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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
आदेश /O R D E R
Per Shri D.S.Sunder Singh, Accountant Member :
This appeal is filed by the revenue against the order of Commissioner of Income Tax (Appeals), [CIT(A)], Tirupati in 17/CIT(A)/TPT dated 03.01.2019 for the Assessment Year (A.Y.) 2013-14 and the cross objections are filed by the assesse with a delay of 10 days. The assesse filed condonation petition stating that the delay was due to medical reasons and requested to condone the delay. After hearing both the parties, the delay is condoned and cross objections are admitted.
In the instant case, the revenue filed the following grounds of appeal : i. The CIT(A) erred in allowing the appeal of the assessee ii. The CIT(A) erred in allowing exemption u/s when the assessee did not furnish full details of bills and vouchers called by the Assessing Officer. - Rs.1,05,10,893/- iii. The Ld.CIT(A) erred in allowing 50% of the expenditure incurred on boarding and lodging when bills and vouchers were not produced. - Rs.2,63,394/- iv. The Ld.CIT(A) erred in allowing interest paid to interested persons at 18% without considering the market rate of interest. - Rs.6,19,626/- v. The Ld.CIT(A) erred in allowing the rent for building by relying on the copy of the rental agreement produced by the assessee before the CIT(A) which was not sent to the AO for verification - Rs.3,60,000/- vi. The Ld.CIT(A) erred in allowing the expenses on rent of vehicles when the assessee had failed to produce the documents called for by the Assessing Officer during the assessment proceedings as well as in remand report proceedings - Rs.2,16,000/-
CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi vii. Any other ground that may be taken up at the time of hearing.
Ground No.(i) and (vii) are general in nature which do not require specific adjudication.
Ground No.(ii) is with regard to exemption u/s 11 of the Income Tax Act, 1961 (in short ‘Act’). Brief facts of the case are that the assessee is running educational institutions and filed its return of income disclosing ‘Nil’ income on 30.09.2013. The case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued to the assessee but the assessee did not respond to the notices issued by the Assessing Officer (AO), hence, the AO could not ascertain whether there was any violation of provisions u/s 13(1)(c) of the Act, therefore, taxed the surplus amount of Rs.3,50,36,310/- disclosed in the statement of total income and denied the exemption claimed u/s 11 by the assessee. The assessment was completed u/s 144 of the Act.
4.1. Against the order of the AO, the assesse went on appeal before the CIT(A) and furnished all the details called for by the AO. The Ld.CIT(A) admitted the evidences placed before him during the appeal proceedings and called for the remand report from the AO. During the remand
CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi proceedings the AO called for the details and the same was furnished by the assessee i.e the ledger accounts, bills in support of expenditure incurred. After examining the details the AO submitted the remand report. The Ld.CIT(A) on receipt of the remand report, allowed exemption u/s 11 and deleted the addition made by the AO.
4.1.2. Against the order of the Ld.CIT(A) the revenue filed appeal before us. During the appeal hearing, the Ld.DR argued that the assesse has not produced bills and vouchers to ascertain the correctness of exemption u/s 11 claimed by the assessee, hence, argued that the order of the Ld.CIT(A) required to be set aside and restore the assessment order.
4.1.3. On the other hand, the Ld.AR relied on the order of the Ld.CIT(A).
4.1.4. We have heard both the parties and perused the material placed on record. In the instant case, the AO denied exemption u/s 11 and made the addition of Rs.3,50,36,310/- towards surplus income. During the appeal proceedings, the assesse furnished the details and the CIT(A) called for the remand report. During the remand proceedings, the assessee furnished complete details, i.e.ledger accounts and expenses which were CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi examined by the AO and discussed by the Ld.CIT(A) head-wise in his appeal order. The AO at no point of time, made any adverse comments with regard to the exemption claimed by the assesse. For the sake of clarity and convenience, we extract relevant part of the order of the Ld.CIT(A) which reads as under: “I have considered the findings given by the AO in the remand report the objections given by AR of the appellant from time to time on the proposed disallowance. The AO made detailed enquiries with respect to the claim of expenses incurred towards addition to the assets of Rs.3,42,78,050/- and also other expanses claimed in the Income & Expenditure Account The AO, after making detailed enquiry, accepted the claim of appellant that most of the expenses claimed are genuine. The AO also accepted the claim of fees received towards hostel receipts and under the head fee collection account, after detailed verification. The AO did not make any adverse observation against the Manager or Trustees of the Society in the remand report, on the issue of misappropriation of the funds of the Society, as alleged by the AO in the course of assessment proceedings. The appellant is a society, managing educational institution. The income & expenditure claimed were found to be spent for aims and objectives of the Society. Therefore, the denial of claim, of exemption u/s 11 made by the AO in the order of assessment requires to be reconsidered. Hence, the AO is directed to grant the claim of exemption u/s 11 to the assessee Society, and consequently, delete the addition of Rs.3,42,78,050/- towards expenditure to addition to the assets.” The Ld.CIT(A) granted exemption u/s 11 on the basis of the remand report submitted by the AO. The Ld.CIT(A) directed the AO to grant exemption u/s 11 and observed that the AO did not make any adverse observation against Manager of the Trustee or Society in the remand report with regard to misappropriation of the funds of the Society. Further, we find from the order of the Ld.CIT(A) that no violation u/s 13(1)(c) was brought on record by the AO in the remand report. Therefore, we do not CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. Ground No.(ii) of the department is dismissed.
Ground No.(iii) is related to restricting the disallowance to 50% of the expenditure incurred on boarding and lodging expenses. During the assessment proceedings, the AO disallowed the entire expenditure since the assesse failed to respond to the notices. As stated earlier during the appeal hearing before the first appellate authority, the assesse furnished the bills and vouchers and the Ld.CIT(A) has called for the remand report. The AO submitted the remand report, stating that though the assessee had produced the ledger accounts of lodging and boarding, hotel bills and payment details along with the copies of bank statements, the names of persons, their identity and purpose of visit was not furnished by the assesse, hence viewed that the authenticity and correctness of the expenses could not be verified. Therefore, Ld.CIT(A) confirmed the addition of 50% of the expenditure incurred towards lodging and boarding out of total sum of Rs.17,55,957/-. and deleted the balance amount. While restricting the disallowance to 50%, the Ld.CIT(A) observed that the assesse is engaged in running of educational institution and engaged faculty for college, however,
CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi failed to furnish conclusive evidence, therefore, restricted the disallowance to 50%.
5.1. Against which the revenue is in appeal before this Tribunal.
5.1.2. We have heard both the parties and perused the material placed on record. Before the Ld.CIT(A), the assesse furnished the details which the AO had examined in the remand proceedings. However, it was stated that the assessee could not furnish some of the details, such as names of persons, their identity and purpose of visit etc., which created suspicion to hold that the expenditure was not completely verifiable. Since the assesse has furnished the information merely because of the failure of the assessee to furnish some of the details such as names of persons, purpose of visit etc.., disallowance of the entire expenditure unjustified. The assessee is engaged in running the educational institutions and it is needless to say that it has to engage the faculty from outside for which the expenditure required to be incurred. The AO did not doubt the genuineness of expenditure. Therefore, we hold that restricting the expenditure to the extent of 50% is reasonable and no interference is called for in the order of the Ld.CIT(A). Therefore, appeal of the revenue on this ground is dismissed.
CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi
Ground No.(iv) is related to the interest payment to interested persons @18%. The AO disallowed the entire interest because of non response from the assesse to the notices issued. As discussed earlier, during the remand proceedings, it is observed by the AO that the assessee has paid the interest of Rs.28,18,274/- to Ms M.Sucharitha and Rs.33,77,989/- to C.Krishna Murthy @18% on the amounts borrowed by the assessee. Both of them are interested persons in the trust. Mr.Krishna Murthy is the founder trustee and Smt.Sucharita is the Managing trustee. From the assessment records, it is found that the assessee had borrowed the sum of Rs.1,51,55,432/- from C.Krishna Murthy and Rs.2,15,27,680/- from Sucharitha and the interest was paid @18%. In the remand proceedings, the AO viewed that interest payment @12% is reasonable and recommended for disallowance of interest paid over and above 12% which worked out to Rs.20,65,421/-. The Ld.CIT(A) allowed the entire interest , observing that the payment of interest @18% is on par with the market rate. For the sake of clarity and convenience, we extract para No.5.1 of the order of the Ld.CIT(A) which reads as under :
“5.1. The AO has proposed for disallowance of interest paid of Rs.20,65,421/- to the Managing Trustee and founder trustee, on the ground that the interest charged on loans obtained from these persons is excessive The AO disallowed 6% of interest on loans taken from Managing Trustee and Founder Trustee of the Society. During the course of appellate proceedings, AR of the appellant
CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi submitted that the appellant charged interest, @18% on the loans obtained from the interested persons at the market rate charged by the Banks. The AR of the appellant further observed that there is no bar on the rate of charging interest on the loans borrowed from the friends and relatives of the assessee-Society and further contended that the disallowance made by AO is legally untenable. I have considered the claim of the appellant. I find that the appellant charged interest @18% which is a market rate of interest charged by the Banks. There is no specific bar on the higher ceiling of interest to be chargeable on loans borrowed from the friends and relatives of the assessee Society. The Income Tax Act does not provide for fixing the rate of interest payable on such loans. Therefore the disallowance proposed by AO in the remand report is not accepted. Hence, the AO is directed to grant the interest claimed.” 6.1. We have heard both the parties and perused the material placed on record. The simple issue involved in this ground is whether the payment of interest @18 % reasonable or not? The assessee has paid the interest @18% to the interested persons and explained that interest payment was on par with the market rate and there was no pressure from the lenders for immediate payment of the principle. The Ld.CIT(A) viewed that there is no bar on payment of interest @18% and the same is on par with the market rate. The department did not bring any material to show that the funds are available in the market for interest lesser than 18%. Since the CIT(A) has given a finding that the interest payment @18%, is on par with the market rate and the department failed to bring any material to controvert the finding given by the Ld.CIT(A) we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. The appeal of the Revenue on this ground is dismissed.
CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi
Ground No.(v) is related to the building rent. The AO found that the assessee has paid the rent of Rs.30,00,000/- for buildings and out of above sum of Rs.30,00,000/- an amount of Rs.12,00,000/- was paid to Smt. M.Sucharitha towards Hostel Building. During the remand proceedings, the assesse failed to produce the lease deed, hence, the AO submitted the remand report stating that the payment of rent of Rs.12,00,000/- could not be verified. Before the Ld.CIT(A), the assessee produced rent agreement dated 10.04.2009 which was stated to be continued in operation for the impugned assessment years also. Therefore, the Ld.CIT(A) allowed the appeal of the assesse. For the sake of clarity and convenience, we extract para No.6 of the Ld.CIT(A) order which reads as under :
“6. The AO in the remand report, proposed for disallowance of rent payment of Rs.12,00,000/- to M.Sucharita for want of lease deed in respect of hostel building. The AR of the appellant in the course of appellate proceedings submitted that the rental agreement of the building could not be submitted before AO due to misplacement. However, AR of the appellant stated that the deed of rental agreement executed on 10th Day of April, 2009 continues to be in operation and the rental agreement dated 10.04.2009 was filed. On consideration of the factual position given by AR of the appellant, the disallowance proposed by AO cannot be accepted.”
7.1. Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before us.
CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi 7.2. We have heard both the parties and perused the material placed on record. The assesse had entered into rental agreement for letting out the building on 10.04.2009 which was continued thereafter including in the impugned assessment year. The AO did not give any finding with regard to non utilisation of the hostel building for Trust purpose. The AO also did not dispute the genuineness of rent payments as observed from the remand report as well as the order of the Ld.CIT(A) in the earlier years as per the said agreement. The AO also did not suspect the genuineness of the rent payment to Smt.M.Sucharitha in the impugned assessment year. Before the Ld.CIT(A), the assessee furnished the rent agreement which was verified by the Ld.CIT(A) and allowed the expenditure. The assesse filed paper book and in page No.20, the assessee has furnished the copies of rental agreement, wherein, the property was let out to the assessee for a monthly rent of Rs.1,00,000/- per month and the same was used for hostel building by the society. Therefore, we do not see any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. In the result, appeal of the revenue on this ground is dismissed.
Ground No.(vi) is with regard to the sustaining the addition of Rs.3,60,000/ for vehicle rents. During the assessment proceedings, the AO
CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi found that the assessee has paid the rent of Rs.10,80,000/- to Smt. M.Sucharita for car and tractor. Though the assessee had produced the rent agreement for car, the assessee did not furnish the rent agreement in respect of tractor. Therefore, the AO submitted the remand report stating that authenticity in respect of tractor rent could not be verified. The AO neither recommended for disallowance of rent nor accepted the assessee’s claim. During the appeal hearing, the Ld.CIT(A) deleted the addition of Rs.7,20,000/- towards the car rent and confirmed the addition of Rs.3,60,000/- towards tractor. On deletion of the addition of Rs.7,20,000/-, the department is in appeal before us.
8.1. We have heard both the parties and gone through the orders of the lower authorities. Before the AO, the assessee has furnished the ledger account for payment rent for car and tractor and rent agreement for both the cars. The AO simply submitted report stating that the authenticity of expenditure of Rs.10,80,000/- could not be verified without even calling for the necessary details apart from the agreements. The AO ought to have verified with the lessors and also made proper enquiries. However, as seen from the remand report of the AO, it is observed that the AO recommended for disallowance only because non production of registration certificates,
CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi vehicle log books etc. The use of car was not disputed by the AO. The Ld.CIT(A) found that the AO did not make proper enquiry to enable the assessee to produce the details and accordingly confirmed the addition of Rs.3,60,000/- towards tractor rent and deleted the balance. From the order of the lower authorities, we observe that the department did not make out case that the expenditure was not incurred by the assessee. We also observe from the paper book page No.20 to 23 that there was written agreement dated 10.04.2009 from M.Sucharitha for letting out the cars to the assessee. Since the assessee has produced ledger accounts and rental agreements in respect of cars and no material was brought on record by the AO to controvert the finding of the Ld.CIT(A) with regard to non utilisation of cars by the Trust, we are unable to disagree with the Ld.CIT(A), accordingly, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue.
The assessee has filed cross objections and withdrawn the original the objections originally raised in CO filed on 31.05.2019. However, subsequently filed a petition requesting for admission of two additional grounds in the petition filed on 21.09.2020 and the same are adjudicated as under:
CO No.66/Viz/2019, A.Y.2013-14 M/s C.V.S.Krishna Murthy Teja Charities, Tirupathi
Ground No.6 of cross objection is against restricting the expenditure to 50% in respect of boarding and lodging. As per the detailed discussion made in this order, the order of the Ld.CIT(A) is upheld and the appeal of the revenue is dismissed, thus, the cross objection filed by the assesse in ground No.6 also stands dismissed as per the reasoning given in appeal order.
Ground No.7 is related to partly confirming the vehicle rent amounting to Rs.3,60,000/-. As per the detailed discussion made in this order, we find that the disallowance restricted by the Ld.CIT(A) is held to be reasonable and accordingly we upheld the order of the Ld.CIT(A). For the same reasoning, the cross objection filed by the assesse stands dismissed.
In the result, appeal of the revenue as well as the cross objections of the assessee are dismissed.
Order pronounced in the open court on 23rd November, 2020.