SANDIPANI EDUCATION AND CHARITABLE TRUST,JAMNAGAR vs. ITO WARD 1(5), JAMNAGAR

Since, both the appeals relate to the same assessee and identical and common facts are involved, therefore, both these appeals have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.

Grounds of appeal raised by the assessee for assessment year (A.Y.) 2013- 14 are as follows: “1. The learned Assessing Officer CPC as well as the Learned Jurisdictional Assessing Officer Ward 1(5), Jamnagar, as well as the Honourable CIT(A), Ranchi have erred in law as well as on facts by assessing Total Income by Rs. 16,30,682/-, being the Gross Total Income earned from Educational activities of the Trust without allowing deduction of Rs. 16,28,889/- being related expenditure incurred to earn such Income while assessing Income of the Appellant as per Normal Provision of the Income Tax Act, 1961. The Assessed Taxable Income of the Appellant may please be reduced from Gross Income of Rs. 16,30,682/- to only Rs. 1,793/-, after deduction of legitimate expenditure being Rs. 16,28,889/-, incurred to earn such Income and Erroneous Tax demand of Rs. 5,18,500/- may please be cancelled. 2. The learned Assessing Officer, CPC, as well as the Learned Jurisdictional Assessing Officer - Ward-1(5), Jamnagar, As well as the Honourable CIT(A), Ranchi have erred in law as well as on facts by Not allowing deduction of actual expenditure incurred to earn taxable Income as per Normal Provision of the Income Tax Act, only on the ground that the Appellant had filed Erroneous Form No. ITR 7 instead of Form No. ITR 5 which was claimed inadvertently U/s. 11(1) as application of Income in ITR 7. As per the Income Tax Act, 1961, Net Income after deduction of Legitimate expenditure to earn such Income is to be taxed even if the assessee has filed its Return of Income in Erroneous ITR Form. 3. The learned Assessing Officer, CPC, as well as the Learned Jurisdictional Assessing Officer Ward 1(5), Jamnagar, as well as the Honourable CIT(A), Ranchi ought to have allowed exemption of entire income of the trust U/s 10(23C)(iiiad) of the Income Tax Act, 1961 which was though the appellant is eligible but inadvertently not claimed and not filled required details in related clauses of ITR 7. 4. As the Appellant Trust is not registered under Section 12A of the Income Tax Act, 1961, it loses benefits available U/s 11 and 12 of the I. T. Act, 1961 and its taxable income is chargeable at Normal Provision of the I. T. Act, 1961, However, the Trust is not losing its character as Charitable trust, therefore the taxable income of the appellant trust is chargeable as per tax rate and basic exemption limit applicable to Individual as AOP (Trust). 4. At the outset, Ld. Counsel for the assessee submitted that the registration of the trust u/s.12A of the Act is not effective and the assessee has not claimed deduction u/s.11 of the Act and will never claim the deduction u/s.11 of the Act. However, the assessee is running a School and in such School there are income by way of fees and there are expenses by way of payment of salary to the teachers and staffs and peons. After considering income of the assessee and deducting the expenses of the assessee, the assessee derived the net profit, which is earned from running of the School, therefore, such net profit may be treated as ‘business income’ of the assessee. Therefore, the assessee’s net income should be assessed under the head ‘income from business and profession’ and not under the head ‘income from other sources’.

The Ld. Counsel further stated that assessee under consideration should be treated, as if the assessee is doing normal business of running a school and earning income by way of fees and making several expenses on account of teachers’ salary, staff salary, and other expenses for running school on commercial basis, and net profit should be taxable after deducting expenses from the income.

On the other hand, Ld. DR for the Revenue submitted that since the assessee under consideration is engaged in educational activities and provides the education to the children and running school on the basis of commercial principles and not on the basis of charitable trust, therefore, assessee’s income should be examined and the assessee’s expenditure should also be examined by the assessing officer and, thereafter, the net profit should be taxable in the hands of the assessee, as determined by the assessing officer. Hence, the matter may be restored back to the file of the assessing officer for examination of the income and expenditure of the assessee.

I have heard, both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of 3 the ld CIT(A) and other materials brought on record.I note that the assessee is engaged in imparting the education and on that account the assessee is running school and received fees from students and assessee incurred expenses on the staffs and on salary of teachers and other expenses. The assessee had offered the net profit for taxation purpose on commercial basis, and the assessee under consideration is not doing any charity, hence, net profit of the assessee should be taxable under the head income from business and profession. However, I also note that merely because an educational institution collects fees from students, pays salaries to teachers/staff, maintains accounts on commercial principles, and earns surplus, it cannot automatically be assessed as business income. If the institution exists solely for educational purposes and not for profit, exemption under sections 10(23C) may still be available under the Income-tax Act, 1961. However, where the dominant object is profit-making or private enrichment, the income may be taxable under the head ‘Profits and Gains of Business or Profession’.

I have noted that in the assessee’s case under consideration, the dominant object is profit-making or private enrichment, hence the income may be taxable under the head ‘Profits and Gains of Business or Profession’. I have also noted that since, the assessee is not claiming exemption u/s.11 of the Act, as the registration of the assessee under section 12A of the Act is not effective, and running the school on commercial basis, to earn profit, therefore, I direct the assessing officer to examine the income of the assessee and expenditure of the assessee and then compute net profit of the assessee under the head ‘income from business and profession’. I also direct the assessee, to provide the Profit and Loss account and Balance Sheet to the assessing officer, along with documentary evidences. It is needless to say that the assessee will be at liberty to adduce any evidences as deemed relevant before the assessing officer at the time of assessment, proceedings in consequence to this order and the Assessing Officer 4 shall, allow the assessee adequate opportunity of being, heard and to make relevant submissions, and then pass a speaking order which is fair and judicious.

In the result, both the appeals of the assessee are allowed for statistical purposes, in above terms.