THE COMMISSIONER OF INCOME TAX V. CMR JNANADHARA TRUST

ITA/73/2009

AI Insights

The case involves the Commissioner of Income-Tax Exemptions and the Deputy Director of Income-Tax as appellants, against CMR Jnanadhara Trust as the respondent. The core issue was whether the Trust, which collected developmental fees exceeding government-prescribed limits, was still eligible for tax exemption under Section 11 of the Income Tax Act, 1961. The Tribunal and the lower appellate authority had previously ruled in favor of the Trust, leading to the Revenue's appeal to the High Court. The High Court's judgment affirmed the Tribunal's decision, focusing on the Trust's application of income towards its charitable objectives rather than the commercial nature of its fee collection.

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 728890 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 20-01-2015
• Assessment Year: misc
• Other Referred Cases: COMMISSIONER OF INCOME TAX VS. BREACH CANDY SWIMMING BATH TRUST
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Respondent
• Court: HIGH COURT
• Department Lawyers: S PARTHASARATHI; V K GURUNATHAN; JEVITHA CHATARJEE
• Assessee Lawyers: K V ARAVIND
• Keywords: Charitable Trust; Commercial Activity; Income tax exemption; Section 11 exemption; Developmental Fees
• Section: 142(1); 143(2); 11; 12A; 13; 133A; 11(5); 260-A

Judgement Text

" - 1 - IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 20TH DAY OF JANUARY 2015 PRESENT THE HON’BLE MR.JUSTICE N. KUMAR AND THE HON’BLE MR. JUSTICE B. VEERAPPA I.T.A. NO. 73 OF 2009 C/W I.T.A. NO. 74 OF 2009 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX EXEMPTIONS C.R.BUILDING, QUEENS ROAD BANGALORE 2. THE DY. DIRECTOR OF INCOME-TAX CIRCLE-17(1) C.R.BUILDING, QUEENS ROAD BANGALORE ... COMMON APPELLANTS (BY SRI. K.V.ARAVIND, ADV.) AND: CMR JNANADHARA TRUST CA NO.2, 3RD C CROSS 6TH A MAIN ROAD, 2ND BLOCK HRBR LAYOUT BANGALORE - 560043 … COMMON RESPONDENT - 2 - (BY SRI. S.PARTHASARATHI, V.K.GURUNATHAN AND JEVITHA CHATARJEE, ADVS.) ITA 73/09 IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961, ARISING OUT OF ORDER DATED 26/9/2008 PASSED IN ITA NO.820/BNG/2007, FOR THE ASSESSMENT YEAR 2004-05, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW; ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT IN ITA NO. 820/BNG/2007 DATED 26/9/2008 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY DIRECTOR OF INCOME TAX, CIRCLE-17(1), BANGALORE; AND ETC. ITA 74/09 IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961, ARISING OUT OF ORDER DATED 26/9/2008 PASSED IN ITA NO.3024/BNG/2004, FOR THE ASSESSMENT YEAR 2001-02, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW; ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT IN ITA NO.3024/BNG/2004 DATED 26/9/2008 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY DIRECTOR OF INCOME TAX, CIRCLE-17(1), BANGALORE; AND ETC. THESE ITAs. COMING ON FOR FINAL HEARING THIS DAY, N. KUMAR J. DELIVERED THE FOLLOWING: JUDGMENT The Revenue has preferred these appeals against the order passed by the Tribunal, holding, though the assessee is receiving amounts in excess of the amount prescribed by the government by way of developmental fees, that by itself would not render the assessee - 3 - ineligible for exemption under Section 11 of the Income Tax Act, 1961. 2. The assessee is running several educational institutions and hostels for college girls and boys. The assessee is a Trust duly registered under Section 12A of the Income Tax Act, 1961 (for short, hereinafter referred to as the ‘Act’). The assessee was also granted exemption under Section 11 of the Act. The assessee filed return of income on 31/10/2001 declaring ‘nil’ income by claiming its excess income over expenditure amounting to Rs.1,04,59,578/-. In the course of examination of the assessee’s application for renewal of recognition under Section 80G of the Act, the Director of Exemptions, Bangalore, informed the Deputy Director of Income-Tax (Exemptions)/AO regarding certain discrepancies in the balance sheet and income & expenditure account. On receipt of such information, a survey was conducted under Section 133A of the Act on - 4 - 29/5/2002. The assessee’s case was selected for scrutiny. Notices under Section 143(2) and 142(1) were issued on 7/6/2002, along with details/questionnaire, calling for books of account, bank statements and clarifications/explanations for the discrepancies noted by the Director of Income-Tax (Exemptions). The assessee had shown a sum of Rs.2,83,83,830/- as development fees collected from the students and claimed exemption under Section 11 of the Act. The Assessing Officer was of the view that the amounts collected by the assessee are in contravention of the notification dated 21/7/2000 issued by the Government of Karnataka and that the assessee existed not for educational purpose, but for profit motive and therefore it ceased to be a charitable institute and accordingly the exemption under Section 11 of the Act, was denied. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals). The Appellate Authority reconsidered the entire material - 5 - on record and held that the Assessing Officer has not made out a case for any specific violation by the assessee – Trust under Section 11(5) or Section 13 of the Act. The assessee is enjoying the benefit of exemption under Section 10(22) of the Act for over 16 years, till the aforesaid provision was omitted from the statute. The presumption is that, all along the assessee has been carrying out the running of a charitable institute as per objects and did not involve in any commercial activity for making profits and therefore he held that the assessee-Trust is a charitable one and eligible to claim exemption under Section 11 of the Act. Therefore he directed the Assessing Authority to grant exemption under Section 11 of the Act. 3. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal. The Tribunal, on re-appreciation of the evidence on record, held the fact that the assessee was collecting developmental fee - 6 - during the year under consideration, is not in dispute, but this factum alone, is not enough to deny the exemption claimed by the assessee under Section 11 of the Act. The claim of the assessee that the entire funds have been applied and all have been properly accounted for in the books of account, is not denied by the Revenue. From the balance sheet, it is seen that all the moneys collected, have been applied for acquiring assets in the hands of the Trust and there is loan to the extent of Rs.3,01,75,330/- as on 31/3/2001. This is indicative of the fact that the assessee-Trust had not only applied all the moneys collected, for the activities of the Trust, but also had raised loan with an intention to carry out the objects of the Trust. There is not even an iota of evidence in regard to mal-application of the funds and therefore it was reasoned that the institution is established for charitable purposes and the same has to be determined with reference to the real purpose of the Trust and not by circumstances that income derived - 7 - can be measured by standards usually applicable to a commercial activity and therefore they upheld the order passed by the Appellate Authority. Aggrieved by the said order, the Revenue has preferred this appeal. 4. The appeals were admitted to consider the following substantial questions of law: 1) Whether the Appellate Authorities were correct in holding that wrong maintenance of proper books of accounts and non compliance of Section 12A(b) of the Act, violation of the Karnataka Educational Institutions (prohibition of Capitation Fees) Act, 1984 and Government orders and notifications in respect of collection of fees, generation huge surplus year after year contrary to Apex Court judgments, running the institutions on commercial lines and making payment to president/trustees will not violate Section 11 of the Act and the assessee would be continue to be a charitable Institution ? 2) Whether the Appellate Authorities were correct in ignoring the discrepancies in accounts detected and pointed out by the Assessing Officer which is contrary to Rule 46A of the Income Tax Rules would disentitle the assessee to claim exemption especially when cash deficits was pointed out and not explained ? - 8 - 3) Whether the Appellate Authorities were correct in holding that a sum of Rs.1,65,40,319/- and Rs.2,83,83,830/-, in ITA 73/09 and 74/09, respectively, collected as surplus contrary to State Government notifications No. ED/60/URC/2000 dated 18/7/2000 and No. ED/95/TEC?97 dated 21/7/2000, fixing the fees as per Apex Court order will entitle the assessee to claim exemption u/s. 11 of the Act, as it is opposed to public policy ? 4) Whether the Appellate Authorities were correct in holding that the institution which is making a profit year after year 1995-96 – 50% profit, 1996-97 – 81% profit, 1997-98 – 53% profit, 1998-99 – 59% profit, 1999-2000 – 47% profit, 2000-01 – 41% profit, 2001-02 – 25.24%, 2002-03 – 47.93% & 2003-04 – 44.19% being run on commercial lines can be termed as charitable institution contrary to judgment of Apex Court in AIR 1992 SC 1456? 5. The learned counsel for the Revenue, assailing the impugned order contended, it is not in dispute from the material on record that the assessee has collected from the students, amounts in excess of what is prescribed by the government under the notification. Such collection of excess amount is prohibited under - 9 - the provisions of the Karnataka Educational Institutions (Prohibition of Capitation Fees) Act, 1984. Having regard to the quantum of amount collected, it only shows the assessee is running the institution as a commercial venture and is making huge profits. Therefore it ceases to be a charitable institution. As such, the assessee is not entitled to the benefit of Section 11 of the Act. 6. Per contra, learned counsel appearing for the assessee submitted, whatever amount is collected by the assessee, is accounted for in their books of accounts and is spent for the purpose of the Trust. In fact the entire amount is spent towards the purpose of the Trust and therefore he submits, the Appellate Authorities were justified in granting the benefit under Section 11 of the Act. 7. In the light of the aforesaid materials and rival contentions, the short point that arises for our - 10 - consideration is, whether if the assessee recovers amounts in excess of what is prescribed in law, either under a statute or by way of notification, it amounts to a commercial activity and take the case out of Section 11 of the Act ? 8. The material on record clearly establishes, the assessee is running educational institutions. It has been granted registration under Section 12A of the Act on the ground that running of educational institutions, partakes the character of a charitable institution. The assessee has been granted the benefit of exemption from payment of tax on the income derived under Section 10(22) of the Act, till the said provision was omitted. Subsequently the assessee has been extended the benefit of exemption under Section 11 of the Act. The condition precedent for granting exemption under Section 11 of the Act is, the income derived from property held under Trust wholly for charitable or - 11 - religious purposes to the extent to which said income is applied to such purposes in India, then the assessee would be entitled to the benefit of Section 11. if any such income is accumulated or set apart for application of said purpose in India to the extent to which the income so accumulated or set apart, is not in excess of 15% of the income from such property, even then the assessee would be entitled to the benefit of Section 11. Whether educational institution receives money in accordance with the statute and the notification which has prescribed the fee or in excess of the fee that is prescribed, that would be an income derived by the Trust. Income tax do not make any difference between income lawfully derived and income unlawfully derived. All incomes are liable to tax. However, Section 11A carves out an exemption. The income derived from property held under Trust wholly or for charitable or religious purpose to the extent such income is applied to such purpose in India, then such an income shall not - 12 - be included in the total income of the previous year of the person in receipt of the income. In fact, the Bombay High Court, in the case of COMMISSIONER OF INCOME TAX VS. BREACH CANDY SWIMMING BATH TRUST reported in (1955) 27 ITR 279 (BOM), held, the only essential factor to determine whether it is a charity or not would be whether there is any private gain by the setting up of the institution. If the gain derived by running the institution continues to be impressed with the trust which is a charitable trust, then it is immaterial whether the institution is run as a commercial institution or not, but if in the running of the institution profits are made and the profit goes to any private individual or if the institution is intended for any private gain, then undoubtedly the running of the institution could not be considered as being run for a charitable object. This was the judgment rendered under the earlier Act under Section 4(3)(i)/(ia) of the Income Tax Act, 1922. In the present Act, under Section 11, the - 13 - word used is “the extent to which said income is applied to such purposes in India, then the assessee would be entitled to the benefit of exemption”. Therefore the test is, the application of the income of the Trust, is it for a personal gain or is it for the purpose of the Trust, that is the determining factor. The only essential factor to determine whether it is charity or not, would be, whether there is any private gain by the setting up of the institution. Therefore what is to be seen in such circumstances is, firstly, whether there should be an income derived from property held under the Trust only for charitable purposes; secondly, the income of the said Trust must be applied solely to the purpose of the Trust; thirdly, the said income should be derived in the course of carrying out the primary purpose of the institution. Once such income is applied for the purpose of the Trust, then the assessee would be entitled to the benefit of Section 11 of the Act. - 14 - 9. In the instant case, it is not in dispute, the assessee has collected money from the students belonging to the government quota, as prescribed by the government, in the notification. From the students belonging to the management quota, they have collected the fees prescribed by the government and in addition, they have also collected developmental charges. All these amounts received, are accounted for in their books of accounts. All these amounts are invested in the activities of the Trust. In fact they have taken loan to the extent of Rs.3,01,75,330/-, as the amount received by way of developmental charges, is not sufficient for the activities of the Trust. The said loan is also raised to carry out the objects of the Trust. As pointed out by the Tribunal, there is not even an iota of evidence in regard to mal application of the funds. Merely because the assessee has collected huge amounts by way of developmental charges, the Trust does not cease to be a charitable Trust and the activities - 15 - carried on by the Trust would not transform itself into a commercial activity. Therefore the Tribunal was justified in upholding the order of the First Appellate Authority and dismissing the appeal preferred by the Revenue. In that view of the matter, the substantial questions of law which are framed in these appeals, are answered in favour of the assessee and against the Revenue. Hence we pass the following order: Appeals are dismissed. SD/- JUDGE SD/- JUDGE Rd/- "