CARMEL CONVENT ,THIRUVANANTHAPURAM vs. ITO EXEMPTION WARD, TRIVANDRAM, THIRUVANANTHAPURAM

Appellant by: Shri Anil D. Nair, Advocate Respondent by: Smt. J.M. Jamuna Devi, Sr. D.R. Date of Hearing: 20.12.2023 Date of Pronouncement: 07.03.2024 O R D E R Per: Sanjay Arora, AM This is an Appeal by the Assessee directed against the Order dated 04.04.2022 by the Commissioner of Income Tax (Appeals), Income Tax Department[CIT(A)], dismissing the assessee’s appeal contesting it’s assessment under section 143(3) of Income Tax Act, 1961 (the Act) dated 30/12/2018 for Assessment Year 2016-17.

3.2 There is, to begin with, no conflict between a receipt being capital in nature and, by fiction of law, being an income chargeable to tax under the Act: Punjab Distilling Industries Ltd. v. CIT [1965] 57 ITR 1 (SC). The assessee claiming exemption u/s. 11(1)(d), the burden to though prove that the receipt is on capital account – a matter of fact, is on it, as indeed that the ingredients of the exemption provision, implying satisfaction of the essential conditions of the section, are met. Exemptions provisions, as indeed tax statutes, are to be strictly construed: CC v. Dilip Kumar & Co. [2018] 6 GSTR-OL 46 (SC); Banarsi Debi v. ITO [1964] 53 ITR 100 (SC); Ramnath & Co. v. CIT [2020] 425 ITR 337 (SC), affirming [2016] 388 ITR 307 (Ker); Ajmera Housing Corporation v. CIT [2010] 326 ITR 642 (SC). (AY : 2016-17) Carmel Convent v. Income Tax Officer (Exemption) 3.3 The assessee’s case before us, as before the Revenue authorities, who found it as wholly unsubstantiated, was that there is nothing to infer that the contributions, received once a year, are not voluntary and, further, there is nothing in law to indicate that the direction accompanying the contribution is to be in writing. We are wholly unimpressed. Going by it’s version, the assessee means to say that all the students or, more correctly, their parents, come together, once a year, at a specified time, and agree to contribute a specific sum toward corpus donation to the assessee, one each for the school building and EWS, and of course de hors the assessee, who has therefore no role therein. The amount fixed may, further, vary from (say) lower to middle to senior school students. Further, they do this religiously each year, without fail, and irrespective of: (a) financial standing of the recipient-society; (b) their individual financial position at the relevant time, particularly considering that they would also be burdened at the relevant time, i.e., the commencement of the academic session, to paying other mandatory charges to the school (for the services (to be) rendered), along with which the voluntary contribution is being paid; (c) the number of their school/college going wards; and (d) the need for the funds by the assessee for these two avenues of investment. This becomes all the more quizzical, considering that: (a) the contributions are stopped immediately on a student graduating from the school; (b) the same is constant across years and irrespective of the number of students studying (during the relevant period) in the assessee’s school; and (c) the need for funds by the school for these two avenues of investment.

This is as bizarre as it can get, and the assessee’s case, clearly a make-believe, only needs to be stated to be rejected. It is apparent – from the various unproved incidences afore-noted, that would otherwise need to be shown, as indeed the manner of collection of the ‘contributions’ annually from the students, that they are called upon, at the beginning of the academic session, to contribute mandatorily, i.e., as a 4 (AY : 2016-17) Carmel Convent v. Income Tax Officer (Exemption) part of the fee-structure, to the various funds maintained by the school, and which therefore these students have necessarily to. That is, there is nothing voluntary about the said contributions, and there is quid pro quo; the students paying the same as a part of their annual charge to the assessee, which allocates the same to different heads of account or, rather, specifies the same, as it does the other elements of the school fee, viz. tuition fee, laboratory fee, sports fee, extra-curriculum activity fee, etc. As regards the assessee’s claim of the law not contemplating a written direction, the same, to be valid, must therefore also show as to how the direction stands communicated to the assessee. The said direction is a positive action by or on behalf of the contributor, which has to be strictly adhered to, forming a part of the terms and conditions where-under, and subject to which, the contribution/s is given. The burden in law to prove his return, or the claims preferred thereby, is on the assessee, case law on which is legion (CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC); Lakshmiratan Cotton Mills Co. v. CIT [1969] 73 ITR 634 (SC)); and which can further only be on the basis of proper materials (CIT v. R. Venkataswamy Naidu [1956] 29 ITR 529 (SC)). The law gets more strict in case of exemption provisions (H.E. Nizam Religious Endowment Trust v. CIT [1966] 59 ITR 582 (SC); CIT v. Joseph John [1968] 67 ITR 74 (SC)). In Udaipur Sahkari Upbhokta Thok Bhandar Ltd. v. CIT [2009] 315 ITR 21 (SC), it stands clarified that the onus to show that it’s claim/s falls within the four corners of the exemption provision is on the assessee, which agrees with the latest decision by the constitutional bench decision of the Apex Court in Dilip Kumar & Co. (supra).

3.4 The assessee’s claim is a bald one, without anything to show the various incidences afore-noted concomitant to the contributions, substantiating it’s claim. The impugned orders are explicit on this, i.e., of the assessee’s claim being sans any material, which aspect remains unchallenged even before us. Why, much less any substantiation, there is no iota of an explanation, at any stage, qua the various aspects (AY : 2016-17) Carmel Convent v. Income Tax Officer (Exemption) of the transaction afore-noted, as indeed qua the basis on which the contributions are stated to be received as corpus donations. The matter, it needs to be appreciated, given the clear law in the matter, is principally factual. The students are the beneficiaries of the services being delivered, for a consideration, of which the impugned sums are a part. The same are a part of the assessee’s regular receipts. We find the Revenue’s reliance on the decision in Asst. CIT v. Scholars Education Trust of India [2017] 88 taxmann.com 158, as apposite, and draw support from the same.

3.5 We, in view of the fore-going, have no hesitation in confirming the impugned orders and, accordingly, uphold the disallowance of exemption u/s. 11(1)(d) of the Act. The impugned receipts would nevertheless form part of the assessee’s regular receipt, i.e., from the activity of running the school and, accordingly, liable for exemption u/s. 11(1)(a), i.e., if otherwise exigible, in accordance with law. Toward this, we find the AO has considered the same, including the impugned sum as part of income derived from property held under trust. He computes exemption u/s. 11(1)(a), i.e., on account of application of income, accordingly, at Rs.54.22 lakhs. The assessee, before the ld. CIT(A) objects thereto, stating as: (a) though depreciation (Rs.24.47 lakhs) has rightly not been taken into account in computing the income (s. 11(6)); the same having not been in fact claimed by it, the AO ought to have taken into account the fact of addition to fixed assets at Rs.17.13 lakhs, deductible u/s. 11(1)(a); (b) it having incurred an excess expenditure over income in the past (at Rs.1842.42 lakhs), which therefore ought to have been taken into account by the AO in computing income (Ground E before us); (c) addition on application of s. 2(24)(x) r/ws. 36(1)(va) of the Act. (Gd. D). The ld. CIT(A) mistook the assessee’s grievance (a) before him to imply non-grant of depreciation allowance (at Rs.24.47 lakhs) and allowed the same. Item (b) being not raised before him per a specific ground, but only by way of an alternate claim on being denied the claim u/s. 11(1)(d) (for Rs. 102.13 lacs), which he confirms, was accordingly not considered by him. Item (c) was decided by him, confirming the 6 (AY : 2016-17) Carmel Convent v. Income Tax Officer (Exemption) addition. While adjustment qua the employee’s contribution is an independent one, the former two are integral to the assessee’s claim u/s. 11(1)(a), which thus has not been, as he was required to on the denial of assessee’s claim u/s. 11(1)(d), examined by the ld. CIT(A). The matter, accordingly, goes back to his file for adjudication thereof, considering each of the assessee’s claims in its respect, and decision in accordance with law, issuing specific findings upon hearing the parties before him. No doubt, the assessee does not before us specifically agitate the non-allowance of capital expenditure, i.e., by way of addition to fixed assets, claimed at Rs.17.13 lakhs. This, as apparent, is for the reason of it having been, albeit unwittingly, allowed a higher claim. It is, however, the correct legal position that is relevant, and not the view that the parties may take of their rights in the matter: CIT v. C. Parakh & Co. (India) Ltd. [1956] 29 ITR 661 (SC) (also see: Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)). Once the issue of computation of deduction u/s. 11(1)(a) in wake of denial of that u/s. 11(1)(d), unaddressed by the ld. CIT(A), is open before him, all aspects thereof, in issue or otherwise integral thereto, would require being looked into. Why, these issues were not raised before us by the assessee’s ld. counsel, Shri Nair limiting his arguments to it’s claim u/s. 11(1)(d). So, however, ignoring the same, despite specific claims by the assessee, would be, to our mind, both unlawful and unjust. As explained time and again by the Hon'ble Apex Court, as in CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 (SC), that the Tribunal is to deal with and determine questions which arise out of the subject-matter of the appeal in the light of the evidence, and consistently with the justice of the case. 3.6 The matter accordingly goes back to the file of the ld. CIT(A) for the purpose. The onus to prove it’s claims though would be on the assessee. We may though, before parting, highlight certain aspects of the matter, of which the ld. CIT(A) shall have regard in adjudicating the matter, as follows: (a) The assessee claims carry forward of excess expenditure (over income), at Rs. 1842.42 lakhs, also describing it as excess application of income – which is a 7 (AY : 2016-17) Carmel Convent v. Income Tax Officer (Exemption) contradiction in terms. As it appears to us, the assessee, as for the current year, presumes exemption u/s. 11(1)(d), while yet claiming capital expenditure/depreciation (a capital allowance). Two, an excess of expenditure is unfeasible except through borrowings, financing expenditure or, as the case may be, application of income. Repayment of borrowings would, in such a case, as is well settled, qualify as an application of income, except where the same is itself through borrowings. Financing through borrowings, it may be appreciated, cannot be regarded as an application of income. This would equally apply to capital expenditure incurred during the year. Without doubt, where financed by own funds, capital expenditure, as indeed revenue, would be an application of income S.RM.M.CT.M Tiruppani Trust v. CIT[1998] 230 ITR 636 (SC). (b) The set aside of current income for future application, which can be at a maximum of 15% thereof, is only for computing the total income for the year. It does not imply that the assessee is not obliged to apply the same in future. As such, a claim of excess application (?) is inconsistent with reserving 15% for future application; again, a contradiction in terms. The same may have to be recomputed for the earlier period/s as well inasmuch as the computation of Rs.1842.42 lakhs being not on record. (c) How, we wonder, could the investment of funds in securities, yielding income, i.e., to secure terminal benefits to it’s employees, and understandably to be paid to the retiring employee at the time of his retirement, can be regarded as either expenditure or an application of income for the current year, except of course where the amount is credited to the employee’s account with a Fund. The same would constitute an expenditure of the year in which it is incurred/paid. It is the cash flow of a charitable/religious institution, as against it’s accounts, where maintained on mercantile basis, that would, in terms of provisions of the Act, govern the computation of it’s income (s. 2(24)(iia) r/w ss. 11 & 12).