VAIRAMS KINDERGARTEN SOCIETY,PUDUKKOTTAI vs. ITO, PUDUKKOTTAI

The appeal filed by the assessee is directed against the order dated 18.11.2013, passed by Ld. Commissioner of Income Tax (Appeals), Tiruchirapalli and it relates to assessment year 2010-11. The assessee is aggrieved by the decision of the Ld. CIT(Appeals) in confirming the addition of `47.71 lakhs made by the Assessing Officer.

The facts relating to the issue are stated in brief. The assessee is a society and it is running an educational institution under the name and style of “Vairams Kindergarten Society” in Pudukottai. The school is conducting classes for LKG and UKG standards. The society filed its return of income for the year under consideration by declaring ‘Nil’ income. The assessee had claimed exemption of its entire income under Section 10(23C)(iiiad) of the Income-tax Act, 1961 (in short 'the Act'). The return of income was taken up for scrutiny by the Assessing Officer. The A.O. noticed that the assessee has obtained PAN – AAGFV 4771 P which normally relates to partnership firms. Further, the A.O. also noticed that the assessee has not obtained registration under Section 12A of the Act and hence it is not eligible to claim exemption u/s 11 of the Act. On scrutinizing the Balance Sheet, the A.O. noticed that the assessee has advanced a sum of `47.71 lakhs to a sister-Trust named “Vairams Matriculation Higher Secondary School”. The assessee explained that the above said amount was given for the purpose of construction of building. Later, the assessee also submitted that the amount was advanced for using the building belonging to Vairams Matriculation Higher Secondary School. The assessee admitted that the amount was paid by way of account transfer, there was no plan approval for the building and further, the Assessing Officer further noticed that the assessee had given such advances in subsequent year also. According to the A.O., the funds so given to other society was lying unused and idle. Accordingly, the Assessing Officer expressed the view that the amount so diverted by the assessee is liable to be taxed as income of the assessee for the following reasons:-

The Ld. CIT(Appeals) also confirmed the same with the following observation:-

The Ld. AR appearing for the assessee submitted that the assessee-society is running an educational institution and its gross receipt was less than the limit prescribed for seeking approval under Section 10(23C) of the Act. Accordingly, he submitted that the assessee had claimed exemption under Section 10(23C)(iiiad) of the Act. He further submitted that the Assessing Officer has proceeded to assess the advance so given by the assessee by applying provisions of Section 11 to 13 of the Act. The Ld A.R rendered in the case of CIT v. Seethakathi Trust (295 ITR 520), wherein it was held that the provisions of Section 11(5) of the Act are not applicable to a Trust claiming exemption under Section 10(22) of the Act. The Ld. A.R. submitted that the provisions of Section 10(22) has since been deleted and in its place the present 10(23C)(iiiad) have been inserted. Accordingly he submitted that the decision rendered in the case of Seethakathi Trust shall be applicable to assessee also. The Ld A.R invited our attention to the decision of Hon'ble Delhi High Court rendered in the case of DIT (Exemption) v. ACME Educational Society (2010) 326 ITR 146, wherein it was held that the amount advanced by one educational society to another educational society cannot be considered as violation of provisions of Section 13(1)(d) read with Section 11(5) of the Act, since the interest-free loan given by the assessee-society was neither an investment nor a deposit. The Ld A.R submitted that the assessee herein has also given only advance to another educational society and hence the same cannot be considered as “Investment” or “Deposit”.

The Ld. A.R. submitted that the objectives of the assessee- society, inter alia, includes “to aid and assist in the establishment, etc. of educational institutions”. The assessee has given impugned construction of the building and the same would amount to “aiding and assisting” in the establishment, carrying on, maintenance, development, improvement and extension of institutions providing all kinds of education. Accordingly, he submitted that the assessee has advanced money in accordance with its objects and hence, the tax authorities are not justified in holding that the impugned advance amount to utilization of funds for non-charitable purposes. He further submitted that the assessee has not claimed the advance given to the other society as an application of income.

The Ld. A.R. further submitted that the assessee has been making such kind of advances since past several years. However, the Assessing Officer has assessed the entire amount of advance outstanding as on 31.03.2010 as income of the assessee. The Ld. A.R. submitted that the assessee is maintaining running account with the other society and balance as on 01.04.2009 was `47.14 lakhs and the balance as on 31.03.2010 was `47.65 lakhs and hence, the Assessing Officer was not justified in assessing the entire outstanding amount as income of the year under consideration. has been giving contradictory statements with regard to nature of accounts. Initially the assessee submitted that the amount was given to other society for the purpose of utilizing the same for construction of the building. However, the assessee could not prove the fact of construction being carried on by the other society by furnishing necessary details. At the later stage, the assessee took a different stand and stated that the advance was given for Accordingly, the Ld. D.R. submitted that the assessee is giving explanations which are contradictory to each other. The ld D.R placed reliance on the decision rendered by Hon’ble Punjab & Haryana High Court in the case of St. Francis Convent School Vs. CBDT (2012)(67 DTR (P&H) 251) and also the decision rendered by Hon’ble Madras High Court in the case of VGP Foundation (supra).

In the rejoinder, the Ld A.R submitted that the decision was rendered by Hon’ble Madras High Court in the case of VGP Foundation (supra) in the context of funds given to a sister concern, which was a private limited company of which the trustees of the assessee were also directors. However, in the instant case, the assessee, being an educational institution, has advanced money to further the recipient society is also an educational institution. He submitted that the decision rendered in the case of St. Francis Convent School (supra) is also not applicable, since the funds were diverted by the assessee therein to the Diocese of Jalandhar.

We have heard rival contentions and perused the record.

Next, the assessing officer has expressed the view that the advance so given by the assessee cannot be considered as an application of income. A perusal of the return of income filed by the assessee would show that the assessee has not claimed the same as application of income. Hence, the said observation made by the assessing officer also fails.

The Assessing officer has finally stated that the claim of exemption u/s 10(23C)(iiiad) is not accepted because the Society has diverted the sum of `47,71,056/- for purposes which are not charitable in nature. First of all, we notice that the assessing officer has failed to refer to any of the provisions of the Act, under which he is forming such an opinion, i.e., he has not shown as to how the assessee has violated any of the provisions of the Act, which would warrant rejection of claim of exemption made u/s 10(23C)(iiiad) of the Act. On the contrary, the contention of the assessee is that the amount so advanced to another educational institution falls within its object of the assessee society. The said contention of Ld A.R could not be rebutted by the revenue. Hence the said reasoning given by the assessing officer also fails.

In view of the foregoing discussions, we are of the view that the assessing officer has brought to tax the amount of `47,71,058/- in the hands of the assessee without the authority of law.

In the result, the appeal filed by the assessee is allowed.