SAKET EDUCATION SOCIETY,NEW DELHI vs. JCIT(E), RANGE- 2, NEW DELHI

This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)- 40, Delhi dated 02.01.2018 pertaining to assessment year 2014-15.

The sum and substance of the grievance of the assessee is that the CIT(A) erred in sustaining the action of the AO in denying exemption u/s 11 and 12 of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'. The assessee is further aggrieved by the denying of application of income in respect of donation given to Pacific Society for Education and Social Activities.

Briefly stated, the facts of the case are that the assessee society is a registered society under the Society Registration Act, 1860. The assessee also enjoys the registration u/s 12A and is a notified society u/s 80G of the Act.

The assessee entered into an agreement with Delhi Public School Society [‘DPSS’ for short] on 17.02.2012 by which the DPSS and the assessee jointly agreed to set up a school at Raj Nagar. One Nirbhay Realtors [P] Ltd [‘NRPL’ for short] acquired land at Raj Nagar Extension, Ghaziabad and leased out the said piece of land to the assessee for a period of 30 years extendable by another 30 years. The assessee entered into a Memorandum of Understanding on 03.09.2012 by which the assessee had to deposit with NRPL an amount equivalent to the cost of the land towards interest free refundable security deposit as a cost to NRPL and in lieu of this security deposit, NRPL agreed to lease the land to the assessee. The assessee constructed school building on the said piece of land and started running a school in the subsequent period. It was agreed that the assessee shall pay lease rent of Rs. 2000/- p.m. from the first academic year of operation of school at Raj Nagar Extension.

The bone of contention is the amount of Rs. 5.53 crores paid during the year by the assessee to NRPL as interest free deposit. The revenue alleges that by giving such security deposit, the assessee has passed on a benefit to its related concern thereby violating provisions of section 13 of the Act. It is the case of the Revenue that the assessee entered into an agreement with DPSS much before the land was acquired by NRPL. The revenue further alleges that indirectly the assessee has borne the entire cost of the land without getting ownership of the said piece of land and by giving equivalent amount of the cost as security deposit to NRPL the assessee has enured benefit to the related party.

It is the case of the Revenue that the assessee has incurred substantial capital expenses for the construction of the building on the land owned by NRPL which means that at the time of sale of the land, entire construction will go to NRPL and the assessee society will not get any benefit out of the same. This way, huge benefit has been passed on to specified person.

The AO was of the firm belief that the provisions of section 13(1)(c) of the Act have been violated for which no explanation has been submitted by the assessee. Drawing support from the decision of the Hon'ble Delhi High Court in the case of Chiranjiv Charitable Trust 267 CTR 305 [DEL], the AO has denied the benefits of section 11/12 of the Act and assessed the income under the normal provisions of the Act. Proceeding further, the AO found that the assessee has given donation of Rs. 8.02 crores to Pacific Society for Education and Social Activities, which was not registered u/s 12A of the Act during the year under consideration. The AO further found that the members of the assessee society are also members of PSESA thereby making PSESA a specified person as defined u/s 13(3) of the Act. The AO was of the opinion that since the donee society is not a registered society, the donation given by the assessee was denied deduction.

The assessee strongly agitated the matter before the CIT(A) but without any success. While dismissing the appeal of the assessee, the first appellate authority was also of the opinion that the deposit made with NRPL is not eligible for deduction u/s 13(1)(d) of the Act.

Before us, the ld. AR explained the transaction with NRPL by referring to the relevant documentary evidences brought on record in the form of a paper book. It is the say of the ld. AR that the said transaction does not convey any benefit to NRPL. The ld. AR pointed out that NRPL purchased the said piece of land from the funds made available to it by Pacific Development Corporation Ltd and not by the assessee. The ld. AR strongly contended that NRPL has acquired the land from its own funds and, thereafter, leased out the said piece of land to the assessee-society. Therefore, no benefit has been passed on to NRPL by making interest free security deposit for the leasehold land.

Per contra, the ld. DR strongly supported the findings of the revenue authorities and once again relied on the decision of the Hon'ble High Court of Delhi in the case of Chiranjiv Charitable Trust [supra].

We have given thoughtful consideration to the orders of the authorities below. There is no dispute in so far as the transaction with NRPL is concerned. Admittedly, NRPL is a specified person and the same has been accepted by the assessee during the course of assessment proceedings itself. Facts on record show that the assessee society has paid a total sum of Rs. 11,02,73,500/- to NRPL till 31.03.2014, break up of which is as under:

We are surprised to find that Rs. 5.48 crores was paid in F.Y. 2012-13 relevant to A.Y 2013-14 which is the immediately preceding A.Y to the year under consideration and no adverse inference has been drawn by the AO. We fail to understand why the AO has taken a different view for the same set of transaction in this year. We are told that A.Y 2013-14 was assessed u/s 143(3) of the Act and the exemption u/s 11/12 of the Act was granted to the assessee

Let us now understand the transaction with NRPL. It is true that the assessee did not purchase the said piece of land at Raj Nagar Extension, Ghaziabad. It is equally true that vide agreement dated 17.02.2012 with DPSS, the assessee agreed for setting up an English Medium School with DPSS for an educational joint venture. On finding difficulty in acquiring the ear-marked land at Ghaziabad, the assessee approached NRPL and agreed to take the land to be acquired by NRPL on a long term lease for 30 years which was renewable for another 30 years at the option of the assessee –society against an interest free deposit which was equivalent to the cost of the land. The assessee further agreed to pay a notional lease rent of Rs. 2000/- p.m. from the year in which the academic session started. The NRPL purchased the said piece of land. The detail of land purchased is as under:

On appreciation of facts on record, we are of the opinion that the assessee has not passed on any benefit directly or indirectly to the specified person NRPL. Firstly, by paying a meagre lease rent of Rs. 2000/- p.m., the assessee could get the possession of 7.88 acres of land. Interest free deposit of Rs. 5.53 crores paid during the year is nothing but akin to a security deposit. The Revenue’s allegation that after the expiry of lease period, the building will go alongwith the piece of land thereby benefitting the specified person NRPL is a far- fetched thought in as much as we cannot presume happening or non- happening of an event, which would take place after 30/60 years. Moreover, the provisions of section 13 of the Act clearly show that the benefit should enure to the specified person during the year under consideration itself.

At this stage, let us consider the provisions of section 13(2) of the Act which read as under: “(2) Without prejudice to the generality of the provisions of clause (c) 3 and clause (d)] of sub- section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub- section (3),- (a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub- section (3) for any period during the previous year without either adequate security or adequate interest or both; (b) if any land, building or other property of the trust or institution is, or continues to be, made available for the use of any person referred to in sub- section (3), for any period during the previous year without charging adequate rent or other compensation; (c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub- section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services; (d) if the services of the trust or institution are made available to any person referred to in sub- section (3) during the previous year without adequate remuneration or other compensation; (e) if any share, security or other property is purchased by or on behalf of the trust or institution from any person referred to in sub-section (3) during the previous year for consideration which is more than adequate; (f) if any share, security or other property is sold by or on behalf of the trust or institution to any person refer- red to in sub- section (3) during the previous year for consideration which is less than adequate; (g) 1 if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub- section (3): Provided that this clause shall not apply where the income, or the value of the property or, as the case may be, the aggregate of the income and the value of the property, so diverted does not exceed one thousand rupees;] (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period

A perusal of the aforesaid relevant provision shows that even the legislature allows transactions with specified persons if the same are at arms length.

It is not the case of the Revenue that the assessee has not started operation of the school on the leasehold land. It is also not the case of the revenue that the assessee has not utilised the money in furtherance of its objects of the trust. No doubt, NRPL is a specified person but then the Act does not bar any normal transaction done with a specified person. All that is provided in the provisions of section 13 of the Act is that any transaction with specified person should not enure any benefit to that person directly or indirectly. If we consider the transaction with NRPL in its right perspective, the only logical conclusion comes is that no benefit has been passed on to NRPL by the assessee-society.

The decision relied upon by the Revenue in the case of Chiranjiv Charitable Trust [supra] is misplaced in as much as in that case the assessee paid 95% of the price of the land to its specified person and yet after a lapse of more than one year, sale could not be completed and no registered document was executed. In that case, real motive was to advance its surplus money to its specified person without charging any interest which was directly hit by section 13(3) of the Act whereas the facts of the case in hand show that the assessee paid interest free deposit only when NRPL has purchased the land and leased out to the assessee on which the assessee constructed the school building and started its operation.

Considering the facts in totality, we are of the considered opinion that since no benefit has been enured to the specified person from the impugned transaction, denial of exemption u/s 11/12 of the Act is uncalled for. We, accordingly, set aside the findings of the CIT(A) and direct the AO to allow exemption u/s 11/12 of the Act.

Second grievance relates to the donation to PSESA.

The main reason for denying the claim of donation is that PSESA is not a registered society during the year under consideration u/s 12A of the Act. There is no finding that PSESA is not an educational institution. On the contrary, facts on record show that PSESA is a like- minded society which is also running a school and is engaged in imparting education. CBDT has made it clear through Circulars and Instructions issued from time to time that payment of a sum from one charitable trust to another for utilisation by the donee trust towards its charitable objects is proper application of income for charitable purposes in the hands of the donee trust meaning thereby that both the trusts should be charitable. ‘Charitable purpose’ has been defined u/s 2(15) of the Act and education is very much a charitable purpose. It is also an undisputed fact that PSESA was registered u/s 12A and 80G of the Act w.e.f. A.Y 2015-16. In our considered opinion, while granting registration u/s 12A of the Act revenue has to see objects of the trust and since PSESA has been registered u/s 12A of the Act, the revenue has accepted its objects. Merely because PSESA was not registered u/s 12A of the Act for the year under consideration that cannot be a reason for not allowing corpus donation of Rs. 8.02 crores to the assessee society, keeping in mind that the donee society is also a like minded society. We accordingly direct the AO to allow the corpus donation of Rs. 8.02 crores as application of income.

In the result, the appeal of the assessee in is allowed.