SHRI KUL BHARAT, JM AND SHRI VIKRAM SINGH YADAV, AM

For The Assessee : Shri Vinod Kumar Gupta (CA)
For The Revenue : Shri Anil Kumar (CIT)

ORDER

SHRI VIKRAM SINGH YADAV, A.M.-These are cross appeals filed by the Revenue and the assessee society against two separate orders of ld CIT(A) dated 17.11.2015 in respect of assessment year 2010-11 and 2011-12 respectively. Since these appeals carry identical facts and common grounds of appeals, the same were taken up for hearing together and are being disposed off by this consolidated order.

2. For the sake of discussion, we will take up the appeals for AY 2010-11 first wherein the Revenue and the assessee society have taken up following grounds of appeal:

In ITA No. 105/JP/16 (Revenue):
On the facts and in the circumstances of the case and in law, the ld CIT(A) has erred in:
(1) allowing assessee’s claim of exemption u/s 11 even though provisions of section 13 are attracted.
(2) allowing the benefit of section 11(1) of the IT Act without considering the huge surpluses being earned by the society and expenses were incurred for the benefit of persons covered u/s13(3) of the IT Act.

(3) allowing salary expenses to the extent of the following amounts – Rs. 90,450/- (Mrs. Mohini Bakshi), Rs. 24,750/- (Mr. M.S. Bakshi), Rs. 29,025/- (Mr. Sandeep Bakshi) and Rs. 25,125/- (Ms. Preeti Bakshi) which is higher than reasonable.

(4) deleting addition made on account of foreign travelling expenses despite the fact that the assessee society failed to prove that these expenses were incurred for the objects of the society.

(5) allowing contribution made to Jaipur National University during the year under consideration as application of income u/s 11 of the Act despite the fact that the assistance provided to JNU is the violation of byelaws of society as well as the violation of provision of section 13(1)(c) and 13(2)(a) of the IT Act, 1961.”

In ITA No. 30/JP/16(Assessee):
“Under the facts and circumstances of the case and in law, the ld. AO has erred in holding that depreciation under section 32 of the IT Act, 1961 is not admissible in respect of the assets on which exemption has been allowed u/s 11 of the IT Act, 1961 while applying the income for charitable purpose. Further ld. CIT(A) has erred in upholding the same.”

3. The brief facts of the case are that the assessee is a society registered under the Rajasthan Society Registration Act, 1958 vide registration No. 518/1985-86 dated 19.02.1986. The assessee society is also registered under the provisions of Section 12AA of the IT Act, 1961 with effect from 17.12.1990. For the year under consideration, the assessee society filed its return of income on 15.10.2010 showing income as NIL after claiming exemption u/s 11(1)(a) of the IT Act, 1961 and the assessment was concluded u/s 143(3) on 25.03.2013 at total income of Rs. 8,46,93,414/-. Aggrieved with the order of AO, the assessee society filed an appeal before the ld CIT(A), Jaipur who has allowed partial relief to the assessee. Now the Revenue is in appeal against relief granted by the ld CIT(A) in terms of allowing exemption under section 11 and deleting the disallowance relating to salary, foreign travel and treating contribution to Jaipur National University as application of income. The assessee society is in appeal against the order of ld CIT(A) for not treating the allowance of depreciation as application of income.

4. The first question that arises in the present appeal is the entitlement of the assessee society to exemption under section 11 of the Act. The relevant provisions which govern the exemption under section 11, are contained in section 2(15), 11, 12 ,12A, 12AA read with section 13 of the Act.

5. Section 2(15) defines “charitable purpose” to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. The Hon’ble Supreme Court in case of Sole trustee, Lok Sikshana Trust V. CIT reported in 101 ITR 234, 241 (SC) has held that “What ‘Education’ connotes in section 2(15) is the process of training and developing the knowledge, skill, mind and character of students by normal schooling. It is the systematic instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received.” Further, it is noted that the proviso to section 2(15) doesnt apply to first three limbs which includes relief of the poor, education and medical relief and is limited is the last limb “the advancement of any other object of general public utility.

6. The objectives of the assessee society, on perusal of its Bye-laws, are as follows:-

7. On perusal of the above objectives of the assessee society, it is clear that the main objects of the society are setting up of educational institutions and operating them for the promotion of education and there are other stipulated objectives which are related to promotion and spreading of systematic education. During the year under consideration, in pursuance of its objectives, the assessee society is operating two educational institutions namely, Seedling Public School, Jawahar Nagar, Jaipur and Seedling Modern High School, Mahaveer Nagar, Jaipur.The society has also established a University in name of “Jaipur National University” and is the sponsoring body of the said University. The Jaipur National University has been set up by the society mainly for the promotion of technical and other higher education. It is therefore not a matter of dispute that the society is imparting “education” through various educational institutions set up by it as per its stated objectives and the activities of the assessee societyfall within the ambit of the term “education” in the context of Section 2(15) of the Act.

8. We now refer to the provisions of section 11 of the Act which reads as under:
11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-

[(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;

(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property;

(c) income derived from property held under trust-
(i) created on or after the 1st day of April, 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and

(ii) for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India: Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income;

[(d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.]

[Explanation.-For the purposes of clauses (a) and (b),-
(1) in computing the fifteen per cent of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income;

(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the casemay be, held under trust in part, by any amount-

(i) for the reason that the whole or any part of the income has not been received during that year, or
(ii) for any other reason, then -
(a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and

(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, may, at the option of the person in receipt of the income such option to be exercised in writing before the expiry of the time allowed under subsection (1) of section 139 for furnishing the return of income be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.]

(1A) For the purposes of sub-section (1),-
(a) where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:-

(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain;

(ii) where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset;

(b) where a capital asset, being property held under trust in part only for such purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:-

(i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of the appropriate fraction of such capital gain;

(ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset.

Explanation.-In this subsection,-
(i) "appropriate fraction" means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purposes;

(ii) "cost of the transferred asset" means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in sub-clause (b) of clause (1) of section 55;

(iii) "net consideration" means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.]

(1B) Where any income in respect of which an option is exercised under clause (2) of the Explanation to sub-section (1) is not applied to charitable or religious purposes in India during the period referred to in sub-clause (a) or, as the case may be, sub-clause (b), of the said clause, then, such income shall be deemed to be the income of the person in receipt thereof-

(a) in the case referred to in sub-clause (i) of the said clause, of the previous year immediately following the previous year in which the income was received; or

(b) in the case referred to in sub-clause (ii) of the said clause, of the previous year immediately following the previous year in which the income was derived.]

[(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that subsection is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:-

'(a) such person specifies, by notice in writing given to the Assessing Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years;

(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5) : Provided that in computing the period of ten years referred to in clause

(a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded:

Provided further that in respect of any income accumulated or set apart on or after the 1st day of April, 2001, the provisions of this sub-section shall have effect as if for the words "ten years" at both the places where they occur, the words "five years" had been substituted. [Explanation.-Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.

(3) Any income referred to in sub-section (2) which-
(a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or
(b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or
(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof,

(d) is credited or paid to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or subclause (via) of clause (23C) of section 10,

shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited or credited or paid or, as the case may be, of the previous year immediately following the expiry of the period aforesaid.

(3A) Notwithstanding anything contained in sub-section (3), where due to circumstances beyond the control of the person in receipt of the income, any income invested or deposited in accordance with the provisions of clause (b) of sub-section (2) cannot be applied for the purpose for which it was accumulated or set apart, the Assessing Officer may, on an application made to him in this behalf, allow such person to apply such income for such other charitable or religious purpose in India as is specified in the application by such person and as is in conformity with the objects of the trust; and thereupon the provisions of subsection (3) shall apply as if the purpose specified by such person in the application under this sub-section were a purpose specified in the notice given to the Assessing Officer under clause (a) of sub-section (2):] Provided that the Assessing Officer shall not allow application of such income by way of payment or credit made for the purposes referred to in clause (d) of sub-section (3) of section 11:

Provided further that in case the trust or institution, which has invested or deposited its income in accordance with the provisions of clause (b) of sub-section (2), is dissolved, the Assessing Officer may allow application of such income for the purposes referred to in clause (d) of sub-section (3) in the year in which such trust or institution was dissolved.

(4) For the purposes of this section "property held under trust" includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the Assessing Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes.

(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an 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 account are maintained by such trust or institution in respect of such business.

(5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely :-

(i) investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government;

(ii) deposit in any account with the Post Office Savings Bank;

(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank). Explanation.-In this clause, "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);

(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);
(v) investment in any security for money created and issued by the Central Government or a State Government;

(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government;

(vii) investment or deposit in any public sector company: Provided that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company,-

(A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company;

(B) such other investment or deposit shall be deemed to be an investment or deposit made under this clause for the period up to the date on which such investment or deposit becomes repayable by such company;

(viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;

(ix) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;

(ixa) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India. Explanation.-For the purposes of this clause,-

(a) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;

(b) "public company" shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);
(c) "urban infrastructure" means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport;]
(x) investment in immovable property.
Explanation.-"Immovable property" does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth;]
(xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964);]
[(xii) any other form or mode of investment or deposit as may be prescribed.

(6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.

(7) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) of section 12AA or has obtained registration at any time under section 12A [as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996)] and the said registration is in force for any previous year, then, nothing contained in section 10 [other than clause (1) and clause (23C) thereof] shall operate to exclude any income derived from the property held under trust from the total income of the person in receipt thereof for that previous year.

9. As per the section 11(1) of the Act, subject to provisions of section 60 to 63, the income of the charitable or religious trust in receipt of the income as specified under sub clauses of the aforesaid section, applied for charitable or religious purposes and the income in form of voluntary contribution with the specific directions that they shall form part of the corpus of the trust or institution in the manner and to the extent specified shall not be included in the total income of the previous year. Sub-section (2) of section 11 deals with the situation where income referred to in clause (a) and ( b) of sub-section (1) read with Explanation to the sub-section is not applied or is not deemed to have been applied to the charitable purpose or religious purposes in India during the previous year but is accumulated or set apart either in whole or in part for application to such purposes in India and mandates that such income shall not be included in the total income of the previous year of the person in the receipt of the income on the compliance of the conditions specified in subclause (a) and (b). Sub-section (3) of section 11, provides that any income referred to in sub-section (2) which is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or ceases to remain invested for deposited in any of forms or modes specified in sub-section (5) or is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof or is credited or paid to any trust or institution registered under section 12A or any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause 23C of Section 10, shall be deemed to be the income of such person of the previous year in which it is so applied for ceases to be accumulated or set apart or ceases to remain so invested or deposited or credited or paid or as the case may be, of the previous year immediately following the expiry of the aforesaid period.

10. The scheme of granting fiscal incentive by way of exemption u/s 11 of the Income Tax Act, 1961 to the charitable institutions is thus devised by the legislature in such a manner that the institutions who earn from charitable work are not liable to tax if they either apply such earnings during the year or accumulate such earnings for further achieving the “charitable purposes” and do not withdraw such income for utilization for any purposes other than “charitable purposes”. In other words, the charitable institutions may earn income and enjoy tax exemptions so long as they re-circulate such earnings for charitable objectives and thereby further promote the charitable purpose. The conditions which are required to be fulfilled are as follows:

a. Income should be derived from property held under trust by the person claiming exemption.

b. Such Property from which income is derived should be held wholly for charitable or religious purposes.

c. Income for which exemption is claimed is being applied for charitable or religious purposes in India. If such income is accumulated/ set apart for such application in future then the exemption is limited to the extent of certain percentage of such income.

11. In this regard, the ld AR drawn our reference to the salient provisions of Rajasthan Society registration Act, 1958 which, read along with the Byelaws of the society (reproduced above), governs the assessee society as under:
“Section 5. Property of society in whom vested:-

(1) The property, movable and immovable, belonging to or held or acquired by a society registered under this Act, if not vested in trustees in trust for such society, shall be deemed to be so vested for the time being in governing body of such society, and in all proceedings, civil and criminal, may be described as the property of the governing body of such society.

(2) Where any such property is vested or is to become vested in trustees in trust for any society registered under this Act and any new trustees have been appointed under and in accordance with section 5-A, the property shall, notwithstanding anything contained in any instrument or in the rules and regulations of the society, become vested, without any conveyance or other assurance, in such new trustees and the continuing old trustees jointly of it, there are no old continuing trustees, in such new trustees wholly upon the same trusts, and with and subject to the same powers and provisions, as it was vested in the old trustees.:

“Section 10. Members liable to be sued as strangers:-

(1) Any Member of a society registered under this act, who may be in arrear of the subscription which, according to the rules and registrations of the society, he is bound to pay or who shall possess himself of or detain any property of the society in manner or for a time contrary to such rules and regulations or shall injure or destroy any property of the society, may be sued for such arrear or for the damage accruing from such possession, detention, injury or destruction of the property in the manner here in before provided.

(2) If in any suit or proceeding brought under sub section (1) at the instance of the society the defendant shall be successful and shall be adjudged to recover his costs, he may elect to proceed to recover the same from the officer n whose name the suit or other proceeding shall be brought or from the society , and in the latter case, shall have process against the property of the said society in the manner above described.

“Section 14. Upon dissolution no member to receive surplus property:-

If upon dissolution of any society registered under this Act there shall remain after the satisfaction of all its debts and liabilities any property whatsoever, the same shall not be paid to or distributed among the members of the said society or any of them, but shall be given to some other society, whether registered under this Act or not, to be determined by the votes of not less than two-thirds of the members present personally or by proxy at the time of the dissolution or, in default thereof, by such court as aforesaid:

Provided that the section shall not apply to any society which have been founded or established by the contributions of share-holders in the nature of a joint-stock company.

Provided further that noting in this section shall be deemed to affect any provision contained in any instrument for the payment or distribution of the property of a society dissolved under section 13”

“Section 14-A. Surplus property may be given to government:-

Not-withstanding anything contained in section 14, it shall be lawful for the members of any society dissolved under section 13 to determine by the votes of not less than two-third of their total number that any property whatsoever remaining after the satisfaction of all its debts and liabilities shall be given to the State Government to be utilized for any of the purposes specified in Section 1-B.”

12. It was submitted that the statutory provisions and regulations governing the assessee society provide that the society has perpetual succession and its managing committee/ trustee may change from time to time but the property of the society remains with the society for the benefit of its beneficiaries in trustee capacity. The members of management committee or executive committee or any office bearers of the society are merely trustees of the property of such society and caretakers thereof for the ultimate benefit of public at large. Such members of management committee or the office bearers cannot be considered to be the owner of the property of such society. Their powers, duties, obligations are defined by way of Byelaws of the society and in absence of any specific provision in Byelaws, by the governing statues, rules and regulations. They are permitted to use the funds of the society only for the objects of the society and in case there is any misuse of funds for their personal purposes, they are obliged to reimburse/ compensate to the society in respect of such misuse/ personal use in the same manner as any other person would have been liable. In light of above, it was submitted that the assessee society fulfills all the three conditions specified in section 11(1)(a) of the Act for claiming the exemption as explained below:

a. assessee society is a society which is holding all the properties including educational institutions in “trustee capacity” or “in trust”. The property is held for the benefit of the beneficiaries and no individual is the owner of the property.

b. The property held by the assessee society is held wholly for charitable purposes within the meaning of section 2(15) of the Income Tax Act, 1961 since all the objects of the society qualify as “charitable purpose” within the statutory meaning;

c. Income of assessee society is applied for “charitable purpose” and the exemption is also being claimed u/s 11 on the basis of, and to the extent of the income so applied only.

13. It was further submitted that all the objectives of the society relate to the promotion of education and activities incidental thereto and fall within the ambit of the term “charitable purpose” as defined under section 2(15) of the Income Tax Act, 1961. Thus, the society not only exists solely for “charitable purpose” but also there is no object of the society which is beyond the scope of “charitable purpose”. Whatever income is generated by the society is from the “property held under trust” for charitable purpose and the income earned by the society can be used and is actually used only for the “charitable purpose” as defined u/s 2(15) of the Act.

14. On perusal of the assessment order, it is noted that the prime reason for denial of exemption under section 11 of the Act by the Assessing officer is systematic generation of surplus year after year under various heads of income by the assessee society. As per Assessing officer, the systematic generation of surplus year after year establishes that various educational institutions are being run by assessee society with profit motive and not for any charitable purposes. The institutions are being run on commercial basis by charging hefty fees and generating heavy surplus from its education activity just like a business establishment with dominant motive being to earn profits. Negating the submissions of the assessee society that it is imparting education through various institutions and therefore carrying on charitable activity within the meaning of section 2(15), the Assessing officer held that looking at the fee structure of the institutions run by the assessee society, the children of common people and weaker section cannot afford to take education in these institutes and imparting education at such high cost cannot be treated as that of general public utility. Therefore, it was held that assessee society is not carrying on any charitable activity and surplus generated every year under various heads of fees cannot be held to be ‘income from property held for charitable purposes’ for the purposes of section 11(1) of the Act and the assessee society is therefore not entitled to exemption u/s 11 of the Act. In addition, the Assessing officer noted that the assessee society has allowed various benefits to persons covered under section 13(3) and in view of the provisions of section 13(1), the assessee society is not held eligible for exemption under section 11 of the Act.

15. Here, we refer to the decision of Hon’ble Supreme Court in case of Queen’s Education Society reported in 372 ITR 699 where relevant principles of law have been laid down to determine whether an educational institution exists solely for educational purposes and not for profit. In that case, the provisions of section 10(23C)(iiiad) of the Act were under consideration of Hon’ble Supreme Court . The Revenue therein has argued that the legislature and the language employed in the statute doesn’t contemplate making of large profits and if an educational institution, in fact, makes large profits, then even though it may plough such profits back into the purchase of assets for education, yet such institution cannot be said to be existing solely for educational purposes and it would really be for profit. The Hon’ble Supreme Court negated the said line of arguments put forward by Revenue and referred to its earlier decisions rendered in case of Surat Art Silk Cloth Manufacturing (121 ITR 1), Aditanar Educational Institution (224 ITR 310) and American Hotel & lodging Assn. Educational Institute (301 ITR 86) and laid down the following principles in law as set out in paragraph 11 of its decision which reads as under:

“11..the law common to section 10(23C)(iiadi) and (vi) may be summed up as follows:

(1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for education purposes and becomes an institution for the purpose of making profit.

(2) The predominant object test must be applied - the purpose of education should not be submerged by a profit making motive.

(3) A distinction must be drawn between the making of a surplus and an institution being carried on “for profit”. No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit.

(4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes

(5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons.”

16. The Hon’ble Supreme Court in above decision also approved the decision of Hon’ble Punjab and Haryana High Court in case of Pine Grove International Charitable Trust (327 ITR 273). In that case, Chief CIT, Chandigarh withdrew the exemption under section 10(23C)(vi) stating that the profits are substantial and arising year after year and not incidental as held in case of Aditanar Educational Institution and the assessee should reduce the fees and apply a fresh. In that background, the Hon’ble Punjab and Haryana High Court held as under:

“8.13 From the aforesaid discussion, the following principles of law can be summed up –

(1) It is obligatory on the part of Chief Commissioner of Income Tax or the Director which are the prescribed authorities, to comply with proviso thirteen (un-numbered). Accordingly , it has to be ascertained whether the educational institution has been applying its profit wholly and exclusively to the object for which the institution is established. Merely because an institution has earned profit would not be deciding factor to conclude that the educational institution exists for profit.

(2) The provisions of section 10(23C)(vi) of the Act are analogous to the erstwhile section 10(22) of the Act, as has been laid down by Hon’ble Supreme Court in the case of American Hotel and Lodging association (supra). To decide the entitlement of an institution for exemption u/s 10(23C)(vi) of the Act, the test of predominant object of the activity has to be applied by posing the question whetherit exists solely for education and not to earn profit [see5 Judges constitution Bench Judgement in the case of Surat Art Silk Cloth Manufactures association (supra)]. It has to be borne in mind that merely because profits have resulted from the activity of imparting education would not result in change of character of the institution that it exists solely for educational purpose. A workable solution has been provided by Hon’ble Supreme Court in para 33 of its judgement in American Hotel and Lodging Association’s case (supra). Thus on an application made by an institution, the prescribed authority can grant approval subject to such terms and conditions as it may deems fit provided that they are not in conflict with the provisions of the Act . The parameters of earning profit beyond 15% and its investment wholly for educational purposes may be expressly stipulated as per the statutory requirement. Thereafter the Assessing Authority may ensure compliance of those conditions. The cases where exemption has been granted earlier and the assessment are complete with the finding that there is no contravention of the statutory provisions, need not be reopened. However, after grant of approval if it comes to the notice of the prescribed authority that the conditions on which approval was given, have been violated or the circumstances mentioned in 13th proviso exists, then by following the procedure envisaged in 13th proviso, the prescribed authority can withdraw the approval.

(3) The capital expenditure wholly and exclusively to the objects of education is entitled to exemption and would not constitute part of the total income.

(4) The educational institutions which are registered as a society would continue to retain their character as such and would be eligible to apply for exemption under section 10(23C)(vi) of the Act.

(5) Where more than 15% of income of an educational institution is accumulated on or after 1st April, 2002, the period of accumulation of the amount exceeding 15% is not permissible beyond five years, provided the excessincome has been applied or accumulated for application wholly and exclusively for the purpose of education.”

17. The Hon’ble Supreme Court also approved the decision of Hon’ble Bombay High Court in case of Tolani Education Society as under:

“24. ……Also in Tolani Education Society v. Deputy Director of Income Tax (Exemption) & Ors., (2013)351 ITR 184, the Bombay High Court has expressed a view inline with the Punjab and Haryana High Court view, following the judgments of this Court in the Surat Art Silk Manufacturers Association Case and Aditanar Educational Institution case as follows:

“…..The fact that the Petitioner has a surplus of income over expenditure for the three years in question, cannot by any stretch of logical reasoning lead to the conclusion that the Petitioner does not exist solely for educational purposes or, as that Chief Commissioner held that the Petitioner exists for profit. The test to be applied is as to whether the predominant nature of the activity is educational. In the present case, the sole and dominant nature of the activity is education and the Petitioner exists solely for the purposes of imparting education. An incidental surplus which is generated, and which has resulted in additions to the fixed assets is utilized as the balance-sheet would indicate towards upgrading the facilities of the college including for the purchase of library books and the improvement of infrastructure. With the advancement of technology, no college or institution can afford to remain stagnant. The Income-tax Act 1961 does not condition the grant of an exemption under Section 10(23C) on the requirement that a college must maintain the status-quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption under Section 10(23C). Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exemptions have been granted to educational institutions. Knowledge in contemporary times is technology driven. Educational institutions have to modernise, upgrade and respond to the changing ethos of education. Education has to be responsive to a rapidly evolving society. The provisions of Section 10(23C) cannot be interpreted regressively to deny exemptions. So long as the institution exists solely for educational purposes and not for profit, the test is met.” (Emphasis supplied)

18. Though the above referred decision of the Hon’ble Supreme Court in case of Queen’s educational society has been rendered in the context of section 10(23C)(iiiad) where the legislature has used the words “income received by any person on behalf of educational institution existing solely for education purposes and not for the purposes of profit”, in our view, the proposition in law is equally relevant and applicable in context of section 11 of the Act where the legislature has used the words “income derived from property held under trust wholly for charitable purposes” and wherein similar provisions exist in terms of accumulation and plough back of surplus for educational purposes as the intent behind both the provisions is essentially the same. The said analogy also becomes clear from the fact that the Hon’ble Supreme Court in case of Queen Education Society has itself referred to and approved its earlier decision in case of S.R.M.M.C.T.M Tiruppani Trust (2 SCC 584) which was rendered in context of section 11 while discussing the principle of accumulation and utilization of surplus for educational purposes in para 19 of its order as under:

“...9. In the present case, the assessee is not claiming any benefit u/s 11(2) as it cannot, because in respect of this assessment year, the assessee has not complied with the conditions laid down in section 11(2). The assessee however, is entitled to claim the benefit of section 11(1)(a). In the present case the assessee has applied Rs. 8 lakhs for charitable purposes in India by purchasing a building which is to be utilized as a hospital. This income, therefore, is entitled to an exemption u/s 11(1). In addition u/s 11(1)(a), the assessee can accumulate 25% of its total income pertaining to the relevant assessment year and claim exemption in respect thereof. Section 11(1)(a) does not require investment of this limited accumulation in government securities. The balance income of Rs. 1,64,210.03 constitutes less than 25% of the income for the assessment year 1970-71.Therefore, the assessee is entitled to accumulate this income and claim exemption from income tax u/s 11(1)(a).”

19. Subsequently, the Hon’ble Supreme Court in its subsequent decision in case of Visvesvaraya Technological University (Civil Appeal No. 4361-4366 of 2016) dated April 22, 2016, in context of section 10(23C)(iiiab), referred to principles laid down in Queen’s education society (supra) and stated that one further test as laid down in CIT vs. Surat Art Silk Cloth Manufacturer’s Association and culled out in American Hotel & Lodging Association Educational Institute vs. Central Board of Direct Taxes and Others may be added which is as follows:

“In order to ascertain whether the institute is carried on with the object of making profit or not it is the duty of the prescribed authority to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established .”

In the said decision, it further states that the above principle has been specifically reiterated in paragraph 19 of the decision in Queen’s Educational Society (supra) in the following terms:

“The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall out of Section 10(23C) is to ignore the language of the section and to ignore the tests laid down in Surat Art Silk Cloth case (CIT vs. Surat Art Silk Cloth Manufacturer’s Association (1980) 2 SCC 31) Aditanar case (Aditanar Educational Institution vs. CIT (1997) 3 SCC 346) and American Hotel & Lodging Association, Educational Institute vs. CBDT(2008) 10 SCC 509). It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit.”

In that case, the facts of the case before the Hon’ble Supreme Court were that the University had generated huge surplus of about Rs. 500 crores from the year 1999 to 2010 by realising fees under different heads in consonance with the power vested in the University. The difference between the fees collected and actual expenditure was significant and represents only a minuscule part of the fees collected. No remission, rebate or concession in the amount of fees charged under the different heads were granted to the students. At the same time, it was noted that University has grown, number of private engineering colleges affiliated to it has increased from about 64 to 194, the infrastructure of the University has increased offering educational avenues to an increasing number of students in different and varied subjects. The University has spent about Rs. 504 crores and available surplus in the year 2010 to the tune of Rs. 440 crores was also intended to be applied for different infrastructural work.

In the above factual matrix, it was noted by the Hon’ble Supreme Court that there is no manner of doubt that the surplus accumulated over the years has been ploughed back for educational purposes and it was held that the appellant University exists solely for educational purposes and not for the purposes of profit.

20. In our view, the above decision of Hon’ble Supreme Court in case of Visvesvaraya Technological University supports the case of assessee society where under similar fact pattern the surplus has been generated over the period of time and at the same time, the same has been ploughed back and utilised for the purposes of promotion of education through setting up educational institutions, operating them and also upgrading them from time to time for further benefits to the students at large. The society has also established a university, “Jaipur National University” for the promotion of technical and other higher education where the Society is the sponsoring body of the University and has helped set up the University and its infrastructure. Here, it would be relevant to note the surplus that has been generated by the assessee society over the years starting AY 1999-00 to AY 2011-12 and to what extent the same has been utilised over the years:

On perusal of above figures, it is clear that over the period of 11 years, it is no doubt that the assessee society has generated surplus of Rs. 50.76 Crores but at the same time, the whole of the said surplus has been plouged backed and utilised on infrastructure to the tune of Rs. 60.19 Crores (including borrowings) . Even for the two years under consideration, there is surplus of Rs. 16.97 Crores and out of that, Rs. 9 crores have already been spent on the infrastructure.

21. The CBDT has also come out with a clarification vide its circular No. 14/2015 dated 17th August, 2015, wherein, the guidance to the Field Officers has been provided precisely on the issue under consideration on generation of surplus out of gross receipt, the relevant para is reproduced as follows:-

“3. Generation of surplus out of gross receipts:

A doubt has been raised whether generation of surplus out of gross receipts would necessarily ‘breach’ the threshold condition that the educational institution should exist ‘solely for educational purpose and not for the purpose of profit’. Perusal of prescribed provisions clearly reveal that mere generation of surplus cannot be a basis for rejection of application u/s 10(23C)(vi) on the ground that it amounts to an activity of the nature of profit making. In fact, the third Proviso to the said clause clearly provides that accumulation of income is permissible subject to the manner prescribed therein provided such accumulation is to be applied “wholly and exclusively to the objects for which it is established”. Hence, it is clarified that mere generation of surplus by educational institution from year to year cannot be a basis for rejection of application u/s 10(23C)(vi) if it is used for educational purposes unless the accumulation is contrary to the manner prescribed under law.”

22. A perusal of the above clarification issued by CBDT clearly shows that while examining that an educational institute exists solely for educational purpose or for the purpose of the profit, mere generation of surplus from year to year cannot be basis to hold that it exists for the purpose of the profit as sufficient safeguards have been provided whereby accumulation of income is permissible subject to the manner prescribed therein provided such accumulation is to be applied wholly and exclusively to the objects for which it is established. In our view, the view of the CBDT is in consonance with the express wordings provided and intended by the legislature in 10(23C)(vi) and in comfirmity with the law laid down by the Hon’ble Supreme Court in case of Queens Education Society where it is provided that where the surplus is ploughed back for education purposes, the educational institution exists solely for educational purposes and not for purposes of profit. The same will apply with equal force in context of section 11 as similar safeguards have been provided in terms of accumulation and utilisation of surplus so generated for the purposes of charitable purposes in terms of section 11(2) of the Act.

23. It is further noted that similar issue has come up in the past right from AY 2001-02 to AY 2009-10 wherein the exemption u/s 11 has been denied to the assessee society on account of generating surplus year on year. However, the Coordinate Benches have consistently taken a view that looking at the scheme of exemption as envisaged in the statue, generating surplus cannot be basis for denial of exemption under section 11 of the Act.

24. In light of above discussions, in the instant case, we are of the considered view that given that the assessee society is generating surplus year after year is not the deciding factor to determine whether it is eligible for exemption under section 11 of the Act. And on this ground alone, the exemption claimed by the assessee society under section 11 can not be denied.

25. What is relevant to examine is whether the surplus so generated is ploughed back in furthance of its educational objectives and related activities or not. As we have discussed above, there is no dispute that in the earlier years, the surplus has been ploughed back and utilised for the purposes of promotion of education through setting up educational institutions, operating them and also upgrading them from time to time for further benefits to the students at large. For the year under consideration, the assessee society has disclosed a surplus of Rs. 8,37,63,255. In terms of application of such surplus, it has shown addition to Fixed Assets amounting to Rs. 27,48,064, contribution to Jaipur National University amounting to Rs. 3,86,84,912 and amount set apart u/s 11(2) amounting to Rs. 50,00,00,00. In this regard, the Assessing officer has stated in his assessment order that the assessee society has allowed certain benefits to persons covered under section 13(3) by way of salary and foreign travel expenditure which has been disallowed, contribution to Jaipur National University which has not been held to be application of income in view of violation of section 13(1)(c) and section 13(2)(a) of the Act, and addition to fixed Assets which have not been allowed as application of income. Taking into consideration all these issues in addition to systematic generation of surplus (discussed earlier), the assessee society has been held not eligible for exemption under section 11 of the Act.

26. We will first take up the issue relating to contribution to Jaipur National university amounting to Rs. 3,86,84,912 as to whether it qualifies as application of income under section 11 of the Act in the hands of the assessee society. Alternatively, whether the financial assistance provided to JNU is in the violation of byelaws of the society as well as the violation of provision of Sections 13(1)(c) and 13(2)(a) of the Income Tax Act.

27. The Assessing officer held that the bye-laws of the assessee society authorises the society to run different educational institutions including institutes for engineering and higher education but the bye-laws don’t provide that the assessee society will provide financial assistance to other educational institutes. The Assessing officer referred to the Jaipur National University Act, 2008 and acknowledged the fact that assessee society will provide a sum of Rs. 2 crores in establishment of an endowment fund for the benefit of the University but at the same time, held that it doesn’t flow from the said Act that providing contribution/lending money to University was one of the objectives of the assessee society. It was therefore held by the Assessing officer that the act of providing loans/assistance/contribution, by whatever name called, to Jaipur National University is specific violation of the bye-laws of the society. The Assessing officer also referred to CBDT Circular No. 100 dated Januray 24, 1973 stating that since granting of loan is not as per the objectives of the assessee society, it will not be treated as application of income. The Assessing officer further held that Jaipur National University falls within the definition of related person as defined in section 13(3)(b) of the Act and lending of money to a related person without adequate security or adequate interest is violation of section 13(2)(a) read with section 13(2)(g) of the Act

28. The ld CIT(A) relied upon the order of the Coordinate Bench in the case of assessee society for AY 2009-10 wherein it was held that JNU is not a specified Person within the meaning of section 13(3) of the Income Tax Act and contribution made is well within the object of the assessee society and contribution made is eligible to be treated as application. The relevant findings of the Coordinate Bench are contained at para 2.8 of its order which reads as under:

“2.8. We have heard and considered the arguments advanced by the parties in light of the material on record. The scheme of statutory exemption as contained in sections 11, 12, 12A, 12AA read with the provisions of Section13 is devised by the legislature in such a manner that the institutions who earn from charitable work are not liable to tax if they plough-back such earnings for further achieving the ‘charitable purpose’ and do not withdraw such income for utilization for any purposes other than ‘charitable purposes’. The activities of appellant society have been held to be charitable in all preceding years by the Tribunal and therefore, following the same, the appellant is entitled to the exemption u/s 11 of the Act during the year under consideration also.It has also been disputed by the Assessing Officer and upheld bythe Ld. CIT(A) that the Jaipur National University is a specified person within the meaning of the section 13(3) of the Act for the appellant society and accordingly, the assistance to Jaipur National University does not qualify for exemption u/s 11 and rather, because of such contribution, the exemption u/s 11 should be denied in entirety. We, however, do not agree with the departmental authorities on account of the reasons that Jaipur National University is an institution incorporated vide legislative enactment and as per the provisions of such enactment, no individual or a person is entitled to any profits from such University and thus, the University cannot be treated to be specified person. This is evident from the definition of substantial interest given in Explanation 3 in section 13 of the Act reproduced herein:-

“Explanation 3- For the purposes of this section, a person shall be deemed to have a substantial interest in a concern:-

(i) in a case where the concern is a company, if its shares(not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than twenty per cent of the voting power are, at any time during the previous year, owned beneficially by such person or partly by such person ad partly by one or more of the other persons referred to in sub-section (3);

(ii) in the case of any other concern, if such person is entitled or such person and one or more of the other persons referred to in sub-section (3) are entitled in the aggregate, at any time during the previous year, to not less than twenty per cent of the profits of such concern.”

We have also seen that the Jaipur National University does not fall in any of the clauses of section 13(3) and therefore it is not a specified person. Rather this University itself is a charitable institution and has been recognized as such by the Income Tax Department itself u/s 12.”

29. The ld AR submitted that the facts of the year under consideration are similar to the facts in AY 2009-10 except that in the previous year existing fixed assets were also transferred whereas, in the year under consideration there is no such fixed assets were transferred to Jaipur National University and only financial assistance was provided. And therefore, the decision of the Coordinate Bench will apply equally for the year under consideration.

30. The ld AR further submitted that the main objects of the society are setting up of educational institutions and operating them for the promotion of education and there are other stipulated objectives, most of which are related to promotion and spreading of systematic education to the students. It was submitted that in terms of objectives mentioned at serial No. 3 and 7 of its bye-laws which provides for establishment and promotion of various educational institutions including schools, colleges and universities, the assessee society sponsored a university in the name of Jaipur National University (referred to as ‘the University’ or ‘JNU’). JNU has been established and incorporated in Rajasthan as a private University under the Jaipur National University Act, 2008 (Act No. 5 of 2008) (referred to as ‘the JNU Act’) with the objective to undertake research and studies in various disciplines of systematic education/knowledge. As per the preamble and Section 3 of the JNU Act, the assessee society is the sponsoring Body of JNU and accordingly, the society agreed to invest its educational infrastructure(as detailed in Schedule-1 of the JNU Act) alongwith a contribution of Rs. 2 Crores in establishment of an endowment fund for JNU.

31. It was further submitted that in the initial period of setting up and operations, any new educational institution needs substantial capital outlay and other funds, particularly when it is a University. As a sponsoring body, it was the responsibility of the society to make every effort for the success of the University and, therefore, the Society, from time to time, advanced the funds needed by the University for educational purposes. This was done pursuant to the following objectives of the Society:-

- To establish primary, middle, secondary and higher secondary schools, colleges, higher education institutions, Universities, higher training institutions, research institutions and to manage and control them(clause 3 of the objectives).

- To establish various technical engineering, management, scientific educational institutions, tourism, film technology, teachers training institutions, colleges and to manage and control them and to establish research centers, colleges and universities relating to all these faculties and to manage and control them(clause 7 of the objectives).

32. It was further submitted that as per the provisions of section 2(u) of JNU Act read with section 3 and preamble of the said Act, the assessee society was the sponsoring body of JNU. Further, as per section 43 of the said Act, the assessee society being the sponsoring body has the right to dissolve the university by giving prescribed notice and upon the dissolution, all the assets and liabilities of the university shall vest in the assessee society being the sponsoring body. Therefore, it was submitted that:

A) Firstly, as the sponsoring body, the assessee society was duty bound to provide requisite financial assistance to JNU. Needless to mention that the objectives of managing and controlling would mean doing whatever is required for better management and control.

B) Secondly, whatever it was providing to JNU was invested for educational purposes as JNU itself is separately registered u/s 12AA of the Income Tax Act,1961.

C) Thirdly, in substance, since on dissolution, all the assets of the University have to become assets of the Assessee, it is as good as direct investment by the assessee societyfor educational purposes.
33. It was further submitted that contributing or providing financial assistance to the institutions having similar objectives has been considered to have been applied for its own objectives by the Contributor in various judicial pronouncements.

34. In view of the above, it was submitted that the amount advanced by the Society to JNU was in accordance with the objectives of the Society and is, therefore, deserves to be treated as application of income under section 11(1)(a) of the Act. The application of the income of a trust can be for revenue or capital purpose or even assistance (temporary or permanent), loan or any other form of utilization of funds towards the objectives of the Institution.

35. Further to above, under Section 11 of the Act, the exemption from Income Tax is granted only in respect of the income applied for charitable purposes during the previous years. However, the word ‘applied’ need not necessarily be equated with the word ‘spent’ and even if an amount is irretrievably earmarked and allocated for charitable purpose or purposes, it would be said to have been applied to the purpose. Reliance for this is placed on the following judgments:-

CIT vs. Trustees of H.E.H. The Nizam’s Charitable Trust (1981) 131 ITR 497 (AP)
CIT vs. Radhaswami Satsang Sabha (1954) 25 ITR 472

36. It was further submitted that it is an established legal position that granting of loan or financial assistance by a charitable trust/institution for advancement of its own objectives is application of income under section 11(1)(a) of the Act. It has also been clarified in the CBDT Circular No. 100 dated 24th January, 1973 that if the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfillment of the objectives of the trust, granting of loans even interest bearing will amount to the application of income for charitable purposes.

37. Reliance is further placed on the following judicial pronouncements:-
Indian National Theatre Trust v. ITO (1985) 13 ITD 588 (Delhi Trib.)
The assessee trust, constituted with an object to promote cultural activities, had lent certain amount to another charitable trust whose object was not only to promote cultural activities but also to maintain library room and reading room. The said loan was held amounting to application of income and lower authorities were held not justified in rejecting the assessee’s claim on the ground that the objects of the done trust were not similar.

CIT vs. JK Charitable Trust (1992) ITR 31, 42 (All)
A charitable purpose may be served in more than one way. One is to directly contribute for the promotion of that cause; the other is to contribute money to another charitable organization, which advances that cause. The amount contributed to other charitable institutions amounts to application of the income for charitable or religious purposes.
Commissioner of Income Tax and Anr. Vs. Shamnur Savithramma Kallappa Public Trust (2011) 53 DTR (Kar) 117

Clause 4(a) makes it clear as to what are the purposes for which the trust is constituted. If authorizes the trust to extend financial or other assistance to such institutions. Therefore, the clause in the trust deed is unambiguous. There is no scope for any confusion. Not only the trust carries on charitable purpose, but it also extends assistance to such institutions carrying on these charitable purposes. assessee charitable trust formed with the object of imparting general, professional and technical knowledge and authorized to extend assistance to other institutions carrying on similar charitable activities, having made donations to other charitable trusts which are approved under s. 80G, exemption under s. 11 could not be denied to the assessee trust on the ground that the donations given by it were not utilized for the objects enumerated in the trust deed.

38. Further, on facts, it was submitted that Ld. Assessing Officer denied exemption under section 11 of the Act by alleging that the assessee society has lent an amount of Rs. 3,86,84,912/- to the persons covered u/s 13(3), without adequate security and interest and has thus, violated provisions of section 13(2)(a) of the Act and that on account of the same, the assessee society has violated the provisions of Section 13(1)(c) and 13(2)(a) of the Act.In this regard, it was submitted that Ld. Assessing Officer failed to appreciate that JNU to whom the contribution was made is itself a public charitable institution imparting higher education in various areas/subjects. The same is also registered u/s 12AA of the Act and is eligible for exemption of its income u/s 11 of the Act. Since it is a public charitable trust, the same is not covered within the definition of Specified Persons u/s 13(3) of the Act. The provisions of section 13(3) of the Act is reproduced herein alongwith evaluation of the facts clause by clause of the instant case:-

39. It was further submitted that the assessee society has never received any contribution from JNU, therefore, the case of Champa Charitable Trust vs Commissioner Of Income-Tax, (1995) 214 ITR 0764, relied upon by Ld AO is not applicable and have distinguishable facts.

40. It was further submitted that on perusal of the requirement of a person to be qualified as a Specified Person under section 13(3) r.w.s. 13(2) applied to the facts of the instant case as demonstrated in above Para, it is crystal clear that JNU is not specified person covered under the provisions of section 13(3) r.w.s. 13(2) as much as assessee society is concern.

41. It was further submitted that it has been held in various judicial pronouncements that donation to the other institutions which qualifies for exemption u/s 11 of the Act is eligible for exemption being application u/s 11(1)(a) of the Act. The reliance for this purpose is placed on the following judicial pronouncements:-

(i) CIT vs. Thanthi Trust (1999) 239 ITR 502 (SC)
(ii) CIT vs. Sri Ram Memorial Foundation (2004) 269 ITR 35 (Del.)
(iii) CIT vs. Hindustan Charity Trust (1983) 139 ITR 913 (Cal.)
(iv) CIT vs. Arbindo Memorial Fund Society (2001) 247 ITR 93 (Mad.)
(v) St. Thomas Education Society v. Asst. DIT (2007) 11 SOT 340 (Mum.)

42. In view of the above submissions and case laws, it was submitted that the contribution made to JNU by the assessee society deserves to be allowed as application of income and the contribution to JNU cannot be the basis for invoking the provisions of section 13(3) of the Act against the assessee society.

43. In order to appreciate the issue under consideration, it would be relevant to again refer to the relevant provisions of section 11 which reads as under:

“11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property;

(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property;

(c) income derived from property held under trust-
(i) created on or after the 1st day of April, 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and

(ii) for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India:

Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income;

[(d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.]
[Explanation.-For the purposes of clauses (a) and (b),-

(1) in computing the fifteen per cent of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income;

(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the casemay be, held under trust in part, by any amount-

(i) for the reason that the whole or any part of the income has not been received during that year, or
(ii) for any other reason, then
-
(a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and

(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, may, at the option of the person in receipt of the income such option to be exercised in writing before the expiry of the time allowed under subsection (1) of section 139 for furnishing the return of income be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.

(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that subsection is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:-

'(a) such person specifies, by notice in writing given to the Assessing Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years;

(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5) :

Provided that in computing the period of ten years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded:

Provided further that in respect of any income accumulated or set apart on or after the 1st day of April, 2001, the provisions of this sub-section shall have effect as if for the words "ten years" at both the places where they occur, the words "five years" had been substituted.

[Explanation.-Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.

(3) Any income referred to in sub-section (2) which-
(a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or
(b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or

(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof,

(d) is credited or paid to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or subclause (via) of clause (23C) of section 10,

shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited or credited or paid or, as the case may be, of the previous year immediately following the expiry of the period aforesaid.

44. The relevant provisions under consideration are explanation to subsection 2 as well as clause (d) of sub-section 3 of section 11, both of which were inserted and brought on statute by the Finance Act, 2022 with effect from April 1, 2003. In order to under the legislative intent behind such amendments, it would be relevant to relevant to the memorandum explaining the Finance Bill 2002 which reads as under:

“Restriction on the application of accumulated income of the charitable or religious trusts

It is proposed to insert an Explanation below sub-section (2) of section 11 so as to provide that any amount paid or credited out of income from property held under trust referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or subclause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, either during the period of accumulation or thereafter, shall not be treated as application of income for charitable or religious purposes.

Thus, payment to other trusts and institutions out of income from property held under trust in the year of receipt will continue to be treated as application of income. However, any such payment out of the accumulated income shall not be treated as application of income and will be taxed accordingly. (Emphasis supplied)

It is also proposed to insert a new clause (d) in sub-section (3) of section 11 so as to provide that if any income referred to in sub-section (2) of the said section, is paid or credited to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or (v) or (vi) or (via) of clause (23C) of section 10, such payment or credit shall be deemed to be the income of the person in receipt of the income from property held under trust, of the previous year in which such payment or credit is made.

It is further proposed to insert a proviso in sub-section (3A) so as to provide that the Assessing Officer shall not allow application of accumulated income by way of payment or credit made for the purposes referred to in the proposed clause (d) of sub-section (3) of section 11. This takes away the discretion of the Assessing Officer provided in sub-section (3A) to allow the trusts to apply the accumulated income for payment or credit to other charitable or religious trusts and institutions.

These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years.”

45. It would also be relevant to refer to the recent Finance Bill, 2017 wherein it has been proposed an insertion of a new explanation 2 to in subsection (1) of section 11 with effect from the 1st day of April, 2018, namely:-

“Explanation 2.-Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1, to any other trust or institution registered under section 12AA, being contribution with a specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income for charitable or religious purposes.”.

46. Explaining the rationale behind introduction of such an explanation, the Memorandum explaining the Finance Bill 2017 provides as under:
“Restriction on exemption in case of corpus donation by exempt entities to other exempt entities:

As per the existing provisions of the Act, donations made by a trust to any other trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, except those made out of accumulated income, is considered as application of income for the purposes of its objects.

Similarly, donations made by entities exempted under sub-clause (iv) or subclause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 to any trust or institution registered under section 12AA, except those made out of accumulated income, is also considered as application of income for the purposes of its objects.

However, donation given by these exempt entities to another exempt entity, with specific direction that it shall form part of corpus, is though considered application of income in the hands of donor trust but is not considered as income of the recipient trust. Trusts, thus, engage in giving corpus donations without actual applications. Therefore, it is proposed to insert a new Explanation to section 11 of the Act to provide that any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1) of section 11, being contributions with specific direction that they shall form part of the corpus of the trust or institution, shall not be treated as application of income. It is also proposed to insert a proviso in clause (23C) of section 10 so as to provide similar restriction as above on the entities exempt under subclauses (iv), (v), (vi) or (via) of said clause in respect of any amount credited or paid out of their income.

These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years. “

47. On perusal of above provisions, It is clear that as per the existing provisions of the Act, donations made by a trust to any other trust or institution registered under section 12AA, except those made out of accumulated income, is considered as application of income for the purposes of its objects. Even where such donation is given by a exempt entity to another exempt entity, with specific direction that it shall form part of corpus of the recipient entity, it is considered as application of income in the hands of donor entity for the period under consideration. In other words, where any donations are made by one exempt entity to another exempt entity and irrespective of directions by the donor entity as to whether such contribution should form part of the corpus of the recipient exempt entity or may be used for incurrence of expenditure towards achievement of its charitable purpose by the recipient exempt entity, such contribution is treated as application of income in the hands of the donor exempt entity. It is only now that the Finance Bill 2017 has proposed w.e.f 1 April 2018 that where such donations are made with specific directions to form part of corpus of the recipient entity, it will not be considered as application of income in the hands of the donor entity. However, the donations with no specific directions to the recipient entity continue to be eligible as application of income.

48. In the instant case, Jaipur National University is registered under section 12AA as a charitable entity undertaking educational activity and thus qualify as an eligible entity for receiving contributions from the assessee society. The contribution of Rs. 3,86,84,912 is made by the assessee society out of income generated during the year under consideration as apparent from the return of income and computation of income available at APB 146-148 and the contribution so made is thus not made out of past accumulated profits.

49. As far as nature of contribution is concerned, the Assessing officer has stated that the funds have been advanced by way of loan by the assessee society to the Jaipur National University. So long as the advancement of funds are in consonance with the objectives of the assessee society, even the CBDT has clarified vide its circular 100 dated 24 January 1973 that the same will qualify as application of income. Clause 3 and 7 of the objectives of the assessee society as contained in its Bye-laws provide for establishment, management and control of educational institutions including Universities. The establishment, management and control include the whole gamut of activities in terms of arranging the necessary infrastructure, land and building for establishing the university and related financial activities including arranging for the financial resources from banks/financial institutions as well as contribution from the sponsoring body and donations/grant from the general public at large. As a sponsoring body of the Jaipur National University, it was the responsibility of the assessee society to provide the necessary physical and financial resources for the set up of the University. The same is manifestly clear from perusal of the Preamble to the Jaipur National university Act, 2008 and other related provisions relating to Endowment Fund and General Fund.

50. The Preamble to Jaipur National University reads as under:

“With a view to keep pace with the rapid development in all spheres of knowledge in the world and the country, it is essential to create world level modern research and study facilities in the State to provide state of the art educational facilities to the youth at their door steps so that they can make out of them human resources compatible to liberalized economic and social order of the world.

And whereas, rapid advancement in knowledge and changing requirements of human resources makes it essential that a resourceful and quick and responsive system of educational research and development be created which can work with entrepreneurial zeal under the essential regulatory setup and such a system can be created by allowing the private institutions engaged in higher education having sufficient resources and experience to establish universities and by incorporating such universities with such regulatory provisions as ensure efficient working of such institutions.

And whereas the Mahima Shiksha Samiti, Jaipur, a society registered under the Rajasthan Societies Registration Act, , 1958 having its registered office at A-18, Shanti Path Tilak Nagar, Jaipur is engaged in the field of education for last several years and is running a number of educational institutions under the name of ‘Seedling Institutions’ which are imparting education in various disciplines.

And whereas, the said Mahima Shiksha Samiti has set up educational infrastructures , both physical and academic, as specified in Schedule-1, at Jagatpura Tehsil Sanganer, Jaipur in the State of Rajasthan and has agreed to invest the said infrastructure in a university for search and studies in the disciplines specified in Schedule –II, and has also deposited an amount of rupees two crore to be utilized in establishment of an endowment fund in accordance with the provisions of this Act.

And whereas, the sufficiency of the above infrastructure has been got enquired into by a committee, appointed in this behalf by the State Government consisting of the Vice-Chancellor, Vardhman Mahaveer Open University, Kota the Secretary to the Government in the Department of Medical Education, Government of Rajasthan, the Commissioner College Education, Rajasthan, Dr. V.C. Tiwari Member Secretary, N.C.T.E. New Delhi and Dr. S.Y. Gobhe, Member P.C.I. New Delhi .
And whereas, if the aforesaid infrastructure is utilized in incorporation as a University and the said Mahima Shiksha Samiti, Jaipur is allowed to run the University, it would contribute in the academic development of the people of the State.

Now, therefore, be it enacted by the Rajasthan State Legislature in the Fiftyninth Year of the Republic of India .”
51. The clauses relating to Endowment Fund and General Fund reads as follows:

“(8) Endowment Fund (1): There shall be established an Endowment of Fund as soon as may be after coming into force of this Act with an amount of rupees two crores which have been deposited by the Sponsoring Body with the State Government.

(2) The Endowment Fund shall be used as security deposit to ensure that the University complies with the provisions of this Act and functions as per provisions of this Act, Statutes and Ordinances. The State Government shall have the powers to forfeit in the prescribed manner, a part or whole of the Endowment Fund in case the University or the Sponsoring Body contravenes any of the provisions of this Act or Statutes, Ordinances, Regulations or rules made thereunder.

(3) Income from the Endowment Fund may be utilised for development or infrastructure of the University but shall not be utilized to meet out the recurring expenditure of the University.
(4) The amount of the Endowment Fund shall be invested and kept invested under the dissolution of the University in long term securities issued or guaranteed by the State Government or deposited and kept deposited under the dissolution of the University in the interest bearing Personal Deposit Account of the Sponsoring Body in the Government Treasury.

(5) In case of investment in long term security, the certificates of the securities shall be kept in the safe custody of the State Government and in case of deposit in the interest bearing Personal Deposit Account in Government Treasury, the deposit shall be made with the condition that the amount shall not be withdrawn without the permission of the State Government. “

“(9) General Fund: The University shall establish a fund, which shall be called the General Fund to which following shall be credited namely;

(a) fees and other charges received by the University,
(b) any contributions made by the Sponsoring Body
(c) any income received from consultancy and other work undertaken by the University in pursuance of its objectives;
(d) trust, bequests, donations , endowments and any other grants, and
(e) all the sums received by the University.”

52 It light of above discussions, it is clear that amount advanced by the assessee society to Jaipur National University is in accordance with its objectives of setting up of educational institutions and managing and operating them for promotion of education and spreading of systematic education to students. The contribution so made is also in consonance with the Jaipur University Act which require the assessee society to contribute and support the University in its activities, as a sponsoring body on a regular basis.

53. Further, the issue of whether the Jaipur National University qualifies as a specified person under section 13(3) or not, the Coordinate Bench in assessee’s own case for AY 2009-10 has examined the matter at length and has held that Jaipur National University doesn’t qualify as a specified person. We donot see any justifiable reason to deviate from the said view taken by the Coordinate Bench in AY 2009-10.

54. In light of above discussions, we are of the view that contribution to Jaipur National University during the year under consideration is in due compliance with the provisions of section 11 read with section 12 and 13 of the Act. Accordingly, the contribution to Jaipur National University will qualify as due application of income in the hands of the assessee society and the same cannot be a basis for denial of exemption under Section 11 to assessee society.

55. We now come to Revenue’s Ground of Appeal No. 3 where the Revenue has challenged the action of ld CIT(A) in allowing salary expenses to the extent of the following amounts:- 90,450/- (Mrs. Mohini Bakshi), 24,750/- (Mr. M S Bakshi), 29,025/- (Mr. Sandeep Bakshi) and 25,125/- (Mrs. Preeti Bakshi) which is higher than reasonableto persons covered under section 13(3) of the Act and also one of the reasons for denial of exemption under section 11 of the Act.

56. As per the Assessing officer, the salary paid to the members of Bakshi family who are persons referred in section 13(3) of the Act has been increased sharply in comparison to the salary paid during the preceding year and is much higher than those paid to the head of the institutions.The Government allows upgradation of salary of its employees and officers by 3% every year, whereas, the assessee society has increased salary of specified persons ranging from 5.26% to 9.09%, and hence, increment beyond 3% was disallowed and an amount of Rs. 169,350 was added to the income in the hands of the assessee society.

57. Being aggrieved, the assessee society carried the matter in appeal before ld CIT(A) who has held that the basis of allowing only 3% increment by Assessing officer is not backed by any documentary evidence. And in view of the commercial expediency and following the judgments of the Coordinate Bench on the issue for the AY 2003-04 to AY 2008-09, it was held that the Assessing officer was not justified in disallowing the claim of salary expenditure.

58. At the outset, the ld AR submitted that the issued is covered in favour of the assessee society by the orders of Hon’ble ITAT, Jaipur Bench, for assessment years starting A.Y. 2001-02 to A.Y 2008-09. Similar disallowance was made in immediate previous A.Y. 2009-10 which was decided in favour of the assessee society by the ld CIT(A) and no appeal has been filed by Department. Under these facts, the subject issue attained finality and ground is covered. 59. It was further submitted that the A.O. made such disallowances holding that the Government allows upgradation of salary of its employees and officers by 3% every year, whereas, in the case of assessee, the increase in salary ranges from 5.26% to 9.09%. In this regard, it is pertinent to note here that, the comparison made is wrong and arbitrary due to (i) increment in salary cross the sectors, localities, industries, services, nature of job, level of employees in the organization, year of service, other benefit attached, experience, availability of the employees for the particular job etc. cannot be at same percentage. Furthermore, Ld. A.O. neither provided from where, he has picked up this 3% nor has referred any material from where, he has picked up this figure of 3%. Under the facts, it is clear that the action of the Ld. A.O. is arbitrary without any basis and based on surmises, whereas, the increase in salary is quite genuine, moreover, it is quite clear from the comparative details of salary/remuneration paid to the members of the assessee society placed at APB 149that the increment is minor, commensurate with the inflation rate and increase work load due to increase in activities. Ld AO failed to appreciate the service rendered by concerned persons as required by the law and rather compared with unsubstantiated rate of increment of other organization. Thus, the increase in salary cannot be said to be unreasonable.

60. It was further submitted that as the Society is expanding, the work load is also multiplying. The same is evident from the fact that, during the year under consideration total receipts of the assessee society increased by 23.22% in comparison to immediate preceding year. The work load on each and every responsible person of the Samiti has increased very much. The details of work responsibilities of the persons belonging to Bakshi family whose part of salaries is disallowed are placed at APB 150-156. Thus, the members to whom salary is paid do not fall under the purview of section 13(2)(c) of the Income Tax Act, 1961.

61. It was further submitted that all the members of Bakshi family who are entitled to salary are the key persons for the management of all the activities of the assessee society. Therefore, all these expenses are under the commercial expediency of the assessee society and are incurred wholly and exclusively for the purpose of management of society. Moreover, in applying the test of commercial expediency for determining whether expenditure was wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue. In adjudging the reasonableness of the remuneration paid to the employees, the expenditures incurred should be examined from the point of view of a businessman and not of the revenue.

62. To support the above said contentions, the ld AR placed reliance on the following judicial pronouncements:-

- D. N. Sinha (P.) Ltd. v. CIT. (1976) 102 ITR 491, 498 (Cal.)
“Whether another employee would have been available at a less salary or whether the assessee could have managed to produce the same trading results by a cheaper expenditure or not is not the true test about the reasonableness of the expenditure.”
- J.K. Woollen Manufacturers v. CIT (1969) 72 ITR 612 (SC)
“Tribunal cannot determine remuneration which in their view should be paid to an employee. assessee societyis entitled to determine the remuneration which in their view should be paid to an employee.”

From the above judgments, it is clear that the Revenue or the Court cannot justifiably claim toput itself in the armchair of a businessman or in the position of the Board of Directors and assume the role of ascertaining how much is a reasonable expenditure having regard to the circumstances of the case.

63. The issue under consideration relates to remuneration paid to members of the Bakshi family during the year under consideration. It is not in dispute that the members of the Bakshi family are the key personnel of the assessee society and they are responsible for themanagement and day to day affairs of the assessee society. Therefore, it is not in dispute that these persons are covered within the definition of specified persons as defined in section 13(3) of the Act .

64. As per the AO, there has been an increase in the salary paid to members of the Bakshi family which ranges from 5.6% to 9.09 % during the year. As per the AO, the increase in salary is not commensurate with what is allowed in other institutions or in Govt. jobs. As per AO, even Govt. allows increment of salary to its employees and officers by 3% every year and taking the same as bench mark, the increase in salary over and above 3% has been considered as unreasonable and added to the total income of the assessee society. While doing so, the AO has invoked the provisions of section 13(1)(c)(ii) of the Act, which provides that “in the case of firm, trust for charitable purposes or a charitable institutions any income thereof , if any part of such income or any property is during the previous year used or applied directly or indirectly for the benefit of any person referred to in sub-section (3)”. Further, Section 13(2) provides that “without prejudice to the generality of the provisionscontained in clause 13(1)(c), the income or property of the trust or institutions or any part of such income or property shall for the purposes of clause 13(1)(c) be deemed to have been used or applied for the benefit of a person referred to in section 13(2) of the Act if any amount is paid by way of salary , allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institutions for services rendered by that person to such trust or institutions and the amount so paid is in excess of what may be reasonably paid for such services.”

65. It is not in dispute that the members of the Bakshi family have rendered services during the year to the assessee society in terms of management and day to affairs of the society . The only challenge raised by the Revenue is that the remuneration paid to Bakshi family is not commensurate with the services so rendered and the increment during the year over and above 3% has been held unreasonable.

66. For determining the reasonableness of the salary paid to a person what is essential to examine is the relevant qualification and experience which that person holds, and whether the same is commensurate with the work responsibilities he/she has been assigned and for which he/she is responsible for. Further, the reasonableness has to be seen vis-a-vis legitimate needs of the assessee society and benefit derived or accruing to the assessee society as well as fair market value of such services.

67. In the present case, Mrs. Mohini Bakshi who holds the position of Secretary in the assessee Society is a qualified post graduate and holds B.Ed. degree and has under gone Montessary training from London and her area of work responsibilities are as under :

1. Ensuring that the institutions run by the group are progressing towards the objectives laid down by the Mahima Shiksha Samiti.

2. Coordinating and Chairing Executive Committee Meetings, AGMS and School Management Committee Meetings- Monitoring and coordinating of academic functions.

3. Monitoring and Co-ordination of academic functioning of the institutions i.e. of Seedling Public School, Seedling Modern High School and Jaipur National University or other institutions run by the group.

a. Overseeing procedures of admissions and proposing fee structure.

b. Coordinating with Principals and Directors of finalization of syllabi, books curricular and extra curricular activities ( Annual Function, Sports Day, University Cultural Festival, Technical Festival, Convocation etc.). Monitoring their implementation to the members of staff. Coordinating with the Directors and Staff members required.

c. Interacting with the parents in order to satisfy their queries and seeing that their wards are progressing satisfactorily.
d. Co-ordinating with delegating work to the principal and other office bearers on a day to day basis to make sure that work is progressing with maximum efficiency.
e. Evaluating the results of the students and suggesting the changes in the direction of improving performance.
f. Travelling extensively with the country and to other countries to select and expose the staff members to the latest educational technologies and to provide the best opportunities for in service training. The collaborate with universities and schools abroad for academic and cultural exchange programmes to provide global exposure to students.
4. Interacting with the staff members at the human and social level to solve their problems and enhance their quality of life.
5. Co-ordinating with the Samiti
a Keeping the executive informed regarding the working of institutions under the group and their progress in meeting objective of the Samiti.
b. To introduce and forward motions for the development and expansion of the group for example by establishing Jaipur National University.
6. General Administration
a. To make certain that the day-to- day running of the institutions under the group is efficient through a study of all academic records.
b. counselling of students in order to develop good moral values and overall personality development.
7. Undertaking and other work delegated by the Samiti.

68. Mr. Sandeep Bakshi who is a Treasurer of the assessee society holds the Bachelor’sdegree in Commerce, B.Ed. degree and has done MBA. His area of work responsibility are as under:

1. Ensuring that the institutions run by the group are progressing towards the objectives laid down by the Mahima Shiksha Samiti.

2. Planning & implementing programs for the diversification and expansion of the group and collaborating with foreign universities for globalization of education. Travelling extensively within and outside the country for selection of faculty and implementing the latest programs and technology in the institutions of the group.

3. Monitoring and co-ordination of academic functioning of the institutions i.e. schools & colleges run by the group.

a. Coordinating with principals and Directors for finalization of syllabi, books curricular and extra curricular activities ( Annual Function, Sports Day, University Cultural Festival, Technical Festival, Convocation etc.). Monitoring their implementation by the members of staff.

b. Interacting with the parents in order to satisfy their queries and seeing that their wards are progressing satisfactorily.

c. Co-ordinating with and delegating work to the principal and other office bearers on day to day basis to make sure that work progressing with maximum efficiency.
d. Evaluating the results of students and suggesting changes in the direction of improving performance.
e. Facilitating opportunities to expose staff members to the latest educational technologies and providing opportunities for in service training.
f. Interacting with Government bodies, Boards, Private schools associations, with other educational agencies.
4. Interacting with the staff members at the human and social level to solve their problems and enhance their quality of life.
5. Co-ordinating with the Samiti
a. Keeping the executive informed regarding the working of institution under the group and their progress in meeting the objective of the Samiti.
b. To introduce and forward motions for the development and expansion of the group for example by establishing Jaipur Nation University.
c. To undertake for all administrative and managerial tasks associated with the establishment and running of the Jaipur National University.
6. Overseeing the day-to-day administration of the institutions under the group Seedling Public School, Seedling Modern High School and Jaipur National University.
a. Facilitating recruitment of quality personnel at various level including administrative, clerical teaching faculty & security staff. b. Monitoring maintenance of buildings and essential facilities. Coordinating and keeping check on new construction as and where required.
c. Dealing with matters related to tax payments.
d. Handling and legal matters of the group.

e. Finalization of accounts and Balance Sheets including day to day running expenses, fee collection, salaries & infrastructural expenses.

f. Monitoring the efficient handling of the transport requirements of both staff & students.
7. Interacting with the media & organizing the medial campaign for the institutions of the group to show casethe Brad and enhance brand value.
69. Dr. Preeti Bakshi who is a member of the assessee society is a practicing MBBS Doctor. Her area of work responsibility are as under:
1. Ensuring that the institutions run by the group are progressing towards the objectives laid down by the Mahima Shiksha Samiti.
2. Participating actively in Executive Committee Meetings, AGMs and School Management Committee Meetings- Monitoring and coordinating of academic functions of Jaipur National University and Seedling Modern High School.
3. Monitoring and Co-ordination of academic functioning of the institutions i.e. of Seedling Modern High Nursery School and Jaipur National University.

a. Overseeing procedures for admissions and proposing fee structure.

b. Coordinating with principals and Directors for finalization of syllabi, books curricular and extra curricular activities ( Annual Function, Sports Day, University Cultural Festival, Technical Festival, convocation etc.), Monitoring their implementation to the members of staff. Coordinating with the Directors and Staff members required.

c. Interacting with the parents in order to satisfy their queries and seeing that their wards are progressing satisfactorily.

d. Co-ordinating with delegating work to the principal and other office bearers on a day to day basis to make sure that work is progressing with maximum efficiency.
e. Evaluating the results of the students and suggesting the changes in the direction of improving performance.

f. Traveling extensively within the country and to other countries to select and expose the staff members to the latest educational technologies and to provide the best opportunities for in service training. To collaborate with universities and schools abroad for academic and cultural exchange programmes to provide global exposure to students.

4. Interacting with the staff members and the human and social level to solve their problems and enhance their quality of life.
5. Co-ordinating with the samiti
a. Keeping the executive informed regarding the working of institutions under the group and their progress in meeting objective of the Samiti.
b. To introduce and forward motions for the development and expansion of the group for example by establishing Jaipur National University.
6. General Administration
a. To make certain that the day-to-day running of the institutions under the group is efficient through a study of all academic records.
b. Counseling of students in order to develop good moral values and overall personality development.
7. Undertaking any other work delegated by the Samiti.

8. A qualified doctor, Dr. Preeti Bakshi looks after the day to day counselling of the students in the various institutions of the group. She also looks after the medical programme being run by the institution for the medical and dental check up of students

70. Similarly Mr. M.S. Bakshi who is a member of the assessee society holds
a Bachelor degree in Engineering and his area of work responsibility are as under:
1. Ensuring that the institutions run by the group are progressing towards the objectives laid down by the Mahima Shiksha Samiti.
2. To oversee the efficient management of the transport system in the institutions of the Group including fitness of vehicles as per norms, transport arrangement, fees, etc.
3. To undertake tours to study of the institutions of the group.
4. Conducting Bank transactions of the group.
5. Monitoring fee accounts.

71. Now if we look at the remuneration which has been paid to the members of the Bakshi family over the last three years, the figures are as under:

72. On perusal of the salary it is noticed that Mrs. Mohini Bakshi was paid total remuneration of Rs. 16.20 lacs in F.Y. 2009-10as compared to 14.85 lacs in F.Y. 2008-09 wherein the salary has increased by 9.09%. In case of Mr. M.S. Bakshi he has drawn salary of Rs. 7.2 lacs as against Rs. 6.75 lacs last year with an increase of 6.62%. In case of Mr. Sandeep Bakshi who has been paid salary of Rs. 13.5 lacs the increment has been 5.26% vis-a-vis last year and here it is a relevant to note that his salary in F.Y. 2008-09 has in fact gone down vis-a-vis F.Y. 2007-08. In case of Mrs. Preeti Bakshi she has drawn salary of Rs. 4.5 lacs which is the same as the salary which she has drawn in F.Y. 2007-08 and in fact salary in F.Y. 2008-09 has come down to Rs. 4.12 lacs.

73. In our view, given the qualification and the experience of these persons and the fact that these persons have managed the affairs of the society since its inception and they are closely and actively involve in management and day to affairs of the assessee society, the salary and allowances paid to them is reasonable vis-a-vis legitimate needs of the assessee society and benefit derived or accruing to the assessee society. We do not see any justifiable reason to disturb the decision which has been taken by the management of the assessee society in terms of determining the appropriate remuneration payable to these persons. The only scenario where one can think of disturbing the said decision taken by the management of the assessee society is where people holding similar position and having similar experience and qualification have been drawing lesser remuneration compared to what has been paid to these persons by the assessee society. In other words, the test of reasonableness can be invoked where there is contemporary data in terms of identifiable third party transactions in similar area of operation of education. In the instant case, the revenue has not brought on record any such contemporary data in terms of other educational institutions of same scaleand size and having similar strength of student and infrastructure wherein keep managerial person having been paid lesser salary. Further the Courts have held from time to time that the reasonableness of the expenditure is to be adjudged from the point of view of an business man and not of the Revenue. In other words, the reasonableness has to be seen vis-a-vis legitimate needs of the assessee society and benefit derived or accruing to the assessee society and as determined by the assessee society. It is also noted that in the past consistently over the years, the matter relating to reasonableness of the salary paid to the members of the Bakshi family have been raised by the Revenue and the Coordinate Benches have consistently held in favour of the assessee society and have not seen any justifiable basis for such action on the part of the revenue. For one of the years i.e. A.Y. 2009- 10, the Revenue has accepted the order of the Ld. CIT(A) upholding the salary paid to these persons. In the entirety of the facts and circumstances of the case, we are of the view that the salary paid to the members of Bakshi family are commensurate with qualifications and experience as well as area of their responsibility in terms of management and day to day affairs of the assessee society and commensurate vis-a-vis legitimate needs of the assessee society and benefit derived or accruing to the assessee society. In the result, we do not see any violation in terms of section 13 and the disallowance made by the A.O. which has been deleted by the ld. CIT(A) is upheld.In the result, ground No.3 of the Revenue is dismissed.

74. We now refer to Revenue’s ground no. 4 where the Revenue has challenged the action of ld CIT(A) in deleting the addition made on account of foreign travelling expenses despite the facts that the assessee society failed to prove that these expenses were incurred for the objects of the society and one of the reasons for denial of exemption under section 11 of the Act.

75. The Assessing officer noted that expenses of Rs. 5,60,911/- was incurred by Mrs. Mohini Bakshi and M.S. Bakshi for their Germany tour and expenses of Rs. 4,45,042/- was incurred by Smt. Preeti Bakshi towards her China visit. After going through the tour reports submitted by the assessee society, the Assessing officer hold that expenses to the extent of visit to Germany are for the purpose of tour which is incidental to the objectives of the assessee society but expenses incurred on China tour which was undertaken by Smt. Preeti Bakshi were personal in nature, therefore, a clear cut violation of provisions of section 13(1)(c). However, while concluding the matter, the Assessing officer held that whole of the foreign tour expenses of Bakshi family are not justified and an amount of Rs. 8,00,000 out of total foreign tour expenses of Rs. 10,05,953 was disallowed and added to the income of the assessee. The ld CIT(A) followed the order of the Coordinate Bench for AY 2009-10 and allowed the claim of the foreign travel expenses against which the Revenue is in appeal before us.

76. The ld AR submitted that total expenditure incurred during the year on foreign traveling was Rs. 10,05,953/-, out of which, Rs. 5,60,911/- was incurred on Germany Tour of Mrs. Mohini Bakshi and M.S. Bakshi and Rs. 4,45,042/- was incurred on China and Hongkong tour of Smt. Preeti Bakshi. The Ld. A.O. disallowed Rs. 8,00,000/- on adhoc proportionate basis. The action of Ld. A.O. implies that there is no dispute in conducting the tour and also even on partly basis, it is admitted that expenditure was incurred for activities incidental to or for furtherance of the object of the society.

77. It was submitted that the expenditure related to the foreign travel and incurred on account of purchase of air ticket, foreign currency and hotel bookings and these payments have been made to the tour operator through account payee cheque, hence, available for verification. The copy of the Ledger Account for the foreign travel as well as the tour operator containing the details of the payment through bank is placed at APB 158-179.

78. It was submitted that as far as tour of Mrs. Mohini Bakshi and M.S. Bakshi is concerned, Ld. A.O. himself at Page 27 of his order held that the tour of these people are incidental to the objective of the society, therefore, proportionate disallowance with respect to the tour of these persons amounting to Rs. 4,46,073/- is contrary to his own findings.

79. It was submitted that as far as tour of Mrs. Preeti Bakshi is concerned, it was held by AO that amount of foreign currency purchase is not subject to verification. However, in light of the enclosed Ledger Account and the fact that the payment has been made through the banking channel, the allegation is factually incorrect and consequent disallowance is also wrong.

80. It further appears that Ld. A.O. compared the total expenditure incurred on foreign travel by Mrs. Preeti Bakshi, considering that she has carried out one foreign trip as against the fact that she has carried out two foreign trips, while the expenditure incurred by Mrs. Mohini Bakshi and Mr. M.S. Bakshi was in respect of one trip.

81. Under the facts, no such adhoc disallowance can be made by alleging that expenditure is not subject to verification. Further, different judicial authorities are consistently taking the view that adhoc disallowances are not permissible. In this regard, we placed our reliance on following case laws:-

(a) Delta Construction Vs ITO, ITA No. 817/Kol/2012
(b) Asstt. CIT v. Arthur Anderson & Co. [2005] 94 TTJ (Mum.) 736
(c) Syntex (India) Ltd. v. CIT [1996] 130 Taxation 101 (Jp-Trib.)
(d) ACIT V/s B.R. Oil Mills reported at 27 TW 43
(e) ACIT, Circle 1, Faridabad v. TALBROS Engineering Limited
(f) Friends Clearing Agency (P) Ltd. Vs CIT (2011) 332 ITR 0269 (Delhi)
(g) DCIT Vs M/s Janki Corp Limited, ITA No. 601/Jodh/2013, ITAT Jodhpur
(h) T&T Motors Limited Vs ACIT, ITA No. 3161/del/2013, ITAT Delhi
(i) ACIT Vs.Ganpati Enterprises Ltd. ITA No. 6112, ITAT Delhi

82. It was submitted that so far as the facts relating to current year are concerned, Mrs. Mohini Bakshi and Mr. M.S. Bakshi visited the London and Germany in a single trip and Mrs. Preeti Bakshi visited Hongkong and China in two trips. The focus of the visit was to study the education pattern in visiting country’s educational institutions/universities and for exploring the possibility of tie-ups for dual/joint degree programmes/exchange programmes, international conferences, seminars with these educational institutions. As a part of the tour, visits were undertaken to various institutes of higher and technical education. During the tour, visits were made to various schools and universities, details of the same are available in tour reports placed at APB 158- 168.

83. It was submitted that such tours provides an opportunity to visit various institutions of higher and technical education there and one of the most important observations was the multicultural and multinational nature of students and faculty employed in the various colleges/universities and facilities provided. Moreover, the visits to such old, renowned and well-established educational institutions gave valuable insights to the member of assessee societysamiti about how to turn an educational institution in the best possible manner and how to manage the affairs of a large educational institution in an efficient manner. During visits to these educational institutions, talks were held with the management of some of these institutions for a possible future tie-up, student/teachers exchange program and also took/ learned valuable insights/ideas or running the new University i.e. Jaipur National University of which the assessee societySamiti is the sponsoring body. The detailed tour reports alongwith invitation received from Beden-Wurttemberg, Germany and e-mail exchanged are placed at Paper Book Page 180-191.

84. It was submitted that the office bearers who are at the helm of the affairs of such a large and multi-disciplinary educational institutional set up, such visits are required for the following reasons:-

- Office bearers and other persons at the helm of a modern educational institutions ought to be well equipped and advanced in terms of all round knowledge and information about the culture, history, economy, geography, civilization, law & order, educational systems, political scenario, infrastructural, living standards of different classes of people, requirement of different kind of human resources, employment of environment protection measures etc. Such knowledge and information on the one hand makes them a very experienced mentor and counselor for the students but also the teachers of these educational institutions, which in turn, is reflected in imparting better education to the students. Need not be emphasized that a person who is widely travelled, gained first hand all round knowledge of various countries/geographies, is well versed with variety of cultures and encountered several kind of people becomes very enlightened and confident resource person.

- The educational institutions these days, as a part of their curriculum, not only have the lessons and chapters having direct nexus with the Indian context but also the subjects and chapters relating to cultures of various countries, geography of various places, history of various regions, cross country lifestyles, various religions practiced in different parts of the world, global recent affairs and events, international level of art and different streams of science, wildlife, sports, special fields such as space mission centers etc. This is required for all round growth of the students and making them competent to compete with global standards. This also helps in appropriate selection of the branch of education and practice as per the individual interests and capabilities. Unless this is known, the students are left with nominal choices for their career advancements. The aim of any institutions is to produce such caliber which is no less than the best standards in the world. Therefore, the persons who have the duty to provide such education and opportunity have to be first themselves equipped with such information and knowledge.

85. It was further submitted that apart from the above, various visits to the educational institutions around the world also help in inter institutional exchange programs which have really happened in the case of the assessee societyon account of consistent efforts of these office bearers. Apart from Nigeria, Sudan, U.S.A., Dubai, U.K. etc., now the students from Germany, are also coming to the Assessee’s institutions and going from Assessee’s institutions. These visits helped the assessee society in conclusion of certain understandings with foreign educational institutions regarding teachers and students exchange programmes, cultural exchange programmes etc. The evidence and reference appears relating to the same are placed at Paper Book Page 180-191.

86. It was submited that these documents show that the foreign travel visits of the persons who are at the helm of assessee society affairs have substantially benefited the assessee society in respect of its objectives of imparting all round education and producing globally competitive students. Further, such associations with the foreign educational institutions have also helped in increasing the popularity and revenues of the assessee society. Thus, the foreign travel expenditure is justified and reasonable. Since, such details are available during the year under consideration, therefore, the decision of the Tribunal for AY 2003-04, 2004-05, 2006-07, 2007-08, 2008-09 and 2009-10 would be applicable and the decisions of AY 2001-02, 2002-03 and 2005-06 would not be applicable.

87. It was submitted that the expenditure incurred on foreign tours are in conformity with the object of the Society and only for the furtherance of the object of the society. The whole tour was for the purpose of the assessee society and benefitted the Samiti, therefore, in such circumstances, expenditure on foreign visit cannot be disallowed and Ld. CIT(A), recognizing the purpose and necessity has rightly allowed the expenditure.

88. It was further submitted that in no case, Section13(3) or 13(1)(c) of the Act can be invoked on account of disallowance of foreign travel expenses because even if such travel is considered to be perquisites to the persons at the helm of applicant societies affairs, the same commensurate with the fair value of the services provided by them to the assessee society particularly, keeping into consideration that their dedicated services have led to significant growth and popularity of the educational institutions run by the assessee societysociety.Under the above narrated facts and circumstances, the Ld. CIT(A) has rightly deleted the disallowance.

89. We have gone through rival contentions and perused the material on record. The assessee society has incurred an amount of Rs. 5,60,911/- towards foreign travel to Germany by Mrs. Mohini Bakshi and Mr M.S. Bakshi and an amount of Rs. 4,45,042/- towards foreign travelling to China and Hongkong by Smt. Preeti Bakshi. As per AO, the expenses incurred towards visit to Germany are for the purpose which is incidental to the objective of the assessee society but expenses incurred for China tour undertaken by Smt. Preeti Bakshi were personal in nature. Therefore, there was violation of section 13(1)(c) of the Act. Contrary to the above findings, the AO thereafter went ahead and disallowed Rs. 8 lakhs proportionate to the whole of the foreign travelling expenses of Rs. 10,05,953/- incurred on foreign travelling by the Bakshi family.

90. Regarding the visit to Germany, as per the tour report available on record,it is noted that the visit was undertaken in order to strengthen the ties between the Seedling group of institutions and the schools in the region of Freiburg Bad Sackingen, Kandern, Heitershein, Emmendingen, Badan-Wuerttemberg. The seedling group of institutions has an existing student exchange programme with some of these schools, therefore this visit was undertaken to strengthen the student exchange programmes and expand its coverage with the other schools for near future. Further there is an official invitation to visit Germany as part of the student exchange programme from 25th May to 28th June 2009.

91. In respect of the visit by Mrs. Preeti Bakshi whose job responsibilities include to collaborate with Universities and Schools overseas for academic purposes, and to provide global exposure to students as well as to explore areas for students and teacher exchange programme with other schools and universities based overseas, she has visited China and Hongkong. As per the tour report which is available on record and not disputed by the Revenue, she visited China during the period 1 -12 June 2009 to exploreareas of collaboration and potential of English teachers from India being send to China to teach in various schools and colleges. As part of her visit, she visited British International School Beijing, Beijing City International School, and Shaghai American School of Guangzhou. In terms of visit to Hong Kong during 27th December to 2nd January, 2010, she visited Hong Kong as part of the team working actively towards implementation of the International Baccalaureate Programme at the seedling Group of Institutions and as part of that, she visited IB Schools in Hong Kong.

92. It is further noted that as part of these foreign visits which have been undertaken from time to time, the assesses society has been able to put in place a regular and systematic student/teacher exchange programme with schools based overseas wherein there are regular visits by students along with their teachers based in India have visited overseas schools and similarly, students from overseas schools along with their teachers have visited India. The visits therefore have helped strengthened and contributed in the growth and development of students and in turn is in consonance with the overall objectives of the assessee society. Further, it is noted that on similar lines the Co-ordinate Bench in its order dated 31.01.2008 in ITA No. 7932/JP/2006 has allowed the claim of the foreign travelling expenses and the said view has been followed by subsequent Bench in its order dated 11.03.2014 for A.Y. 12009-10 which has been followed by the ld. CIT(A) while deleting the subject disallowance. In the entirety of facts and circumstances of the case, we do not see any infirmity in the order of the ld. CIT(A). Hence, the ground no. 4 of the Revenue is dismissed.

ITA No. 30/JP/16
93. Now coming to assessee society’s appeal, the only ground taken by the assessee society is that the Ld. A.O. has erred in holding that depreciation under section 32 of the Income Tax Act, 1961 is not admissible in respect of the assets on which exemption has been allowed under section 11 of the Income Tax Act, 1961 while applying the income for charitable purpose.

94. As per AO, charging of depreciation on fixed assets tantamount to double deduction on cost of assets, first as an application of income u/s 11(1)(a) and secondly as depreciation u/s 32 of the I.T.Act, 1961. When the cost of fixed assets is claimed as 100% application of funds, it means that the assessee society has claimed 100% diminution in the value of asset for the year when the asset was purchased. When 100% diminution is claimed then the WDV of the asset becomes zero. When the WDV of any asset is zero then no depreciation is allowable.

95. As per ld CIT(A), since the assets on which depreciation claimed has already been granted to assessee society as application therefore any allowance of depreciation shall result into giving double application to the extent of depreciation.

96. The ld AR drawn our attention to the amendment in the statute whereby sub section (6) was inserted to section 11 by the Finance (No. 2) Act, 2014, which is reproduced as follows:-

“(6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purpose the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.”
97. The applicability of subsection 6 to section 11 has been discussed in the memorandum explaining Finance Bill 2014, wherein it is stated that “The said amendment will take effect from 1st April, 2015 and will accordingly, apply in relation to the assessment year 2015-16 and subsequent years.” Thus, with the insertion of said sub-section (6), it was submitted that the controversy has been settled and upto A.Y. 2014-15, income can be determined after deduction or allowance of deprecation in respect of assets, acquisitions of which has been claimed as an application of income. Thus, the disallowance of depreciation made by Ld AO and sustained by Ld. CIT(A) deserves to be deleted.

98. In support, the ld AR placed reliance on following case laws:-

A) In the case of DIT vs. Indrprastha Cancer Society vide order dated 18.11.2014 wherein the Hon’ble Delhi High Court has observed that “the newly enacted sub-section (6) to section 11, would change the legal position after 01.04.2015, not for the year prior to this.”

B) Hon’ble Jaipur ITAT in the case of Santokbha Trust Vs ITO vide order dated 13.03.2015 in ITA No. 241 & 242/JP/2014 held that as under:-

“2.8 Apropos Revenue's appeals also, we find merit in the arguments of the ld. Counsel for the assessee that the change in law has been specifically brought with prospective effect from 01-04-2015 and is not retrospective. Thus the old position settled by judgment cited (supra) in this behalf i.e. depreciation remains intact. In view thereof, we find no infirmity in the order of the ld. CIT(A) on this issue allowing depreciation. Hence, the appeals of the Revenue are dismissed.”

C) Hon’ble Karnataka High Court in the case of DIT Vs. Al- Ameen Charitable Fund Trust, IT Appeal No. 62 and 414 of 2010 vide order dated 22.02.2016 has held as under:-

“21. Section 11(6) inserted with effect from 1.4.2015 by Finance Act No.2/2014, reads as under:

“(6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.”
22. The plain language of the amendment establishes the intent of the legislature in denying the depreciation deduction in computing the income of Charitable Trust is to be effective from 1.4.2015. This view is further supported by the Notes on Clauses in Finance [No.2] Bill, 2014, memo explaining provisions and circulars issued by the Central Board of Direct Taxes in this regard. Clause No.7 of the Notes on Clauses reads thus:

“Clause 7. of the Bill seeks to amend section 11 of the Income-tax Act relating Income from property held for charitable or religious purposes. The existing provisions of the aforesaid section contain a primary condition that for grant of exemption in respect of income derived from property held under trust, such income should be applied for the charitable purposes in India, and where such income cannot be so applied during the previous year, it has to be accumulated in the prescribed modes. It is proposed to insert sub-sections (6) and (7) in the said section so as to provide that-

(i) where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without, any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in any previous year, and

(ii) where a trust or an institution has been granted registration under clause (b) of sub-section (1) of section 12AA or has obtained registration at any time under section 12A [as it stood before is amendment by the Finance (No.2) Act, 1996] and the said registration is in force for any previous year, then, nothing contained in section 10 [other than clause (1) and clause (23C) thereof] shall operate to exclude any income derived from the property held under trust from the total income of the person in receipt thereof for that previous year.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years”.

The Memo explaining the provisions in Finance (No.2) Bill, 2014 reads thus:

“The second issue which has arisen is that the existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law. The provisions need to be rationalized to ensure that double benefit is not claimed and such notional amount does not excluded from the condition of application of income for charitable purpose”.

23. Paragraphs 7.5, 7.5.1, 7.6 of Central Board of Direct Taxes Circular reported in 371 ITR 22 makes it clear that the said amendment shall take effect from 1.4.2015 and will accordingly apply in relation to the assessment year 2015-16 and subsequent assessment years.

24. The Constitution Bench of the Apex Court in Vatika Township (P.) Ltd.’s case (supra), had laid down general principles concerning retrospectivity in Paragraphs 33 and 34, and the same is extracted hereunder:

“33. We would also like to point out, for the sake of completeness, that where a benefit is conferred by a legislation, the rule against a retrospective construction is different. If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In Government of India v. Indian Tobacco Association, the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay v. State of Maharashtra. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. However, we are confronted with any such situation here.

34. In such cases, retrospectively is attached to benefit the persons in contradistinction to the provision imposing some burden or liability where the presumption attaches towards prospectivity. In the instant case, the proviso added to Section 113 of the Act is not beneficial to the assessee. On the contrary, it is a provision which is onerous to the assessee. Therefore, in a case like this, we have to proceed with the normal rule of presumption against retrospective operation. Thus, the rule against retrospective operation is a fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication. Dogmatically framed, the rule is no more than a presumption, and thus could be displaced by out weighing factors”.

25. The Apex Court in the said judgment, while interpreting the proviso, whether to be applied retrospectively or prospectively, has considered the Notes on Clauses appended, the Finance Bill and the understanding of the Central Board of Direct Taxes in this regard. The Apex Court has also taken cognizance of the fact that the legislature is fully aware of 3 concepts insofar as amendments made to a statute:

(i) prospective amendments with effect from a fixed date;
(ii) retrospective amendments with effect from a fixed anterior date; and
(iii) clarificatory amendments which are prospective in nature.

Keeping in view, the aforesaid principles enunciated by the Apex Court, in Vatika Township (P.) Ltd.’s case(supra), it would be safely held that Section 11(6) of the Act is prospective in nature and operates with effect from 01.04.2015. This is further clarified when compared with certain other provisions which have been made retrospectively in the same Finance Act.”

99. The subject issue is no more res integra. As per Hon’ble Karnataka High Court, the plain language of the amendment by way of insertion of subsection 6 to section 11 establishes the intent of the legislature in denying the depreciation deduction in computing the income of Charitable Trust prospectively with effective from 1.4.2015. This view is further supported by the Notes on Clauses in Finance [No.2] Bill, 2014, memo explaining provisions and circulars issued by the Central Board of Direct Taxes in this regard.

100. Further, recently, the Hon’ble Rajasthan High Court in the case of CIT vs. Krishi Upaj Mandi Samiti reported in 388 ITR 605 (Raj) has held as under:

(5) The assessee is a charitable institution registered u/s 12A of the Act, 1961 and 100 per cent capital expenditure was availed by it against the asset concerned, i.e. a building. Section 32(1) of the Act, 1961 provides for deprecation in respect of building, plant and machinery owned by the assessee and used for business purposes. Income of the charitable trust like the present assessee derives from the depreciable heads is also liable to be computed on commercial basis, however, while doing so it is to be kept in mind that ultimately the assessee is a charitable institution and its income for tax purposes is required to be determined by taking into consideration provisions of section 11 of the Act of 1961 after extending normal depreciation and deductions from its gross income. In computing the income of a charitable institution/trust depreciation of assets owned by such institution is a necessary deduction on commercials, hence, the amount of depreciation has to be deducted to arrive at the income available.

(6) In view of the discussions made above, we find ourselves in agreement with the view taken by the Bombay High Court in DIT (Exemptions) vs. Framjee Cawasjee Institute (supra) and the Cit vs. Institute of Banking (supra). The substantial question framed in the instant matter , thus is answered in the terms that the Income Tax appellate Tribunal rightly allowed depreciation claimed by the assessee society on capital assets for which capital expenditure was already given in the year under consideration.”

101. The ld DR submitted that the Revenue has not accepted the said above decision of the Hon’ble Rajasthan High Court and a prayer for special leave petition against the said order has since been admitted by the Hon’ble Supreme Court. In his rejoinder, the ld AR submitted that the admitting of an SLP against the order of Hon’ble Rajastahn High Court is no bar for the Tribunal and any of the lower authorities to follow such binding decision of the jurisdictional High Court unless the operation of such order has been stayed by the Hon’ble Supreme Court.

102. Respectfully following the decision of Hon’ble Karnataka High Court wherein the amendment to section 11 (6) has been held prospective in nature with effect from 01-04-2015 and the Hon’ble Rajasthan High Court decision (supra), the depreciation is held admissible to the assessee society under the provisions of section 32 of the Act in respect of assets on which exemption has been allowed under section 11 of the Act. The ground taken by the assessee society is thus allowed.

103. In light of above discussions and in the entirety of facts and circumstances of the case, taking into consideration the rival contentions advanced by both the parties, Hon’ble Supreme Court decision in case of Queens’s educational society and others, various other High Courts decisions referred supra as well as orders passed by the Coordinate Benches in earlier years, the assessee society is held eligible for exemption under section 11 read with section 12 and 13 of the Act. The payment of salary to persons specified in section 13(3), incurrence of foreign travel expenditure, contribution to Jaipur National University and additions to fixed assets during the year qualify for due application of income in accordance with the above said provisions. In the result, all the grounds taken by the Revenue are dismissed and ground taken by the assessee society is allowed.

ITA No. 106 & 31/JP/16
104. In ITA No. 106/JP/16 and 31/JP/16, both parties agreed that the facts are pari-materia and similar grounds of appeal have been raised by the Revenue as well as assessee society as in ITA No. 105/JP/16 and 30/JP/16 decided supra. In view of the same, our observations and decision in ITA No. 105/JP/16 and 30/JP/16 shall apply mutatis-mutandis to these appeals as well.

In the result the appeals filed by the Revenue are dismissed and the appeals filed by the assessee society are allowed in respect of both the years.