High Court Of Punjab & Haryana
CIT vs. Manav Mangal Society
Section 11
Asst. Year 2003-04
Adarsh Kumar Goel & Mrs. Daya Chaudhary, JJ.
IT Appeal No. 450 of 2008
19th August, 2009
Counsel Appeared : Ms. Urvashi Dhugga, for the Revenue
JUDGMENT
ADARSH KUMAR GOEL, J. :
The Revenue has preferred this appeal under s. 260A of the IT Act, 1961 (for short, “the Act”) against the order of the Tribunal, Chandigarh, Bench ‘B’ passed in IT Appeal No. 266/Chd/2007, dt. 22nd Nov., 2007 for asst. yr. 2003-04, proposing to raise the following questions of law :
“1. Whether in the facts and circumstances of the case, the learned Tribunal has erred in law in allowing the exemption to the assessee under s. 11(1)(a) instead of exemption under s. 11(4A) because as per the aims and objects of the society, the schools were established only to achieve the aims and objects. Therefore, the establishment of school is incidental to promoting the aims and objects of the charitable societies /institutions as per their own articles of association/memorandum.
” 2. Whether in the facts and circumstances of the case, the learned Tribunal has erred in allowing the application of money on construction of building especially when no verification by the AO was ever done nor was it put up to the AO during the course of assessment proceedings. Besides the construction of the building has directly been taken into the balance sheet and not into the income and expenditure account by the assessee and it was held by the Hon’ble Uttrakhand High Court in CIT vs. Queens’ Educational Society [reported at (2009) 223 CTR (Uttarakhand) 395—Ed.] that the investment in the fixed assets like furniture and building are the properties of the society and may be connected with the imparting of education but the same has been constructed and purchased out of income from imparting the education with a view to expand the institution and to earn more income as decided in IT Appeal No. 103 of 2007 and also referring the decision of the Hon’ble Supreme Court agreeing with the findings of the High Court, reported in (1992) 3 SCC 390.”
2. The assessee is running a school and claimed exemption under s. 11 of the Act in respect of its income. The AO rejected the claim on the ground that the assessee had not applied 85 per cent of the profits for the purpose of the society, as required under s. 11 (4A) r/w s. 11(2) of the Act. This view was reversed by the CIT(A) taking into account the fact that the assessee had spent the amount equal to more than 85 per cent. The relevant observations are as under : “The details of income of the society and schools as per P&L a/c attached with the return are as under:
Before application of income to charitable purposes (in Rs. )
Manav
After application of income to charitable purposes (in Rs. )
(a) Mangal Society 2,67,832 74,905
Mana v Mang alCha ndigar h Mana v Mang alPan chkula
School,School, 1,05,54,039 1,53,32, 255 2,61,54, 4,58,708 30,31,368 126 35,64,981
As per judgment of the Hon’ble Supreme Court, the assessee society has applied an amount of (Rs. 2,61,54,126 minus Rs. 35,64,981) Rs. 2,25,89,145, which works out to 86.36 per cent leaving a balance of Rs. 13.64 per cent (Rs. 35,64,981) for accumulation. According to the Authorised Representative, the learned AO has wrongly applied the percentage of 85 to the unspent balance as against to the figure of Rs. 2,61,54,126. It was claimed that since the assessee society has spent/applied its income to charitable purpose more than the statutory requirement, it is not liable to income-tax for the year under consideration. He contended that as the action of the learned AO in taxing the assessee is not within the legal framework, it was urged that the same may be quashed and impugned addition be deleted.” ………… “The amount spent on construction of school building at Panchkula is a capital expenditure but for the purpose of s. 11 it is an outgoing which is application of the income of the appellant for charitable purpose. The appellant shall also be entitled to claim depreciation on school building.
The appellant is carrying on no activity other than running a school and imparting education to the students as such, the assessee has applied its income when it constructed school building which amounts to applying income for charitable purpose only.” This view was affirmed by the Tribunal with the following observations : “The another contention raised by learned Departmental Representative is that the learned CIT(A) allowed the expenditure incurred on the construction of the Panchkula School building amounting to Rs. 41,12,590 before calculating the quantum of accumulation of income @ 15 per cent specially when it was opined in the assessment order that the assessee is not a trust but an institution. However, facts remains that the assessee is a charitable society, registered under the Societies Registration Act and also under s. 12A of the Act. We are of the view, if the expenditure of Rs. 41,12,590 was incurred for the construction of the Panchkula building, it nowhere violates the aims and objects of the assessee society as is evident from item No. (e) of the aims and objects of the assessee. It is not the case of the Revenue that the expenditure was incurred for the personal benefit of the persons who are managing the society.”
The Tribunal further observed as under : “It is not the case of the Revenue that running of the schools or investment in the construction of the building of such schools is not incidental to its object. Therefore, the income of the society will be covered under s. 11 (4A). Sub-s. (1) or sub-s. (2) or sub-s. (3) or sub-s. (3A) shall not apply in relation to any income of a trust or any institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or as the case may be, institution and separate books of accounts are maintained by such trust or institution in respect of such business.”
We have heard learned counsel for the Revenue. Contention raised on behalf of Revenue is that exemption was wrongly allowed under s. 11(1)(a) instead of s. 11(4A) in respect of profits and gains declared by the assessee, which was not from the property but from business incidental to the objectives of the society.
We do not find any merit in the submission. Once exclusion contemplated under s. 11(4A) is not applicable, the exemption had to be allowed as ss. 11(1), (2) and (3) become applicable even in respect of profits and gains. The Tribunal erred in observing that in such a situation where income falls under s. 11(4A), sub-ss. (1), (2), (3) or (3A) will not apply. Finding of the Tribunal is contradictory. If sub-ss. (1), (2) and (3) or (3A) are held to be inapplicable, exemption could not be available. We are of the view that on plain reading of the provisions, these sub-sections will apply, except where the income falls in the exclusionary provision, which is not the case here. It is not even the case of the Revenue that the income falls in exclusionary clause. The exclusionary clause applies if business income is not incidental to the main objects or other conditions are not fulfilled.
Learned counsel for the Revenue submitted that factually condition laid down in s. 11(2) does not exist in as much as 85 per cent of the income has not been applied in the manner contemplated. This contention has no force. Even if 85 per cent income has not been applied in the manner laid down, it is not enough to disallow exemption unless there is a further condition of accumulation beyond contemplated period or not maintaining accounts or intimating the AO as laid down. This aspect need not be examined further as it has been held that more than 85 per cent of the income was in fact applied for the purpose of the society. Thus, while holding that the observation of the Tribunal that sub- ss. (1), (2), (3) or (3A) of s. 11 do not apply to the income falling under s. 11(4A) of the Act is erroneous, there is no error in the conclusion for holding the assessee eligible for exemption
No substantial question of law arises. The appeal is dismissed
[Citation : 328 ITR 421]
