VIDYA BHARATI SOCIETY FOR EDUCATION & SCIENTIFIC ADVANCEMENT,KOLKATA vs. ACIT(EXEMPTION) CIRCLE - 1(1), KOLKATA , KOLKATA

Per Shri A.T.Varkey, JM Both these appeals preferred by the Assessee against the separate orders of Ld. CIT(A) – 25, Kolkata dated 21.09.2017 for AYs 2010-11 and 2014-15. Since facts are identical and grounds are mostly common, we dispose of both these appeals together by this consolidated order for the sake of convenience.

2 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 and documents as per requisitions made by him. According to AO, the assessee is a society registered u/s. 12A of the Act vide order dated 06.08.1999. The AO noted that the assessee had claimed exemption u/s. 11 and had furnished audit report in Form 10B dated 19.01.2011 along with the return of income. On examination of accounts, the AO observed that the assessee had received “development fees” for Rs.19,39,000/- which the assessee had capitalized in the development fund account. According to AO, since the development fee was received from students, it was revenue in nature and therefore formed part of the income of the assessee Society for the relevant previous year. Since the assessee had not included the ‘development fees’ by way of its income in the Income & Expenditure Account and/or in the computation of total income filed along with the return, the AO required the assessee to explain as to why such amount shall not be treated as its income chargeable to tax for the relevant previous year. The reply furnished by the assessee is reproduced hereunder:

“The development fund is required to be used by the school authority for development of educational institutions in the form of capital expenditure and long term benefit. The nature of receipt is altogether different from any other fees or collection received from students. In respect of other fees and collections from students the school authority has unrestricted powers to make use of such receipts. However, in the case of use of development fund, the school authority did not have any such unrestricted power to use such fund. Therefore, the nature of receipt of the money from students was capital in nature not revenue.” 4. The AO however held that the explanation furnished by the assessee is not acceptable. According to AO, the development fees were collected from the students on a regular basis and even in advance and therefore, there is a certainty in receiving such payment or it is at least expected to be received in due course of time. The AO thus held that such receipts are revenue in nature and cannot be regarded as capital receipt. The AO further observed that the development fees collected from students cannot be equated with donation. According to him, donation is unconditional transfer of money or money’s worth from donor to donee upon own wish, willingness and choice of the donor, having no dictation from the donee. According to AO however, the development fee collected by the educational institution from students was not paid by them on their own volition or choice or unconditionally to the institution. Thus, according to AO, development fees paid cannot be regarded as donation by students. With regard to the assessee’s claim that such

3 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 development fee was in the nature of ‘corpus donation’, the AO observed that the corpus donation is not defined in the Act. Referring to the language of section 12(1) and section 11(1)(d) of the Act, the AO noted that these Sections speak of exclusion of donation made with specific direction that such donation shall form part of the corpus of the trust i.e. it will remain outside the ambit of the chargeable income. The AO observed that corpus denotes “principal or capital sum” and not ‘interest’ or ‘recurring receipts’ or ‘income’. Referring to the definition of ‘corpus’ set out in Black’s Law dictionary, the AO observed that ‘corpus’ is a capital amount in the form of money, moveable or immovable property or the donation received by a charitable trust for specific purpose, which may be said to be corpus and remains as capital in a fund in contrast to income. According to AO therefore, whether a donation would constitute corpus or capital of the receiving trust or would fall within the ambit of its income depends upon given circumstances of the case, having regard to the motive, intention and nature of the voluntary contribution. The AO observed that the characteristics of income are that, it is a periodical monetary return coming in with regularity or at least expected regularity. Whereas, the corpus donation is a bilateral contract where the donor expresses the intention that donation will form part of the corpus or capital of the trust and the donee accepts it subject to the condition. According to AO, in the facts of the present case, this characteristic is completely absent as there is no written direction of the students that the fees are paid towards the corpus of the institution. The AO thus concluded that both the contentions of the assessee i.e. fees were capital in nature and made with a specific direction, failed and, therefore, he treated the amount of Rs.19,39,000/- collected as development fees by way of undisclosed income of the assessee for the previous year. The AO also did not allow the benefit u/s. 11 with reference to such income as according to him no income or part thereof was applied for charitable purposes, which according to him was evident from the fact that the assessee did not show such fees as its income in the return and thus it had never intended to apply it. Aggrieved by such action of the AO, the assessee preferred an appeal before the Ld. CIT(A).

4 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 According to Ld. CIT(A), the development fees which has been taken from all the students along with all fees missed the essential character of “voluntary and declaration of direction” and therefore it could not be equated with voluntary donation. He further held that such fees had been received from the students compulsorily every month at a fixed rate and as a component of the overall fee and therefore it cannot be regarded as donation towards corpus by the students. Rejecting the assessee’s claim that the collection of development fees was towards specific purpose of school building and infrastructure pursuant to the resolution dated 03.01.2000 and therefore in the nature of corpus donation, the Ld. CIT(A) held that to claim a donation as corpus, a written document of declaration is necessary for corpus donation from the donor and not the donee. According to Ld. CIT(A), in the facts of the present case, there was nothing on record to show that there was any written direction from the students that the fees are paid towards the corpus of the institution but the material on record showed that it is pre-determined decision of the school to impose the development fees upon the students and ensure a regular source of income for the school. With these findings, the Ld. CIT(A) was pleased to dismiss the appeal of the assessee. Being aggrieved, the assessee is now in appeal before us.

6 Assailing the action of the Ld. CIT(A), the Ld. AR submitted that though the voluntary contribution constitutes ‘income’ under section 11(1)(a) but such contribution shall not be included in the total income of the trust or institutions which is towards the corpus fund in terms of section 11(1)(d) r.w.s. 12 of the Act, which states that the contribution made with a specific direction will not form part of the income but shall form corpus of the trust. Relying on the decision of Hon’ble Rajasthan High Court in case of Sukhdeo Charity Estate v. ITO [1991] 192 ITR 615, he submitted that when the amount was contributed to the corpus of the institution and the same is kept as capital by the assessee society, then it cannot be treated as income or revenue receipt for the purpose of section 11 of the Act. Drawing our attention to the resolution dated 03.01.2000, the ld. AR contended that the amount collected from the students were only for the purpose of the development of the school and that such amount collected would be used only for the construction or development of building, library, computer up-gradation etc. and for no other purpose and hence such contribution by the students constituted capital receipt. He explained that the

5 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 school run by the assessee society required at regular periodic intervals development and up-gradation for which substantial corpus was required. Upon mutual discussions held with the parents, it was agreed that instead of donating lump sum amount, they would contribute in yearly instalments towards the development fund so that the assessee society can systematically plan and carry out the development activities with the fund raised in a phased manner. According to Ld. AR, the mere manner of receiving contribution towards corpus cannot change the character of the receipt. He argued that much emphasis was laid upon by the lower authorities on the fact that the contributions were made on monthly basis and therefore it could not be considered to be towards corpus. The ld. AR submitted that the argument of the lower authorities in this regard was factually erroneous and untenable on the given facts. He further pointed out that even the receipts issued by the assessee society made it abundantly clear that the development fee had been separately contributed by the students towards the specific purpose of development, repairs & maintenance of the school building and equipments and therefore the lower authorities had erred in concluding that the development fee was received without mention of the specific object or purpose. He thus submitted that amount collected was utilized with the specific object and solely for development purpose and for the developmental activities for which it was ear-marked and it is for that reason that the amount collected was routed not through income and expenditure account but taken directly as Balance Sheet item. The Ld. AR thus urged that the development fee was in the nature of capital receipt and therefore not liable to tax by way of income of the assessee Society.

6 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 that the receipt in question cannot be classified as donation or contribution for specific projects and therefore, was rightly assessed as revenue receipt by the lower authorities. She further pointed out that upon considering the development fee as revenue receipt, since the surplus of the assessee society went beyond the prescribed limit of 15% cap provided under section 11(1)(a) of the Act, the excess surplus over and above the 15% cap is liable to income-tax.

“Abstract of minutes of meeting Trustees of Vidya Bharati Society for Education and Scientific Advancement held on 3rd January, 2000 at Registered office in Kolkata. DEVELOPMENT FUND It was unanimously resolved that Development Fund be collected from each student of Vidya Bharati School (Mominpur) of the Trust for further development of school building and purchase of capital equipments required for various educational activities required for school purpose and as per studies curriculum. It was further resolved that development fund so collected would not be used for revenue purpose of the school and it would be used for only development activities as desired herein above.” 9. From the plain reading of the said resolution it was apparent that the Trustees had resolved to collect funds for development of the school building and associated infrastructure inter alia including purchase of capital equipment to support educational activities. The Trustees had also resolved that the funds to be collected for development of the educational infrastructure would be used only for defined objects and not for revenue purposes and to give effect to the said resolution, the development contributions were received from the students and were directly taken into the Balance Sheet under the head ‘Development Fund’. We therefore find that the accounting entries passed by the assessee society were in conformity with the views expressly stated by the Trustees in the resolution passed as far as back in January 2000. It is true that instead of receiving the contributions to Development Fund in one lump-sum and from the public at large, the assessee society received the contributions towards development fund from the students. We also find merit

7 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 in the ld. AR’s submissions that the authorities below were factually wrong in stating that the contribution to development fund was collected by the assessee society every month along with the tuition fees and this fact influenced the decision of the lower authorities to hold that the payment being regular monthly feature constituted revenue receipt. On the other hand, the ld. AR filed before us sample copies of the receipts issued from which it was evident that the contributions to ‘Development Fund’ were not collected on monthly basis along with tuition fees for the month but the students paid contributions to Development Fund at their own volition at any time during the year. We therefore find that the basic premise on which the lower authorities proceeded i.e. the development fund contributions were compulsorily collected by the assessee society from each student along with monthly tuition fees on monthly basis being factually wrong, the conclusions drawn based on assumption of wrong facts is therefore unsustainable.

8 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 considered cumulatively and harmoniously lead only to conclusion that the development fees contribution received from the students were intended to provide corpus or capital of the assessee society which was to be solely used for specific capital purposes and there was embargo on the assessee society to utilize it for revenue purpose. As far as the Revenue’s objection that the donor did not give any express written direction for treating such contributions to be forming part of corpus, we note that there is no such requirement prescribed in law mandating a written direction from the donor so as to constitute any voluntary payment to form part of the corpus. By the conduct of the parties as also the entries in books of accounts, one can reasonably infer the intention of the donor as well as donee and determine whether or not the parties had intended to use the donation amounts for capital purposes or any purpose for which the trust is established. As noted in the foregoing, the assessee society in its resolution passed dated 03.01.2000 had specifically resolved to raise the funds by way of development fees to generate corpus to meet the capital requirements of the society. Further the receipts which the assessee society issued expressly acknowledged that the amounts were received from them towards the development fund and this was sufficient to substantiate the intention of the parties that the amount so contributed formed part of the corpus. In this regard, we may gainfully refer to the decision of the Hon’ble Rajasthan High Court in case of Sukhdeo Charity Estate v. ITO [1991] 192 ITR 615 wherein it was held that when the amount was contributed to the corpus of the institution and is kept as capital in the books, then it cannot be treated as income or revenue receipt for the purpose of section 11 of the Act.

9 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 any material brought on record by the lower authorities or before us by the Ld. DR to substantiate that the contribution towards development fund was not voluntary or that it was in exchange for the services provided by the assessee society to the payers. In this regard we may gainfully refer to the decision of Hon'ble Delhi High Court in case of DIT (Exemption) v. National Association of Software & Services Co's. [2012] 345 ITR 362 wherein the Hon'ble High Court has held that onetime fee paid by members who are aware that it could be spent by assessee only towards capital purposes was in the nature of corpus donation and not taxable as income. The Court also took note of the fact that apart from the one time fees, the association was collecting fees separately for the services rendered to the members and therefore the one-time fee could not be linked with the services rendered to the members.

“1. For that the AO and the CIT(A) both had erred in treating the receipt of development fees for Rs.34,12,500/- as undisclosed income of the assessee and further erred in disallowing benefit u/s.11 of the Income Tax Act, 1961 under the facts and circumstances of the case. 2. For that the collection of development fees from the students were in the nature of capital receipt under the facts and circumstances of the case which were based on the submissions and evidences filed during assessment proceedings before the AO and therefore, not includible in the total income of the assessee society. 3. For that under the identical facts Ld. CIT(A) in the case of appellant itself for the assessment year 2009-10 had held that the development funds were capital in nature and could not be added to the income of the assessee society and the CIT(A) erred in not referring to the same in the appeal order- decision portion, although noted in appeal order _. appellant's submission portion.

10 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 4. For that the AO and CIT(A) both had ignored assessee society's resolution, its explanation and copy of sample fees book under the facts and circumstances of the case. 5. For that Ld. AO & Ld. CIT(A) both had erred in not allowing deduction for depreciation for Rs.25,40,795/-. 6. For that Ld. CIT(A) had ignored the appeal order of the jurisdictional Calcutta High Court on identical facts CIT vs. Siliguri Regulated Market Committee [2014] 51 Taxmann.com 455 and followed the decision of Hon'ble ITAT Chennai, drawing reference to Section 32 of the Act in the case of charitable Trusts are highly misplaced. 7. For that your appellant assessee society craves leave to add or alter and modify the grounds of appeal before or at the time of appeal hearing.”

11 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 Charitable Foundation (2018) 402 ITR 441 (SC) upheld the action of the Hon'ble High court, which in turn upheld the action of Tribunal, allowing the depreciation claimed by the assessee on the assets acquired/expenditure made, which has been allowed as application of income as well. In the said judgment, the Hon'ble Supreme Court had also taken specific note of the amendment brought in by the Legislature in section 11(6) of the Act by Finance Act (No. 2) of 2014 and held that the amendment is prospective and is therefore effective from AY 2015-16 and onwards. The relevant findings of the Hon’ble Supreme Court are as under:

"These are the petitions and appeals filed by the Income Tax Department against the orders passed by various High Courts granting benefit of depreciation on the assets acquired by the respondents-assessees. It is a matter of record that all the assessees are charitable institutions registered under Section 12A of the Income Tax Act (hereinafter referred to as 'Act'). For this reason, in the previous year to the year with which we are concerned and in which year the depreciation was claimed, the entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable puruposes under Section 11(1)(a) of the Act. The view taken by the Assessing Officer in disallowing the depreciation which was claimed under Section 32 of the Act was that once the capital expenditure is treated as application of income for charitable purposes, the assessees had virtually enjoyed a 100 per cent write off of the cost of assets and, therefore, the grant of depreciation would amount to giving double benefit to the assessee. Though it appears that in most of these cases, the CIT (Appeals) had affirmed the view, but the ITAT reversed the same and the High Courts have accepted the decision of the ITAT thereby dismissing the appeals of the Income Tax Department. From the judgments of the High Courts, it can be discerned that the High Courts have primarily followed the judgment of the Bombay High Court in 'Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS)' [(2003) 131 Taxman 386 (Bombay)]. In the said judgment, the contention of the Department predicated on double benefit was turned down in the following manner: "3. As stated above, the first question which requires consideration by this Court is: whether depreciation was allowable on the assets, the cost of which has been fully allowed as application of income under section 11 in the past years? In the case of CIT v. Munisuvrat Jain 1994 Tax Law Reporter, 1084 the facts were as follows. The assessee was a Charitable Trust. It was registered as a Public Charitable Trust. It was also registered with the Commissioner of Income Tax, Pune. The assessee derived income from the temple property which was a Trust property. During the course of assessment proceedings for assessment years 1977-78, 1978-79 and 1979-80, the assessee claimed depreciation on the value of the building @2½% and they also claimed depreciation on furniture @ 5%. The question which arose before the Court for determination was : whether depreciation could be denied to the assessee, as expenditure on acquisition of the assets had been treated as application of income in the year of acquisition? It was held by the Bombay High Court that section 11 of the Income Tax Act makes provision in respect of computation of income of the Trust from the property held for charitable or religious purposes and it also provides for application and accumulation of income. On the other hand, section 28 of the Income Tax Act deals with chargeability of income from profits and gains of business and section 29 provides that income from profits and gains of business ahll be computed in accordance with section 30 to section 43C. That, section 32(1) of the Act provides for depreciation in respect of

12 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 building, plant and machinery owned by the assessee and used for business purposes. It further provides for deduction subject to section 34. In that matter also, a similar argument, as in the present case, was advanced on behalf of the revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income Tax Act and not under general principles. The Court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income Tax Act The Court rejected the argument on behalf of the revenue that section 32 of the Income Tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a Charitable Trust derived form building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust. In view of the aforestated judgment of the Bombay High Curt, we answer question No. 1 in the affirmative i.e., in favour of the assessee and against the Department. 4. Question No. 2 herein is identical to the question which was raised before the Bombay High Court in the case of Director of Income-tax (Exemption) v. Framjee Cawasjee Institute [1993] 109 CTR 463. In that case, the facts were as follows: The assessee was the Trust. It derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the Trust. The ITO held that depreciation could not be taken into account because, full capital expenditure had been allowed in the year of acquisition of the assets. The assessee went in appeal before the Assistant Appellate Commissioner. The Appeal was rejected. The Tribunal, however, took the view that when the ITO stated that full expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as 'application of income' of the Trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. This view of the Tribunal has been confirmed by the Bombay High Court in the above judgment. Hence, Question No. 2 is covered by the decision of the Bombay High Court in the above Judgment. Consequently, Question No. 2 is answered in the Affirmative i.e., in favour of the assessee and against the Department." 2. After hearing learned counsel for the parties, we are of the opinion that the aforesaid view taken by the Bombay High Court correctly states the principles of law and there is no need to interfere with the same. 3. It may be mentioned that most of the High Courts have taken the aforesaid view with only exception thereto by the High Court of Kerala which has taken a contrary view in 'Lissie Medical Institutions v. Commissioner of Income Tax'. 4. It may also be mentioned at this stage that the legislature, realising that there was no specific provision in this behalf in the Income Tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015- 2016. The Delhi High Court has taken the view and rightly so, that the said amendment is prospective in nature. 5. It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well.

13 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 6. For the aforesaid reasons, we affirm the view taken by the High Courts in these cases and dismiss these matters."

Order is pronounced in the open court on 10th January, 2020 Sd/- Sd/- (P.M. Jagtap) (Aby. T. Varkey) Vice-President Judicial Member

Dated : 10th January, 2020

Jd. (Sr. P.S.)

14 ITA No. 2397-2398/Kol/2017 Vidya Bharati Society for Education & Scientific Advancement, AYs: 2010-11 & 2014-15 Copy of the order forwarded to:

2 Respondent – ACIT (Exemption), Circle-1(1), Kolkata. 3. The CIT(A) - 25, Kolkata. (through e-mail)

By order,

Assistant Registrar ITAT, Kolkata