M/S. JASLEEN EDUCATIONAL SERVICE SOCIETY,INDORE vs. THE ACIT-2(1), INDORE

PER O.P. MEENA, ACCOUTANT MEMEBR. This appeal is filed by the assessee against the order of

ld. Commissioner of Income-tax (Appeals)-22, holding

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concurrent jurisdiction of CIT(A), Indore-1 [hereinafter referred

to as the CIT(A)] dated 08.12.2015. This appeal pertains to

assessment year 2005-06 as against appeal decided in respect

of assessment order dated 31.12.2007 passed u/s 143(3) of

the Income-tax Act, 1961 (hereinafter referred to as “the Act”

by the ACIT, 2(1), Circle 2(1), Indore (hereafter referred to as

the AO).

exemption u/s 10(23C)(iiiad) of the Act.

2.1 Succinctly, the facts as culled out from the orders of

the lower authorities are that the assessee is an A.O.P.

registered with Registrar of Society vide Registration

No.IMD/2914/98 dated 09.12.1998. The Society is running an

educational institution in the name of “Auckland Academy”.

The assessee has filed its return of income on 30.10.2003

showing income at Rs. Nil. The assessee has shown net profit

of Rs. 2,62,971/- on the gross annual receipt of Rs.

41,99,249/- and claimed exemption of Rs. 2,62,971/- u/s

10(23C)(iiiad) of the Act. The AO examined the claim and held

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that the assessee society registered on 09.12.1998, and

applied for registration u/s 12A on 02.04.2007 before the

CIT(A), Indore, which has not been decided, hence, the

assessee is not eligible for benefit u/s 11 & 12 of the Act. With

regard to exemption u/s 10(23C)(iiiad), the AO observed that

in the assessment order u/s 143(3) dated 15.11.2006, for

assessment year 2004-05, it was held that the assessee was

not existed primarily for educational purposes as it has given

loan of Rs. 1.25 crores to M/s. Sheetu Educational Services

Pvt.Ltd., Indore, ( for short – SESPL ), hence, the assessee has

diverted the funds to its sister concern. Further, the assessee

had neither utilized/expanded its income/funds wholly and

exclusively for educational purposes nor for the objects of the

institution. The AO further observed that the assessee has

shown receipts of Rs. 9,17,200/- for bus fee and also claimed

depreciation of Rs. 2,76,872/- @ 40% on motor buses, which

means that buses were for solely used for the business of

running them on hire and not for other purposes. In view of

this matter, the AO held that the assessee is not existed solely

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for educational purposes during the accounting year under

consideration, hence, the claim of exemption u/s 10(23C)(iiiad)

of the Act is not allowable.

2.2 Being aggrieved, the assessee filed an appeal before

the CIT(A). However, the ld. CIT(A) noted that the CIT(A)-II,

Indore, vide order dated 31.12.2012 for assessment year 2004-

05 in appeal no. 129/09-10/455 held that the exemption u/s

10(23C)(iiiad) is not available as the conditions u/s

10(23C)(iiiad) is not satisfied. According to the CIT(A), the

institution should not be for the purpose of profit and this

condition is not satisfied as held in the assessment year 2004-

05, the ld. CIT(A) has upheld the order of the AO.

2.3 Being aggrieved, the assessee has filed this appeal

before us. The Ld. Counsel for the assessee submitted that the

assessee has not advanced loan to SESPL, Indore of Rs.

1,25,27,660/- but the entire amount was advanced for

construction of school building, which was ultimately used by

the assessee over running of school. The AO referred that the

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amount of Rs. 4,01,947/- was further advanced by the

assessee, but from the balance sheet of the company, it is

clear that the said amount was utilized for the purpose of

repayment of liability and maintenance of school building and

furniture. The contention of the AO that amount was given to

M/s. SESPL was diversion of funds by the assessee society is

not correct. The assessee on lease hold land of individual

family members is in possession of the company, constructed

a school building society and the school building was also

used for the purpose of running of school of the society.

Hence, there was no diversion of funds of the society for non-

educational purposes. As regards observation of the AO that

advance to company tantamount to contravention of

provisions of Section 13 of the Act is not correct, as the AO

has failed to appreciate factual position that when company is

in the lease hold land construct a school building for the

assessee society and the said school building was also used for

the purpose of running of the school of the society. Hence, the

amount as advanced for the construction of the school

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building was not contravention of the provisions of Section 13

of the Act. Thus, the assessee has properly utilized its entire

income for the purpose of educational activities. Further, the

bus fee and other receipts are directly linked with the

educational activities of the society and, therefore, the

assessee solely engaged in the educational activities. The AO’s

interpretation that bus used for the purpose of running on

hire is factually not correct as the buses used for pick up and

drop of the students and bus fee was separately charged from

the students. Hence, for the purpose of allowability of

depreciation, the same has been considered as bus run on

hire otherwise all the buses are used for pick and drop of the

students only.

2.4.1 The ld. Authorized Representative of the assessee

further submitted that it is not in dispute that gross receipts

of the assessee is Rs. 48,66,663/-, which is less than Rs. 1

crore and the assessee solely existed for educational purposes.

Hence, it is eligible for exemption u/s 10(23C)(iiiad) of the Act.

The ld. AO/CIT(A) disallowed the exemption by holding that

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the assessee having surplus income and the same was used in

advancing to M/s. SESPL, one of the group companies.

However, the AO and CIT(A) has failed to appreciate that the

assessee entered into a Deed of sub-lease on 28.08.1999 with

M/s.SESPL for taking of the building of M/s. SESPL on lease

for running of its school in that building. The land area was

around 1.50 acres and built up area was around 15,000 sq.ft.

The Deed agreement was executed between both the parties on

31.03.2000 whereas it was agreed that “the party referred to

as tenant above has deposit with the owner of the amount

which has been mutually decided by both the parties by way

of security deposit. Against this deposit, the interest shall not

be charged by the party referred to as tenant (Jasleen

Educational Service Society) above and the parties referred to

as owner (SESPL) shall not be charged rent on said building.”

Thus, the amount received by SESPL was not used for

personal purposes but used for construction of building. The

ld. Authorized Representative of the assessee further

submitted that surplus earning of the assessee in the year of

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appeal and also few previous year and subsequent years are

as under :-

S.No. Particulars 31.03.03 31.03.04 31.03.05 31.03.06 31.03.07 1. Gross 6632783 7646452 4866664 4414765 4439171 Receipt 2. Net 3904546 2229702 262970 482906 670353 Income 15.10 % of 58.87 % 29.16 % 5.40% 10.94% Surplus

2.4.2 The ld. Authorized Representative of the assessee relied

on the following decisions :-

(i) St. Joseph’s Upper Primary School vs. ITO, 16 TTJ 389 (Hyd Bench – I.T.A.T. )

(ii) Addl CIT vs. Aditanar Educational Institution, (1979) 118 ITR 235 (Mad).

(iii) Governing Body of Rangaraya Medical College vs. CIT,(1979) 117 ITR 284 (AP).

(iv) Ereaut (H.M. Inspector of Taxes) vs. Girls Public Day School Trust Ltd., (1930) 15 TC 529 (HL) (English decision)

2.4.3 The Board itself seems to have accepted this view by

their Instruction No. 1112 ( F.No.194/16/77-IT (A-I) dated 29th

October, 1977 in the following words :-

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“However, there may be cases where the

educational institution may be owned by the trusts

or societies to whom the provisions of sections 11

may be applicable. Where all the objects of these

trusts are educational and the surplus, if any, from

running the educational institution is used for

educational purposes only, it can be held that the

institution is existing solely for educational purposes

and not for the purposes of profit.”

2.4.4 The ld. Authorized Representative of the assessee

further relied upon the following decisions :-

(a) OASIS Educational Society vs. ADIT (Exemptions), 132 TTJ 59 ( Hyd Bench – I.T.A.T. )

(b) Aditanar Educational Institution etc. vs. Addl. CIT, 224 ITR 310 ( S. C.)

(c) ACIT vs. VATSALYA Senior Secondary School, 130 TTJ 27 (Ind. I.T.A.T. )

2.5 The ld. Departmental Representative relied on the

orders of the lower authorities.

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2.6 We have considered the facts, rival submissions and

perused the material available on record. The undisputed fact

of the case are that the assessee society does not possess

registration u/s 12A of the Act for the year under

consideration. Therefore, exemption in Section 11 & 12 is not

available to assessee. We find that the assessee is in

possession of lease hold land which belongs to individual

family member of trustees. The entire amount of Rs. 1.25

crore, given to M/s. SESPL by the assessee has been utilized

for construction of school building on the land in possession of

land. We also find that the assessee had utilized the said

building for the purpose of running school, without paying any

rent. Further, the amount of Rs. 4,01,947/- paid was for the

purpose of repayment of liability and maintenance of school

building and furniture. Therefore, we do not find any diversion

of funds as alleged by the AO. As the funds so advanced were

used for the purpose of education only. In view of these facts,

we are of the view that the assessee has properly utilized the

entire income for the purpose of educational activities. We also

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find that the buses were used for pick up and drop of the

students only for which fees were separately charged.

Therefore, it cannot be said that the buses were used for

running them on hire, as except pick and drop of student,

these buses were used. Hence, it cannot be held that the

assessee has derived any business profit from buses. However,

for the purpose of allwoability, it was considered on running

them on hire. We also note that the amount of Rs. 1.25 crore

advanced to M/s. SESPL was for the purpose of construction

of school building, as is evident from the facts that no interest

thereon has been charged nor any rent of school building was

given. This view is supported from the decision of Hon'ble

Supreme Court in the case of Aditanar Educational

Institution, etc. vs. Addl. CIT, (1997) 224 ITR 310 (S.C.),

wherein it was held that “ when surplus is utilized for

educational purposes i.e. for infrastructure development, it

cannot be said that the institution was having the object to

make profit, that the surplus used for management and

betterment of the institution could not be termed as profit.”

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2.6.1 We also find support of our view from C.B.D.T.

Instruction No. 1112 dated 29.10.1977, wherein it has been

laid down that where all objects of trust are educational and if

there is any surplus from running of educational institute,

which is used for educational purpose only and it can be held

that the said institution is existing solely for educational

purpose and not for the purpose of profit. We also find that the

assessee and M/s. SESPL has entered into an agreement

dated 31.03.2000 according to which the assessee is not to

charge any rent on security deposit and M/s. SESPL will not

charge rent from the assessee society.

2.6.2 We also find support from the decision relied by the

ld. Authorized Representative of the assessee in the case of St.

Joseph’s Upper Primary School vs. ITO, 16 TTJ 389 (Hyd.-

Trib), wherein the school was housed in two buildings owned

by the society. The other belongs to Smt. Rajamma, who was

daughter in law of Secretary of the Society, the first and

second floor was constructed by borrowings from the society.

But the society has benefit of housing of its school without

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paying any rent. It was for this reason that interest was not

charged. It was held that there was no misuse of any authority

so as to make the society’s professed objects as not being real

and, therefore, society cannot be deprived of benefit of

exemption u/s 13 of the Act. We find that the facts of the

present case is identical as here the building was constructed

on the amount given by society in which society is running

school. Therefore, the assessee society is eligible for exemption

u/s 10(23C)(iiiad) of the Act. The ld. Authorized Representative

of the assessee also relied in the case of Oasis Educational

Society vs. ADIT (Exemption) 132 TTJ 59 (Hyd), wherein the

preamble read….. that it is found that merely because the land

on which the school building was constructed belong to the

sons and wife of the Principal/Secretary of the Society, it could

not be said that the assessee society is running the

educational society for earning profit and not for charitable

purpose…. . The other case laws are relied and referred above

in submission of ld. Authorized Representative of the assessee

also support the case of the assessee society.

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2.6.3 We find that a society can claim exemption u/s

10(23C)(iiiad) of the Act, if the condition enumerated therein

are satisfied. We find that aggregate annual receipt of the

society are at Rs. 48,66,663/- which does not exceed the

amount of Rs. 1 crore for the assessment years under

consideration. Therefore, the assessee is eligible for deduction

u/s 10(23C)(iiiad) of the Act. The perusal of the assessment

order shows that imparting of educational nature of activities

carried on by the assessee has not been doubted by the AO.

The provisions of Section 10(23C)(iiiad) of the Act reads as

under :-

“(iiiad) any university or other educational institution

existing solely for educational purposes and not for

purposes of profit if the aggregate annual receipts of

such university or educational institution do not

exceed the amount of annual receipts as may be

prescribed; or……

2.6.4 The perusal of the above provision shows that the

exemption u/s 10(23C)(iiiad) of the Act is available to an

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institution, which is solely exists for educational purposes.

Therefore, the phrase used as “solely” means that not for the

purposes of profit. Therefore, plain reading of the said Section

means that an educational institution, which is engaged solely

for the purpose of imparting education is solely for the

purpose of imparting education is qualifies for the exemption

u/s 10(23C)(iiiad). The “solely” words used therein means that

the assessee institution is not carrying out other activities of

earning of profit.

2.6.5 We have gone through the case laws relied upon by

the ld. Authorized Representative of the assessee. We find

that in the case of Addl.CIT vs. Aditanar Educational

Institution, (1979) 118 ITR 235 (Mad), wherein it was held that

if a society registered under Societies Registration Act, 1880,

to run educational institution could be treated as an

educational institution itself u/s 10(22) of the Act. This

decision was approved by Apex Court in Aditanar Educational

Institution vs. Addl. CIT, (1997) 224 ITR 310 ( S.C.).

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2.6.6 In the light of above discussion, facts and

circumstances, we find that the assessee society is engaged in

the running of school and amount of surplus has also been

utilized by the assessee for construction of school building,

which was also used by the assessee, hence, the society is

engaged in the charitable purpose u/s 2(15) of the Act. Since

the gross receipts of society is less than Rs. 1 crore, therefore,

it is eligible for exemption u/s 10(23C)(iiiad) of the Act. We

also find that the facts of the present case are squarely

covered by the above decisions discussed above. Therefore, we

are of the considered opinion that the lower authorities were

not justified in not allowing the deduction to the assessee u/s

10(23C)(iiiad) of the Income-tax Act, 1961. Accordingly, the AO

is directed to treat the Society as covered by Section

10(23C)(iiiad) of the Act and allow the relief accordingly.

Accordingly, ground nos.1.1 & 1.2 are allowed.

“ 2.1 That on the facts and in the circumstances of the case, the ld. CIT(A) erred in maintaining disallowance of kitchen expenses by invoking

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the provisions of Section 40(a)(ia) of the Act when the assessee has reimbursed the same to IMPERIAL ACADEMY. 2.2 That on the facts and in the circumstances of the case, the ld. CIT(A) erred in not allowing the claim of kitchen expenses as per 2nd proviso to Section 40(a)(ia) of the Act even when 2nd proviso having retrospective effect as per decision of the Hon'ble Delhi High Court in the case of Ansal Land Mark Township (P) Limited,( I.T.A.No. 160/161 of 2015)” 3.1 The AO found that the assessee has claimed Rs.

4,75,486/- as kitchen expenses out of which Rs. 1,89,000/-

were reimbursed to Sheetu Eductional Society for the kitchen

work carried out by Imperial Academy. The AO was of the view

that these expenses were paid fixed @ Rs 1000/- per student

for 189 students, hence, payment falls on services rendered

under contract, on which, TDS was liable to be deducted u/s

194C of the Act. Since, no TDS was done, hence, payments

were disallowed u/s 40(a)(ia) of the Act.

3.2 The ld. CIT(A) has observed that the payment has been

made of round figure of Rs. 1000/- per annum per student,

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hence, it is not reimbursement of actual expenses but lump

sum payment for services, hence TDS was required to be

made. As regards reliance by assessee in the case of Ansal

Land Mark Township (P) Limited (I.T.A.No. 160-161/2015

dated 26.08.2015), the CIT(A) has held that second proviso to

Section 40(a)(ia) r.w.s. 201(1) and Rule 31 ACB, specifies that

Form 26A is required to be filed for claiming benefit of second

proviso to Section 40(a)(ia), which has not been filed, hence,

dismissed the appeal.

3.3 Being aggrieved, the assessee filed this appeal before us,

the ld. Authorized Representative of the assessee submitted

that the assessee has reimbursed kitchen expenses incurred

by Imperial Academy, hence, not liable for TDS. Further, the

receipt has duly considered the receipts in their books on

which legitimate amount of tax due is paid, hence, as per

second proviso to Section 40(a)(ia) having retrospective effect

in the light of decision in the case of Ansal land Mark

Township P.Ltd. (160-161/2015 dated 26.08.2015), the AO

was not justified in disallowing the claim.

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3.4 The ld. Departmental Representative relied upon on the

orders of the lower authorities.

3.5 We have considered the facts, rival submissions and

perused the material available on record. Since, the claim of

assessee that the recipient has paid due tax in the light of

second proviso to Section 40(a)(ia), we deem fit to restore this

issue to the file of the AO for verification and if found correct

allow the same as the ratio laid down in the case of Ansal

Land Mark Township P.Ltd. [160 – 161/2015 dated

26.08.2015 ]

“That on the facts and in the circumstances of the case, the ld. CIT(A) erred in maintaining disallowance of Rs. 28,648/- out of kitchen expenses without properly appreciating the facts of the case and submission made before him even when there was no specific defects were pointed out by the AO in the books of accounts of the assessee.”

4.1 The assessee has claimed kitchen expenses of Rs.

5,75,486/- out of which Rs. 1,89,000/- were claimed as

reimbursement to Imperial Academy and for balance of Rs.

2,86,484/- only ledger copy was filed. On spot inquiry, the

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Inspector found that no meal was provided to students,

considering the genuineness, the AO disallowed Rs. 28,648/-

being 10% of expenses of Rs. 2,86,480/- as income for non-

education activity.

4.2 The ld. CIT(A) has also confirmed the disallowance so

made.

4.3 The ld. Authorized Representative of the assessee

submitted that kitchen expenses relates to mess facility

provided to student, teacher and staff, therefore, there was no

justification for disallowance whether books of accounts are

audited.

4.4 We have considered the facts and we are of the view that

the AO was not justified in making ad hoc disallowance when

books of accounts are audited, vouchers and accounts

produced and there cannot be any expenses other than

education purposes, hence, disallowance made by the AO is

deleted. This ground is allowed.

purposes.

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The order has been pronounced in open court on the 28th February , 2017.

Sd/- Sd/- (डी.ट�.गरा�सया) (ओ.पी.मीना) �या�यक सद�य लेखा सद�य (D.T.GARASIA) (O.P.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER

�दनांक /Dated : 28th February, 2017.

CPU*