C I TEXEMPTIONS JAIPUR vs. M/S PODDAR SANSTHAN JAIPUR

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 145 / 2016 Commissioner of Income Tax (Exemptions) 3rd Floor Kailash Heights, Lal Kothi, Tonk Road, Jaipur ----Appellant Versus M/s Poddar Sansthan, Sector 7, Mansarovar, Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Mr. Daksh Pareek on behalf of Mr. Sammer Jain For Respondent(s) : Dr. P. C. Jain with Mr. Gunjan Pathak _____________________________________________________ HON'BLE MR. JUSTICE K. S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS judgment 23/10/2017 1. By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeal of the department. 2. This court while admitting the appeal on 02.05.2017 framed the following question of law:- “1. Whether the Ld. ITAT was justified in the facts of the case as well as in law in upholding the allowance of exemption u/s 11 to assessee respondent by ignoring that the assessee has extended loan to a person specified u/s 13(3) of the Act in violation of section 13(1)(c) r.w.s. 13(2) (a)/(b)/(g) of the Act?” 3. Counsel for the appellant has taken us to the order passed by AO wherein while considering the matter the AO has taken into account the provision of Sections 13(1)(c) of the Income Tax Act

(2 of 15) [ITA-145/2016] and observed as under:- “2.1 Provision of section 13(1)(c) are applicable where any income or property of the trust are used or applied directly or indirectly for the benefit of any person referred to in sub section 3 of section 13. 2.2 Provisions of section 13(2) provide for all those situations where income will be deemed to have been used or applied for the benefit of a person referred to in sub section 3 to section 13. 2.3 At the outset it may be noted that Poddar Trust is not a person covered under section 13(3). 2.4 In view of the above, giving a loan which is interest free does not attract the provisions of section 13(1)(c)/13(2). Reply of the assessee has been considered. If part of the income or property of the trust is lent without either adequate security or adequate interest or both there is violation of section 13(2)(a). In this case assessee has lentmoney to the related trust without interest as per clause (a) as mentioned above. As per copy of resolution submitted, the documents of the land of the Poddar Trust were obtained as security. But there is no mention of charging of interest. As per Income & Expenditure account also no such interest income has been shown. This providing of loan is in violation of provisions of section 13(2)(b) also as the property/funds were made available to persons covered u/s 13(3) without charging any compensation. This is also violation of clause (g), since it is diversion of funds in favour of related trust.” 4. He contended that both the authorities have committed an error in reversing the view taken by the AO. 5. He has relied upon the decision of Delhi High Court in Director of Income Tax (Exemption) V/s Charanjiv Charitable Trust 2014(8) AD (Delhi) 595 wherein it has been held as under:- “21. We may first take up the fundamental question as to whether the assessee was ineligible for the

(3 of 15) [ITA-145/2016] exemption under Section 11 on the ground that there was contravention of the provisions of Section 13(1) (c)(ii) read with Section 13(3) of the Act. It is necessary to briefly notice the statutory provisions in this regard. Section 11 exempts any income derived from property held under trust wholly for charitable or religious purposes to the extent to which it is applied to such purposes in India, to the extent of 85% of such income. Charitable purposes are defined in Section 2(15). There is no dispute that the objects pursued by the assessee fall within the said definition. Even if the objects of a trust satisfies the definition of "charitable purpose" as per Section 2(15), it does not automatically confer exemption to the trust; it has to further get itself registered under Section 12A. This condition is also satisfied in the present case since the assessee was registered under Section 12A on 28.05.1976. There are further conditions for being eligible to the exemption. Section 13(1) enumerates instances under which the provisions of Section 11 granting exemption will not operate. One such instance is furnished by clause (c) (ii) which says that if any part of the income or any property of the trust is, during the relevant previous year, used or applied directly or indirectly for the benefit of any person referred to any sub-section (3), the exemption will not be allowed. Sub-section (3) enumerates the prohibited persons and there is no dispute that the assessee's case falls within clause (e) of sub-section (3). There is another provision which we have to notice and that is Section 13(2) which in clauses (a) to (h) thereof sets out illustrative instances where the income or property of the trust may be deemed to have been used or applied for the benefit of a prohibited person.” 6. Ms. Parinitoo Jain has taken us to observation made by CIT(A) which reads as under:- “In the cited case, the issue before the Hon'ble Bombay High Court was whether a trust could be a person or not for the purpose of deciding the applicability of section 13(1)(c). The Hon'ble Bombay High Court held that the definition of "person" occurring in section 2(31) was applicable to the word "person" occurring is section 13 of the Act. The controversy before the Bombay High Court was whether the trust could be a "person" or not.”

(4 of 15) [ITA-145/2016] 7. She has also relied upon the observation made by the Tribunal which reads as under:- “5.4 The contention of the assessee that transaction like current account was going on between both the trusts and both the trusts were lending money to each other, in fact goes against the assessee in view of the judgment of Hon’ble Delhi High Court in the matter of DCIT vs. Charanjiv Charitable Trust in ITA No. 321 to 323 of 2013, (2014) 233 Taxman 071 (Delhi) wherein in para 25 the identical contentions have been dealt with by the Hon’ble High Court and after considering the identical contention, the exemption under section 11 was held to be not available to the assessee, for the purpose of convenience, we are hereby reproducing the finding of the Hon’ble Delhi High Court in the above said matter :- “25. Counsel for the assessee would, however, contend that the chart set out in the order of the Tribunal would show that the account between the assessee and the APIL is a running account and if the entries are taken as a whole it would be seen that it is APIL which is funding the assessee and not the other way round. It was again submitted that in the 12 month period ended on 31.03.2006, no monies flowed out from the assessee to any prohibited person. This latter submission has already been dealt with by us supra. As to the contention that it is only a running account between the assessee and the APIL, we are unable to give effect to the submission since Section 13(1)(c)(ii) read with Section 13(2) does not appear to make any distinction between a running account where there is inter-flow of funds and a case of pure advance. Section 13(2) makes it clear that the instances listed in its clauses (a) to (h) are only illustrative and without prejudice to the generality of the provisions of Section 13(1)(c). The prohibition is on the use or application of any part of the income or property of the trust, during the relevant previous year, for the direct or indirect benefit of any prohibited person. When funds of assessee trust are lying with APIL – even though they were not advanced in the relevant accounting year – and no interest or security is taken, it is a case of direct use of the funds for the benefit of a prohibited person. Clause (a) of Section 13(2) says that even if the income or

(5 of 15) [ITA-145/2016] property of the trust continues to remain lent to any prohibited person for any period during the relevant previous year without security or interest, it would be a case of deemed misapplication. This shows that it is not necessary that there should be any advance payment to the prohibited person in the relevant accounting year. At this juncture it is relevant to point out a crucial aspect. The provision makes reference to income or property of the trust being "lent" or continued to be "lent" to any prohibited person. If the funds of the assessee had been given to APIL without any agreement to sell being entered into there would have been no defence to the assessee as that would have been a clear case of monies lent or continue to be lent without interest or security. It is only in order to get out of the clutches of the said clause that the assessee appears to have conceived of a device and entered into documentation with APIL to make it appear as if the monies were not "lent" to APIL, but were given for the purpose of acquiring lands under agreements to sell, for the objects of the trust. This explains why the assessee admitted before the assessing officer in its first letter that it had not taken possession of the lands, but resiled from that position in its second letter, realising its faux par, citing some clauses in the agreements. Taking possession of the lands has not been established as a fact by adducing evidence. 26. The argument of the counsel for the assessee that the CIT (Appeals) and the Tribunal have entered concurrent findings of fact which should not normally be disturbed unless they are perverse is technically correct; however, we are in agreement with the submission of the counsel for the revenue that the findings of the CIT (Appeals) (for the assessment year 2006-07) and the Tribunal are superficial and have not taken note of the normal course of human conduct and probabilities. A little probing or scratching of the surface was all that was required on the part of the Tribunal to find out the truth about the claim of the assessee. The Tribunal has chosen, erroneously – this we say with respect – to ignore the normal course of human conduct and probabilities of the case and has preferred to be led simply by the documentation presented by the assessee. Each and every objection taken by the assessing officer has been attempted to be explained away by the assessee and the Tribunal overlooked that the facts have to be looked at cumulatively and as a whole; it failed to realise

(6 of 15) [ITA-145/2016] that and the real transaction between the assessee and APIL is not just an aggregate of the several component parts thereof; the authenticity of the transaction has to be examined by keeping in view the conspectus of the facts without missing the woods for the trees. 27. In the aforesaid view of the matter, we hold that the findings of the Tribunal on this aspect cannot be upheld. We uphold the findings of the assessing officer and hold that in advancing the amount of Rs.8,60,16,000/- to APIL the assessee committed a violation of the provisions of Section 13(1)(c)(ii) read with Section 13(2) and section 13(3) of the Act. The trust was accordingly not eligible for the exemption under Section 11 of the Act for both the years. “ The reliance placed by ld. CIT (A) on the judgment of Acme Educational Society is ill founded. Our reading shows that the issue of applicability of section 13(3) was not an issue in the judgment in the case of Director of Income-tax vs. Acme Educational Society , so far as prohibited person is concerned. The discussion in the said judgment, on the question involved in the IT Appeal, was mentioned in para 12 to 15, as under :- “12. This court in the case of Director of Income- tax (Exemption) v. Alarippu [2000] 244 ITR 358 has pointed out that the words "investment", "deposit", and "loan" have different meanings. The relevant observations in the said judgment are reproduced hereinbelow (headnote): "The expressions used in both the provisions quoted above, are 'investment' and 'deposit'. The former expression means to lay out money in business with a view to obtain an income or profit. Deposit, on the other hand, means that which is placed anywhere, as in any one's hands for safe- keeping, something entrusted to the care of another. These two expressions have been used in a cognate sense and have to be understood as such. In order to constitute an investment the amount laid down should be capable of any result of any income, return or profit to the investor and in every case of investment, the intention and positive act on the part of the investor should be to earn such income, returns, profit in order to constitute an investment, the monies shall be laid out in such a manner as to acquire some species of property which would bring in an income to the investor. A loan, on the other hand, is granting temporary use of money, or temporary

(7 of 15) [ITA-145/2016] accommodation. The words 'investment', 'deposit' and 'loan' are certainly different. Section 11(5) refers to pattern of investment by the assessee. Section 11(5) was introduced by the Finance Act, 1983, with effect from April 1, 1983, i.e., for and from the assessment year 1983-84. It prescribes the forms and modes of investing and depositing money referred to in section 11(2)(b). Subsequently, new forms and modes have been added. Section 13(1)(d) as amended by the Finance Act, 1983, provides that the income of any charitable or religious trust or institution will not be entitled to exemption under sections 11 and 12, if certain conditions stipulated therein are not complied with. The word 'deposit' does not cover transaction of loan which can be more appropriately described as direct bailment. The essence of deposit is that there must be a liability to return it to the party by whom or on whose behalf has been made on fulfilment of certain conditions. In the commercial sense, the term is used to indicate the aforesaid transaction as deposit of money for employment, in business, deposits for value to initiate security for deposit of title deeds, similar documents as security for loan, deposit of money bills in a bank in the ordinary course of business of current account and deposits of a sum at interest at a fixed deposit in a bank." 13. In Baidya Nath Plastic Industries (P) Ltd. v. K.L Anand, ITO [1998] 230 ITR 522 (Delhi) a learned single judge of this court pointed out that the distinction between "loan" and "deposit" is that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement, while in the case of the latter it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and make a demand for it. 14. A Division Bench of this court in case of Director of Income-tax (Exemption) v. Pariwar Sewa Sansthan [2002] 254 ITR 268 (Delhi) has held that no question of law arises from the order of the Income-tax Appellate Tribunal holding that there was no violation of the provision of section 13(1)(d) of the Act, 1961 where loan had been given by one society to another society having similar objects. 15. Keeping in view the aforesaid exposition of law, we are of the opinion that interest free loan of Rs. 90,50,000 given by the assessee-society to Nav Bharti Educational Society does not violate section 13(1)(d) read with section 11(5) of the

(8 of 15) [ITA-145/2016] Act, 1961 as the said loan was neither an "investment" nor a "deposit". This is more so as both the societies had similar objects and were registered under section 12A of the Act, 1961 and had approvals under section 80G of the Act, 1961. The fact that the loan was interest free and had been subsequently returned is also significant. In view of the order passed by the Commissioner of Income-tax (Appeals) in the case of Nav Bharati Educational Society, Ms. Bansal's allegation with regard to "entry scam" also does not survive. Consequently, there is no substantial question of law involved in the present appeal and accordingly, the appeal is dismissed but with no order as to costs.” 8. She has relied the following decisions:- Commissioner of Income Tax vs. Thanthi Trust (14.03.1996 – SC), (1999) 239 ITR 0502 1. The question arising herein is essentially a question of fact. After considering all the facts and circumstances of these cases, the High Court (see MANU/TN/0061/1981MANU/TN/0061/1981 : [1982] 137 ITR 735) has recorded the following finding (page 773) : Thus, on the material on record, we are not in a position to say that after making the credit entries, the assessee retained any control over the monies or any beneficial ownership therein. For the accounting year 1966-67 corresponding to the assessment year 1968-69, a sum of Rs. 10,41,689.47 had been credited by the assessee in favour of the educational institution out of which Rs. 3,04,035 had been drawn by the said institution, and for the accounting year 1967-68 corresponding to the assessment year 1969-70, a sum of Rs. 8,99,535 has been credited in favour of the educational institution and the educational institution has drawn Rs. 16,71,500 during that year. The conduct of the educational institution in drawing from the asses-see-trust larger sums than what has been credited by the trust in its favour in 1969-70 shows that it was fully aware of its credit with the assessee-trust and the funds that had been made available to it by the trust. If the amounts had been actually handed over to the Aditanar College during the assessment years in question, the assessee could claim the benefit of

(9 of 15) [ITA-145/2016] exemption under Section 11 as the college has been established only for the educational purposes and no part of its fund can be utilised for non-charitable purposes, and the Revenue cannot insist that unless the educational institution expends the amount donated by the assessee within the assessment year, the assessee cannot claim the benefit of exemption under Section 11. 2. The High Court also took into account the factual situation regarding the amounts credited to the account of the college from year to year and the withdrawals by the college. They are the following : 3. It appears that the Adityanar College was run, not by the assessed-trust, but by another registered charitable society. In the circumstances, the High Court was right in the conclusion which it arrived at. It may also be mentioned that it is no part of the Revenue's case at any point of time that the credit entries made in the assessee's books of account were not genuine or true or that they were mere make-believe or bogus. It is also not brought to our notice that the Income-tax Officer doubted the said entries and called upon the assessee to produce the accounts of the college and that the assessee failed to produce the same. Director of Income Tax vs. ACME Educational Society (28.07.2010 – DELHC), (2010) 326 ITR 0146 Keeping in view the aforesaid exposition of law, we are of the opinion that interest free loan of Rs. 90,50,000 given by the assessee-society to Nav Bharti Educational Society does not violate section 13(1)(d) read with section 11(5) of the Act, 1961 as the said loan was neither an "investment" nor a "deposit". This is more so as both the societies had

(10 of 15) [ITA-145/2016] similar objects and were registered under section 12A of the Act, 1961 and had approvals under section 80G of the Act, 1961. The fact that the loan was interest free and had been subsequently returned is also significant. In view of the order passed by the Commissioner of Income-tax (Appeals) in the case of Nav Bharati Educational Society, Ms. Bansal's allegation with regard to "entry scam" also does not survive. Consequently, there is no substantial question of law involved in the present appeal and accordingly, the appeal is dismissed but with no order as to costs. Champa Charitable Trust vs. Commissioner of Income Tax (05.12.1994 - BOMHC) (1995) 214 ITR 0764 3. Section 11 of the Act exempts from tax certain income from property held for charitable or religious purposes. This exemption does not apply in certain cases specified in section 13 of the Act. Section 13, so far as relevant, at the material time read as under : "13. Section 11 not to apply in certain cases. - (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof - … (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof - . . . . (ii) if any part of such income or any property of the trust or institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3) : Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3), if such use or application is by way of compliance with a

(11 of 15) [ITA-145/2016] mandatory term of the trust or a mandatory rule governing the institution : . . . . (2) Without prejudice to the generality of the provisions of clause (c) of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3), - . . . . (g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3) : Provided that this clause shall not apply where the income, or the value of the property or, as the case may be, the aggregate of the income and the value of the property so diverted does not exceed one thousand rupees; (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971) in any concern in which any person referred to in sub-section (3) has a substantial interest. (3) The persons referred to in clause (c) of sub- section (1) and sub-section (2) are the following, namely :- (a) the author of the trust or the founder of the institution; (b) any person who has made a substantial contribution to the trust or institution, [that is to say, any person whose total contribution up to the end of the relevant previous year exceeds five thousand rupees]; . . . . ." The bracketed part in clause (b) of section 13(3) was inserted by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1977, and hence, applies to assessments for the assessment year 1977-78 only. This amendment is, however, not relevant for the purposes of the present case where the contribution of Shri Laherchand Uttamchand Trust Fund was Rs. 1,00,000, far in

(12 of 15) [ITA-145/2016] excess of the above amount. It is clear from a reading of section 13, which opens with the non obstante clause "Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of a person" that this section has an overriding effect over sections 11 and 12 and on contravention of any of the provisions thereof or on the happening of any of the contingencies specified therein, the income of the person would not be excluded from the total income of such person despite fulfilment of the conditions of section 11 or 12 of the Act. There is no dispute about the fact that Laherchand Uttamchand Trust Fund had made a substantial contribution to the assessee-trust and the contribution so made up to the end of the previous years relevant to the assessment years under consideration being Rs. 1,00,000 far exceed Rs. 5,000. There is also no dispute about the fact that sums of Rs. 50,000 and Rs. 56,001 were used or applied by the assessee-trust for the benefit of the said Laherchand Uttamchand Trust in the previous years relevant to the assessment years 1976-77 and 1977-78, respectively. Apparently, in such a situation, sub-section (3) of section 13 is attracted. This position is not disputed by counsel for the assessee also. The only contention of the assessee is that the expression "person" appearing in section 13(1) does not include a "trust" and that the said Laherchand Uttamchand Trust being a charitable trust, the question of applying the said mounts directly or indirectly for the benefit of such trust cannot arise. The term "person" has been defined in clause (31) of section 2 of the Act to include : (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. It is not disputed before us that a "trust" is also a "person" within the meaning of section 2(31) of the Act. If that is so, we fail to understand how a different meaning can be ascribed to the same expression "person" appearing in the various sub-sections and clauses of section 13 of the Act. That being so, the assessee-trust having applied a substantial part of its income or property (even more than the total

(13 of 15) [ITA-145/2016] contribution of Laherchand Uttamchand Trust to it), the provisions of section 13(1)(c)(ii) of the Act are clearly attracted as the said trust is a "person" falling under clause (b) of section 13(3) of the Act. Any other construction of the expression "person" appearing in section 13(3) of the Act will defeat the very purpose of section 13(1)(c)(ii) of the Act, because it would be possible for the assessees in that event to circumvent the provisions of section 13(1)(c)(ii) by channelising the donations through trusts. 4. In that view of the matter. we do not find any infirmity in the finding of the Tribunal. We, therefore, answer the question referred to us in the affirmative and in favour of the Revenue. The Commissioner of Income Tax, Bhopal vs. Maa Vaishnav Education Society (19.06.2013 – MPHC), (2013) 91 DTR 0166 6. Aggrieved by the order passed by the Commissioner of Income Tax (Appeals), the respondent had preferred an appeal before the Income Tax Appellate Tribunal. The Tribunal considered the matter and have found that the matter of the assessee for assessment year 2004- 2005 was examined by the Tribunal vide order dated 27.11.2009 and recorded findings that the assessee was imparting education by running Colleges. The assessing officer had declined deductions under sections 11 and 12 of the Act on the ground that there was infringement of the provisions of Section 13 of the Act on account of interest free loans given to three associates namely Pyramid Education Society, Shefali Education Society and RKDF Education Society. The Tribunal had found that the Shefali Education Society and RKDF Education Society were registered under Section 12AA of the Act of which registration certificates were placed before the assessing officer. These were charitable societies engaged in providing education. The similar loans were given by the assessee society in the year 2004-2005 and the same issue was raised before the Tribunal and the Tribunal vide order dated 27.11.2009 had decided the same in favour of the assessee. The Tribunal have further found that M/s. Pyramid

(14 of 15) [ITA-145/2016] Education Society was not registered under Section 12AA of the Act but was a charitable society registered with the Registrar of Societies under the M.P. Societies Registration Act, 1973 with the same object of education. The amount of loan lent to the Society was Rs. 69,370/-. The Commissioner of Income Tax (Appeals) had applied the provisions of section 13(3) read with section 13(2)(a) of the Act. For application of the aforesaid provision, share in profit was required to be 20% but there was no such profit in the society. On the aforesaid ground, the Tribunal have found that there was no infringement of the provisions as contained in Section 13(3) of the Act for lending amount of Rs. 69,370/- to M/s. Pyramid Education Society. On the aforesaid ground, the appeal was allowed and the order of Assessing Officer was set aside. This order is under challenge in this appeal. 7. We have considered the contention of the appellant and find that merely the respondent society had given interest free loan to another society, so the loan was neither investment nor deposit. The provisions as contained in Section 13(3) of the Act were not applicable. The aforesaid is a finding of fact recorded by Tribunal in which we do not find any error or substantial question of law. Apart from this, the question was already decided by the Tribunal for the assessment year 2004-2005, against which no appeal was preferred. 8. In view of the aforesaid factual position involved in these cases, we find that the present appeals do not involve any substantial questions of law for our consideration. Apart from this, Delhi High Court in Director of Income-Tax (Exemption) vs. Acme Educational

Society

reported

in MANU/DE/4491/2010MANU/DE/4491/2010 : (2010) 326 ITR 146 (Delhi) have examined the similar issue and decided the matter in favour of the assessee. In the light of the aforesaid discussion, we find that these appeals do not involve any substantial question of law for our consideration and are dismissed at admission stage, with no order as to costs.

(15 of 15) [ITA-145/2016] Director of Income Tax (Exemption) vs. Pariwar Sewa Sansthan (29.05.2001 – DELHC), (2002) 254 ITR 0268 3. For the assessment year 1996-97, the assessed primarily challenged the question as to the reasonableness of salary. That plea was accepted in view of the conclusions for 1995-96. As the extracted portion of the order passed by the Tribunal goes to show the conclusions are essentially factual giving rise to no question of law. Accordingly, we do not entertain this appeal. Dismissed. “ 9. Taking into account the view taken by both the authorities, we are of the opinion that the conclusion raised by the Tribunal is just and proper. 10. The issue is answered in favour of the assessee against the department. 11. The appeal stands dismissed. (VIJAY KUMAR VYAS),J. (K.S.JHAVERI),J. B.M.G/Gourav/28