Allahabad H.C : The Tribunal is justified in law in confirming the order of the CIT (A) directing the A.O to allow exemption u/s 11 and u/s 10 (23-c) (vi) of the Act, which had been rightly disallowed by the A.O after appreciation of material on record

High Court Of Allahabad

CIT vs. Sunbeam English School

Assessment Year : 2004-05

Section : 10(23C), 11

Sunil Ambwani And Surya Prakash Kesarwani, JJ.

IT Appeal No. 185 Of 2009

July 17, 2013

ORDER

1. We have heard Shri Shambhu Chopra, learned counsel appearing for the department. Shri Ashish Bansal appears for the respondent-assessee.

2. This Income Tax Appeal filed under Section 260-A of the Income Tax Act arises from an order of Income Tax Appellate Tribunal, Allahabad Bench, Allahabad dated 24.12.2008 relating to the assessment year 2004-05.

3. The appeal has been preferred by the department on following substantial questions of law:—

“1. Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in confirming the order of the CIT (A) directing the A.O to allow exemption u/s 11 and u/s 10 (23-c) (vi) of the Act, which had been rightly disallowed by the A.O after appreciation of material on record?

2. Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in deleting the addition made by the AO by holding that the assessee society has not violated the conditions of Section 10 (23-c) (vi)/11 of the Act?

3. Whether there was violation of the condition imposed by the CCIT while granting the certificate of exemption u/s 10 (23-c) of the Act as the funds of the assessee society were being utilized for other purposes than for the purposes of the society as such the Tribunal has justified in holding to the contrary.”

4. Shri Ashish Bansal has explained the office note of DCIT, Range-I, Varanasi dated 27.12.2006. He submits that the DCIT did not allow the continuation of certificate under Section 10 (23-c) for the assessment years 2005-06 and 2006-07 on the basis of findings, which have been recorded by the DCIT, Range-I, Varanasi in the assessment order dated 27.12.2006.

5. The assessee is registered under Section 12-A. For the assessment year 2004-05 the assessee returned the income (nil) claiming exemption under Section 11 (1) of the Act. The AO denied the exemption on the ground that Smt. Bharti Madhok-the director of the society i.e. Sunbeam English School, 206 Bhagwanpur, Varanasi entered into an agreement on 20.12.2005 in her name as Director of Sunbeam English School and purchased the family property of her husband Shri Deepak Madhok, who is the Chairman of the Society. The AO returned the findings that having purchased the property in her individual name from her husband, Smt. Bharti Madhok tried to legalise the matter with retrospective effect by filing a civil suit, in which a direction was issued to correct the sale deed and to record the property in the name of the Society through Smt. Bharti Madhok, the director.

6. The AO found that the intention was to avoid payment of tax, though the fruits of profits were enjoyed by the director, family members and office bearers of the society. He also found that it was a fit case for withdrawing exemption under Section 11 or under section 10(23c)(vi).

7. In the appeal filed by the assessee Society the CIT (A) found that the assessee admittedly runs a school and is an educational institution to which the provisions of Section 10 (23c) (vi) are applicable. The society was granted approval under Section 10 (23c) (a) subject to certain conditions. One of the conditions was to maintain the accounts of the investment of the properties. A vague allegation was made of inflation of expenses and diversion of funds but no instance was brought on record. The allegation, that the property of Smt. Bharti Madhok has been purchased by the Society or through her, was not substantiated. The property was found to be registered in the name of Smt. Bharti Madhok, director of Sunbeam English School, which did not mean that the investment was made in the name of director in her individual capacity. The records demonstrate that the entire funds were drawn from the Society, and the assets were shown in the books of the society. In fact the property was also mortgaged to the bank for a loan obtained by the society, and that the mortgage has been approved by the Court. The CIT (A) allowed the appeal.

8. In the second appeal filed by the Assistant Commissioner of Income Tax, Range-I, Varanasi, the ITAT returned following findings:—

“8. It was submitted before the learned Commissioner of Income tax (Appeals) that the assessee exists solely for the purpose of education as it runs schools recognized by CBSE. It has applied its income only for the objects for which it exists. There was no diversion or misutilisation of funds. It was stated that registration of plot of land situated in Mauza Habibpur and construction of building on that land belongs to the society only as the plot is registered in the name of Smt. Bharti Madhok, as director of the society. It was submitted that the funds for purpose of property have come from the society and it was not disputed by the department that the land and building are not being utilized for the purpose of the society. The society runs school in the said building and no part of the building is utilized for any personal purpose of the directors or any person related through them. When the society wanted to purchase the property for construction of a building for school, the matter for preparation of documents was entrusted to legal consultants. Since the registration law required personal attendance and photographs of the person representing transferee on behalf of the society, Smt. Bharti Madhok, one of the directors, was present for registration and her photograph was affixed to the documents and the document was prepared in the name of Smt. Bharti Madhok, director, Sunbeam English School. The fact that she is representing the society and that the property is not being registered for her personal purpose is evident from the narration of the transferee in the deed. With the approval of the district court, the property has been mortgage to Union Bank of India for loan availed by the assessee society for construction of the school building. It was further submitted that as the department has made a big issue regarding the manner of narration of the society as transferee in the transfer deed and on that ground exemption has been denied, an application was made to the District Judge under section 26 and 34 of the Specific Relief Act for rectifying the sale deed dated 24th December, 2000 to meet the requirements of the revenue department. The Civil Judge vide order dated 17.1.2006 accepting the plea of the society that the property is owned by the assessee society through the director Smt. Bharti madhok, ordered that with effect from 20th December, 2000 i.e. the date of the sale, the property shall be deemed to be owned by the assessee M/s Sunbeam English School. It was further submitted that the Additional CIT, Range-I under section 144-A for the assessment year 2003-04 expressed a view that there is no doubt about the ownership of the property by the society.

9. It was further submitted that wild allegations have been made about inflation of expenditure and diversion of funds for personal benefit but no evidence has been brought on record to support such an allegation. It was further submitted that it is a wild allegation that the property was purchased through Shri Madhok. It was further submitted that the vehicles are owned by the assessee society and the directions were only representing the society and that vehicles are used for the purpose of the society and in any case to avoid misunderstanding the names have since been changed. It was further submitted that salary to the directors and other employees are reasonably paid for which entire record is maintained. It was further submitted that the assessee never violated any condition laid down by the CCIT. Therefore, there is no reason to withdraw the exemption granted to the assessee.

10. The learned Commissioner of Income tax (Appeals) considering the submissions of the assessee and the material on record held that the assessee runs school and is thus an educational institution to which provisions of section 10 (23c) (vi) of the Act are applicable and necessary approval by the competent authority has already been granted to the assessee. The learned Commissioner of Income tax (Appeals) further noted that there is only objection that if in the purchase of the property, name of the director Smt. Bharti Madhok is mentioned, is itself a vague allegation because there is no single instance pointed out about diversion of funds for any personal purposes. The learned Commissioner of Income tax (Appeals) further noted that the property is registered in the name of Smt. Bharti Madhok, director of the school, which would not mean that the investment is made in the name of the director in her individual capacity. The learned Commissioner of Income tax (Appeals) further noted that all the records are set right by the order of the Civil Court and even the assessee obtained loan by mortgaging the property with the approval of the Court and funds have been utilised for the purpose of assessee society.

14. On consideration of the rival submissions and the material on record, we are of the view that no interference is called for in the matter. The sole objection raised by the Assessing Officer for denying the exemption to the assessee was that the property was purchased in the name of Smt. Bharti madhok, director of the assessee society. The assessee is a society which cannot represent itself before the Registrar for the purpose of registration of the sale deed. Somebody has to represent the assessee society in the sale deed for getting it registered. The director of the assessee society is a competent person to represent the assessee society for getting the sale deed registered. Originally the sale deed was registered in the name of Smt. Bharti Madhok, director of the assessee school. Even in such narration, there should not have been any objection of the revenue department because only the director represents the assessee society. However, in order to avoid any controversy, the assessee moved before the civil court for direction in the matter and the Director of the assessee made statement before the Civil Court that she has no objection if necessary correction is made in the sale deed in question. The Civil Court accordingly directed to make necessary correction in the sale deed in which the assessee society was directed to represent Smt. Bharti Madhok from the date of the sale deed. The necessary endorsement was accordingly made in the sale deed in which it was noted that the assessee society was represented by Smt. Bharti Madhok. Therefore, the objection of the revenue would not survive at all. It is not a case of diversion of funds for purchasing the property for the benefit of the director. It is not in dispute that the land and building is used for the purpose of the assessee society for educational purposes. In the assessment year 2003-04 the Additional Commissioner of Income tax issued directions to the Assessing Officer on the same set of facts and directed to grant exemption to the assessee. It was also held that the vehicles are purchased for the benefit of the assessee society. Even the CBSE has granted recognition and approval to the assessee society to run the educational school in the same property.”

9. The ITAT has relied upon the orders passed by the Civil Court, which directed necessary correction to be made in the sale deed to the effect that the assessee society was directed to be represented by Smt. Bharti Madhok from the date of the sale deed.

10. The findings recorded by the CIT (A) and ITAT clearly demonstrate that the name of Smt. Bharti Madhok, director of the society, in whose name the property was purchased, was a mistake, which was corrected by obtaining an order from the Civil Court, which examined the entire matter and found that the property was purchased from the funds of the Society, and is recorded in the name of the Society. A correction was directed to be made to avoid any complication which may arise in mentioning the name of Smt. Bharti Madhok as the purchaser of the property.

11. The ITAT also observed that the property was also mortgaged with the Bank after taking permission of the Court. Such permission is granted by the Court after scrutinizing the bonafides and genuineness of the transaction. The Bank also does not ordinarily create a charge over the property unless due diligence is carried out by the bank enquiring about the title over the property, the funds and the sources from which the property has been purchased and is held by the mortgagor.

12. On these findings we are of the view that the Tribunal was justified in confirming the order of the CIT (A) directing the AO to allow exemption under Section 11 and under Section 10 (23c) (vi), and further the Tribunal was also justified in holding that the assessee Society has not violated any of the conditions in the aforesaid sections. It was also held that the funds of the Society were not utilised for any purpose other than the objects of the Society.

13. We may observe here that exemptions under Section 10 (23c) (vi) of the Act can be claimed by the assessee without applying for registration under Section 12A of the Act, as it is not required to fulfill the conditions mentioned under Section 11 of the Act in claiming exemption under Section 10 (23c) (vi) of the Act, as explained by this Court in CIT v. Jeevan Deep Charitable Trust [2013] 212 Taxman 19/[2012] 28 taxmann.com 242 (All.).

14. On the discussion as above all the three questions are decided against the revenue and in favour of the assessee.

15. The Income Tax Appeal is dismissed.

[Citation : 361 ITR 325]