Commissioner Of Income Tax-I, Chandigarh v. M/S Manav Mangal Society, Sector 21, Chandigarh

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH I.T.A., No. 450 of 2008Date of decision: 19.8.2009 Commissioner of Income Tax-I, Chandigarh. Vs. M/s Manav Mangal Society, Sector 21, Chandigarh. ......Appellant ...Respondent CORAM:-HON'BLE MR.JUSTICE ADARSH KUMAR GOELHON'BLE MRS.JUSTICE DAYA CHAUDHARY PRESENT:Ms Urvashi Dhugga, Standing Counsel for Revenue.**** ADARSH KUMAR GOEL, J. (Oral) 1.The revenue has preferred this appeal under Section 260A of theIncome Tax Act, 1961 (for short, “the Act”) against the order of the IncomeTax Appellate Tribunal, Chandigarh, Bench 'B' passed in ITA No.266/CHD/2007 dated 22.11.2007 for assessment year 2003-04, proposing toraise the following questions of law: 1. “Whether in the facts and circumstances of the case, the learned ITAT has erred inlaw in allowing the exemption to the assesseeu/s 11(1)(a) instead of exemption underSection 11(4A) because as per the Aims andObjects of the Society, the schools wereestablished only to achieve the Aims andObjects. Therefore, the establishment of school is incidental to promoting the Aimsand Objects of the CharitableSocieties/Institutions as per their ownarticles of association/memorandum.” 2. “Whether in the facts and circumstances of the case, the ld. ITAT has erred inallowing the application of money onconstruction of building especially when noverification by the AO was ever done norwas it put up to the AO during the course ofassessment proceedings. Besides theconstruction of the building has directlybeen taken into the balance-sheet and notinto the income and expenditure account bythe assessee and it was held by the Hon'bleUttrakhand High Court in CIT v. QueenEducation Society (HC) that the investmentin the fixed assets like furniture andbuilding are the properties of the societyand may be connected with the imparting ofeducation but the same has been constructedand purchased out of income from impartingthe education with a view to expand theinstitution and to earn more income as decided in ITA No. 103 of 2007 and alsoreferring the decision of the Hon'bleSupreme Court agreeing with the findingsof the High Court, reported in [1992] (3)SCC 390.” 2.The assessee is running a school and claimed exemption underSection 11 of the Act in respect of its income. The Assessing Officerrejected the claim on the ground that the assessee had not applied 85% ofthe profits for the purpose of the Society, as required under Section 11(4A) read with Section 11(2) of the Act. This view was reversed by theCIT(A) taking into account the fact that the assessee had spent the amountequal to more than 85%. The relevant observations are as under: “ The details of income of the societyand schools as per P&L accountattached with the return are as under: As per judgment of the Hon'bleSupreme Court, the assessee societyhas applied an amount of (Rs.2,61,54,126/-minusRs.35,64,981/-)Rs.2,25,89,145,which works out to 86.36% leaving abalanceofRs.13.64%(Rs.35,64,981/-) for accumulation.According to the AR, the Ld.Assessing Officer has wronglyapplied the percentage of 85 to theunspent balance as against to thefigure of Rs.2,61,54,126/-. It wasclaimed that since the assessee societyhas spent/applied its income tocharitable purpose more than thestatutory requirement, it is not liableto income tax for the year underconsideration. He contended that asthe action of the Ld. AssessingOfficer in taxing the assessee is notwithin the legal framework, it wasurged that the same may be quashedand impugned addition be deleted.” xx xx xx xx xx xx “The amount spent on constructionof school building at Panchkula is a [5] xx xx xx xx xx xx “The amount spent on constructionof school building at Panchkula is a [5] capital expenditure but for thepurpose of Section 11 it is anoutgoing which is application of theincome of the appellant for charitablepurpose. The appellant shall also beentitled to claim depreciation onschool building. The appellant is carrying on noactivity other than running a schooland imparting education to thestudents as such, the assessee hasapplied its income when itconstructed school building whichamounts to applying income forcharitable purpose only.” This view was affirmed by the Tribunal with the following observations: “The another contention raised by ld.DR is that the ld. CIT(A) allowed theexpenditure incurred on theconstruction of the Panchkula Schoolbuilding amounting to Rs.41,12,590/-before calculating the quantum ofaccumulation of income @ 15%specially when it was opined in theassessment order that the assessee is not a trust but an institution.However, facts remains that theassessee is a charitable society,registered under the societiesregistration act and also under section12A of the Act. We are of the view, ifthe expenditure of Rs.41,12,590/- wasincurred for the construction of thePanchkula building, it nowhereviolates the aims and objects of theassessee society as is evident fromitem No.(e) of the aims and objects ofthe assessee. It is not the case of therevenue that the expenditure wasincurred fore the personal benefit ofthe persons who are managing thesociety.” The Tribunal further observed as under: “It is not the case of the revenue thatrunning of the schools or investmentin the construction of the building ofsuch schools is not incidental to itsobject. Therefore, the income of thesociety will be covered u/s 11 (4A) .Sub section (1) or sub section (2) or sub section (3) or sub section (3A)shall not apply in relation to anyincome of a trust or any institution,being profits and gains of business,unless the business is incidental to theattainment of the objectives of thetrust or as the case may be , institutionand separate books of accounts aremaintained by such trust or institutionin respect of such business.” 3.We have heard learned counsel for the revenue.4.Contention raised on behalf of revenue is that exemption waswrongly allowed under Section 11(1)(a) instead of 11 (4A) in respect ofprofits and gains declared by the assessee, which was not from the propertybut from business incidental to the objectives of the society. 5.We do not find any merit in the submission. Once exclusioncontemplated under section 11(4A) is not applicable, the exemption had tobe allowed as Sections 11(1), (2) and (3) become applicable even inrespect of profits and gains. The Tribunal erred in observing that in such asituation where income falls under Section 11(4A), sub-section (1), (2), (3)or (3A) will not apply. Finding of the Tribunal is contradictory. If subsections (1),(2) and (3) or (3A) are held to be inapplicable, exemption couldnot be available. We are of the view that on plain reading of the provisions,these sub-sections will apply, except where the income falls in the exclusionary provision, which is not the case here. It is not even the caseof the revenue that the income falls in exclusionary clause. Theexclusionary clause applies if business income is not incidental to themain objects or other conditions are not fulfilled. 6.Learned counsel for the revenue submitted that factuallycondition laid down in Section 11(2) does not exist inasmuch as 85% of theincome has not been applied in the manner contemplated. This contentionhas no force. Even if 85% income has not been applied in the manner laiddown, it is not enough to disallow exemption unless there is a furthercondition of accumulation beyond contemplated period or not maintainingaccounts or intimating the Assessing Officer as laid down. This aspectneed not be examined further as it has been held that more than 85% of theincome was in fact applied for the purpose of the society. 7.Thus, while holding that the observation of the Tribunal thatsub-section (1), (2), (3) or (3A) of Section 11 do not apply to the incomefalling under Section 11(4A) of the Act is erroneous, there is no error inthe conclusion for holding the assessee eligible for exemption. 8.No substantial question of law arises. 9.The appeal is dismissed. (ADARSH KUMAR GOEL) JUDGE August 19, 2009 raghav (DAYA CHAUDHARY) JUDGE Note: Whether this case is to be referred to the Reporter? ........Yes/No