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Income Tax Appellate Tribunal, ‘D’ (SMC
Before: SHRI MAHAVIR SINGH
आदेश /O R D E R This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-2, Madurai, in order dated 21.05.2019. The Assessment was framed by Income Tax Officer, Exemption Ward, Madurai for the assessment year 2015-16 vide order dated 23.12.2017 U/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The only issue in this appeal of assessee is against the order of CIT(A) upholding the addition made by the AO by 2 invoking the provisions of Section 13(1)(c) r.w.s. 13(2)(g) of the Act disallowing expenses incurred by the assessee trust. For this, assessee has raised following 4 effective grounds:- “1. The learned Commissioner of Income Tax (Appeals) on the facts and in the circumstances of the caswe and in law, has erred in upholding the taxing of Rs.9,40,334/- made by the Assessing Officer by invoking section 13(1)(c) r.w.s.13(2)(g).
The learned Commissioner of Income Tax (Appeals) failed to note that the main object of incurring the impugned expenditure is the charitable purpose of running the school and not to divert favour to the trustee as alleged by the Assessing Officer.
3. The learned Commissioner of Income Tax (Appeals) failed to note that even if the building had been taken on rent from any other person, the trust would have incurred this expenditure under similar circumstances.
The learned Commissioner of Income Tax (Appeals) failed to see that the impugned expenditure was incurred as authorized by the resolution of the trustees dated 01.02.2014.”
Brief facts are that the assessee trust is running a school in a building owned by the trustee Shri R. Krishnamoorthi. The assessee trust is paying rent of Rs.20.40 lakhs per year for the hostel and school building. The AO noticed from the income and expenditure statement for the financial year 2014-15 relevant to this assessment year 2015-16 that the assessee has incurred the following expenses:- i) Sand fill expenses Rs.1,90,850/- ii) Building maintenance expenses Rs.7,95,118/- iii) Play ground gallery expenses Rs.2,10,260/- iv) Compound wall expenses Rs.5,77,074/- According to AO, the assessee trust has incurred these expenses for the benefit of the trustee i.e., the interested person, the owner of building Shri R. Krishnamoorthi, because building is owned by the trustee and whatever maintenance and extension of building, it is beneficial to the owner. Therefore, the AO noted that this is in clear violation of provisions of Section 13(1)(c) r.w.s. 13(2)(g) of the Act. The AO noted that the funds utilized for the above expenses were diverted towards building are nothing but the benefit to the trustee, in violation of provisions of section 13(1)(c) of the Act. Therefore, the AO issued a show cause notice asking the assessee as to why this amount of Rs.17,73,302/- should not be taxed by invoking the provisions of section 13(1)(c) r.w.s. 13(2)(g) of the Act. The assessee replied that these are normal maintenance expenses of the building and assessee trust being an educational institution requires infrastructure facilities at par with the requirements and standards set up by the Government which has recognized this institution. The assessee explained that the building maintenance expenses includes white washing, plumber work, painting, carpenter work, electricity maintenance, constructions to facilitate the students to conduct tournaments for sports, construction of compound wall for security reasons to 4 avoid tress passers. The assessee also enclosed a copy of resolution of the trustees dated 01.02.2014 regarding incurring of these expenses. The AO on perusal of the vouchers and also other details of expenses noted that the expenses of Rs.2,10,260/- towards construction of gallery and expenses of Rs.5,77,074/- towards construction of compound wall is capital expenditure incurred for the expansion of building which is owned by the trustee, thereby benefiting the interested person as per the provisions of section 13(2)(g) of the Act and accordingly, the provisions of section 13(1)(c) of the Act will apply. Accordingly, he added these two amounts totaling to Rs.9,40,334/-. Aggrieved, assessee preferred an appeal before the CIT(A).
4. The CIT(A) after considering the facts and submissions made by the assessee noted that the trust is allowed to apply the trust funds only for the purpose of approved charitable activities and trust cannot divert its own funds for the benefit of trustees as mentioned in the provisions of section 13(1)(c) r.w.s. 13(2)(g) of the Act. He noted that the capital expenses in the form of construction of water tank, sports gallery and compound wall was in the nature of capital expenses for the purpose of value addition on long term basis for the benefit of trustee. Therefore, he held
5 that the AO has rightly invoked the provisions of section 13(1)(c) r.w.s. 13(2)(g) of the Act. Aggrieved, the assessee preferred an appeal before the Tribunal.
I have heard rival contentions and perused the case records and materials placed before me. The ld.counsel for the assessee before me filed the details of expenditure and submitted that the land and school building leased to the trust was owned by one of the trustee. It was contended that the above leased property is fetching rent on market rate regularly. The ld.counsel stated that no enduring benefit has been accrued to the owner because the expenses are either very necessary expenses or no expansion of building. He narrated that water tank, playground gallery and compound wall are necessary to carry out activities of the trust. He narrated that without these, school cannot be run and once necessary expenditure are incurred, they are in the nature of revenue expenses and for this, he relied on the decision of Hon’ble Madras High Court in the case of CIT vs. TVS Lean Logistics Ltd., [2007] 293 ITR 432, wherein the Hon’ble High Court held that explanation 1 of section 32(1) does not apply in a case of construction on the land which is taken on lease by the assessee, as the assessee does not acquire a capital asset but had 6 put up a construction of the building only for business advantage. Here in the present case before me also, the Revenue could not point out how these expenses incurred for construction of water tank, playground gallery will constitute capital asset, reason being these are used in schools or educational institutions only. The construction of compound wall was very necessary to avoid trespassing and any outside obstruction in school activities. Further, ld.counsel for the assessee also relied on exactly identical case law of Hon’ble Allahabad High Court in the case of CIT vs Nathji Education & Cultural Trust in of 2009, (2013) 219 Taxman 71 (All), wherein the Hon’ble High Court held that in the registered lease deed, there is no stipulation that the construction made on the lease land would become the property of the lessor after the expiry of the lease period. After the expiry of the lease period, it is always open to the assessee to remove the constructions and, therefore, no benefit would directly endure to the benefit of the trustees. The ld.DR could not controvert the above cited case laws.
The facts are admitted and assessee is an educational trust running a school in lease hold property. Admittedly, the building is owned by one of the trustee. The assessee trust has carried
7 out certain construction i.e., water tank, playground gallery and compound wall for a sum of Rs.9,40,334/-. I find that these expenses are necessary expenses and no enduring benefit will fetch to the trustee owner. During hearing, a query was put to ld.counsel for the assessee, whether the trustee owner will become owner of the property constructed by trust i.e., the playground gallery, water tank and compound wall. He answered that there is no such stipulation in the lease deed. In the present case also, the trust is free to remove the construction. Once this is a fact, the expenditure incurred cannot be termed as capital and for trust it is revenue expenditure. Hence, I delete the disallowance and allow the appeal of the assessee.
In the result, the appeal of the assessee is allowed.