SETH RAMJIDAS MODI VIDHYA NIKETAN SOCIETY,KOTA vs. CIT(EXEMPTIO), JAIPUR

1. The impugned order dated 27/01/2020 passed under to 15th proviso to S. 10(23C)(vi) of the Act, is bad in law and on facts of the case, being beyond the scope of the said provision and for various other reasons and hence, the impugned order kindly be quashed.

The ld. CIT(Exemptions), Jaipur erred in law as well as on the facts of the case in recording the findings adverse to the appellant assesse society which are contrary to the facts and material already on record and therefore, such finding kindly be negated/quashed.

The Assessee Society filed detailed reply is dated 26.12.2019 stating that society exists solely for educational purpose and not for the purposes of profit. There apart, the Assessee Society applied more than 85% of its income for the objects of the trust in accordance with the law and also similarly invested or deposited its own fund in accordance with the prescribed manner and up to the prescribed limit. The Assessee Society further submitted that the Assessee Society borrowed funds of Rs.4,83,53,000/- from various lenders and repaid Rs. 1,05,49,736/- thus, the net unsecured loan was Rs. 3,78,03,264/- during the year, out of which the Assessee Society only advanced Rs. 2,39,82,043/- to RNMCS. Therefore, it is only financial help for time being to RNMCS because of its weak financial position and thus, there was a reasonable cause and the peculiar circumstances behind these financial transactions. Hence, entering in to financial transactions by the Assessee Society cannot by itself be made a valid ground for rescinding of the notification. However, the ld. CIT(Exemptions) did not agree with the assessee’s contention and 5 ITA 197/JP/2020_ Seth Ramjidas Modi Vidhya Niketan Society Vs CIT(E) observe that the Assessee Society was demerged from RNMCS on 02.10.14 in order to comply with the provisions of S.10(23C)(vi), which require the Assessee Society to apply its income solely towards educational objects and not towards any other objects.

That the Assessee Society has continued to divert its funds towards non-educational activities by way of huge advances to RNMCS.

That the amount of advance to RNMCS reached a figure of Rs. 6,48,83,543/- as on 06.08.18, which is just before the issue of scrutiny notice u/s 143(2) dated 09.08.18, which seems to have prompted the Appellant Society to gradually reduce such advances made for non-educational purposes and were finally squared up by 15.05.19. 3. That the Appellant Society diverted the trust funds for non- educational purposes violating the 3rd proviso since the funds of the trust have not been wholly and exclusively applied towards the objects of the trust and have also not been invested or deposited in the modes specified in Section 11(5). 4. That no interest has been charged by the Appellant Society on the advances to RNMCS, except a small amount of interest of Rs. 38,98,180/- charged in financial year 2017-18.

Against this order of the ld. CIT(Exemptions), the assessee is in further appeal before the ITAT.

We have considered the rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by the ld. CIT(Exemptions) in his

We had also carefully gone through the audited annual statement of the account of the assessee and found that the major receipts are only from the fees from students and the expenditures are also aimed and meant for Education. There is absolutely no other source of income except the school fees / i.r.t imparting of education. Please refer a chart Pg. 8 of this written submission. After demerger the object was duly annexed excluding the part relating to hospital vide resolution dated 01.04.2016. The law requires an educational institution to exist solely for educational purposes and not for profit but that does not mean that 8 ITA 197/JP/2020_ Seth Ramjidas Modi Vidhya Niketan Society Vs CIT(E) ancillary activities, which helps the institution attaining the main object, should also not be carried out. With a view to disentitle an Institution from the exemption u/s 10 (23 C) (vi), the revenue has to establish that firstly, the institution was not existing for solely for education and Secondly & cumulatively, the revenue must also establish that such institution was found engaged/ was existing for the purposes of profit. Unless these twin conditions are fulfilled and established, the revenue cannot deny/ withdraw exemption (where already granted). In the present case, however, the ld. CIT (E) has alleged that the Society did not exist solely for educational purposes but at the same time utterly failed to establish that the Assessee Society existed for the purposes of Profit (but not for education purposes). He even did not whisper on this aspect what to talk of establishing the fulfillment of this basic condition. The repeated allegation that the society borrowed interest bearing funds and diverted to other charitable society RNMCS, is grossly insufficient to establish that the Assessee Society existed for profit only and not for education. Further, it was not the case of the CIT (E) that the Assessee Society was engaged in some money lending activity or that the funding to RNMCS/other party was with a profit motive or that it was a separate venture of the Assessee Society. It was ignored that only because of some peculiar circumstances which compelled the assesse to support the 9 ITA 197/JP/2020_ Seth Ramjidas Modi Vidhya Niketan Society Vs CIT(E) other charitable society (which was earlier a part of the Assessee Society only before the demerger) involved in charitable activities. To repeat, the Assessee Society continued imparting education exclusively and continued existing solely for education and not for any purpose other than this. No case is made out that similar financial transactions were entered with other third parties also with a profit motive, thus CIT(E) failed to establish that the Assessee Society existed for profit motive. There is otherwise no evidence to suggest anything contrary to this contention. Surprisingly, the ld. CIT (E) is completely silent on this factual contention made before him. There is no dispute on the fact that whatever surplus was earned was ploughed back for education purposes only and therefore the assessee has to be held existing solely for educational purposes not for profit as repeatedly held in various cases.

The ld. CIT(Exemptions) in his order, further alleged that the Assessee Society has not applied its income and has not invested its fund in accordance with the provisions sub-clause (a) and (b) of 3rd proviso of section 10(23C)(vi) r/w S. 11 (5) hence, it attracts 15th Proviso of S. 10(23C)(vi) of the I.T. Act, 1961. In this regard, we observe that 3rd proviso, clauses (a) and (b) along with 13th proviso to S. 10(23C)(vi) which confers a power of rescinding on the competent authority, very

Furthermore, the statute has very specifically denoted/identified which particular amount is required to be applied/ invested. It is not that any or every amount (or fund or loan or anything else) of any other trust, fund or institution or of a third party viz. a debtor, which is also required to be applied / invested. The contention of the ld. CIT that the borrowed funds are own funds having been deposited in the same bank account has lost its color and therefore it is difficult to establish one to one co- relation between the own funds & outgoing and borrowed funds & outgoing, is something beyond understanding. Hence, otherwise there is no violation as alleged. Also it clearly shows that neither income nor funds

We had also carefully gone through the bank statements of different Accounts were submitted before the ld. CIT (E) to support the assessee’s contention that normally unsecured loans were taken (mainly group/family members) and were onward transferred to RNMCS as and when they needed. Assesse’s own fund were not utilized nor it is so alleged by the ld. CIT (E). On the contrary he himself admitted the fact the assesse’s own fund were separate and there were borrowed funds however in his view, both the funds taken together found a kitty and therefore should be treated as Assessee Society’s own fund. We do not find any merit in the observation of the ld. CIT(Exemptions)that the Assessee Society’s own fund and borrowed fund both were deposited in the same bank account and were shown in the balance sheet and hence they should be treated as the Assessee Society’s own fund for the purposes of applying 3rd proviso and 13th proviso of S. 10(23C)(vi) of the Act. In this regard we observe that the borrowing shall always remained borrowing and can never become the property of the borrower (here the Assessee Society). Had it been so, why should the Assessee Society have shown in the audited annual statement of accounts as the borrowed

As per our considered view, the legislature intended that they meant own Income and own fund only & of the Institution only and it is manifest from 3rd Proviso (b) & newly inserted Explanation thereto by Finance Act, 2020 w.e.f. 01.04.2020 to the effect that donation received towards the corpus, is not required to be invested in the specified securities, making it clear even though it is Institution’s own fund yet such requirement was not pressed. Therefore, in absence of the specific requirement of law of applying/ investing third party’s funds, institution’s failure on that part cannot authorize the ld. CIT to withdraw the exemption.

We place reliance on the decision of the Hon’ble Supreme Court in the case of Aditanar Educational Institution vs. Addl. CIT (1997) 224 ITR 310 (SC), wherein it was held that overall view is to be taken and without being hyper technical in granting exemption under s. 10(22) of the Act, which include the objects of the society.

The Hon’ble Supreme Court in the case of Queen’s Educational Society vs. CIT (2015) 372 ITR 699 (SC), held that Exemption under ss. 10(23C)(iiiad) and 10(23C)(vi)—Educational institution—Profit motive— Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it has ceased to exist solely for educational purposes and has become an institution for the purpose of making profit—In such case, the predominant object test must be applied—A distinction must be drawn between making of a surplus and the object of 14 ITA 197/JP/2020_ Seth Ramjidas Modi Vidhya Niketan Society Vs CIT(E) carrying on the institution "for profit"—Merely because imparting of education results in making a profit, no inference arises that it has become an activity for profit—Ultimate test is whether on an overall view of the matter in the relevant assessment year the object is to make profit as opposed to educating persons—When a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit—13th proviso to s. 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down.

The Hon’ble Delhi High Court in the case of DIT (E) v/s All India Personality Enhancement & Cultural Centre for Scholars Society (2015) 379 ITR 464 (Delhi), it was opined that “An educational institution existing solely for educational purposes would not cease to be so only for the reason that some of its activities have yielded surpluses; fact that certain advances have been made to chairman and some of his family members who were involved in running the school cannot be construed as diluting the predominant object of the Assessee Society had realigned all its investment in the manner as specified under provisos to s. 10(23C) r/w s. 11(5) prior to 31st march,2001 and had complied with 15 ITA 197/JP/2020_ Seth Ramjidas Modi Vidhya Niketan Society Vs CIT(E) the provisos of s. 10(23c); thus, the assessee would qualify for exemption under s. 10(22)/10(23C).”

In DCIT vs. COSMOPOLITAN EDUCATION SOCIETY 244 ITR 0494 (Raj.), affirming the finding of the ld. ITAT, it was held that there is allegation of misutilisation of the funds of the Society or mismanagement or the activities of the Society, the action could be taken against the members of the society as per the provision of various Institutes governing the Society. However, even such misutilisation and mismanagement by the members could not be the basis of rejection of the claim of exemption to the assessee education Society. Further the SLP against the judgement stood dismissed vide 241 ITR 132 (St). This was again relied upon on the case Mahima Sikhsha Samiti in DBIT No. 262/2017 vide order dated 23.09.2017 by the Hon’ble Rajasthan High Court.

This case also directly applies because the nature of allegation in both the matters are more or less the same. Hence, merely because of some financial transactions in peculiar circumstances could not be the basis of denying exemption.

After perusing entire documents placed on record, we observe that the Assessee Society has applied its own income in accordance with the 16 ITA 197/JP/2020_ Seth Ramjidas Modi Vidhya Niketan Society Vs CIT(E) law and also similarly invested or deposited its own fund in accordance with the prescribed manner and up to the prescribed limit. These contentions are supported and evident from the Audit Report and R & E Account that the assessee was in receipt of income of Rs. 14,53,01,969/- out of which, after defraying/ incurring expenditure of Rs. 13,22,57,344/- (the ld. Auditor however considered the expenditure after reducing interest also at Rs. 13,79,29,334/-, on the attainment of the objects of the Society, there remained surplus which is less than 15% of income. Thus, the application of the income was more than 85%. A.Y 2017-18 AMOUNT % OF INCOME APPLIED RECEIPTS Rs. 14,53,01,969/- EXPENDITURE Rs. 13,22,57,344/- 91% Similarly, a perusal of the Audit Report will make it clear that the investments (i.e. capital expenditure of Rs.1.78 Cr.) made by the Assessee-Society were out of its own funds/ surplus of the year but not out of the borrowed fund.

We further observe that there was a reasonable cause and there were peculiar circumstances behind the ssessee entering into such financial transactions with RNMCS. It is necessary to understand the background. The Assessee Society was granted approval on 13.10.2008 u/s 10 (23C). The other entity RNMCS Society was merged with the 17 ITA 197/JP/2020_ Seth Ramjidas Modi Vidhya Niketan Society Vs CIT(E) Assessee Society on 04.06.2008 and thereafter, was demerged from the Assessee Society on 02.10.2014 on the insistence of the department (due to adverse view taken that a hospital cannot be run by an educational society). Copies of Certificates of merger and demerger were submitted on 31.10.2019. Thus, both the Societies remained merged for a long period of 6 years and has been popularly known as R. N. Modi Vidya Niketan (i.e. assessee).

Moreover, after demerger, the financial position of RNMCS was weak and the fact that after demerger RNMCS has become a separate entity (detached from assessee Modi Vidya Niketan) was not so became known to the outer world/ third parties were still continued carrying the same impression that the Assessee Society who as also the RNMCS, were the part & parcel of one and the same organization (i.e Ram Niwas Modi Vidya Niketan). Therefore, they were used to give cheque in the name of the assessee, even though such payment pertained to/ was intended to be in the name of the RNMCS. There apart, there were various transactions like the payment of ECF & PF which though pertained to RNMCS but had to be made by the assessee because RNMCS was not having online banking facility; and payment of Rs. 1.95 Lacs was made to Sushil Kumar Modi HUF by the assessee but was on behalf of RNMCS and 18 ITA 197/JP/2020_ Seth Ramjidas Modi Vidhya Niketan Society Vs CIT(E) so on and there are many more examples (some of them were given in the show cause notice itself).

We also observe that immediately on demerger, all the transactions between the original institution and the demerged institution, as also transactions with the third parties, cannot come to a standstill and the parties continued transacting in the same fashion, more particularly, when there was not a much time gap between the demerger (02.10.2014, FY 2015-16) and the time when the subjected transaction were carried out (i.e. in the FY 2015-16, 2016-17 only), that means within the same FY or after a gap of one/ two years only. There is nothing wrong if Assessee Society provided funds to some other institution (RNMCS) (more particularly a group concern) as a financial help for time being.

Now coming to the allegation of the ld. CIT(Exemptions) regarding non-charging of interest on the advances given. In this regard, we observe that such allegation is not relevant in the context of S. 10 (23C) (vi) in as much as there appears no such specific clause/ provision in 15th Proviso or anywhere in S. 10 (23C)(vi) empowering the CIT, or as may be the case u/s 12AA (3) r/w S. 13 (1)(c). Such a basis being otherwise contrary to the pre-dominant test theory propounded by the Supreme Court, is completely irrelevant and has to be ignored. No such 19 ITA 197/JP/2020_ Seth Ramjidas Modi Vidhya Niketan Society Vs CIT(E) provision can be read if it is missing as per the doctrine of Casus Omissus. Secondly, there was no condition of charging interest on such loan between the parties and it was only as a financial help necessitated as a result of demerger. Thirdly, it is wrong to say the Society had claimed the interest of Rs. 56,71,990/- Lacs in as much as the society had already applied its income at 91.02% that is more than 85% as required by law. Therefore, the fact of interest bearing loan taken, the alleged diversion thereof and the allegation of non-charging of interest, are completely irrelevant.

With regard to allegation of ld. CIT(Exemptions) that the Assessee Society started reducing the advances (as per CIT (E) reached to Rs. 6.49 Cr. as on 06.08.2018) just before the issuance of notice u/s 143(2) dt 09.08.2018 prompted the Assessee Society to gradually reduce such advances, is nothing but a mere suspicion. Firstly, how a person could foresee that some notice would be issued in future so as to plan its affair and save itself. Secondly, the RNMCS itself started paying back the amounts so taken in a normal course from date 19.7.2018 in A.Y 2019-20 and admittedly by 15.05.2019 (A.Y 2020-21), the entire amount taken from the Assessee Society stood paid back and account of RNMCS in Assessee Society’s books stood squared up. Even otherwise alternatively, if the Assessee Society started taking back the loans after 09.08.2018 /

In the context of various allegations levelled by the ld. CIT(Exemptions), we observe that there is no gain to the revenue for the simple reason that even assuming had the assessee charged interest of Rs. 56.72 Lacs (approx.) from RNMSCS, revenue was not going to get any tax there upon because the assessee had admittedly fulfilled the condition of applying its income more than 85% on one hand. Similarly, on the 21 ITA 197/JP/2020_ Seth Ramjidas Modi Vidhya Niketan Society Vs CIT(E) other hand, RNMSCS also being a charitable society running a hospital enjoying exemption under S. 12A, (paying of interest or not paying) to the assessee was not going to make any difference because, either way entire income of RNMSCS was also exempt. Further, the group members having charged interest had already declared in their ROI and paid taxes thereon and thus, the group as a whole rather paid taxes. Notably, assessee is registered u/s 12AA & hence not been withdrawn so far.

It was contention of the ld. CIT-DR that the ld. AR has relied upon the case of DIT (Exemption)v. All India Personality Enhancement & Cultural Centre For Scholars Aipeccs Society 120151 62 taxmann.com 92 (Delhi) which is relating to grant of approval u/s 10(23C) of the Act and not rescinding the approval already granted by the competent authority. Further, in the said case all the investments made earlier in contravention of section 11(5) were aligned with provisions of section 11(5) of the Act by 30th March, 2000 and exemption u/s 10(23C) of the Act was allowed by the Hon'ble High Court. It would be appropriate to reproduce the relevant extracts as under:

In view of the above, the exemption available under Section 10(22) and 10(23C) could not be denied to the Assessee on the ground that it had invested its funds contrary to Section 11(5) of the Act, as the said condition was introduced by the fifth proviso to Section 10(23C) only w.e.f. 1st April, 1999. More importantly, the Assessees who had made their investments which did not conform to Section 11(5) of the Act, were by virtue of the proviso to Section 10(23C) afforded time till 30th March, 2001 - a period of three years - to transfer their investments to permissible securities as specified under Section 11(5) of the Act." Thus, it could be seen from the above that these findings are in favour of revenue only. The ld. AR has relied on the case of CIT Surya Educational & Charitable Trust[2011] 1S taxmann.com 123 (Punjab & Haryana). and CIT vs Red Rose School 120071 163 TAXMAN 19 (ALL.). It may be mentioned that these cases are relating to grant of registration u/s 12AA of the Act and thus, are distinguishable on facts.

With regard to above contention of the ld. CIT-DR, we observe that in the case of All India Personality Enhancement & Cultural Centre [2015] 62 taxmann.com 92, the assessee has simply relied upon

The ld. CIT-DR has also contended that the trust deed was not amended as it contains clause relating to hospital or if amended there is no evidence of filling thereof to the Registrar Societies and/or his approval and so on. He relied upon Desales Education Society vs. PCIT (E) [2018] 94 taxmann.com 206 (Vizag- Trib.) We found that even the ld CIT (E) himself did not rescind the notification on this ground. He raised a query and the assessee submitted a copy of a resolution letter dt. 01- 04.2016 pr. 2 amending the object removing the clause i.r.t. hospital and he felt satisfied therefore he has not raised this issue in final order. The Assessee society has also informed the Registrar vide letter dated 28.04.2016 bearing the acknowledgement by the registrar office. Hence allegation is factually wrong. No approval for amendment is required and if so the ld. CIT-DR merely alleged but did not show the relevant provision.

From the record, we found that demerger took place in 2014 on the insistence of Department but even after a lapse of more than six

We also observe that the ld. CIT-DR reliance on the case of Desales Education Society vs. PCIT (E) (Supra) and B.S. Abdur Rahman Institute of Science & Technology V. CCIT (Supra) are not relevant in the above admitted factual context and moreover they are also related to registration matter and not related to withdrawal / rescinding under 15th proviso to 10(23C)(vi). Hence not applicable.

We also observe that the ld. CIT-DR himself agreed that the RNMCS could have taken loan directly from the members as contained by the assessee also that there was no motive and it was only the after effects of the demerger.

In view of the above discussion, facts and circumstances of the case and the legal position, the order passed by the ld. CIT(exemptions) U/s 10(23C)(vi) of the Act is not sustainable.