THE SARDAR PARTAPSINGH EDUCATION SOCIETY,MUMBAI vs. THE CIT (EXEMPTIONS), MUMBAI

आदेश / O R D E R PER MAHAVIR SINGH (V.P): This appeal of the assessee in A.Y.2019-20 is directed against the order of rejection of application u/s.10(23C)(vi) of the Act passed by the ld. Commissioner of Income Tax (Exemptions) hereinafter referred to as ld. CIT(E) vide his proceedings in ITBA/EXM/S/EXM15-2020-21/1031924389(1) dated 30/03/2021

2.1. During the F.Y.2018-19, the ld. CIT(E) noted that there were 415 students studying in the school and staff consisting of 25 teachers and 3 non-teaching staff. It was also submitted that the assessee institution being a minority institution formed by Sikh minority, the provisions of Right to Education Scheme are not applicable to minority educational institutions, so free education is not provided to any student. The assessee trust preferred an application u/s.10(23C)(vi) in the prescribed form seeking registration thereon before the competent authority i.e. the ld. CIT(E). The educational activities of the assessee trust were started from the year 1979. One of the pre-requisites of getting affiliation with Council for Indian School Certificate Examination (CISCE), New Delhi was that the school should have a minimum of 2000 sq.mtrs of land, suitable building constructed on part of the land and proper play ground on the remaining land with adequate facilities as prescribed from time to time by the Council.

2.2. Yet another pre-requisite mentioned in the Rules and Regulations of seeking affiliation with CISCE was that of the land title document should be in the name of society / trust / company / school. In the case of ownership, the land title documents should be the sale deed, conveyance deed and gift deed duly registered before the Registration authority concerned. In case of lease, the lease deed of the land / building should be duly registered before the concerned registration authority and should be for a minimum effective term of five years, with an appropriate renewal clause up to minimum of 30 years. Accordingly, in order to fulfil the requirements prescribed by CISCE in its affiliation rules and in view of the fact that assessee society did not have enough resources to purchase the land on its own to the extent of minimum of 2000 sq.mtrs, had resorted to take the land belonging to that trustees of the trust, on lease. Vide lease deed dated 31/03/2017, the assessee took land measuring 2200 sq.mtrs. on lease from Shri Amarjit Singh Nandrajog and Shri Charanjit Singh Nandrajog (trustees of the trust) for a period of 60 years from January 1988 valid till 31/12/2047 on a monthly rent of Rs.2 lakhs chargeable from F.Y.2018-19 relevant to A.Y.2019-20. The stamp duty of Rs.58,67,000/- was duly paid on the above registered lease deed. The said lease deed also provided for escalation of lease rent from time to time.

2.3. For the A.Y.2019-20, an application in Form 56 D was electronically filed by the assessee trust on 25/09/2019 with all the relevant documents for grant of exemption u/s.10(23C)(vi) of the Act. All the details called for by the ld. CIT(E) from time to time were duly furnished by the assessee trust. The ld. CIT(E) rejected the application for exemption u/s.10(23C)(vi) of the Act preferred by the assessee on the following grounds:- i. that the Appellant did not solely exist for education purposes because there were several objects of non-education nature ii. that the Appellant was making huge surplus. iii. that the Appellant had contravened the provisions of S.13(1)(c) of I.T. Act, 1961 in as much as it had paid lease rent of Rs.24,00,000 p.a. to two of trustees of the Appellant (Rs.12,00,000/- each).

2.4. The ld. AR before us assailed each of the aforesaid grounds by making various arguments with specific reference to relevant supporting documents in the paper book.

2.5. Per contra, the ld. DR vehemently relied on the order of the ld. CIT(E) by stating that no new arguments were made by the ld. AR before this Tribunal and that all the arguments advanced by the ld. AR have already been considered by the ld. CIT(E) in his order dated 30/03/2021 while rejecting the claim of exemption u/s. 10(23C)(vi) of the Act.

2.6. It would be pertinent to adjudicate each of the grounds stated by the ld. CIT(E) for rejection of claim of exemption u/s. 10(23C)(vi) of the Act. The first ground of rejection is that the assessee trust is not existing solely for the purpose of education. To support this point, the ld. CIT(E) had placed reliance on the objects in para ‘f’ to ‘k’ thereon reproduced supra. In our considered opinion, on perusal of the entire objects enumerated in the Memorandum of Association of assessee society, we find that predominant objects that are listed in para ‘a’ to para ’e’ as reproduced supra comprise only for the purpose of education. The objects mentioned in para ‘f’ to ‘k’ in the Memorandum of Association are only incidental objects for the attainment of the main objects i.e. existing solely for the purpose of education. It would be highly impossible to run the school without having any immovable property either on its own or by taking it on lease. Hence, one of the objects which is provided in the Memorandum of Association for purchasing the immovable property either for acquiring the immovable property either by purchase or on lease is only an enabling position for the attainment of the main object of running a school on the said land. The said objects that are enumerated in para ‘g’ to ‘k’ again are only incidental to the attainment of the main object of educational purpose. Hence, we summarily dismiss the first ground of rejection of the ld. CIT(E) for denying exemption u/s. 10(23C)(vi) of the Act as it is without any basis.

2.7. We have perused the income and expenditure account together with the audited financial statements for the year ended 31/03/2016 to 31/03/2019 of the assessee trust. From the perusal of the same, we find that assessee trust had derived income only from educational activity and not otherwise. Hence, even the financial statements of the assessee support the contention of the ld. AR that the trust is existing solely for the purpose of education only and not of any other purpose. Even otherwise during the year under consideration, i.e. F.Y.2018-19 relevant to A.Y.2019-20, for which claim of 10(23C)(vi) of the Act is sought by the assessee trust, the assessee trust had carried all activities only with respect to education and not otherwise at all. Accordingly, the other incidental objects provided in the Memorandum of Association for smooth attainment and fulfilment of the main objects, was not even carried out by the assessee during the year under consideration. Hence, the objection of the ld CIT(E) that the objects contain other irrelevant activities (though factually it is not) deserve to be dismissed in limine. Reliance in this regard has been rightly placed by the ld. AR on the decision of the Hon’ble Jurisdictional High court in the case of Vanita Vishram Trust vs. CCIT reported in 327 ITR 121 (Bom).

3.1. Moreover, the Hon’ble Supreme Court in the case of American Hotel and Lodging Association Educational Institute vs. CBDT reported in 301 ITR 86 held that on the issue of deciding whether an institution is existing for profit or not, the mere excess of income over expenditure cannot be decisive. An institution cannot be considered to be existing for profit, if some surplus is generated over its expenditure. 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. Even otherwise, we find that the CBDT vide its Circular No.14/2015 dated 17/08/2015 had issued clarification on certain issues related to grant of approval and claim of exemption u/s. 10(23C)(vi) of the Act wherein it had categorically stated that the educational institution is entitled to generate surplus out of its gross receipts and mere generation of surplus by educational institution from year to year cannot be a basis for rejection of application u/s. 10(23C)(vi) of the Act if the said surplus is used for educational purpose and not distributed to private individuals as dividend. Even this CBDT Circular, which is binding on the ld. CIT(E), has not been followed by him while rejecting the claim of exemption u/s. 10(23C)(vi) of the Act.

3.2. We find that the ld. CIT(E) had merely looked into income and expenditure account of the assessee trust for coming to the conclusion that assessee had earned surplus and thereby existing for the purpose of profit. In our considered opinion, what is to be seen is the computation of income which are applicable to charitable trusts which works completely on a different principle wherein even the amounts invested in fixed assets are allowed as application of income. This has been conveniently ignored by the ld. CIT(E) while arriving at the conclusion that assessee has earned surplus. If the said investment made in fixed assets are considered as an application of income excluding depreciation thereon, we find that for the A.Y.2019-20, the assessee had only incurred a deficit of Rs.43,76,494/-. Hence the observation of the ld CIT(E) that the assessee trust had made surplus during the A.Y. 2019-20 and thereby existing for profit, is factually incorrect. Hence there is no question of any surplus earned by the assessee, as per the computation of income asper the provisions applicable to charitable trusts for the A.Y.2019-20. Even otherwise, we find that the surplus in the income and expenditure account has not been distributed by the assessee to any trustees or their relatives as profits or as dividend. The said surplus has been re-deployed regularly for the educational objects of the trust. Hence, it could be safely concluded that the assessee trust is existing solely for the purpose of education and not for the purpose of profit. Hence the second objection raised by the ld. CIT(E) for rejecting the claim of exemption u/s. 10(23C)(vi) of the Act is hereby dismissed as baseless.

4.1. From the aforesaid history recorded by the ld. CIT(E) in his order in pages 15 & 16 thereon, it could be seen that the main grievance of the ld. CIT(E) is that assessee trust has paid lease rent of Rs.24 lakhs to two trustees of the trust for taking lease on rent admeasuring 2200 sq.mtrs on which building of the school is constructed and on which the school is functioning as on date. We find that assessee trust had to ensure that it has minimum 2000 sq. mtrs on land, for functioning its school and for getting affiliation with CISCE as per the rules and regulations by CISCE. These documents are enclosed in pages 61 & 62 of the paper book filed before us. From the aforesaid history recorded by the ld. CIT(E), it could be seen that the registered lease deed was duly executed on 31/03/2017 by the present owners of the land i.e. Shri Amarjit Singh Nandrajog and Shri Charanjeet Singh Nandrajog to the assessee trust for a period of 60 years commencing from 01/01/1988 to 31/12/2047 on a monthly rent of Rs. 2 lakhs. It is an undisputed fact that assessee trust had not paid any lease rent to these two trustees up to 31/03/2018. The lease rent was paid only from 01/04/2018 onwards for taking the lease of land for running the school. We find that the ld. CIT(E) had stated that this payment of lease rent is in violation of provisions of Section 13 (1)(c) of the Act. It is pertinent to note that assessee trust had only sought claim of exemption u/s. 10(23C)(vi) of the Act for which the provisions of Section 13(1)(c) need not be looked into as it is only applicable if exemption is claimed u/s.11/12 of the Act. Hence, we hold that reliance placed on the provisions of Section 13(1)(c) of the Act by the ld. CIT(E) is not applicable to the issue under consideration. Even assuming the provisions u/s.13(1)(c) of the Act are to be brought into operation in the instant case, then the ld. CIT(E) ought to have brought evidence on record by bringing comparative quotations to prove the fact that the lease rent paid in the sum of Rs. 2 lakhs per month to the trustees is excessive or unreasonable and beyond the fair market value thereon. On the contrary, we find that the ld. AR placed on record that market value of the land is Rs.13,03,76,400/- as per the registered lease deed and the payment of lease rent of Rs.24 lakhs works out to hardly 1.86% thereon. Hence, it could be safely concluded that the rent paid by the assessee trust to the trustees is not excessive or unreasonable. In view of the aforesaid observations, the third objection raised by the ld. CIT(E) for exemption u/s. 10(23C)(vi) of the Act is hereby dismissed. Accordingly, the grounds raised by the assessee are allowed.

Order pronounced on 11/06/2021 by way of proper mentioning in the notice board.