I.T.A. No.699/KB of 2003, decided on 29th March, 2005. VS I.T.A. No.699/KB of 2003, decided on 29th March, 2005.
2006 P T D (Trib.) 1368
[Income-tax Appellate Tribunal Pakistan]
Before S. Hasan Imam, Judicial Member and Agha Kafeel Barik, Accountant Member
I.T.A. No.699/KB of 2003, decided on 29/03/2005.
Income Tax Ordinance (XXXI of 1979)---
----Second Sched., Part-I, Cl. (86)---C.B.R. Circular No.2 of 1996, dated 18-2-1996---Exemption---Transfer of an amount .by ,College Division to the assessee Foundation---Exemption---Validity---Clause (86) of Part-I of the Second Sched. of the Income Tax Ordinance, 1979 was restricted to any income of any University established solely for educational purposes and did not permit transfer of amount to any other institution whoever it may be---Transfer of amount by College Division of the assessee's Foundation to Foundation out of accumulated funds for the benefit of welfare activities undertaken by the Foundation, could not be allowed exemption, besides, no details had been provided regarding the activities of the Foundation---Assessing Officer was justified to conclude that welfare activities undertaken by the Foundation, if any, did not fall within the ambit of Cl. (86) of Part-I of the Second Schedule of the Income Tax Ordinance, 1979 for the reason that the Foundation was not enjoying exemption under Cl. (86) of Part-I of the Second Schedule of the Income Tax Ordinance, 1979---Assessee foundation had failed to furnish requisite details reflecting the way of transfer so as to determine whether it was a gift/donation/contribution/award or loan---Clause (86) of Part-I of the Second Schedule of the Income Tax Ordinance, 1979 restricted the use of profits and accumulated funds for the education and for the development of education generating profit and not for use of other institution involved in business having profit motive, as such the facts would be that advance had been made to a sister organization---No independent confirmation was available from the other party with whom transaction had been taken place---Was not ascertainable that such advance had been made in the course of actual carrying out a primary purpose of the Foundation---First Appellate Authority was not justified to hold that rejection of claim of exemption was not in line with the provision of law reading with Circular No.2 of 1996, dated 18-2-1996---Order of First Appellate Authority was vacated by the Appellate Tribunal, whereby the treatment meted out by the Assessing Officer was restored.
Riaz Ahmed, D.R. for Appellant.
Muhammad Arshad, A.C.A. for Respondent.
Date of hearing: 22nd March, 2005:
ORDER
By this order, we would like to decide the appeal captioned above, filed at the instance of the Department, being aggrieved and dissatisfied from the impugned order, dated 30-12-2002 passed by the learned CIT(A) allowing the claim of exemption under clause (86) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979.
2. The brief facts leading to above appeal are that the assessee a charitable foundation, established in 1982 as Charitable Trust to undertake commercially viable business for the welfare of the retired as well as serving officials of Pakistan Navy and their dependents. In this case, assessment was finalized at an income of Rs.34,125,866 including the income of Bahria College of Rs.23,26,586. Being aggrieved and dissatisfied from the assessment, the-assessee preferred an appeal before the learned CIT(A), who allowed certain reliefs, however, set aside various issues for re-adjudication. Accordingly reassessment was finalized under sections 62/132. The assessee preferred an. appeal bearing I,T,A, No.1165/KB of 1999-2000 before the ITAT, wherein the issue in respect of exemption of education institution was set aside for-examination in the light of provisions of clause (86) of the Second Schedule to the Income Tax Ordinance, 1979 by. the ITAT vide its orders, dated 29-3-2001. Accordingly notice under sections 61/62 was issued confronting the assessee that you have transferred Rs.11,00,000 to Bahria Foundation (North) during the year under consideration, which is not in line with the Circular No.2 of 1996 and have spent only 2.02% of expenses at Rs.156,052 for the purchase of books of library i.e. for promotion of education, which is also not in line with the Circular No.2 of 1996, besides the assessee was also called upon to furnish the details of salary along with statement under section 139, evidence of utilization of profit/funds for promotion of education, various educational institution established, copies of tax deduction challans and details of expenses of Bahria College Division. In reply thereof, the A.R. of the assessee submitted his written reply contending that Bahria Foundation has been constituted as a Charitable Institution under a scheme of the Pakistan Navy and approved by the Government of Pakistan, and the principal activity of the foundation is to undertake commercially viable business for the welfare of the retired as well as serving official of Pakistan Navy and their dependents and families. As regards claim of exemption from income tax in respect of Bahria College Division, under clause (86), it was stated that Bahria College Division of the Foundation started its operation in August, 1996 with the main objective of providing education at primary and secondary levels within the boundaries of the main objectives of the Foundation. As regards transfer of Rs.11,00,000, it was contended that the transfer of Rs.11,00,000 by the Bahria College Division to Bahria Foundation (North) during the year under consideration, does not represent distribution of any dividend by the former and that it was transferred out of the accumulated funds of the Bahira College Division for the purpose of welfare activities undertaken by the Foundation, which is not against the guidelines contained in C.B.R. Circular No.2 of 1996, wherein certain criteria has been identified directing the Assessing Officer for grant of exemption under clause (86) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979. It was further contended that Bahria College Division has neither provided any benefit to any person having a direct and/or indirect interest in the educational institution nor the profits of the said Division has been invested in the shares of the companies owned or controlled by the management. As regards expenses at Rs.156,052 incurred towards purchase of library books for promotion of education, no explanation was offered by the assessee, besides no required details/ documents were filed in response to notice under sections 61/62, dated 20-9-2001. Since no details/documents called for through notice under sections 61/62 were furnished by the assessee to substantiate its claim and to fulfil the requirement for qualifying the exemption under clause (86), the Assessing Officer rejected the claim and made addition of income from Bahria College as per original order, reassessing the income at Rs.34,741,879.
3. The learned CIT(A) allowed the exemption holding that the rejection of claim of exemption under clause (86) of the Second Schedule to the Income Tax Ordinance, 1979 is not in line with the provision of the law read with the circulars issued by the C.B.R. in this regard.
4. We have heard the learned representatives of the two parties. The learned D.R. argued that the learned CIT(A) was not justified to allow the claim of exemption under clause (86) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979, as facts have not been properly appreciated in terms of Circular No.2 of 1996, dated 18-2-1996. Contrary to the argument of the learned D.R. the learned representative for the assessee contended that the DCIT acted arbitrarily in holding that the assessee has failed to fulfil the requirements of clause (86) of Part-I of the Second Schedule to the repealed Income Tax Ordinance, 1979. He further argued that the transfer of Rs.11,00,000 by Bahria College Division to Bahria Foundation (North), is not covered under clause (86) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979, as Bahria Foundation (North) does not itself enjoy benefit of exemption not being an institution established only for educational purposes and not for purposes of profit.
5. Perused the record in view of the arguments, the assessee a charitable foundation established in 1982 as charitable trust to undertake commercially viable business for the welfare of the retired as well as serving official of Pakistan Navy and their dependents. The educational institution under the cover of Bahria Foundation, enjoys benefits of exemption under clause (86) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979, whereas various institutions covered under Bahria Foundation, Karachi, do not enjoy the benefit referred above to. In the circumstances supra, the controversy to be resolved in nutshell, would be whether amount of Rs.11,00,000 transferred by the Bahria Foundation, Karachi, to Bahria Foundation (North) Division during the year under consideration would be covered under clause (86) of the Part-I of the Second Schedule to the Income Tax Ordinance, 1979.
6. For ready reference clause (86) is referred hereto:
"Any income of any university or other educational institution established solely for educational purposes and not for purposes of profit."
7. The real test to be applied in such cases, is to see that the institution has been established solely for educational purposes and not purposes of the profit, hence it has to be seen that the profits are surplus of the educational institution, is not diverted to the personal benefit of the proprietor, or the directors of the educational institutions. The C.B.R. Circular No.2 of 1996, dated 18-2-1996, has laid down various points in the form of instructions, which are hereunder:--
"(3) The real test to be applied in such cases is to see that the institution has been established solely for educational purposes and not for purposes of profit. In order to ascertain that, it has to be seen that the profits or surplus of the. educational institution is not diverted to the personal benefit of the proprietor, sponsor, partner or the directors of the educational institutions. Some of the points to see in this respect are the following:
(a) No dividend or profit, by whatever name called, is paid to the investors or the sponsors or any other person having direct or indirect interest or control in the educational institution.
(b) No extraordinary pay, salary or remuneration, by whatever name called, is allowed to any employee or any person, related to those sponsoring or managing the institution or, having any interest in the management.
(c) No benefit, whether convertible in cash or otherwise, is provided to any person having a direct or indirect interest in the management.
(d) The profits/surpluses of the educational institution are not invested in the stocks of companies owned or controlled by the management of the institution."
8. It is already stated that the amount of Bahria College Division, which is covered under clause (86), has been transferred to Bahria Foundation (North) Division not enjoying the exemption clause, as such, it will be presumed that the amount transferred, would not be utilized or incurred solely for educational purposes, but for purpose of profit, no doubt sole object of an institution which transferred the amount, is educational, hence its surplus or accumulated funds, is to be used for educational purposes only, even if it is taken granted that for the smooth working of an institution, profit motives would be necessary for providing funds for disposal directly or indirectly in the interest of education. However, in this respect details have not been furnished regarding status of the donee so as to determine, whether Bahria Foundation (North) has no other business, has been established solely for educational purposes and its sole object is education.
9. It is worth-mentioning that clause (86) is restricted to any income of any University established solely for educational purposes and does not permit transfer of. amount to any other institution whoever it may be, thus, transfer of Rs.11,00,000 by the Bahria College Division of the assessee's Foundation to Bahria Foundation (North) out of accumulated funds for the benefit of welfare activities undertaken by the Foundation, cannot be allowed exemption,' besides, no details have been provided regarding the activities of Bahria Foundation (North), hence we find that the Assessing Officer was justified to conclude that the welfare activities undertaken by the Bahria Foundation (North), if any, does not fall within the ambit of clause (86) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979 for the reason that Bahria Foundation (North) is not enjoying exemption under clause (86).
10. Before parting with the order, it would not be unaccustomed to point out that the assessee has failed to furnish the requisite details reflecting the way of transfer so as to determine whether it is a gift/ donation/contribution/award or loan, besides clause (86) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979 apparently restricts the use of profits and accumulated funds for the education and for the development of education generating profit and not for use of other institution involved in business having profit motive, as such the facts would be that advance has been made to a sister organization. No independent confirmation is available from the other party with whom transaction have been taken place. Thus it is not ascertainable that such advance has been made in the course of the actual carrying one of a primary purpose of Bahria Foundation. In the circumstances supra, we find that the learned CIT(A) was not justified to hold that rejection ofclaim of exemption is not in line with the provision of law .read with Circular No.2 of 1996, dated 18-2-1996. Consequently the order of the learned CIT(A) is vacated, whereby the treatment meted out by the Assessing Officer is restored.
11. In view of above discussion and findings, the departmental appeal accordingly stands allowed.
C.M.A./542/Tax (Trib.)Appeal allowed.