K M SHAH CHARITABLE TRUST vs. ASSISTANT COMMISSIONER OF INCOME TAX

Being aggrieved and dissatisfied with the impugned judgment and order passed by the Income Tax Appellate Tribunal, ‘B’ Bench, Ahmedabad (hereinafter referred as ‘the tribunal’) in ITA No.1807/Ahd/2009 for the Assessment Year 2006-07, the appellant has preferred the present Tax Appeal with the following proposed substantial questions of law; (a) Whether, on facts and in law ITAT has substantially erred in it’s interpretation of Section 11 and Section 13 of the Income Tax Act, 1961 for denying exemption under Section 11 of the Act? (b) Whether, on facts and in law, the tribunal’s finding and conclusion for confirming addition of Rs.10 Crores as revenue receipt taxable for the year under consideration is in ignorance of relevant material on record and taking aid of irrelevant factors not germane to subject matter of appeal with the result that the finding and conclusion of the tribunal is ‘vitiated’ on facts and in law?

The assessee filed the return of income declaring the the total loss of Rs.5,95,41,536/-. The case of the assessee was selected for scrutiny and notice under Section 143(2) of the Income Tax Act was issued and duly served upon the assessee. Thereafter, a detailed questionnaire alongwith notice under Section 142(1) of the Income Tax Act was issued and duly served upon the assessee to furnish certain information / details adduced by evidences. In response to the said notice, the assessee, through his representative and the Chartered Accountant, attended the assessment proceedings from time to time and furnished the requisite details keeping with the requirements of the questionnaire issued alongwith the notice under Section 142(1) of the Income Tax Act. The assessee is a public charitable trust having been registered with the Charity Commissioner, Vadodara under Section 12A of the Income Tax Act. The assessee-trust was engaged in the activities to contribute to the development of society. It was discovered that the assessee has given interest free advance to Sumandeep Charitable Trust to the tune of Rs.61,05,164/-. It was found that the trustee of Sumandeep Charitable Trust were related to the present trustee of Shri K.M. Shah Charitable Trust and the trustees of K.M. Shah Charitable Trust were Dr. Mansukh K. Shah and Dr. Dixit Shah, whereas Dr. Purvesh M. Shah is the son of Dr. Mansukh K. Shah and Dr. Varsha Dixit Shah, who is the wife of Dr. Dixit Shah, are the two trustees in Sumandeep Charitable Trust. It was further gathered that the registration under Section 12AA of the Income Tax Act has been cancelled in the case of Sumandeep Charitable Trust and, therefore, it was found that Sumandeep Charitable Trust albeit a registered trust was not a registered trust under Section 12AA of the Income Tax Act. Vide order sheet entry dated 24/12/2008 the assessee was asked to furnish an explanation on the aforesaid interest free advances given. The assessee submitted his reply, however, the Assessing Officer was not satisfied with the explanation submitted by the assessee. The Assessing Officer analyzed the legal position for claiming of exemption under Section 11 of the Income Tax Act and held that the charitable purposes have been defined in Section 2(15) of the Income Tax Act which does not take care of any advance given to other trust. The Assessing Officer also observed that the assessee had not explained that the advance given out of its corpus fund or donations or accumulated income and the advance given to Sumandeep Charitable Trust was treated as a default under Section 11(5) of the Income Tax Act and, therefore, the Assessing Officer held that the exemption is withdrawn to the extent of advance given and the said investment, which was in the form of interest free advance alongwith the notional interest thereon is treated as income of the assessee for the Assessment Year 2006-07 and taxed at maximum marginal rate. Thus, the Assessing Officer made the addition of Rs.68,37,780/-.

Being aggrieved and dissatisfied with the order passed by the Assessing Officer in making the addition of Rs.68,37,780/-, the assessee preferred appeal before the Commissioner of Income Tax (Appeals) and the Commissioner of Income Tax (Appeals) allowed the said appeal and deleted the addition of Rs.68,37,780/- made by the Assessing Officer by holding that as the income was not utilized for such advances, there is no question of invoking Sections 11(5), 13(1)(c) or Section 13(1) (d) of the Income Tax Act.

Being aggrieved and dissatisfied with the order passed by the Commissioner of Income Tax (Appeals) in deleting the addition made by the Assessing Officer, the revenue preferred further appeal before the tribunal and by impugned judgment and order the tribunal has allowed the appeal and quashed and set aside the order passed by the Commissioner of Income Tax (Appeals) restoring the addition made by the Assessing Officer. 2. 3. Being aggrieved and dissatisfied with the impugned judgment and order passed by the tribunal, the assessee has preferred the present Tax Appeal with the aforesaid proposed questions of law.

Shri R.K. Patel, learned advocate appearing on behalf of the assessee has vehemently submitted that the tribunal has erred in interpreting Sections 11, 12AA, 13 and Section 2(15) of the Income Tax Act while allowing the revenue’s appeal.

It is submitted that as such on the same facts and on interpretation of law there are contrary findings of the Commissioner of Income Tax (Appeals) and the tribunal. It is submitted by Shri Patel, learned advocate appearing on behalf of the assessee that the tribunal’s finding is vitiated on facts and law since exemption under Section 11 is denied though the trust are not related and only the trustees of both the trust are related. It is further submitted by Shri Patel, learned advocate appearing on behalf of the assessee that the tribunal has made misapplication of Section 13(1)(c) since registration of recipient trust is not required for application of funds. It is submitted that the tribunal has not properly appreciated the distinction between ‘advance’ and ‘income’ on facts and in law whereas the Commissioner of Income Tax (Appeals) vide paragraph no. 6 has take care of this aspect in its true perspective. It is further submitted by Shri Patel, learned advocate appearing on behalf of the assessee that the tribunal has failed to appreciate that as the income was not utilized for advance, invoking Sections 11(5), 13(1)(c) or Section 13(1)(d) was out of context. Making the above submissions, it is requested to admit / allow the the present Tax Appeal.

We have heard Shri Patel, learned advocate appearing on behalf of the appellant-assessee at length. We have also perused and considered the judgment and order passed by the tribunal, Commissioner of Income Tax (Appeals) as well as the Assessment Order. At the outset, it is required to be noted that the assessee had given interest free advance to Sumandeep Charitable Trust to the tune of Rs.61,05,164/-. It was found that registration of the said Sumandeep Charitable Trust under Section 12AA of the Act was cancelled. It has also come on record on inquiry by the Assessing Officer that the trustees of the Sumandeep Charitable Trust are related to the present trustee of K.M. Shah Charitable Trust. It was found that the assessee took loans from the trustees as well as private concern (Masuk Garments), which was owned by the trustee. The said loans were repaid to Sumandeep Charitable Trust instead of the persons who had given the loan. Considering the relevant provisions of the Act, more particularly, Sections 2(15) and 11(5) of the Income Tax Act, the Assessing Officer passed the order to withdraw the exemption to the extent of advance given and passed an order to treat the income of the assessee for the Assessment Year 2006-07.

On appeal, the Commissioner of Income Tax (Appeals) had allowed the appeal observing that the assessee is a charitable trust, which is applied for the purpose of objects of the trust registered with the Charity Commissioner. The Commissioner of Income Tax (Appeals) also observed that the amount was given to Sumandeep Charitable Trust out of the funds made available by the trustee by way of advance to the assessee. The Commissioner of Income Tax (Appeals) also observed that Section 11(5) of the Income Tax Act refers to the application of the income of the trust, atleast 85% for the purpose of objects during the year and for the balance income it can be accumulated for the utilization in future and such fund has to be invested in prescribed manner. The Commissioner of Income Tax (Appeals) also held that Sumandeep Charitable Trust cannot be held to be a different entity as defined in Section 13(3) of the Income Tax Act. The Commissioner of Income Tax (Appeals) observed that as the amount of advance was made from out of the fund made available by the trustees by way of advance to the assessee, , it cannot be said to be utilization of income by the assessee for the purpose of such advance to Sumandeep Charitable Trust. The Commissioner of Income Tax (Appeals) thus held that as the income was not utilized for such advance there was no question of invoking Sections11(5), 13(1)(c) or Section 13(1)(d) of the Act and consequently he deleted the said addition. On appeal, the tribunal has restored the addition made by the Assessing Officer by observing in paragraph 6 as under; “We have heard the rival contentions of both the parties and perused the material available on record. Undisputedly, the interest free advance given to unregistered trust where son of the trustee of the assessee trust and wife of the trustee of the assessee trust are trustee of Sumandeep Charitable Trust. The registration of Sumandeep Charitable Trust has been cancelled by the department. If assessee trust diverts any income or property to related trust then Section 13(1)(c) & 13(1)(d) are applicable and violates the application of fund under Section 11 of the Income Tax Act. The assessee trust is hit by Section 13(1)(c) & 13(1) (d). The advance even given from the fund provided by the trustee bears the fruits in form of either interest or accretion of value of assets in the hand of related trust. It is true that there is no relation between trusts but trustees of both the trusts are related. Thus, we have considered view that CIT(A) was not justified in allowing

Having heard the learned advocates appearing on behalf of the respective parties, we are in complete agreement with the view taken by the tribunal. The assessee trust had taken loan / advance from the trustee and instead of returning the same to the persons who had advanced the money to the assessee, the assessee had advanced the said amount to Sumandeep Charitable Trust whose registration has been cancelled by the Department. It is required to be noted that the advance given to Sumandeep Charitable Trust was interest free advance, which can be said to given from the fund provided

Under the circumstances and in the facts and circumstances of the case and on considering the relevant provisions of the Income Tax Act, more particularly, Sections 2(15), 11(5), 13(1)(c) and 13(1)(d) of the Income Tax Act, the tribunal has rightly restored the additions made by the Assessing Officer to the extent of interest free advance given by the assessee to the Sumandeep Charitable Trust.

Under the circumstances and in the facts and circumstances of the case, we see no reason to interfere with the impugned judgment and order passed by the tribunal. Consequently, we answer the proposed questions of law against the assessee and in favour of the revenue and consequently we are of the opinion that no question of law, much less substantial question of law, arises in the present Tax Appeal. Hence, the present Tax Appeal deserves to be dismissed and is accordingly dismissed. (M.R. SHAH, J.) (R.P. DHOLARIA, J.) Siji