CENTRE FOR THE STUDY OF SOCIAL CHANGE ,BANDRA MUMBAI vs. INCOME TAX OFFICER EXEMPTION WARD 1(2), MUMBAI

The Ld.AO noted that, the assessee claimed exemption under section 11 which was examined. On perusal of the balance sheet of the assessee, the Ld.AR noted that, assessee has shown Rs.4,95,00,000/- as liability as on 31/03/2016. It was noted that, the liability included a sum of Rs.4,80,00,000/- received by the associate as a deposit from M/s. Kamat Hotels (India) Ltd. From the details filed, the Ld.AO noted that, the said deposit was received by the associate during the year 1995 and 1996 as a A.Y. 2016-17 Centre For The Study Of Social Change security deposit towards the management of the proposed international scholars hostel based on an MOU signed between the assessee and Kamat Hotels India Ltd. It was also noted by the Ld.AR that, the project was stalled and the arrangement was in dispute as per note 6 to the audited accounts of the assessee. 3.1 The Ld.AO issued notice under section 133(6) of the Act, to M/s. Kamat Hotels India Ltd., calling upon them to furnish details in regards to the agreement and the deposit that was given to the assessee by M/s.Kamat Hotels. In response to the notice, the Kamath hotels replied vide letter dated 01/09/2018. It was submitted that, the said deposit was not repaid back by the associate and also no legal proceedings are pending recover the said amount due to which M/s.Kamat Hotels have written off the said amount from the books of account. M/s.Kamat Hotels also provided in support. 3.2 The Ld.AO noted that, during the financial year 2013-14, Kamat Hotels had written off the deposit given by it to the assessee amounting to Rs.4,80,00,000/-. The Ld.AO thus issued a show cause notice on 20/11/2018 calling upon the assessee as to why, the entire amount of Rs4.80 crores should not be treated as income of the assessee. In response to the notice, assessee vide letter dated 01/12/2018 requested for cross-examination of Kamat Hotels Ltd. The assessee also submitted that, M/s. Kamat Hotels initiated arbitration proceedings and an arbitrator was assigned by Hon’ble Bombay High Court vide order dated 08/02/2016, a copy of which was furnished before the Ld.AO. The Ld.AO, however, did not accept the submissions of the A.Y. 2016-17 Centre For The Study Of Social Change assessee and made addition in the hands of the assessee, treating Rs.4.80 crores as income due to cessation of liability. 3.3 Further, the Ld.AO noted that, the assessee disclosed some of Rs.60,000/- as income from other sources in its income and expenditure account. The assessee submitted that the said amount was received from an AOP towards the use of some portion of the trust premises. Further ongoing through the auditor's report, the Ld.AR noted that, assessee had allowed about 2585.29 ft² of its building premises to Life Supporters Institute of Health Sciences without any consideration. The Ld.AO accordingly issued notice under section 133(6) of the Act to the Life Supporters Institute of Health Sciences (hereinafter referred to as LIHS). Reply was filed by LIHS on 21/08/2018 stating that it has trained 75,000 volunteers in 1st aid and disaster preparedness in the past 11 years and that there was no agreement with assessee for the use of property of the assessee. 3.4 Assessee was also called upon to furnish supportive documents in respect of the same. The assessee did not furnish any document in respect of the arrangement between with LIHS, The Ld.AO was therefore of the opinion that nature of activities of LIHS and the assessee are not common. 3.5 The Ld.AO rejected the contention of the assessee that LIHS was using only table space in classrooms. Further, the Ld.AO noted that, the assessee did not seek any approval from the charity commissioner in this regard. Further, the Ld.AO noted that, assessee did not produce any document in respect of the LIHS providing support to WIN clinics project of assessee, and A.Y. 2016-17 Centre For The Study Of Social Change that both assessee as well as LIHS are institutional members of the assessee trust. 3.5 The Ld.AO thus computed notional rent considering Rs.60 per square feet per month for a year, and disallowed Rs.18,61,409/- in the hands of the assessee. Aggrieved by the order of the Ld.AO the assessee preferred appeal before Ld. CIT(A).

The Ld.CIT(A) observed that, during cross-examination of Kamath Hotels India Ltd., the facts remained the same, in respect of the liability having seized, due to write off of Rs.4.80 crores by, Kamat Hotels. The Ld.CIT(A) thus confirmed the addition made by the assessing officer. 4.1 In respect of notional rent computed in the hands of the assessee for the premises used by LIHS, the Ld.CIT(A) noted that, the assessee and LIHS, being related and interested parties, using such large portion of the property of the assessee without any consideration was not justified. He thus upheld the addition made by the assessing officer. Aggrieved by the order of the Ld.CIT(A),assessee is in appeal before the Tribunal.

The Ld.AR at the outset submitted that Ground No.1-3is in respect of addition of Rs.4.80 crores in the hands of the assessee. The Ld.AR submitted as under: The sum of Rs. 4,80,00,000/- was never written off by Kamat Hotels (I) Ltd., which is evident from the financial statements of the said party. Note 15 of the financial statements indicates that a provision was made for Rs.4.88.croresdue to the ongoing litigation. He submitted that making a provision does not amount A.Y. 2016-17 Centre For The Study Of Social Change to writing off a receivable debt. The Ld. AR submitted that the note itself states that the aforementioned provision will be adjusted in the year when the dispute between the parties is resolved. This clearly shows that Kamat Hotels (I) Ltd. has not waived the said deposit and that the dispute remains open. Furthermore, there has been no communication from the said party to the Assessee regarding this matter. In fact, on the contrary, the said party is engaged in litigation, as is indicated in Note 15. Additionally, it is important to note that the Assessee has continued to display the said deposit as a liability in its financial statements. Thus, the Ld.AR contends that the observations of the Ld.AO/CIT(A) concerning the waiver or cessation of the said sum is factually incorrect. 5.1 Without prejudice to the above, even if it is considered for the time being that there was a cessation of liability, no addition could be made in the hands of the assessee since such cessation did not give rise to any income in the 1stplace. Further, cessation of a liability amounts to a deemed income as per section 2(24)(v) r.w.s. Section 41 of the Act, which does not apply to the present Assessee, being a charitable trust, and there is no dispute on the same. The learned assessing officer proposed the said addition under section 41 of the Act, and after objecting to the same, it was categorically mentioned in the assessment order that section 41 was mentioned by mistake. However, the learned assessing officer did not mention any section that supports such an addition. Section 11 does not contemplate any such cessation as deemed income, unlike Section 41, and Section 41 is inapplicable A.Y. 2016-17 Centre For The Study Of Social Change since Heads of income do not apply in trust taxation. The Ld.AR relied on the following case laws. CIT vs. Rajasthan & Gujarati Charitable Foundation Poona (2018) 89 taxmann.com 127 (SC)-Confirmed the observation of the Bombay HC Hindusthan Welfare Trust vs. DIT (Exemption) [1993] 68 Taxman 205 (Calcutta) CIT vs. Rao Bahadur CalavalaCunnanChetty Charities MANU/TN/0381/1979- Madras HC DIT vs. GirdhariShewnarain Trust MANU/WB/0145/1991 5.2 Without prejudice to the above, the Ld.AR submitted that, even for the sake of argument and without any admission, if the cessation of liability is considered taxable as income in the case of a charitable trust, the addition of Rs. 4,80,00,000/- cannot be made in the previous year relevant to the assessment year under consideration. He submitted that, this is because, according to Ld.AO, the cessation, if any, occurred during the financial year 2013-14. The Ld.AR submitted that, the Ld.AO himself remarked that the entry of provision was made by Kamat Hotels India Ltd. in the financial year 2012-13, pertaining to the assessment year 2014-15. In such circumstances, any income taxable due to the alleged cessation could only be assessed in the hands of the assessee in the assessment year 2013-14, and not in the present assessment year under consideration. He relied on sections 4, 5, 4,5,7, and 9 to support this submission. 5.3 It is, however, submitted that, alleged cessation did not take place in the previous year relevant to the assessment year under consideration.

The Ld. AR submitted that the observations of the Ld. CIT(A) and the Ld. AO regarding expiry of limitation is incorrect, as the assessee continues to record the alleged deposit as a liability in A.Y. 2016-17 Centre For The Study Of Social Change its books of accounts. As stated above, litigation had already begun in 2013, thereby ruling out the applicability of limitation in any case. Furthermore, it is a well-established principle of law that the expiration of a limitation does not amount to cessation of liability. Additionally, the observations of the Ld. AO and the Ld. CIT(A) regarding the availability of funds is also incorrect. The Ld.AR submitted that the assessee initially incurred costs for the project related to this deposit. Subsequently, since Kamat Hotel (I) Ltd. did not fulfil its commitments. This resulted in the current dispute pending before the Ld. Arbitrator. The Ld.AR emphasized that lack of liquidity does not change the legal position or the facts. 6.1 He further submitted that, during the pendency of the proceeding before the Ld.AO, despite making a specific request, the records, including statements of cross-examination, were never provided to the assessee, thereby grossly violating the principles of natural justice. 6.2 On the contrary, the Ld.DR relied on the orders passed by the authorities below We have perused the submissions advanced by both sides in the light of the records placed before us.

It is noted that on page 69 of the notes to the financial statement of Kamat Hotel for the year ended 31/03/2013 the said amount was reduced from the expenses as “Provision for doubtful deposit for hotel project” which was supported by note 30.2. The entry and the note is reproduce:

This Tribunal called upon the Ld.AR to submit the statement of claim and counterclaims filed by Kamat Hotels and assessee before the Ld. Arbitrator. It is noted that, these documents were never reviewed by the authorities below and based on the reply filed by Kamat Hotels, a presumption is drawn regarding the liability of the assessee having ceased. Considering the totality of the facts we note that the issue is still pending before the arbitrator. It is also noted that, both parties continue to assert their respective claims to be valid in this litigation. 8.1 It is a basic accounting principle that when the loan be – an impairment, the land, can – a provision to indicate the risk also -- - with the advance to – non-recoverability. We also note that waiting a provision is an accounting measure, that allows the lender to clean their balance sheet but it does not relieve the borrower of their debt. The lender can take legal action, use collateral, or pursue other recovery methods. 8.2 In our view, the authorities' observation below lacks any basis and is unsupported by any provisions of the Act. Under these circumstances, Kamat Hotels' decision to write off the alleged advance does not ipso facto imply that the liability has ceased in the hands of the assessee. 8.3 Based on the above facts, in our view the quantification of the liability depends on the award passed by the Ld. Arbitrator. We therefore do not find any force in the addition made in the hands of the assessee during the year under consideration, and the same deserves to be deleted.

Ground No. 4 to 5 raised by the assessee concern the notional rent calculated for the trust property used by LIHS without any consideration.

The Ld.AR submitted that, the addition of notional rental rent was made in the hands of the assessee in respect of the property that was used by LIHS. He submitted that the assessee being a trust is governed by provisions of section 11 to 13 of the Act, and provisions of section 14 cannot be invoked. He thus submitted that addition of notional rental is untenable under the head “Income from house property” or under the head “Income from other sources”. 10.1 The Ld.AR further, submitted that, section 56 governing income from other sources does not contain any addition on a notional basis. It is submitted that, section 56 can be invoked only when there is a real income (and not notional income) and such income is not attributable to any of the heads of income. 10.2 The Ld.AR submitted that provisions of Sec. 13(2)(b) r.w.s. 13(3) of the Act are not applicable in the present case. He submitted that LIHS did not fall within the ambit of Section 13(3) as no direct individual/personal benefits are or can be received by the LIHS being a charitable trust. The Ld.AR relied on the decision of the coordinate bench of this Tribunal in the case of Smt. Chandrakala Somani Charitable Trust vs. Seventh Income Tax Officer reported in (1991) 38 ITT 70 (Bombay). 10.3 The Ld. AR submitted that no income of the assessee was used/applied directly or indirectly for benefit of LIHS during the A.Y. 2016-17 Centre For The Study Of Social Change year under consideration. He submitted that that the land was allotted by the Government in 1974 and the building/superstructure thereon was constructed. Since, the income of the previous year 2015-16 was not used in either construction of building or acquisition of land, benefit of section 11 cannot be denied and no addition can be made. 10.4 Without prejudice to the above submission, the Ld.AR submitted that, if the contention of revenue is considered, no addition on account of notional rent could be made. He submitted that, it is well settled proposition of law that, on the applicability of Sec. 13(2)(b) r.w.s. 13(3) of the Act, denial of benefit of Sec. 11 must be restricted only to the extent of funds/property diverted or utilised in violation of Sec. 13(2)(b) of the Act. HE relied on the decision of Hon’ble Bombay High Court in case of CIT(E) vs. Audyogik Shikshan Mandal reported in (2019) 101 taxmann.com 247 (Bombay)" and CIT (E) vs. Maharashtra Academy of Engineering and Educational Research reported in (2024) 161 taxmann.com 290 (Bombay). He submitted that, the effect of application of income for the benefits of persons specified under section 13(3) is a denial of benefit of section 11 to such income/funds mis-utilised and not addition of notional income 10.5 On the contrary, the Ld.DR relied on the orders passed by the authorities below We have perused the submissions advanced by both sides in the light of the records placed before us.

Charitable Trust or Institution has been provided a special fiction of law for income and application of income. These operate within section 2(15), 2(24) (iia), 11, 12, 13, etc. of the Income Tax A.Y. 2016-17 Centre For The Study Of Social Change Act. The income includes income derived from the property held under trust, including income being profits and gains of business which is incidental to the main objects of the trust or institution, subject to satisfying the conditions laid down thereon as contained in s 11(4A). Also it includes income in respect of business undertaking held under trust in accordance with s 11(4). 11.1 A trust may have income from all of the heads of income, except the head Salaries. However, the income from property held for charitable or religious purposes cannot be equated with the income which is computed under the general provisions of the Act in respect of the other assessees who are not entitled to the benefit of section 11. 11.2 Section 14 provides heads of income under which all income for the purposes of charge of income tax and computation of total income are required to be done. Income of a trust is not determined under section 2(45). Section 11 is the charging Section for trusts. It requires 85% of the income to be applied for charitable purposes. 11.3 Thus there is no reference to classification of income into different heads of income as per section 14 of the Act and special provision created under section 11 would prevail over the other general provisions. The decisions relied on by the Ld.AR in his written submissions emphasise the above position of law. However, these decisions do not address the issue under consideration and are therefore of no assistance to the assessee.

Ground no.6 raised by the assessee is consequential to the above two issues. In the event there is any deficit, the same may be set off while considering the income of the subsequent year. Accordingly Ground no.6 stands partly allowed for statistical purposes. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 27/05/2025 Sd/- Sd/- (GIRISH AGRAWAL) (BEENA PILLAI) Accountant Member Judicial Member Mumbai: Dated: 27/05/2025 Poonam Mirashi, Stenographer Copy of the order forwarded to: