ITO, Bhubaneswar v. M/s Human Resource Development & Management Trust (ASBM Trust), Bhubaneswar

ITA 127/CTK/2011 | 2007-2008
Pronouncement Date: 29-07-2011

Appeal Details

RSA Number 12722114 RSA 2011
Bench Cuttack
Appeal Number ITA 127/CTK/2011
Duration Of Justice 4 month(s) 27 day(s)
Appellant ITO, Bhubaneswar
Respondent M/s Human Resource Development & Management Trust (ASBM Trust), Bhubaneswar
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Department
Bench Allotted DB
Tribunal Order Date 29-07-2011
Date Of Final Hearing 30-06-2011
Next Hearing Date 30-06-2011
Assessment Year 2007-2008
Appeal Filed On 03-03-2011
Judgment Text
IN THE INCME TAX APPELLATE TRIBUNAL CUTTACK BENCH CUTTACK BEFORE : HONBLE SHRI K.K.GUPTA ACCOUNTANT MEMBER AND HONBLE SHRI K.S.S.PRASAD RAO JUDICIAL MEMBER. ITA NO . 127/CTK/2011 AND C.O.NO .14/CTK/2011 (FILED BY THE ASSESSEE) (ASSESSMENT YEAR 2 007 - 08) INCOME - TAX OFFICER WARD 2(1) BHUBANESWAR. VERSUS M/S.HUMAN RESOURCE DEVELOPMENT & MANAGEMENT TRUST (ASBM TRUST) PLOT NO.8 SAI ANANDAM COMPLEX DAMANA SQUARE BHUBANESWAR 751 024. PAN:AAATH 5331 H (APPELLANT) (RESPONDENT) FOR THE APPELLANT: SHR I P.C.MOHANTY DR FOR THE RESPONDENT S/SHRI P.C.PANDA AND KAMAL AGARWALLA ARS ORDER PER BENCH : THE APPEAL IS PREFERRED BY THE REVENUE HAVING BEEN AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) BHUBANESWAR DT.3.12.2010 FOR THE A SSESSMENT YEAR 2007 - 08. THE ASSESSEE HAS FILED THE CROSS OBJECTION. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT (A) HAS ERRED IN ACCEPTING THE FINAL SUBMISSIONS OF THE ASSES SEE WITHOUT GIVING ANY OPPORTUNITY TO THE AO PARTICULARLY WHEN THE ASSESSEE DID NOT PRODUCE THE DETAILS BEFORE THE AO DURING REMAND PROCEEDING THOUGH DIRECTED BY THE LD. CIT (A). 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT (A) HAS E RRED IN APPLYING CASES OF AMRICAN HOSTEL AND LODGING ASSOCIATION EDUCATION INSTITUTION V. CBDT AND THE CASE OF PINEGROVE INTERNATIONAL CHARITABLE TRUST VS. UNION OF INDIA AND OTHER WHICH WERE DISTINGUISHABLE ON FACTS. 3. ON THE FACTS AND IN CIRCUMSTANC ES OF THE CASE THE LD. CIT (A) HAS ERRED IN NOT CORRECTLY APPRECIATING THE PROFIT MOTIVE OF THE ASSESSEE AS ILLUSTRATED IN THE CASE OF SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATION AND FOLLOWED BY THE OTHER TWO CASES CITED SUPRA . 4. THE LD. CIT(A) ERRE D IN TREATING THE ACTIVITY OF THE ASSESSEE TO DERIVE INCOME OUT OF EDUCATIONAL ACTIVITY AS THE ACTIVITY OF CHARITABLE PURPOSE THERE BY FAILED TO UNDERSTAND THE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 2 PREDOMINANT OBJECT OF THE INSTITUTION IN THE LIGHT OF DICTUM IN THE CASE OF ADDI. CIT V. SURAT A RT SILK CLOTH MANUFACTURERS ASSOCIATION REPORTED IN [1980] 121 ITR 1. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE ISSUE OF CAPITATION TEES/PROFITEERING AS DEFINED BY THE APEX COURT IN THE CASE OF T. M.A. PAI FOUNDATION AND OPEL ACT 2007 WAS NOT APPLICABLE TO THE CASE OF THE ASSESSEE. THE FACT THAT THE ASSESSEE COLLECTED THE ENTIRE COURSE FEE IN ONE YEAR IS COVERED BY THE DEFINITION OF CAPITATION FEES AS PER THE OPEI ACT. 2007. 6. ON THE FACTS AND I N THE CIRCUMSTANCES THE LD. CIT (A) HAS ERRED IN HOLDING THAT THE TRAINING OF DEVELOPMENT AND ELOQUENCE IS INCIDENTAL TO AICTE RECOMMENDED COURSE OF MANAGEMENT WHERE THE STUDENTS ARE ADMITTED ON THE BASIS OF CAT/MAT SCORE. 7. ON THE FACTS AND IN THE CIR CUMSTANCES THE ED. CIT (A) HAS ERRED IN HOLDING THAT THE FINISHING SCHOOL ACTIVITY OF THE ASSESSEE WAS EDUCATION IGNORING THE PRINCIPLE DECIDED IN THE CASE OF SOLE TRUSTEE SHIKSHANA TRUST AND BIHAR SCHOOL OF MINING CASE. 8. ON THE FACTS AND IN THE CIRC UMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN HOLDING THAT ANY COMMERCIAL ACTIVITY WAS INCIDENTAL TO THE ACTIVITY OF RECOGNIZED EDUCATIONAL INSTITUTION. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) WAS NOT CORRECT IN HOLDING THAT TO ARRIVE AT PROFIT OF THE ASSESSEE CAPITAL EXPENDITURE IS ALSO TO BE DEDUCTED WHICH IS AGAINST NORMAL ACCOUNTING PRINCIPLES. 10. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT (A) HAS FAILED TO DISTINGUISH BETWEEN THE GROWTH OF CIT Y MONTESSORY SCHOOL WHICH IS MORE THAN 50 YEARS OLD AND THE ASSESSEE WHICH IS ONLY 3 YEARS OLD. 11. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT (A) WAS NOT CORRECT IN HOLDING THAT CAPITAL EXPENSES ARE ALSO APPLICATION OF INCOME IN THIS CASE SINCE STUDENTS START READING ONLY AFTER BASIC INFRASTRUCTURES ARE PUT IN PLACE AS PER AICTE NORMS. 12. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT (A) HAS ERRED IN ACCEPTING SALARY PAID TO A TRUSTEE WITHOUT AUTHORIZATION OF THE T RUST DEED. ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 3 13. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT (A) HAS ERRED IN ALLOWING COLLECTION OF MONEY FROM THE BENEFICIARY OF THE TRUST FOR EDUCATION WITHOUT AUTHORIZATION OF THE TRUST DEED AND WITHOUT INTIMATION TO THE CIT. 14. O N THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT (A) WAS NOT CORRECT IN OBSERVING THAT THE AO HAD NO BASIS TO SAY THAT FEES COLLECTED WERE EXCESSIVE INSPITE OF THE FACT THAT THE AO HIGHLIGHTED THIS IN PAGE -- 2 OF HIS ORDER. 3. IN THE CROSS O BJECTION THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS. 01. THAT THE AO HAS SUPPRESSED THE FUNDAMENTAL PREMISE OF THE ORDER OF THE LD. CIT(A) THAT THE ASSESSMENT OF A VALIDLY REGISTERED CHARITABLE ORGANIZATION HAS TO BE DONE BY APPLYING THE PROVISIONS O F SECTION 11 TO 13. THE AO HAS NO POWER TO WITHDRAW THE CHARITABLE STATUS AND GO BEYOND THE SCOPE OF SECTION 11 TO 13 DURING ASSESSMENT UNDER SECTION 143(3). 02. THAT THE AO HAS ERRED IN HOLDING THAT CAPITAL EXPENSES CANNOT BE TREATED AS APPLICATION FOR CHARITABLE PURPOSES WITHOUT QUESTIONING THE GENUINENESS OR RELEVANCE OF SUCH EXPENDITURES. 03. THE AO HAS ERRED IN HOLDING THAT EVEN REASONABLE REMUNERATION IS NOT PAYABLE TO THE TRUSTEE FOR SERVICES RENDERED. 04. THAT THE RATIO OF THE CASES AMERICAN H OSTEL AND LODGING ASSOCIATION EDUCATION INSTITUTION V CBDT AND PINEGROVE INTERNATIONAL CHARITABLE TRUST VS. UNION OF INDIA AND ADDI. CIT V. SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATIONS REPORTED IN [19801 121 ITR 1 IS RELEVANT AND HAS NOT BEEN DISTINGUIS HED ON FACTS OR LAW. 05. THAT THE REVISED GROUNDS OF APPEAL WER E SHARED TO THE AO VIDE LETTER N O. CIT(A) - II/ BBSRJ2O1O - 11/1093 DT.13.09.2010 NO NEW GROUNDS FOR FACTS WERE RAISED THEREAFTER. 06. THAT THERE WAS NO REMAND PROCEEDING DIRECTED BY THE LD. CI T(A) AGAINST THE ASSESSEE. THE AO ON REMAND WAS ASKED TO SPECIFICALLY RESPOND TO VARIOUS SUBMISSIONS MADE BY THE ASSESSEE DURING THE HEARINGS. ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 4 07. THAT ALL OTHER GROUNDS ARE BASELESS AND CONTINGENT UPON CROSS OBJECTION NO. 1 2 AND 3 AS STATED ABOVE. ALL THE GROUNDS OF APPEAL HAVE BEEN REFUTED AS PER THE ENCLOSED WRITTEN SUBMISSION IN SUPPORT OF CROSS OBJECTIONS . 4. BOTH THE PARTIES WERE HEARD REGARDING THE ISSUES RAISED BY THEM IN THE APPEAL AS WELL AS THE CROSS OBJECTION AND THEIR LEGAL IMPLICATIONS. 5. ON CAREFUL CONSIDERATION OF THE MATERIAL MADE AVAILABLE TO THE TRIBUNAL INCLUDING THE WRITTEN SUBMISSIONS FILED BY THE ASSESSEE AND THE CITATIONS RELIED ON BY BOTH THE PARTIES THE UNDISPUTED FACTS RELATING TO THE ISSUES ARE THAT THE ASSESSEE IS RUNNING AN EDUCATIONAL INSTITUTION IN THE NAME AND STYLE HUMAN RESOURCES DEVELOPMENT AND MANAGEMENT TRUST OF INDIA(ASBM TRUST) . IT IS OFFERING REGULAR COURSES IN MANAGEMENT. THE COURSE S OFFERED BY THE ASSESSEE S ARE APPROVED BY AICTE AND OTHER REGULATORY BODIES. THE ASSESSEE TRUST WAS CONSTITUTED AS PER TRUST DEED DT. 08.08.2005. THE DEPARTMENT HAS GIVEN REGISTRATION U/S 12AA OF I T ACT VIDE CITS ORDER DT. 28.03.07 WITH RETROSPECTIVE EFFECT FROM 01.04.2006. THE REGISTRATION IS STILL CONTINUING . AS PER THE TRUST D EED THE MAIN OBJECT OF THE TRUST IS RUNNING OF EDUCATIONAL INSTITUTIONS. THE RETURN OF INCOME FOR ASSESSMENT YEAR 2007 - 08 IS FILED ENCLOSING THERETO THE AUDIT REPORT IN FORM NO. 10 B DISCLOSING THE TOTAL DEFICIT OF RS. 5 70 49 834. THIS DEFICIT WAS ARRIVE D AT ON THE BASIS OF RECEIPT AND PAYMENT ACCOUNT. IN THE SAID ACCOUNT ALL RECEIPTS BY WAY FEES RECEIVED FROM STUDENTS DONATIONS BANK INTEREST MISC INCOME ETC WERE TAKEN AS RECEIPTS AND ALL OUTGOINGS TOWARDS EXPENDITURE INCURRED FOR EDUCATIONAL PURPOSES INCLUDING CAPITAL EXPENDITURE ON BUILDINGS AND OTHER INFRASTRUCTURE OF THE TRUST WERE TAKEN AS APPLICATION. THIS RETURN OF THE ASSESSEE WAS TAKEN UP FOR SCRUTINY CONSIDERATION U/S 143(3) AND ORDER OF ASSESSMENT WAS PASSED ON 31.12.2009 ON A TOTAL INCOME O F RS. 4 03 74 030. WHILE DOING SO T HE DEFICIT SHOWN BY THE ASSESSEE IN THE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 5 RECEIPTS AND PAYMENTS ACCOUNT AMOUNTING TO RS. 5 70 49 834 WAS CONVERTED INTO A SURPLUS BY THE AO BY DISALLOWING SOME CAPITAL EXPENDITURE OF RS 8 47 44 796 CLAIMED BY THE ASSESSEE AS AN APPLICATION TOWARDS CONSTRUCTION OF BUILDING AND OTHER FACILITIES REQUIRED FOR ADVANCING ITS OBJECTS OF EDUCATION. THE ASSESSING OFFICER HAS OPINED THAT THE ASSESSEE INSTITUTION IS NOT ENTITLED TO THE BENEFITS OF EXEMPTION BECAUSE OF NON COMPLIANCE T O VARIOUS PROVISIONS OF SECTIONS 11 AND 13 OF THE ACT. THIS ACT OF THE ASSESSING OFFICER HAS RESULTED IN COMPUTATION OF PO SITIVE INCOME OF RS. 4 03 74 030 AS AGAINST THE DEFICIT OF RS. 5 70 49 834. ACCORDINGLY THE ASSESSING OFFICER HAS TAXED THE SURPLUS O F RS. 4 03 74 030. IN THE ASSESSMENT ORDER THE ASSESSING OFFICER HAS OBSERVED THAT THE TRUST DEED HAS NO SPECIFIC CONDITION THAT THE ASSESSEE WILL RUN THE INSTITUTION COLLECT FEES FROM STUDENTS AND INVEST THE SURPLUS TO EXPAND ITS ACTIVITY FOR EDUCATION . THE ASSESSING OFFICER IS OF THE VIEW THAT THE FEES COLLECTED FROM THE STUDENTS SHOULD BE ONLY UTILISED FOR THE EDUCATION RELATED EXPENSES OF THE ST UDENTS WHO ARE THE CONTRIBUTORS . THE ASSESSING OFFICER FURTHER POINTED OUT THAT OUT OF THE TOTAL FEES COLL ECTED DURING THE YEAR AMOUNTING TO RS.8.82 CRORES THE TRUST HAS UTILISED ON RS.4.72 CRORES TOWARDS EDUCATIONAL RELATED EXPENSES AND THE BALANCE AMOUNT WAS UTILISED TOWARDS ACQUISITION OF CAPITAL ASSETS. THIS ACTIVITIES OF THE ASSESSEE WAS FOUND BY THE ASS ESSING OFFICER AS A PROFIT MOTIVE WHICH WILL ULTIMATELY GO TO THE SOCIETY NOT TO STUDENTS. HE FURTHER OPINED THAT THE EXPRESSION APPLICATION SHOULD BE LIMITED TO REVENUE EXPENDITURE AND CANNOT BE INTERPRETED AS INCLUSIVE OF REVENUE AND CAPITAL EXPENDIT URE. WHILE COMING TO THIS CONCLUSION THE ASSESSING OFFICER HAS MADE A REFERENCE TO SECTION 11(1A) OF THE ACT WHICH DEALS WITH APPLICATION OF INCOME ARISING OUT OF CAPITAL GAIN WHICH STIPULATES THAT SUCH GAIN UTILISED FOR ACQUISITION OF CAPITAL ASSET IS DE EMED TO BE AN APPLICATION FOR CHARITABLE PURPOSE. THE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 6 ASSESSING OFFICER HAS RELIED ON THE DECISION RENDERED IN THE CASE OF CIT V QUEENS EDUCATIONAL SOCIETY 2009 319 ITR 160 177 TAXMAN 326 (UTTRAKHAND) FOR THE PROPOSITION THAT CAPITAL EXPENDITURE IS NOT AN APPLICATION OF THE FUNDS. THE ASSESSING OFFICER HAS FOUND THAT THE ASSESSEE IS RUNNING A FINISHING SCHOOL AND HAS COLLECTED FEES OF RS.2 18 00 000 DURING THE PREVIOUS YEAR. ON THIS ASPECT THE ASSESSING OFFICER HAS OPINED THAT RUNNING A FINISHING SCHOO L IS A DISTINCT COMMERCIAL ACTIVITY UNCONNECTED WITH THE OBJECT OF IMPARTING EDUCATION. HE WAS OF THE VIEW THAT THE PROFIT GENERATED OUT OF THIS ACTIVITY SHOULD HAVE BEEN IN CONFORMITY WITH THE PROVISIONS SECTION 11(4A) AND HENCE SEPARATE BOOKS SHOULD HA VE BEEN MAINTAINED. HE FORTIFIED THIS VIEW BY PLACING RELIANCE O N THE DECISION RENDERED IN THE CASE OF BIHAR INSTITUTE OF MINING AND MINING SURVEY V CIT [ 208 ITR 608 ( PATNA )] . THE LEARNED ASSESSING OFFICER FURTHER POINTED OUT THAT THE TRUST IS COLLECTING C APITATION FEES FROM THE STUDENTS WHICH IS PROHIBITED IN CASE OF EDUCATIONAL INSTITUTIONS. HE CONSIDERED THE SAID FEES COLLECTED AS EXCESSIVE AND UNREASONABLE. ACCORDINGLY HE CAME TO THE CONCLUSION THAT THER E IS A TAINT OF COMMERCIALITY IN THE ACTIVITIES OF THE ASSESSEE . FOR THIS HE RELIED ON THE OBSERVATION OF THE HONBLE APEX COURT IN THE CASE OF T M A PAI FOUNDATION V STATE OF KARNATAK A 2002 8 SCC AND VODHITOLA EDUCATION SOCIETY V ADIT(EXEM) HYDERABD ( 2008 ) 20 SOT 535 (HYD). HE FURTHER OBSERVED IN TH E ASSESSMENT ORDER THAT THE ASSESSEE HAS PAID REMUNERATION OF RS.6 16 500 TO ITS TRUSTEE AND FULL TIME DIRECTOR PROF ESSOR SHRI BISHWAJIT PATNAIK . IN THIS WAY THE ASSESSEE IS FOUND TO HAVE VIOLATED THE PROVISIONS OF SECTION 13(2)(C) WHICH DISENTITLES A TRU ST FROM CLAIMING EXEMPTION UNDER SE CTION 11 THE TRUSTEE BEING AN INTEREST ED PERSON WITHIN THE MEANING OF SECTION 13(3) OF THE ACT. ULTIMATELY THE ASSESSING OFFICER HAS HELD THAT MERE GRANTING OF REGISTRATION UNDER SECTION ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 7 12AA WOULD NOT ENTITLE THE ASS ESSEE TO CLAIM EXEMPTION UNLESS IT C OMPLIES WITH THE PROVISIONS OF S ECTION S 11 AND 13. HE FURTHER OBSERVED THAT AT THE TIME OF GRANTING REGISTRATION THE COMMISSIONER IS NOT REQUIRED TO EXAMINE THE APPLICATION OF INCOME. THE EXERCISE OF DISCRETION UNDER SEC TION 12AA IS LIMITED TO SEE WHETHER THE OBJECTS OF THE TRUST ARE CHARITABLE. HE FORTIFIED THIS VIEW BY PLACING RELIANCE ON THE DECISIONS RENDERED IN THE CASE OF SANJEEVAMMA HANUMATHA GOWDA CHARIATBIE TRUST V DIT (EXEMPTION) [( 2006 ) 285 ITR 327 ( KA R)] FIFT H GENERATION EDUCATION SOCIETY V CIT [ 185 ITR 634 ( ALL )] AND CIT V GUJURAT MARITIME BOARD 2007 [ 289 ITR 139 ( GUJ )] . 6. AGGRIEVED WITH THE SAID ORDER OF ASSESSMENT PASSED BY THE ASSESSING OFFICER THE ASSESSEE PREFERRED APPEAL BEFORE CIT (A). THE LEARNED CIT(A) CONSIDERING THE MATERIAL MADE AVAILABLE IN THE ASSESSMENT RECORDS AND SUBMISSIONS MADE BY THE ASSESSING OFFICER AS WELL AS THE ASSESSEE AND EXAMINING THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER ON EACH ISSUE DISTINGUISH ED THE CASE LAWS CITE D BY THE ASSESSING OFFICER AND THEREBY ALLOWED THE APPEAL OF THE ASSESSEE BY INTER ALIA OBSERVING THAT THE ISSUE OF GENERATING SURPLUS WHICH HAS BEEN HELD AS MAKING SYSTEMATIC PROFIT BY THE ASSESSING OFFICER TO DENY EXEMPTION THE LEARNED CIT(A) OPINED THAT WHEN SOURCES OF FUNDS AND GENUINENESS OF EXPENDITURE FOR EDUCATIONAL PURPOSES HAVE BEEN NOT DOUBTED BY THE ASSESSING OFFICER THE VIEW EXPRESSED BY THE ASSESSING OFFICER THAT THE EXEMPTION CANNOT BE ALLOWED AS THERE IS SURPLUS IS NOT JUSTIFIED. THE L EARNED CIT(A) FOUND THAT CORE ISSUE PERTAINS TO APPLICATION OF FUNDS TOWARDS CAPITAL EXPENDITURE OF THE TRUST WHIC H HAS BEEN DISALLOWED BY THE ASSESSING OFFICER TO WORK OUT TAXABLE SURPLUS AGAINST THE DEFICIT SHOWN BY THE ASSESSEE AS PER ITS BOOKS. HE FOR TIFIED HIS FINDINGS BY PLACING RELIANCE ON THE PROPOSITION S ENUNCIATED BY THE APEX COURT IN THE CASE OF S R M. M.CT M TIRUPPANI TRUST V CIT [( 1998 ) 230 ITR 636 ] CIT V ST ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 8 GEORGE FORANA CHURCH [( 1998 ) 170 ITR 62 ( KER )] AND CIT V MOOLCHAND SHARBATI DEVI HOSP ITAL TRUST [( 2010 ) 190 TAXMAN 338 ( ALL )] WHEREIN IT WAS HELD THAT CAPITAL EXPENDITURE IS AN ALLOWABLE EXPENDITURE FOR WORKING OUT THE SURPLUS/DEFICIT OF A TRUST. ACCORDINGLY THE LEARNED CIT(A)HAS DIFFERED WITH THE VIEW EXPRESSED IN THE CASE OF QUEENS EDU CATIONAL SOCIETY (SUPRA) AS RELIED ON BY THE ASSESSING OFFICER . THE LEARNED CIT(A) HAS RELIED ON THE DECISIONS RENDERED SUBSEQUENT TO THE SAID DECISION RENDERED IN THE CASE OF PINEGROVE INTERNATIONAL CHARITABLE TRUST V UOI [( 2010 ) 327 ITR 73(P&H) ] IN WHI CH THE RATIO OF THE DECISION IN QUEENS CASE (SUPRA) WAS DELIBERATED AND DISTINGUISHED. THE LEARNED CIT(A) HAS NOT ACCEPTED THE VIEW OF THE ASSESSING OFFICER THAT THE ASSESSEE IS COLLECTING CAPITATION FEES FROM THE STUDENTS AND THEREFORE NOT ENTITLED TO E XEMPTION OF ITS SURPLUS. ACCORDING TO THE LEARNED CIT(A) THE FEES COLLECTED ARE REASONABLE AND COMPARABLE WITH OTHER SIMILAR INSTITUTIONS. THE LEARNED CIT(A) DIFFERED FROM THE DECISION IN THE CASE OF VODITOLA EDUCATION SOC IETY (SUPRA) RELIED ON BY THE ASS ESSING OFFICER . WHILE CONSIDERING THE ACTIVITIES OF THE ASSESSEE RUNNING OF A FINISHING SCHOOL THE LEARNED CIT (A) HAS DIFFERED WITH THE VIEW OF THE ASSESSING OFFICER THAT THIS ACTIVITY WAS IN THE NATURE OF A BUSINESS ACTIVITY. WHILE COMING TO THIS CONCL USION THE L EANED CIT(A) DISTINGUISHED THE CASE OF BIHAR INSTITUTE OF MINING AND MINING SURVEY (SUPRA) OBSERVING THAT THE SAME WAS A DISTINCT INSTITUTE FOR BEING RUN FOR A SPECIFIC PURPOSE TO PREPARE THE STUDENTS FOR APPEARING FOR VARIOUS EXAMINATION AND IT HAS NO ATTRIBUTES OF NORMAL SCHOOLING. THE LEARNED CIT(A) CONSIDERING THE PAYMENT OF S ALARY TO SRI BISHWAJIT PATNAIK T RUSTEE AND MANAGING DIRECTOR OF THE INSTITUTE AMOUNTING TO RS.6 16 500 DIFFERED WITH THE VIEW OF THE ASSESSING OFFICER THAT THIS PAYME NT IS IN VIOLATION OF THE PROVISIONS OF SECTION 13(2)(C). THE LEARNED CIT(A) HAS OBSERVED THAT PAYMENT OF REASONABLE SALARY FOR SERVICES ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 9 RENDERED IS PERMISSIBLE AS PER THE PROVISIONS OF I.T. ACT. WHILE CONSIDERING THE OTHER OBJECTIONS OF THE ASSESSING OF FICER REGARDING THE ASPECT OF THE TRUST DEED NOT CONTEMPLAT ING THAT THE ASSESSEE WOULD RUN THE INSTITUTE AND INVEST SURPLUS TO EXPAND ITS ACTIVITY OUT OF THE F EES COLLECTED FROM THE STUDENTS THE LEARNED CIT(A) HAS NOT ACCEPTED THE CONTENTION OF THE ASSESS ING OFFICER POINTING OUT THAT NO COGENT EVIDENCE WAS BROUGHT ON RECORD . HE FURTHER OBSERVED THAT THE ASSESSING OFFICER HAS NOT BROUGHT ANY MATERIAL ON RECORD TO THE EFFECT THAT THE ASSESSEE HAS DEVIATED FROM ITS ACTIVITIES AFTER OBTAINING REGISTRATION UNDE R SECTION 12AA OF THE ACT O R THE ASSESSEE HAS APPLIED THE FEES COLLECTED BY IT FOR ANY NON - CHARITABLE PURPOSES. THUS OBSERVING THE LEARNED CIT(A) REJECTED THE CONTENTIONS OF THE ASSESSING OFFICER AND WORKED OUT THE SURPLUS AND THE DEFICIT AS UNDER : TH US THE LEARNED CIT(A) WORKED OUT THE TAXABLE INCOME IN THE HANDS OF THE ASSESSEE AT NIL BY ALLOWING THE APPEAL FILED BY THE ASSESSEE BEFORE HIM. 7. THE LEARNED DR HAS VEHEMENTLY ARGUED SUPPORTING THE ORDER OF THE ASSESSING OFFICER ON ALL ISSUES AND PRESSE D THAT ORDER PASSED BY THE LEARNED CIT(A) IS NOTHING BUT OUT OF INCORRECT APPRECIATION OF FACTS AND NOT BEING IN ACCORD ANCE WITH THE PROVISIONS OF LAW AND ACCORDINGLY HE SOUGHT FOR SETTING ASIDE THE SAME. THE LEARNED DR HAS MAINLY ARGUED THAT THE ACTIVITI ES OF THE ASSESSEE IN NOT FULLY APPLYING THE FEES COLLECTED TOWARDS OBJECTS OF THE TRUST FOR IMPARTING EDUCATION AND APPLYING THE SURPLUS TOWARDS CAPITAL ASSETS POINTS OUT TOWARDS EXPANSION OF ITS ACTIVITIES AND A PROFIT MOTIVE. HE FURTHER ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 10 CONTENDED THAT T HE TRUST SHOULD SOLELY EXIST FOR CHARITABLE PURPOSES FOR WHICH REGISTRATION UNDER SECTION 12AA WAS GRANTED TO IT. IN SUPPORT OF THIS CONTENTION THE LEARNED DR STRONGLY RELIED ON THE DECISION IN THE CASE OF QUEENS EDUCATION SOCIETY CASE (SUPRA) WHEREIN IT WAS HELD THAT THE CAPITAL EXPENDITURE IS NOT AN APPLICATION TOWARDS THE OBJECTS OF THE TRUST UNDER S ECTION 11 OF THE I.T.ACT. HE FURTHER POINTED OUT THAT THE ASSESSEE WAS COLLECTING CAPITATION FEES WHICH IS NOT PERMISSIBLE UNDER LAW . THE CRUX OF HIS ARGU MENT IS THAT THE ACTIVITIES OF THE ASSESSEE TRUST JUDGED IN THE OVERALL PERSPECTIVE WOULD INDICATE THAT THE SAME IS TAINTED WITH AN ELEMENT OF COMMERCIALITY DISENTITLING IT FROM CLAIMING OF EXEMPTION UNDER S ECTION 11 OF THE ACT. 8. CONTRARY TO THIS THE LEARNED AR OF THE ASSESSEE VEHEMENTLY ARGUED ASSAILING THE ORDER OF THE ASSESSING OFFICER ON ALL COUNTS SUBMITTED THAT THE ORDER PASSED BY THE LEARNED CIT(A) ELABORATELY ADDRESSES TO ALL ISSUES BOTH ON FACTS AND IN LAW AND HENCE HE SOUGHT FOR UPHOLDING T HE SAME. DURING THE COURSE OF HEARING THE LEARNED AR OF THE ASSESSEE HAS BROUGHT TO OUR ATTENTION TO THE CROSS OBJECTION FILED BY THE ASSESSEE AND THE WRITTEN SUBMISSIONS FILED BY HIM. ON DETAIL ANALYSIS OF VARIOUS FACETS OF THE ORDER OF THE ASSESSING OFF ICER AND THAT OF LEARNED CIT(A) THE LEARNED AR IDENTIFIED FIVE CORE ISSUES AND POINTED OUT THAT IF THESE ISSUES ARE DECIDED THE SAME WOULD RESOLVE THE ENTIRE CONTROVERSY . THESE ISSUES ARE COLLECTION OF FEES FROM THE STU DENTS AND GENERATION OF SURPLUS APPLICATION OF THE SAME TOWARDS CAPITAL EXPENDITURE ISSUE OF CAPITATION FEES RUNNING OF FINISHING SCHOOL AND PAYMENT OF SALARY TO THE TRUSTEE VIEWED AS VIOLATION OF SECTION 13 BY ASSESSING OFFICER . HE DESCRIBED THE ORDER OF THE ASSESSING OFFICER AS LOPSI DED INAS MUCH AS THE SAME IS CONCEPTUALLY WRONG FACTUALLY INCORRECT AND LEGALLY NOT SUSTAINABLE. WHILE ARGUING ON EACH OF THE ISSUES THE LEARNED ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 11 AR OF THE ASSESSEE SUBMITTED THAT THE ORDER PASSED BY THE ASSESSING OFFICER IS REPLETE WITH INSTANCES OF CONSI DERATION OF PARTLY RELEVANT AND IRRELEVANT MATERIALS WITHOUT BEING BACKED UP BY COGENT EVIDENCE ON VARIOUS ISSUES. HE FURTHER CONTENDED THAT SUCH AN ORDER STANDS VITIATED AS IT IS NOT KNOWN TO WHAT EXTENT THE MIND OF THE AO IS INFLUENCED BY IRRELEVANT CONS IDERATIONS. HE ARGUED IN DETAIL ON VARIOUS ISSUES AROSE IN THIS APPEAL AND THE CROSS OBJECTION FILED BY THE ASSESSEE. ACCORDINGLY HE SOUGHT FOR UPHOLDING THE ORDER OF THE LEARNED CIT(A) BY DISMISSING THE APPEAL OF THE REVENUE AND ALLOWING THE CROSS OBJECTI ON OF THE ASSESSEE. 9. ON CAREFUL ANALYSIS OF THE ASSESSMENT ORDER AS WELL AS THE IMPUGNED ORDER PASSED BY THE LEARNED CIT(A) IN THE LIGHT OF THE DETAILS PLACED BEFORE THE TRIBUNAL IT REVEALED THAT THE GROUNDS OF APPEAL OF THE REVENUE AND THE CROSS OBJECT ION FILED BY THE ASSESSEE ARE LENGTH Y AND SOMETIMES OVERLAPPING EACH OTHER. SO IN ORDER TO HAVE A CLEAR ANALYSIS OF THE IMPUGNED ORDER OF THE LEARNED CIT(A) AS WELL AS THE ORDER PASSED BY THE ASSESSING OFFICER THE BASIC ISSUES REQUIRE OUR ADJUDICATION IN THE LIGHT OF THE FACTUAL BACKGROUND OF THE CASE AND LEGAL ASPECTS THEREOF ARE AS FOLLOWS : I) WHETHER GENERATION OF SURPLUS OUT OF THE FEES COLLECTED WOULD INDICATE A PROFIT MOTIVE AND THE ACTIVITY OF A TRUST CAN BE SAID TO BE TAINTED WITH AN ELEMENT OF C OMMERCIALITY TO DISENTITLE THE TRUST FROM CLAIMING EXEMPTION UNDER S ECTION 11 OF THE ACT ? (I) WHETHER GENERATION OF SURPLUS OUT OF THE FEES COLLECTED WOULD INDICATE A PROFIT MOTIVE AND THE ACTIVITY OF THE ASSESSEE CAN BE SAID TO BE TAINTED WITH AN ELEMENT OF COMMERCIALITY TO DISENTITLE THE TRUST FROM CLAIMING EXEMPTION UNDER SECTION 11. II) WHETHER CAPITAL EXPENDITURE IS REQUIRED TO BE TREATED AS APPLICATION WHILE ARRIVING AT THE SURPLUS U/S.11 OF THE I.T.ACT MORE SO IN THE LIGHT OF THE D ECISION IN THE C ASE OF QUEENS EDUCATIONAL SOCIETY CASE(SUPRA). ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 12 III) WHETHER FEES COLLECTED BY THE ASSESSEE DURING THE YEAR COULD BE CONSIDERED AS EXCESSIVE TO ASCRIBE THE SAME AS CAPITATION FEE DISENTITLING T HE INSTITUTION THE BENEFITS OF S ECTION 11 OF THE I.T.ACT ? IV) WHETHER THE ACTIVITY OF THE TRUST IN RUNNING A FINISHING SCHOOL CAN BE TREATED AS A DISTINCT BUSINESS ACTIVITY AS DISTINGUISHED FROM CHARITABLE ACTIVITY ? V) WHETHER THE ASSESSEE HAS VIOLATED THE PROVISIONS OF S ECTION 13 TO DISENTITLE IT FROM CLAIM ING THE BENEFITS OF S ECTION 11 IN VIEW OF PAYING REMUNERATION TO ITS TRUSTEE AND WHOLE - TIME DIRECTOR ? VI) WHETHER ADEQUATE OPPORTUNITY WAS AFFORDED BY THE CIT(A) TO THE ASSESSING OFFICER TO STATE HIS CASE IN THE COURSE OF HEARING OF APPEAL ? VII) WHETH ER CIT(A) SHOULD HAVE TAKEN INTO ACCOUNT THE OBSERVATION OF ADMINISTRATIVE CIT IN THE ORDER PA SSED UNDER SECTION 264 THAT THE ASSESSEE IS NOT ENTITLED TO REGISTRATION ? 10. NOW COMING TO THE ASPECT OF FIRST POINT AS ABOVE IT IS FOUND THAT THE ASSESSING O FFICER HAS NOT ONLY WORKED OUT THE PROFIT BY DISALLOWING CAPITAL EXPENDITURE FOR THE PERIOD UNDER CONSIDERATION BUT HAS TAKEN INTO ACCOUNT THE BOOK RESULTS FOR THE SUBSEQUENT PERIOD OF THE ASSESSMENT YEAR 2008 - 09 AND 2010 - 11 BASING ON THE AMOUNTS SUBMITTE D BY THE ASSESSEE AND RECONSTRUCTED THEM AS HERE UNDER : DURING THE PERIOD UNDER CONSIDERATION A SURPLUS OF RS.4 03 74 0 30 HAS BEEN WORKED OUT BY THE ASSESSING OFFICER BY DISALLOWING THE APPLICATION TOWARDS CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE . FOR SUBSEQUENT YEARS THE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 13 ASSESSEE HAD DEFICIT AS PER ITS BOOKS AS INDICATED IN THE ABOVE TABLE BUT THE ASSESSING OFFICER WORKED OUT SURPLUS AFTER DISALLOWING CAPITAL EXPENDITURE. THE ASSESSING OFFICER APPEARS TO HAVE DRAWN A N INFERENCE THAT THE REWORK ED SURPLUS WITH THE ASSESSEE AMOUNTS TO EARNING SYSTEMATIC PROFIT FROM YEAR TO YEAR AND ITS ACTIVITIES ARE TAINTED WITH COMMERCIALITY THEREBY THE ASSESSEE HAS DEVIATED FROM CHARITABLE ACTIVITY FOR WHICH REGISTRATION WAS GRANTED UNDER S ECTION 12AA OF T HE I.T.ACT . THIS OPINION OF T HE ASSESSING OFFICER WAS NOT ACCEPTED BY THE LEARNED CIT(A) HOLDING THAT THE ASSESSING OFFICER WAS NOT CORRECT TO REWORK THE SURPLUS WITHOUT CONSIDERING CAPITAL EXPENDITURE AS APPLICATION. DURING THE COURSE OF HEARING THE LEA RNED AR OF THE ASSESSEE HAS VEHEMENTLY ARGUED THAT THE METHOD OF COMPUTATION OF SURPLUS BY THE ASSESSING OFFICER AMOUNTS TO TRANSGRESSING THE MANDATES OF PROVISIONS OF S ECTION 11 OF THE I.T.ACT THE ASSESSING OFFICER IS NOT ENTITLED FOR SUCH AN EXERCISE EX CEPT RELYING ON THE BOOK RESULTS. THIS METHOD IS REPUGNANT TO THE PROVISIONS OF THE ACT. HE FURTHER POINTED OUT THAT THE PROVISIONS OF S ECTION 11 IS A DEPARTURE FROM THE HEAD - WISE COMPUTATION OF INCOME AS PROVIDED UNDER S ECTION 14 OF THE ACT . AS PER SECTIO N14 OF THE ACT THE COMPUTATION ON COMMERCIAL ITY PRINCIPLES IS PROVIDED IN CONTRADISTINCTION TO THE COMPUTATION OF INCOME UNDER THE PROVISIONS OF THE I.T.ACT. HE FURTHER OBJECTED TO THE OBSERVATION OF THE ASSESSING OFFICER THAT THE ASSESSEE SHOULD APPLY ALL ITS RECEIPTS BY WAY OF FEES RECEIVED FOR THE STUDENTS WHO CONTRIBUTED THE SAME STATING THAT THE ASSESSEE IS NOT GOVERNED BY THE PRINCIPLE OF MUTUALITY WHERE THERE SHOULD BE COMPLETE IDENTITY BETWEEN THE CONTRIBUTORS AND PARTICIPANTS. ELABORATING HIS AR GUMENT THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT MERELY BECAUSE THERE IS SURPLUS THE SAME WOU LD NOT POINT TO A PROFIT MOTIVE OF THE ASSESSEE. HE FURTHER ARGUED THAT IN A CASE OF SURPLUS RESULTS THAT WOULD NOT POINT TO A PROFIT MOTIVE OR ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 14 COMMER CIALITY SO LONG AS THE RECEIPTS OF THE TRUST ARE APPLIED TOWARDS ITS OBJECTS WITHIN THE STIPULATED PERIOD. HE FURTHER SUBMITTED THAT THE DECISION IN THE CASE OF QUEENS EDUCATIONAL SOCIETY [( 2009 ) 319 ITR 160 (UTTARAKHAND)] IS NOT A GOOD LAW AS THE PRINCI PLES LAID DOWN IN THIS DECISION HAVE BEEN DISSENTED IN A NUMBER OF DECISIONS RENDERED BY VARIOUS HIGH COURTS AND TRIBUNALS. HE FORTIFIED THIS SUBMISSION BY QUOTING DECISIONS IN THE PINE GROVE INTERNATIONAL CHARITABLE TRUST V UOI [( 2010 ) 327 ITR 73(P&H) ] S T LAWRENENCE EDUCATIONAL SOCIETY V CIT [( 2010 ) 197 TAXMAN 504 ( DELHI )] VANITA ASHRAM TRUST V CCIT [( 2010 ) 327 ITR 121 ] KHATRIYA MAHARANA PRATAP BHAWAN V UOI ( 194 TAXMAN 442 ) AND SUNBEAM ENGLISH SCHOOL SOCIETY V CIT VARANASI [( 2011 ) 129 LTD 299 (ALLD) ] . H E FURTHER PONTED OUT THAT THE DECISION IN QUEENS EDUCATIONAL SOCIETY (SUPRA) IS THE DECISION OF NON JURISDICTIONAL HIGH WHICH HAS NO BINDING PRECEDENT IN THE CASE OF THE ASSESSEE. FOR THIS PROPOSITION HE RELIED ON THE DECI SION IN THE CASE OF CIT V. THANE ELECTRICITY SUPPLY LTD. [1994] 206 ITR 727 ( BOM ) . FURTHER HE POINTED OUT THAT THE THEORY OF PREPONDERANCE JUDICIAL PREFERENCE SUPPORTS THE CASE OF THE ASSESSEE BECAUSE OF A NUMBER OF CONTRARY DECISIONS. FOR THIS PROPOSITION HE RELIED ON THE DECISION IN T HE CASE OF CIT BANGAL ORE VS. B C SRINIVAS SETTY AND ORS [( 1981 ) 128 ITR 294 ( SC )] AND CIT V P J CHEMICALS [( 1994 ) 210 ITR 830 ( SC )].HE RELIED ON THE PROPOSITION THAT THE VIEW THAT COMMENDS ITSELF AS ACCEPTABLE IS THE ONE WHICH HAS COMMENDED ITSELF TO THE MAJORITY OF THE HIGH COURTS. 11. ON CAREFUL ANALYSIS OF THIS ISSUE IN THE LIGHT OF THE PROVISIONS OF SECTIONS 12AA 11 AND 13 OF THE I.T.ACT WE HOLD THAT IT IS AN ACCEPTED PRINCIPLE THAT THE INCOME OF A TRUST HAS TO BE COMPUTED ON COMMERCIAL PRINCIPLE. WH ILE DOING SO THERE IS BOUND TO BE A SURPLUS /DEFICIT IN THE CASE OF A TRUST DURING A PREVIOUS YEAR. GENERATION OF SURPLUS WHICH IS A USUAL ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 15 OUTCOME IN THIS WORKING SHOULD NOT BE TAKEN AS A DISQUALIFICATION AGAINST A TRUST IN ANY MANNER. THE ISSUE HAS TO BE VISUALIZED IN THREE SITUATIONS. IN THE FIRST SITUATION THERE MAY BE NO SURPLUS AS BECAUSE THE RECEIPTS WERE FULLY APPLIED TOWARDS THE OBJECTS OF THE TRUST. IN SUCH A SITUATION THE TRUST WOULD ENJOY EXEMPTION UNDER S ECTION 11 AND ATTRIBUTING A COMMERCIAL MOTIVE WOULD NOT ARISE. IN THE SECOND SITUATION THERE MAY BE A DEFICIT IN COMPUTATION OF INCOME FOR SIMILAR REASONS AS POINTED IN SITUATION NUMBER ONE AND IN SUCH A SITUATION BEN EFIT OF EXEMPTION UNDER S ECTION 11 CANNOT BE DENIED ON THE GROUND OF COMMERCI AL MOTIVE. IN THE THIRD SITUATION THE APPLICATION MAY FALL SHORT OF REQUIRED 85% STIPULATED TO BE APPLIED TOWARDS THE OBJECTS OF THE TRUST. IN THIS SITUATION THE ACT PERMITS ACCUMULATION OF THE SAME FOR BEING UTILISED I N THE SUBSEQUENT YEAR(S) UNDER S ECT ION 11(2). THE SCHEME OF THE ACT IS NOT PERMITTING TO ACCEPT A PROPOSITION THAT THE TRUST IS REQUIRED TO SPEND THE ENTIRE RECEIPTS FOR THE STUDENTS DURING THE YEAR WHO CONTRIBUTED THE SAME. IT IS NOT EQUALLY POSSIBLE TO SUBSCRIBE TO A VIEW THAT IF ANY SURPLUS REMAINS AFTER APPLICATION THE SAME WOULD INDICATE A PROFIT MOTIVE. GENERATION OF SURPLUS/DEFICIT DURING A PREVIOUS YEAR IS ENVISAGED IN THE STATU TE INAS MUCH AS THE SECTION 11(2) PERMITS A TRUST TO ACCUMULATE ITS SURPLUS IN EXCESS OF 15% FOR BEING APPLIED FOR THE PURPOSES OF THE TR UST WITHIN A PERIOD OF 5 YEARS PROVIDED THE TRUST HAS MADE AN APPLICATION IN FORM NO.10 AS PER RULE 17 TO THE ASSESSING OFFICER AND INVEST THE SURPLUS NOT APPLIED DURING THE YEAR IN THE SP ECIFIED MANNER AS CONTAINED IN S ECTION 11(5). THE VIEW OF THE REVENUE THAT FEES COLLECTED OR SURPLUS ARISING OUT OF THE SAME SHOULD BE APPLIED TOWARDS THE BENEFIT OF THE CONTRIBUTORS OF FUND IS NOT ACCEPTABLE IN THE LIGHT OF THE SCHEME ENVISAGED IN THE RELEVANT PROVISIONS OF THE I.T.ACT . THERE IS NO SUCH STIPULATION IN THE STATUTE. SO ALSO THE REVENUES PROPOSITION THAT THE FEES COLLECTED OR SURPLUS ARISING OUT OF THE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 16 SAME SHOULD BE APPLIED FOR THE BENEFIT OF THE CONTRIBUTORS OF FUND IS NOT ENVISAGED IN THE SCHEME OF THE I.T.ACT. ACCORDIN GLY THE REVENUES CONTENTION THAT SYSTEMATIC PROFIT THEREFORE HAS NO LEGS TO STAND . ACCORDINGLY NO ADVERSE CONCLUSION AGAINST THE ASSESSEE CAN BE DRAWN TO WITHDRAW EXEMPTION UNDER S ECTION 11 OF THE I.T. ACT . WE ARE OF THE CONSIDERED VIEW THAT THE ASSE SSING OFFICER SHOULD ONLY REFER TO INCOME AS PER THE BOOKS OF ACCOUNT OF THE TRUST AND NOT THE TOTAL INCOME COMPUTED UNDER SECTION 2(45). THE COMPUTED INCOME HAS NO RELEVANCE TO ALLOW EXE MPTION UNDER SECTION 11. THAT ASSESSING OFFICER IS REQUIRED TO RELY ON SURPLUS AS PER BOOKS AS WAS HELD IN THE CASES OF CIT V TRUSTEES OF HEH NIZAMS SUPPLEMENTAL RELIGIOUS ENDOWMENT TRUST ( 127 ITR 378 )( AP ) CIT V RAO BAHADUR CALWALA CUNNON CHETTY CHARITIES ( 135 ITR 485 )( MADRAS ) . THEREFORE THE ASSESSING OFFICER IS NOT EN TITLED TO DISTURB THE BOOK RESULT IN CASE OF A TRUST DURING THE CURRENCY OF REGISTRATION TO DERIVE HIS OWN CONCLUSION. IT IS ONLY WHEN THE TRUST VIOLATES THE PROVISIONS OF SECTION 13 OF THE I.T.ACT THE SURPLUS AS PER BOOKS CAN BE SUBJECTED TO TAX. THEREFO RE THE MET HOD OF THE WORKING AS DONE BY AO AFTER DISALLOWING CAPITAL EXPENDITURE IN ORDER TO WORK OUT A SURPLUS IS NOT CORRECT. SUCH AN ACT OF THE ASSESSING OFFICER DOES NOT ACCORD WITH THE PROVISIONS OF LAW. 12. AT THIS JUNCTURE IT IS NECESSARY TO EXAM INE THE DECISIONS RENDERED BY HONBLE APEX COURT IN THE CASE OF AMERICAN HOTEL INSTITUTE V CBDT [20071158 TAXMAN 146 AND ADDI CIT V SURAT ART SILK MI LLS [1980] 121 ITR 1 2 TAXMAN 50 1 ( SC ) . IN THE CASE OF AMERICAN HOTEL (SUPRA) IT WAS HELD THAT IN DECIDING THE CHARACTER OF THE RECIPIENT IT IS NOT NECESSARY TO LOOK AT THE PROFITS OF EACH YEAR BUT THE NATURE OF THE ACTIVITIES UNDERTAKEN IN INDIA ARE TO BE CONSIDERED . IF IT IS FOUND THAT THE INDIAN ACTIVITY HAS NO CORRELATION WITH EDUCATION EXEMPTION HAS TO BE DENIED. IN THE RESULT THE CHARACTER OF THE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 17 RECIPIENT OF INCOME MUST HAVE CHARACTER OF EDUCATIONAL INSTITUTION IN INDIA TO BE ASCERTAINED FROM THE NATURE OF THE ACTIVITIES. SIMPLY BECAUSE AFTER MEETING EXPENDITURE SURPLUS REMAINS FROM THE ACTIVITY CAR RIED ON BY THE EDUCATIONAL INSTITUTION IT WILL NOT CEASE TO BE ONE EXISTING SOLELY FOR EDUCATIONAL PURPOSES. IN A WAY EXISTENCE OF SURPLUS FROM THE ACTIVITY WILL NOT MEAN ABSENCE OF AN EDUCATIONAL PURPOSE. IN THIS VIEW OF THE MATTER THE ASSESSING OFFIC ER COMMITTED W RONG IN ASSUMING THAT THERE IS AN ELEMENT OF COMMERCIALITY ONLY FOR THE REASON THAT THE ASSESSEE - TRUST HAD SURPLUS IN COURSE OF ADVANCING ITS OBJECT OF EDUCATION. IN OTHER CASE OF ADDI . CIT V SURAT ART SILK MILLS [1980] 121 ITR 1 SC WHILE IN TERPRETING THE EXPRESSION ACTIVITY OF PROFIT HONBLE APEX COURT HAS HELD THAT IT IS NOT ENOUGH THAT IF AN ACTIVITY RESULTS IN PROFIT IT CAN BE ASSUMED THAT SUCH AN ACTIVITY WAS CARRIED ON WITH THE OBJECT OF EARNING PROFIT. IN ORDER TO HOLD THAT AN INSTI TUTION EXISTED FOR PROFIT - MAKING THE SAME MUST BE THE END TO WHICH THE ACTIVITY MUST BE DIRECTED MEANING THEREBY THE PREDOMINANT OBJECT OF THE ACT IVITY MUST BE MAKING OF PROFIT . TH EREFORE AN ACTIVITY IS NOT PERVADED BY PROFIT MOTIVE BUT IS CARRIED ON PRI MARILY FOR SERVING THE CHARITABLE PURPOSE IT WOULD NOT BE CORRECT TO DESCRIBE IT AS AN ACTIVITY FOR PROFIT. IF THE ACTIVITIES ARE CARRIED ON WITH THE PREDOMINANT OBJECT OF EARNING PROFIT IT WOULD BE AN ACTIVITY FOR PROFIT THOUGH IT MAY BE CARRIED ON IN ADVANCEMENT OF THE CHARITABLE PURPOSE OF THE TRUST OR INSTITUTION. THE ACT OF CHARITABLE PURPOSE SHOULD NOT BE SUBMER GED BY THE PROFIT - MAKING MOTIVE. IN THE PRESENT CASE ON HAND THE ASSESSEES MAIN ACTIVITY WAS CHARITABLE IN AS MUCH AS IT WAS RUNNING EDUC ATIONAL INSTITUTION WHICH WAS ITS OBJECT FOR WHICH IT WAS REGISTERED UNDER SECTION 12AA. NO MATERIAL WAS MADE OUT BY THE ASSESSING OFFICER TO INDICATE OTHERWISE. AS CAN BE SEEN FROM THE ASSESSMENT ORDER THE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 18 ASSESSING OFFICER HAS STARTED EXAMINING THE FACT S WITH A PRESUMPTION THAT THE ACTIVITIES OF EDUCATION TO AN ASSUMED ACTIVITY OF PROFIT ON ACCOUNT OF FEES RECEIVED FROM STUDENTS BASING ON HIS OWN INFERENCES. AS CAN BE SEEN FROM THE MATERIAL MADE OUT BY THE DEPARTMENT THE CHARITABLE PURPOSE OF THE TR UST WAS NEVER AFFECTED AS THE FEES COLLECTED FROM STUDENTS WAS MEANT TO FEED CHARITY BUT NOT FOR PERSONAL BENEFIT FOR ANY INDIVIDUAL. THE ASSESSING OFFICER IS ON THE MISTAKEN IMPRESSION THAT THE TRUST WAS IN THE BUSINESS OF RU NNING THE EDUCATIONAL INSTITUT E FORGETTING FOR A MOMENT THAT CARRYING ON AN ACTIVITY WHICH IS CHARITABLE IN NATURE WHAT THE ASSESSEE IS DOING ARE TOTALLY DIFFERENT. THE A CTIVITY OF THE TRUST AS PER ITS OBJECTS MAY RESULT IN A SURPLUS BUT IT CANNOT BE TERMED AS PROFIT. BUT SO LONG AS THE TRUST CARRIES ON CHARITABLE ACTIVITY SUCH ACTIVITY CANNOT BE CALLED A BUSINESS ACTIVITY OR AN ACTIVITY OF PROFIT . IN THE PRESENT FACTS AND CIRCUMSTANCES OF THE CASE PROFIT MOTIVE CANNOT BE IMPUTED TO THE ASSESSEE. THE OTHER ASPECT OF THIS ISSUE RELA TES TO THE DECISION OF HONBLE UTTARAKHAND HIGH COURT IN THE CASE OF QUEENS EDUCATIONAL SOCIETY (SUPRA) . IN THE SAID DECISION THE REVENUES CONTENTION IS ON TWO ISSUES ONE ISSUE IS PROFIT MAKING AND THE OTHER IS APPLICATION TOWARDS CAPITAL EXPENDITURE. IN THAT VIEW OF THE MATTER IT REQUIRES DISCUSSION AT SOME LENGTH. IN THIS CASE THE HONBLE COURT OBSERVED THAT IF THE PROFIT IS PROVED BY AN EDUCATIONAL SOCIETY THEN THAT WILL BE INCOME TO THE SOCIETY AS THE SURPLUS AMOUNT REMAINS IN THE ACCOUNT BOOKS OF THE SOCIETY AFTER MEETING ALL THE EXPENSES INCURRED TOWARDS IMPARTING THE EDUCATION. THAT THE INVESTMENT IN THE FIXED ASSETS LIKE FURNITURE AND BUILDINGS ARE THE PROPERTIES OF THE SOCIETY AND MAY BE CONNECTED WITH THE IMPARTING OF EDUCATION BUT THE SAME H AS BEEN CONSTRUCTED AND PURCHASED OUT OF INCOME FROM IMPARTING THE EDUCATION WITH A VIEW TO EXPAND THE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 19 INSTITUTION AND TO EARN MORE INCOME. APPLICATION TOWARDS CAPITAL EXPENDITURE TO ARRIVE AT THE SURPLUS IS NOT PERMISSIBLE UNDER LAW. HONBLE COURT SEEMS TO HAVE RESTED ABOVE CONCLUSIONS ON THE OBSERVATION OF THE HONBLE SUPREME COURT IN THE CASE OF ADITANAR EDUCATIONAL INSTITUTION V. ADDL . CIT [1997] 224 ITR 310. THEREFORE IT IS FOUND NECESSARY TO EXAMINE THE RELEVANT PARAGRAPHS OF THE HONBLE APEX COURT. HONBLE APEX COURT HAS OBSERVED THAT A FTER MEETING THE EXPENDITURE IF ANY SURPLUS RESULT INCIDENTALLY FROM THE ACTIVITY LAWFULLY CARRIED ON BY THE EDUCATIONAL INSTITUTION IT WILL NOT CEASE TO BE ONE EXISTING SOLELY FOR EDUCATIONAL PURPOSES SINCE THE OB JECT IS NOT ONE TO MAKE PROFIT. THE DECISIVE OR ACID TEST IS WHETHER ON AN OVERALL VIEW OF THE MATTER THE OBJECT IS TO MAKE PROFIT. IN EVALUATING OR APPRAISING THE ABOVE ONE SHOULD ALSO BEAR IN MIND THE DISTINCT DIFFERENCE BETWEEN THE CORPUS THE OBJECT S AND POWERS OF THE CONCERNED ENTITY. FROM THIS OBSERVATION OF THE HONBLE APEX COURT IT IS FOUND THAT THE PRINCIPL ES ENUNCIATED IN THE ABOVE CASE DO NOT SUPPORT THE INFERENCE DERIVED IN THE CASE OF QUEENS EDUCATIONAL SOCIETY.(SUPRA). IN ADITANAR EDUCATIO NAL INSTITUTION CASE (SUPRA) THE PRINCIPLES ENUNCIATED BY THE APEX COURT CONFIRMS TO THE BROAD PRINCIPLE THAT SO LONG AS AN INSTITUTION EXISTS FOR THE PURPOSE OF EDUCATION AND ITS ACTIVITIES ARE LAWFUL IF ANY PROFIT/SURPLUS RESULTS AFTER APPLICATION TOWA RDS THE EDUCATIONAL PURPOSE THE SAME WOULD NOT BE A FACTOR TO COME TO A CONCLUSION THAT SUCH SOCIETY EXISTED FOR PROFIT. THE DECISIVE OR ACID TEST IS WHETHER ON AN OVERALL VIEW OF THE MATTER THE OBJECT IS TO MAKE PROFIT. THIS OBSERVATION OF THE HONBLE APEX COURT MAKES IT CLEAR AS TO WHAT ARE THE PRINCIPLES TO BE FOLLOWED IN DECIDING THE ASPECT OF PROFIT. IN THE PRESENT CASE ON HAND THE OBJECT OF TRUST WAS NEVER TO MAKE PROFIT AND IT CANNOT BE UNDER THE RULES GOVERNING THE INSTITUTION. IN THESE CIRCUMST ANCES WE ARE OF THE CONSIDERED VIEW THAT MERE ACCRUAL OF SURPLUS DURING A PREVIOUS ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 20 YEAR WOULD NOT CHARACTERIZE AN INSTITUTION AS AN PROFIT EARNING ENTITY . APART FROM THAT T HE RATIO LAID DOWN BY THE HONBLE APEX COURT IN THE CASE OF ADITANAR EDUCATIONAL INSTITUTION CASE (SUPRA) WILL NOT SUPPORT THE DECISION RENDERED IN THE CASE OF AMERICAN HOTEL INSTITUTE V CBDT AND ADDI CIT V SURAT ART SILK MILLS (SUPRA). 13. NOW COMING TO THE PRINCIPLES ENUNCIATED IN THE CASE OF QUEENS EDUCATIONAL SOCIETY (SUPRA) THE SAID DECISION HAS BEEN DISSENTED IN A NUMBER OF DECISIONS PRONOUNCED LATER. ONE OF THE LEADING DECISION IS THE CASE OF PINE GROVE INTERNATIONAL CHARITABLE TRUST V UO I (SUPRA). THE PRINCIPLES ENUNCIATED IN QUEENS CASE HAS BEEN DISTING UISHED HOLDING THAT THE DECISION IN THE CASE OF QUEENS EDUCATIONAL SOCIETY (SUPRA) IS NOT APPLICABLE IN THE CASES GOVERNED BY SECTION 11 SINCE THE RATIO OF THE DECISION IS LIMITED TO SECTION 10(23C)(IIIAD). FROM A READING OF THE SAID JUDGMENT IT WAS OBSERVED THAT HONBLE HIGH C OURT HAS NOT APPRECIATED THE RATIO OF THE JUDGMENT IN THE CASE OF ADITANAR EDUCATIONAL SOCIETY(SUPRA) AND CHILDERENS BOOK TRUST IN THE CORRECT PERSPECTIVE. THE VIEW TAKEN IS NOT CONSISTENT WITH THE LAW LAID DOWN BY THE APEX COURT IN THE CASE OF AMERICAN HO TEL ASSOCIATION( SUP RA) WHEREIN IT WAS HELD BY THE APEX COURT THAT ONCE THE APPLICANT COMES WITHIN AMBIT OF THE PHRASE EXIST SOLELY FOR EDUCATIONAL PURPOSES AND NOT FOR PROFIT NO OTHER CONDITION LIKE APPLICATION OF INCOME ARE REQUIRED TO BE COMPLIED WI TH. IT WAS OBSERVED FURTHER THAT CAPITAL EXPENDITURE INCURRED BY AN EDUCATIONAL INSTITUTION FOR ACQUIRING CAPITAL ASSET FOR THE PURPOSE OF EDUCATION IS AN APPLICATION. 14. HONBLE DELHI HIGH COURT I N THE CASE OF ST LAWRENENCE EDUCATIONAL SOCIETY V CIT [( 20 10 ) 197 TAXMAN 504 ( DELHI )] HAS HELD THAT THE OPINION EXPRESSED IN THE CASE OF QUEENS EDUCATIONAL SOCIETY FOR THE PROPOSITION THAT THE EDUCATIONAL INSTITUTIONS SEEKING EXEMPTION SHOULD NOT GENERATE ANY ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 21 QUANTITATIVE SURPLUS IS LEGALLY UNTENABLE AND INCORRE CT. IN THE CASE OF VANITA ASHRAM TRUST V CCIT [( 2010 ) 327 ITR 121 ] IT WAS HELD THAT WHERE RECORD DEMONSTRATED THAT ASSESSEE - TRUST CONDUCTED EDUCATIONAL INSTITUTIONS AND NO OTHER ACTIVITY WAS CARRIED ON IT MUST BE REGARDED AS EXISTING SOLELY FOR THE PURPO SE OF EDUCATION IRRESPECTIVE OF FACT THAT MEMORANDUM OF ASSOCIATION OF TRUST CONTAINING VARIED OBJECTS. IT WAS FURTHER HELD THAT THE REQUIREMENT THAT THE INSTITUTION MUST EXIST SOLELY FOR EDUCATIONAL PURPOSES WOULD MILITATE AGAINST AN INSTITUTION PURSUIN G OTHER OBJECTS. CONSEQUENTLY THE HIGH COURT WAS IN OUR VIEW AND WITH DUE RESPECT NOT CORRECT IN HOLDING AS A PRINCIPLE OF LAW THAT THE BENEFIT OF THE EXEMPTION SHOULD BE DENIED ON THE GROUND THAT THE ASSESSEE HAS ONLY PURSUED ITS MAIN OBJECT OF PROVIDI NG EDUCATION AND HAD NOT PURSUED THE OTHER OBJECTS FOR WHICH THE TRUST WAS CONSTITUTED. W H ERE THE ASSESSEE PURSUE S OTHER OBJECTS IT WOULD CLEARLY RUN A FOUL OF SUB - CLAUSE (VI). IN THE CASE OF KHATRIYA MAHARANA PRATAP BHAWAN V UOI [ 194 TAXMAN 442 ] IT WAS HELD THAT W HEN THE FACTS OF THE VARIOUS CASES ARE EXAMINED IN THE LIGHT OF THE ABOVE DISCUSSION THE FIRST THING WHICH BECOMES EVIDENT IS THAT CAPITAL ASSETS ACQUIRED/CONSTRUCTED BY THE EDUCATIONAL INSTITUTIONS HAVE BEEN TREATED AS INCOME IN A BLANKET MANN ER WITHOUT RECORDING ANY FINDING WHETHER THE CAPITAL ASSETS HAVE BEEN APPLIED AND UTILISED TO ADVANCE THE PURPOSE OF EDUCATION. IT IS OBLIGATORY ON THE PART OF THE PRESCRIBED AUTHORITY WHILE CONSIDERING THE APPLICATION FOR GRANT OF EXEMPTION WHETHER EXPEN DITURE INCURRED AS CAPITAL INVESTMENT IS ON THE OBJECT OF EDUCATION OR NOT. IT WAS FURTHER OBSERVED THAT THE COMPETENT AUTHORITIES SHOULD NOT HAVE READ THE JUDGMENT OF UTTARAKHAND HIGH COURT IN THE CASE OF QUEENS EDUCATIONAL SOCIETY (SUPRA) LIKE A STATUTE. 15. ON DETAIL CONSIDERATION OF THE FACTS AS MENTIONED ABOVE IN THE LIGHT OF JUDICIAL PRONOUNCEMENTS ON THE SUBJECT WE ARE OF THE CONSIDERED VIEW THAT ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 22 THE ACTIVITIES OF THE TRUST CANNOT BE TAINTED WITH COMMERCIALITY MERELY BECAUSE IT GENERATED SURPLUS A PPLIED THE SAME TOWARDS CAPITAL EXPENDITURE. IN OUR CONSIDERED VIEW THE OBSERVATION OF THE HONBLE APEX COURT SQUARELY APPLIES TO THE ISSUE OF GENERATING SURPLUS/PROFIT BY A CHARITABLE INSTITUTION. ON THE ISSUE OF GENERATING PROFIT/SURPLUS BY A CHARITABL E INSTITUTION THE OBSERVATIONS OF APEX COURT IN OUR OPINION SQUARELY APPLY. ACCORDINGLY THE ISSUES RAISED BY THE REVENUE IN THIS REGARD IN THE GROUNDS APPEAL ARE DISMISSED. 16 . NOW COMING TO THE SECOND MOST IMPORTANT ISSUE RELATES TO DEDUCTION OF CAPIT AL EXPENDITURE WHILE WORKING OUT THE SURPLUS/DEFICIT UNDER SECTION 11(1)(A) FOR THE PURPOSE OF EXEMPTION. IT IS THE VIEW OF THE REVENUE THAT CAPITAL EXPENDITURE IS NOT DEDUCTIBLE IN WORKING OUT THE SURPLUS/DEFICIT. THE REVENUE HAS BASED THIS CONCLUSION REL YING ON THE RATIO OF THE DE CISION IN THE CASE OF QUEENS EDUCATIONAL SOCIETY CASE(SUPRA) . THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED BEFORE US THAT THIS VIEW OF THE REVENUE IS ERRONEOUS INASMUCH AS THE APPLICATION UNDER SECTION 11 INCLUDE CAPITAL EXPENDI TURE SO LONG AS THE SAME IS TOWARDS THE OBJECTS OF THE TRUST. HE SUBMITTED THAT THE TRUST WHICH HAS THE OBJECT OF ADVANCEMENT OF EDUCATION AND WHICH IS IN THE NASCENT YEARS OF ITS EXISTENCE HAS TO NECESSARY APPLY ITS RECEIPTS IN DEVELOPING INFRASTRUCTURAL FACILITIES. OTHERWISE THE VERY PURPOSE FOR WHICH REGISTRATION WAS GRANTED UNDER SECTION 12AA WOULD BE DEFEATED . GROWTH OF AN EDUCATIONAL INSTITUTION FOR TRANSLATING ITS OBJECTS CANNOT BE VIEWED FROM PROFIT MOTIVE ANGLE. HE POINTED OUT THAT THERE IS NO PR OFIT MOTIVE IN THE ACTIVITIES CARRIED OUT BY THE ASSESSEE AS CAN BE SEEN FROM THE MATERIAL MADE AVAILABLE TO THE DEPARTMENT REGARDING THE ACTIVITIES OF THE ASSESSEE. THE DEPARTMENT IS NOT ABLE TO SHOW THAT THE INCOME OF THE ASSESSEE IS ENJOYED BY ONE WHO MANAGES HIS OWN ENTERPRISE . HE ASSAILED THE COMMENTS OF THE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 23 ASSESSING OFFICER THAT APPLICATION TOWARDS CAPITAL EXPENDITURE WOULD POINT A PROFIT MOTIVE. HE FURTHER CONTENDED THAT BY NOT ALLOWING THE CAPITAL EXPENDITURE AS APPLICATION UNDER SECTION 11 THE A SSESSING OFFICER HAS IMPORTED A NEW CONDITION IN SECTION 11 WHICH IS NOT THERE IN THE STATUTE. WHILE INTERPRETING THE STATUE ONE HAS TO LOOK MERELY AT WHAT IS CLEARLY SAID AND THERE IS NO ROOM FOR ANY INTENDMENT. THE LEARNED AR OF THE ASSESSEE ALSO ASSAI LED THE VIEW OF THE REVENUE ON THE RATIO OF THE DECISION IN THE CASE OF CITY MONTESSORI V UOI [( 2009 ) 315 ITR 148 ] HAS BEEN WRONGLY APPLIED BY THE LEARNED CIT(A) . HE FURTHER SUBMITTED THAT THE VIEW OF THE REVENUE RUNS CONTRARY TO THE PRINCIPLES SETTLED BY THE APEX COURT AND IN OTHER JUDICIAL FORUMS . IN SUPPORT OF THAT HE RELIED ON THE DECISION S IN THE CASE S OF S RM M CT M THIRUPANNI TRUST V CIT [( 1998 ) 230 ITR 636 ] CIT VS. ST. GEORGE FORANA CHURCH [170 ITR 62 (K ER.) ] CIT VS. MOD CHAND SHARBAATI DEVI HOSPI TAL TRUST [ 190 TAXMANN 338 ] . 17. AFTER CAREFUL CONSIDERATION OF THIS ISSUE BASING ON THE PRINCIPLES AND JUDICIAL PRECEDENTS WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSING OFFICER WAS TOTALLY MISCONSTRUED THE METHOD OF COMPUTATION OF SURPLUS OR DEFICIT IN THE CASE OF A TRUST WHICH IS BASED ON THE COMMERCIAL PRINCIPLE. THE VITAL ASPECT IS THAT THE INCOME OF A TRUST HAS TO BE UNDERSTOOD IN THE POPULAR AND GENERAL SENSE AND NOT IN THE SENSE THE INCOME IS ARRIVED AT FOR THE PURPOSES OF ASSESSMENT TO TAX BY A PPLICATIONS OF PRESCRIBED PROVISIONS FOR ALLOWING OR DENYING DEDUCTIONS. THOSE PROVISIONS CANNOT BE IMPORTED TO WORK OUT THE INCOME OF PROPERTIES HELD BY TRUST. ONCE IT IS HELD THAT THE TRUST EXISTS FOR THE PURPOSE FOR WHICH IT RECEIVED REGISTRATION UNDER SECTION 12AA AND THERE IS NO VIOLATION UNDER SECTION 13 THE CAPITAL EXPENDITURE HA VE TO BE ALLOWED AS APPLICATION OF THE FUNDS. THE ISSUE FOR DEDUCTION OF CAPITAL EXPENDITURE FOR WORKING OUT THE SURPLUS/DEFICIT IS NO MORE DEBATABLE IN THE LIGHT OF THE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 24 DEC ISIONS IN THE CASE OF M.CT. M. TIRUPANNI TRUST VS. CIT [ 230 ITR 636 ( SC ) CIT VS. ST. GEORGE FORANA CHURCH [170 ITR 62 (K ER.) ] AND CIT VS. MOOL CHAND SHARBAATI DEVI HOSPITAL TRUST [ 190 TAXMANN 338 ]. FROM A READING OF ALL THESE DECISIONS IT IS CLEAR THAT CAP ITAL EXPENDITURE IS AN ALLOWABLE EXPENDITURE UNDER SECTION 11(1) TO WORK OUT THE SURPLUS OR DEFICIT. WHILE PASSING THE ASSESSMENT ORDER THE ASSESSING OFFICER SEEMS TO HAVE TOTALLY IGNORED THE RATIO OF THESE DECISIONS. IN THE ASSESSMENT ORDER THE ASSESSI NG OFFICER HAS SOUGHT TO DISTINGUISH THE CASE OF M.CT. M. TIRUPANNI TRUST(SUPRA) ON THE GROUND THAT IN THE CASE BEFORE THE APEX COURT APPLICATION TOWARDS CAPITAL ASSET WAS OUT OF SURPLUS OF EARLIER YEAR SHOWN AS AN ADVANCE IN THE BALANCE SHEET WHICH WAS S UBSEQUENTLY UTILISED FOR CONSTRUCTION OF A HOSPITAL BUILDING WHICH WAS ONE OF THE OBJECTS OF THE TRUST. ON THE OTHER HAND IN THE CASE OF THE PRESENT ASSESSEE TRUST IT HAS APPLIED CURRENT YEARS RECEIPTS TOWARDS CAPITAL EXPENDITURE. IN THAT VIEW OF THE MAT TER DISTINCTION BROUGHT OUT BY THE ASSESSING OFFICER CANNOT ADVANCE THE CASE OF THE REVENUE. IN OUR CONSIDERED VIEW HONBLE COURT HAS HELD THAT CONSTRUCTION OF A HOSPITAL BUILDING WHICH IS A CAPITAL EXPENDITURE IS AN APPLICATION. THEREFORE IN THE PRE SENT CASE OF THE ASSESSEE THERE WOULD BE NO BAR IF IT APPLIES THE RECEIPTS OF THE CURRENT YEAR TOWARDS COST OF A CAPITAL ASSET FOR ADVANCING THE OBJECTS OF THE TRUST. THE ASSESSING OFFICER HAS NOT MADE OUT ANY MATERIAL TO DEPICT THAT THE ASSET ACQUIRED IS NOT IN FURTHERANCE OF THE OBJECT BUT AS AN INVESTMENT TO ENHANCE THE INCOME. AFTER COMPREHENSIVELY DISCUSSING THE RATIO OF THE DECISIONS IN THE PRESENT CASE WE ARE OF THE CONSIDERED VIEW THAT THE DECISION IN THE CASE OF QUEENS EDUCATIONAL SOCIETY (SUPRA) WILL NOT STAND FOR LEGAL SCRUTINY. ON CAREFUL READING OF THE PROVISIONS IN SECTIONS 11 AND 13 OF THE I.T.ACT WILL SHOW THAT THERE IS NO BAR EITHER SPECIFICALLY OR BY NECESSARY IMPLICATION FOR APPLICATION OF CAPITAL EXPENDITURE TOWARDS THE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 25 OBJECTS OF THE TRUST. THE DECISIONS OF COURTS WOULD INDICATE THAT CAPITAL EXPENDITURE IS DEDUCTIBLE. S ECTION 11 OF THE I.T.ACT STIPULATES APPLICATION BUT NOT EXPENDITU RE. THE TERM APPLICATION IS A WIDER ONE. AS CAN BE SEEN FROM THE ASSESSMENT ORDER THE ASSESSING O FFICER HAS TRIED TO IMPORT A NEW CONDITION REGARDING APPLICATION OF CAPITAL EXPENDITURE UNDER SECTION 11(1). L.J. DENNING IN SEA FORD COURT ESTATES V. ASHER [1949] 2 ALL ER 155 POINTED OUT THAT A JUDGE MUST NOT ALTER THE MATERIAL OF WHICH THE ACT IS WOVEN. AS CAN BE SEEN FROM THE ASSESSMENT ORDER THE ASSESSING OFFICER HAS ATTEMPTED TO INNOVATE AND ADD A NEW CONDITION IN THE STATUTE WHICH MILITATES AGAINST THE STATUTORY PROVISION WHICH IS CLEAR AND UNAMBIGUOUS. SUCH AN ACT IS NOT PERMISSIBLE IN LAW. NOW CON SIDERING THE APPLICATION OF THE RATIO OF THE DECISION RENDERED IN THE CASE OF CITY MONTESSORI SCHOOL (SUPRA) IT IS THE CONTENTION OF THE REVENUE THAT THE PRINCIPLES OF THIS DECISION HAVE BEEN WRONGLY APPLIED BY THE REVENUE. ON GOING THROUGH THE IMPUGNED O RDER IT IS FOUND THAT THE LEARNED CIT(A) HAS PLACED RELIANCE ON THIS DECISION IN PARA 12.12 OF HIS ORDER TO REBUT THE ARGUMENT TAKEN BY THE ASSESSING OFFICER THAT BY EXPENDING SURPLUS ON CAPITAL EXPENDITURE THERE IS A PROFIT MOTIVE TO EXPAND THE INSTITUT ION. ON CAREFUL CONSIDERATION OF THIS DECISION IT IS FOUND THAT THE ISSUE BEFORE THE HONBLE COURT PERTAINED TO GRANT O F RECOGNIZATION UNDER SECTION 10 (23C)(VI) OF THE ACT WHICH WAS REFUSED BY THE CCI T. WHILE COMING TO THE CONCLUSION THAT THE INSTITUTION IS ENTITLED FOR EXEMPTION IT WAS OBSERVED THAT SO LONG AS AN INSTITUTION EXISTS FOR EDUCATIONAL PURPOSES AND NO EVIDENCE IS FORTHCOMING THAT THE SAME EXISTED FOR PERSONAL GAIN IT IS ENTITLED TO REGISTRATION. BASING ON THIS OBSERVATION AT PARA 34 OF THE O RDER OF THE LEARNED CIT(A) HAS DECIDED THAT SINCE ASSESSING OFFICER FAILED TO PROVE THAT THERE WAS ANY PERSONAL GAIN IN EXPANSION OF INSTITUTION CAPITAL EXPENDITURE IS ALLOWABLE AS AN APPLICATION. THE APPLICATION OF THE RATIO OF ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 26 THIS DECISION BY THE LEAR NED CIT(A) WAS NOT AT ALL WRONG THOUGH IT WAS RENDERED WHILE INTERPRETING SECTION 10 (23C)(VI) AS THE ACTIVITIES OF THE ASSESSEE ARE GENUINE AND WITHOUT ANY PERSONAL GAIN WHILE SENDING THE SURPLUS/INCOME TOWARDS CAPITAL EXPENDITURE. HOWEVER THIS WOULD NO T MAKE ANY D IFFERENCE IN VIEW OF OUR OBSERVATION ON THE ISSUE THAT CAPITAL EXPENDITURE IS AN ALLOWABLE DEDUCTION UNDER SECTION 11. ACCORDINGLY WE UPHOLD THE ORDER OF THE LEARNED CIT(A) ON THIS ISSUE FINDING THE GROUNDS RAISED BY THE REVENUE IN THIS REGARD AS DEVOID OF MERITS. 18. THE NEXT ISSUE RELATES TO COLLECTION OF CAPITATION FEE S. THE DEPARTMENT HAS DERIVED A CONCLUSION THAT THE TRUST EXISTED FOR PROFITEERING BUT NOT FOR THE PURPOSE OF CHARITY. THE LEARNED AR OF THE ASSESSEE VEHEMENTLY OBJECTED TO SUCH A VIEW ON THE GROUND THAT COLLECTION OF CAPITATION FEE CANNOT BE PRESUMED. SUCH AN INFERENCE CAN ONLY BE FOUNDED ON EVIDENCE. TO SUPPORT HIS CONTENTION THE LEARNED AR OF THE ASSESSEE B ROUGHT OUR ATTENTION TO THE DETAILS OF FEES COLLECTED BY VARIOUS S IMILAR INSTITUTION S IN THE COUNTRY AS MENTIONED PARA 16.9 OF THE ORDER OF LEARNED CIT(A). ON COMPARISON OF THIS IT IS FOUND THAT THE FEES CHARGED BY THE ASSESSEE IS LESS ALTHOUGH THE INSTITUTION HAS BEEN RATED AS ONE OF THE BEST B SCHOOLS IN THE COUNTRY ON THE BASIS OF EVALUATION CARRIED OUT BY VARIOUS AGENCIES. IT WAS FURTHER SUBMITTED BEFORE US BY THE LEARNED AR OF THE ASSESSEE THAT THE BOOKS OF ACCOUNT OF THE ASSESSEE TRUST WERE AUDITED BY QUALIFIED CA AND INSPECTED BY VARIOUS REGULATORY AUTHORITIES. NO INSTANCE OF COLLECTION OF EXCESSIVE FEES WAS POINTED OUT BY ANY ONE . IN THE ABSENCE OF UNREASONABLENESS IN THE FEES COLLECTED BY THE ASSESSEE FROM THE STUDENTS IT CANNOT BE TERMED AS EXTORTION AND DEPARTMENT HAS NOT BEEN ABLE TO DEMONSTRATE THE PRESENCE OF AN ULTERIOR MOTIVE TO USE THE SAME FOR PERSONAL GAINS. ON CAREFUL CONSIDERATION OF THE CONTENTIONS OF THE REVENUE THE CASE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 27 OF THE ASSESSEE AS DISCUSSED IN THE LIGHT OF THE IMPUGNED ORDER PASSED BY THE LEARNED CIT(A) WE ARE OF THE CONSIDERED VIEW THAT IT IS AN UNDISPUTED FACT THAT THE TRUST HAS MAINTAINED BOOKS OF ACCOUNT AND ACCOUNTED FOR THE REGULAR FEES COLLECTED BY IT. THEREFORE IT CAN NEVER BE PRESUMED THAT THE INSTITUTION HAS COLLECTED CAPITATION FEES WHICH COULD EITHER CONSIDERED AS SURREPTIOUS O R EXCESSIVE. FROM THE DETAILS OF FEES MENTIONED IN THE ORDER OF THE LEARNED CIT(A) IT CANNOT BE SAID THAT THE TRUST HAS COLLECTED EXORBITANT FEES IN ORDER TO HAVE A PROFIT. THE REVENUE IS NOT ABLE TO DEMONSTRATE BEFORE US THE ASPECT OF SIPHONING OR MISAP PROPRIATION OF ANY FUND COLLECTED BY THE ASSESSEE. UNDER THESE FACTS AND CIRCUMSTANCES WE ARE OF THE CONSIDERED VIEW THAT THE CONTENTION OF THE REVENUE THAT THE ASSESSEE HAS COLLECTED UNREASONABLE FEES FROM THE STUDENTS WITH A COMMERCIAL MOTIVE IS NOT AT ALL CORRECT. 19. THE REVENUE SEEMS TO HAVE RELIED ON THE DECISION IN THE CASE OF T.M.A. PAL FOUNDATION V. STATE OF KARNATAKA (2002) 8 SCC 481. AS CAN BE SEEN FROM THE SAID DECISION HONBLE COURT HAS OBSERVED THAT THE FEE STRUCTURE MUST BE FIXED KEEPING I N MIND THE INFRASTRUCTURE AND FACILITIES AVAILABLE THE INVESTMENT MADE SALARIES PAID TO THE TEACHERS AND STAFF FUTURE PLANS FOR EXPANSION AND/OR BETTERMENT OF THE INSTITUTION ETC. ON PERUSAL OF THE RATIO OF THIS DECISION A PORTION OF WHICH HAS EXTRACTE D IN THE ORDER OF THE ASSESSING OFFICER WE FIND THAT IT PROHIBITS COLLECTION OF UNREASONABLE FEES WHICH WOULD INDICATE A PROFIT MOTIVE AS AGAINST CHARITABLE ACTIVITY. AS IN THE ASSESSMENT ORDER AND ALSO DURING THE COURSE OF HEARING BEFORE US THE REVENUE HAS NOT AT ALL SHOWED AS TO HOW THE COLLECTION OF FEES BY THE TRUST WAS UNREASONABLE OR EXCESSIVE. IN A SUBSEQUENT DECISION IN THE CASE OF ISLAMIC ACADEMY OF EDUCATION V. STATE OF KARNATAKA (14/08/2003) AND P.A. INAMDAR & ORS V. STATE OF MAHARASHTRA & ORS (12/08/2006) RENDERED BY ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 28 THE APEX COURT THE ABOVE VIEW REGARDING FEES STRUCTURE AND APPLICATION THEREOF AS MENTIONED IN TMA PAI FOUNDATIONS CASE (SUPRA) WERE REITERATED. IT WAS FURTHER OBSERVED THAT UNAIDED INSTITUTIONS CAN HAVE THEIR OWN ADMISSION POLIC Y PROVIDED I F IT IS FAIR TRANSPARENT NON - EXPLOIT ATIVE AND BASED ON MERIT SINCE THEY ARE NOT DERIVING ANY AID FROM THE SAID FUNDS. THE ASSESSMENT ORDER OF THE ASSESSING OFFICER DOES NOT HAVE ANY DISCUSSION THAT FEE STRUCTURE OF THE ASSESSEE TRUST SUFFER S FROM ANY SUCH INFIRMIT I E S . FOR THE PROPOSITION THAT COLLECTION OF CAPITATION FEE CANNOT BE PRESUMED THE LEARNED AR OF THE ASSESSEE HAS RELIED ON THE DECISION OF HONBLE PUMJAB & HARYANA HIGH COURT IN THE CASE OF CIT BHATINDA V KHALSA RURAL HOSPITAL AND NURSING TRAINING INSTITUTE [( 2008 ) 304 ITR 29 ]. ON GOING THROUGH THE SAID DECISION IT IS FOUND THAT HONBLE COURT HAS FOUND NOTHING ON RECORD TO SHOW THAT THE ASSESSEES TRUST WAS CHARGING ANY CAPITATION FEE. THERE IS NO ADMISSION OF THE RESPONDENT - TRUST ON RECORD. THE SO - CALLED VERBAL ADMISSION DURING THE COURSE OF ASSESSMENT PROCEEDINGS BY THE MANAGING DIRECTOR OF THE TRUST CANNOT BE RELIED UPON. NEITHER IT CAN BE PRESUMED FROM MERE ASSUMPTIONS THAT BDS SEATS ARE ALLOTTED AFTER PAYMENT OF CAPITATION FEE IN THE ABSENCE OF ANY MATERIAL. EVEN OTHERWISE THE ASSESSING OFFICER HAS NOT FOUND ANY IRREGULARITY IN THE ACCOUNTS OF THE TRUST. THERE IS NO DOCUMENT TO SHOW THAT THE TRUST IS BEING RUN FOR ANY PURPOSE OF PROFIT EXCEPT THAT FOR EDUCATIONAL PURPOSES. IN THE LIGHT OF THIS DECISION IT IS INCUMBANT ON THE PART OF THE REVENUE TO MAKE OUT COGENT MATERIAL WITH REGARD TO THE ASPECT OF CAPITATION FEES. AS CAN BE SEEN FROM THE IMPUGNED ORER WE ARE OF THE CONSIDERED VIEW THAT THE VIEW OF THE DEPARTMENT IS ONLY A PRESUMPTION AND THERE IS NOTHING MATERIAL MADE OUT ON RECORD TO CORROBORATE SUCH A CONCLUSION. ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 29 20. THE REVENUE HAS RELIED ON THE DECISION OF HONBLE ITAT IN THE CASE OF VODITALA EDUCATIONAL SOCIETY V ADIT [ 20 SOT 353 (HYD) ] . ON PERUSAL OF THIS DECISIO N IT IS FOUND THAT IT IS DISTINGUISHABLE ON FACTS TO THE ASSESSEES CASE. IN THIS CASE A SURVEY WAS CARRIED OUT IN THE PREMISES OF THE INSTITUTION RESULTING IN DISCOVERY OF EVIDENCE REGARDING COLLECTION OF CAPITATION FEES AND SIPHONING OFF THE SAME BY THE TRUSTEES. BASING ON THIS MATERIAL FACT THE ITAT CONCLUDED THAT THE INSTITUTION IS RUNNING ON COMMERCIAL LINES AND IS NOT ENTITLED TO THE BENEFIT OF SECTION 11. IN THE PRESENT CASE O N HAND NO SUCH EVIDENCE HAS BEEN BROUGHT ON RECORD. THEREFORE WE ARE OF THE CONSIDERED VIEW THAT THE ISSUE RAISED BY THE DEPARTMENT THAT THE ASSESSEE TRUST HAS COLLECTED EXCESSIVE OR UNREASONABLE FEES WHICH CAN BE CATEGORIZED AS CAPITATION FEES WITH A COMMERCIAL MOTIVE AS DISTINGUISHED FROM A CHARITABLE OBJECTIVE IS NOT SUBST ANTIATED . ACCORDINGLY THE FINDING OF THE LEARNED CIT(A) ON THIS ISSUE IS HEREBY UPHELD FINDING THE GROUND RAISED BY THE DEPARTMENT BEING DEVOID OF MERIT. 21. THE OTHER ASPECT AGITATED BY THE DEPARTMENT BEFORE US RELATES TO RUNNING OF FINISHING SCHOOL. TH E REVENUE IS CONTENDING THAT RUNNING OF A FINISHING SCHOOL IS A SEPARATE BUSINESS ACTIVITY HAVING NO NEXUS WITH THE EDUCATIONAL ACTIVITY FOR WHICH REGISTRATION UNDER SECTION 12AA WAS GRANTED TO THE ASSESSEE . THE FINISHING SCHOOL IS NOT A FORMAL TEACHING ED UCATION BUT A TRAINING TO ADD VALUE TO MANAGEMENT EDUCATION. THEREFORE THE ASSESSEE SHOULD HAVE MAINTAINED SEPARATE BOOKS OF ACCOUNTS AS REQUIRED UNDER SECTION 11(4A). ASSAILING THIS CONTENTION THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT THE REVENUE HA S FULLY MISUNDERSTOOD THE CONCEPT OF FINISHING SCHOOL. F INISHING SCHOOL THOUGH NAMED SO IS NOT A DISTINCT ACTIVITY BUT A PART AND PARCEL OF THE REGULAR CURRICULUM OF IMPARTING EDUCATION IN MANAGEMENT COURSES WHICH IS THE OBJECT OF THE TRUST. IT WAS NOT AN ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 30 INCIDENTAL ACTIVITY AS THE ENTIRE ACTIVITY OF THE TRUST IS INTEGRATED WITH THE MAIN OBJECTIVE OF IMPARTING EDUCATION. ALL THE ACTIVITIES ARE INTERTWINED AND INTERLACED AND NO BUSINESS MOTIVE CAN BE INTERPRETED REQUIRING THE ASSESSEE TO MAINTAIN SEPARAT E BOOKS OF ACCOUNTS A S REQUIRED UNDER SECTION 11(4A). ON CAREFUL ANALYSIS OF THE ORDER OF THE ASSESSING OFFICER AND THE DETAIL SUBMISSIONS OF THE REVENUE AS WELL AS THE ASSESSEE WE ARE OF THE CONSIDERED VIEW THAT THE R EVENUE HAS RELIED ON THE DECISION IN THE CASE OF CIT V SOLE TRUSTEE LOK SHISHANA TRUST V CIT [ 101 ITR 235 ( SC ) FOR THE PROPOSITION THAT EDUCATION SHOULD NOT BE LIBERALLY UNDERSTOOD TO INCLUDE ALL TYPES OF ACQUIRING KNOWLEDGE . AS CAN BE SEEN FROM THE DECISION OF HONBLE APEX COURT THE TERM E DUCATION USED IN SECTION 2(15) MEANS A PROCESS OF TRAINING AND DEVELOPING THE KNOWLEDGE SKILL MIND AND CHARACTER OF STUDENTS BY NORMAL SCHOOLING. ON ANALYSIS OF THE ACTIVITIES OF THE ASSESSEE TRUST IN RUNNING THE EDUCATIONAL INSTITUTION INCLUDING THE F INISHING SCHOOL AS A PART OF IT IN THE LIGHT OF THE DECISIONS OF HONBLE SUPREME COURT RELIED ON BY THE REVENUE IT CANNOT BE INTERPRETED THAT THE ACTIVITIES OF THE ASSESSEE ARE CONTRARY TO THE CONCEPT OF EDUCATION EXPOUNDED BY THE APEX COURT IN THE SAID DECISION AND THE ACTIVITIES OF THE FINISHING SCHOOL CANNOT BE TERMED AS A SEPARATE BUSINESS ACTIVITY DIFFERENT FROM ITS MAIN ACTIVITY. 22. THE ISSUES RAISED BY THE ASSESSEE IN ITS CROSS OBJECTION ARE ENTIRELY SUPPORTING THE IMPUGNED ORDER PASSED BY THE LEA RNED CIT(A). WHILE DOING SO THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE GUIDELINES ISSUED BY THE MINISTRY OF HUMAN RESOURCES IGNOU AICTE AND SUBMITTED THAT IN THE LIGHT OF THE SAME IT CANNOT BE CONSTRUED THAT A FINISHING SCHOOL PROGRAMME IS A SEPARATE A CTIVITY AND TAKES THE NATURE OF NORMAL COACHING CLASS. ON GOING THROUGH THE GUIDELINES ISSUED BY THE AICTE IT IS SEEN THAT A FINISHING SCHOOL IS DEFINED AS A PRIVATE SCHOOL FOR STUDENTS THAT EMPHASIZE TRAINING IN ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 31 ALL ROUND PERSONALITY DEVELOPMENT CULTURA L AND SOCIAL ACTIVITIES. SPECIFIC SKILL SETS MAY BE IMPARTED AS VALUE ADDITION. THE NAME REFLECTS THAT IT FOLLOWS A SCHOOL OR COLLEGE EDUCATION AND IS INTENDED TO COMPLETE THE EDUCATIONAL EXPERIENCE. IT MAY CONSIST OF AN INTENSIVE COURSE OR A ONE - YEAR PRO GRAM. THESE OBSERVATIONS INDICATE THAT THE CONCEPT OF FINISHING SCHOOL SHOULD NOT BE UNDERSTOOD IN A NARROW SENSE. WE ARE OF THE CONSIDERED VIEW THAT THIS PROGRAMME RESULTS IN CULMINATION OF THE PROCESS OF EDUCATION SO AS TO MAKE IT RESPOND TO FELT NEE DS FOR WHICH FORMAL EDUCATION IS IMPARTED. IT MAKES VALUE ADDITION TO THE EDUCATION. HENCE IT CANNOT BE EQUATED WITH A COACHING CLASS WHICH IS PREPARATORY TO ENTERING INTO VARIOUS INSTITUTIONS . IT CANNOT ALSO BE CATEGORISED AS A SEPARATE BUSINESS ACTIVITY OR AN INCIDENTAL ACTIVITY TO THE MAIN ACTIVITY TO COME UNDER THE AMBIT OF SECTION 11(4A). THE REVENUE HAS RELIED ON THE DECISION RENDERED IN THE CASE OF BIHAR INSTITUTE OF MINING AND MINING STUDIES V CIT [ 208 ITR 608 (PAT) ] . ON GOING THROUGH THIS JUDGMEN T IT IS FOUND THAT ONE OF THE PRINCIPAL PROJECTS OF THE INSTITUTION WAS THE OBJECT OF COACHING AND PREPARING THE STUDENTS FOR APPEARING IN VARIOUS EXAMINATIONS CONDUCTED BY THE BOARD OF MINING EXAMINATION. IN THESE CIRCUMSTANCES IT WAS OPINED BY THE HON BLE COURT THAT A COACHING INSTITUTE CANNOT BE SAID TO BE AN INSTITUTION WHERE NORMAL SCHOOLING IS DONE AND THEREFORE THE SAME CANNOT BE A CHARITABLE PURPOSE. BUT HERE AS CAN BE SEEN FROM THE ABOVE DISCUSSIONS RUNNING OF THE FINISHING SCHOOL IS AN INTE GRAL PART OF THE WHOLE EDUCATIONAL CURRICULUM OF THE TRUST. FINISHING SCHOOL CANNOT B E EQUATED WITH A COACHING CLASS. THEREFORE THE REVENUE CANNOT CLAIM THE SUPPORT OF THE SAID DECISION OF HONBLE PATNA HIGH COURT. THE REVENUE IS OF THE VIEW THAT IN ORDE R TO CLAIM EXEMPTION OF INCOME THE ACTIVITY SHOULD BE INCIDENTAL TO THE MAIN ACTIVITY. AS PER SECTION 11(4A) SEPARATE BOOKS ARE TO BE MAINTAINED FOR THIS ACTIVITY. AS WE HAVE HELD THAT ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 32 FINISHING SCHOOL IS NOT AN INCIDENTAL ACTIVITY BUT A PART OF THE ACTIV ITY OF IMPARTING EDUCATION BY THE TRUST THE PROVISIONS CONTAINED IN SECTION 11(4A) DOES NOT APPLY. 23. THE OTHER ISSUES RAISED BY THE REVENUE RELATES TO PAYMENT OF SALARY OF RS.6 16 500 TO PROF BISHWAJIT PATNAIK TRUSTEE AND FULL TIME DIRECTOR OF THE TRU ST. THE VIEW OF THE REVENUE IS THAT SRI PATNAIK BEING AN INTERESTED PERSON WITHIN THE MEANING OF SECTION 13(3)(A) THE PAYMENT OF SALARY VIOLATES THE PROVISIONS OF SECTION 13(2)(C) . HENCE THE PROVISIONS OF SECTION 11 WILL NOT APPLY TO EXEMPT THE INCOME OF THE TRUST. ON HEARING BOTH SIDES ON THIS ISSUE WE FIND THAT THE ASSESSING OFFICER HAS NOT PROPERLY APPRECIATED THE IMPORT OF SECTION 13. THE PROVISIONS CONTAINED IN SECTION 13(1)(C) DOES NOT BAR PAYMENT OF REASONABLE SALARY FOR SERVICES RENDERED BY AN IN TERESTED PERSON. IT IS ONLY WHEN SUCH PAYMENT IS FOUND UNREASONABLE OR EXCESSIVE THAT STIPULATION OF CLAUSE(C) OF SECTION 13(2)(C) WOULD BE ATTRACTED. AS CAN BE SEEN FROM THE RIVAL SUBMISSIONS AS WELL AS THE MATERIAL MADE AVAILABLE BEFORE THE TRIBUNAL P ROF PATNAIK IS A FULL TIME DIRECTOR. HE WAS A FORMER PROF IN TIM LUCKNOW AND IIM INDORE WITH VAST EXPERIENCE. HE WAS ALSO A DIRECTOR IN IIBM UNDER RBI. THE SALARY OF SHRI PATANAIK AS A DIRECTOR OF IIBM IN THE YEAR 2006 - 07 WAS RS.12 76 500. HAD S RI PATNAIK CONTINUED IN THE SAME ASSIGNMENT HE WOULD HAVE DRAWN DOUBLE THE SALARY AS DRAWN BY HIM FROM THE ASSESSEE TRUST. THE PURPOSE IN CONNECTION OF THIS PROVISION IS THAT THE PAYMENT SHOULD NOT BE A BURDEN ON THE RESOURCES OF THE TRUST CAUSING DETRIMENT TO ITS P ROPERTY. IN THAT VIEW OF THE MATTER THE SALARY BEING REASONABLE AND PERMISSIBLE UNDER AICTE RULES NO ADVERSE INFERENCE SHOULD BE DRAWN UNDER SECTION 13. THOUGH AS PER THE PROVISIONS CONTAINED UNDER INDIAN TRUST ACT 1882 WHICH IS APPLICABLE TO PRIVATE TR USTS NO REMUNERATION IS PAYABLE TO THE TRUSTEES. BUT UNDER THE INCOME - TAX ACT THERE IS NO SUCH ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 33 ABSOLUTE RESTRICTION . ON THE OTHER HAND THE ACT PERMITS PAYMENT OF REASONABLE SALARY FOR THE SERVICES RENDERED BY AN INTERESTED PERSON SO LONG AS IT IS NOT A BURDEN ON THE RESOURCES OF THE TRUST. IN SUPPORT OF THIS PROPOSITION THE LEARNED AR OF THE ASSESSEE RELIED ON THE DECISIONS RENDERED IN THE CASES OF ARVINDA BHARTIYA VIDYALAYA SAMITI V ACIT [( 2008 ) 173 TAXMAN 119 ]( JAIPUR 0] CIT V KAMAL TOWN TRUST [( 2005 ) 279 ITR 89 ( ALI )] AND DIT( EXEMPTION ) V PARIVAR SEVA SANSTHAN [( 2002 ) 254 ITR 268 ( DEL)] . ON CAREFUL ANALYSIS OF THE IMPUGNED ORDER PASSED BY THE LEARNED CIT(A) IN THE LIGHT OF THE JUDICIAL DECISIONS STATED SUPRA WE FIND THAT THE REVENUE IS NOT ABLE TO MA KE OUT ANY MATERIAL ON RECORD TO SHOW THAT THE PAYMENT TO PROF. SHRI PATTANAIK WAS EXCESSIVE OR UNREASONABLE VIS - - VIS THE SERVICES RENDERED BY HIM. WHILE COMING TO THIS CONCLUSION THE LEARNED CIT(A) HAS ALSO OBSERVED THAT NO SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE ON THIS ACCOUNT REQUIRING ITS EXPLANATION . AS CAN BE SEEN FROM THE DECISION IN THE CASE OF KAMAL TOWN TRUST [( 2005 ) 279 ITR 89 ( ALL )] THE ONUS LIES ON THE REVENUE TO BRING ON RECORD COGENT MATERIAL TO ESTABLISH THAT THE TRUST/CHARITABLE I NSTITUTION IS HIT BY THE PROVISIONS OF SECTION 13. IN THE PRESENT CASE ON HAND THE REVENUE HAD FAILED TO BRING ANY MATERIAL ON RECORD TO ESTABLISH THAT THE TRUST IN QUESTION FELL WITHIN THE PROHIBITED CATEGORY ENUMERATED IN SECTION 13. A BENEFIT IN COMMON PARLANCE DENOTES SOMETHING WHICH IS NOT DUE TO A PERSON. THE BENEFIT TO INTERES TED PERSONS CANNOT BE INFERRED BY ANY STRETCH OF IMAGINATION. ACCORDINGLY WE ARE OF THE CONSIDERED VIEW THAT THE FINDING REACHED BY THE LEARNED CIT(A) ON THIS ISSUE IS WELL REA SONED ONE AND THEREFORE UPHOLD THE SAME FINDING THE GROUNDS RAISED BY THE REVENUE IN THIS REGARD AS DEVOID OF MERIT. 24. THE OTHER ISSUE RAISED BY THE REVENUE RELATES TO COLLECTION OF FEES FROM THE STUDENTS INVESTMENT OF SUCH FEES IN CAPITAL ASSET OF THE TRUST ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 34 WITHOUT BEING AUTHORISED BY THE TRUST DEED. IT WAS SUBMITTED BY THE LEARNED AR OF THE ASSESSEE BEFORE US THAT IT IS NOT A REQUIREMENT IN AS MUCH AS THE COLLECTION OF FEES AND APPLICATION THEREOF ARE IN CONSONANCE WITH THE CHARITABLE OBJECTS CARRIED ON BY THE TRUST WHICH IS ITS PRIMARY OBJECT AS ENSHRINED IN THE DEED. ABSENCE OF MENTIONING OF COLLECTION OF FEES AND APPLICATION THEREOF COULD NOT BE TAKEN AS A LIMITATION. T HESE ASPECTS ARE IMPLICIT IN THE OBJECTS AND OTHER CLAUSES OF THE DEED AND WERE C ARRIED OUT BY THE ASSESSEE. THE OBSERVATION OF THE ASSESSING OFFICER THAT THE ASSESSEE TRUST HAS MISUSED THE REGISTRATION GRANTED BY THE COMMISSIONER IS NOT WITHIN HIS DOMAIN AND POWERS . MORE SO WHEN THE ASSESSING OFFICER HAS NOT BEEN ABLE TO BROUGHT ON R ECORD THAT THERE WAS MISUSE OF THE REGISTRATION UNDER 12AA BY COLLECTION OF FEES AND EXPENDING THEM FOR CHARITABLE PURPOSES OF THE ASSESSEE. NOWHERE IN THE ASSESSMENT ORDER THE ASSESSING OFFICER HAS QUESTIONED THE NATURE OF THE EXPENSES INCURRED BY THE AS SESSEE AS NOT BEING CHARITABLE IN NATURE. ON CAREFUL CONSIDERATION OF THE RIVAL SUBMISSIONS OF BOTH THE PARTIES WE ARE OF THE CONSIDERED VIEW THAT THE COLLECTION OF FEES IS IMPLICIT IN ITS OBJECTS WHEN A TRUST IS REQUIRED TO ESTABLISH SET UP PROMOTE AND RUN EDUCATIONAL INSTITUTION FOR WHICH REGISTRATION WAS GRANTED. THE CHARITABLE NATURE OF EXPENSES INCURRED BY THE TRUST OUT OF THE FEES HAVING NOT BEEN FOUND FOR NON - CHARITABLE PURPOSE THE SAME CANNOT BE VIEWED ADVERSELY AGAINST THE ASSESSEE THE REVENUE CANNOT TAKE ADVANTAGE OF THE SAME AS THE ACTIVITIES OF THE ASSESSEE ARE FOUND TO BE IN ACCORDANCE WITH THE OBJECTS FOR WHICH REGISTRATION WAS GRANTED. THIS OBJECTION OF THE REVENUE IS ONLY TECHNICAL IN NATURE AND CANNOT BE CONSIDERED AT AL. ACCORDINGLY W E UPHOLD THE FINDING OF THE LEARNED CIT(A) IN THIS REGARD FINDING THE GROUNDS RAISED BY THE REVENUE AS DEVOID OF MERIT. ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 35 25. ANOTHER ISSUE RAISED BY THE REVENUE IN THE WRITTEN SUBMISSIONS FILED BY IT RELATES TO THE OBSERVATION OF THE CIT(ADMINISTRATION). THE LEARNED CIT(ADMIN) W HILE DISPOSING OF THE APPLICATION UNDER SECTION 264 HAS OBSERVED THAT THE TRUST IS NOT ENTITLED TO REGISTRATION UNDER SECTION 12AA. THE CONTENTION OF THE REVENUE REGARDING THIS ASPECT IS THAT THE OBSERVATION OF THE CIT SHOULD HAVE B EEN TAKEN COGNIZANCE BY THE CIT(A) WHI LE DISPOSING OF THE CASE. ON THIS ISSUE THE LEARNED AR POINTED OUT THAT CIT(A) BEING AN APPELLATE AUTHORITY IN THE DEPARTMENTAL HIERARCHY IS NOT BOUND BY THE OBSERVATION OF ANOTHER AUTHORITY WHO IS OF EQUAL RANK. TH EREFORE THE CONTENTION OF THE REVENUE THAT THE LEARNED CIT(A) SHOULD HAVE TAKEN NOTE OF THE OBSERVATION OF THE LEARNED CIT(ADMIN) IS NOT SUSTAINABLE FOR LEGAL SCRUTINY AS THEY WOULD NEGATE THE STATUTORY POWER. ON CAREFUL CONSIDERATION OF THE RIVAL SUBMIS SIONS WE ARE OF THE CONSIDERED VIEW THAT IT IS AN ACCEPTABLE PRINCIPLE THAT THE AUTHORITY IN WHICH JURISDICTION IS VESTED CAN ONLY EXERCISE THAT POWER. IN A WAY THE POWER MUST BE EXERCISED ONLY BY THE AUTHORITY TO WHICH IT IS COMMITTED. THAT AUTHORITY MU ST GENUINELY ADDRESS ITSELF TO THE MATTER BEFORE IT; IT MUST NOT ACT UNDER THE DICTATES OF ANOTHER BODY OR DISABLE ITSELF FROM EXERCISING DISCRETION IN INDIVIDUAL CASES. IF THE VIEW EXPRESSED BY THE DEPARTMENT IS ACCEPTED THEN IT WOULD AMOUNT TO NEGATION O F THESE PRINCIPLES. THIS WOULD DESTROY THE BASIC STRUCTURE O F THE ACT AND ITS INTEGR ITY. HENCE WE ARE OF THE CONSIDERED VIEW THAT SUCH AN ARGUMENT OF THE REVENUE IS NOT ACCEPTABLE UNDER LAW AND ACCORDINGLY WE REJECT THE SAME. 26. ANOTHER ASPECT OF THE CO NTENTION OF THE REVENUE RELATES TO NON - AFFORDING OPPORTUNITY BY THE LEARNED CIT(A) TO THE ASSESSING OFFICER IN COURSE OF DECIDING THE CASE . THE REVENUE HAS POINTED OUT THAT NO SUFFICIENT OPPORTUNITY WAS GIVEN TO THE ASSESSING OFFICER BY THE LEARNED WHILE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 36 ADJUCATING THE APPEAL FILED BEFORE HIM. THE LEARNED AR OF THE ASSESSEE HAS BROUGHT O UR ATTENTION TO THE PROFORMA OF THE ORDER WHEREIN IT HAS BEEN MENTIONED THAT SRI MK PATI ASSESSING OFFICER WAS PRESENT AT THE TIME OF HEARING. A COPY OF THE APPEAL MEMO I N FORM NO 35 WITH STATEMENT OF FACTS AND GROUNDS OF APPEAL WAS ALSO SENT TO ASSESSING OFFICER AND HE HAS OFFERED HIS COMMENTS IN A COMPREHENSIVE REPLY. IN THAT VIEW OF THE MATTER THE CONTENTION OF THE REVENUE IS HIGHLY UNTENABLE UNDER LAW. IT WAS FURTHER POINTED OUT BY THE LEARNED AR OF THE ASSESSEE THAT THE REVISED GROUNDS WERE BASICALLY ORIGINAL GROUNDS OF APPEAL REWORDED AND RENUMBERED SO THAT THE NARRATIVE PORTIONS OF THE ORIGINAL GROUNDS OF APPEAL WERE OMITTED TO MAKE THE GROUND MORE SPEAKING. ON CA REFUL CONSIDERATION OF THE SUBMISSIONS OF BOTH THE PARTIES IN THE LIGHT OF THE IMPUGNED ORDER PASSED BY THE LEARNED CIT(A) IT IS FOUND THAT AS CAN BE SEEN FROM PARA 6 OF THE IMPUGNED ORDER A REMAND REPORT WAS CALLED FOR FROM THE ASSESSING OFFICER AND S AME WAS SUBMITTED RUNNING INTO 40 PAGES. IN PARA 7 IT WAS FURTHER OBSERVED BY THE LEARNED CIT(A) THAT THE ASSESSING OFFICER AND THE APPELLANT - ASSESSEE HAVE LABORED THEIR UTMOST CAPACITY TO JUSTIFY THEIR RESPECTIVE STANDS. THE ASSESSING OFFICER ALSO APPEA RED AND DE FENDED THE ORDER PASSED BY HIM. AS CAN BE SEEN FROM THE IMPUGNED ORDER IT IS CLEAR THAT THE ORDER IS PRIMARILY BASED ON INTERPRETATION LAW AND JUDICIAL PRECEDENTS. ALL OTHER RELEVANT FACTUAL ASPECTS HAVE BEEN DISCUSSED IN THE ORDER OF THE ASSESS ING OFFICER AND THAT OF THE LEARNED CIT(A). DURING COURSE OF HEARING THE DEPARTMENT IS NOT ABLE TO BROUGHT OUT ANYTHING TO INDICATE THAT THE REVENUE WOULD HAVE IMPROVED ITS CASE FURTHER HAD SOME MORE OPPORTUNITY BEEN GRANTED. HENCE WE ARE OF THE CONSID ERED VIEW THAT NO PREJUDICE IS CAUSED TO THE DEPARTMENT O N THIS ACCOUNT. APART FROM THAT LAW INVESTS THE LEARNED CIT(A) WITH POWER TO MAKE ENQUIRIES AS HE THINKS FIT ON THE FACT AND CIRCUMSTANCES. HENCE WE ITA NO .127/CTK/2011 AND C.O.NO .14/CTK/2011 37 ARE OF THE CONSIDERED VIEW THAT THIS GROUND RAISE D BY THE DEPARTMENT IS ALSO DEVOID OF MERIT AND IS HEREBY DISMISSED. 27. FOR THE REASONS DISCUSSED ABOVE WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT(A) AND THEREFORE WE UPHOLD THE SAME BY DISMISSING THE APPEAL OF THE REVENUE AND ALLOWIN G THE CROSS OBJECTION FILED BY THE ASSESSEE SUPPORTING THE IMPUGNED ORDER OF THE LEARNED CIT(A). 28. IN THE RESULT THE APPEAL OF THE REVENUE IS DISMISSED AND THE CROSS OBJECTION FILED BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN OPEN COURT ON DT. 29 TH JULY 2011 SD/ - SD/ - (K.K.GUPTA) ACCOUNTANT MEMBER (K.S.S.PRASAD RAO) JUDICIAL MEMBER DATE: H.K.PADHEE SENIOR PRIVATE SECRETARY. COPY OF THE ORDER FORWARDED TO : 1. THE APP ELLANT: INCOME - TAX OFFICER WARD 2(1) BHUBANESWAR. 2. THE RESPONDENT: M/S.HUMAN RESOURCE DEVELOPMENT & MANAGEMENT TRUST (ASBM TRUST) PLOT NO.8 SAI ANANDAM COMPLEX DAMANA SQUARE BHUBANESWAR 751 024. 3. THE CIT 4. THE CIT(A) 5. THE DR CUTTACK 6. GUARD FILE (IN DUPLICATE) TRUE COPY BY ORDER SENIOR PRIVATE SECRETARY.