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Income Tax Appellate Tribunal, LUCKNOW BENCH ‘B’, LUCKNOW
Before: SHRI A. D. JAIN & SHRI T. S. KAPOOR
PER T. S. KAPOOR, A.M.
This is an appeal filed by the Revenue against the order of learned CIT(A)-4, Lucknow dated 27/09/2017 pertaining to assessment year 2014- 2015. The grounds of appeal taken by the Revenue are reproduced below:
“1. Ld. Commissioner of Income Tax (A) has erred in law and facts by allowing the benefit of section 11 thereby deleting the addition of surplus of Rs.83,78,034/- ignoring the fact that the activities of the society are not in accordance with the aims and objects of the society.
Ld. Commissioner of Income Tax (A) has erred in law and on facts by deleting the addition made on account of excess salary paid of Rs. 50,000/-.
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Ld. Commissioner of Income Tax (A) has erred in law and facts by deleting the addition of Rs. 97,98,616/- it being the claim of application of income/ deduction of the expenses by the assessee incurred by the partner NGOs.
The order of Ld. CIT(A) be cancelled and the order of the A.O. be restored.”
At the outset, Learned D. R., submitted that he relies on the order of the Assessing Officer where he has given elaborate findings and therefore, the relief allowed by learned CIT(A) be reversed and appeal of the Revenue be allowed.
Learned counsel for the assessee, on the other hand, submitted that it is an undisputed fact that the assessee is registered u/s 12A of the Act and during the year under consideration it has utilized the grants received by it by donating the same to other societies engaged in similar objects. It was submitted that the Assessing Officer has added back the surplus earned by assessee by disallowing the benefit u/s 11 of the Act and has also made an addition of the amounts which it had paid to other societies engaged in similar objects. Learned counsel for the assessee submitted that in the earlier year i.e. assessment year 2013-14, similar issues arose and learned CIT(A) in that year also allowed relief to the assessee and on an appeal filed by the Revenue against the order of learned CIT(A), the Tribunal has dismissed the appeal of the Revenue and in this respect our attention was invited to pages 233 to 241 where a copy of Tribunal order in I.T.A. No.623/Lkw/2016 was placed. Our attention was also invited to a chart filed by him where the page numbers of findings of Assessing Officer as well as those of learned CIT(A)’s were placed. Our attention was also invited to learned CIT(A) order where by he has allowed relief to the assessee and Learned counsel for the assessee heavily placed reliance on the order of learned CIT(A).
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We have heard the rival parties and have gone through the material placed on record. We find that the Assessing Officer, in his order, itself has mentioned the fact of having incurred expenses to the tune of Rs.97,98,616/- towards payment to other partner NGOs. The Assessing Officer has further noted that these NGOs were also registered u/s 12A of the Act. The only reason for disallowing these expenses was that the assessee had not produced evidence which could prove that those NGOs, to whom assessee had made payments, had filed their respective returns of income. The other reason for disallowing these expenses was that the Assessing Officer, in earlier paragraph, had held that the assessee had not spent any expenditure on the objects stated in the Memorandum of Association. The learned CIT(A) has elaborately dealt with the issue and after relying on a number of case laws has deleted the addition by holding as under: “5. The undersigned has gone through the assessment order and written submissions of the appellant. The grounds of appeal are discussed and decided in following paragraphs of this order.
The appellant society renders rural development services for poverty alleviation through economic empowerment programmes and is registered since 26.02.1993. Society is governed by Management Committee. Only one of the original signatories to MOA is there in present Management Committee and none of the members are related to one another nor related to the original signatories of MOA. Donors to society are reputed names like Jamsetji Tata Trust, UNICEF, ITC Ltd, ICCO Netherland etc.
Ground of appeal No. 1.1 to 1.5
The AO vide para 1 of his order discussed expenditure on programme implementation with regards to two grants i.e.
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Business development of Agri producer companies (grant receive from ICCO Corp. Netherland).
Down stream research on seed system, awareness generation and seed multiplication, UP. (grant receive from IRRI Manila, Phillipnes)
The AO held that the expenditure is not in accordance with the aims and objects of the trust and do not reflect any charity work having been done from the grant received and accordingly disallowed claim of exemption u/s 11 of the Act.
During the course of appellate proceeding the appellant submitted as under:-
BUSINESS DEVELOPMENT OF AGRI. PRODUCER COMPANIES
The assessee society has in Annexure XXIII forming part of its Balance Sheet (erroneously referred to as note sheet of the Chartered Accountant by the learned Assessing Officer has given a detailed write up on the aforesaid programme as under:
a) This two-year project, supported by 'ICCO & Kerk in Actie' (Now ICCO-COOPERATION, New Delhi), aims at strengthening the governance/ managerial and the business aspects of two primary producer companies (PPCs) of marginal and small farmers being promoted by CDS (one each in Eastern UP and Central Rajasthah). The total outlay of the project is Euro 47,136.00. Under the project, the two PPCs are being provided high quality technical support for processes like strategic business planning; value chain analysis of the key products of the companies (aloe vera juice, in case of the Rajasthan based company and cereal & vegetable seeds for the Eastern UP company); refinement of existing products and product development standardisation of the quality control and production process; refinement of marketing strategies; and, upgradation of management and governance systems. For this purpose, during the year 2013-14, the major activities carried out under the project include viability analyses
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of the companies and the initiation of the strategic business planning and value chain analyses of the key products. The business plans were prepaid and the marketing efforts were further streamlined with PPCs. Training and exposures for improved Governance and Management were organized during the year." The appellant has further contended that:-
The assessee vide reply dated 29.11.201C in response to show cause notice dated 04-11-2016 of the assessing office/ made detailed submissions before the assessing officer on the particulars of activities conducted under the said programme and the way community was benefited. In addition to the particulars of activities the assessee also produced photographs, CDs, reports and documents of the project. Relevant page of show cause dated 04- 11-2016 of assessing officer is attached at page 78-79 of paper book and written submissions dated 29.11.2016 filed before the assessing officer is enclosed at pages 93, 131 to 138 of the paper book
b) DOWNSTREAM RESEARCH ON SEED SYSTEM, AWARENESS GENERATION AND SEED MULTIPLICATION, UPSCALING, DEVELOPMENT AND IMPROVEMENT OF BUSINESS MODEL AND DOCUMENTATION OF SUCCESS STORIES
(vii) The assessee society has in Annexure XXIII forming part of its Balance Sheet (erroneously referred to as note sheet of the Chartered Accountant by the learned assessing officer) has given a detailed write up on the aforesaid programme as under:
(viii)International Rice Research Institute supported GDS towards strengthening the seed multiplication for stress tolerant varieties of Rice as business model among farmers through GDS promoted Primary Producer Company at Maharajganj and SHG Federation in Sitamarhi, Bihar. During the year, seed production process was streamlined with certification process was
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put in place. Super bags use for seed storage and packaging of seed was done, suiting to the market demand. Awareness meetings for farmers was conducted, technological support was provided and the documentation was done for best practices in seed dissemination and business model promotion for the farmers. The appellan t further con tended that :-
The assessee vide reply dated 29.11.2016 in response to show cause notice dated 04-11-2016 issued by the assessing officer made detailed submissions before the assessing officer on the particulars of activities conducted under the said programme and the way community was benefitted. In addition to the particulars of activities the assessee also produced photographs, report, and documents of the project. Relevant page of show cause dated 04- 11-2016 of assessing officer is attached at page 80 of paper boc,< and written submissions dated 29.11.2016 filed before the assessing officer is enclosed at pages 94, 152 to 155 of the paper book.
The appellant filed copy of details regarding expenditure made on the projects submitted before the AO during the course of assessment proceedings. The appellant had also produced evidence regarding the activities of the appellant with respect to the projects. The AO could not point out any expenditure that was not being incurred for said projects, bin made a sweeping remark that no training and exposure were been done during the period. In absence of any cogent reason the inference drawn by the AO does not stand the test of scrutiny under the Act. The Assessing Officer cannot put itself in the shoes of the appellant and decide whether the activity is necessary or not. It is for the appellant society to decide whether any activity is necessary for fulfillment of the aims and objects of it.
This issue has been adjudicated upon in a number of decisions of Hon'ble I.T.A.T. and Hon'ble High Court. It has been held that once it is established that there is a nexus between the expenditure and purpose of business then the
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AO cannot justifiably claim to put itself in the arm chair of the business man or in position of Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It has been further held that no businessman can be compelled to maximise his profit and that the IT Authorities may step in the shoes of the appellant to decide as to how a prudent business man should act meaning there by that the AO must not look at the matter from his/her own point of view but that of a prudent businessman.
It is evident from the above that the projects of the appellant are funded by the grants received from reputed Nations and International organisations which have their own check and Balances on the projects funded by them. It is not open to the appellant society to deviate from the terms and condition on which the grant has been received. Furthermore, the assessee had incurred an expenditure of Rs. 5,13,912/- under the same project at point (a) in the A.Y. 2013-14 and no adverse inference was drawn by the department although the same case was assessed u/s 143(3). The AO at best could have added the expenses incurred on these two projects to the income of appellant but the AO did not chose to exercise the option and instead made sweeping remark that "the expenses debited do not reflect any charity were having been done from the grant received. The activities of the society are not in accordance with the aims and objects of the society. Hence assesses claim of exemption u/s 11 is denied."
The appellant received numerous grants from various reputed National and International Organization. It is strange that the AO was able to decide whether the activities of the appellant society are genuine or not on the basis of expenses made on mere two projects. The denial of benefit of exemption u/s 11 of the Act by the AO does not fulfill the requirement as envisaged under the Act. It is held that appellant is eligible for exemption u/s 11 and the addition of Rs. 83,78/034/- made by the Assessing Officer is hereby deleted. Ground of appeal No. 1.1 to 1.5 are allowed.”
4.1 In the above findings learned CIT(A) has elaborately held as to how the assessee got funds through grant received from reputed national and
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international organizations and how the assessee had spent on the objects through other various organizations engaged in similar activities. We further find that in assessment year 2013-14, similar denial of exemption u/s 11 of the Act was made and the Tribunal vide order dated 16/11/2018 had confirmed the findings of learned CIT(A) by holding as under:
Vide ground No. 3 the Revenue is aggrieved with the action of learned CIT(A) by which he has deleted the addition of Rs.62,40,012/- made by the Assessing Officer on account of amounts paid to other partner NFOs. We find that learned CIT(A) has deleted the addition made by the Assessing Officer by holding as under:
“Appellant claimed Rs.2,01,70,662/- as application of income for charitable purposes. This utilization includes donations given out of current years receipts of Rs.62,40,012/- being expenses incurred by partner NGO's out of grants by the appellant. The AO disallowed this claim of Rs. 62,40,012/- for reason that NGO's are registered u/s 12A of the Act and are eligible to claim exemption, therefore, these amounts are not allowable in hands of the appellant. On this issue the law stands well settled that when a sum has been disbursed to another entity carrying out similar object and registered u/s 12A of the Act then it is application of income for purpose of section 11 and 12 of the Act.
The Hon'ble Jurisdictional High Court in the case of J.K Charitable Trust (1992) 196 ITR 31(All) held that "Donation to another charitable trust out of contributions received by assessee trust is application of income for charitable purpose and such donation cannot be treated as income of assessee trust in year of contribution either under unamended as amended section 12 of the Act.
CBDT instruction No. 1132 dated 05.01.1978 stated that "The payment of sum by one charitable trust to another for utilization by donee trust towards its charitable objects is proper application of income for charitable purpose in hands of donor trust and donor
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trust will not loose exemption u/s 11 of the Act of the donations during the year of receipt itself.
The decision of Hon'ble Gujrat High Court in case of Nirmala Baku Bhai Foundation (1997) 226 ITR 394 (Guj.) too is in favour of the appellant on this issue itself.
The recent decisions in case of Delhi State Aids Control vs. ITO in ITAT No. 2906/Del/2010 and in case of Ram Ashram Trust, Nashik vs. Deptt of Income Tax in ITA No. 975/PN/2012 are also in the favour of appellant on this issue itself.
In view of the above facts and judgments outlined above the disallowance of Rs. 62,40,6127- made by the AO is hereby deleted. The grounds of appeal No. 4 is allowed.”
5.1 We find that learned CIT(A) while deciding the above ground has considered various judicial pronouncements and has exhaustively dealt with the issue which needs no interference from our side. Keeping in view the facts and circumstances of the case, we confirm the view of learned CIT(A) and dismiss the ground No. 3 taken by the Revenue.”
4.2 In view of the above facts and circumstances, ground No. 1 of the appeal filed by the Revenue is dismissed.
Now coming to ground No. 2 of the appeal, we find that learned CIT(A) has deleted the addition of Rs.50,000/- by relying on earlier order of learned CIT(A) for assessment year 2013-14 in the case of the assessee itself by holding as under:
“5.1 Ground of appeal No. 201 and 2.2
The Assessing Officer has held that salary paid to Shri S. K. Dwivedi (Secretary), Shri Amitabh Mishra (Treasurer) and Shri Probir Bose (Member) is excessive and disallowed Rs.20,000/- and Rs.20,000/- and Rs.10,000/- out of their salaries u/s 13 of the Act. Total Disallowance made was Rs. 50,000/-. The AO
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was provided with detailed job1 descriptions of these three persons along with other details Vide submission dated 22.07.2016 along with details of remuneration paid to them in last 10 years.
Identical issue regarding the addition made was raised in the appellant's own case for the A.Y. 2013-14. The issue was decided by my predecessor vide his order dated 04.08.2016 wherein it was held that:-
"The AO has just made a general comment that salary given is excessive and disallowed Rs. 50,000/- out of salary given. No finding has been given as to why it is excessive or what is the basis of making the disallowance. No comparative case has been given to justify the disallowance. A disallowance based on a general comment is not called for. The action of the AO defies the logic. In view of these facts the disallowance of Rs. 50,000/- u/s 13 made by the AO is hereby deleted. Relief of Rs. 50,000/- is allowed to the applicant."
Since, no new evidence or findings have been given by the AO in his order, I do not find any reason to deviate from the findings of my predecessor. Accordingly, the. addition made by the AO is hereby deleted and Grounds of appeal No. 2.1 and 2.2 are allowed.”
5.1 We further find that the Revenue has filed appeal against the order of learned CIT(A) before the Tribunal and Tribunal, vide order dated 16/11/2018, has dismissed this ground of appeal by holding as under:
We have heard the rival parties and have gone through the material placed on record. Vide ground No. 1 & 2 the Revenue is aggrieved with the action of learned CIT(A) by which he has deleted the addition of Rs.50,000/- and Rs.96,152/- made by the Assessing Officer u/s 13(1)(c)(ii) and 13(2)(c) and 13(3) on account of excessive salary paid to regular/part time employees. We find that learned CIT(A) has deleted both the additions made by the Assessing Officer by holding as under:
“5.1 The AO has held that salary paid to Shri S.K. Dwivedi (Secretary), Shri Amitabh Mishra(Treasurer) and Shri Probir
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Bose (Member) is excessive and disallowed Rs. 20,000/-, Rs. 20,000/- and Rs. 10,000/- out of their salaries u/s 13 of the Act. Total Disallowance made was Rs. 50,000/-. The AO was provided with detailed job descriptions of these three persons along with other details vide submission dated 18.11.2015 alongwith details of remuneration paid to them in last 10 years.
Similarly the AO held that Ms Padmja Nair (Member) and Shr J.L Dwivdei (Member) are part time employees and not full time employees. Therefore, their salaries of Rs. 78,652/- and Rs.17,500/- was disallowed u/s 13 of the Act. Total Disallowance made was Rs. 96,152/-. 5.2 During course of appellate proceedings, detailed job descriptions of Shr S.K. Dwivedi, Shri Amitabh Mishra and Shri Probir Bose was provided.
Shri Probir Bose is program Director for Migration projects supported by Jamshetji Tata Trust being implemented at Khalilabad and Lucknow. He is working with appellant since July 2001 and was coopted as Member on 28.01.2004.
Shri Amitabh Mishra is Program Director for Goat based livelihood project in Bundelkhand, NRM project in Lalitpur, CBDRR project in Eastern UP and Agricultural Project in Hardoi. He is working with appellant since July 1996 and is member of Board since 26.02.2007.
Shri S.K. Dwivedi is Executive Director and oversees the projects for revival of Agricultural based livelihoods in Eastern U.P. and North Bihar, IRRAS project and Jawaja project. He is responsible for strategic planning, implementation of projects and monitoring their outcomes. He also coordinates the Finance and Accounts functions.
Salaries are fixed as per terms and conditions of service under specific scale (Category E-I) consisting of Basic Salary, DA (50% of basic), HRA, transport Allowance which is revised from time to time after performance appraisal. Either side may terminate the salary agreement by giving one month notice or pay in lieu of notice.
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Particulars of salary paid to these three persons over last 10 years was filed i.e. 2003-04 to 2012-13. The average increase in salary in 2012-13 as compared to 2011-12 is 15% approximately in all the three cases. After looking at their job description, their professional profile, their work experience and the inflationary pressures the increase in annual salary by 15% in the three key members of appellate society cannot be held as excessive or unreasonable. The AO has not outlined any basis on which he has come to a finding that this salary is excessive. Either the services rendered are not commensurate with the salary or the salary given is in excess of services rendered. No such finding has been given by the AO.
To find out whether the payment of salary is excessive then same has to be examined on commercial considerations i.e. in comparison to market value of services rendered. The AO has not brought anything on record to show that salary paid to these three persons was excessive in comparison to the market value of services rendered. Merely because there is increase in salary by 15% compared to earlier year will not lead to conclusion that salary paid is excessive or it is personal benefit as envisaged in Section 13(1) of the Act Excessive salary has to be shown not with reference to increase in salary over earlier year but with reference to excessiveness in comparison to market value of the services that is with reference to commercial considerations. Such a finding is clearly missing in the assessment order.
The AO has just made a general comment that salary given is excessive and disallowed Rs. 50,000/- out of salary given. No finding has been given as to why it is excessive or what is the basis of making the disallowance. No comparative case has been given to justify the disallowance. A disallowance based on a general comment is not called for. The action of the AO defies the logic. In view of these facts the disallowance of Rs. 50,000/- u/s 13 made by the AO is hereby deleted. Relief of Rs. 50,000/- is allowed to the applicant.
5.3 Similarly, the AO has disallowed Rs. 96,152/- on the basis of a general comment that this payment is not
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allowable u/s 13 of the Act for the sole basis that Ms. Padmja Nair and Shri J.L Dwivedi are part time employees and not full time employees. The AO has further noted that the "assessee could not explain their job and duties rendered to the assessee. The detailed terms and conditions of Mrs. Padmja Nair and Mr. J. L. Dwivedi were made available to the AO vide written submissions dated 18.11.2015.
Mrs. Padmja Nair was paid for a specific task i.e. critical appraisal of "Community led total Sanitation" process carried out under the project Facilitating community led WASH and livelihood interventions in flood plains of Eastern UP in 20 villages of Rapti basin spread over district of Siddartha Magar, Sant Kabir Nagar, Maharaj Ganj and Gorakhpur, The important component was to promote sanitation in these villages. Total fees paid was Rs. 70,000/- subject to TDS and exclusive of service tax after submission of final report. Total payment made was Rs. 78,652/- inclusive of service tax (12%) and Education cess (3%).
Dr. J.L Dwivedi was paid for specific task for "designing and implementation of Agriculture based livelihood strengthening programme within the project in appellant society as well as partners location in Eastern UP and Northern Khar". Total payment made was Rs. 17,500/-.
It is pertinent to point out that Mrs. Padmja Nair and Mr. J.L. Dwivedi are acclaimed independent professionals in the development sector specializing in rural development. The AO ignored the entire above stated gamut of facts before him and disallowed payment of Rs. 96,152/-to these two independent professionals based on a general comment that they are only part time employees and not full time employees. The AO ignored the that these two persons are consultants for specific projects and not even t time employees.
Any disallowance based on a general comment by the AO is uncalled for. In view of the above mentioned facts the disallowance of Rs. 96,152/- is hereby deleted. Grounds of appeal No. 1 and 2 are allowed.”
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4.1 We find that learned CIT(A) has dealt with the issues exhaustively and finding no infirmity in the findings of learned CIT(A), ground No. 1 & 2 of the Revenue’s appeal are dismissed.
5.2 In view of the above facts and circumstances and judicial precedents, ground No. 2 is also dismissed.
Now coming to ground No. 3, we find that similar issue arose in assessment year 2013-14 also and the Tribunal dismissed similar ground of appeal raised by the Revenue by holding as under: “5. Vide ground No. 3 the Revenue is aggrieved with the action of learned CIT(A) by which he has deleted the addition of Rs.62,40,012/- made by the Assessing Officer on account of amounts paid to other partner NFOs. We find that learned CIT(A) has deleted the addition made by the Assessing Officer by holding as under:
“Appellant claimed Rs.2,01,70,662/- as application of income for charitable purposes. This utilization includes donations given out of current years receipts of Rs.62,40,012/- being expenses incurred by partner NGO's out of grants by the appellant. The AO disallowed this claim of Rs. 62,40,012/- for reason that NGO's are registered u/s 12A of the Act and are eligible to claim exemption, therefore, these amounts are not allowable in hands of the appellant. On this issue the law stands well settled that when a sum has been disbursed to another entity carrying out similar object and registered u/s 12A of the Act then it is application of income for purpose of section 11 and 12 of the Act.
The Hon'ble Jurisdictional High Court in the case of J.K Charitable Trust (1992) 196 ITR 31(All) held that "Donation to another charitable trust out of contributions received by assessee trust is application of income for charitable purpose and such donation cannot be treated as income of assessee trust in year of contribution either under unamended as amended section 12 of the Act.
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CBDT instruction No. 1132 dated 05.01.1978 stated that "The payment of sum by one charitable trust to another for utilization by donee trust towards its charitable objects is proper application of income for charitable purpose in hands of donor trust and donor trust will not loose exemption u/s 11 of the Act of the donations during the year of receipt itself.
The decision of Hon'ble Gujrat High Court in case of Nirmala Baku Bhai Foundation (1997) 226 ITR 394 (Guj.) too is in favour of the appellant on this issue itself.
The recent decisions in case of Delhi State Aids Control vs. ITO in ITAT No. 2906/Del/2010 and in case of Ram Ashram Trust, Nashik vs. Deptt of Income Tax in ITA No. 975/PN/2012 are also in the favour of appellant on this issue itself.
In view of the above facts and judgments outlined above the disallowance of Rs. 62,40,6127- made by the AO is hereby deleted. The grounds of appeal No. 4 is allowed.”
5.1 We find that learned CIT(A) while deciding the above ground has considered various judicial pronouncements and has exhaustively dealt with the issue which needs no interference from our side. Keeping in view the facts and circumstances of the case, we confirm the view of learned CIT(A) and dismiss the ground No. 3 taken by the Revenue.
In view of the above facts and circumstances of the case and the judicial precedents, the appeal filed by the Revenue is dismissed.
In the result, the appeal of the Revenue stands dismissed.
(Order pronounced in the open court on 13/08/2021)
Sd/. Sd/. ( A. D. JAIN ) ( T. S. KAPOOR ) Vice President Accountant Member
Dated:13/08/2021 *Singh
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Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow
By Order Assistant Registrar