DCIT, C-1 (EXEMPTIONS), CHANDIGARH vs. CT EDUCATIONAL SOCIETY, JALANDHAR

Per Sanjay Garg, Judicial Member :

The present appeals have been preferred by the revenue against the order dated 24.04.2017 and 15.02.2019 passed u/s 250(6) of the Income Tax Act, 1961 ( in short ‘the Act’) of

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the Commissioner of Income Tax-2, Jalandhar (hereinafter

referred to as CIT(A) respectively for the assessment year 2014-

15 and 2015-16.

identical, therefore, both the appeals are being taken up

together for the sake of convenience.

ITA 1135/CHD/2017 ( a.y. 2014-15

modified Grounds of appeal :

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revenue is aggrieved by the action of the CIT(A) in allowing

exemption u/s 11 of the Income Tax Act,1961 ( in short ‘the

Act’) to the assessee society on two grounds. Firstly that the

assessee society had made the interest free advances to its

Members which transaction was covered under the provisions

of Section 13(1)(c) and 13(1)(d) read with Section 13(3) of the

Act and further that the assessee Society had paid excessive

salary to its Members having contravened the provisions of

Section 13(2)(c) of the Act. The ld. Assessing Officer (in short

‘AO’) made the addition of Rs. 1,98,48,600/- on account of

notional interest @ 12% P.A. on the interest free advances paid

to its Members by the Society and further disallowed a sum of

Rs. 46,75,933/- paid to members towards salary. However, the

ld. CIT(A) deleted the disallowance so made by the AO.

it was explained by the Society that the same were infact not

interest free advances, rather the same was towards

payment/consideration for the purchase of land from the

Members of the society. The land, infact was given by the

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Members to the Society for construction of building for

educational activity of the Society. However, the payment of

construction was spread over a period as per availability of the

funds and finally the Sale Deed of the land was executed by the

Members in favour of the assessee. That the sale consideration

was fixed at arms length price/Collector rate and there is no

allegation that any excessive payment was made by the Society

for the purchase of the aforesaid land. The ld. CIT(A)

considering the submissions of the assessee deleted the

additions so made by the AO, observing as under :

4.4 I have gone through the assessment order passed by the AO as well as detailed submissions made by the appellant including judicial citations given therein and find that an addition of Rs. 1,98,48,600 has been made by the AO on the ground that interest free advances amounting to Rs. 16,54,05,000 have been made by the society to the persons, who are members of the society. It is stated by the AO that interest at the rate of 12% per annum has to be charged on these advances based on the market rate of interest. 4.5 It is further held by the AO that amount paid to the members of the society as advances are covered under section 13(l)(c) and 13(l)(d) r.w.s. 13(3) of the IT Act and therefore, cannot be treated as an application of income. It is also stated that these advances paid are not as per the modes specified in the provisions of sub section 5 of section 11 of the IT Act. Therefore, interest at the rate of 12% P. A. on the total amount of interest free advances amounting to Rs.16,54,05,000, which comes to Rs. 1,98,48,600 has been added to the income of the society. 4.6 The appellant has stated that advances of Rs. 16,54,05,000 have been given to 3 persons namely- Sh. Harpreet Singh, Smt. Parminder Kaur and Sh. Manbir Singh. A copy of account of the three persons explaining the nature of transactions and purpose of the same has been filed in the course of assessment proceedings. It is stated that amount has been paid by the society as advance purchase of land for the purposes of society. The society is engaged in educational activities and therefore, funds have been paid over a period of time to these persons and details of payments made over a period of 4 years, is as under:-

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Name A.Y. 2012-13 A.Y. 2013-14 A.Y. 2014-15 A.Y. 2015-16 Harpreet Singh 2,20,00,000/- 6,20,00,000/- 6,86,80,000/- 9,60,00,000/- Parminder Kaur 1,10,00,000/- 5,50,00,000/- 6,40,00,000/- 7,05,15,000.- Manbir Singh 2,20,00,000/- 2,20,00,000/- 3,27,25,000/- 4,62,00,000-- Total 5,50,00,000/- 13,90,00,000/-, 16,54,05,000/- 21,27,15,000 -

4.7 The appellant has further stated that no un-due benefit has been taken by these persons as the sale of land has been executed by Sh. Harpreet Singh for Rs. 9.60 crores and by Sh. Manbir Singh for Rs. 4.62 crores in the name of the society. The land is situated at Greater Kailash, Maqsudan, Jalandhar and tax was deducted @ 1% on the total amount of sale consideration. The capital gain earned by these persons has also been declared in their income tax returns and a copy of the same has also been filed on record. It is further stated that Smt. Parminder Kaur has been paid an advance of Rs. 7,05,15,000 for purchase of land and the sale deed is to be executed in the year 2016-17. A copy of the account along with confirmation and copy of bank statement, has been placed on record and was also filed in the course of assessment proceedings.

4.8 The appellant has submitted that these members of the society have in the initial years contributed their property consisting of land to the cause education by gifting this land free of cost to the society. It is stated that no benefit has been taken by the members on account of sale of this land to the society as the transaction has been executed at the prevailing market rate which is in accordance with the value determined by the Stamp Valuation Authority. It is also stated that capital gains tax has also been paid by these persons on the gains earned on sale of land to the society and a copy of the ITRs filed by these persons has also been placed on record to support its contentions. 4.9 I have carefully considered the detailed submissions made in this regard and find that it is an accepted fact that in the initial phase of the society, land has been contributed as free of cost by these members to the society. Further, it is not disputed that these transactions for purchase of land has been executed by the society at arms length i.e. at the prices fixed by the Stamp Valuation Authority. However, as regards the payment of purchase consideration is concerned the only issue is that payment of this consideration has been made in a phased manner spread over a period of 3-4 years. Now, the issue for consideration is whether it amounts to giving un-due benefit to the members of the society?

4.10 In this case, the payment has been made by the society over a period of 3-4 years based on the availability of funds in their hands. The other alternative before the society could have been to make the payment in year 1 itself- by contributing the amount which has been given as advance to the members in year from own resources and borrowing the balance funds from the bank/market. This would have meant making the re-payment of loan to the bank/market of an amount which has been paid as advance in year 2, year 3 and year 4 along with an element of interest cost.

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4.11 Thus, in view of the above mentioned facts, I find that it is the other way round as it is the members who have sold the land to the society have lost out on the interest component which they would have earned had the sale price been paid in one instalment. Therefore, this transaction amounts to suiting the convenience of the buyer of the property as the sale price has been paid over a period of time as and when the funds were available in their hands. Further, I find that these transactions have been accepted by the AO in the preceding three years. Accordingly, I do not find any justification in the action of the AO in charging notional interest @12% per annum on the amount of advances given by the society to the members against purchase of land. 4.12 In the course of appellate proceedings, the AR of the appellant was asked vide note sheet entry dated 23.03.2017 as to whether any TDS under the provisions of section 194-IA was made by the society on part payment of sale consideration to Smt. Parminder Kaur, in whose case the sale deed has not yet been executed. The appellant has in response to this in the written reply filed stated that TDS will be deducted at the time of full payment and registration as was done in the other two cases as well. The appellant is under a bonafide belief that TDS is to be made at the time of execution of sale deed payment.

4.13 It would be relevant at this stage to examine the provisions of Section 194IA of the IT Act, which for the sake of convenience are re- produced as under :- 194-I.A. (1) Any person, being a transferee, responsible for paying (other person referred to in section 194LA) to a resident transferor any sum consideration for transfer of any immovable property (other than agricultural land) shall, at the time of credit of such sum to the account of the transferor or at payment of such sum in cash or by issue of a cheque or draft or by an\ (I whichever is earlier, deduct an amount equal to one per cent of such sum as tax thereon. (2) No deduction under sub-section (1) shall be made where the consideration fi transfer of an immovable property is less than fifty lakh rupees. (3) The provisions of section 203A shall not apply to a person required to dedut in accordance with the provisions of this section. Explanation.— For the purposes of this section,— (a) "agricultural land" means agricultural land in India, not being a land situate i area referred to in items (a) and (b) of sub-clause (iii) of clause (14) of section 2; (b) "immovable property" means any land (other than agricultural land) building or part of a building.]

4.14 Thus, it may be seen from the above that this section has been inserted the Finance Act 2013, w.e.f. 01.06.2013 and it applies to any person who responsible for making a payment to a transferor any sum by way consideration for transfer of any immoveable property shall at the time of credit of such sum to the account of the transferor or payment of

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such sum i cash or cheque or draft, whichever is earlier, deduct an amount equal to 1°/ such sum as income tax thereon. Therefore, I find that appellant has failed to comply with the provisions of section 194-IA of the IT Act and is therefore liable for penal provisions under the provisions of IT Act- person liable for making deduction of tax failed to do so.

4.15 Accordingly, a copy of this order is being forwarded to t h e Commissioner -TDS, having jurisdiction over the case of the case of t h e appellant being the buyer(who is responsible for deduction of tax source, while making part payment to the seller) for necessary action required under the provisions of the Act.

4.16 To sum up, an addition of Rs. 1,98,48,600 made by the AO on account of notional interest charged on the amount of advance paid by the society is deleted.”

Agreement to Sell executed by the members was unregistered

and further that the payment was made over the years and that

the same were infact interest free advances and further that

the TDS was not effected on the payments and thus, the

assessee society had violated the provisions of Section 194I(a)

of the Act.

submitted that the TDS was duly deducted in respect of

payments made by the Society to the sellers. However, in case

of Smt. Parminder Kaur, whose Sale Deed was yet to be

executed, the TDS was not deducted as the Society had

deducted TDS at the time of full payment and registration of

the Sale Deed.

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That the ld. CIT(A) taking note of the above fact has already

denied relief in case of the payment made to Smt. Parminder

Kayur as discussed in para 4.13 to 4.15 of the impugned order.

He has further submitted that because of any technical lapse, it

cannot be said that the transaction was not bonafide and that

the ld. CIT(A) taking into overall facts and circumstances of the

case, has rightly deleted the additions made by the AO on this

issue.

the record. In our view, it is not a case of any undue favour by

the assessee to its members. In this case, the ld. CIT(A) has discussed that the

Members of the Society had already offered their land for the

construction of building for technical activities of the assessee

Society. The assessee Society, as per its convenience, paid the

sale consideration in installments, which were spread over a

period and ultimately the Sale Deeds have been executed at the

Collector rate. We, therefore, do not find any infirmity in the

order of the ld. CIT(A) on this issue.

decisions of the Hon'ble High Courts :

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by the ld. DR. We find that the aforesaid case laws are not

applicable to the facts and circumstances of the present case.

In the case of CIT Vs V.G.P. Foundation (2004) 134 Taxman

663 (Madras), the assessee Trust had advanced certain amount

to its sister concern, a Private Limited Company of which the

Trustees of the assessee Society were also Directors and the

money had remained lying with the company for the whole of the

year without having spent. In these circumstances, the Hon'ble

High Court held that it cannot be said that the money had been

applied by the assessee for charitable purposes in the relevant

assessment year.

(Exemption) (supra), the assessee Trust had advanced huge

amounts to a company which had substantial interest in Trust

without any security and adequate interest. In the case of CIT

Vs Sadhu Singh Hamdard Trust (supra), the payments were

made to trustees by the assessee society without any

justification. The facts in this case, as such are quite

distinguishable. In all these case laws, the assessee society

could not justify the payments made by the assessee trust to

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its members. However, in the case in hand, it is duly proved

on the file that the payments were made to the members for the

purchase of land and such payments were made at arms length

price. Therefore, in view of the above, we do not find any

infirmity in the order of the CIT(A) and the same is upheld on

this issue.

members of the society is concerned, we find that it is not the

case of the Department that the salary has been paid in excess

of what may be reasonably paid for such services. The only

objection by the AO was that the payment during the year was

increased to large extent as compared to the payments made in

earlier years. The ld. counsel for the assessee has submitted

that merely because in earlier years the Members for their services had

accepted lower payments as compared to the payments

reasonably paid for such services, does not mean that any

excess payment has been made by the assessee society in this year towards

salary of the Members who had rendered their

expert/professional services to the Society. We find that the

said issue has been discussed by the ld. CIT(A) in para 5.4

onwards of the impugned order. Relevant part is reproduced

as under :

5.4 I have gone through the assessment order passed by the AO as well as submissions made by the appellant including judicial citations given therein and find that an

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addition of Rs.46,75,933 has been made by the AO on account of disallowance of salary, interest paid to the specified persons who are members of the society. The disallowance has been made by the AO on the ground that excessive payments have been made to these persons which are not reasonable & permissible under section 13(l)(c) of the IT act. These persons are covered under the provisions of section 13(3) of the IT act. AO has also stated in the order that these persons are having their own independent sources of income and are therefore not exclusively engaged in providing their services to the society. It is stated that all these members have been paid salaries which are unreasonable given the facts and circumstances of the case. 5.5 The appellant has stated that AO has failed to appreciate that these persons have been providing their services to the society and payments have been made to them in the preceding few years which were accepted by the department even in the orders passed under section 143(3) of the IT Act. It is submitted that payments made to these persons are in accordance with the norms laid down by the UGC and other persons working in the society have been paid much higher amounts than these persons. The appellant has also submitted that salaries paid to specified persons constitute 0.90% of the total expenditure and therefore cannot be stated as under reasonable. It is stated that principle of consistency has to be applied by the AO. 5.6 The appellant has also stated that interest has been paid to a specified person, which is a company and under the provisions of the Companies Act loans and advances cannot be given interest-free to the related parties. It is stated that interest has been paid to this party in the preceding two years as well, which was accepted by the department. 5.7 I have gone through the detailed submissions made in this regard and find that AO has held that these payments made by the society on account of salary and interest as unreasonable mainly on account of the fact that these persons are engaged in other activities and have their other sources of income. I find that the total percentage of expenses incurred by the society on account of payments made to these persons constitute less then 1% of the total expenses incurred by the society. Further the total payments made by the society on account of salaries to these persons are less then 2.5% of the total expenditure incurred on account of salaries. 5.8 Thus, I find that these facts and figures have not been considered by the AO before making the disallowance. Also, I find that no adverse material has been brought on record by the AO to hold that services have not been rendered by these persons and payments made to these specified persons are excessive and unreasonable. In view of these facts, I hold that there is no justification in the action of the AO for making a disallowance under this head. Accordingly, this ground of appeal is allowed.” 14. After considering the rival contentions of both the parties

on this issue, we do not find any infirmity in the order of the

ld. CIT(A) on this issue also.

appeal of the Revenue and the same is, accordingly, dismissed.

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both the appeals, therefore, our findings given in ITA

1135/CHD/2017 ( assessment year 2014-15) would mutatis-

mutandis apply to the revenue’s appeal in ITA 700/CHD/2019 (

assessment year 2015-16) also. In view of this, this appeal of

the Revenue is also dismissed.

dismissed.

Order pronounced on4th October, 2021.

Sd/- Sd/- (अ�नपूणा� गु�ता) (संजय गग�) (ANNAPURNA GUPTA) (SANJAY GARG) लेखा सद�य/ Accountant Member �या�यक सद�य/ Judicial Member

“Poonam” आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : अपीलाथ�/ The Appellant 1. 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT आयकर आयु�त (अपील)/ The CIT(A) 4. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 5. 6. गाड� फाईल/ Guard File