IN INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA No. 1340/Hyd/2014 Assessment Year: 2010-11 Quality Circle Forum of India, vs. Dy. Director of Income-tax, Hyderabad. Exemptions III, Hyderabad. PAN AAAAQ0008 P (Assessee) (Respondent) Assessee by : Shri K.E. Sunil Babu Revenue by : Shri A.V. Sadasiva & Shri M.V. Anil Kumar Date of hearing 01-08-2016 Date of pronouncement 28-09-2016 ORDER PER S. RIFAUR RAHMAN, A.M.: This appeal is preferred by assessee against order of learned Commissioner of Income-tax(A) - IV, Hyderabad, dated 20/06/2014 for AY 2010-11. 2. Briefly facts of case are that assessee filed its return of income on 30/09/2010 claiming exemption u/s 11 of Income-tax Act, 1961 (in short Act ). Assessing Officer rejected claim of exemption u/s 11 on basis of proviso to section 2(15). Thereafter, Assessing Officer assessed total income at Rs. 1,28,25,761/-. 2.1 In course of assessment proceedings, Assessing Officer took view that assessee was providing services to its clients 2 ITA No. 1340/H/14 Quality Circle Forum of India, Hyd. (mainly corporate/business houses). Before Assessing Officer assessee submitted as follows: "Our main objectives are for providing education and training to bottom line employees on quality and improvement methods and integrate them with main stream of organisation. We assist in small and medium scale industries clustering them through their association" 2.2 assessee supplied relevant course material during courses. If any organization (who were clients of assessee) needed extra publication for their staff/ employees, it was supplied at nominal cost. This showed that assessee was providing training and its publications to its members only. assessee had organized National Convention on Quality Control (NCQC) where all chapters located in different parts of country had taken part. For NCQC 2009 assessee had received following amounts: i. Advertisement and sponsoring fee Rs.20,79,500 ii. Registration fee Rs.1,44,29,760 iii. Participation fee Rs.1,45,02,760 iv. Participation fee Rs.17,70,000 v. Souvenir donation Rs.2,48,000 2.3. main activities of assessee were providing training, consultancy, professional services to its clients in lieu of fees. assessee had charged fees to its clients, referred to as institutional members, over and above membership fee. It was clear that activities were not for benefit of general public and was limited to members only on payment of fee for specific services rendered e.g. participation fees, registration fees, advertisement and sponsoring fee, training programme fee, sale of books, membership fee etc. expenses were attributable mainly to administration and salary and honorarium. No charity was involved in expenses. 3 ITA No. 1340/H/14 Quality Circle Forum of India, Hyd. 2.4 Assessing Officer, therefore, concluded that activities of assessee were in nature of business and commerce and no charity was involved in its activities. Assessing Officer issued show cause notice to assessee on 07.12.2012, fixing hearing on 17.01.2013. As requested, hearing was adjourned to 25.01.2013. There was no compliance from AR on this date. Assessing Officer therefore presumed that assessee had no explanation to offer and brought entire excess of income to tax by denying exemption u/s 11. 2.5 Assessing Officer had also directed assessee to produce books of account and since assessee failed to do so, Assessing Officer inferred that assessee had not maintained proper books of account and disallowed 20% of revenue expenditure of Rs.2,70,01,223, amounting to Rs.54,00,245/-. 2.6 Assessing Officer further noted that assessee had claimed Rs.14,55,963 as depreciation. Assessing Officer held that depreciation was not allowable in view of decision in case of Escorts Ltd vs. Union of India (SC). However since exemption u/s 11 had been denied to assessee, Assessing Officer allowed depreciation on assets acquired during current year and consequently disallowed Rs.13,35,805/- . 3. Aggrieved with order of AO, assessee preferred appeal before CIT(A). 4. In course of appellate proceedings, AR submitted that assessee were to provide education and training, primarily to bottom line employees on quality and improvement methods and integrate them with mainstream of organization, that for this purpose assessee conducted training programmes and seminars and whenever any member or participant needed extra publication for their staff/employees, assessee provided same at nominal 4 ITA No. 1340/H/14 Quality Circle Forum of India, Hyd. price. AR submitted that objectives of assessee were in nature of education and training, that word education had not been defined in Act, that process of learning or training was also education and that education was not merely systematic teaching followed by certificate, AR submitted that education had broader meaning u/s 2(15) than u/s 10(23C)(iiiab), (iiiad) and (vi) and therefore, activities of assessee were to be considered to be 'education'. 4.1 AR submitted that even if assessee's activity was to be considered as not falling within definition of education, it fell under residuary category, general public utility. assessee aimed to develop bottom line people many of whom had no means to pursue their education and to hone their skills and most significant gain from such training was not monitory but self confidence and self satisfaction that workers derive. 4.2 AR also submitted that it was well settled law that even when merely section of society or public was benefited, exemption u/s 11 cannot be denied. AR relied on decision in case of ICAI vs. DGIT [2013] 358 ITR 91 (Del). 4.3 AR submitted that exemption u/s 11 could not be denied merely due to existence of profit so long as proceeds were applied for its objects. AR relied on various decisions in support of assessee s case, which were extracted by CIT(A) in his order at pages 7 and 8. 5. After considering submissions of assessee, CIT(A) as regards exemption u/s 11 of Act, observed that there is no element of charity in activities of assessee. Each and every activity of assessee is charged for. Such charging of fees is not occasional but systematic and mandatory. fees are also not fixed at nominal level but in manner to generate regular adequate surplus. He, therefore, held that assessee is engaged in 5 ITA No. 1340/H/14 Quality Circle Forum of India, Hyd. activity in nature of trade or business. As result, assessee is adversely affected by proviso to sec.2(15) and is not eligible for exemption u/s 11. 5.1 As regards disallowance of 20% of expenditure claimed, CIT(A) observed that assessee has submitted that it had not maintained regular books of accounts duly supported by bills and vouchers which had been produced during assessment proceedings and that same was evidenced by audit report attached to return of income. He further observed that there is no dispute that books of assessee had been audited and audited report had been enclosed to return. However, that does not debar Assessing Officer from examining books of account and satisfying himself that claims made in audited books are in order. For this purpose, assessee was obliged to produce books of account and other supporting evidence like bills and vouchers before Assessing Officer when called upon to do so. There is no evidence that assessee did so. CIT(A) held that under circumstances, Assessing Officer was justified in disallowing 20% of expenses. 5.3 As regards disallowance of depreciation, CIT(A) observed that there is no dispute that cost of assets had been allowed as application of income in preceding years. Following decisions of coordinate bench of this Tribunal upheld action of AO. 6. Aggrieved by order of CIT(A), assessee is in appeal before us raising following grounds of appeal: 1. order of learned Commissioner of Income Tax, Hyderabad, is against law, weight of evidence and probabilities of case. 2. Your assessee submits that CIT(A) ought to have appreciated fact that your Assessee is carrying on education and training activities, based on various case laws cited 6 ITA No. 1340/H/14 Quality Circle Forum of India, Hyd. before CIT(A), within meaning of education under section 2(15) of Income Tax Act, 1961. 3. CIT (A) ought to have appreciated fact that assessee was allowed exemption during past 30 years and there is no change in objectives and activities of assessee. 4. CIT (A) erred in concluding that there is no element of charity in activities of your assessee, whereas your Assessee since inception in 1982, was granted exemption under section 11 on basis that its objectives as well as its activities are charitable within meaning of section 2(15) of Income Tax Act, 1961. 5. CIT(A) as well as Assessing Officer erred in law and facts of case that your assessee was in fact carrying on education and training to which proviso to section 2(15) are not applicable and not have denied exemption u/s 11 of Income Tax Act, 1961. 6. CIT (A) as well as Assessing Officer erred in law and on facts of case in disallowing 20% of expenditure claimed where assessee had maintained regular books of accounts and vouchers which have been produced. 7. CIT (A) erred in law and on facts of case in disallowing depreciation claimed by your assessee. 8. assessee craves leave to add to, amend or modify above grounds of appeal either before or at time of hearing of appeal, if it is considered necessary. 7. Before us, ld. AR submitted that assessee is registered charitable society and established with main objective of educating people regarding concept of quality in executing day to day activities of employment and empowerment of force though improvement of quality of people, product and services. assessee was involved in educating people in matters of quality maintenance and improvement. It is established in 1982 and was granted registration u/s 12A of Income-tax Act, 1961, vide No. H.Qrs. III/5(46)86/87, dtd. 18/05/87. It was allowed exemption u/s 11 of Act, since inception. All these years, there is no change in objects nor activities of assessee. From inception, it was functioning as non-profit organization. 7 ITA No. 1340/H/14 Quality Circle Forum of India, Hyd. 7.1 He also invited our attention to categorical findings of CIT(A) at para 6.4 in his order, which are as below: 6.4 There is no doubt that appellant is engaged in upgrading skill of workers to whom it imparts training. It is also doing it in systematic and structured manner. However, it is necessary to examine nature of these skills and manner in which it is done in order to arrive at conclusion whether such training falls within definition of education as per decision of Supreme Court. 7.2 He further submitted that activities of assessee will fall in category of education and section 2(15) of Act will not apply to assessee. 7.3 AR relied on following case laws: 1. DIT (Exemption) Vs. Ahmedabad Management Association, 366 ITR 85 (Guj.) 2. ICAI Accounting Research Foundation Vs. DIT(E), 183 Taxman 462 (Delhi). 3. Institute of Chartered Accountants of India Vs. DIT(E), Delhi 347 ITR 99 (Delhi) 4. Society of Indian Automobile Manufacturers Vs. ITO (E), [2016] 71 Taxmann.com 138 (Delhi Trib.) 5. CIT Vs. St. Peter s Education Society, [2016] 70 Taxmann.com 171 (SC). 8. Ld. DR, on other hand, relied on order of CIT(A) and also relied on specific submissions of CIT(A) as below: 6.4 There is no doubt that appellant is engaged in upgrading skill of workers to whom it imparts training. It is also doing it in systematic and structured manner. However, it is necessary to examine nature of these skills and manner in which it is done in order to arrive at conclusion whether such training falls within definition of education as per decision of Supreme Court. 6.9 What emerges from these case studies is that teams of workers are encouraged to identify some problems affecting business of their employer, teams then studied and analysed problem to arrive at workable solution. role of appellant is to guide workers in process of analysis 8 ITA No. 1340/H/14 Quality Circle Forum of India, Hyd. for finding solution to problems. In effect, employer instead of hiring professional consultants for improving its productivity, relies on its own workers to do so. In process, appellant acts as mentor for workers in making them learn to think about and to analyse problems from their work environment. 6.12 decision of Supreme Court envisages strict definition of 'education', involving set of scholastic instructions in formal method of schooling that is glaringly lacking in appellant's case. appellant's activities also do not result in imparting of any structured and formally recognized body of knowledge to participants. I, therefore, hold that activities of appellant do not fall in realm of 'education'. 9 Considered submissions of both counsels and material facts on record as well as orders of revenue authorities. There is no dispute on fact that trust is functioning since 1982 and 12A registration is granted as well as enjoying exemption u/s 11. There is no change in trust nor method of accounting since inception. After amendment to section 2(15) of Act, department is relooking at objects and functioning of trust. After analyzing submissions, question raised before us is that whether trust, no doubt charitable, falls in second limb of definition of charitable purpose contained in section 2(15) of Act, i.e. education or fourth limb i.e. advancement of any other object of general public utility. 9.1 To adjudicate issue in dispute, we analyse judicial pronouncements, which are as below: 9.2 It was held in Bureau of Indian Standards Vs. DGIT (Exemption) [2013] 212 Taxmann 210 (Del.), activities of Bureau of Indian Standards in prescribing of standards of goods/articles and enforcing those standards through accreditation and continuing supervision through inspection etc., cannot be considered as trade business or commercial activity merely because testing procedures involves charging of fees. In present case also merely charging fees does not take away charitable nature of trust. 9 ITA No. 1340/H/14 Quality Circle Forum of India, Hyd. 9.3 On issue of education activities, as held in DIT(*E) Vs. Amhedabad Management Association [2014] 47 Taxmann.com 162 (Guj.), from Circular No. 11/2008, dtd. 19/12/2008, it appears that newly inserted proviso to section 2(15) of Act will apply to entities whose purpose is advancement of any other object of general public utility and hence such entities will not be eligible for exemption u/s 11 or 10(23)(C) of Act if they carry on commercial activities and if aggregate value of receipts from activities is ten lakh rupees or more in relevant PY. proviso will not apply in respect of first three limbs of section 2(15) i.e. relief to poor, education or medical relief. Thus, where purpose of trust or institution is relief to poor, education or medical relief, it will constitute charitable purpose even if it incidentally involves carrying on of commercial activities. In present case, AO and CIT(A) have held that there exists income over expenditure and assessee is charging certain fees for activities carried on by it, which amounts to carrying on of commercial activities, hence, denied exemption u/s 11. We are of view that mere charging of fees for carrying activities will not loose character of charity and in this case, department has already granted registration treating activities as charitable but has not declared under which activity whether under education or general public utility. From assessment order, assessee has charged fee to various activities like seminars, participation fees of participants shows that assessee had engaged in some sort of lectures/training relating to objects of trust i.e. education and training to bottom line employees in quality and improvement methods. It was not controverted by department. It was only objected to charging of fees. In our considered view, assessee has carried on activities of imparting training to bottom line employees and there is no element of profit in said activity as surplus generated out of activities is again applied for charitable activity only. Moreover, assessee quoted various case laws in support of its claim that they are in field of 10 ITA No. 1340/H/14 Quality Circle Forum of India, Hyd. education. When analysed closely, all institutions i.e. Ahmadabad Management Assocation, ICAI, Peter s education society, are educating people more on structured manner and acknowledging by issuing proper certificates. In present case, we are not sure if such activities are being carried on by assessee. We are not inclined to adjudicate whether they fall into education activities in absence of relevant material before us. However, assessee is imparting training to bottom like employees, which may be similar to education. Hence, in our view, assessee is involved in carrying on of charitable activities and not in any commercial activities as held by AO. Thus, AO cannot deny benefit u/s 11 of Act. Accordingly, grounds raised by assessee in this regard are allowed. 10. With regard to ground No. 6, disallowance of 20% of expenditure due to observation of AO that assessee had not maintained proper books of account. From records, books of assessee was audited gives impression that there exists books of account and we are in agreement with CIT(A) that because of books of account are audited, AO has also right to review books of account. There is no dispute that books of account was audited since, assessee has submitted audited financial statement. Since books are audited, there exists books of account. Considering above, we find it appropriate to remit this issue back to file of AO to verify books. We direct assessee to submit books before AO so that AO can verify genuineness of transactions and vouchers. We direct AO to verify books as per law and complete assessment after giving proper opportunity to assessee in this regard instead of resorting to disallow on adhoc basis. Accordingly, ground raised by assessee is allowed for statistical purposes. 11 ITA No. 1340/H/14 Quality Circle Forum of India, Hyd. 11. With regard to depreciation, AO has not disallowed any depreciation in assessment, therefore, we do not find this ground as appropriate for adjudication. Accordingly, same is rejected. 12. In result, appeal of assessee is partly allowed for statistical purposes. Pronounced in open court on 28 th September, 2016 Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 28 th September, 2016 kv Copy to:- 1) Quality Circle Forum of India, C/o M. Anandam & Co, CAs., 7A, Surya Towers, SP Road, Secunderabad 500 003. 2) ADIT - III, Hyderabad. 3) CIT(A) IV, Hyd 4) DIT(E), Hyderabad 5) Departmental Representative, I.T.A.T., Hyderabad. De scri pti on Date Intls S.No. 1. Draft dictated on Sr.P.S./P.S 2. Draft placed before author Sr.P.S/PS Draft propo ed & placed before second Member JM/AM 3 4 Draft discussed/approved by second Member JM/AM 5 Approved Draft comes to Sr.P.S./PS Sr.P.S./P.S 6. Kept for pronouncement on Sr. P.S./P.S. 7. File sent to B enc h Cl erk Sr.P.S./P.S 8 Date on which file goes to Head Clerk 9 Date of Dispatch of order Quality Circle Forum of India v. Dy. Director of Income-tax, Exemptions–III, Hyderabad