act.
(iii) That Section 11(1)(a) of the Act refers to income derived from property of the trust and it does not cover the income earned by exploitation of the objects (referred as charitable) leading to surplus of income over the expenditure in running the business of the trust & using the trust as a colourable device to dodge the revenue & as well as the people of any 'charity' as the trust could not established that it is working for charitable purposes.
(iv) That under the I.T.Act, there is no provision for allowing the capital expenditure as revenue expenditure. Section 11(2) of the Act refers to application of surplus of income to be applied for specified purposes as referred to in section 11(3) of the Act and it does not any way permits the expenses to be allowed as revenue expenses or can be covered or can be considered as application of surplus (Reference is made to Section 11(5)(x) of the Act)
(v) That the provisions of section 11(10(a0 of the Act require the fulfillment of conditions as mentioned therein during any previous year. In the circumstances, grant of registration u/s 12AA of the Act does not override the provision of section 11(1)(a) of the Act. The provisions of both the sections 12AA(1)(b)(i)/11(1)(a) of the Act are independent so far as taxability/exemption of income is concerned.
(vi) That with reference to section 11(4A) of the Act, where the assessee is held as not engaged in any charitable activity, provisions of section 11(4A) of the Act will have no application and meaning.
2. That it is prayed that the order of the Ld. CIT(A0 be set aside and that of the A.O. restored.
3. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed off."
3. In the course of present appellate proceedings, the ld. Counsel for the assessee contended that all the grounds raised in this appeal are covered by the decision of this Bench, in assessee's own case, as adjudicated in ITA No.534(Asr)/2009 for the assessment year 2006-07, vide order dated 21st May, 2010 ( copy of order placed at page 49 of the paper book).
34. The Ld. 'DR', on the other hand, placed reliance on the order of the Assessing Officer. However, he conceded that that the issue is covered by the aforesaid order of the Tribunal.
5. Having heard both the parties, we find that similar issue came up for consideration, before this Bench, in assessee's own case, passed in ITA No.534(Asr)/2009 for the assessment year 2006-07, and the Tribunal vide its order dated 21st May, 2010, adjudicated the issue in favour of the assessee and against the Revenue. In view of this, we deem it fit to follow the said order of the Tribunal on the identical issue and the same is reproduced hereunder:
"5. Having heard both the parties, we find that issue relating to eligibility for deduction under section 11(1)(a) of the Act as raised in the present appeal ( in appeal No. 534(Asr)/2009) for the A. Y. 2006-07, came up for consideration, before this Bench, in the case of DCIT, Range-1, Jalandhar Vs. M/s. Saffron Educational Trust, Jalandhar, in ITA No.536(Asr)/2009 for the assessment year 2006-07 and the same was adjudicated vide our order dated 30th April, 2010 in favour of the assessee and against the Revenue. In view of this, we deem it fit to follow the said order of the Tribunal on the identical issue and the same is reproduced hereunder:
"4. In ground No.1.1., the Revenue has contended that the activities of the Trust are not charitable and hence, it is not eligible for exemption under section 11(1)(a) of the Act. It is the contention of the Revenue that grant of registration under section 12AA of the Act, does not over ride the provisions of section 11(1)(a) of the Act, as the same are independent provisions. In nutshell, the Revenue contends that the assessee-trust is not eligible for deduction u/s 11(1)(a) of the Act.
5. In the course of present appellate proceedings, the Ld. 'DR', discussed the factual position of the case and placed reliance on 4 the order of the Assessing Officer. The Ld. 'DR' has also filed written submission as received from the A.O.
6. The Ld. Counsel for the assessee, on the other hand, placed reliance on the order of the CIT(A) and reiterated the submissions made before him. He referred to para 6.1 to 6.3. of the impugned appellate order. He contended that the Ld. CIT(A), has passed a detailed and well reasoned order and Revenue has no case. He, further, submitted that the assessee society which is registered u/s 12AA has satisfied all the requirements of section 11 & 12 of the Act and no violation of any provision of section 13 of the Act has been pointed out by the A.O., as such, it is requested that the impugned appellate order passed by the Ld. CIT(A), may be sustained.
7. We have carefully perused the facts of the case, rival submissions, relevant record, including the assessment order and the appellate order passed by the CIT(A). The brief facts of the case as culled out from the relevant records are that the assessee filed return of income, on 28.10.2006, declaring income of Rs.500/-, after claiming exemption under section 11 of the Act, at Rs.29,07,889/-. In this case, the Assessing Officer, vide assessment order dated 26.12.2008, denied exemption as provided under section 11(1)(a) of the Act. The AO was of the opinion that the surplus over expenditure to the tune of Rs.29,07,890/-, cannot be said to be in the nature of wholly charitable and consequently denied benefit, as contemplated under section 11(1)(a) of the Act. It was contended before the AO that the object "education" is covered under the definition of charitable purpose within the meaning of section 2(15) of the Act. It was contended that the surplus funds had been utilized for the object of providing education and establishing infrastructure to accomplish the object of providing education. It was also brought to the notice of the A.O. that the Ld. CIT has duly granted registration to the society under section 12AA of the Act. However, the AO was of the opinion that granting of registration per se can not make the assessee eligible for exemption under section 11(1)(a) unless the stipulation of section 11 of the Act are complied with. It was observed by the AO that exemption cannot be granted under the guise of issuance of certificate registered under section 12AA of the Act. It was also pointed out by the A.O. that the burden of proving eligibility of exemption u/s 11 of the Act is cast on the assesee. In the ultimate analysis, the AO opined 5 that the Trust was not working as a wholly charitable institution. He rejected the contention of the assessee that the funds applied for raising infrastructure by the trust cannot be construed as that the Trust is wholly charitable. In a nutshell, the AO was of the opinion that the Trust was not wholly charitable, as it was engaged in the activities, which were other than charitable and income of the assessee-trust was not being applied for the attainment of the charitable purpose. The AO also gave finding in the assessment order that the staff welfare expenditure claimed at Rs.1,37,624/-, pertained to the purchase of domestic grocery including variety of Atta, Masala, etc., with no identity of seller. In his view, such expenses represented as incurred for domestic purposes and consequently, the same were disallowed, as not being related to the activities of the Trust. He was also of the opinion that such disallowance was deemed to have been diverted to persons referred to in section 13(3)(cc) of the Act and was more than the limit provided in the proviso below section 13(2)(g). Thus, exemption under section 11(1)(a) of the Act was also not available. The AO has given detailed findings in para 03 to 06 of the impugned assessment order. In concluding para 6, the AO has held as under:
"06. In view of the above facts, it is held that
1. Trust is not wholly charitable as the trust is engaged in the activities which are other than charitable as discussed above.
2. Income arising to the trust is not being applied for the attainment of charitable objects.
And in the circumstances assessee is not entitled for benefit as provided u/s 11(1)(a) of the Act.
7.1. Aggrieved with the order of the A.O., the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A), after considering and appreciating the submission filed before him, adjudicated the issue of impugned exemption, in favour of the assessee. The society is established inter-alia for the purpose to establish and administer Educational institutions. Its primary object is to promote quality education and to impart knowledge, in the fields of Science, commerce, computer, Nursing, arts, sports, language and in the area to teaching and evaluation. The objects of the Trust/Society inter-ala is reproduced hereunder:
"1. The Society is established with a view to establish and administer Educational Institutions its primary is to promote quality 6 education and to impart knowledge in the fields of Science, commerce, computer, Nursing, arts, sports, language and in the area to teaching and evaluation."
7.2. In this case, the Ld. CIT, Jalandhar, has granted registration under section 12AA of the Act vide order dated 05.01.2005. Naturally, the Ld. CIT(A) was satisfied with the genuineness of the activities and objects of the Trust, at the time of granting such registration. The definition of charitable purpose is contained under section 2(15) of the Act, which includes relief to the poor, education, medical relief and the advancement of any other object of general public utility. Needless to say that the definition of charitable purpose as contained u/s 2(15) of the Act, holds the field, in the Scheme of Income-tax Act, and any other common sense, concept or scriptural concept of charitable purpose is irrelevant, to the proceedings under the Income-tax Act, and , hence, the issue of exemption as contemplated under sections 11 to 13 of the Act is to be adjudicated, in terms of the definition as provided under section 2(15) of the Act. 7.3. The definition of charitable purpose has been amended by the Finance Act, 2008, w.e.f. 01.04.2009, and the same reads as under:
"2(15) "charitable purpose' includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involve the carrying on of any activity in the nature of trade, commerce or business, or any activity or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity."
The Finance Minister has referred to the amendment (para 180) in following words:
"180. "Charitable purpose" includes relief of the poor, education, medical relief and any other object of general public utility. These activities are tax exempt, as they should be. However, some entities carrying on regular trade, commerce or business or providing services in relation to any trade, commerce or business and earning incomes have sought to claim that their purposes would also fall under "charitable purpose". Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to exclude the aforesaid cases, Genuine charitable organisations will not in any way be affected." ( emphasis supplied).7
7.4. The circular No.11/2008 dated 19.12.2008 explains and interprets the said amendment and para 2 of the same is reproduced hereunder:
"2.1. The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e. relief of the poor, education or medical relief. Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute charitable purpose even if it."
7.5. The conditions for applicability of section 11 & 12 are contained under section 12A & 12AA of the Act. In case such statutory conditions are complied with by the assessee, he is entitled for exemption. The A.O. while framing assessment in such cases, is competent to examine the application and utilization of income of the Trust or Institution for the specified purpose and carried out in accordance with the objects of the Trust. The AO is not competent to adjudicate, on the issue, whether the activities are charitable or otherwise. However, the AO if finds that the funds of the Trust are used for personal purpose or for non-charitable purpose, then, he can taken action as per relevant statutory provision and also intimate the same, to the CIT who can consider withdrawal of the registration granted under section 12A r.w.s. 12AA of the Act. The AO is not competent to adjudicate that the activities of the Trust are not wholly charitable as has been done in this case.
7.6. The Hon'ble jurisdictional High Court of Punjab & Haryana, in the case of Pinegrove International Charitable Trust Vs. Union of India and others, in CWP No. 6031 of 2009, dated January 29, 2010, has categorically adjudicated that the earning of regular profits is not disqualification for the Trust and the Institution, which would convert character of charitable purpose to non-charitable purpose. The relevant part of decision of the Hon'ble Punjab & Haryana High Court, in the case of Pinegrove International Charitable Trust Vs. Union of India and others (supra) is reproduced hereunder:
7.7. Further, the jurisdictional High Court of Punjab & Haryana has decided, the issue of charity, in the case of Pinegrove International Charitable Trust Vs. Union of India and others, in CWP No. 6031 of 2009, dated January 29, 2010, in favour of the assessee. The question of law raised before the Hon'ble High Court, is reproduced hereunder:
"7.1. In the preceding paras it has already been noticed by referring to the views of Hon'ble the Supreme Court in the cases of Aditanar Educational Institution's case (supra) and American Hotel and 8 Lodging Association (supra) that the character of the recipent of income must be that of an educational institution which is to be ascertained from the nature of activities. In the case of American Hotel and Lodging Association (supra), Hon'ble Supreme Court considered the scope of inquiry by the prescribed authority u/s 10(23)(vi) read with unnumbered third proviso of the Act. In that case the Assessing Officer during the assessment proceedings had accepted that excess income over and above the expenditure shown in its accounts was not to be taken as assessee's income. When the matter travelled to the CBDT it was held that there is a surplus income, which has been repatriated outside India. Therefore, the assessee did not apply for its income for the purpose of education in India. The view of the CBDT was accepted by the Delhi High Court by dismissing the writ petition, filed by the assessee, which is reported as American Hotel and Lodging Association Educational Institute Vs. CBDT (2007) 289 ITR 46 (Delhi). The Division Bench of Delhi High Court held that the gross receipt collected by the assessee's branch office in India is income chargeable to tax. It was further held that such income was required to be applied for educational purposes in India and on its repatriation outside India, the assessee lost the entitlement to seek exemption. It was in the aforesaid background that Hon'ble Supreme Court analysed various proviso added w.e.f. 1.4.1999 and proceeded to observe that " with the insertion of the provisos to Section 10(23)(vi) the applicant who seeks approval has not only to show that it is an institution existing solely for educational purposes [ which was also the requirement u/s 10(22)] but it has now to obtain initial approval from the prescribed authority, in terms of section 10(23C)(vi) by making an application in the standardized form as mentioned in the first proviso to that section'. Hon'ble the Supreme Court then proceeded to examine various provisos by observing as under:
"....With the insertion of the first proviso, the PA is required to vet the application. This vetting process is stipulated by the second proviso. It is important to note that the second proviso also indicates the powers and duties of the prescribed authority. While considering the approval application in the second proviso, the prescribed authority is empowered before giving approval to call for such documents including annual accounts or information from the applicant to check the genuineness of the activities of the applicant institution. Earlier that power was 9 not there with the prescribed authority. Under the third proviso, the prescribed authority has to ascertain while judging the genuineness of the activities of the applicant institution as to whether the applicant applies its income wholly and exclusively to the objects for which it is constituted/established. Under the twelfth proviso, the prescribed authority is required to examine cases where an applicant does not apply its income during the year of receipt and accumulates it but makes payment therefrom to any trust or institution registered u/s 12AA or to any fund or trust or institution or university or other educational institution and to that extent the proviso states that such payment shall not be treated as application of income to the objects for which such trust or fund or educational institution is established. The idea underlying the twelfth proviso is to provide guidance to the prescribed authority as to the meaning of the words "application of income to the objects for which the institution is established". Therefore, the twelfth proviso is the matter of detail. The most relevant proviso for deciding this appeal is the thirteenth proviso. Under that provisio, the circumstances are given under which the prescribed authority is empowered to withdraw the approval earlier granted. Under that proviso, if the prescribed authority is satisfied that the trust, fund, university or other educational institution etc. has not applied its income in accordance with the third proviso or if it finds that such institution, trust, or fund etc. has not invested/deposited its funds in accordance with the third proviso or that the activities of such fund or institution or trust etc. are not genuine or that its activities are not being carried out in accordance with the conditions subject to which approval is granted then the prescribed authority is empowered to withdraw the approval earlier granted after complying with the procedure mentioned therein."
7.2 From the aforesaid view expressed by the Hon'ble Supreme Court, it is evident that at the initial stage when the application for exemption is filed by an educational institution the scope of inquiry is restricted only to ascertain the genuineness of the activities of such an institution. Such an inquiry as per the proviso may even extend to the examination of accounts of the institution, application of its income to the object and purposes of education and other cognate aspects as has been indicated in the observation made 10 by their Lordships'. Once on the basis of genuineness of the activities of an educational institution approval is granted for exemption then the monitoring provisions would come in place and the Assessing Officer has to examine whether the conditions on which the exemption was given, have been fulfilled or not. The aforesaid opinion is also supported by the speech of the Finance Minister as reported in (1998)232 ITR 13 (ST.) 7.3. Hon'ble Supreme Court in para 32 of the judgment rendered in American Hotel and Lodging Association (supra) has further held that there is difference between stipulation of conditions and compliance therein. It has been held that the threshold conditions are aimed at discovering the actual existence of an educational institution and approval of the prescribed authority for which application in the standardized form in terms of the first proviso has to be given by every applicant. If the pre-requisite condition of actual existence of the educational institution is fulfilled then the question of compliance with the requirements contemplated by various provisos would arise. Hon'ble the Supreme Court has approved the contention that the un- numbered third proviso contains monitoring conditions/requirements like application, accumulation, deployment of income in specified assets whose compliance depends on events that have not taken place on the date of the application for initial approval. It follows that firstly the application is filed in the standardized form in accordance with the un-numbered first proviso and then approval is granted. If the educational institution actually exists for education purposes alone then the educational institution is permitted to operate subject to monitoring conditions. A workable solution has been provided by Hon'ble Supreme Court in para 33 by observing as under:
"33. To make the section with the proviso workable we are of the view that the monitoring conditions in the third proviso like application/utilization of income, pattern of investment to be made etc. could be stipulated as conditions by the prescribed authority subject to which approval could be granted. For example, in marginal cases like the present case, where appellant-institute as given exemption up to financial year ending 31.3.1998 (assessment year 1998-99) and where an application is made on 7.4.1999,within seven days of the new dispensation coming into force, the prescribed authority can grant approval subject to such terms and conditions as it deems 11 fit provided they are not in conflict with the provisions of the 1961 Act (including the above mentioned monitoring conditions).While imposing stipulations subject to which approval is granted, the prescribed authority may insist on certain percentage of accounting income to be utilized/applied for imparting education in India...... Therefore, cases where earlier the applicant has obtained exemption(s), as in this case, need not be re-opened on the ground that the third proviso has not been complied with. However, after grant of approval if it is brought to the notice of the prescribed authority that conditions on which approval was given are breached or that circumstances mentioned in the thirteenth proviso exists then the prescribed authority can withdraw the approval earlier given by the following procedure mentioned in that proviso. The view we have taken, namely, that the prescribed authority can stipulate conditions subject to which approval may be granted finds suport from sub-clause (ii) (B) in the thirteenth proviso."
7.4. The question then is whether accumulation of income year after year extending over 4/5 years would deprive an educational institution existing solely for education purpose, its character as an educational institution solely for education purpose and not for profit. In the 5 Judge Constitution Bench judgment rendered in the case of Surat Art Silk Cloth Manufacturers Association (supra), the question of interpretation of clause 15 of section 2 of the Act was involved. The words 'not involving the carrying on any activity for profit' occurring at the end of the definition of 'charitable purpose' in the aforesaid provision were interpreted. After analyzing various judgments and the speech of the Finance Minister, it has been held as under:
"....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 12 manner that it does not result in any profit. It would indeed be difficult for persons 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 only be difficult for practical realisation but would also reflect unsound principle of management. We, therefore, agree with Beg. J. when he said in Sole Trustee, LokSikshana Trust case (1975) 101 ITR 256 (SC) 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."
The learned Judge also added that the restrictive condition "that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit-making is not the real object" (emphasis supplied). We wholly endorse these observations." (emphasis aded . Italics in original).
7.5. The Constitution Bench then proceeded to illustrate the application of the aforesaid test by citing the examples of monthly journal of Gandhi Peace Foundation and the counter example of sale of blood by a Blood Bank on payment of higher price. The aforesaid view has been cited with approval by Hon'ble the Supreme Court in the case of Americal Hotel and Lodging Association (supra), which reads thus:-
"28. In Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Associations reported in (1980) 121 ITR 1, it has been held by this court that test of Predominant object of the activity not to earn profit. However, the purpose would not lose its character merely because some profit arises from the activity. That, it is not possible to carry on educational activity in such a way that the expenditure exactly balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realization but would reflect unsound principles of management. In order to ascertain whether the institute is carried on with the object of making profit or not it is duty of the prescribed authority to ascertain whether the 13 balance of income is applied wholly and exclusively to the objects for which the applicant is established." ( emphasis added.
7.6. It is further appropriate to pointed out that Rule 2BC of the Rules has prescribed the limit of Rs. 1 crore where the requirement of seeking approval for exemption would not be applicable. If the turn over is more than Rs. 1 crore then exemption in terms of Section 10(23C)(vi) is required. The un-numbered third proviso postulates the investment and deposits of surplus funds. An educational institution could make deposits and can also earn interest, which is permissible. There are certain limits imposed on the accumulations which of course have to be met. A Division Bench of Delhi High Court in the case of Director of Income-Tax (Exemption V. Eternal Science of Man's Socity (2007) 290 ITR 535 (Delhi), has held as under:
"I may also be mentioned that for seeking the exemption under Section 10(23C), the assessee will have to follow the guidelines mentioned in Form No. 56D(Rule 2CA). One of the conditions in Form 56-D is that assessee will have to submit the audited accounts and balance sheets for the last three years alongwith a note on the examination of accounts and on the activities as reflected in the accounts and in the annual report with special reference to the appropriation of income towards objects of the university or other educational institution. From the audited accounts, one can easily see whether the funds were utilised for the expansion of educational institution/activity or for personal profits. In the present case, the opposite-parties have not brought any material on record to prove that the surplus earned by the assessee petitioner was utilised for personal profit/gain on any including the Founder-Manager/Director. Whatever fund was acquired, the same was utilised for the expansion of educational activities of institution. Initially there were five students and now the institution is imparting education to more than 34,000 students as pointed out during the course of arguments. Thus, the assessee is fully satisfying all the statutory requirements for getting exemption u/s 10(23C)(vi) of the Income-tax Act. Apart from it, it may be mentioned that the Hon'ble Supreme Court has observed in the case of CI V. Surat Art Silk Cloth Manufacturers Association, 121 ITR SC, p.1 that the institution must be for general public utility and certainly 14 not for profit, then it can be treated as charitable institution. In the instant case, no adverse material was brought on record by the opposite-parties to rejected the application dated 4.2.1999 for seeking said exemption."
7.7 The aforesaid view has been adopted, applied and followed by a Division Bench of Allahabad High Court in the case of City Montessori School (supra) , as has been rightly contended by the learned counsel for the petition(s).Even Special Leave Petition against the aforesaid judgment has been dismissed. Accordingly, the question of law has to be answered in favour of the assessee and against the revenue."
7.8. A perusal of the assessment order reveals that the A.O. has focused on the issue that the activities of the Trust are not wholly charitable. He has also cited certain case laws to support his contention. However, the AO has not specified or quantified the expenditure applied by the Trust for charitable purpose or for non- charitable purpose.
7.9 The earning of profit per se would not disentitle the Trust, for exemption under sections 11 to 13 of the Act, unless the facts of the case warrants that the funds of the Trust has been misappropriated by the Trust. In the context of section 10(23C) of the Act, the Hon'ble Jurisdictional High Court, in the case of Pinegrove International Charitable Trust Vs. Union of India and others (supra), as reproduced above has categorically held that making of profits on regular basis, which has been utilized for the specified purpose, cannot be construed as expenditure not incurred for charitable purpose. The Ld. CIT, to support his findings has quoted the decision of the Hon'ble Supreme Court in the case of Aditanar Educational Institution's, 224 ITR 310 (SC) and also considered the decision of Hon'ble Supreme Court, in the case of CIT Vs. Surat Art Silk Cloth Manufacturers Association, 121 ITR 1 (SC) alongwith other decisions including the decision of jurisdictional High Court in the case of CIT Vs. Manav Mangal Society, in ITA No.450 of 2008 dated 19.08.2009 [reported in 28 DTR (P&H) 129]. The Hon'ble Jurisdictional High Court has also held in the case of Pinegrove International Charitable Trust Vs. Union of India and others (supra), that the capital expenditure incurred by the Trust or Institution such as construction of school 15 building or providing infrastructure is also in the nature of charitable purpose.
7.10.. We have also considered the comments filed by the AO, which are almost repetition of the text and contents of the impugned assessment order. Similarly, we have also considered the written submissions filed by the assessee and the case laws cited therein. The Ld. CIT(A) has quoted and discussed plethora of case laws, relied upon by the contending parties. The relevant part of the order of the Ld. CIT(A) is reproduced hereunder:
"6.5. In the present case, the assessee is registered u/s 12A of the Act by the CIT, as noted earlier. It has also got its accounts audited and submitted a report of the accountant with its income tax return. The AO has not invoked the provisions of section 13 of the Act. Hence, it can be presumed that none of the disabling provisions of section 13 are applicable in the case of appellant. Since the conditions of section 12A are satisfied, there should be no difficulty in applying the provisions of section 11 and 12 to the income of the assessee. The AO contends that because the assessee has been making profits regularly over several preceding years, it is not doing any charitable work. As discussed earlier, charitable work includes education which the assessee is engaged in and which is not denied by the AO. There is nothing in section 2(15) of I.T. Act to suggest that education must be provided at a price which is below the cost of service to entitle the trust or the institution to the exemption u/s 11. "Education" is, by itself, charitable activity as per the I.T. Act. Section 2(15) contained the words "not involving the carrying on of any activity for profit" at the end of the definition of "charitable purposes". These words were omitted by the Finance Act, 1983 w.e.f. 1.4.1984. As per the CBDT Circular No. 372 dated 8.12.1983 these words were omitted consequent to the amendment made in section 11 of the I.T. Act whereunder profits and gains of business in the case of charitable or religious trust and institutions will not be entitled to exemption under that section except in cases where the business fulfills the considering u/s 11(4) of the Act. Section 11(4) of the Act states that for the purpose of this section "property held in trust includes a business undertaken so held,.." As per section 1(4A), sub-section (1) or (2) or (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the 16 business is incidental to the attainment of the objectives of the trust or the institution and separate books of accounts are maintained by such trust or institution in respect of such businesss. In the case of Dharmadipti Vs. CIT 114 ITR 454(SC), the Hon'ble Supreme Court held that the words 'not involving the carrying on of an activity for profit" govern only the last head of charitable purpose, namely, 'any other object of general public utility' and not the other three heads. In the decision in the case of CIT Vs. Surat Art Silk Cloth Manufacturer Association 121 ITR 1 (SC), the Hon'ble Supreme Court overruled their decision in Indian Chamber of Commerce Vs. CIT 101 ITR 796(SC). In the last cited case, the Hon'ble Supreme Court held that section 2(15) excluded from exemption the carrying on of activities for profit even if they were linked with the objects of general public utility. In the case of Surat Art Silk Cloth Manufacturers Associations (supra) it was held that the dominant object had to be examined to see whether it was charitable and the existence of certain objects which may not be charitable in themselves but which were merely ancillary and incidental to the primary purpose would not prevent the trust or institution for a valid charity. Hence, even if a business is being carried out by a registered trust, and the income thereof is applied wholly to charitable purpose like education, the income will be exempt u/s 11.
6.6. In the case of Andhra State Road Transport Corporation Vs. CIT 100 ITR 392 (AP), it was noted that not only the dominant but sole purpose of the assessee corporation was providing transport facilities to public, trade and industry and, therefore, it was for a charitable purpose. It was further held that if the undertaking acts on business principles an element of profit was involved. No doubt, profit may result in the running of the enterprises, but the balance of the income by way of profit was again to be spent for a purpose of public utility i.e. development of roads. Hence, it was held to be entitled to exemption u/s 4(3)(i) of the Indian I.T. Act, 1922 for assessment year 1960-61 and 1961-62. In respect of assessment year 1962-63 also, when the 1961 Act had come into force, it was held that the purpose or object of the institution or concern should be public utility and not profit making and the assessee was held to be entitled to exemption u/s 11 of the I.T. Act. This decision of the Hon'ble High Court was approved by the 17 Hon'ble Supreme Court in the case of Surat Art Silk Cloth Manufacturers Association (supra) and affirmed in the case of CIT Vs. Andhara Pradesh State Road Transport Road Corpn. 159 ITR 1 (SC). In the latter decision the Hon'ble Supreme Court held that the assessee could not be expected or required to be run at a loss. The provision under the RTC Act that the assessee shall act on business principles could not, therefore, deprive the assessee from exemption u/s 11.. Since the object of the corporation under the RTC Act was admittedly of general public utility within the meaning of section 2(15) and if the dominant object was to carry out charitable purpose and not to earn profit, the purpose would not loose charitable character merely because some profit arose from the activity. The assessee was held to be entitled to exemption u/s 11 of the Act. In the case of ACIT Vs. Thanthi Trust etc. 247 ITR 785 (SC), it was held that after 1.4.1992, in view of the amended provisions of section 11(4A), a business whose income was utilized by the trust or the institution for the purposes of achieving the objects of the trust or the institution was a business which was incidental to the achievement of the objects of the trust and entitled to exemption u/s 11 for assessment year 1992-93 and thereafter.
6.7. From the discussion above, it can be inferred that having profits per se does not disentitled an eligible trust or an institution from the exemption u/s 11 of the Act , if the sole or the dominant purpose of the trust or institution is charitable in nature. The question whether a trust is charitable or not has to be examined with reference of its object and activities as to whether they fall within the purview of section 2(15) of the Act. A determination in this regard has to be made by the Commissioner u/s 12A and, after 1.4.1997, u/s 12AA. Once the Commissioner had made the determination that the trust was a charitable one, the AO is not entitled to re-examine the question as to whether the trust is charitable or not, as held by the Hon'ble Supreme Court in the case of Surat City Gymkhana 300 ITR 214 (SC).During assessment the AO can only determine whether the income has been applied for charitable purpose. In the present case, the AO has denied the exemption on the ground that the assessee could not establish that it is wholly for charitable purpose and that it is applying its income 18 for the charitable purpose. The reasons for holding such a view by the AO are predominantely that the assessee is earning surplus year after year even though the assessee has submitted that it had applied 85% of its income every year for charitable purposes. In my opinion, in light of the decision of the Hon'ble Supreme Court in the case of Surat City Gymkhana (supra), the AO was not empowered to take the view that the trust was not wholly for charitable purposes, since the CIT had granted registration u/s 12AA of the I.T. Act to the assessee. Section 12AA(3) grants power to the Commissioner to cancel the registration of the trust or institution if he is satisfied that the activities of the trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution. Hence, once the Commissioner has granted registration or u/s 12AA, it has to be taken that the objects of the institution and the genuineness of the activities of the trust are such that the institution is eligible for deduction of its income u/s 11. If the activities of the institution are not genuine or not in accordance with the objects, the Commissioner may cancel the registration granted earlier. The power of such cancellation is vested only with the Commissioner and not with the AO. The AO cannot determine that the objects of the instruction are not charitable. If the AO believes so, hem ay bring this belief, alongwith reason thereof to the knowledge of the Commissioner for determination as to whether the registration granted to the trust or institution should be withdrawn. However, till such time that the registration u/s 12A or 12AA is not cancelled, it has to be presumed that the trust or institution is charitable. Once that is so, the AO during assessment, cannot hold that the trust or institution is not 'eligible' for deduction u/s 11.The AO can, of course, examine if the income from property held under trust has been applied for the stated charitable or religious purposes, and if there is an excess over 15% of the income not so applied, then whether the other conditions for allowing deduction of the unspent amount have been fulfilled. For this proposition, I draw support from the decision in the case of Madhya Pradesh Madhyan Vs. CIT 256 ITR 277 (MP), in which it has been held that once registration has been granted u/s 12A, I.T. Authorities were bound by the same. The Hon'ble Supreme Court have also held in the case of ACIT Vs. Surat City Gymkhana (supra) that 19 registration u/s 12A was a fait accompli to hold the AO back from further probe into the objects of the Trust. Considering the facts of the case and the decisions discussion above, I hold that the AO is precluded from examining the eligibility of the trust or institution for exemption u/s 11, though he may examine if the income has been applied for charitable purposes. Other than referring to the profits of the assessee trust, the AO has not given any finding that the expenditure incurred by the assessee was on anything other than on education. 6.8. The AO has relied on the decision reported in (1992) 3 (SCC) 390 in the case of MCD Vs. Children's Book Trust. In this decision the Hon'ble Apex Court held that if a society was making systematic profits, it could not claim exemption. This decision has been rendered in the context of another Statute. In my opinion, this decision may be applicable to the provisions of sections 10(22) or 10(23C) of the Act, where making of profit is prohibited. However, in the context of section 11 of the Act, the Hon'ble Apex Court have held that a trust or institution may run on commercial lines and make profits [see discussion on the issue in the case of CIT Vs. Andhra Pradesh State Road Trpt. Road Corpn. 159 ITR 1 (SC) above ].The interpretation of charitable purposes u/s 2(15) has been done by several courts including by the Hon'ble Supreme Court. As has been discussed earlier, merely making of profits or of surplus will not disentitled an eligible trust from exemption u/s 11 of the Act as long as the objects of the trust are charitable, its activities are genuine and the income is applied towards the charitable purposes authorized to be undertaken by the trust or the institution; conversely, if the income is diverted to persons mentioned in section 13 of the Act or is spent for purposes which are not charitable, exemption may be denied to the assessee trust or institution. No such converse finding has been given by the AO in this case. The appellant has stated that since the assessee was charging fees and having profits it was not engaged in charitable activities. This view is untenable in light of discussion above where it has been seen that a charitable organization may run on commercial principles. 6.9. In a recent decision in the case of CIT Vs. Manav Mangal Society, the Hon'ble Jurisdictional High Court in IT Appeal No.450 of 2008 dated 19.08.2009 (reported in 28 DTR (P&H) 129) have upheld the grant of exemption u/s 11 of the 20 Act to the society. Two questions of law were raised before the Hon'ble High Court. The first question was whether in the facts and circumstances of the case the ld. Tribunal erred in law in allowing the exemption to the assessee u/s 11(1)(a) instead of exemption of 11(4A) because as per aims and objects and therefore, the establishment of school was incidental to promoting the aims and objects of the charitable societies/institutions. The second question was whether the ld. Tribunal erred in allowing the application of money on construction of building when no verification was done by AO nor was it put to the AO during the assessment proceedings. Besides, the construction of the building had been taken directly into the balance sheet and not into the income and expenditure account by the assessee and it was held by the Hon'ble Uttarakhand High Court in CIT Vs. Queens' Educational Society 223 CTR (Uttarakhand) 395 that investment in fixed assets like furniture and building were the properties of the society and may be connected with imparting of education but the same had been constructed and purchased out of income from imparting the education with a view to expand the institution and to earn more income and also referring to the decision of Hon'ble Supreme Court reported in (1992) 3 SCC 390 agreeing with the findings of the High Court.
6.9.1 The Hon'ble Jurisdictional High Court noted that the AO had rejected the claim on the ground that the assessee had not applied 85% of the profits for the purposes of the society. The CIT(A) reversed this view taking into account the fact that the assessee had spent an amount equal to more than 85% after considering the application of income for charitable purposes. It was held by the CIT(A) that the amounts spent on construction of school building at Panchkula was capital expenditure but for the purpose of section 11 it was an outgoing which was application of the income of the assessee for charitable purposes. He also held that the assessee would be entitled to claim depreciation on the school building. The assessee was carrying on no activity other than running a school and imparting education to the students: as such the assessee had applied his income when it constructed school building which amounted to applying income for charitable purposes only. The Hon'ble Tribunal confirmed the view of CIT(A) and held that 21 the amount incurred for construction of the building did not violate the aims and objects of the assessee-society and the Revenue had not claimed that the expenditure was incurred for the personal benefit of the persons who were managing the society. The Hon'ble Tribunal held that the income of the society would be covered u/s 11(4A) but sub-section (1), (2), (3) or (3A) would not apply to any income of trust or institution, being profits and gains of business, unless the business was incidental to the attainment of the objectives of the trust and separate accounts were maintained in respect of such business.
6.9.2. The Hon'ble High Court held that once exclusion contemplated u/s 11(4A) was not applicable, the exemption had to be allowed as sub-sections 11(1), 11(2) and 11(3) became applicable even in respect of profits and gains. They held that the observation of the Tribunal that if a case falls under 11(4A), sub-sections (1), (2), (3) and (3A) were not applicable was incorrect and contradictory. They held that the exclusionary clause applied if business income was not incidental to the main objects or other conditions stated therein were not fulfilled. As regards the contention of Revenue that factually conditions laid down in section 11(2) did not exist as 85% of the income had not been applied in the manner contemplated, the Hon'ble High Court held that the same had not force. It was held that if 85% of income had not been applied in the manner laid down, it was not enough to disallow exemption unless there was a further condition of accumulation beyond contemplated period or not maintaining the accounts or not intimating the AO as laid down. It was further held that this matter did not need further examination since it had been held that even if 85% of the income was in fact applied for the purpose of the society. They held that there was no error in the conclusion holding the assessee eligible for exemption but stated that the observation of the Tribunal that sub-section (1), (2), (3) and (3A) of section 11 did not apply to income falling u/s 11(4A) was erroneous. The appeal of the Revenue was dismissed.
6.10. This aforesaid decision of Hon'ble Jurisdictional High Court shows that the mere fact that the assessee was earning income and 85% of the income had not been applied for 22 charitable purpose was not sufficient to disallow exemption u/s 11 to the assessee unless the other conditions required were also not met. Further, application of income for construction of school building for imparting education is application of income for charitable purpose. This decision reinforces the view that capital expenditure meant for charitable purposes is to be considered as application of income u/s 11(1)(a) and that merely because the assessee earns profits will not disentitle the assessee from the exemption allowable u/s 11. The details submitted during assessment proceedings show that after considering the capital expenditure on construction of building of school and hospital, the assessee has applied more tan 85% of its income for charitable purposes. Hence, the assessee is entitled to exemption u/s 11 of the I.T. Act in respect of its income.
6.11. In light of the discussion above, it is held that the assessee society was holding property and deriving income from such property only for the purpose of education and was wholly charitable. Further, since the AO has not shown that the assessee was not applying its income towards education, it is held that the revenue and capital expenditure of the assessee was applied towards charitable purposes and exemption u/s 11(1)(a) of the Act was available to it."
7.11 In view of the above legal and factual discussions and having regard to the detailed and well reasoned order passed by the Ld. CIT(A), which is reproduced above, we are of the considered opinion that the various grounds raised by the Revenue in ground No.1.1 are liable to be dismissed. Consequently, the findings of the CIT(A) are upheld and the grounds raised by the Revenue in ground No.1.1 are dismissed."
6. As the issue involved in the present appeal is identical to the issue considered and adjudicated by the Tribunal, in the in case of DCIT, Range-1, Jalandhar Vs. M/s. Saffron Educational Trust, Jalandhar, for the assessment year 2006-07, whereby vide our dated 30th April, 2010, we have dismissed the appeal of the Revenue, therefore, respectfully following said order, the present appeal of the Revenue is dismissed."
235.1. Thus, respectfully following the aforesaid order in assessee's own case, dated 31st May, 2010, passed in ITA No.534(Asr)/2009 for the assessment year 2006-07, we dismiss this appeal of the revenue.
6. In the result, the appeal filed by the Revenue stands dismissed.
Decision pronounced in the open court on 20th June, 2011.
Sd/- Sd/-
(H.L. KARWA) (MEHAR SINGH)
VICE PRESIDENT ACCOUNTANT MEMBER
Dated: 20th June, 2011
/SKR/
Copy of the order is forwarded to :
1. The Assessee:M/s. Jyoti Province Sacred Heart Congregation, Jalandhar.
2. The DCIT, R-1, Jalandhar.
3. The CIT(A),Jalandhar.
4. The CIT,Jalandhar
5. The SR DRAsr.
True copy By Order (Assistant Registrar) Income Tax Appellate Tribunal Amritsar Bench : Amritsar.