B. N. Mahapatra,J.-The present Income Tax Appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as the “IT Act”), which arises out of the order passed in ITA No.316/CTK/2011 and C.O. No.18/CTK/2011 dated 23.09.2011 passed by the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack for the assessment year 2007-08, has been filed at the instance of the Commissioner of Income Tax, Ayakar Bhawan, Rajaswa Vihar, Bhubaneswar, Dist. Khurda.
2. According to the appellant, the following substantial questions of law are involved in the present Income Tax Appeal:
(i) Whether in the facts and circumstances of the case and in view of the decision of the Hon’ble High Court of Uttarakhand in the case of CIT Vs. Queens Educational Society reported in 319 ITR 160, the learned Income Tax Appellate Tribunal is correct in law in holding that the assessee Trust is not running with profit motive and is eligible for exemption under Section 11 of the I.T. Act, 1961?
(ii) Whether in the facts and circumstances of the case and when the assessee Trust is not eligible for exemption under Section 11 of the Act, the learned ITAT is correct in law in holding that capital expenditure incurred by the assessee Trust shall be allowed as application of income?
3. The facts leading to filing of the present appeal are that the assessee is a Trust registered under Section 12A of the IT Act with effect from 02.09.2002. It filed its return of income on 31.10.2007 for the assessment year 2007-08 disclosing its total loss at Rs. 3,96,54,653/-. On 03.12.2009, the Assessing Officer completed the assessment under Section 143(3) of the IT Act determining the total income at Rs. 03,06,53,610/-. In the assessment order, the Assessing Officer did not allow the benefit of exemption under Section 11 of the IT Act to the Trust on the ground that the assessee-Trust is making systematic profit year after year; incurred capital expenditure of Rs. 51,24,483/- and diverted income to capital funds amounting to Rs. 28,75,204/- which did not amount to application of income as per Section 11(1) of the IT Act. Depreciation of Rs. 95,90,956/- was also added to the income of the Trust. To support his view, the Assessing Officer relied upon the decision of Uttarakhand High Court in the case of Queens Education Society (supra).
4. Being aggrieved by the assessment order, the assessee went in appeal before the Commissioner of Income Tax (Appeal), who after considering the submissions of the assessee, allowed the appeal by deleting all the additions made in the assessment order and directed the Assessing Officer to allow the benefit of exemption to the trust under Section 11 of the IT Act.
5. Against the order of CIT(A), the Department went in appeal before the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (for short, ‘ITAT’) and the learned ITAT in its order dated 23.09.2011 in ITA No.316/CTK/2011 has upheld the order of the CIT(A). Hence, the present appeal.
6. Mr. A. Mohapatra, learned Senior Standing Counsel for the Income Tax Department, submitted that the Trust deed of the assessee never had the condition that the assessee will run the institution and invest the surplus to expand its activity out of the fees collected from the students who are pursuing their course. Assessee’s activity of collecting the fees from the students as their course fee for studying in the assessee’s institution do not find place in the Trust deed, aims and objectives or the notes on the activity, which had been submitted to the CIT for the purpose of registration under Section 12AA. Therefore, the registration granted in favour of the assessee by the CIT on the premise of the Trust deed, aims and objectives and notes on the activity has no relevance regarding the real activity carried on by the assessee after obtaining the registration. Year after year, the assessee had been generating profit and creating fixed assets. For the said purpose, huge amount of loans have been availed from Banks and financial charges had been claimed as expenditure out of the students’ fees. As the assessee had been collecting fees much more than the amount required for imparting education, collection of the said excess amount fits to the definition of capitation fees, which is illegal. The Hon’ble Supreme Court held that the Educational Institutions are set up for charitable purpose and banned the collection of capitation fees and such decision of the Hon’ble Supreme Court is binding on all authorities. The order of the ITAT is not based either on facts or correct application of law. Placing reliance on the judgment of Jharkhand High Court in the case of Queens Education Society (supra), Mr. Mohapatra submitted that the reasons given by the Tribunal for granting exemption to respondent Educational Institution is not sustainable in law. Therefore, Mr. Mohapatra prayed to admit the Tax Appeal for adjudication on the substantial questions of law as stated hereinabove.
7. Mr.J. Sahoo, learned Senior Advocate appearing for the respondent-Educational Institution submitted that no substantial question of law is involved in the case. The Tribunal is fully justified in granting exemption under Section 11 of the IT Act, 1961 for the assessment year 2007-08 for the reasons stated therein. The learned Assessing Officer is not correct in applying the ratio of Queens Education Society (supra), as that case is not in the context of the Organizations registered under Section 11 of the IT Act. The said judgment was rendered in the context of Section 10(23C) of the IT Act. Non-applicability of the ratio of Queens Education Society (supra) has been considered and decided by a number of High Courts and Tribunals and the Revenue has not been able to sustain its plea even in a single judgment in the light of plethora of decisions in favour of the assessee. There is strong reason for not applying the ratio of Queens Education Society (supra) in the case of the appellant. In support of the above contentions, Mr. Sahoo relied upon the decisions of different High Courts, viz., Pinegrove International Charitable Trust vs. Union of India, (2010) 188 Taxman 402 (Punj & Har); S.T. Lawrence Educational Society (Regd.) vs. CIT, (2011) 197 Taxman 504 (Delhi); Vanita Vishram Trust vs. Chief CIT, (2010) 327 ITR 121 (Bombay); Maa Saraswati Educational Trust vs. Union of India, (2010) 194 Taxman 84 (Himachal Pradesh); Kashtriya Sabha Maharana Pratap Bhawan vs. Union of India, (2010) 194 Taxman 442 (Punj & Har.); Sanatan Dharam Shiksha Samiti vs. Chief Commissioner of Income Tax, Panchakula (Writ Petition No.4155 of 2011 disposed of on 03.10.2011 by Punjab & Haryana High Court); Commissioner of Income Tax vs. Manav Mangal Society, (2009) 184 Taxman 502 (Punj & Har.)
Placing reliance upon the judgment of the Hon’ble Supreme Court in the case of CIT Bangalore Vs. B.C. Srinivas Setty and others (1981) 128 ITR 294 (SC) and CIT Vs. P J Chemicals (1994) 210 ITR 830 (SC), it was submitted that the pre-ponderance of judicial views in favour of the assessee should be honoured. Placing reliance upon the judgment of Punjab & Haryana High Court in the case of Pinegrove International Charitable Trust (supra), Mr. Sahoo submitted that the assessee having valid registration under Section 12AA is required to be assessed by applying all the provisions of Section 11 and 13 of the IT Act. The Assessing Officer having not done so, the order is bad in law. Mr.Sahoo further submitted that since the registration was not withdrawn on the date of assessment order, the income of the assessee was exempted in entirety. The learned Assessing Officer is wrong in holding that the capital expenditure is not applicable for charitable purpose. Concluding his argument, Mr. Sahoo submitted for dismissal of the appeal.
8. Before proceeding to examine whether Question Nos. (i) and (ii) as raised by the Revenue in the present case are substantial questions of law or not, it would be appropriate to know as to what is “substantial question of law”.
9. The Hon’ble Supreme Court in the case of Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning & Manufacturing Co. Ltd., AIR 1962 SC 1314, held as under:
“6. .....The proper test for determining whether a question of law raised in the case is substantial would, in our opinion, be whether it is of general public importance or whether if directly and substantially affects the rights of the parties and if so whether it is either an open question in the sense that it is not finally settled by this Court or by the Privy Council or by the Federal Court or is not free from difficulty or calls for discussion of alternative views. If the question is settled by the highest court or the general principles to be applied in determining the question are well settled and there is a mere question of applying those principles or that the plea raised is palpably absurd the question would not be a substantial question of law.”
10. The Hon’ble Supreme Court in the case of Kondiba Dagadu Kadam v. Savitribai Sopan Gujar and others, (1999) 3 SCC 722, held as under:
“6. If the question of law termed as a substantial question stands already decided by a larger Bench of the High Court concerned or by the Privy Council or by the Federal Court or by the Supreme Court, its merely wrong application on the facts of the case would not be termed to be a substantial question of law. Where a point of law has not been pleaded or is found to be arising between the parties in the absence of any factual format, a litigant should not be allowed to raise that question as a substantial question of law in second appeal. The mere appreciation of the facts, the documentary evidence or the meaning of entries and the contents of the document cannot be held to be raising a substantial question of law. But where it is found that the first appellate court has assumed jurisdiction which did not vest in it, the same can be adjudicated in the second appeal, treating it as a substantial question of law. Where the first appellate court is shown to have exercised its discretion in a judicial manner, it cannot be termed to be an error either of law or of procedure requiring interference in second appeal. This Court in Reserve Bank of India v. Ramkrishna Govind Morey2 held that whether the trial court should not have exercised its jurisdiction differently is not a question of law justifying interference.”
11. Now coming to the case at hand, undisputed facts are that the assessee is a Trust registered under Section 12A of the IT Act with effect from 02.09.2003. The main object of the respondent is to impart education. Year after year the respondent-assessee has been generating profit and creating fixed assets. The assessee claims capital expenditure as application of income in terms of Section 11 of the IT Act. On the date of assessment, registration granted under Section 12AA was not withdrawn. The learned Assessing Officer held that the respondent-educational institution is not entitled to exemption under Section 11 of the I.T. Act but both the first appellate authority and the learned ITAT held that the respondent-educational institution is eligible for exemption under Section 11 of the Act.
12. In this context, it would be relevant to refer to the following decisions of the Hon’ble Supreme Court.
A five-Judge Constitution Bench of the Hon’ble Supreme Court in the case of Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association, (1979) 13 CTR (SC) 378, dealt with the question of interpretation of clause (15) of Section 2 of the Act. In the said case it has been held as follows:
“.... 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 the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for a person in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realization but would also reflect unsound principle of management. We, therefore, agree with Beg, J. when he said in Sole Trustee, Loka Shikshana Trust Vs. CIT 1975 CTR (SC) 281 : (1975) 101 ITR 234 (SC), 256 that: ‘If the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity’.”
13. The aforesaid view has been cited with approval by the Hon’ble Supreme Court in the case of American Hotel & Lodging Association Educational Institute Vs. CBDT & Others, (2008) 301 ITR 86 (SC).
14. The Hon’ble Supreme Court in the case of Aditanar Educational Institution etc. vs. Add. CIT (1997) 139 CTR (SC) 7 held that in case of an educational institution, after meeting the expenditure, if any surplus results incidentally, then the institution will not cease to be one existing solely for educational purposes and when the surplus is utilized for educational purpose, i.e., for infrastructure development it cannot be said that the institution was having object to make profit. Thus, surpluses used for management and betterment of institution could not be termed as profit.
15. Strong reliance has been placed by the Revenue on the judgment of the Uttarakhand High Court in Queens Education Society (supra) by the learned Senior Standing Counsel for the appellant to canvas that the Trust is running with profit motive and therefore it is not eligible for exemption under Section 11 of the IT Act.
The decision in the case of Queens Education Society (supra) is misplaced by the Department. The said case is not applicable to the case of respondent-educational Society claiming exemption under Section
11 as the judgment in the case of Queens Education Society (supra) was delivered in the context of Section 10 (23C) (iii ad) and not in the context of availing exemption under Section 11 of the I.T. Act by the institutions registered under Section 12A/12AA of the I.T. Act.
16. It may be profitable to extract here the following relevant observations of Punjab and Harayana High Court in the case of Pinegrove International Charitable Trust (supra):-
“We have not been able to persuade ourselves to accept the view expressed by the Division Bench of the Uttarakahand High Court in the case of Queens Educational Society (supra). There are variety of reasons to support our opinion.
Firstly, the scope of the third proviso was not under consideration, in as much as, the case before the Uttarakhand High Court pertained to section 10(23C)(iii ad) of the Act. The third proviso to section 10(23C)(vi) is not applicable to the cases falling within the purview of section 10(23C) (iii ad). Secondly, the judgment rendered by the Uttarakhand High Court runs contrary to the provisions of section 10(23C)(vi) of the Act including the provisos thereunder. Section 10(23C)(vi) of the Act is equivalent to the provisions of section 10(22) existing earlier, which were introduced w.e.f. 1-4- 1999 and it ignores the speech of the Finance Minister made before the introduction of the said provisions, namely, section 10(23C) of the Act [See observations in American Hotel & Lodging Association, Educational Institute’s case (supra)]. Thirdly, the Uttarakhand High Court has not appreciated correctly the ratio of the judgment rendered by Hon’ble the Supreme Court in the case of Aditanar Educational Institution (supra) and while applying the said judgment including the judgment which had been rendered by the Hon’ble Supreme Court in the case of Children Book Trust (supra), it lost sight of the amendment which had been carried out w.e.f. 1-4-1999 leading to the introduction of the provisions of section 10(23C) of the Act. Lastly, that view is not consistent with the law laid down by Hon’ble the Supreme Court in American Hotel & Lodging Association, Educational Institute (supra).”
17. Apart from the above, perusal of the assessment order reveals that, for withdrawal of exemption, the Assessing Officer assigned various reasons, viz., (i) Limitation in the objects of the Trust Deed; (ii) Assessee generating profit year after year; (iii) Capital expenses are not application of income; (iv) Income or property of the trust is applied/used for the benefit of persons specified in Section 13(3) [section 13(1)(c) read with section 13(2) and 13(3)]; (v) Valuation of old vehicles purchased; (vi) Collection of fees out of canteen expenses of students; (vii) Miscellaneous placement expenses; (viii) Claim of transport expenses against outside vehicle; and (ix) Collection from students over and above the prescribed fees.
The CIT (Appeal) has considered every aspect of the assessment order with reference to the reasons given by the learned Assessing Officer for disallowing exemption and relying upon the latest judicial pronouncements expressed in similar facts that are involved in the present case, came to the conclusion that the Assessing Officer’s approach denying exemption to the respondent-educational institution is not in accordance with law and held that the respondenteducational institution is entitled to claim exemption under Section 11 of the Act.
18. The learned Tribunal, which is the final fact finding authority, after hearing the appeal filed by the Department did not incline to interfere with the order of the first appellate authority, inter alia, with the following observations and findings:
“Apart from that on going through the impugned order, it is found that the learned CIT(A) has thread bare considered the issues in question with reference to the admitted facts that the assessee is registered under Section 12A of the Act and running the educational institution, imparting education in the fields of technical engineering and computer applications with the parameters laid down by the AICTE and the guidelines given by Ministry of Human Resource Development, Government of India, New Delhi and the fees collected by the assessee from the students for imparting such education having been approved by the AICTE. The assessee is spending the amount received by it by way of collection of tuition fees or collection of hostel fees is being spent for building necessary infrastructure for imparting the education in various fields which is the charitable purpose for which the trust was established. The assessee has also spent the said amount for raising the infrastructure necessary for carrying out the object of imparting education and thereby the assessee was found to be entitled for exemption under Section 11 of the I.T. Act and the view of the Assessing Officer that there is contravention of Section 13 of the I.T. Act is found to be baseless by the CIT(A) after thread bare considering all the relevant facts. On the overall consideration of the impugned orders, we found that the order of the leaned CIT(A) is in accordance of the majority views of judicial pronouncements that were rendered by various judicial forums stated in the impugned order. Hence, we find no infirmity in the order of the learned CIT(A) requiring no interference.”
19. In view of the above, question No.(i) is not a substantial question of law.
20. Question No. (ii) is also not a substantial question of law as the respondent -Educational Institution is eligible for exemption under Section 11 of the IT Act for the reasons stated hereinabove and it is a settled position of law that capital expenditure incurred by an Educational Institution is the basic necessity if such expenditure promotes the object of the Trust.
21. The Hon’ble Supreme Court in the case of S.RM. M.CT.M. Tiruppani Trust Vs. CIT, (1998) 230 ITR 636 (SC) and the High Court of Delhi in the case of CIT Vs. Divine Light Mission, (2005) 196 CTR (Del) 135 have held that capital expenditure incurred by a Trust for acquiring/ constructing capital asset would be application of money and the assessee would be entitled to exemption under Section 11(1) of the Act.
22. The Madras High Court in the case of CIT Vs. Kannika Parameswari Devasthanam & Charities, (1982) 133 ITR 779 (Mad.) held as under:-
“The income from the trust properties has to be applied on the objects of the trust. As far as objects of the trust are concerned, the application of the amount can be for revenue or capital purposes. So long as the expenditure had to be incurred out of the income earned by the trust, even if such expenditure is for capital purposes on the objects of the trust, the income would be exempt. The Tribunal is, therefore, wrong in proceeding on the basis that improvement of a property held under the trust would by itself come within the scope of application of the income for charitable purposes. However, facts will have to be investigated to find out whether the assessee had, in incurring the expenditure of a capital nature, promoted the objects of the trust by applying the income to those objects. The ITO will have to go into this question, as the assessment itself has been set aside by the Tribunal and restored to his file. The result is that the question referred to us would have to be answered as follows: So long as the income derived from the property held under the trust had been expended on the objects of the trust, the income would be exempt under section 11 of the Act. If this was not done, then the income would not be exempt.”
23. The High Court of Uttarakhand in the case of CIT Vs. Jyoti Prabha Society, (2009) 177 Taxman 429 (Uttarakhand) has held that the educational society which had utilized rental income for the purposes of imparting education by maintaining the buildings and constructing new building for the same purpose, would be entitled to the exemption claimed under Section 11 of the Act. Section 11(1)(a) is pari materia to the third proviso to Section 10(23C)(vi) of the Act and the only difference is with regard to the percentage of income and the period for which it can be carried forward.
24. The Allahabad High Court applied the legal ratio of the Hon’ble Supreme Court in CIT Vs. Mool Chand Sharbati Devi Hospital Trust, (2010) 190 TAXMAN 338 and held that capital expenditure on building and infrastructure are basic necessity and therefore, it should be treated as expenditure under Section 11(1) of the IT Act.
25. In view of the above, capital expenditure if incurred by an Educational Institution for attainment of the object of the Society, it would be entitled to exemption under Section 11 of the I.T. Act.
26. For the reasons stated above, issues involved in the present case are no more res integra and therefore, no question of law arises for adjudication in the present appeal.
27. In the result, the appeal is dismissed.