B.R. Baskaran, Accountant Member - The appeal filed by the assessee is directed against the order dated November 18, 2013, passed by the learned Commissioner of Income-tax (Appeals), Tiruchirapalli and it relates to the assessment year 2010-11. The assessee is aggrieved by the decision of the learned Commissioner of Income-tax (Appeals) in confirming the addition of Rs. 47.71 lakhs made by the Assessing Officer.
2. The facts relating to the issue are stated in brief. The assessee is a society and it is running an educational institution under the name and style of "Vairams Kindergarten Society" in Pudukottai. The school is conducting classes for LKG and UKG standards. The society filed its return of income for the year under consideration by declaring "nil" income. The assessee had claimed exemption of its entire income under section 10(23C)(iiiad) of the Income-tax Act, 1961 (in short 'the Act'). The return of income was taken up for scrutiny by the Assessing Officer. The Assessing Officer noticed that the assessee has obtained permanent account number -AAGFV4771P which normally relates to partnership firms. Further, the Assessing Officer also noticed that the assessee has not obtained registration under section 12A of the Act and hence it is not eligible to claim exemption under section 11 of the Act. On scrutinising the balance-sheet, the Assessing Officer noticed that the assessee has advanced a sum of Rs. 47.71 lakhs to a sister-trust named "Vairams Matriculation Higher Secondary School". The assessee explained that the above said amount was given for the purpose of construction of building. Later, the assessee also submitted that the amount was advanced for using the building belonging to Vairams Matriculation Higher Secondary School. The assessee admitted that the amount was paid by way of account transfer, there was no plan approval for the building and further, the assessee did not enter into any agreement with other society. The Assessing Officer further noticed that the assessee had given such advances in subsequent year also. According to the Assessing Officer, the funds so given to other society was lying unused and idle. Accordingly, the Assessing Officer expressed the view that the amount so diverted by the assessee is liable to be taxed as income of the assessee for the following reasons:
| (a) |
Advancing of money to another trust does not amount to application of income for the objectives of the society. |
(b) |
The same cannot be considered to be an approved investment as set out in the Income-tax Act. |
(c) |
The exemption under section 10(23C)(iiiad) of the Act cannot be given as the society has diverted Rs. 47.71 lakhs for non-charitable purposes. |
3. The Assessing Officer also noticed that both the societies are having common members/relatives of members in their respective management committee. Thus, by placing reliance on the decision of the hon'ble Madras High Court in the case of CIT v. V.G.P. Foundation [2003] 262 ITR 187/[2004] 134 Taxman 663, the Assessing Officer held that the amount of Rs. 47.71 lakhs (referred above) is to be treated as income of the assessee and accordingly he assessed the same in the hands of the assessee.
4. The learned Commissioner of Income-tax (Appeals) also confirmed the same with the following observation :
"9. The assessee is a charitable institution registered under the Societies Registration Act of Tamil Nadu running an education institution by name Vairams Kindergarten Society. The appellant filed return of income on October 18, 2010 admitting nil income by claiming exemption under section 10(23C)(iiiad) of the Income-tax Act. Being an education institution with receipts less than the prescribed limit of Rs. 1 crore. During the course of assessment proceedings the appellant-society gave an advance to another educational institution, i.e., Vairams Matriculation Higher Secondary School. The appellant is conducting kindergarten classes in the building owned by Vairam Matriculation Higher Secondary School without paying any rent. The appellant-society advanced money to Vairams Matriculation Higher Secondary School for constructing additional building for its purpose of carrying out educational activities. The total advance given by the appellant-society is at Rs. 47,71,056 as of March 31, 2010, these advances are not interest bearing. However, the Assessing Officer assessed the entire outstanding amount advanced to the above school as income of the appellant-institution. The Assessing Officer has treated the advance as investment by invoking the provisions of section 13(1)(d), treating the same as diversion of funds and placed his reliance on the decision of the Madras High Court reported in CIT v. V.G.P. Foundation [2003] 262 ITR 187 (Mad.). The total advances outstanding as on March 31, 2010 is at Rs. 47,71,056. Thus the Assessing Officer has treated that the funds have been diverted for other purposes than for charitable purposes. Thus the funds have been lying unused and idle with the other society, advancing money or transferring money to another trust does not amount to application of funds for the objectives of the society. Further, it cannot be considered as an approved investment in terms of provisions of section 13 of the Income-tax Act. Over and above the assessee's society has neither registered under section 12A or under section 10(23C). Thus the Assessing Officer has denied the exemption claimed under section 10(23C) and treated the entire advance as income of the assessee. Since the assessee himself has accepted that the society is not registered under section 12AA of the Income-tax Act as well as section 10(23C) of the Income-tax Act no exemption can be allowed in respect of the advances diverted to another society. Therefore the addition made by the Assessing Officer on account of diversion of funds treating the same as income of the appellant. Hence, the contentions of the appellant are rejected dismissing the appeal filed by the appellant thereby confirming the addition made by the Assessing Officer."
5. The learned authorised representative appearing for the assessee submitted that the assessee-society is running an educational institution and its gross receipt was less than the limit prescribed for seeking approval under section 10(23C) of the Act. Accordingly, he submitted that the assessee had claimed exemption under section 10(23C)(iiiad) of the Act. He further submitted that the Assessing Officer has proceeded to assess the advance so given by the assessee by applying the provisions of sections 11 to 13 of the Act. The learned authorised representative invited our attention to the decision of the hon'ble Madras High Court rendered in the case of CITv. Seethakathi Trust [2007] 295 ITR 520, wherein it was held that the provisions of section 11(5) of the Act are not applicable to a trust claiming exemption under section 10(22) of the Act. The learned authorised representative submitted that the provisions of section 10(22) has since been deleted and in its place the present section 10(23C)(iiiad) have been inserted. Accordingly he submitted that the decision rendered in the case of Seethakathi Trust shall be applicable to the assessee also. The learned authorised representative invited our attention to the decision of the hon'ble Delhi High Court rendered in the case of DIT (Exemption) v. ACME Educational Society [2010] 326 ITR 146, wherein it was held that the amount advanced by one educational society to another educational society cannot be considered as violation of provisions of section 13(1)(d) read with section 11(5) of the Act, since the interest-free loan given by the assessee-society was neither an investment nor a deposit. The learned authorised representative submitted that the assessee herein has also given only advance to another educational society and hence the same cannot be considered as "investment" or "deposit".
6. The learned authorised representative submitted that the objectives of the assessee- society, inter alia, includes "to aid and assist in the establishment, etc., of educational institutions". The assessee has given impugned advance to another educational society for the purpose of construction of the building and the same would amount to "aiding and assisting" in the establishment, carrying on, maintenance, development, improvement and extension of institutions providing all kinds of education. Accordingly, he submitted that the assessee has advanced money in accordance with its objects and hence, the tax authorities are not justified in holding that the impugned advance amount to utilisation of funds for non-charitable purposes. He further submitted that the assessee has not claimed the advance given to the other society as an application of income.
7. The learned authorised representative further submitted that the assessee has been making such kind of advances since past several years. However, the Assessing Officer has assessed the entire amount of advance outstanding as on March 31, 2010 as income of the assessee. The learned authorised representative submitted that the assessee is maintaining running account with the other society and balance as on April 1, 2009 was Rs. 47.14 lakhs and the balance as on March 31, 2010 was Rs. 47.65 lakhs and hence, the Assessing Officer was not justified in assessing the entire outstanding amount as income of the year under consideration.
8. On the contrary, the learned Departmental representative submitted that the assessee has been giving contradictory statements with regard to nature of accounts. Initially the assessee submitted that the amount was given to other society for the purpose of utilising the same for construction of the building. However, the assessee could not prove the fact of construction being carried on by the other society by furnishing necessary details. At the later stage, the assessee took a different stand and stated that the advance was given for making use of the building belonging to the other society. Accordingly, the learned Departmental representative submitted that the assessee is giving explanations which are contradictory to each other. The learned Departmental representative placed reliance on the decision rendered by the hon'ble Punjab and Haryana High Court in the case of St. Francis Convent School v. CBDT [2012] 67 DTR 251 and also the decision rendered by the hon'ble Madras High Court in the case of V.G.P. Foundation (supra).
9. In the rejoinder, the learned authorised representative submitted that the decision was rendered by the hon'ble Madras High Court in the case of V.G.P. Foundation (supra) in the context of funds given to a sister concern, which was a private limited company of which the trustees of the assessee were also directors. However, in the instant case, the assessee, being an educational institution, has advanced money to another charitable society registered under section 10(23C)(vi) of the Act and further the recipient society is also an educational institution. He submitted that the decision rendered in the case of St. Francis Convent School (supra) is also not applicable, since the funds were diverted by the assessee therein to the Diocese of Jalandhar.
10. We have heard the rival contentions and perused the record. The undisputed facts are that the assessee is a society and it is running a school having LKG and UKG classes and it is not registered under section 12A of the Act. Accordingly, the assessee cannot claim exemption under section 11 of the Act. According to the learned authorised representative, the gross receipts of the assessee was less than one crore and hence it claimed exemption under section 10(23C)(iiiad) of the Act. The learned authorised representative furnished a copy of the return of income filed by the assessee before us. A perusal of the same would show that the assessee has shown an income of Rs. 16,00,500 under the head "Income from business or profession" and claimed the same as exempt under section 10(23C)(iiiad) of the Act. Accordingly it has disclosed nil income. We notice from the assessment order that the Assessing Officer has accepted the claim for exemption under section 10(23C)(iiiad) of the Act with regard to the abovesaid income.
11. The dispute before us surrounds the amount of Rs. 47.71 lakhs, which was shown as the amount due from another society, which happened to be managed by the same group of people. We have already noticed that the Assessing Officer has assessed the abovesaid amount as income of the assessee on three grounds. The Assessing Officer has taken the view that the amount advanced by the assessee was not an approved mode of investment. However, a perusal of the provisions of section 10(23C), more particularly the third proviso, would show that the restriction placed under section 11(5) of the Act with regard to the form or mode of investment is not applicable to the educational institution claiming exemption under section 10(23C)(iiiad) of the Act. Hence, the observation of the tax authorities that the impugned advance is not an approved investment is not in accordance with the requirement of law. Hence, the said view taken by the Assessing Officer cannot be the basis for assessing the advance amount, referred to above, as income of the assessee.
12. Next, the Assessing Officer has expressed the view that the advance so given by the assessee cannot be considered as an application of income. A perusal of the return of income filed by the assessee would show that the assessee has not claimed the same as application of income. Hence, the said observation made by the Assessing Officer also fails.
13. The Assessing Officer has finally stated that the claim of exemption under section 10(23C)(iiiad) is not accepted because the society has diverted the sum of Rs. 47,71,056 for purposes which are not charitable in nature. First of all, we notice that the Assessing Officer has failed to refer to any of the provisions of the Act, under which he is forming such an opinion, i.e., he has not shown as to how the assessee has violated any of the provisions of the Act, which would warrant rejection of claim of exemption made under section 10(23C)(iiiad) of the Act. On the contrary, the contention of the assessee is that the amount so advanced to another educational institution falls within the object of the assessee society. The said contention of learned authorised representative could not be rebutted by the Revenue. Hence the said reasoning given by the Assessing Officer also fails.
14. In view of the foregoing discussions, we are of the view that the Assessing Officer has brought to tax the amount of Rs. 47,71,058 in the hands of the assessee without the authority of law. Accordingly, we are of the view that the learned Commissioner of Income-tax (Appeals) was not justified in confirming the assessment of the abovesaid amount. Hence, we are unable to sustain the order of the learned Commissioner of Income-tax (Appeals) on this issue. Accordingly, we set aside the order of learned Commissioner of Income-tax (Appeals) and direct the Assessing Officer to delete the assessment of Rs. 47,71,058 referred to above.
15. In the result, the appeal filed by the assessee is allowed.