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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 20TH DAY OF SEPTEMBER, 2021
PRESENT
THE HON’BLE MRS.JUSTICE S.SUJATHA
AND
THE HON’BLE MR. JUSTICE RAVI V. HOSMANI
I.T.A.No.230/2016 c/w I.T.A.No.231/2016
BETWEEN :
1 . THE COMMISSIONER OF INCOME-TAX(EXEM) BENGALURU, 6TH FLOOR, UNITY BUILDING ANNEXE MISSION ROAD, BANGALORE-560 027
2 . THE DEPUTY DIRECTOR OF INCOME TAX (EXEMPTION), CIRCLE-17(1), BANGALORE
...APPELLANTS (COMMON)
(BY SRI JEEVAN J. NEERALGI, ADV. A/W SRI T.N.C.SRIDHAR, ADV. FOR SRI E.I.SANMATHI, ADV.)
AND :
KRUPANIDHI EDUCATION TRUST CHIKKABELANDUR, CARMELRAM POST, VARTHUR HOBLI OFF. SARJAPUR ROAD, BANGALORE-560 034 PAN:AAATK 1211R
…RESPONDENT (COMMON)
(BY SRI V.CHANDRASHEKAR, ADV. A/W SRI S.ANNAMALAI, ADV. FOR SRI M.LAVA, ADV.)
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THIS I.T.A.No.230/2016 IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 30.12.2014 PASSED IN ITA NO.125/BANG/2014, FOR THE ASSESSMENT YEAR 2009-2010 PRAYING TO (A) DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT. (B) SET ASIDE THE APPELLATE ORDER DATED 30.12.2014 PASSED BY THE ITAT, 'B' BENCH, BENGALURU, IN APPEAL PROCEEDINGS ITA NO.125/BANG/2014 FOR THE ASSESSMENT YEAR 2009-10 AS SOUGHT FOR IN THIS APPEAL.
THIS I.T.A.No.231/2016 IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 30.12.2014 PASSED IN ITA NO.126/BANG/2014, FOR THE ASSESSMENT YEAR 2010-2011 PRAYING TO (A) DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT. (B) SET ASIDE THE APPELLATE ORDER DATED 30.12.2014 PASSED BY THE ITAT, 'B' BENCH, BENGALURU, IN APPEAL PROCEEDINGS ITA NO.126/BANG/2014 FOR THE ASSESSMENT YEAR 2010-2011 AS SOUGHT FOR IN THIS APPEAL.
THESE APPEALS COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
These appeals are filed by the revenue under Section 260A of the Income Tax Act, 1961 (‘Act’ for short) challenging the common order of the Income Tax Appellate Tribunal, Bangalore Bench ‘B’, Bangalore, dated 30.12.2014 in ITA Nos.125 & 126/Bang/2014 relating to the assessment years 2009-10 and 2010-11.
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These appeals were admitted by this Court to consider the following substantial questions of law:- “1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that there was no violation of Section 13(1)(c) of the Income Tax Act, 1961, while not considering the facts and material brought on record by the Assessing Officer for the period in question; and the Tribunal has erred in not adjudicating on the issue of denial of deduction in its proper perspective? 2. Whether collection of capitation fees in the name of voluntary contribution and general of huge surplus would tantamount to commercialization of education by the assessee and, therefore, the assessee – institution was rightly not considered by the Assessing Officer as existing solely for educational purposes within the meaning of Section 2(15) or Section 10(23)(c) of the Income Tax Act, 1961 and the Tribunal has erred in dismissing the appeal of the revenue on the issue of generation of huge
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surplus without appreciating the material on record?”
The assessee - trust is running various institutions offering degree/training in various academic courses in Bangalore and was granted registration under Section 12A(a) of the Act. Relating to the assessment years under consideration, the assessee filed its return of income declaring Nil income. Exemption was claimed on the entire income taking shelter under Section 12A of the Act as it was engaged in the charitable activity of education. The assessee’s returns were processed under Section 143(1) of the Act and scrutiny assessments were concluded for both the assessment years in question. During the pendency of the assessment proceedings, a survey under Section 133A of the Act was conducted at the assessee’s premises on 16.07.2011. Certain documents were impounded. Pursuant to the material said to have been gathered at the time survey, the Director of Income Tax
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(Exemption), Bangalore, commenced proceedings under Section 12AA(3) of the Act, for cancellation of the registration granted under Section 12A of the Act and concluded the proceedings by order dated 19.12.2011, canceling the registration granted earlier. Against the said order, the assessee preferred an appeal before the Tribunal in ITA No.86/Bang/2012 which came to be allowed, against which the revenue has preferred ITA No.47/2013 before this Court. In the meanwhile, the Assessing Officer completed the assessment for assessment years 2009-10 and 2010-11 under Section 143(3) of the Act by order dated 30.12.2011 denying the claim of exemption under Section 11 of the Act and making certain additions.
Being aggrieved by the assessment orders, the assessee preferred appeals before the CIT (Appeals), Mysore. In the meantime, the appeals filed by the assessee before the Tribunal against the cancellation of
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its registration by order passed under Section 12AA(3) of the Act dated 19.12.2011 were disposed of, quashing the order of cancellation of registration issued by the DIT (Exemption) and restored the registration granted earlier. Being aggrieved, the revenue preferred appeals before the Tribunal, the same having been dismissed, these appeals are preferred by the revenue.
Learned counsel for the revenue argued that the Tribunal failed to appreciate that the assessee had violated the provisions of Section 13(1)(c) of the Act and therefore, the assessee is not entitled to claim exemption under Sections 11, 12 and 13 of the Act. The two trustees namely, Sri. Suresh Nagpal and Smt.Geetha Nagpal were paying remuneration/salary not in proportionate to the pay-scales of a professor and administrative officer respectively. Smt. Geetha Nagpal had not rendered any services for which she was remunerated. It was only diversion of funds of the
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assessee – trust. The breach of Section 13(1)(c) being apparent, the Tribunal ought to have allowed the appeal filed by the revenue. The assessee collecting the capitation fee in the garb of voluntary contribution amounts to commercial activities. Such institutions cannot be considered as charitable institutions within the meaning of Section 2(15) of the Act.
Learned counsel for the assessee justifying the impugned order submitted that mere existence of surplus does not mean that the assessee is not engaged in the charitable activity of imparting education. No violation of provisions of Section 13(1)(c) was made by the assessee and the order of the Assessing Officer has been rightly reversed by the CIT (Appeals) and the Tribunal. The Assessing Officer merely on surmises and conjectures had come to a conclusion that the salary/remuneration paid to the two trustees was highly excessive and not in proportionate to the services
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rendered by them. The department cannot regulate the management of the assessee - trust. Indeed, the salary/remuneration paid to the trustees were duly accounted and reflected in their returns as income. Merely on imagination, exemption under Section 11 of the Act cannot be denied.
We have carefully considered the submissions of the learned counsel for the parties and perused the material on record.
Re. Substantial Question of Law No.1. 8. Section 13(1)(c) of the Act reads thus:- “13.(1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof.- (a) xxxxx (b) xxxxx (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof-
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(i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3).”
The ground on which violation of Section 13(1)(c) of the Act has been alleged is based mainly on the salary/remuneration paid to Sri. Suresh Nagpal and Smt. Geetha Nagpal, the trustees of the assessee – trust, not in proportionate to service rendered by them but a device designed to divert the income of the assessee. This allegation has no basis. It is well settled that the revenue cannot sit in the armchair of an assessee and decide the pattern of working,
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methodology to be adopted for whole administration of the educational trust including the payment structure of salary/remuneration to be paid to the professors/administrative staffs. In other words, the department cannot manage or control the managerial affairs of the educational trust. These aspects would not come within the purview of the authorities to decide the income tax liability merely on suspicion that the assessee is claiming huge expenditures to get the corresponding benefits of allowable deductions. No grounds are raised by the revenue relating to the deletion of the additions made by the CIT (Appeals) before the Tribunal, whereas reference was made to the provisions of Section 13(1)(c) of the Act only to draw support for denying exemption under Section 11 of the Act. The Tribunal has rightly rejected the plea of the revenue as bereft of merit. The alleged breach of Section 13(1)(c) of the Act based on these factors is baseless, wholly untenable. Thus, we answer the substantial
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question of law No.1 in favour of the assessee and against the revenue.
Re. Substantial Question of Law No.2. 10. Section 2(15) of the Act reads thus “2(15) “Charitable purpose” includes relief of the poor, education, yoga, medical relief, preservation of environment (including water-sheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless.-
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(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility, and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year.”
The proviso to Section 2(15) of the Act introduced by the Finance Act, 2008 would not be applicable to the facts of the present case. Survey was conducted under Section 133 of the Act on 16.09.2011. Sub-Section (3) of Section 13 of the Act postulates that the persons referred to in clause (c) of sub-Section (1) and sub-Section (2) are the following, namely;- (a) the author of the trust or the founder of the institution;
(b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the
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end of the relevant previous year exceeds fifty thousand rupees; (c) where such author, founder or person is a Hindu undivided family, a member of the family; (cc) any trustee of the trust or manager (by whatever name called) of the institution; (d) any relative of any such author, founder, person, member, trustee or manger as aforesaid; (e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest.
Section 11 of the Act deals with the income from property held for charitable or religious purposes.
Learned counsel for the assessee has referred to the judgment of the Coordinate Bench of this Court in the case of Commissioner of Income-Tax and another vs. Fr. Mullers Charitable Institutions reported in (2014) 363 ITR 230, wherein the Division Bench considering Section 13(1)(d) of the Act has held that it is only the income from such investment or
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deposit which has been made in violation of Section 11(5) of the Act that is liable to be taxed and that the violation under Section 13(1)(d) does not tantamount to denial of exemption under Section 11 on the total income of the assessee. Reference has been made to the judgment of the Hon’ble Bombay High Court in the case of DIT (Exemptions) vs. Sheth Mafatlal Gangalbhai Foundation Trust reported in (2001) 249 ITR 533 (Bombay), wherein the question “whether violation of Section 11(5) read with Section 13(1)(d) by the assessee- trust attracts the maximum marginal rate of tax and the entire income of the trust?” was considered and held that in case of contravention of Section 13(1)(d), the maximum marginal rate of tax under Section 164(2), proviso is applicable only to that part of income of the trust which has forfeited exemption and not the entire income. The Hon’ble Delhi High Court in the case of DIT (Exemption) vs. Agrim Charan Foundation reported in (2002) 253 ITR 593 (Delhi) has held that
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the legislature has clearly contemplated that in a case, where the whole or part of the relevant income is not exempted under Section 11 by virtue of violation of Section 13(1)(d) of the Act, tax shall be levied on the relevant income or a part of the relevant income at the maximum marginal rate. The Co-ordinate bench of this Court concurring with these judgments has held that for violating Section 11(5) of the Act, the entire income of the assessee - trust cannot be assessed for tax. The same analogy would be applicable even to Section 13(1)(c) of the Act also. Thus, the entire income of the respondent - trust cannot be assessed for tax even for violation of Section 13(1)(c) of the Act.
In Commissioner of Income-tax, (Exemptions), Bangalore, vs. CMR Jnanadhara Trust reported in (2015) 55 taxmann.com 516 (Karnataka), considering the payment of the amounts to the trustees, out of the trust amount, when the trust was availing the
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services of the trustees and on account of the services rendered by them, there was a substantial growth in the trust and its activities, when the payments are made for such services rendered, held that it cannot be said that it contravenes Section 13(1)(c) of the Act. Consequently, there is no justification for denying the benefit under Section 11 of the Act.
The Hon’ble High Court of Bombay in the case of Vanita Vishram Trust vs. Chief Commissioner of Income-tax reported in (2010) 192 Taxman 389 (Bombay) while dealing with Section 10(23C) of the Act has analyzed whether fact that a surplus might incidentally arise from activities of trust after meeting expenditure incurred for conducting educational activities, answered that it would not disentitle a trust to benefit of provisions of Section 10(23)(c) of the Act.
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In the light of these judgments, we have analyzed the facts of the present case. It is not in dispute that the assessee is imparting education, as such proviso to Section 2(15) of the Act introduced by the Finance Act, 2008 would not be applicable. At this juncture, it would be profitable to refer to the Circular No.11/2008 dated 19.12.2008 issued by CBDT. Having regard to the proviso inserted to Section 2(15) amended vide Finance Act, 2008 wherein, it has been clarified that the newly inserted proviso to Section 2(15) will not apply in respect of the first three limbs of Section 2(15) i.e., relief of the poor, education and medical relief. Consequently, where the object of trust or institution is, relief to the poor, education or medical relief, it will constitute ‘charitable purpose’ even if it incidentally involves in carrying of commercial activities.
The Hon’ble High Court of Gujarat in the case of Director of Income Tax (Exemption) vs.
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Sabarmati Ashram Gaushala Trust reported in (2014) 223 Taxman 43 has held that where generation of surplus would not render the activity as being in the nature of trade, commerce or business, there was no intention to make profits in the activities of the trust and the assessee was entitled to exemption under Section 11 of the Act.
The breach of Section 13(1)(c) of the Act as alleged by the department is based on the remuneration paid to the two trustees namely, Sri. Suresh Nagpal and Smt. Geetha Nagpal treating that the amounts were diverted by the assessee – trust to the said trustees in the guise of commission and professional income of the trustees. Similarly, the assessing officer has regarded the income of the trust being diverted and the cash deposits in the bank accounts of the trustees namely, Sri. Suresh Nagpal and Smt. Geetha Nagpal have remained unexplained which has been deleted by the
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CIT (Appeals) relating to the assessment years in question which was the subject-matter of the appeals before the Tribunal filed by the Revenue. The Tribunal has confirmed the finding of the CIT (Appeals) that the two trustees namely, Sri. Suresh Nagpal and Smt. Geetha Nagpal have filed the returns of income reflecting their salary etc., paid to them by the trusts and the same is in accordance with the pay-scale of a Professor and Administrative Officer respectively. As regards the cash deposits found in account of the two trustees, CIT(Appeals) has rightly held that no explanation could be expected from the assessee - trust to explain the source of its deposits and in case of Smt. Geetha Nagpal, it was satisfactorily explained. Merely to deny the exemption under Section 11 of the Act, reference made to Section 13(1)(c) of the Act by the Revenue is held to be unjustifiable. These factual aspects being considered by the CIT (Appeals) and the Tribunal, we are not inclined to sit in re-appreciation of
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factual aspects which is impermissible while exercising the power under Section 260A of the Act. We do not find any infirmity or irregularity in the order passed by the Tribunal.
Hence, the substantial question of law deserves to be answered against the revenue and in favour of the assessee, however subject to result of ITA No.47/2013.
In the result, appeals stand disposed of accordingly.
Sd/- JUDGE
Sd/- JUDGE
PMR