ORISSA HIGH COURT: CUTTACK I.T.A.No.11 OF 2012 In matter of application under Section 260A of Income Tax Act, 1961. Commissioner of Income Tax, Ayakar Bhawan, Rajaswa Vihar, Bhubaneswar, Dist: Khurda Appellant -Versus- M/s Silicon Institute of Technology, Silicon Hills, Patia, Bhubaneswar, Dist: Khurda Respondent For Appellant : Mr.Akhil K. Mohapatra Sr. Standing Counsel, Income Tax For Respondents : Mr.J.Sahoo, Sr. Advocate M/s. H.M.Dhal, P.K.Mohanty, & B.B.Swain P R E S E N T: HONOURABLE SHRI JUSTICE I.MAHANTY AND HONOURABLE SHRI JUSTICE B.N. MAHAPATRA Date of Judgment: 10.11.2014 B.N.Mahapatra,J. present Income Tax Appeal under section 260A of Income Tax Act, 1961 (hereinafter referred to as IT Act ), which arises out of order passed in ITA No.316/CTK/2011 and C.O. No.18/CTK/2011 dated 23.09.2011 passed by Income Tax Appellate Tribunal, Cuttack Bench, Cuttack for assessment year 2007-08, has been filed at instance of Commissioner of Income Tax, Ayakar Bhawan, Rajaswa Vihar, Bhubaneswar, Dist. Khurda. 2 2. According to appellant, following substantial questions of law are involved in present Income Tax Appeal: (i) Whether in facts and circumstances of case and in view of decision of Hon ble High Court of Uttarakhand in case of CIT Vs. Queens Educational Society reported in 319 ITR 160, learned Income Tax Appellate Tribunal is correct in law in holding that assessee Trust is not running with profit motive and is eligible for exemption under Section 11 of I.T. Act, 1961? (ii) Whether in facts and circumstances of case and when assessee Trust is not eligible for exemption under Section 11 of Act, learned ITAT is correct in law in holding that capital expenditure incurred by assessee Trust shall be allowed as application of income? 3. facts leading to filing of present appeal are that assessee is Trust registered under Section 12A of IT Act with effect from 02.09.2002. It filed its return of income on 31.10.2007 for assessment year 2007-08 disclosing its total loss at Rs.3,96,54,653/-. On 03.12.2009, Assessing Officer completed assessment under Section 143(3) of IT Act determining total income at Rs.03,06,53,610/-. In assessment order, Assessing Officer did not allow benefit of exemption under Section 11 of IT Act to Trust on ground that assessee-Trust is making systematic profit year after year; incurred capital expenditure of Rs.51,24,483/- and diverted income to capital funds amounting to Rs.28,75,204/- which did not amount to application of income as per 3 Section 11(1) of IT Act. Depreciation of Rs.95,90,956/- was also added to income of Trust. To support his view, Assessing Officer relied upon decision of Uttarakhand High Court in case of Queens Education Society (supra). 4. Being aggrieved by assessment order, assessee went in appeal before Commissioner of Income Tax (Appeal), who after considering submissions of assessee, allowed appeal by deleting all additions made in assessment order and directed Assessing Officer to allow benefit of exemption to trust under Section 11 of IT Act. 5. Against order of CIT(A), Department went in appeal before Income Tax Appellate Tribunal, Cuttack Bench, Cuttack (for short, ITAT ) and learned ITAT in its order dated 23.09.2011 in ITA No.316/CTK/2011 has upheld order of CIT(A). Hence, present appeal. 6. Mr. A. Mohapatra, learned Senior Standing Counsel for Income Tax Department, submitted that Trust deed of assessee never had condition that assessee will run institution and invest surplus to expand its activity out of fees collected from students who are pursuing their course. Assessee s activity of collecting fees from students as their course fee for studying in assessee s institution do not find place in Trust deed, aims and objectives or notes on activity, which had been submitted to CIT for purpose of registration under Section 12AA. Therefore, registration granted in favour of assessee by CIT on premise of 4 Trust deed, aims and objectives and notes on activity has no relevance regarding real activity carried on by assessee after obtaining registration. Year after year, assessee had been generating profit and creating fixed assets. For said purpose, huge amount of loans have been availed from Banks and financial charges had been claimed as expenditure out of students fees. As assessee had been collecting fees much more than amount required for imparting education, collection of said excess amount fits to definition of capitation fees, which is illegal. Hon ble Supreme Court held that Educational Institutions are set up for charitable purpose and banned collection of capitation fees and such decision of Hon ble Supreme Court is binding on all authorities. order of ITAT is not based either on facts or correct application of law. Placing reliance on judgment of Jharkhand High Court in case of Queens Education Society (supra), Mr. Mohapatra submitted that reasons given by Tribunal for granting exemption to respondent Educational Institution is not sustainable in law. Therefore, Mr. Mohapatra prayed to admit Tax Appeal for adjudication on substantial questions of law as stated hereinabove. 7. Mr.J. Sahoo, learned Senior Advocate appearing for respondent-Educational Institution submitted that no substantial question of law is involved in case. Tribunal is fully justified in granting exemption under Section 11 of IT Act, 1961 for assessment year 2007-08 for reasons stated therein. learned Assessing Officer is not correct in applying ratio of Queens Education 5 Society (supra), as that case is not in context of Organizations registered under Section 11 of IT Act. said judgment was rendered in context of Section 10(23C) of IT Act. Non-applicability of ratio of Queens Education Society (supra) has been considered and decided by number of High Courts and Tribunals and Revenue has not been able to sustain its plea even in single judgment in light of plethora of decisions in favour of assessee. There is strong reason for not applying ratio of Queens Education Society (supra) in case of appellant. In support of above contentions, Mr. Sahoo relied upon decisions of different High Courts, viz., Pinegrove International Charitable Trust vs. Union of India, (2010) 188 Taxman 402 (Punj & Har); S.T. Lawrence Educational Society (Regd.) vs. CIT, (2011) 197 Taxman 504 (Delhi); Vanita Vishram Trust vs. Chief CIT, (2010) 327 ITR 121 (Bombay); Maa Saraswati Educational Trust vs. Union of India, (2010) 194 Taxman 84 (Himachal Pradesh); Kashtriya Sabha Maharana Pratap Bhawan vs. Union of India, (2010) 194 Taxman 442 (Punj & Har.); Sanatan Dharam Shiksha Samiti vs. Chief Commissioner of Income Tax, Panchakula (Writ Petition No.4155 of 2011 disposed of on 03.10.2011 by Punjab & Haryana High Court); Commissioner of Income Tax vs. Manav Mangal Society, (2009) 184 Taxman 502 (Punj & Har.) Placing reliance upon judgment of Hon ble Supreme Court in case of CIT Bangalore Vs. B.C. Srinivas Setty and others (1981) 128 ITR 294 (SC) and CIT Vs. P J Chemicals (1994) 210 ITR 830 (SC), it was submitted that pre-ponderance of judicial views in favour of assessee should be honoured. Placing reliance upon judgment 6 of Punjab & Haryana High Court in case of Pinegrove International Charitable Trust (supra), Mr. Sahoo submitted that assessee having valid registration under Section 12AA is required to be assessed by applying all provisions of Section 11 and 13 of IT Act. Assessing Officer having not done so, order is bad in law. Mr.Sahoo further submitted that since registration was not withdrawn on date of assessment order, income of assessee was exempted in entirety. learned Assessing Officer is wrong in holding that capital expenditure is not applicable for charitable purpose. Concluding his argument, Mr. Sahoo submitted for dismissal of appeal. 8. Before proceeding to examine whether Question Nos. (i) and (ii) as raised by Revenue in present case are substantial questions of law or not, it would be appropriate to know as to what is substantial question of law . 9. Hon ble Supreme Court in case of Sir Chunilal V. Mehta and Sons Ltd. v. Century Spinning & Manufacturing Co. Ltd., AIR 1962 SC 1314, held as under: 6. .....The proper test for determining whether question of law raised in case is substantial would, in our opinion, be whether it is of general public importance or whether if directly and substantially affects rights of parties and if so whether it is either open question in sense that it is not finally settled by this Court or by Privy Council or by Federal Court or is not free from difficulty or calls for discussion of alternative views. If question is settled by highest court or general principles to be applied in determining question are well settled and there is mere question of applying those principles or that plea raised is palpably absurd question would not be substantial question of law. 7 10. Hon ble Supreme Court in case of Kondiba Dagadu Kadam v. Savitribai Sopan Gujar and others, (1999) 3 SCC 722, held as under: 6. If question of law termed as substantial question stands already decided by larger Bench of High Court concerned or by Privy Council or by Federal Court or by Supreme Court, its merely wrong application on facts of case would not be termed to be substantial question of law. Where point of law has not been pleaded or is found to be arising between parties in absence of any factual format, litigant should not be allowed to raise that question as substantial question of law in second appeal. mere appreciation of facts, documentary evidence or meaning of entries and contents of document cannot be held to be raising substantial question of law. But where it is found that first appellate court has assumed jurisdiction which did not vest in it, same can be adjudicated in second appeal, treating it as substantial question of law. Where first appellate court is shown to have exercised its discretion in judicial manner, it cannot be termed to be error either of law or of procedure requiring interference in second appeal. This Court in Reserve Bank of India v. Ramkrishna Govind Morey2 held that whether trial court should not have exercised its jurisdiction differently is not question of law justifying interference. 11. Now coming to case at hand, undisputed facts are that assessee is Trust registered under Section 12A of IT Act with effect from 02.09.2003. main object of respondent is to impart education. Year after year respondent-assessee has been generating profit and creating fixed assets. assessee claims capital expenditure as application of income in terms of Section 11 of IT Act. On date of assessment, registration granted under Section 12AA was not withdrawn. learned Assessing Officer held that 8 respondent-educational institution is not entitled to exemption under Section 11 of I.T. Act but both first appellate authority and learned ITAT held that respondent-educational institution is eligible for exemption under Section 11 of Act. 12. In this context, it would be relevant to refer to following decisions of Hon ble Supreme Court. five-Judge Constitution Bench of Hon ble Supreme Court in case of Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association, (1979) 13 CTR (SC) 378, dealt with question of interpretation of clause (15) of Section 2 of Act. In said case it has been held as follows: .... test which has, therefore, now to be applied is whether predominant object of activity involved in carrying out object of general public utility is to subserve charitable purpose or to earn profit. Where profit making is predominant object of activity, purpose, though object of general public utility, would cease to be charitable purpose. But where predominant object of activity is to carry out charitable purpose and not to earn profit, it would not lose its character of charitable purpose merely because some profit arises from activity. exclusionary clause does not require that activity must be carried on in such manner that it does not result in any profit. It would indeed be difficult for person in charge of trust or institution to so carry on activity that expenditure balances income and there is no resulting profit. That would not only be difficult of practical realization but would also reflect unsound principle of management. We, therefore, agree with Beg, J. when he said in Sole Trustee, Loka Shikshana Trust Vs. CIT 1975 CTR (SC) 281 : (1975) 101 ITR 234 (SC), 256 that: If profits must necessarily feed charitable purpose under terms of trust, mere fact that activities of trust yield profit will not alter charitable character of trust. test now is, more clearly than in past, genuineness of purpose tested by obligation created to spend money exclusively or essentially on charity . 9 13. aforesaid view has been cited with approval by Hon ble Supreme Court in case of American Hotel & Lodging Association Educational Institute Vs. CBDT & Others, (2008) 301 ITR 86 (SC). 14. Hon ble Supreme Court in case of Aditanar Educational Institution etc. vs. Add. CIT (1997) 139 CTR (SC) 7 held that in case of educational institution, after meeting expenditure, if any surplus results incidentally, then institution will not cease to be one existing solely for educational purposes and when surplus is utilized for educational purpose, i.e., for infrastructure development it cannot be said that institution was having object to make profit. Thus, surpluses used for management and betterment of institution could not be termed as profit. 15. Strong reliance has been placed by Revenue on judgment of Uttarakhand High Court in Queens Education Society (supra) by learned Senior Standing Counsel for appellant to canvas that Trust is running with profit motive and therefore it is not eligible for exemption under Section 11 of IT Act. decision in case of Queens Education Society (supra) is misplaced by Department. said case is not applicable to case of respondent-educational Society claiming exemption under Section 11 as judgment in case of Queens Education Society (supra) was delivered in context of Section 10 (23C) (iii ad) and not in context of availing exemption under Section 11 of I.T. Act by institutions registered under Section 12A/12AA of I.T. Act. 10 16. It may be profitable to extract here following relevant observations of Punjab and Harayana High Court in case of Pinegrove International Charitable Trust (supra):- We have not been able to persuade ourselves to accept view expressed by Division Bench of Uttarakahand High Court in case of Queens Educational Society (supra). There are variety of reasons to support our opinion. Firstly, scope of third proviso was not under consideration, in as much as, case before Uttarakhand High Court pertained to section 10(23C)(iii ad) of Act. third proviso to section 10(23C)(vi) is not applicable to cases falling within purview of section 10(23C) (iii ad). Secondly, judgment rendered by Uttarakhand High Court runs contrary to provisions of section 10(23C)(vi) of Act including provisos thereunder. Section 10(23C)(vi) of Act is equivalent to provisions of section 10(22) existing earlier, which were introduced w.e.f. 1-4- 1999 and it ignores speech of Finance Minister made before introduction of said provisions, namely, section 10(23C) of Act [See observations in American Hotel & Lodging Association, Educational Institute s case (supra)]. Thirdly, Uttarakhand High Court has not appreciated correctly ratio of judgment rendered by Hon ble Supreme Court in case of Aditanar Educational Institution (supra) and while applying said judgment including judgment which had been rendered by Hon ble Supreme Court in case of Children Book Trust (supra), it lost sight of amendment which had been carried out w.e.f. 1-4-1999 leading to introduction of provisions of section 10(23C) of Act. Lastly, that view is not consistent with law laid down by Hon ble Supreme Court in American Hotel & Lodging Association, Educational Institute (supra). 17. Apart from above, perusal of assessment order reveals that, for withdrawal of exemption, Assessing Officer assigned various reasons, viz., (i) Limitation in objects of Trust 11 Deed; (ii) Assessee generating profit year after year; (iii) Capital expenses are not application of income; (iv) Income or property of trust is applied/used for benefit of persons specified in Section 13(3) [section 13(1)(c) read with section 13(2) and 13(3)]; (v) Valuation of old vehicles purchased; (vi) Collection of fees out of canteen expenses of students; (vii) Miscellaneous placement expenses; (viii) Claim of transport expenses against outside vehicle; and (ix) Collection from students over and above prescribed fees. CIT (Appeal) has considered every aspect of assessment order with reference to reasons given by learned Assessing Officer for disallowing exemption and relying upon latest judicial pronouncements expressed in similar facts that are involved in present case, came to conclusion that Assessing Officer s approach denying exemption to respondent-educational institution is not in accordance with law and held that respondent- educational institution is entitled to claim exemption under Section 11 of Act. 18. learned Tribunal, which is final fact finding authority, after hearing appeal filed by Department did not incline to interfere with order of first appellate authority, inter alia, with following observations and findings: Apart from that on going through impugned order, it is found that learned CIT(A) has thread bare considered issues in question with reference to admitted facts that assessee is registered under Section 12A of Act and running educational institution, imparting education in fields of technical engineering and computer applications with parameters laid down by AICTE and 12 guidelines given by Ministry of Human Resource Development, Government of India, New Delhi and fees collected by assessee from students for imparting such education having been approved by AICTE. assessee is spending amount received by it by way of collection of tuition fees or collection of hostel fees is being spent for building necessary infrastructure for imparting education in various fields which is charitable purpose for which trust was established. assessee has also spent said amount for raising infrastructure necessary for carrying out object of imparting education and thereby assessee was found to be entitled for exemption under Section 11 of I.T. Act and view of Assessing Officer that there is contravention of Section 13 of I.T. Act is found to be baseless by CIT(A) after thread bare considering all relevant facts. On overall consideration of impugned orders, we found that order of leaned CIT(A) is in accordance of majority views of judicial pronouncements that were rendered by various judicial forums stated in impugned order. Hence, we find no infirmity in order of learned CIT(A) requiring no interference. 19. In view of above, question No.(i) is not substantial question of law. 20. Question No. (ii) is also not substantial question of law as respondent -Educational Institution is eligible for exemption under Section 11 of IT Act for reasons stated hereinabove and it is settled position of law that capital expenditure incurred by Educational Institution is basic necessity if such expenditure promotes object of Trust. 21. Hon ble Supreme Court in case of S.RM. M.CT.M. Tiruppani Trust Vs. CIT, (1998) 230 ITR 636 (SC) and High Court of Delhi in case of CIT Vs. Divine Light Mission, (2005) 196 CTR (Del) 135 have held that capital expenditure incurred by Trust for acquiring/ constructing capital asset would be application of money 13 and assessee would be entitled to exemption under Section 11(1) of Act. 22. Madras High Court in case of CIT Vs. Kannika Parameswari Devasthanam & Charities, (1982) 133 ITR 779 (Mad.) held as under:- income from trust properties has to be applied on objects of trust. As far as objects of trust are concerned, application of amount can be for revenue or capital purposes. So long as expenditure had to be incurred out of income earned by trust, even if such expenditure is for capital purposes on objects of trust, income would be exempt. Tribunal is, therefore, wrong in proceeding on basis that improvement of property held under trust would by itself come within scope of application of income for charitable purposes. However, facts will have to be investigated to find out whether assessee had, in incurring expenditure of capital nature, promoted objects of trust by applying income to those objects. ITO will have to go into this question, as assessment itself has been set aside by Tribunal and restored to his file. result is that question referred to us would have to be answered as follows: So long as income derived from property held under trust had been expended on objects of trust, income would be exempt under section 11 of Act. If this was not done, then income would not be exempt. 23. High Court of Uttarakhand in case of CIT Vs. Jyoti Prabha Society, (2009) 177 Taxman 429 (Uttarakhand) has held that educational society which had utilized rental income for purposes of imparting education by maintaining buildings and constructing new building for same purpose, would be entitled to exemption claimed under Section 11 of Act. Section 11(1)(a) is pari materia to third proviso to Section 10(23C)(vi) of Act and 14 only difference is with regard to percentage of income and period for which it can be carried forward. 24. Allahabad High Court applied legal ratio of Hon ble Supreme Court in CIT Vs. Mool Chand Sharbati Devi Hospital Trust, (2010) 190 TAXMAN 338 and held that capital expenditure on building and infrastructure are basic necessity and therefore, it should be treated as expenditure under Section 11(1) of IT Act. 25. In view of above, capital expenditure if incurred by Educational Institution for attainment of object of Society, it would be entitled to exemption under Section 11 of I.T. Act. 26. For reasons stated above, issues involved in present case are no more res integra and therefore, no question of law arises for adjudication in present appeal. 27. In result, appeal is dismissed. .... . B.N. Mahapatra, J. I. Mahanty, J. I agree .... .. I. Mahanty, J. Orissa High Court, Cuttack Dated 10th November, 2014/bks/ss/skj Commissioner of Income-tax v. M/s Silicon Institute of Technology