DEPUTY COMMISSIONER OF INCOME TAX (E), CIRCLE, JAIPUR vs. MAHATMA GANDHI CHARITABLE SOCIETY FOR EDUCATION AND RESEARCH, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”B” JAIPUR Jh lanhi xkslkbZ] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI SANDEEP GOSAIN, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 359/JP/2019 fu/kZkj.k o"kZ@Assessment Year : 2015-16 Mahatma Gandhi Charitable Society cuke The DCIT (Exemptions) Vs. Circle – Jaipur for Education and Research Jaipur 521, Acharya Kriiplani Marg, Adrash Nagar,Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABAM 4006 G vihykFkhZ@Appellant izR;FkhZ@Respondent jktLo dh vksj ls@ Revenue by: Smt.Runi Paul, JCIT DR fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal, CA lquokbZ dh rkjh[k@ Date of Hearing : 16/01/2020 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 23 /01/2020 vkns'k@ ORDER PER SANDEEP GOSAIN, J.M. The present appeal has been filed by the Revenue against the order of CIT(A), Kota dated 24.12.2018 for the assessment year 2015-16 wherein the Revenue has raised the following grounds of appeal. ‘’1. On the facts and circumstances of the case and in law the ld. CIT(A) erred in allowing exemption u/s 11 of the I.T. Act, 1961 to the assessee without appreciating the fact that the assessee made payment to Rambagh Polo Club for corporate membership which has nothing to do with the

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

objects of the society and therefore, the funds of the society have been diverted for the personal benefit of the specified persons.

2.1 Brief facts of the case are that the assessee filed its return of

income on 29-09-2015 declaring a total income of Rs. 46,000/-. The

assessee derives income from educational institute. The assessment was

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

completed u/s 143(3) on 28-09-2017 computing the total income of the

assessee by making disallowances/additions.

2.2 Aggrieved by the order of the AO, the assessee preferred the appeal

before the ld. CIT(A) and the ld. CIT(A) after considering the case of

both the parties allowed the appeal of the assessee and deleted the

additions made by the AO.

2.3 Aggrieved by the order of the ld. CIT(A), the Revenue has filed the

present appeal before us on the grounds mentioned hereinabove.

3.1 The ground Nos. 1 and 2 raised above by the Revenue are

interrelated and interconnected and also relates to challenging the order of

the ld. CIT(A) in allowing exemption u/s 11 of the Act to the assessee.

We,therefore thought it fit to dispose off these grounds through the

consolidated order.

3.2 The ld. DR appearing on behalf of the Revenue submitted before us

that the ld. CIT(A) erred in allowing the exemption u/s 11 of the I.T. Act,

1961 to the assessee without appreciating the facts that the assessee made

payments to Rambagh Polo Club for corporate membership which has

nothing to do with the objects of the society and therefore, in this way the

funds of the society have been diverted and misutilized for the personal

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

benefits of the specified persons. It was further submitted that the ld.

CIT(A) also erred in allowing exemption to the assessee by holding that

only the portion of income which violates the provisions are to be

charged at MMR and therefore, he relied on the order passed by the AO.

3.3 On the other hand, the ld.AR appearing on behalf of the assessee

relied on the order of the ld. CIT(A). It was submitted that where the

assessee had violated the provisions of section 13, neither the exemption

u/s 11/12 can be denied nor the surplus as such can be charged to tax at

Maximum Marginal Rate. The ld.AR of the assessee relied on the

provisions of Section 164(2) of the Act and submitted that said provisions

deals with the charge of tax on the income of the trust which is derived by

it from the property held wholly for charitable or religious purposes. It

was submitted that where the whole or any part of the relevant income is

not exempt u/s 11 or 12 because of the provisions of the section 13(1)(c)

or 13(1)(d), tax is chargeable on the relevant income or part of the

relevant income at the maximum marginal rate (MMR). Therefore, in

case there is violation of sec.13, entire income of the trust is not liable to

be taxed at MMR but only the relevant part of the income which violates

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

sec.13 attracts the MMR. For this purpose, the ld.AR of the assessee

relied on following case laws:-

(i) DIT Vs. Working Women’s Forum (2015) 235 Taxman 516 (SC) - SLP dismissed against High Court’s ruling that in case of trust registered u/s 12AA, only such part of income which is violative of section 13(1)(d) can be brought to tax at minimum marginal rate and entirety of income cannot be denied exemption u/s 11. (ii) CIT Vs. Fr. Mullers Charitable Institutions (2014) 227 Taxman 369 (SC) - High Court by impugned order held that in case of charitable trust, it is only income from investment or deposit which had been made in violation of section 11(5) that was liable to be taxed and that violation u/s 13(1)(d) does not tantamount to denial of exemption u/s 11 on total income of assessee trust. Special leave petition filed against impugned order was to be dismissed. It was further submitted that similar disallowance was made by the AO in

AY 2014-15 where the ld. CIT(A) vide its order dated 28.12.2018 held

that the entire exemption u/s 11/ 12 cannot be denied. The portion of

income which violates the provisions is to be charged at MMR. Against

the order of ld. CIT(A), the Revenue has not filed any further appeal

before Hon’ble ITAT. The ld.AR of the assessee thus submitted that the

ld. CIT(A) has rightly allowed the exemption u/s 11 to the assessee and

hence, grounds of the department be dismissed.

3.4 We have heard the ld. counsel of both the parties, perused the

materials placed on record, orders of the lower authorities and the

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

judgement cited by the parties. Before we decide the merits of these

grounds, it is necessary to evaluate the orders passed by the Revenue

authorities. The ld. CIT(A) while dealing with these grounds had passed

the detailed order and the operative portion as mentioned at pages 20 to

22 of the ld. CIT(A)’s order is contained hereinbelow.

‘’As regards Ground Nos. 1 and 3, I am in agreement with the AO’s stand that taking a corporate membership in a private club cannot be linked to the objects of the Trust/society in any manner. The trust exists for some other purposes and gets benefit under tax laws for genuine pursuit of its objects towards good of the society and not for ‘’business’’ like expansion through entertainment for guests in private clubs and networking etc. for which normally businesses use such memberships. In CIT vs United Glass Manufacturing Co. Ltd. the Apex Court has opined that club membership fee is purely a business expense and allowable u/s 37 of the I.T. Act which applies to deductions allowable against Business profits. There is no such provision in Trust cases for such expenses under the Governing Sections 11, 12 & 13. The decisions of the AO to disallow the expenses of Rs. 11,71,949/- against membership charges to Rambagh Gold Club as contested by the assessee in Ground 1 is upheld. Similarly, as per Ground No. 3, the disallowance of interest amount of Rs. 1,40,634/- worked out on this payment is also upheld. These grounds of appeal are dismissed.

As regards Ground No. 4, on perusal of the overall facts and the provisions of the Act, I find that the assessee society is registered under the Rajasthan Society Act and also registered u/s 12AA of the I.T. Act. This exemption has not been withdrawn. It is a settled law that even if it is held that assessee has violated the provisions of Sectin 13, neither the exemption u/s 11/ 12 can be denied nor the surplus as such can be charged to tax at Maximum Marginal Rate. Section 164 deals with the charge of the tax where the share of the beneficiary is unknown. Section 164(2) deals with the charge of tax

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

on the income of the trust which is derived by it from the property held wholly for charitable or religious purposes. The proviso to this section which is relevant in the present case reads as under:-

‘’Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause © or clause (d) of sub-section (1) of Section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.’’

From the plain reading of this proviso, it is evident that where the whole or any part of the relevant income is not exempt u/s 11 or 12 because of the provisions of the Section 13(1)( c) or 13(1)(d), tax is chargeable on the relevant income or part of the relevant income at the maximum marginal rate (MMR). Therefore, in case there is violation of Sec 13, the entire income of the trust is not liable to be taxed at MMR but only the relevant part of the income which violates sec 13 attracts the MMR.

This principle of law is settled by the following decisions referred by the AO:-

DCIT vs Working Women’s Forum (2015) 235 Taxman 516 (SC). CIT vs Fr. Mullers Charitable Institutions (2014) 227 Taxman 369 (SC)

CIT vs Fr. Mullers Charitable Institutins(2014) 363 ITR 230 (Kar.)

CIT vs Orpat Charitable Trust (2015) 230 Taxman 0066 (Guj) H.C.

DIT (Exemption) vs Sheth Mafatlal Gagalbhai Foundation Trust,249 ITR 533 (Bom.)

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

M/s. Santokba Durlabhji Trust Fund vs ITO in ITA No. 169/JP/2012 for A.Y. 2008-09 dated 5-11-2014.

Jamsedji Tata Trust vs JDIT (Exem.) 101 DTR 305 / 148 ITD 388 (Mum) (Trib.)

Considering all these facts, I find that the entire exemption u/s 11/12 can’t be denied. The portion of the income which violates the provision are discussed separately in Grounds 1 & 3 above, where the tax is to be charged at Maximum Marginal Rate. Accordingly, the AO is directed to compute the income of the assessee trust after allowing the exemption u/s 11/12.

This ground of appeal is allowed.’’

After having heard the ld. counsel for both the parties at length, we fond

that the ld. CIT(A) had rightly upheld the decision of the AO by holding

that taking a corporate membership in a private club cannot be linked to

the objects of the trust /society in any manner. The trust exists for some

other purposes and gets benefits under the tax laws for genuine pursuit of

its objects towards good of the society and not for the business like

expansion through entertainment for guests in private club and

networking etc. for which normally businesses use such memberships.

We also found support from the decision of Hon'ble Supreme Court in the

case of CIT vs United Glass Manufacturing Co. Ltd. wherein it was held

that club membership fees is purely a business expenses and allowable u/s

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

37 of the I.T. Act which applies to deductions allowable against business

profits. There is no such provision in trust cases for such expenses under

the Governing Sections 11 to 13 of the Act . Therefore, the ld. CIT(A)

had rightly upheld the decision of the AO to disallow the expenses of Rs.

11,71,949/- against membership charges to Rambagh Gold Club.

3.4.1 Similarly, we are also of the view that the even if it is held that

assessee has violated the provisions of section 13 of the Act, even then

the exemption u/s 11 or 12 of the Act cannot be denied nor the surplus as

such can be charged to tax at Maximum Marginal Rate. Even otherwise,

the provision of Section 164 specifically deals with the charge of tax

where the shares of the beneficiary is unknown. Section 164(2) deals with

charge of tax on the income of the trust which is derived by it from the

property held wholly for charitable or religious purposes. From the plain

reading of this proviso, it is evident that where the whole or any part of

the relevant income is not exempt u/s 11 or 12 because of the provisions

of the Section 13(1)( c) or 13(1)(d) then tax is chargeable on the relevant

income or part of the relevant income at the maximum marginal rate

(MMR). Thus in that eventuality, even in case there is violation of Sec

13, the entire income of the trust is not liable to be taxed at MMR but

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

only the relevant part of the income which violates sec 13 attracts the

MMR. We also found support from the decision in the case of DCIT vs

Working Women’s Form (2015) 235 Taxman 516 and CIT vs Fr.Mullers

Charitable Institutions (2014) 227 Taxman 369 (SC). No new facts or

circumstances have been brought before us in order to controvert or rebut

the findings so recorded by the ld. CIT(A). Therefore, we find reason to

interfere in the order of the ld. CIT(A). Hence, the ground Nos. 1 and 2 of

the Revenue are dismissed.

4.1 In Ground No. 3, the Revenue is aggrieved that the ld. CIT(A) has

erred in deleting the disallowances of depreciation of Rs. 1,23,30,183/-

(correct amount Rs. 1,20,32,873/-) ignoring the amendment made through

Finance Act No. 2/2014 in section 11 by inserting sub-section (6) to the

Section of 11of the I.T. Act, 1961 in the statute which became effective

from the A.Y. 2015-16 and the fact that the assets on which depreciation

have been claimed had already been claimed as application of income by

the assessee in earlier years.

4.2 Brief facts of the case are that the AO during the year under

consideration observed that the assessee had claimed depreciation on

fixed assets at Rs. 1,20,32,873/-. The AO further noted that each of the

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

assets has already been treated as application of the income and therefore,

further claiming depreciation would tantamount to double taxation of the

same income. Accordingly, the AO made disallowance of claim of

depreciation of Rs. 1,20,32,873/-.

4.3 In first appeal, the ld. CIT(A) after relying on the decision of

Hon'ble Supreme Court in the case of CIT vs Rajasthan and Gujarati

Charitable Foundation 402 ITR 441 and the decision of Hon'ble

Rajasthan High Court in the case of CIT vs Krishi Upaj Mandi Samiti,

Jaislmer (2015) 125 DTR 281, deleted the disallowance made by the AO.

4.4 During the course of hearing, the ld. DR relied on the order of the

AO.

4.5 On the other hand, the ld.AR of the relied on the order of the ld.

CIT(A). It was contended by the ld.AR of the assessee that the assessee

has not claimed cost of fixed assets as application of income as there was

very meager surplus in earlier years The assessee only claimed the

depreciation of fixed assets. It was submitted that even during the year the

purchase of fixed assets is to the tune of Rs. 1,17,78,921/- but the same is

not claimed as application and only depreciation is claimed. Thus in these

circumstances, the disallowance of claim of depreciation by the AO was

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

not called for and therefore, the same was rightly deleted by the ld.

CIT(A).

4.6 We have heard the ld. counsels of both the parties and perused the

materials available record. The ld. DR during the course of hearing

submitted before us that the disallowance of claim of depreciation was

deleted by the ld. CIT(A) by merely relying on the decision of CIT vs

Rajasthan and Gujarat Charitable Foundation (supra) whereas in the said

judgement it has categorically been held that the amendment in Section

11(6) of the Act has been incorporated vide Finance Act (No. 2 ) of 2014

which became effective from Assessment Year 2015-16. The ld. DR has

also drawn our attention to the clarification given by the Hon'ble Supreme

Court wherein it has confirmed the prospective nature of Section 11(6) of

the Act which clarifies that income of an institution would be calculated

without provision for any depreciation or deduction in relation to an asset

that has been acquired by the institution. From the records, we noticed

that although it was submitted by the ld.AR of the assessee that it had not

claimed cost of fixed asset as application of income as there was very

meager surplus in earlier years and it only claimed depreciation of fixed

asset. However, this fact has not been verified by the AO as to whether

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

the assessee has claimed the cost of fixed assets as application of income

in the previous year or not. Therefore, in our view and in the interest of

equity and justice, this issue is restored back to the file of the AO with the

direction to verify the facts of the earlier years as to whether the assessee

had claimed the cost of fixed assets as application of income or has

claimed depreciation and then pass the afresh assessment order on the

issue in question by providing reasonable opportunity of being heard to

the assessee. Thus Ground No. 3 of the Revenue is allowed for Statistical

purposes.

5.1 In Ground No. 4, the Revenue is aggrieved that the ld. CIT(A) has

erred in deleting addition of Rs.89,37,519/- u/s 40A(3) without verifying

that such expenditure had been claimed by the assessee as application

without appreciating the fact that the assessee has been assessed as an

AOP and has made cash payment to the contractors in contravention to

the provisions of section 40A(3) of the IT Act, 1961.

5.2 Brief facts of the case are that the AO on perusal of the cash book

observed that the assessee had made cash payment of Rs. 89,37,519/- in

contravention of provisions of Section 40A(3) of the I.T. Act, 1961.

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

Accordingly, the AO disallowed the payment made for fixed assets in

cash.

5.3 In first appeal, the ld. CIT(A) has deleted the disallowance made

by the AO by observing as under:-

‘’(ii) As regards Ground No. 5, the AO had made disallowance of Rs. 89,37,519/- u/s 40A(3) in respect of the payment made for fixed assets in cash. The A/R argued that the provisions of section 40A(3) do not apply8 to capital expenditure.

As I hence held in the appellant’s own case for A.Y. 2014-15 on this very issue that since all the payments were capitalized in the books of account and no expenditure are claimed as Revenue expenditure and therefore, the provisions of section 40A(3) would not apply on the same. CBDT Circular No.34[F.No.13A/92/69-IT(A-II), dated 5-03- 1970 clearly states that section 40A(3) is applied only to revenue expenditure and not to capital expenditure, when capital expenditure is incurred in cash, section 40A(3) cannot be invoked. The relevant Para is as under:-

‘’2. The provisions of section 40A(3) would apply in computing the income under the heads ‘’profits and gains of business or profession’’ and ‘’income from other sources’’ as per section 58(2). All payments in excess of Rs. 2,500/- at one time whether for goods or services obtained for cash or credit, which are deductible in computing the income, have to be made by cross cheque or bank draft. Thus the price of goods purchased for resale or use in manufacturing process or payments for services will be covered by the provisions of section 40A(3). However, the section will not apply to repayment of loans or payment towards the purchase price of capital assets such as plant and machinery not for resale.’’

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

Accordingly, the disallowance to the extent of capital expenditure of Rs. 89,37,519/- is not being upheld.’’

.5.4 We have heard the ld. counsel for both the parties and perused the

materials available on record. We noticed that the payment of Rs.

89,37,519/- was made for acquiring the fixed assets and it was also made

to labour contractors who had to make payments to the labourers. All the

payments were capitalized in the books of account and no expenditure

was claimed as Revenue expenditure. When no expenditure was claimed

in the profit and loss account then the provision of section 40A(3) cannot

be applied. In this respect, we also rely on the CBDT Circular No.34

dated 5-03-1970 wherein it has clearly been stated that section 40A(3)

applies only to Revenue expenditure and not to capital expenditure. Even

otherwise, similar disallowance was mad by the AO in Assessment Year

2014-15 which was deleted by the ld. CIT(A) vide order dated 28-12-

2018 against which the Revenue has not filed any further appeal before

ITAT. In this case, no new facts or circumstances have been brought

before us by the Revenue in order to controvert or rebut the findings so

recorded by the ld. CIT(A). Therefore, we find no reason to interfere with

ITA No. 359/JP/2019 The DCIT (Exemptions) Circle – Jaipur vs Mahatama Gandhi Charitable Society for Education and Resarch, Jaipur

the order of the ld. CIT(A) on this issue. Hence, we dismiss the Ground No. 4 of the Revenue by upholding the order of the ld. CIT(A). 6.0 In the result, the appeal filed by the Revenue is partly allowed for Statistical purposes with no order as to cost. Order pronounced in the open court on 23/01/2020.

Sd/- Sd/- ¼lanhi xkslkbZ½ ¼foØe flag ;kno½ (Vikram Singh Yadav) (Sandeep Gosain) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member

Tk;iqj@Jaipur fnukad@Dated:- 23/01/2020. *Mishra आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1.vihykFkhZ@The Appellant- The DCIT (Exemptions), Circle- Jaipur , Jaipur 2.izR;FkhZ@ The Respondent-Mahatama Gandhi Charitable Society for Education and Research, aipur 3. vk;dj vk;qDr@ CIT vk;dj vk;qDr@ CIT(A) 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 4. xkMZ QkbZy@ Guard File {ITA No. 359/JP/2019} 5. vkns'kkuqlkj@ By order, सहायक पंजीकार@Aेेजज. त्महपेजतंत