Deputy Commissioner of Income tax, Jalandhar V. M/s. Jyoti Province Sacred Heart Congregation, Jalandhar

ITA 376/ASR/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5731 (ITAT-AMRITSAR)
• Duration Of Justice: 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 20-06-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 27-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMIRK CHAND
• Assessee Lawyers: NITIN GANDHI
• Keywords: Business income; Depreciation; Charitable institution; Question of law; Revenue expenditure; Capital expenditure
• Section: 12A; 12AA; 12; 10; 11; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. H.L. KARWA, VICE PRESIDENT AND SH. MEHAR SINGH, ACCOUNTANT MEMBER I.T.A. NO.376(ASR)/2010 ASSESSMENT YEAR:2002-03 PAN :AAATJ0517B THE DY. COMMR. OF INCOME-TAX, VS. M/S. JYOTI PROV INCE SACRED HEART RANGE-1, JALANDHAR. CONGREGATION, JALANDHAR. (APPELLANT) (RESPONDENT) DEPARTMENT BY:SH. AMIRK CHAND, DR ASSESSEE BY:SH. NITIN GANDHI, CA ORDER PER MEHAR SINGH, AM, THE PRESENT APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A), JALANDHAR, DATED 29.06.2010, PASSED UN DER SECTION 250(6) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO IN SH ORT THE ACT) FOR THE ASSESSMENT YEAR 2002-03. 2. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPE AL: 1. THAT, ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. CIT(A) HAS ERRED I LAW IN ALLOWING EXEMPTION U/S 11 OF THE ACT. 1.1. WHILE DOING SO, THE LD. CIT(A) HAS FAILED TO A PPRECIATE THE FACTS. (I) THAT THE TRUST COULD NOT ESTABLISH THAT IT IS W ORKING WHOLLY FOR CHARITABLE PURPOSES AND APPLYING ITS INCOME TO ACHI EVE THE CHARITABLE PURPOSES OF THE TRUST. (II) THAT THE ACTIVITIES OF THE TRUST ARE NOT CHARI TABLE THOUGH THE TRUST DEED REFERS TO CHARITABLE OBJECTS. FOR EXAMPLE, TRU ST DEED NO WHERE MENTIONS OF CHARGING FEE OF ANY AMOUNT FOR AN Y OF ITS 2 SERVICES (OBJECTS) AND THIS ASPECT HAS NOT BEEN APP ROVED BY THE CIT WHILE GRANTING REGISTRATION U/S 12AA(1)(B)(I) O F THE ACT. (III) THAT SECTION 11(1)(A) OF THE ACT REFERS TO INCOME D ERIVED FROM PROPERTY OF THE TRUST AND IT DOES NOT COVER THE INC OME EARNED BY EXPLOITATION OF THE OBJECTS (REFERRED AS CHARITABL E) LEADING TO SURPLUS OF INCOME OVER THE EXPENDITURE IN RUNNING T HE BUSINESS OF THE TRUST & USING THE TRUST AS A COLOURABLE DEVI CE TO DODGE THE REVENUE & AS WELL AS THE PEOPLE OF ANY CHARITY AS THE TRUST COULD NOT ESTABLISHED THAT IT IS WORKING FOR CHARIT ABLE PURPOSES. (IV) THAT UNDER THE I.T.ACT, THERE IS NO PROVISION FOR A LLOWING THE CAPITAL EXPENDITURE AS REVENUE EXPENDITURE. SECTION 11(2) OF THE ACT REFERS TO APPLICATION OF SURPLUS OF INCOME TO B E APPLIED FOR SPECIFIED PURPOSES AS REFERRED TO IN SECTION 11(3) OF THE ACT AND IT DOES NOT ANY WAY PERMITS THE EXPENSES TO BE ALLO WED AS REVENUE EXPENSES OR CAN BE COVERED OR CAN BE CONSID ERED AS APPLICATION OF SURPLUS (REFERENCE IS MADE TO SECTIO N 11(5)(X) OF THE ACT) (V) THAT THE PROVISIONS OF SECTION 11(10(A0 OF THE ACT REQUIRE THE FULFILLMENT OF CONDITIONS AS MENTIONED THEREIN DURI NG ANY PREVIOUS YEAR. IN THE CIRCUMSTANCES, GRANT OF REGIS TRATION U/S 12AA OF THE ACT DOES NOT OVERRIDE THE PROVISION OF SECTION 11(1)(A) OF THE ACT. THE PROVISIONS OF BOTH THE SEC TIONS 12AA(1)(B)(I)/11(1)(A) OF THE ACT ARE INDEPENDENT SO FAR AS TAXABILITY/EXEMPTION OF INCOME IS CONCERNED. (VI) THAT WITH REFERENCE TO SECTION 11(4A) OF THE ACT, WHERE THE ASSESSEE IS HELD AS NOT ENGAGED IN ANY CHARITABLE A CTIVITY, PROVISIONS OF SECTION 11(4A) OF THE ACT WILL HAVE N O APPLICATION AND MEANING. 2. THAT IT IS PRAYED THAT THE ORDER OF THE LD. CIT( A0 BE SET ASIDE AND THAT OF THE A.O. RESTORED. 3. THAT THE APPELLANT REQUESTS FOR LEAVE TO ADD OR AMEND OR ALTER THE GROUNDS OF APPEAL BEFORE THE APPEAL IS HEARD AN D DISPOSED OFF. 3. IN THE COURSE OF PRESENT APPELLATE PROCEEDINGS, THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT ALL THE GROUNDS RAISED IN T HIS APPEAL ARE COVERED BY THE DECISION OF THIS BENCH, IN ASSESSEES OWN CASE, AS ADJUDICATED IN ITA NO.534(ASR)/2009 FOR THE ASSESSMENT YEAR 2006-07, V IDE ORDER DATED 21 ST MAY, 2010 ( COPY OF ORDER PLACED AT PAGE 49 OF THE PAPER BOOK). 3 4. THE LD. DR, ON THE OTHER HAND, PLACED RELIANCE ON THE ORDER OF THE ASSESSING OFFICER. HOWEVER, HE CONCEDED THAT THAT T HE ISSUE IS COVERED BY THE AFORESAID ORDER OF THE TRIBUNAL. 5. HAVING HEARD BOTH THE PARTIES, WE FIND THAT SIMI LAR ISSUE CAME UP FOR CONSIDERATION, BEFORE THIS BENCH, IN ASSESSEES OW N CASE, PASSED IN ITA NO.534(ASR)/2009 FOR THE ASSESSMENT YEAR 2006-07, A ND THE TRIBUNAL VIDE ITS ORDER DATED 21ST MAY, 2010, ADJUDICATED THE ISS UE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. IN VIEW OF THIS, WE DEEM IT FIT TO FOLLOW THE SAID ORDER OF THE TRIBUNAL ON THE IDENTICAL ISS UE AND THE SAME IS REPRODUCED HEREUNDER: 5. HAVING HEARD BOTH THE PARTIES, WE FIND THAT ISS UE RELATING TO ELIGIBILITY FOR DEDUCTION UNDER SECTION 11(1)(A) O F THE ACT AS RAISED IN THE PRESENT APPEAL ( IN APPEAL NO. 534(ASR)/2009) FOR THE A. Y. 2006-07, CAME UP FOR CONSIDERATION, BEFORE THIS BEN CH, IN THE CASE OF DCIT, RANGE-1, JALANDHAR VS. M/S. SAFFRON EDUCATION AL TRUST, JALANDHAR, IN ITA NO.536(ASR)/2009 FOR THE ASSESSME NT YEAR 2006-07 AND THE SAME WAS ADJUDICATED VIDE OUR ORDER DATED 30 TH APRIL, 2010 IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. IN VIEW OF THIS, WE DEEM IT FIT TO FOLLOW THE SAID ORDER OF THE TRIBUN AL ON THE IDENTICAL ISSUE AND THE SAME IS REPRODUCED HEREUNDER: 4. IN GROUND NO.1.1., THE REVENUE HAS CONTENDED THAT THE ACTIVITIES OF THE TRUST ARE NOT CHARITABLE AND HEN CE, IT IS NOT ELIGIBLE FOR EXEMPTION UNDER SECTION 11(1)(A) OF THE ACT. I T IS THE CONTENTION OF THE REVENUE THAT GRANT OF REGISTRATION UNDER SEC TION 12AA OF THE ACT, DOES NOT OVER RIDE THE PROVISIONS OF SECTION 1 1(1)(A) OF THE ACT, AS THE SAME ARE INDEPENDENT PROVISIONS. IN NUTSHELL , THE REVENUE CONTENDS THAT THE ASSESSEE-TRUST IS NOT ELIGIBLE FO R DEDUCTION U/S 11(1)(A) OF THE ACT. 5. IN THE COURSE OF PRESENT APPELLATE PROCEED INGS, THE LD. DR', DISCUSSED THE FACTUAL POSITION OF THE CASE AN D PLACED RELIANCE ON 4 THE ORDER OF THE ASSESSING OFFICER. THE LD. DR HA S ALSO FILED WRITTEN SUBMISSION AS RECEIVED FROM THE A.O. 6. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, PLACED RELIANCE ON THE ORDER OF THE CIT(A) AND REIT ERATED THE SUBMISSIONS MADE BEFORE HIM. HE REFERRED TO PARA 6. 1 TO 6.3. OF THE IMPUGNED APPELLATE ORDER. HE CONTENDED THAT THE LD. CIT(A), HAS PASSED A DETAILED AND WELL REASONED ORDER AND REVEN UE HAS NO CASE. HE, FURTHER, SUBMITTED THAT THE ASSESSEE SOCIETY WH ICH IS REGISTERED U/S 12AA HAS SATISFIED ALL THE REQUIREMENTS OF SECTION 11 & 12 OF THE ACT AND NO VIOLATION OF ANY PROVISION OF SECTION 13 OF THE ACT HAS BEEN POINTED OUT BY THE A.O., AS SUCH, IT IS REQUESTED THAT THE IMPUGNED APPELLATE ORDER PASSED BY THE LD. CIT(A), MAY BE SUSTAINED. 7. WE HAVE CAREFULLY PERUSED THE FACTS OF THE C ASE, RIVAL SUBMISSIONS, RELEVANT RECORD, INCLUDING THE ASSESSM ENT ORDER AND THE APPELLATE ORDER PASSED BY THE CIT(A). THE BRIEF FAC TS OF THE CASE AS CULLED OUT FROM THE RELEVANT RECORDS ARE THAT THE A SSESSEE FILED RETURN OF INCOME, ON 28.10.2006, DECLARING INCOME OF RS.50 0/-, AFTER CLAIMING EXEMPTION UNDER SECTION 11 OF THE ACT, AT RS.29,07,889/-. IN THIS CASE, THE ASSESSING OFFICER, VIDE ASSESSMENT O RDER DATED 26.12.2008, DENIED EXEMPTION AS PROVIDED UNDER SECT ION 11(1)(A) OF THE ACT. THE AO WAS OF THE OPINION THAT THE SURPLU S OVER EXPENDITURE TO THE TUNE OF RS.29,07,890/-, CANNOT BE SAID TO BE IN THE NATURE OF WHOLLY CHARITABLE AND CONSEQUENTLY DENIED BENEFIT, AS CONTEMPLATED UNDER SECTION 11(1)(A) OF THE ACT. IT WAS CONTENDED BEFORE THE AO THAT THE OBJECT EDUCATION IS COVERED UNDER THE DEFINI TION OF CHARITABLE PURPOSE WITHIN THE MEANING OF SECTION 2(15) OF THE ACT. IT WAS CONTENDED THAT THE SURPLUS FUNDS HAD BEEN UTILIZED FOR THE OBJECT OF PROVIDING EDUCATION AND ESTABLISHING INFRASTRUCTURE TO ACCOMPLISH THE OBJECT OF PROVIDING EDUCATION. IT WAS ALSO BROUGHT TO THE NOTICE OF THE A.O. THAT THE LD. CIT HAS DULY GRANTED REGISTRATIO N TO THE SOCIETY UNDER SECTION 12AA OF THE ACT. HOWEVER, THE AO WAS OF THE OPINION THAT GRANTING OF REGISTRATION PER SE CAN NOT MAKE T HE ASSESSEE ELIGIBLE FOR EXEMPTION UNDER SECTION 11(1)(A) UNLESS THE STI PULATION OF SECTION 11 OF THE ACT ARE COMPLIED WITH. IT WAS OBSERVED BY THE AO THAT EXEMPTION CANNOT BE GRANTED UNDER THE GUISE OF ISSU ANCE OF CERTIFICATE REGISTERED UNDER SECTION 12AA OF THE ACT. IT WAS AL SO POINTED OUT BY THE A.O. THAT THE BURDEN OF PROVING ELIGIBILITY OF EXEMPTION U/S 11 OF THE ACT IS CAST ON THE ASSESEE. IN THE ULTIMATE AN ALYSIS, THE AO OPINED 5 THAT THE TRUST WAS NOT WORKING AS A WHOLLY CHARITAB LE INSTITUTION. HE REJECTED THE CONTENTION OF THE ASSESSEE THAT THE FU NDS APPLIED FOR RAISING INFRASTRUCTURE BY THE TRUST CANNOT BE CONS TRUED AS THAT THE TRUST IS WHOLLY CHARITABLE. IN A NUTSHELL, THE AO WAS OF THE OPINION THAT THE TRUST WAS NOT WHOLLY CHARITABLE, AS IT WAS ENGAGED IN THE ACTIVITIES, WHICH WERE OTHER THAN CHARITABLE AND INCOME OF THE ASSESSEE-TRUST WAS NOT BEING APPLIED FOR THE ATTAINMENT OF THE CH ARITABLE PURPOSE. THE AO ALSO GAVE FINDING IN THE ASSESSMENT ORDER TH AT THE STAFF WELFARE EXPENDITURE CLAIMED AT RS.1,37,624/-, PERTA INED TO THE PURCHASE OF DOMESTIC GROCERY INCLUDING VARIETY OF ATTA, MASALA, ETC., WITH NO IDENTITY OF SELLER. IN HIS VIEW, SUCH EXPEN SES REPRESENTED AS INCURRED FOR DOMESTIC PURPOSES AND CONSEQUENTLY, TH E SAME WERE DISALLOWED, AS NOT BEING RELATED TO THE ACTIVITIES OF THE TRUST. HE WAS ALSO OF THE OPINION THAT SUCH DISALLOWANCE WAS DEEM ED TO HAVE BEEN DIVERTED TO PERSONS REFERRED TO IN SECTION 13(3)(CC ) OF THE ACT AND WAS MORE THAN THE LIMIT PROVIDED IN THE PROVISO BELOW SECTION 13(2)(G). THUS, EXEMPTION UNDER SECTION 11(1)(A) OF THE ACT W AS ALSO NOT AVAILABLE. THE AO HAS GIVEN DETAILED FINDINGS IN PARA 03 TO 06 OF THE IMPUGNED ASSESSMENT ORDER. IN CONCLUDING PARA 6 , THE AO HAS HELD AS UNDER: 06. IN VIEW OF THE ABOVE FACTS, IT IS HELD THAT 1. TRUST IS NOT WHOLLY CHARITABLE AS THE TRUST IS ENGAGED IN THE ACTIVITIES WHICH ARE OTHER THAN CHARITABLE AS D ISCUSSED ABOVE. 2. INCOME ARISING TO THE TRUST IS NOT BEING APPLIED FOR THE ATTAINMENT OF CHARITABLE OBJECTS. AND IN THE CIRCUMSTANCES ASSESSEE IS NOT ENTITLED F OR BENEFIT AS PROVIDED U/S 11(1)(A) OF THE ACT. 7.1. AGGRIEVED WITH THE ORDER OF THE A.O., THE ASSE SSEE FILED AN APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A), AFTER CONSIDERING AND APPRECIATING THE SUBMISSION FILED BEFORE HIM, ADJUD ICATED THE ISSUE OF IMPUGNED EXEMPTION, IN FAVOUR OF THE ASSESSEE. THE SOCIETY IS ESTABLISHED INTER-ALIA FOR THE PURPOSE TO ESTABLISH AND ADMINISTER EDUCATIONAL INSTITUTIONS. ITS PRIMARY OBJECT IS TO PROMOTE QUALITY EDUCATION AND TO IMPART KNOWLEDGE, IN THE FIELDS OF SCIENCE, COMMERCE, COMPUTER, NURSING, ARTS, SPORTS, LANGUAGE AND IN THE AREA TO TEACHING AND EVALUATION. THE OBJECTS OF THE TRUST/S OCIETY INTER-ALA IS REPRODUCED HEREUNDER: 1. THE SOCIETY IS ESTABLISHED WITH A VIEW TO ESTAB LISH AND ADMINISTER EDUCATIONAL INSTITUTIONS ITS PRIMARY IS TO PROMOTE QUALITY 6 EDUCATION AND TO IMPART KNOWLEDGE IN THE FIELDS OF SCIENCE, COMMERCE, COMPUTER, NURSING, ARTS, SPORTS, LANGUAGE AND IN THE AREA TO TEACHING AND EVALUATION. 7.2. IN THIS CASE, THE LD. CIT, JALANDHAR, HAS GRA NTED REGISTRATION UNDER SECTION 12AA OF THE ACT VIDE ORDER DATED 05.0 1.2005. NATURALLY, THE LD. CIT(A) WAS SATISFIED WITH THE G ENUINENESS OF THE ACTIVITIES AND OBJECTS OF THE TRUST, AT THE TIME O F GRANTING SUCH REGISTRATION. THE DEFINITION OF CHARITABLE PURPOSE IS CONTAINED UNDER SECTION 2(15) OF THE ACT, WHICH INCLUDES RELIEF TO THE POOR, EDUCATION, MEDICAL RELIEF AND THE ADVANCEMENT OF ANY OTHER OBJ ECT OF GENERAL PUBLIC UTILITY. NEEDLESS TO SAY THAT THE DEFINITION OF CHARITABLE PURPOSE AS CONTAINED U/S 2(15) OF THE ACT, HOLDS THE FIELD, IN THE SCHEME OF INCOME-TAX ACT, AND ANY OTHER COMMON SENSE, CONCEPT OR SCRIPTURAL CONCEPT OF CHARITABLE PURPOSE IS IRRELEVANT, TO TH E PROCEEDINGS UNDER THE INCOME-TAX ACT, AND , HENCE, THE ISSUE OF EXEMP TION AS CONTEMPLATED UNDER SECTIONS 11 TO 13 OF THE ACT IS TO BE ADJUDICATED, IN TERMS OF THE DEFINITION AS PROVIDED UNDER SECTIO N 2(15) OF THE ACT. 7.3. THE DEFINITION OF CHARITABLE PURPOSE HAS BEEN AMENDED BY THE FINANCE ACT, 2008, W.E.F. 01.04.2009, AND THE SAME READS AS UNDER: 2(15) CHARITABLE PURPOSE INCLUDES RELIEF OF THE POOR, EDUCATION, MEDICAL RELIEF, AND THE ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY. PROVIDED THAT THE ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBLIC UTILITY SHALL NOT BE A CHARITABLE PURPOSE, IF IT INVOLVE THE CARR YING ON OF ANY ACTIVITY IN THE NATURE OF TRADE, COMMERCE OR BUSINESS, OR ANY ACTIV ITY OR BUSINESS, FOR A CESS OR FEE OR ANY OTHER CONSIDERATION, IRRESPECTIVE OF TH E NATURE OF USE OR APPLICATION, OR RETENTION, OF THE INCOME FROM SUCH ACTIVITY. THE FINANCE MINISTER HAS REFERRED TO THE AMENDMENT (PARA 180) IN FOLLOWING WORDS: 180. CHARITABLE PURPOSE INCLUDES RELIEF OF THE P OOR, EDUCATION, MEDICAL RELIEF AND ANY OTHER OBJECT OF G ENERAL PUBLIC UTILITY. THESE ACTIVITIES ARE TAX EXEMPT, AS THEY SHOULD BE. HOWEVER, SOME ENTITIES CARRYING ON REGULAR TRADE, C OMMERCE OR BUSINESS OR PROVIDING SERVICES IN RELATION TO ANY T RADE, COMMERCE OR BUSINESS AND EARNING INCOMES HAVE SOUGH T TO CLAIM THAT THEIR PURPOSES WOULD ALSO FALL UNDER C HARITABLE PURPOSE. OBVIOUSLY, THIS WAS NOT THE INTENTION OF PARLIAMENT AND, HENCE, I PROPOSE TO AMEND THE LAW TO EXCLUDE T HE AFORESAID CASES, GENUINE CHARITABLE ORGANISATIONS W ILL NOT IN ANY WAY BE AFFECTED. ( EMPHASIS SUPPLIED). 7 7.4. THE CIRCULAR NO.11/2008 DATED 19.12.2008 EXPLAINS AND INTERPRETS THE SAID AMENDMENT AND PARA 2 OF THE SAME IS REPROD UCED HEREUNDER: 2.1. THE NEWLY INSERTED PROVISO TO SECTION 2(15) W ILL NOT APPLY IN RESPECT OF THE FIRST THREE LIMBS OF SECTION 2(15), I.E. RELIEF OF THE POOR, EDUCATION OR MEDICAL RELIEF. CONSEQUENTLY, WHERE THE PURPOSE OF A TRUST OR INSTI TUTION IS RELIEF OF THE POOR, EDUCATION OR MEDICAL RELIEF, IT WILL CONSTITUTE CH ARITABLE PURPOSE EVEN IF IT. 7 .5. THE CONDITIONS FOR APPLICABILITY OF SECTION 11 & 12 ARE CONTAINED UNDER SECTION 12A & 12AA OF THE ACT. IN C ASE SUCH STATUTORY CONDITIONS ARE COMPLIED WITH BY THE ASSESSEE, HE I S ENTITLED FOR EXEMPTION. THE A.O. WHILE FRAMING ASSESSMENT IN SU CH CASES, IS COMPETENT TO EXAMINE THE APPLICATION AND UTILIZATI ON OF INCOME OF THE TRUST OR INSTITUTION FOR THE SPECIFIED PURPOSE AND CARRIED OUT IN ACCORDANCE WITH THE OBJECTS OF THE TRUST. THE AO IS NOT COMPETENT TO ADJUDICATE, ON THE ISSUE, WHETHER THE ACTIVITIES AR E CHARITABLE OR OTHERWISE. HOWEVER, THE AO IF FINDS THAT THE FUNDS OF THE TRUST ARE USED FOR PERSONAL PURPOSE OR FOR NON-CHARITABLE PURPOSE, THEN, HE CAN TAKEN ACTION AS PER RELEVANT STATUTORY PROVISION AND ALSO INTIMATE THE SAME, TO THE CIT WHO CAN CONSIDER WITHDRAWAL OF THE REGIST RATION GRANTED UNDER SECTION 12A R.W.S. 12AA OF THE ACT. THE AO IS NOT C OMPETENT TO ADJUDICATE THAT THE ACTIVITIES OF THE TRUST ARE NOT WHOLLY CHARITABLE AS HAS BEEN DONE IN THIS CASE. 7.6. THE HONBLE JURISDICTIONAL HIGH COURT OF PUNJ AB & HARYANA, IN THE CASE OF PINEGROVE INTERNATIONAL CHARITABLE TRU ST VS. UNION OF INDIA AND OTHERS, IN CWP NO. 6031 OF 2009, DATED JANUARY 29, 2010, HAS CATEGORICALLY ADJUDICATED THAT THE EARNING OF REGUL AR PROFITS IS NOT DISQUALIFICATION FOR THE TRUST AND THE INSTITUTION, WHICH WOULD CONVERT CHARACTER OF CHARITABLE PURPOSE TO NON-CHARITABLE P URPOSE. THE RELEVANT PART OF DECISION OF THE HONBLE PUNJAB & HARYANA HI GH COURT, IN THE CASE OF PINEGROVE INTERNATIONAL CHARITABLE TRUST VS. UNI ON OF INDIA AND OTHERS (SUPRA) IS REPRODUCED HEREUNDER: 7.7. FURTHER, THE JURISDICTIONAL HIGH COURT OF PUN JAB & HARYANA HAS DECIDED, THE ISSUE OF CHARITY, IN THE CASE OF PINE GROVE INTERNATIONAL CHARITABLE TRUST VS. UNION OF INDIA AND OTHERS, IN CWP NO. 6031 OF 2009, DATED JANUARY 29, 2010, IN FAVOUR OF THE ASSE SSEE. THE QUESTION OF LAW RAISED BEFORE THE HONBLE HIGH COURT, IS REPROD UCED HEREUNDER: 7.1. IN THE PRECEDING PARAS IT HAS ALREADY BEEN N OTICED BY REFERRING TO THE VIEWS OF HONBLE THE SUPREME COURT IN THE CASES OF ADITANAR EDUCATIONAL INSTITUTIONS CASE (SUPRA) AND AMERICAN HOTEL AND 8 LODGING ASSOCIATION (SUPRA) THAT THE CHARACTER OF THE RECIPENT OF INCOME MUST BE THAT OF AN EDUCATIONAL INSTITUTION W HICH IS TO BE ASCERTAINED FROM THE NATURE OF ACTIVITIES. IN THE C ASE OF AMERICAN HOTEL AND LODGING ASSOCIATION (SUPRA), HONBLE SUPREME COURT CONSIDERED THE SCOPE OF INQUIRY BY THE PRESCRIBED A UTHORITY U/S 10(23)(VI) READ WITH UNNUMBERED THIRD PROVISO OF TH E ACT. IN THAT CASE THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEED INGS HAD ACCEPTED THAT EXCESS INCOME OVER AND ABOVE THE EXPENDITURE S HOWN IN ITS ACCOUNTS WAS NOT TO BE TAKEN AS ASSESSEES INCOME. WHEN THE MATTER TRAVELLED TO THE CBDT IT WAS HELD THAT THERE IS A S URPLUS INCOME, WHICH HAS BEEN REPATRIATED OUTSIDE INDIA. THEREFORE , THE ASSESSEE DID NOT APPLY FOR ITS INCOME FOR THE PURPOSE OF EDUCATI ON IN INDIA. THE VIEW OF THE CBDT WAS ACCEPTED BY THE DELHI HIGH COU RT BY DISMISSING THE WRIT PETITION, FILED BY THE ASSESSEE , WHICH IS REPORTED AS AMERICAN HOTEL AND LODGING ASSOCIATION EDUCATIONAL INSTITUTE VS. CBDT (2007) 289 ITR 46 (DELHI). THE DIVISION BENCH OF DELHI HIGH COURT HELD THAT THE GROSS RECEIPT COLLECTED BY THE ASSESSEES BRANCH OFFICE IN INDIA IS INCOME CHARGEABLE TO TAX. IT WAS FURTHER HELD THAT SUCH INCOME WAS REQUIRED TO BE APPLIED FOR EDUCATIO NAL PURPOSES IN INDIA AND ON ITS REPATRIATION OUTSIDE INDIA, THE AS SESSEE LOST THE ENTITLEMENT TO SEEK EXEMPTION. IT WAS IN THE AFORES AID BACKGROUND THAT HONBLE SUPREME COURT ANALYSED VARIOUS PROVISO ADD ED W.E.F. 1.4.1999 AND PROCEEDED TO OBSERVE THAT WITH THE INSERTION OF THE PROVISOS TO SECTION 10 (23)(VI) THE APPLICANT WHO SEEKS APPROVAL HAS NOT ONLY TO SHOW THAT IT IS AN INSTITUTION EXISTING SOLELY FOR EDUCATIONAL PURPOSES [ WHICH WAS ALSO THE REQUIREMENT U/S 10(22 )] BUT IT HAS NOW TO OBTAIN INITIAL APPROVAL FROM THE PRESCRIBED AUTH ORITY, IN TERMS OF SECTION 10(23C)(VI) BY MAKING AN APPLICATION IN THE STANDARDIZED FORM AS MENTIONED IN THE FIRST PROVISO TO THAT SECT ION. HON BLE THE SUPREME COURT THEN PROCEEDED TO EXAMINE VARIOUS PRO VISOS BY OBSERVING AS UNDER: .WITH THE INSERTION OF THE FIRST PROVISO, THE PA IS REQUIRED TO VET THE APPLICATION. THIS VETTING PROCESS IS STIPUL ATED BY THE SECOND PROVISO. IT IS IMPORTANT TO NOTE THAT THE SE COND PROVISO ALSO INDICATES THE POWERS AND DUTIES OF THE PRESCRI BED AUTHORITY. WHILE CONSIDERING THE APPROVAL APPLICATION IN THE S ECOND PROVISO, THE PRESCRIBED AUTHORITY IS EMPOWERED BEFO RE GIVING APPROVAL TO CALL FOR SUCH DOCUMENTS INCLUDING ANNUA L ACCOUNTS OR INFORMATION FROM THE APPLICANT TO CHECK THE GENU INENESS OF THE ACTIVITIES OF THE APPLICANT INSTITUTION. EARLIE R THAT POWER WAS 9 NOT THERE WITH THE PRESCRIBED AUTHORITY. UNDER THE THIRD PROVISO, THE PRESCRIBED AUTHORITY HAS TO ASCERTAIN WHILE JUD GING THE GENUINENESS OF THE ACTIVITIES OF THE APPLICANT INS TITUTION AS TO WHETHER THE APPLICANT APPLIES ITS INCOME WHOLLY AND EXCLUSIVELY TO THE OBJECTS FOR WHICH IT IS CONSTITUTED/ESTABLIS HED. UNDER THE TWELFTH PROVISO, THE PRESCRIBED AUTHORITY IS REQUIR ED TO EXAMINE CASES WHERE AN APPLICANT DOES NOT APPLY ITS INCOME DURING THE YEAR OF RECEIPT AND ACCUMULATES IT BUT MAKES PAYMEN T THEREFROM TO ANY TRUST OR INSTITUTION REGISTERED U/S 12AA OR TO ANY FUND OR TRUST OR INSTITUTION OR UNIVERSITY OR OTHER EDUCATI ONAL INSTITUTION AND TO THAT EXTENT THE PROVISO STATES THAT SUCH PA YMENT SHALL NOT BE TREATED AS APPLICATION OF INCOME TO THE OBJECTS FOR WHICH SUCH TRUST OR FUND OR EDUCATIONAL INSTITUTION IS ES TABLISHED. THE IDEA UNDERLYING THE TWELFTH PROVISO IS TO PROVIDE G UIDANCE TO THE PRESCRIBED AUTHORITY AS TO THE MEANING OF THE WORDS APPLICATION OF INCOME TO THE OBJECTS FOR WHICH THE INSTITUTION IS ESTABLISHED. THEREFORE, THE TWELFTH PROVISO IS TH E MATTER OF DETAIL. THE MOST RELEVANT PROVISO FOR DECIDING THIS APPEAL IS THE THIRTEENTH PROVISO. UNDER THAT PROVISIO, THE CIRCU MSTANCES ARE GIVEN UNDER WHICH THE PRESCRIBED AUTHORITY IS EMPOW ERED TO WITHDRAW THE APPROVAL EARLIER GRANTED. UNDER THAT P ROVISO, IF THE PRESCRIBED AUTHORITY IS SATISFIED THAT THE TRUST, F UND, UNIVERSITY OR OTHER EDUCATIONAL INSTITUTION ETC. HAS NOT APPLIED ITS INCOME IN ACCORDANCE WITH THE THIRD PROVISO OR IF IT FINDS TH AT SUCH INSTITUTION, TRUST, OR FUND ETC. HAS NOT INVESTED/D EPOSITED ITS FUNDS IN ACCORDANCE WITH THE THIRD PROVISO OR THAT THE ACTIVITIES OF SUCH FUND OR INSTITUTION OR TRUST ETC. ARE NOT G ENUINE OR THAT ITS ACTIVITIES ARE NOT BEING CARRIED OUT IN ACCORDANCE WITH THE CONDITIONS SUBJECT TO WHICH APPROVAL IS GRANTED THE N THE PRESCRIBED AUTHORITY IS EMPOWERED TO WITHDRAW THE APPROVAL EARLIER GRANTED AFTER COMPLYING WITH THE PROCEDURE MENTIONED THEREIN. 7.2 FROM THE AFORESAID VIEW EXPRESSED BY THE HONBL E SUPREME COURT, IT IS EVIDENT THAT AT THE INITIAL STAGE WHEN THE APPLICATION FOR EXEMPTION IS FILED BY AN EDUCATIONAL INSTITUTION TH E SCOPE OF INQUIRY IS RESTRICTED ONLY TO ASCERTAIN THE GENUINE NESS OF THE ACTIVITIES OF SUCH AN INSTITUTION. SUCH AN INQUIRY AS PER THE PROVISO MAY EVEN EXTEND TO THE EXAMINATION OF ACCOUNTS OF T HE INSTITUTION, APPLICATION OF ITS INCOME TO THE OBJECT AND PURPOSE S OF EDUCATION AND OTHER COGNATE ASPECTS AS HAS BEEN INDICATED IN THE OBSERVATION MADE 10 BY THEIR LORDSHIPS. ONCE ON THE BASIS OF GENUINENE SS OF THE ACTIVITIES OF AN EDUCATIONAL INSTITUTION APPROVAL IS GRANTED F OR EXEMPTION THEN THE MONITORING PROVISIONS WOULD COME IN PLACE AND T HE ASSESSING OFFICER HAS TO EXAMINE WHETHER THE CONDITIONS ON WH ICH THE EXEMPTION WAS GIVEN, HAVE BEEN FULFILLED OR NOT. TH E AFORESAID OPINION IS ALSO SUPPORTED BY THE SPEECH OF THE FINA NCE MINISTER AS REPORTED IN (1998)232 ITR 13 (ST.) 7.3. HONBLE SUPREME COURT IN PARA 32 OF THE JUDGME NT RENDERED IN AMERICAN HOTEL AND LODGING ASSOCIATION (SUPRA) HAS FURTHER HELD THAT THERE IS DIFFERENCE BETWEEN STIPULATION OF CON DITIONS AND COMPLIANCE THEREIN. IT HAS BEEN HELD THAT THE THRE SHOLD CONDITIONS ARE AIMED AT DISCOVERING THE ACTUAL EXISTENCE OF AN EDU CATIONAL INSTITUTION AND APPROVAL OF THE PRESCRIBED AUTHORITY FOR WHIC H APPLICATION IN THE STANDARDIZED FORM IN TERMS OF THE FIRST PROVISO HAS TO BE GIVEN BY EVERY APPLICANT. IF THE PRE-REQUISITE CONDITION OF ACTUAL EXISTENCE OF THE EDUCATIONAL INSTITUTION IS FULFILLED THEN THE Q UESTION OF COMPLIANCE WITH THE REQUIREMENTS CONTEMPLATED BY VARIOUS PRO VISOS WOULD ARISE. HONBLE THE SUPREME COURT HAS APPROVED THE CONTENT ION THAT THE UN- NUMBERED THIRD PROVISO CONTAINS MONITORING CONDITIO NS/REQUIREMENTS LIKE APPLICATION, ACCUMULATION, DEPLOYMENT OF INCO ME IN SPECIFIED ASSETS WHOSE COMPLIANCE DEPENDS ON EVENTS THAT HAV E NOT TAKEN PLACE ON THE DATE OF THE APPLICATION FOR INITIAL APPROVAL . IT FOLLOWS THAT FIRSTLY THE APPLICATION IS FILED IN THE STANDARDIZED FORM IN ACCORDANCE WITH THE UN-NUMBERED FIRST PROVISO AND THEN APPROVAL IS GRANTED. IF THE EDUCATIONAL INSTITUTION ACTUALLY EXISTS FOR EDUCATI ON PURPOSES ALONE THEN THE EDUCATIONAL INSTITUTION IS PERMITTED TO O PERATE SUBJECT TO MONITORING CONDITIONS. A WORKABLE SOLUTION HAS BEEN PROVIDED BY HONBLE SUPREME COURT IN PARA 33 BY OBSERVING AS UN DER: 33. TO MAKE THE SECTION WITH THE PROVISO WORKABLE WE ARE OF THE VIEW THAT THE MONITORING CONDITIONS IN THE THIR D PROVISO LIKE APPLICATION/UTILIZATION OF INCOME, PATTERN OF INVES TMENT TO BE MADE ETC. COULD BE STIPULATED AS CONDITIONS BY THE PRESCRIBED AUTHORITY SUBJECT TO WHICH APPROVAL COULD BE GRANTE D. FOR EXAMPLE, IN MARGINAL CASES LIKE THE PRESENT CASE, W HERE APPELLANT-INSTITUTE AS GIVEN EXEMPTION UP TO FINANC IAL YEAR ENDING 31.3.1998 (ASSESSMENT YEAR 1998-99) AND WHER E AN APPLICATION IS MADE ON 7.4.1999,WITHIN SEVEN DAYS O F THE NEW DISPENSATION COMING INTO FORCE, THE PRESCRIBED AUTH ORITY CAN GRANT APPROVAL SUBJECT TO SUCH TERMS AND CONDITIONS AS IT DEEMS 11 FIT PROVIDED THEY ARE NOT IN CONFLICT WITH THE PROV ISIONS OF THE 1961 ACT (INCLUDING THE ABOVE MENTIONED MONITORING CONDITIONS).WHILE IMPOSING STIPULATIONS SUBJECT TO WHICH APPROVAL IS GRANTED, THE PRESCRIBED AUTHORITY MAY I NSIST ON CERTAIN PERCENTAGE OF ACCOUNTING INCOME TO BE UTILI ZED/APPLIED FOR IMPARTING EDUCATION IN INDIA THEREFORE, CASES WHERE EARLIER THE APPLICANT HAS OBTAINED EXEMPTION(S), AS IN THIS CASE, NEED NOT BE RE-OPENED ON THE GROUND THAT THE THIRD PROVISO HAS NOT BEEN COMPLIED WITH. HOWEVER, AFTER GRANT OF APP ROVAL IF IT IS BROUGHT TO THE NOTICE OF THE PRESCRIBED AUTHORITY T HAT CONDITIONS ON WHICH APPROVAL WAS GIVEN ARE BREACHED OR THAT CIRCUMSTANCES MENTIONED IN THE THIRTEENTH PROVISO E XISTS THEN THE PRESCRIBED AUTHORITY CAN WITHDRAW THE APPROVAL EARLIER GIVEN BY THE FOLLOWING PROCEDURE MENTIONED IN THAT PROV ISO. THE VIEW WE HAVE TAKEN, NAMELY, THAT THE PRESCRIBED AUT HORITY CAN STIPULATE CONDITIONS SUBJECT TO WHICH APPROVAL MAY BE GRANTED FINDS SUPORT FROM SUB-CLAUSE (II) (B) IN THE THIRTE ENTH PROVISO. 7.4. THE QUESTION THEN IS WHETHER ACCUMULATION OF I NCOME YEAR AFTER YEAR EXTENDING OVER 4/5 YEARS WOULD DEPRIVE AN EDUC ATIONAL INSTITUTION EXISTING SOLELY FOR EDUCATION PURPOSE, ITS CHARACTE R AS AN EDUCATIONAL INSTITUTION SOLELY FOR EDUCATION PURPOSE AND NOT FO R PROFIT. IN THE 5 JUDGE CONSTITUTION BENCH JUDGMENT RENDERED IN THE C ASE OF SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATION (SUPRA), THE QUESTION OF INTERPRETATION OF CLAUSE 15 OF SECTION 2 OF THE ACT WAS INVOLVED. THE WORDS NOT INVOLVING THE CARRYING ON ANY ACTIVITY F OR PROFIT OCCURRING AT THE END OF THE DEFINITION OF CHARITABLE PURPOSE IN THE AFORESAID PROVISION WERE INTERPRETED. AFTER ANALYZING VARIOUS JUDGMENTS AND THE SPEECH OF THE FINANCE MINISTER, IT HAS BEEN HELD AS UNDER: .THE TEST WHICH HAS, THEREFORE, NOW TO BE APPLIED IS WHETHER THE PREDOMINANT OBJECT OF THE ACTIVITY INVOLVED IN CARRYING OUT THE OBJECT OF GENERAL PUBLIC UTILITY IS TO SUBSERVE THE CHARITABLE PURPOSE OR TO EARN PROFIT. WHERE PROFIT-MAKING IS T HE PREDOMINANT OBJECT OF THE ACTIVITY, THE PURPOSE, TH OUGH AN OBJECT OF GENERAL PUBLIC UTILITY WOULD CEASE TO BE A CHARITABLE PURPOSE. BUT WHERE THE PREDOMINANT OBJECT OF THE AC TIVITY IS TO CARRY OUT THE CHARITABLE PURPOSE AND NOT TO EARN PR OFIT, IT WOULD NOT LOSE ITS CHARACTER OF A CHARITABLE PURPOSE MER ELY BECAUSE SOME PROFIT ARISES FROM THE ACTIVITY. THE EXCLUSION ARY CLAUSE DOES NOT REQUIRE THAT THE ACTIVITY MUST BE CARRIED ON IN SUCH A 12 MANNER THAT IT DOES NOT RESULT IN ANY PROFIT. IT WO ULD INDEED BE DIFFICULT FOR PERSONS IN CHARGE OF A TRUST OR INST ITUTION TO SO CARRY ON THE ACTIVITY THAT THE EXPENDITURE BALANCES THE INCOME AND THERE IS NO RESULTING PROFIT.THAT WOULD ONLY BE DIFFICULT FOR PRACTICAL REALISATION BUT WOULD ALSO REFLECT UNSOUN D PRINCIPLE OF MANAGEMENT. WE, THEREFORE, AGREE WITH BEG. J. WHEN HE SAID IN SOLE TRUSTEE, LOKSIKSHANA TRUST CASE (1975) 101 I TR 256 (SC) THAT IF THE PROFITS MUST NECESSARILY FEED A CHARITABLE PURPOSE UNDER THE TERMS OF THE TRUST, THE MERE FACT THAT TH E ACTIVITIES OF THE TRUST YIELD PROFIT WILL NOT ALTER CHARITABLE CHARACTER OF THE TRUST. THE TEST NOW IS, MORE CLEAR LY THAN IN THE PAST, THE GENUINENESS OF THE PURPOSE TESTED BY THE OBLIGATION CREATED TO SPEND THE MONEY EXCLUSIVELY O R ESSENTIALLY ON CHARITY. THE LEARNED JUDGE ALSO ADDED THAT THE RESTRICTIVE CONDITION THAT THE PURPOSE SHOULD NOT INVOLVE TH E CARRYING ON OF ANY ACTIVITY FOR PROFIT WOULD BE SAT ISFIED IF PROFIT-MAKING IS NOT THE REAL OBJECT (EMPHASIS SUPPLIED). WE WHOLLY ENDORSE THESE OBSERVATIONS. (EMPHASIS AD ED . ITALICS IN ORIGINAL). 7.5. THE CONSTITUTION BENCH THEN PROCEEDED TO ILLUS TRATE THE APPLICATION OF THE AFORESAID TEST BY CITING THE EXA MPLES OF MONTHLY JOURNAL OF GANDHI PEACE FOUNDATION AND THE COUNTER EXAMPLE OF SALE OF BLOOD BY A BLOOD BANK ON PAYMENT OF HIGHER PRICE . THE AFORESAID VIEW HAS BEEN CITED WITH APPROVAL BY HONBLE THE SU PREME COURT IN THE CASE OF AMERICAL HOTEL AND LODGING ASSOCIATION (SUPRA), WHICH READS THUS:- 28. IN ADDL. CIT VS. SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATIONS REPORTED IN (1980) 121 ITR 1 , IT HAS BEEN HELD BY THIS COURT THAT TEST OF PREDOMINANT OBJECT OF TH E ACTIVITY NOT TO EARN PROFIT. HOWEVER, THE PURPOSE WOULD NOT LOSE ITS CHARACTER MERELY BECAUSE SOME PROFIT ARISES FROM TH E ACTIVITY. THAT, IT IS NOT POSSIBLE TO CARRY ON EDUCATIONAL AC TIVITY IN SUCH A WAY THAT THE EXPENDITURE EXACTLY BALANCES THE INCOM E AND THERE IS NO RESULTANT PROFIT, FOR, TO ACHIEVE THIS, WOULD NOT ONLY BE DIFFICULT OF PRACTICAL REALIZATION BUT WOULD REFLE CT UNSOUND PRINCIPLES OF MANAGEMENT. IN ORDER TO ASCERTAIN WHE THER THE INSTITUTE IS CARRIED ON WITH THE OBJECT OF MAKING P ROFIT OR NOT IT IS DUTY OF THE PRESCRIBED AUTHORITY TO ASCERTAIN WH ETHER THE 13 BALANCE OF INCOME IS APPLIED WHOLLY AND EXCLUSIVELY TO THE OBJECTS FOR WHICH THE APPLICANT IS ESTABLISHED. ( EMPHASIS ADDED. 7.6. IT IS FURTHER APPROPRIATE TO POINTED OUT THAT RULE 2BC OF THE RULES HAS PRESCRIBED THE LIMIT OF RS. 1 CRORE WHER E THE REQUIREMENT OF SEEKING APPROVAL FOR EXEMPTION WOULD NOT BE APPLICA BLE. IF THE TURN OVER IS MORE THAN RS. 1 CRORE THEN EXEMPTION IN TE RMS OF SECTION 10(23C)(VI) IS REQUIRED. THE UN-NUMBERED THIRD PROV ISO POSTULATES THE INVESTMENT AND DEPOSITS OF SURPLUS FUNDS. AN EDUCAT IONAL INSTITUTION COULD MAKE DEPOSITS AND CAN ALSO EARN INTEREST, WH ICH IS PERMISSIBLE. THERE ARE CERTAIN LIMITS IMPOSED ON THE ACCUMULATIO NS WHICH OF COURSE HAVE TO BE MET. A DIVISION BENCH OF DELHI HI GH COURT IN THE CASE OF DIRECTOR OF INCOME-TAX (EXEMPTION V. ETERNAL SCIEN CE OF MANS SOCITY (2007) 290 ITR 535 (DELHI), HAS HELD AS UNDER: I MAY ALSO BE MENTIONED THAT FOR SEEKING THE EXEMP TION UNDER SECTION 10(23C), THE ASSESSEE WILL HAVE TO FOLLOW T HE GUIDELINES MENTIONED IN FORM NO. 56D(RULE 2CA). ONE OF THE CON DITIONS IN FORM 56-D IS THAT ASSESSEE WILL HAVE TO SUBMIT T HE AUDITED ACCOUNTS AND BALANCE SHEETS FOR THE LAST THREE YEAR S ALONGWITH A NOTE ON THE EXAMINATION OF ACCOUNTS AND ON THE ACTI VITIES AS REFLECTED IN THE ACCOUNTS AND IN THE ANNUAL REPORT WITH SPECIAL REFERENCE TO THE APPROPRIATION OF INCOME TOWARDS OB JECTS OF THE UNIVERSITY OR OTHER EDUCATIONAL INSTITUTION. FROM T HE AUDITED ACCOUNTS, ONE CAN EASILY SEE WHETHER THE FUNDS WERE UTILISED FOR THE EXPANSION OF EDUCATIONAL INSTITUTION/ACTIVITY O R FOR PERSONAL PROFITS. IN THE PRESENT CASE, THE OPPOSITE-PARTIES HAVE NOT BROUGHT ANY MATERIAL ON RECORD TO PROVE THAT THE S URPLUS EARNED BY THE ASSESSEE PETITIONER WAS UTILISED FOR PERSONA L PROFIT/GAIN ON ANY INCLUDING THE FOUNDER-MANAGER/DIRECTOR. WHAT EVER FUND WAS ACQUIRED, THE SAME WAS UTILISED FOR THE EX PANSION OF EDUCATIONAL ACTIVITIES OF INSTITUTION. INITIALLY TH ERE WERE FIVE STUDENTS AND NOW THE INSTITUTION IS IMPARTING EDUCA TION TO MORE THAN 34,000 STUDENTS AS POINTED OUT DURING THE COUR SE OF ARGUMENTS. THUS, THE ASSESSEE IS FULLY SATISFYING A LL THE STATUTORY REQUIREMENTS FOR GETTING EXEMPTION U/S 10(23C)(VI) OF THE INCOME-TAX ACT. APART FROM IT, IT MAY BE MENTIONED THAT THE HONBLE SUPREME COURT HAS OBSERVED IN THE CASE OF C I V. SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATION, 121 ITR S C, P.1 THAT THE INSTITUTION MUST BE FOR GENERAL PUBLIC UTILITY AND CERTAINLY 14 NOT FOR PROFIT, THEN IT CAN BE TREATED AS CHARITABL E INSTITUTION. IN THE INSTANT CASE, NO ADVERSE MATERIAL WAS BROUGHT O N RECORD BY THE OPPOSITE-PARTIES TO REJECTED THE APPLICATION DA TED 4.2.1999 FOR SEEKING SAID EXEMPTION. 7.7 THE AFORESAID VIEW HAS BEEN ADOPTED, APPLIED AND FO LLOWED BY A DIVISION BENCH OF ALLAHABAD HIGH COURT IN THE CASE OF CITY MONTESSORI SCHOOL (SUPRA) , AS HAS BEEN RIGHTLY CONTENDED BY THE LEARNED COUNSEL FOR THE PETITION(S).EVEN SPECIAL LE AVE PETITION AGAINST THE AFORESAID JUDGMENT HAS BEEN DISMISSED. ACCORDI NGLY, THE QUESTION OF LAW HAS TO BE ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 7.8. A PERUSAL OF THE ASSESSMENT ORDER REVEALS THAT THE A.O. HAS FOCUSED ON THE ISSUE THAT THE ACTIVITIES OF THE TR UST ARE NOT WHOLLY CHARITABLE. HE HAS ALSO CITED CERTAIN CASE LAWS TO SUPPORT HIS CONTENTION. HOWEVER, THE AO HAS NOT SPECIFIED OR QU ANTIFIED THE EXPENDITURE APPLIED BY THE TRUST FOR CHARITABLE PUR POSE OR FOR NON- CHARITABLE PURPOSE. 7.9 THE EARNING OF PROFIT PER SE WOULD NOT DISENTIT LE THE TRUST, FOR EXEMPTION UNDER SECTIONS 11 TO 13 OF THE ACT, UNLE SS THE FACTS OF THE CASE WARRANTS THAT THE FUNDS OF THE TRUST HAS BEEN MISAPPROPRIATED BY THE TRUST. IN THE CONTEXT OF SECTION 10(23C) OF THE ACT, THE HONBLE JURISDICTIONAL HIGH COURT, IN THE CASE OF PINEGROV E INTERNATIONAL CHARITABLE TRUST VS. UNION OF INDIA AND OTHERS (SUP RA), AS REPRODUCED ABOVE HAS CATEGORICALLY HELD THAT MAKING OF PROFITS ON REGULAR BASIS, WHICH HAS BEEN UTILIZED FOR THE SPECIFIED PURPOSE, CANNOT BE CONSTRUED AS EXPENDITURE NOT INCURRED FOR CHARITABLE PURPOSE. THE LD. CIT, TO SUPPORT HIS FINDINGS HAS QUOTED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ADITANAR EDUCATIONAL INSTITUTIONS, 224 ITR 310 (SC) AND ALSO CONSIDERED THE DECISION OF HONBLE SUPREME COURT, IN THE CASE OF CIT VS. SURAT ART SILK CLOTH MANUFAC TURERS ASSOCIATION, 121 ITR 1 (SC) ALONGWITH OTHER DECISIO NS INCLUDING THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE O F CIT VS. MANAV MANGAL SOCIETY, IN ITA NO.450 OF 2008 DATED 19.08.2 009 [REPORTED IN 28 DTR (P&H) 129]. THE HONBLE JURISDICTIONAL HI GH COURT HAS ALSO HELD IN THE CASE OF PINEGROVE INTERNATIONAL C HARITABLE TRUST VS. UNION OF INDIA AND OTHERS (SUPRA), THAT THE CAPIT AL EXPENDITURE INCURRED BY THE TRUST OR INSTITUTION SUCH AS CONSTR UCTION OF SCHOOL 15 BUILDING OR PROVIDING INFRASTRUCTURE IS ALSO IN THE NATURE OF CHARITABLE PURPOSE. 7.10.. WE HAVE ALSO CONSIDERED THE COMMENTS FILED B Y THE AO, WHICH ARE ALMOST REPETITION OF THE TEXT AND CONTENTS OF T HE IMPUGNED ASSESSMENT ORDER. SIMILARLY, WE HAVE ALSO CONSIDERE D THE WRITTEN SUBMISSIONS FILED BY THE ASSESSEE AND THE CASE LAWS CITED THEREIN. THE LD. CIT(A) HAS QUOTED AND DISCUSSED PLETHORA OF CA SE LAWS, RELIED UPON BY THE CONTENDING PARTIES. THE RELEVANT PART O F THE ORDER OF THE LD. CIT(A) IS REPRODUCED HEREUNDER: 6.5. IN THE PRESENT CASE, THE ASSESSEE IS REGISTER ED U/S 12A OF THE ACT BY THE CIT, AS NOTED EARLIER. IT HAS ALSO G OT ITS ACCOUNTS AUDITED AND SUBMITTED A REPORT OF THE ACCOUNTANT WI TH ITS INCOME TAX RETURN. THE AO HAS NOT INVOKED THE PROVI SIONS OF SECTION 13 OF THE ACT. HENCE, IT CAN BE PRESUMED TH AT NONE OF THE DISABLING PROVISIONS OF SECTION 13 ARE APPLICAB LE IN THE CASE OF APPELLANT. SINCE THE CONDITIONS OF SECTION 12A A RE SATISFIED, THERE SHOULD BE NO DIFFICULTY IN APPLYING THE PROVI SIONS OF SECTION 11 AND 12 TO THE INCOME OF THE ASSESSEE. TH E AO CONTENDS THAT BECAUSE THE ASSESSEE HAS BEEN MAKING PROFITS REGULARLY OVER SEVERAL PRECEDING YEARS, IT IS NOT D OING ANY CHARITABLE WORK. AS DISCUSSED EARLIER, CHARITABLE W ORK INCLUDES EDUCATION WHICH THE ASSESSEE IS ENGAGED IN AND WHIC H IS NOT DENIED BY THE AO. THERE IS NOTHING IN SECTION 2(15) OF I.T. ACT TO SUGGEST THAT EDUCATION MUST BE PROVIDED AT A PRI CE WHICH IS BELOW THE COST OF SERVICE TO ENTITLE THE TRUST OR T HE INSTITUTION TO THE EXEMPTION U/S 11. EDUCATION IS, BY ITSELF, CH ARITABLE ACTIVITY AS PER THE I.T. ACT. SECTION 2(15) CONTAIN ED THE WORDS NOT INVOLVING THE CARRYING ON OF ANY ACTIVITY FOR PROFIT AT THE END OF THE DEFINITION OF CHARITABLE PURPOSES. THE SE WORDS WERE OMITTED BY THE FINANCE ACT, 1983 W.E.F. 1.4.19 84. AS PER THE CBDT CIRCULAR NO. 372 DATED 8.12.1983 THESE WOR DS WERE OMITTED CONSEQUENT TO THE AMENDMENT MADE IN SECTION 11 OF THE I.T. ACT WHEREUNDER PROFITS AND GAINS OF BUSINESS I N THE CASE OF CHARITABLE OR RELIGIOUS TRUST AND INSTITUTIONS WILL NOT BE ENTITLED TO EXEMPTION UNDER THAT SECTION EXCEPT IN CASES WHE RE THE BUSINESS FULFILLS THE CONSIDERING U/S 11(4) OF THE ACT. SECTION 11(4) OF THE ACT STATES THAT FOR THE PURPOSE OF THI S SECTION PROPERTY HELD IN TRUST INCLUDES A BUSINESS UNDERTA KEN SO HELD,.. AS PER SECTION 1(4A), SUB-SECTION (1) OR ( 2) OR (3A) SHALL NOT APPLY IN RELATION TO ANY INCOME OF A TRUS T OR AN INSTITUTION, BEING PROFITS AND GAINS OF BUSINESS, U NLESS THE 16 BUSINESS IS INCIDENTAL TO THE ATTAINMENT OF THE OB JECTIVES OF THE TRUST OR THE INSTITUTION AND SEPARATE BOOKS OF ACCO UNTS ARE MAINTAINED BY SUCH TRUST OR INSTITUTION IN RESPECT OF SUCH BUSINESSS. IN THE CASE OF DHARMADIPTI VS. CIT 114 I TR 454(SC), THE HONBLE SUPREME COURT HELD THAT THE WO RDS NOT INVOLVING THE CARRYING ON OF AN ACTIVITY FOR PROFIT GOVERN ONLY THE LAST HEAD OF CHARITABLE PURPOSE, NAMELY, ANY O THER OBJECT OF GENERAL PUBLIC UTILITY AND NOT THE OTHER THREE HEA DS. IN THE DECISION IN THE CASE OF CIT VS. SURAT ART SILK CLOT H MANUFACTURER ASSOCIATION 121 ITR 1 (SC), THE HONB LE SUPREME COURT OVERRULED THEIR DECISION IN INDIAN C HAMBER OF COMMERCE VS. CIT 101 ITR 796(SC). IN THE LAST CITED CASE, THE HONBLE SUPREME COURT HELD THAT SECTION 2(15) EXCLU DED FROM EXEMPTION THE CARRYING ON OF ACTIVITIES FOR PROFIT EVEN IF THEY WERE LINKED WITH THE OBJECTS OF GENERAL PUBLIC UTIL ITY. IN THE CASE OF SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATIONS (SUPRA) IT WAS HELD THAT THE DOMINANT OBJECT HAD TO BE EXAMINE D TO SEE WHETHER IT WAS CHARITABLE AND THE EXISTENCE OF CER TAIN OBJECTS WHICH MAY NOT BE CHARITABLE IN THEMSELVES BUT WHICH WERE MERELY ANCILLARY AND INCIDENTAL TO THE PRIMARY PURP OSE WOULD NOT PREVENT THE TRUST OR INSTITUTION FOR A VALID CH ARITY. HENCE, EVEN IF A BUSINESS IS BEING CARRIED OUT BY A REGIST ERED TRUST, AND THE INCOME THEREOF IS APPLIED WHOLLY TO CHARITABLE PURPOSE LIKE EDUCATION, THE INCOME WILL BE EXEMPT U/S 11. 6.6. IN THE CASE OF ANDHRA STATE ROAD TRANSPORT COR PORATION VS. CIT 100 ITR 392 (AP), IT WAS NOTED THAT NOT ONL Y THE DOMINANT BUT SOLE PURPOSE OF THE ASSESSEE CORPORATI ON WAS PROVIDING TRANSPORT FACILITIES TO PUBLIC, TRADE AND INDUSTRY AND, THEREFORE, IT WAS FOR A CHARITABLE PURPOSE. IT WAS FURTHER HELD THAT IF THE UNDERTAKING ACTS ON BUSINESS PRINCIPLES AN ELEMENT OF PROFIT WAS INVOLVED. NO DOUBT, PROFIT MAY RESULT I N THE RUNNING OF THE ENTERPRISES, BUT THE BALANCE OF THE INCOME B Y WAY OF PROFIT WAS AGAIN TO BE SPENT FOR A PURPOSE OF PUBLI C UTILITY I.E. DEVELOPMENT OF ROADS. HENCE, IT WAS HELD TO BE ENTI TLED TO EXEMPTION U/S 4(3)(I) OF THE INDIAN I.T. ACT, 1922 FOR ASSESSMENT YEAR 1960-61 AND 1961-62. IN RESPECT OF ASSESSMENT YEAR 1962-63 ALSO, WHEN THE 1961 ACT HAD COME INTO FORCE, IT WAS HELD THAT THE PURPOSE OR OBJECT OF THE INSTITUT ION OR CONCERN SHOULD BE PUBLIC UTILITY AND NOT PROFIT MAKING AND THE ASSESSEE WAS HELD TO BE ENTITLED TO EXEMPTION U/S 11 OF THE I.T. ACT. THIS DECISION OF THE HONBLE HIGH COURT WAS APPROVED BY THE 17 HONBLE SUPREME COURT IN THE CASE OF SURAT ART SIL K CLOTH MANUFACTURERS ASSOCIATION (SUPRA) AND AFFIRMED IN T HE CASE OF CIT VS. ANDHARA PRADESH STATE ROAD TRANSPORT ROAD C ORPN. 159 ITR 1 (SC). IN THE LATTER DECISION THE HONBLE SUPREME COURT HELD THAT THE ASSESSEE COULD NOT BE EXPECTED OR REQUIRED TO BE RUN AT A LOSS. THE PROVISION UNDER THE RTC AC T THAT THE ASSESSEE SHALL ACT ON BUSINESS PRINCIPLES COULD NOT , THEREFORE, DEPRIVE THE ASSESSEE FROM EXEMPTION U/S 11.. SINCE THE OBJECT OF THE CORPORATION UNDER THE RTC ACT WAS ADMITTEDLY OF GENERAL PUBLIC UTILITY WITHIN THE MEANING OF SECTION 2(15) AND IF THE DOMINANT OBJECT WAS TO CARRY OUT CHARITABLE PURPOSE AND NOT TO EARN PROFIT, THE PURPOSE WOULD NOT LOOSE CHARITABLE CHARACTER MERELY BECAUSE SOME PROFIT AROSE FROM THE ACTIVITY. THE ASSESSEE WAS HELD TO BE ENTITLED TO EXEMPTION U/S 11 OF THE ACT. IN THE CASE OF ACIT VS. THANTHI TRUST ETC. 247 ITR 785 (SC), IT WAS HELD THAT AFTER 1.4.1992, IN VIEW OF T HE AMENDED PROVISIONS OF SECTION 11(4A), A BUSINESS WHOSE INC OME WAS UTILIZED BY THE TRUST OR THE INSTITUTION FOR THE PU RPOSES OF ACHIEVING THE OBJECTS OF THE TRUST OR THE INSTITUTI ON WAS A BUSINESS WHICH WAS INCIDENTAL TO THE ACHIEVEMENT O F THE OBJECTS OF THE TRUST AND ENTITLED TO EXEMPTION U/S 11 FOR ASSESSMENT YEAR 1992-93 AND THEREAFTER. 6.7. FROM THE DISCUSSION ABOVE, IT CAN BE INFERRED THAT HAVING PROFITS PER SE DOES NOT DISENTITLED AN ELIGIBLE TRU ST OR AN INSTITUTION FROM THE EXEMPTION U/S 11 OF THE ACT , IF THE SOLE OR THE DOMINANT PURPOSE OF THE TRUST OR INSTITUTION I S CHARITABLE IN NATURE. THE QUESTION WHETHER A TRUST IS CHARITABLE OR NOT HAS TO BE EXAMINED WITH REFERENCE OF ITS OBJECT AND ACTIVI TIES AS TO WHETHER THEY FALL WITHIN THE PURVIEW OF SECTION 2(1 5) OF THE ACT. A DETERMINATION IN THIS REGARD HAS TO BE MADE BY TH E COMMISSIONER U/S 12A AND, AFTER 1.4.1997, U/S 12AA. ONCE THE COMMISSIONER HAD MADE THE DETERMINATION THAT THE TR UST WAS A CHARITABLE ONE, THE AO IS NOT ENTITLED TO RE-EXAMIN E THE QUESTION AS TO WHETHER THE TRUST IS CHARITABLE OR NOT, AS HE LD BY THE HONBLE SUPREME COURT IN THE CASE OF SURAT CITY GYM KHANA 300 ITR 214 (SC).DURING ASSESSMENT THE AO CAN ONLY DETERMINE WHETHER THE INCOME HAS BEEN APPLIED FOR C HARITABLE PURPOSE. IN THE PRESENT CASE, THE AO HAS DENIED THE EXEMPTION ON THE GROUND THAT THE ASSESSEE COULD NOT ESTABLISH THAT IT IS WHOLLY FOR CHARITABLE PURPOSE AND THAT IT IS APPLYI NG ITS INCOME 18 FOR THE CHARITABLE PURPOSE. THE REASONS FOR HOLDING SUCH A VIEW BY THE AO ARE PREDOMINANTELY THAT THE ASSESSEE IS E ARNING SURPLUS YEAR AFTER YEAR EVEN THOUGH THE ASSESSEE HA S SUBMITTED THAT IT HAD APPLIED 85% OF ITS INCOME EVERY YEAR FO R CHARITABLE PURPOSES. IN MY OPINION, IN LIGHT OF THE DECISION O F THE HONBLE SUPREME COURT IN THE CASE OF SURAT CITY GYMKHANA (S UPRA), THE AO WAS NOT EMPOWERED TO TAKE THE VIEW THAT THE TRUS T WAS NOT WHOLLY FOR CHARITABLE PURPOSES, SINCE THE CIT HAD G RANTED REGISTRATION U/S 12AA OF THE I.T. ACT TO THE ASSESS EE. SECTION 12AA(3) GRANTS POWER TO THE COMMISSIONER TO CANCEL THE REGISTRATION OF THE TRUST OR INSTITUTION IF HE IS S ATISFIED THAT THE ACTIVITIES OF THE TRUST OR INSTITUTION ARE NOT GENU INE OR ARE NOT BEING CARRIED OUT IN ACCORDANCE WITH THE OBJECTS OF THE TRUST OR INSTITUTION. HENCE, ONCE THE COMMISSIONER HAS GRANT ED REGISTRATION OR U/S 12AA, IT HAS TO BE TAKEN THAT T HE OBJECTS OF THE INSTITUTION AND THE GENUINENESS OF THE ACTIVITI ES OF THE TRUST ARE SUCH THAT THE INSTITUTION IS ELIGIBLE FOR DEDUC TION OF ITS INCOME U/S 11. IF THE ACTIVITIES OF THE INSTITUTION ARE NOT GENUINE OR NOT IN ACCORDANCE WITH THE OBJECTS, THE COMMISSI ONER MAY CANCEL THE REGISTRATION GRANTED EARLIER. THE POWER OF SUCH CANCELLATION IS VESTED ONLY WITH THE COMMISSIONER A ND NOT WITH THE AO. THE AO CANNOT DETERMINE THAT THE OBJECTS OF THE INSTRUCTION ARE NOT CHARITABLE. IF THE AO BELIEVES SO, HEM AY BRING THIS BELIEF, ALONGWITH REASON THEREOF TO THE KNOWLEDGE OF THE COMMISSIONER FOR DETERMINATION AS TO WHETHER T HE REGISTRATION GRANTED TO THE TRUST OR INSTITUTION SH OULD BE WITHDRAWN. HOWEVER, TILL SUCH TIME THAT THE REGIST RATION U/S 12A OR 12AA IS NOT CANCELLED, IT HAS TO BE PRESUMED THAT THE TRUST OR INSTITUTION IS CHARITABLE. ONCE THAT IS SO, THE AO DURING ASSESSMENT, CANNOT HOLD THAT THE TRUST OR INSTITUTI ON IS NOT ELIGIBLE FOR DEDUCTION U/S 11.THE AO CAN, OF COUR SE, EXAMINE IF THE INCOME FROM PROPERTY HELD UNDER TRUST HAS BE EN APPLIED FOR THE STATED CHARITABLE OR RELIGIOUS PURPOSES, AN D IF THERE IS AN EXCESS OVER 15% OF THE INCOME NOT SO APPLIED, THEN WHETHER THE OTHER CONDITIONS FOR ALLOWING DEDUCTION OF THE UNSP ENT AMOUNT HAVE BEEN FULFILLED. FOR THIS PROPOSITION, I DRAW S UPPORT FROM THE DECISION IN THE CASE OF MADHYA PRADESH MADHYAN VS. CIT 256 ITR 277 (MP), IN WHICH IT HAS BEEN HELD THAT ON CE REGISTRATION HAS BEEN GRANTED U/S 12A, I.T. AUTHOR ITIES WERE BOUND BY THE SAME. THE HONBLE SUPREME COURT HAVE A LSO HELD IN THE CASE OF ACIT VS. SURAT CITY GYMKHANA (SUPRA) THAT 19 REGISTRATION U/S 12A WAS A FAIT ACCOMPLI TO HOLD TH E AO BACK FROM FURTHER PROBE INTO THE OBJECTS OF THE TRUST. C ONSIDERING THE FACTS OF THE CASE AND THE DECISIONS DISCUSSION ABOVE, I HOLD THAT THE AO IS PRECLUDED FROM EXAMINING THE ELIGIBI LITY OF THE TRUST OR INSTITUTION FOR EXEMPTION U/S 11, THOUGH H E MAY EXAMINE IF THE INCOME HAS BEEN APPLIED FOR CHARITAB LE PURPOSES. OTHER THAN REFERRING TO THE PROFITS OF THE ASSESSEE TRUST, THE AO HAS NOT GIVEN ANY FINDING THAT THE EXPENDITURE INCU RRED BY THE ASSESSEE WAS ON ANYTHING OTHER THAN ON EDUCATION. 6.8. THE AO HAS RELIED ON THE DECISION REPORTED IN (1992) 3 (SCC) 390 IN THE CASE OF MCD VS. CHILDRENS BOOK TR UST. IN THIS DECISION THE HONBLE APEX COURT HELD THAT IF A SOCIETY WAS MAKING SYSTEMATIC PROFITS, IT COULD NOT CLAIM EXEM PTION. THIS DECISION HAS BEEN RENDERED IN THE CONTEXT OF ANOTHE R STATUTE. IN MY OPINION, THIS DECISION MAY BE APPLICABLE TO THE PROVISIONS OF SECTIONS 10(22) OR 10(23C) OF THE ACT, WHERE MAKING OF PROFIT IS PROHIBITED. HOWEVER, IN THE CONTEXT OF SECTION 1 1 OF THE ACT, THE HONBLE APEX COURT HAVE HELD THAT A TRUST OR IN STITUTION MAY RUN ON COMMERCIAL LINES AND MAKE PROFITS [SEE DISCU SSION ON THE ISSUE IN THE CASE OF CIT VS. ANDHRA PRADESH STATE R OAD TRPT. ROAD CORPN. 159 ITR 1 (SC) ABOVE ].THE INTERPRETATI ON OF CHARITABLE PURPOSES U/S 2(15) HAS BEEN DONE BY SEV ERAL COURTS INCLUDING BY THE HONBLE SUPREME COURT. AS HAS BEEN DISCUSSED EARLIER, MERELY MAKING OF PROFITS OR OF S URPLUS WILL NOT DISENTITLED AN ELIGIBLE TRUST FROM EXEMPTION U/ S 11 OF THE ACT AS LONG AS THE OBJECTS OF THE TRUST ARE CHARIT ABLE, ITS ACTIVITIES ARE GENUINE AND THE INCOME IS APPLIED TO WARDS THE CHARITABLE PURPOSES AUTHORIZED TO BE UNDERTAKEN BY THE TRUST OR THE INSTITUTION; CONVERSELY, IF THE INCOME IS DIVER TED TO PERSONS MENTIONED IN SECTION 13 OF THE ACT OR IS SPENT FOR PURPOSES WHICH ARE NOT CHARITABLE, EXEMPTION MAY BE DENIED T O THE ASSESSEE TRUST OR INSTITUTION. NO SUCH CONVERSE FIN DING HAS BEEN GIVEN BY THE AO IN THIS CASE. THE APPELLANT HAS STA TED THAT SINCE THE ASSESSEE WAS CHARGING FEES AND HAVING PROFITS IT WAS NOT ENGAGED IN CHARITABLE ACTIVITIES. THIS VIEW IS UNTE NABLE IN LIGHT OF DISCUSSION ABOVE WHERE IT HAS BEEN SEEN THAT A CHARITABLE ORGANIZATION MAY RUN ON COMMERCIAL PRINCIPLES. 6.9. IN A RECENT DECISION IN THE CASE OF CIT VS. MA NAV MANGAL SOCIETY, THE HONBLE JURISDICTIONAL HIGH COU RT IN IT APPEAL NO.450 OF 2008 DATED 19.08.2009 (REPORTED IN 28 DTR (P&H) 129) HAVE UPHELD THE GRANT OF EXEMPTION U/S 1 1 OF THE 20 ACT TO THE SOCIETY. TWO QUESTIONS OF LAW WERE RAISE D BEFORE THE HONBLE HIGH COURT. THE FIRST QUESTION WAS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. TRIBUNAL ERR ED IN LAW IN ALLOWING THE EXEMPTION TO THE ASSESSEE U/S 11(1)(A) INSTEAD OF EXEMPTION OF 11(4A) BECAUSE AS PER AIMS AND OBJECTS AND THEREFORE, THE ESTABLISHMENT OF SCHOOL WAS INCIDENT AL TO PROMOTING THE AIMS AND OBJECTS OF THE CHARITABLE SOCIETIES/INSTITUTIONS. THE SECOND QUESTION WAS WH ETHER THE LD. TRIBUNAL ERRED IN ALLOWING THE APPLICATION OF MONEY ON CONSTRUCTION OF BUILDING WHEN NO VERIFICATION WAS D ONE BY AO NOR WAS IT PUT TO THE AO DURING THE ASSESSMENT PROC EEDINGS. BESIDES, THE CONSTRUCTION OF THE BUILDING HAD BEEN TAKEN DIRECTLY INTO THE BALANCE SHEET AND NOT INTO THE I NCOME AND EXPENDITURE ACCOUNT BY THE ASSESSEE AND IT WAS HELD BY THE HONBLE UTTARAKHAND HIGH COURT IN CIT VS. QUEENS EDUCATIONAL SOCIETY 223 CTR (UTTARAKHAND) 395 THAT INVESTMENT IN FIXED ASSETS LIKE FURNITURE AND BUILD ING WERE THE PROPERTIES OF THE SOCIETY AND MAY BE CONNECTED WITH IMPARTING OF EDUCATION BUT THE SAME HAD BEEN CONSTRUCTED AND PURCHASED OUT OF INCOME FROM IMPARTING THE EDUCATION WITH A VIEW TO EXPAND THE INSTITUTION AND TO EARN MORE INCOME AND ALSO REFERRING TO THE DECISION OF HONBLE SUPREME COURT REPORTED IN (1992) 3 SCC 390 AGREEING WITH THE FINDINGS OF THE HIGH COURT. 6.9.1 THE HONBLE JURISDICTIONAL HIGH COURT NOTED T HAT THE AO HAD REJECTED THE CLAIM ON THE GROUND THAT THE ASSES SEE HAD NOT APPLIED 85% OF THE PROFITS FOR THE PURPOSES OF THE SOCIETY. THE CIT(A) REVERSED THIS VIEW TAKING INTO ACCOUNT THE F ACT THAT THE ASSESSEE HAD SPENT AN AMOUNT EQUAL TO MORE THAN 85% AFTER CONSIDERING THE APPLICATION OF INCOME FOR CHARITABL E PURPOSES. IT WAS HELD BY THE CIT(A) THAT THE AMOUNTS SPENT ON CO NSTRUCTION OF SCHOOL BUILDING AT PANCHKULA WAS CAPITAL EXPENDI TURE BUT FOR THE PURPOSE OF SECTION 11 IT WAS AN OUTGOING WHICH WAS APPLICATION OF THE INCOME OF THE ASSESSEE FOR CHARI TABLE PURPOSES. HE ALSO HELD THAT THE ASSESSEE WOULD BE E NTITLED TO CLAIM DEPRECIATION ON THE SCHOOL BUILDING. THE ASSE SSEE WAS CARRYING ON NO ACTIVITY OTHER THAN RUNNING A SCHOOL AND IMPARTING EDUCATION TO THE STUDENTS: AS SUCH THE AS SESSEE HAD APPLIED HIS INCOME WHEN IT CONSTRUCTED SCHOOL BUILD ING WHICH AMOUNTED TO APPLYING INCOME FOR CHARITABLE PURPOSE S ONLY. THE HONBLE TRIBUNAL CONFIRMED THE VIEW OF CIT(A) AND H ELD THAT 21 THE AMOUNT INCURRED FOR CONSTRUCTION OF THE BUILDIN G DID NOT VIOLATE THE AIMS AND OBJECTS OF THE ASSESSEE-SOCIET Y AND THE REVENUE HAD NOT CLAIMED THAT THE EXPENDITURE WAS IN CURRED FOR THE PERSONAL BENEFIT OF THE PERSONS WHO WERE MANAGI NG THE SOCIETY. THE HONBLE TRIBUNAL HELD THAT THE INCOME OF THE SOCIETY WOULD BE COVERED U/S 11(4A) BUT SUB-SECTION (1), (2), (3) OR (3A) WOULD NOT APPLY TO ANY INCOME OF TRUST OR INSTITUTION, BEING PROFITS AND GAINS OF BUSINESS, U NLESS THE BUSINESS WAS INCIDENTAL TO THE ATTAINMENT OF THE OB JECTIVES OF THE TRUST AND SEPARATE ACCOUNTS WERE MAINTAINED IN RESPECT OF SUCH BUSINESS. 6.9.2. THE HONBLE HIGH COURT HELD THAT ONCE EXCLUS ION CONTEMPLATED U/S 11(4A) WAS NOT APPLICABLE, THE EXE MPTION HAD TO BE ALLOWED AS SUB-SECTIONS 11(1), 11(2) AND 11(3 ) BECAME APPLICABLE EVEN IN RESPECT OF PROFITS AND GAINS. TH EY HELD THAT THE OBSERVATION OF THE TRIBUNAL THAT IF A CASE FALL S UNDER 11(4A), SUB-SECTIONS (1), (2), (3) AND (3A) WERE NOT APPLIC ABLE WAS INCORRECT AND CONTRADICTORY. THEY HELD THAT THE EXC LUSIONARY CLAUSE APPLIED IF BUSINESS INCOME WAS NOT INCIDENTA L TO THE MAIN OBJECTS OR OTHER CONDITIONS STATED THEREIN WERE NOT FULFILLED. AS REGARDS THE CONTENTION OF REVENUE THAT FACTUALLY CO NDITIONS LAID DOWN IN SECTION 11(2) DID NOT EXIST AS 85% OF THE I NCOME HAD NOT BEEN APPLIED IN THE MANNER CONTEMPLATED, THE HO NBLE HIGH COURT HELD THAT THE SAME HAD NOT FORCE. IT WAS HELD THAT IF 85% OF INCOME HAD NOT BEEN APPLIED IN THE MANNER LAID D OWN, IT WAS NOT ENOUGH TO DISALLOW EXEMPTION UNLESS THERE WAS A FURTHER CONDITION OF ACCUMULATION BEYOND CONTEMPLATED PERIO D OR NOT MAINTAINING THE ACCOUNTS OR NOT INTIMATING THE AO A S LAID DOWN. IT WAS FURTHER HELD THAT THIS MATTER DID NOT NEED F URTHER EXAMINATION SINCE IT HAD BEEN HELD THAT EVEN IF 85% OF THE INCOME WAS IN FACT APPLIED FOR THE PURPOSE OF THE S OCIETY. THEY HELD THAT THERE WAS NO ERROR IN THE CONCLUSION HOLD ING THE ASSESSEE ELIGIBLE FOR EXEMPTION BUT STATED THAT TH E OBSERVATION OF THE TRIBUNAL THAT SUB-SECTION (1), (2), (3) AND (3A) OF SECTION 11 DID NOT APPLY TO INCOME FALLING U/S 11(4A) WAS E RRONEOUS. THE APPEAL OF THE REVENUE WAS DISMISSED. 6.10. THIS AFORESAID DECISION OF HONBLE JURISDICTI ONAL HIGH COURT SHOWS THAT THE MERE FACT THAT THE ASSESSEE W AS EARNING INCOME AND 85% OF THE INCOME HAD NOT BEEN APPLIED F OR 22 CHARITABLE PURPOSE WAS NOT SUFFICIENT TO DISALLOW E XEMPTION U/S 11 TO THE ASSESSEE UNLESS THE OTHER CONDITIONS REQU IRED WERE ALSO NOT MET. FURTHER, APPLICATION OF INCOME FOR CONSTRU CTION OF SCHOOL BUILDING FOR IMPARTING EDUCATION IS APPLICAT ION OF INCOME FOR CHARITABLE PURPOSE. THIS DECISION REINFO RCES THE VIEW THAT CAPITAL EXPENDITURE MEANT FOR CHARITABLE PURPOSES IS TO BE CONSIDERED AS APPLICATION OF INCOME U/S 11(1)(A) AND THAT MERELY BECAUSE THE ASSESSEE EARNS PROFITS WILL NOT DISENTITLE THE ASSESSEE FROM THE EXEMPTION ALLOWABLE U/S 11. THE D ETAILS SUBMITTED DURING ASSESSMENT PROCEEDINGS SHOW THAT AFTER CONSIDERING THE CAPITAL EXPENDITURE ON CONSTRUCTION OF BUILDING OF SCHOOL AND HOSPITAL, THE ASSESSEE HAS APPLIED M ORE TAN 85% OF ITS INCOME FOR CHARITABLE PURPOSES. HENCE, THE A SSESSEE IS ENTITLED TO EXEMPTION U/S 11 OF THE I.T. ACT IN RES PECT OF ITS INCOME. 6.11. IN LIGHT OF THE DISCUSSION ABOVE, IT IS HELD THAT THE ASSESSEE SOCIETY WAS HOLDING PROPERTY AND DERIVING INCOME FROM SUCH PROPERTY ONLY FOR THE PURPOSE OF EDUCATIO N AND WAS WHOLLY CHARITABLE. FURTHER, SINCE THE AO HAS NOT SH OWN THAT THE ASSESSEE WAS NOT APPLYING ITS INCOME TOWARDS EDUCA TION, IT IS HELD THAT THE REVENUE AND CAPITAL EXPENDITURE OF TH E ASSESSEE WAS APPLIED TOWARDS CHARITABLE PURPOSES AND EXEMPTI ON U/S 11(1)(A) OF THE ACT WAS AVAILABLE TO IT. 7.11 IN VIEW OF THE ABOVE LEGAL AND FACTUAL DISCUSS IONS AND HAVING REGARD TO THE DETAILED AND WELL REASONED ORDER PASS ED BY THE LD. CIT(A), WHICH IS REPRODUCED ABOVE, WE ARE OF THE CO NSIDERED OPINION THAT THE VARIOUS GROUNDS RAISED BY THE REVENUE IN G ROUND NO.1.1 ARE LIABLE TO BE DISMISSED. CONSEQUENTLY, THE FINDINGS OF THE CIT(A) ARE UPHELD AND THE GROUNDS RAISED BY THE REVENUE IN GRO UND NO.1.1 ARE DISMISSED. 6. AS THE ISSUE INVOLVED IN THE PRESENT APPEAL IS IDENTICAL TO THE ISSUE CONSIDERED AND ADJUDICATED BY THE TRIBUNAL, I N THE IN CASE OF DCIT, RANGE-1, JALANDHAR VS. M/S. SAFFRON EDUCATION AL TRUST, JALANDHAR, FOR THE ASSESSMENT YEAR 2006-07, WHEREBY VIDE OUR DATED 30 TH APRIL, 2010, WE HAVE DISMISSED THE APPEAL OF THE REVENUE, THEREFORE, RESPECTFULLY FOLLOWING SAID ORDER, TH E PRESENT APPEAL OF THE REVENUE IS DISMISSED. 23 5.1. THUS, RESPECTFULLY FOLLOWING THE AFORESAID ORD ER IN ASSESSEES OWN CASE, DATED 31 ST MAY, 2010, PASSED IN ITA NO.534(ASR)/2009 FOR THE ASSESSMENT YEAR 2006-07, WE DISMISS THIS APPEAL OF THE REVENUE. 6. IN THE RESULT, THE APPEAL FILED BY THE REVENUE S TANDS DISMISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 20TH JUNE, 2011. SD/- SD/- (H.L. KARWA) (MEHAR SINGH) VICE PRESIDENT ACCOUNTANT MEMBER DATED: 20TH JUNE, 2011 /SKR/ COPY OF THE ORDER IS FORWARDED TO : 1. THE ASSESSEE:M/S. JYOTI PROVINCE SACRED HEART CONGR EGATION, JALANDHAR. 2. THE DCIT, R-1, JALANDHAR. 3. THE CIT(A),JALANDHAR. 4. THE CIT,JALANDHAR 5. THE SR DRASR. TRUE COPY BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH : AMRITSAR.