DCIT(EXEMPTION), BHOPAL vs. VANASHPATI SMRITI SHIKSHA SAMITI, BHOPAL, BHOPAL

This appeal filed by the Revenue is directed against the order dated 21.08.2020 of the learned CIT(A)-2, Bhopal [“Ld. CIT(A)”] in Appeal No. CIT(A)-2/BPL/IT-10186/18-19, which in turn arises out of the assessment-order dated 07.12.2018 passed by the learned Exemption Circle, Bhopal [“Ld. AO”] u/s 143(3) of the Income-tax Act, 1961 [“the Act”] for the assessment-year 2016-17. The assessee has also submitted Cross-Objection No. CO/33/Ind/2021 which is admitted and being disposed of.

The registry has informed that that the present appeal was required to be filed by 07.11.2020 but the same was actually filed on 08.02.2021, after a delay of 93 days. The Ld. AR prayed that the delay has occurred due to Covid-19 Pandemic. The Ld. AR further placed reliance on the order of Hon’ble Supreme Court in Suo Motu Writ Petition (C) No. 3 of 2020 read with Misc. Applications, by which suo motu extension of the limitation-period for filing of appeals w.e.f. 15.03.2020 under all laws has been granted and hence there is no delay in fact. We confronted the Ld. DR who agreed to the submission of Ld. AR. In view of this, the appeal is proceeded with for hearing, there being no delay.

Briefly stated the facts are such that the assessee is a Society registered u/s 12AA and entitled to the exemption u/s 11 of the Act. The assessee submitted return declaring a total income of Rs. Nil for the relevant assessment-year on 14/09/2016 alongwith audit report in Form No. 10B, which was taken up for scrutiny by serving statutory notices u/s 143(2) and 142(1) of the Act. The Ld. AO passed order of assessment u/s 143(3) on 07/12/2018 at a total income of Rs. 10,97,04,778/- after making certain adjustments. Being aggrieved by the order of assessment, the assessee submitted appeal to Ld. CIT(A). The Ld. CIT(A) decided appeal on 21.08.2020 and allowed part-relief. Against the order of Ld. CIT(A), the Revenue has filed this appeal and the assessee has filed Cross-Objection and both sides are before us.

The revenue has raised following Grounds:

The assessee has raised following Ground:

Facts qua this issue are such that the assessee has claimed excess application of Rs. 84,23,44,060/- made in earlier years, against the income of current year. The assessee made this claim, for the first time before Ld. CIT(A) by invoking Rule 46A of the Income-tax Rules, 1962 and placed relevant evidences before the Ld. CIT(A). The Ld. CIT(A) sought 3

At the outset we would like to mention that the Revenue is not disputing the legality of excess application of earlier years against the income of subsequent year. The only grievance of the revenue in Ground No. 1, is that neither the assessee has made such a claim in the return of income nor before the Ld. AO and therefore allowing this claim by the Ld. CIT(A) for the first time is violative of the decision of Hon’ble Supreme Court in Goetze (India) Ltd. Vs. CIT (284) ITR 323. Before us, the Ld. DR emphasized this grievance and submitted that the Ld. CIT(A) has wrongly allowed the claim raised by the assessee for the first time before him and therefore the action of Ld. CIT(A) is not justified.

Per contra, the Ld. AR submitted that the decision in Goetze India (supra) should be read fully and not in piecemeal or partly. According to Ld. AR, in this decision the Hon’ble Supreme Court has categorically held that the restriction to admit a new claim is on the assessing authority only and it does not impinge on the power of the appellate authority. According to the Ld. AR, the proceeding before the Ld. CIT(A) are also appellate proceeding. Hence the Ld. AR argued that the Ld. CIT(A) was very much within the power to entertain and allow the legitimate claim made before him for the first time even though the same was not made in the return of income or before the Ld. AO.

We have considered the rival contentions of the both sides and perused the material held on record. We have also given our due 4

Now we take up revenue’s Ground No. 2. In this Ground, the issue raised by the revenue is whether the CIT(A) was justified in deleting the disallowance of advertisement expenditure of Rs. 49,52,163/- claimed by the assessee.

During assessment proceedings, the Ld. AO found that the assessee has claimed a total expenditure of Rs. 49,52,163/- on account of advertisement expenditure. On verification of details of expenditure, the Ld. AO observed that the supporting bills pertained to the assessment- year 2015-16 and not to the assessment-year 2016-17 under consideration. Hence the Ld. AO disallowed expenditure on the ground that the expenditure related to an earlier year and not to the assessment- year under consideration.

The Ld. CIT(A) has, however, allowed the claim of assessee by observing as under:

Per contra the Ld. AR repeated the submissions made by the assessee before Ld. CIT(A). The contention of the Ld. AR is that though the bills of impugned expenditure pertained to the assessment-year 2015-16, there was an ongoing negotiation between the assessee and the advertisers which could finally be settled in the assessment year 2016-17. Hence the liability of expenditure de facto crystalized in the assessment- year 2016-17 under consideration only. The Ld. AR further emphasized that the section 11 allows exemption on the basis of “application of income”. Since the “application of income” for meeting the impugned expenditure has taken place in the current year, the said expenditure of Rs. 49,52,163/- is eligible for exemption u/s 11 in the current year i.e. assessment year 2016-17, notwithstanding the fact that the bills related to earlier years.

We have considered the rival submissions of both sides and perused the material available on record. We observe that the Ld. CIT(A) has

Now we take up Revenue’s Ground No. 3. In this Ground, the issue involved is the disallowance of Rs. 4,80,000/- out of salary paid to specified person.

During assessment proceedings, the Ld. AO found that the assessee has paid a salary of 16,80,000/- (Rs. 1,40,000/- per month) to Mr. Ajit Singh, a member of society. The assessee submitted that Mr. Ajit Singh manages all institutions in Bhopal and Indore, carried on by the assessee, and hence salary payment is reasonable. However, the Ld. AO found that the total salary and establishment expenditure incurred by the assessee as a whole (including salary of Mr. Ajit Singh) was approximately 42% of the gross receipts which is quite high so as to indicate that the assessee has sufficient staff to look after the day-to-day activities. The Ld. AO further observed that Mr. Ajit Singh is also engaged in his own business and activities and he could hardly devote time for the institution. However, since Mr. Ajit Singh was a responsible person to manage, control and supervise the overall working of the society, the Ld. AO considered reasonable salary of Rs. 12,00,000/- (Rs. 1,00,000/- per month) and disallowed excess payment of Rs. 4,80,000/- by invoking section 13(1)(c) read with section 13(3).

The Ld. CIT(A) has made an elaborate analysis of this issue running over Page No. 7 to 14 of his order, which includes the submissions made by the assessee as well as the remand-report submitted by Ld. AO. The precise conclusions coming out of the analysis made by Ld. CIT(A) are such that (i) the assessee is engaged in educational activity where so much of technical and non-technical staff are required. Hence expenditure on salary is naturally high. But Mr. Ajeet Singh was discharging duties of administration; (ii) Mr. Ajit singh is a highly qualified person holding B.B.A., M.B.A. and Ph.D. as supported by the degree-certificates by way of additional evidences under Rule 46A; (iii) Mr. Singh was associated with the assessee since inception in the year 2005. It is due to his efforts over the years that the assessee could achieve such a height; (iv) Mr. Singh was administering the activities of all seven institutes of the assessee which comprised of 4 engineering colleges, 1 pharmacy, 1 MBA and 1 B.Ed. college; (v) Mr. Singh was devoting majority of his time and efforts to the assessee and not to his own activities; and (vi) Mr. Singh had been working for Rs. 16,80,000/- in the assessee society but had he worked somewhere else, he would have earned not less than Rs. 2,00,000/- per month i.e. Rs. 24,00,000/- in a year. Taking note of these facts, the Ld. CIT(A) accepted Rs. 16,80,000/- as a reasonable salary and deleted the disallowance made by Ld. AO.

Before us, the Ld. DR supported the assessment-order and claimed that the Ld. AO has rightly taken Rs. 1,00,000/- per month i.e. Rs. 12,00,000/- for the whole year as a reasonable salary and disallowed excess payment of Rs. 4,80,000/-. Hence the disallowance must be upheld.

Per contra, the Ld. AR supported the order of Ld. CIT(A). The Ld. AR further argued that there cannot be a hard and fast yardstick to determine the reasonable amount of salary. The reasonableness of salary has to be

We have considered the submissions and contentions of both sides and also perused the material held on record. We observe that Mr. Ajit Singh possess a solid educational background consisting of BBA, MBA and Ph.D, which has a great value for an educational society like this assessee. We also observe that the assessee is an educational society having as many as 7 varied colleges whose administration was being done by Mr. Ajit Singh. Therefore, the duties discharged by Mr. Ajit Singh certainly involve a big amount of time, efforts and skills. We also find weightage in the claim of the assessee that Mr. Singh has been associated with the assessee since inception in 2005 and under his able administration, the assesse has got tremendous growth. We also note that the assessee has made a categorical submission that Mr. Ajeet Singh would have received a minimum salary of Rs. 2,00,000/- per month from any other institution but the Ld. AO has not been able to negate this submission. The Ld. AO has made his own estimation of Rs. 1,00,000/- per month and that too without any cogent basis. In view of these facts, we do not find any infirmity in the action of Ld. CIT(A). Therefore, we agree with the deletion of disallowance made by the Ld. CIT(A). Accordingly, this ground of revenue is also dismissed.

Now we take up Revenue’s Ground No. 4. In this Ground, the issue involved is the disallowance of rent expenditure of Rs. 20,40,035/-.

The assessee has paid a rent of Rs. 20,40,035/- as per following details:

During assessment proceedings, the Ld. AO found that these rent- payments have been made to the persons specified in section 13(1)(c) of the Act. In response to the query of Ld. AO, the assessee submitted that the premises were taken for official purpose and therefore rent payment is allowable. The Ld. AO, however, observed that the assessee’s head office is located at Bhopal wherefrom all works are being controlled. The Ld. AO further observed that the assessee has not given any specific reason for taking these flats, which are situated in Delhi and Indore, on rent and it is the possibility that these flats may be used by the trustee / members of society or other for personal reasons and not for official purpose. Hence the Ld. AO formed a view that the rent-payment is a benefit to the persons specified under section 13(1)(c) and does not deserve exemption u/s 11.

The Ld. CIT(A) has discussed this issue in detail on Page No. 14 to 18 of his order in which he has considered the submissions made by the assessee as also the remand-report submitted by Ld. AO. It is the submission of assessee that the society is having an engineering college and one MBA college at Indore and the officials need to visit Indore very frequently, therefore the assessee has been maintaining a guest house at Indore which is very economical as compared to staying in hotel. 10

On the contrary, the Ld. AR made strong submissions to justify that the flats were actually needed and used for official purpose. The submissions of Ld. AR are more or less same as made by the assessee before Ld. CIT(A) and narrated in foregoing paragraph. Therefore we refrain from repeating the same.

We have considered the rival submissions and contentions of both sides and also perused the material held on record. We observe that the assessee has produced before the Ld. AO the evidences to justify that the officials had frequently visited to Indore and Delhi and claimed only expenditure on travel and not on stay, lodging or boarding. This fact is accepted by the Ld. AO too in Para No. 4.1 and 4.2 of his remand-report, reproduced at Page No. 19 of the appeal-order passed by Ld. CIT(A), although the Ld. AO has given remark about non-maintenance of register in the guest houses. We feel that maintenance of register in the guest house is not a reason to deny the deduction when not only the factum of travels to Indore and Delhi with the support of tickets is established but also it is on record that the assessee has claimed only cost of tickets and saved the expenditure on stay, lodging or boarding due to guest houses maintained at Indore and Delhi. We also observe that the assessee has given sufficient explanation to justify the necessity of maintaining those guest houses at Indore and Delhi. We find that the Ld. CIT(A) has aptly considered these factual aspects and after a due consideration, deleted the disallowance of Rs. 20,40,035/-. Therefore, we do not have any interference with the order of Ld. CIT(A) in this regard. Consequently, this ground of revenue is also dismissed.

Now we take up Revenue’s Ground No. 5. In this Ground, the issue raised by the revenue is whether the CIT(A) was justified in allowing the deduction for the application of income on acquisition of fixed assets?

Before proceeding further, it would be worthwhile to take note of the fact that nowhere in the assessment-order the Ld. AO has disallowed the deduction for the application of income on acquisition of fixed assets. It is only Para No. 7 of the assessment-order where the Ld. AO has stated that by virtue of unreasonable payment of salary and rent to specified persons specified in section 13(3), the provision of section 13(1)(c) triggers and the effect would be that whole exemption u/s 11 shall be denied to the assessee. It seems that the assessee has gathered an apprehension from this part of the assessment-order that the Ld. AO meant to disallow the deduction for application on acquisition of fixed assets. Hence the assessee raised following ground before the Ld. CIT(A):

Before us, the Ld. DR argued that once the exemption u/s 11 is lost for any reason, may be due to section 13(1)(c), it would necessarily follow that the application of income for acquisition of fixed assets shall not be allowable to the assessee.

Per contra, the Ld. AR supported the order of Ld. CIT(A).

We have considered rival submissions of both sides. We observe that this Ground No. 5 raised by the revenue, hinges on Ground No. 3 and 4. It can be seen from foregoing discussion that we have already accepted the deduction of rent and salary paid by the assessee to specified persons as reasonable and dismissed the Ground No. 3 and 4 of the revenue. Consequently the issue of attraction of section 13(1)(c) also came to an end. Being so, the fear of the assessee that the Ld. AO is not going to allow the expenditure on acquisition of fixed assets as application of income, is automatically dispelled. To conclude the Ground No. 5 comes to an end due to dismissal of Ground No. 3 and 4. Accordingly the Ground No. 5 of the revenue is also dismissed.

Now we turn to the Assessee’s Cross-objection. The solitary ground raised by the assessee in cross-objection is that the Ld. CIT(A) has erred in not allowing repayment of loan as “application of income” for section 11.

Precisely stated the facts are such that the assessee took loans for purchase of fixed assets in an earlier year and claimed cost of fixed assets as “application of income” for section 11 in that year. In subsequent year, when the assessee made repayments of those loans (to the extent of Rs. 31,42,25,109), the assessee claimed such repayment as “application of income” for section 11. The Ld. CIT(A), however, rejected this claim of assessee by holding as under on Page No. 24 of his order:

Before us, the Ld. AR submitted that there are two different transactions, viz. (i) incurring the cost of fixed assets in an earlier year by utilizing borrowed funds, and (ii) the repayment of borrowed funds in a subsequent year. These are the two separate and independent transactions which should not be mixed-up, more so when these transactions have taken place in two different years and not in the same year. The Ld. AR thereafter relied upon the decision of Hon’ble Supreme Court in CIT, Pune Vs. Rajasthan & Gujrati Charitable Foundation 15

The Ld. DR supported the orders of lower authorities and claimed that the lower authorities have rightly disallowed the claim of assessee. The Ld. DR requested to uphold the disallowance.

We have considered the rival submissions of both sides and perused the record. We have also gone through the judgements cited before us as also the amendment made in section 11(1) through Finance Act, 2021 from assessment-year 2022-23. At the outset, we find that the Hon’ble Apex Court, in CIT, Pune Vs. Rajasthan & Gujrati Charitable Foundation Poona (supra), has allowed deduction of depreciation on assets even when the assessee had already claimed the cost of those assets as “application of income”. It is also noteworthy that in the said judgement, the Hon’ble Apex Court also took note of the amendment made

In the result the appeal of Revenue is dismissed and the cross- objection of assessee is allowed.