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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Smt. P. Madhavi Devi & Shri S.Rifaur Rahman
Per Smt. P. Madhavi Devi, J.M.
This is Revenue’s appeal for the A.Y 2008-09 against the order of the CIT (A), Guntur, dated 10.10.2014. The Revenue has raised the following grounds of appeal: “ 1. The order of the Ld. CIT (Appeals), is erroneous both on facts and in law.
The Ld. CIT (Appeals), erred in law in holding that the assessee is eligible for exemption u/s.11, when there was clear violation of provisions of Sec.13(1)(c) of the Act on the part of the assessee, as established by the AO in the assessment order.
The Ld. CIT (A) was not justified in accepting that construction agreement dt.15.03.2008 referred to by the assessee, in the face of
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detailed factual discussions made by the AO in the assessment, establishing unreliability of the said document and for non-acceptance of the said document.
The Ld. CIT (A) ought to have appreciated that in face of full factual discussions made by the AO in the assessment, there was clear violation of Sec. 13(1)(c) of the Act on the part of the assessee thereby making ineligible for exemption u/s 11, following the said advance of Rs.1,50,00,000/- given by the assessee to Yashaswi Infrastructures Pvt. Limited, a concern covered u/s.13(3) of the Act.
The Ld. CIT(A) erred in deleting the disallowances made by the AO u/s 40 (a)(ia) of the Act and for the capital expenditure in the assessment, when the assessee is not entitled for exemption u/s 11 of the Act.
The Ld. CIT(A) erred in deleting the addition made on account of under reporting of tuition fee in the assessment, when the addition was made on the basis of the number of students in the case of the society and the fee being charged from each student and the income reported under that head by the assessee society.
The Ld. CIT(A) erred in holding that there is no violation of sec. 13(1)(c) and the payments made to Sri T.V.Pranay Kumar, Treasurer of the society, is not excessive for the services rendered by him, without appreciating the fact that the AO has made elaborative discussion in that regard, establishing as to how provision of Sec. 13(1)(c) is attracted in the case from such payment made to that person”.
Brief facts of the case are that the assessee is a society registered u/s 12A of the Act. It is running a school under the name ‘Delhi Public School’. It filed its return of income for the A.Y
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2008-09 on 25.09.2008 declaring ‘Nil’ income after claiming exemption u/s 11 of the Act. The return was initially accepted u/s 143(1) of the Act and subsequently selected for scrutiny by issuance of notices u/s 143(2) and 142(1) of the Act. In response to the said notices, the AR of the assessee appeared from time to time and furnished the details called for. .
Meanwhile, a survey u/s 133A was conducted in the assessee’s premises on 25.10.2010 and it was found that the assessee is not maintaining proper books of account and therefore, its books do not reflect the true and correct picture of its transactions. Therefore, after obtaining the approval of the Director of Income Tax (Exemptions), the books were referred for audit u/s 142(2A) of the Act on 23.12.2010. The audit report dated 19.4.2011, was submitted to the Department on 20.04.2011. A copy of the audit report was forwarded to the assessee calling for its explanation on various issues raised in the audit report. The assessee furnished its explanation and thereafter, the assessment was completed by the AO.
The AO found that during the financial year 2007-08, the assessee had given interest free advance of Rs.1,50,00,000 to M/s. Yashaswi Infrastructure Pvt. Ltd (a contractor), a company in which Shri M. Komaraiah is holding 64.55% and his wife Smt. M. Pallavi is holding 13.99%, together holding 78.54% of the voting power/share capital. He observed that Mr. M. Komaraiah and his wife Smt. M. Pallavi are also the members of the assessee society. Before the AO, the assessee claimed that this interest free advance was given in pursuance of a construction agreement
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executed on 15.3.2008 for development of land and construction of a school building at a total cost of Rs.514.69 lakhs. The assessee claimed that it was a normal business transaction and was not for the benefit of M/s. Yashaswi Infrastructure Pvt. Ltd and therefore, the provisions of section 13(1)(c)(ii) of the Act was not attracted.
The AO did not accept the above contentions of the assessee for the following reasons: i) The construction agreement was not found during the course of survey nor was it produced during the assessment proceedings and therefore, agreement is not genuine. It was only produced for the first time before the Special Auditor, and therefore, this casts a doubt about the authenticity of the date of execution of the document.
ii) The stamp paper on which the construction agreement was written was purchased on 26.09.2005, while the agreement was executed at a much later date i.e. 15.03.2008.
iii) The agreement is notarized without any date and hence there is no evidence to indicate that the agreement was executed on 15.03.2008.
iv) The terms of the agreement are totally in favour of the Contractor and does not give any details about the number of floors, the quality of material to be used for interior works of the school to be constructed and there was no mention of the date before which the construction should be completed.
v) The assessee society did not have any permission from the Municipal authorities for construction of the school building. Even for the formation of the approach road to the building, there are no specifications as to the length & width of the road, quality of the material to be used etc.
vi) The termination clauses are also in favour of the Contractor and the assessee has not invoked any of these clauses
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to cancel the agreement, even though the Contractor did not fulfil any of the conditions of the contract.
The assessee has claimed that it has received back the advance of Rs.1.50 crores from the Contractor in the subsequent years but did not offer any explanation/reason for the contractor returning the amount after a lapse of two years. The assessee, by itself, was carrying on the work of construction and therefore, it was within its knowledge that its sister concern was not carrying on any activity of the construction for the Trust and they chose to arrange the affairs between them in such a manner unmindful of the fact that such an advance has caused detriment to the Trust and the same cannot be held as an application of its income u/s 11 of the Act nor an investment u/s 11(5) of the Act. Thus, the agreement of construction is only a self-serving document, only to justify interest free advance of Rs.1.50 crores to the Contractor and claimed it to be a business transaction.
For these reasons, the AO held that the assessee Trust has advanced the funds to a person for the benefit of a person referred to in sub-section 3 of section 13 of the Act and hence the assessee is not entitled to exemption u/s 11 of the Act.
The AO also proceeded to consider the allowability of the expenses claimed by the assessee. He found that the assessee has claimed to have paid salary of Rs.3.30 lakhs to one Shri T.V. Pranay Kumar for 11 months from 2.6.2007 to 31.3.2008. When confronted, the assessee’s explanation was that Shri T.V. Pranay Kumar is an Advocate by profession and that he provided legal
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services to the society for which the payment was made. The AO observed that the assessee did not prove its claim with any documentary evidence. He also observed that Shri T.V. Pranay Kumar is not a full-fledged Advocate and is only working as a Junior/Assistant to a Senior Advocate and therefore, his services cannot be considered as legal professional services. He also observed that in addition to the above, the assessee further listed out the “Legal & Professional Charges” totaling to Rs.2,20,999 and therefore, held that if the payment made to Shri T.V. Pranay Kumar is towards fees for legal advice/professional charges, these payments were not reflected in Schedule 10. Since Shri T.V. Pranay Kumar was the Treasurer and Member of the assessee society, the AO was of the opinion that this payment attracts the provisions of section 13(1)(c) of the Act. In view of this violation, the AO held that the assessee is not entitled to the exemption u/s 11 of the Act.
Thereafter, the AO proceeded to consider the allowability of other expenses claimed by the assessee and found various expenses to be not allowable. One such expenditure is the payment made to various parties without making TDS. He therefore, made the disallowance u/s 40(a)(ia) and the consequential addition of Rs.7,03,645 under this head.
Further, as per the income and expenditure a/c ending on 31.03.2008, he observed that the assessee declared “Term Tuition Fee” to the tune of Rs.3,99,68,660. However, he found that there was a shortfall of Rs.15.00 lakhs, found from the analysis of invoices, cash bank balances and fee account. He
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accordingly made the disallowance and the consequential addition.
Aggrieved, the assessee preferred an appeal to the CIT (A), who deleted the additions and also held that the assessee is entitled to exemption u/s 11 of the Act. Aggrieved by the relief granted by the CIT (A), the Revenue is in appeal before us.
The learned DR, strongly supported the orders of the AO and submitted that the assessee has violated the provisions of exemption by making interest free advances to its related concern which has benefitted the said concern and hence is sufficient cause to deny the exemption u/s 11 of the Act.
The learned Counsel for the assessee, on the other hand, reiterated the submissions made before the authorities below and further submitted that the interest free amount was advanced to M/s. Yashaswi Infrastructure Pvt. Ltd only for business purposes and that too on 31.03.2008 and therefore, even if it is presumed to be not for business purposes, no benefit has enured to the Contractor during the relevant previous year and therefore, the assessee cannot be denied the exemption u/s 11 of the Act for the said year.
Having regard to the rival contentions and the material on record, we find that the reasons for disallowance of exemption u/s 11 of the Act are that (i) the assessee had advanced interest free advance to M/s. Yashaswi Infrastructure Pvt. Ltd, a related
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concern for its benefit and therefore, transaction falls under clause (c) of sub-section(1) of section 13 of the I.T. Act and; (ii) the Treasurer of the Society has been paid salary of Rs.3,30,000 and hence the provision of section 13(1)(c) are attracted. The undisputed facts which needs consideration are, that (a) the assessee is a registered society u/s 12A of the Act; (b) it is carrying on charitable activity of running an educational institution; (c) it has filed its return of income on 25.09.2008; (d) the advance was given to the related party on 31.03.2008 and (e) the said amount was returned within a period of two years thereafter. There is also no dispute that M/s. Yashaswi Infrastructure Pvt. Ltd, is a concern in which the Trustees, have a substantial interest. Therefore, the question to be considered is whether this advance is for the benefit of such a concern or is it a normal business transaction.
The assessee has claimed it to be a normal business transaction i.e. for construction of a school building. The copy of the agreement is filed in the paper book filed before us and as rightly pointed out by the AO, the agreement does not speak of the approved plan or the number of floors or area to be constructed or the quality of material to be used etc. Therefore, it appears to be an agreement entered into to explain the purpose of the advance of Rs.1,50,00,000. The CIT (A) has accepted the assessee’s contention that the amount has been returned subsequently and also that M/s. Yashaswi Infrastructure Pvt. Ltd, has carried out the preliminary activities of levelling the land, removal of the boulders, etc. and that the said company has incurred certain expenditure which has not been returned to the
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assessee. But, in our opinion, the CIT (A) has failed to consider that the assessee has constructed the building by itself during the relevant previous year and also in the subsequent years. Therefore, we are in agreement with the findings of the AO that the assessee has not invoked the clauses of the agreement to cancel the contract, even though it had the knowledge that M/s. Yashaswi Infrastructure Pvt. Ltd was not fulfilling the conditions of the contract nor was going to execute the contract. However, we find strength in the argument of the learned Counsel for the assessee that the advance was given on the last day of the relevant financial year i.e. 31.03.2008 and therefore, no benefit has accrued to the said company for the relevant financial year and hence the provisions of section 13(1)(c) are not attracted. The registration u/s 12A allow the assessee to make the claim of exemption u/s 11 of the Act while the allowability of claim is to be considered by the AO year to year. Therefore, the first and foremost condition to invoke section 13(1)(c) is that the assessee should have used or applied the income of the assessee directly or indirectly for the benefit of any person referred to in section 13(3) of the Act. There is no dispute that M/s. Yashswi Infrastructure Pvt. Ltd is a person referred to in section 13(3) of the Act and the income of the assessee has been advanced to it. The benefit is the advance being interest free. The next condition is that such person should have derived the benefit during the relevant A.Y. If it is a business transaction, there cannot be any presumption of the benefit referred to u/s 13(1) (c) of the Act. The Hon'ble Allahabad High Court in the case of CIT vs. Kamala Town Trust reported in (2005) 279 ITR 89 (All.) has held that the burden to prove that section 13 has been violated was on the revenue. The
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Tribunal at Agra in the case of Shri Amol Chand Varshney Sewa Sansthan reported in (2013) 25 ITR (Trib.) 211 (Agra) held that the exemption u/s 11 cannot be denied on mere presumption. In the case on hand also, the AO has not brought out on record that the related concern has benefited during the relevant financial year. Another factor which needs consideration is that the construction agreement is alleged to have been executed on 15.03.2008 and the advance has been given on 31.03.2008 and the said advance has been returned over a period of two years thereafter and no disallowance or an addition has been made in the subsequent A.Ys towards the interest free advance. All these transactions have been carried out before the date of survey i.e. on 25.10.2008. Therefore, it cannot be said that this contention of the assessee is an afterthought. In view of these reasons, we agree with the findings of the CIT (A) that the assessee cannot be denied the exemption u/s 11 of the Act for the relevant A.Y. The Revenue’s grounds of appeal Nos. 2, 3 & 4 are therefore, rejected.
The other ground on the basis of which the exemption u/s 11 has been denied is the payment of salary to Shri T.V. Pranay Kumar. We find that before the CIT (A), the assessee had filed the proof that Mr. T.V. Pranay Kumar is registered as an Advocate and that he has rendered services to the Society in legal proceedings before the Hon'ble High Court of Andhra Pradesh and before the Civil Courts at Secunderabad. We find that the CIT (A) has also observed that the AO has not disputed the reasonableness of the payment to Mr.T.V. Pranay Kumar or that it was in pursuance of the objects of the Society Trust. In the absence of any evidence to the contrary, we do not see any reason
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to interfere with the order of the CIT (A). Ground No.7 is accordingly rejected. In this view of the matter, we hold that the assessee cannot be denied the exemption u/s 11 of the Act for the relevant A.Y.
As regards Ground No.5, it was submitted by the assessee before the CIT (A) that the assessee has not claimed such expenditure in its books of account but in fact has capitalized the same. Further, it is also submitted that when the assessee’s income is being computed u/s 11 of the Act, the provisions of section 40(a)(ia) of the Act cannot be invoked. The CIT (A) has accepted the contention of the assessee without any verification as to whether the said expenditure has been claimed by the assessee in the income and expenditure a/c. As rightly pointed out by the learned Counsel for the assessee and also held by the CIT (A), when the assessee is being assessed as a charitable institution, the provisions of section 40(a)(ia) of the Act are not applicable. In view of our finding above, that the assessee is entitled to the exemption u/s 11 of the Act, we do not see any reason to interfere with the order of the CIT (A) on this issue.
As regards Ground No.6, the AO has estimated the tuition fee received by the assessee on the basis of number of students studying in the school of the assessee. The CIT(A) has deleted the addition by observing that the Special Auditor has not pointed out any discrepancy in fee receipts and also that the AO has not accounted for concession fee in respect of children of teaching and non-teaching staff.
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The learned DR has not been able to rebut the findings of the CIT (A) with any evidence to the contrary. In view of the same, we see no reason to interfere with the order of the CIT (A) on this issue. Accordingly, Ground No.6 is rejected.
In the result, Revenue’s appeal is dismissed.
Order pronounced in the Open Court on 24th January, 2018.
Sd/- Sd/- (S.Rifaur Rahman) (P. Madhavi Devi) Accountant Member Judicial Member
Hyderabad, dated 24th January 2018. Vinodan/sps Copy to: 1 DCIT (Exemptions), 3rd Floor, Aayakar Bhavan, Basheerbagh, Hyderabad 500004 2 Balajee Arun Educational Society, Plot Nos. 170 & 171, Dhanalakshi Colony, Mahendra Hills, Secunderabad 3 CIT (A)-Guntur 4 Director of Income Tax (Exemptions), Hyderabad 5 Addl. Director of Income Tax (Exemptions), Hyderabad 6 The DR, ITAT Hyderabad 7 Guard File
By Order
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