INCOME TAX OFFICER (EXEMPTION), ALWAR vs. M/S MANAV BHARTI SAMITI, BHARATPUR

PER VIJAY PAL RAO, JM :

This appeal by the revenue is directed against the order dated 14th

September, 2017 of ld. CIT (A), Alwar for the assessment year 2013-14. The

revenue has raised the following grounds :-

“ 1. On the facts and in the circumstances of the case and in law the ld. CIT (A) has erred in deleting the addition of Rs. 75,54,717/- by the holding that the AO has accepted the exemption of capital gain in its remand report and assets have been donated as per the amended bye-laws whereas the AO has not accepted the issue in his remand report and assessee Samiti failed to give intimation to Competent Authority i.e. concerned CIT for transfer of assets and amendment made in society deed on 08.07.2011.

2 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.

Ground Nos. 1 to 3 are regarding disallowance of exemption under

section 11 of the Income Tax Act.

Act, 1958. The assessee was also granted registration under section 12A of the Act

and is engaged in imparting education by way of an educational institution in the

name of Manav Bharti Secondary School, Bharatpur. During the year under

3 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.

consideration, the assessee has transferred its capital assets to another institution,

namely, M/s. Aadhar Shikshan Sansthan, Bharatpur. The assessee claimed the same

as donation to the other educational institution without any consideration. The AO

in the assessment order noted that the assessee has claimed expenses of Rs.

1,29,30,069/- in its Income and Expenditure account leaving a surplus of income of

Rs. 24,75,086/-. The claim of expenses includes depreciation of Rs. 11,60,580/- on

fixed assets. The AO also asked the assessee to furnish the copies of documents of

donation made of fixed assets and copies of registered Trust deed, Constitution,

Registration, if any, under section 12A/12AA, final accounts etc. of the donee

society/trust. The assessee filed the copy of the Transfer Deed titled as Dan Patra executed on 30th May, 2012 and registered with Sub Registrar, Bharatpur in respect

of transfer of land and buildings in favour of M/s. Aadhar Shikshan Sansthan,

Bharatpur. The AO noted that for the purpose of charging the stamp duty, the

Registering authority has valued the assets at Rs. 1,69,01,950/-. Thus the AO found

that except in case of dissolution as per the clause 24 of the bye laws of the

assessee society, the fixed assets cannot be transferred and that too of a particular

fixed asset. Accordingly, the AO computed the capital gain from transfer of the land

and buildings by the assessee by considering the full value consideration as per the

provisions of section 50C and after allowing the expenditure to the extent of Rs.

80,46,321/- being application of income for addition made in the fixed assets which

were purchased by the assessee in the same year. The AO held that the transfer of

fixed assets without consideration is clear violation of the provisions of section

11(1A) of the Act. The assessee challenged the action of the AO before the ld. CIT

4 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.

(A), who has allowed the appeal of the assessee. Aggrieved by the order of the ld.

CIT (A), the revenue is in appeal before this Tribunal.

fund of the assessee and also a property held in trust and, therefore, the same

cannot be allowed to be transferred by the assessee except in terms of provisions of

section 11(1A) of the Act. Since the assessee has transferred the land and buildings

in question without any consideration, therefore, it is a clear violation of provisions

of section 11 of the IT Act and the assessee has misused the benefit of section 11 in

respect of the income which was applied for acquisition of the land and buildings in

question which was subsequently transferred without any consideration. The ld. D/R

has further contended that the transferee M/s. Aadhar Shikshan Sansthan is not

registered under section 12A/12AA of the IT Act therefore, even otherwise the

donation made to such society/institution is not allowed as application of income for

charitable purposes in terms of section 11 of the IT Act. Once the donation is not

permitted and not eligible as an application of income for charitable purposes then

the said income used for acquisition of the capital asset was subsequently diverted

by the assessee society without any consideration. Thus the ld. D/R has submitted

that it is a clear case of siphoning of funds of the assessee society by using a

colorable device of transfer of capital assets in the name of donation. He has relied

upon the order of the A.O.

3.1. On the other hand, the ld. A/R of the assessee reiterated the submissions as

made before the ld. CIT (A) as under :-

5 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.

“ The ld. AO had computed the capital gain in accordance with the provisions of section 11(1A) of the I.T. Act, 1961 on the transfer of fixed assets to Adhar Shiksha Sansthan, Neemda Gate, Bharatpur vide Dan Patra executed on 30.05.2012 (PB-1 to 16) before the Sub- Registrar, Bharatpur alleging that (1) “Except in case of dissolution as permitted by clause 24 of bye laws dt. 12.12.1968 the society could not transfer it’s entire fixed assets and liabilities to another society”. (2) The Ld. AO further alleged that “without meeting out their own liabilities of unsecured loan out of the assets of the society or relinquishing the loan liability to such extent to the market value of the fixed assets donated or transferring the liabilities of loans with the fixed assets donated, the action of the members having donated the fixed assets without obtaining adequate consideration is not justifiable”. Before alleging (1) above the ld. AO without considering the specific clause of objects No. 8 at PB-18 directly jumped to clause No. 24 relating the dissolution of the society while no such instance of dissolution has arised and the clause No. 24 PB-24 is applicable and operative on the instance of dissolution. In objects clause No. 8 at PB-18 it is very clearly stated that “and do all other works such as educational, tourism and from which the objects of the society is fulfilled” and from the donations of assets to the society of same objects the objects of society is fulfilled. Before alleging (2) above the ld. AO ignored the fact that the assessee samitee is owning assets as appearing in Balance Sheet of Samitee (PB-32) as well as per Balance Sheet of Manav Bharti Secondary School, Sewar (Bharatpur)(PB-33) where in after donations of the fixed assets vide dan patra discussed above, various out fixed assets of Rs. 1,05,000/- as per Balance Sheet of Samitee (PB-32) and Rs. 1,82,26,829/- as per Balance Sheet of Manav Bharti Secondary School,

6 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.

Sewar (Bharatpur)(PB-33) were remained in the ownership of the assessee samitee which are much higher that the loans liabilities of unsecured loans of Rs. 1,17,99,718/- stated by the ld. AO as unsecured loans at Page No. 3 of the assessment order subject of this appeal. Further all these unsecured loans were taken to make additions of fixed assets of school at sevar as evident from the details of fixed assets of Manav Bharti Secondary School, Sewar (Bharatpur) at PB-34. In terms of section 11(1A) of the I.T. Act, 1961 the capital gain is computed where the net consideration on transfer of the capital asset is not utilized for acquiring of another capital asset. Whereas in the case of the assessee no net consideration on transfer for the capital asset has been received to the assessee as the capital assets have been transferred vide Dan Patra without any consideration, hence provisions of section 11(1A) of the I.T. Act, 1961 are not applicable in this case and the ld. AO has erred in charging of capital gain of Rs. 75,54,717/- u/s 11(1A) of the I.T. Act, 1961, which is unjustified and bad in law and needs deletion in this appeal. In terms of section 50C of the IT Act, 1961, this section is applicable where the consideration received or accruing as a result of the transfer by any assessee of a capital asset, while in the case of the assessee the transfer of fixed assets to Adhar Shiksha Sansthan, Neemda Gate, Bharatpur was made vide Dan Patra executed on 30.05.2012 before the Sub Registrar, Bharatpur and it was a purely donation and no considered was received or accrued as a result of the transfer, hence section 50C if not applicable and the ld. AO wrongly applied section 50C which is unlawful and unjustified. In terms of section 11 of the I.T. Act, 1961 accumulation of set apart of income in excess of 15% of the income is taxable and in the case of the assessee the ld. AO considered Rs. 23,32,540/- being 15% of Rs. 1,55,50,265/- only whereas he has considered total income of Rs.

7 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.

3,23,07,105/- (Rs. 1,54,05,155/- income as per Income and Expenditure Account and Rs. 1,69,01,950/- sale consideration as per section 50C of the IT Act) and on this total income of Rs. 3,23,07,105/- being 15% of Rs. 3,23,07,105/- Rs. 48,46,066/- needs to be deducted out of the income taken by the ld. AO. The ld. AO very arbitrarily charged MMR as per provision of section 164(2) of the I.T. Act, 1961 without examining the facts of the case and even without making any question in this regard from the assessee. We pray to your honor to please consider the above submissions and please allow the appeal.”

record. As per the provisions of section 11 of the IT Act, the income derived from

the property held under the Trust wholly for charitable or religious purposes, to the

extent of which such income is applied for charitable purposes in India is exempt

from income tax. The assessee is undisputedly granted registration under section

12AA and, therefore, has been availing the benefit of section 11 and 12 of the IT Act

on the income which is applied for charitable purposes. There is no dispute that the

fixed assets of the assessee were also acquired from the income which was allowed

as exempt from Income Tax Act as per the provisions of section 11 & 12 of the IT

Act. Therefore, the income applied or used for acquisition of fixed assets by the

assessee was treated as application of income for charitable purposes. Hence the

said amount of income becomes part of corpus fund of the assessee society. Once

the fixed asset / capital asset of the assessee is classified as property held in Trust,

the same cannot be transferred except in accordance with the provisions of section

8 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.

11 (1A) of the Act. For ready reference, we quote the section 11 (1A) of the Act as

under :-

Section 11(1A) :

[(1A) For the purposes of sub-section (1),— (a) where a capital asset, being property held under trust wholly for charitable or religious purposes50, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:— (i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain; (ii) where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset; (b) where a capital asset, being property held under trust in part only for such purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:— (i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of the appropriate fraction of such capital gain; (ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset. Explanation.—In this sub-section,— (i) "appropriate fraction" means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purposes; (ii) "cost of the transferred asset" means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in *sub-clause (b) of †clause (1) of section 55; (iii) "net consideration" means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.]

9 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.

Thus the provisions of section 11(1A) of the Act permits the substitution of the fixed

assets and consequently not attracting the tax liability. Otherwise, the transfer in

contravention of the provisions of section 11(1A) would attract the tax liability on the

income arisen or deemed to have arisen for such transfer. Thus, a trust or

charitable institution would not loose the benefit of exemption under sections 11/12

of the IT Act if a capital asset is transferred only with the purposes to acquire

another asset of equivalent value. Though the assessee has acquired a new asset

during the year under consideration for which the AO has allowed the benefit of Rs.

80,46,321/-, however, we note the said attempt was made by the assessee to

escape from the tax liability by acquiring another asset from the loans taken from its

members. Hence it is not a case of substitution of capital asset but the assessee has

transferred the existing asset without consideration and a new asset was acquired

by taking the loans from the members and hence a liability was created by the

assessee for acquiring the new asset. Though the said acquisition of the asset by

utilizing the loan will not satisfy the conditions as per section 11(1A) of the Act,

however, since the AO has already allowed the benefit on account of application of

the income, therefore, the said issue is not before us in the present appeal. Once

the assessee availed the benefit of exemption under sections 11 & 12 of the Act on

account of application of income or being donation received for specific purposes

being corpus fund, then the transfer of the capital asset by utilizing the fund

accumulated after availing the benefit of section 11 & 12 of the Act without

consideration would be treated as application of accumulated fund for non charitable

purposes. It is an indirect mode of transfer of funds of the assessee society to a

10 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.

body not registered under section 12A/12AA or approved under section 10(23C) of

the Act. Even the donation to the another trust is permitted when it fulfills the

conditions of section 11(3)(d) of the Act. There is no dispute that M/s. Aadhar

Shikshan Sansthan, the transferee of the asset in question is not registered under

section 12A/12AA or approved under section 10(23C) of the Act. Hence even if the

transfer is considered as donation, the same is in violation of provisions of section

11(3)(d) of the Act.

4.1. The trust property cannot be transferred except in accordance with the

provisions of Public Trust Act and with the permission of the Court as per the

provisions of section 92 of the CPC. Hence transfer of fixed asset being the property

held in trust by the assessee is in contravention of section 11 (1A) of the Act as well

as section 11(3)(d) of the Act resulting the income on this transfer is liable to tax

and not eligible for exemption under section 11 of the Act. As regards the

applicability of section 50C of the Act is concerned, since the transfer of the capital

asset give rise to the income as capital gain, therefore, the provisions of section 50C

are applicable in case of transfer of land and building. In the case in hand, the asset

in question is comprising of land and building and hence for the purposes of full

value consideration, the provisions of section 50C are applicable. There is another

aspect in this matter regarding transfer without consideration and at the same time

the assessee received loans of Rs. 1.17 crores from the members of the assessee

society. Though the AO questioned the way the assesse created the liability in

favour of the members, however, the source of the said loans in the hands of the

members was not examined by the AO. If the transfer in question and funds

11 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.

received by the members are contemporaneous, then there may be a case of ulterior

device to benefit the members by transfer of the fixed asset held in trust without

direct consideration but in favour of the members. The AO is directed to verify the

source of loan in question given by the members and in case the amount was

received by the members around the same time when the fixed asset was

transferred by the assessee then a proper investigation is required to find out the

trail of money used as loan to the assessee society. Accordingly, to find out the

crucial fact, a proper enquiry is required at the level of the AO, hence we set aside

the impugned order of the ld. CIT (A) and restore the order of the AO on the issue

of taxability of the income arising from transfer of the capital asset in question and

further the matter of loan taken from the members is required to be verified by a

proper enquiry to be conducted by the AO.

Ground nos. 4 & 5 are regarding disallowance of depreciation by the

AO on the ground that a 100% expenditure on acquisition of capital asset

is allowed as application of income then the allowance of depreciation on

the same asset would amount to double deduction.

material on record. This issue is no more res integra as has been settled by a series

of decisions of Hon’ble High Courts. In the latest decision of Hon’ble Supreme Court

in the case of CIT vs. Rajasthan & Gujarati Charitable Foundation, Poona reported in

402 ITR 441, the Hon’ble Supreme Court has held as under :-

12 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.

“ It may also be mentioned at this stage that the legislature, realizing that there was no specific provision in this behalf in the Income Tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the assessment year 2015-16. The Delhi High court has taken the view and rightly so, that the said amendment is prospective in nature. It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well. For the aforesaid reasons, we affirm the view taken by the High Courts in these cases and dismiss these matters.”

Accordingly, in view of the decision of Hon’ble Supreme Court on this issue, we do

not find any error or illegality in the order of the ld. CIT (A) qua this issue.

Order is pronounced in the open court on 13/08/2018.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 13/08/2018. Das/

आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. The Appellant- The ITO (Exemptions), Ward Alwar. 2. The Respondent – M/s. Manav Bharti Samiti, Sewar Road, Sewar, Bharatpur. 3. The CIT(A). 4. The CIT, 5. The DR, ITAT, Jaipur 6. Guard File (ITA No. 902/JP/2017) vkns'kkuqlkj@ By order,

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

13 ITA No. 902/JP/2017 M/s. Manav Bharti Samiti, Bharatpur.