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Facts
The assessee trust, registered under Section 12AA, filed a return of income declaring nil income. The Assessing Officer (AO) completed the assessment ex parte under Section 144, adding unsecured loans and interest paid on them as unexplained income, and also disallowed a corpus donation.
Held
The Tribunal held that while the issue of unsecured loans and interest disallowance are complex, the additional evidence filed by the assessee needs to be admitted and examined by the AO. The corpus donation was correctly treated as income as no specific direction from donors was provided.
Key Issues
Whether the unsecured loans and interest paid thereon are genuine? Whether the donation received is a corpus donation or a revenue receipt? Whether the denial of exemption under Section 11 is justified?
Sections Cited
144, 143(2), 142(1), 12AA, 80G, 11, 11(1)(d), 13(1)(c), 13(3)
AI-generated summary — verify with the full judgment below
Order PER LALIET KUMAR, J.M: This appeal by the assessee is directed against the order dated 16.01.2024 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, for the assessment year 2016-17 arising out of the order dated 26.12.2018 passed by the Assessing Officer under section 144 of the Income Tax Act, 1961.
Briefly the facts of the case are that the assessee trust is registered under section 12AA since 2006 and also enjoys approval under section 80G. It filed its return of income declaring nil income. The case was selected for scrutiny and statutory notices under sections 143(2) and 142(1) were issued. According to the Assessing Officer, despite opportunities the assessee did not satisfactorily substantiate its claims. The Assessing Officer, therefore, proceeded to complete the assessment ex parte under section 144 and assessed total income at Rs.3,57,13,220/-.
2.1 The Assessing Officer noted that the assessee had shown unsecured loans aggregating to Rs . 4,79,20,000/- as on 31.03.2016, compared to Rs. 2 1,71,86,550/- as on 31.03.2015. The difference of Rs 3,07,33,450/- was treated as unexplained and added to income. In support of this conclusion, the Assessing Officer reproduced the details of loans and interest as under: Table 1: Loan Movement S. No. Name of Lender Loan Received during year (Rs.) Closing Balance (Rs.) 1 Amir Chand 50,00,000 0 2 Anju Gupta 74,00,000 22,00,000 3 O. P. Gupta 50,00,000 50,00,000 4 Saroj Gupta 0 0 5 Bal Kishan Sethi 50,00,000 0 6 Shobha Gupta 45,00,000 45,00,000 7 V. P. Gupta 95,00,000 95,00,000 8 Anubha Gupta 34,00,000 34,00,000 9 Manju Gupta 45,00,000 45,00,000 10 Nitesh Gupta 20,00,000 20,00,000 11 C. L. Pardesi 0 47,50,000 12 Manorama Arora 0 35,60,000 13 Rahul Gupta 30,50,000 30,50,000 14 Usha Rani 5,00,000 5,00,000 15 Vidya Devi 30,00,000 30,00,000 Total Loan Received during year: Rs.4,79,20,000 | Closing Balance: Rs.4,79,20,000 Table 2: Interest Payments S. No. Name of Lender Interest Paid (Rs.) Rate of Interest (%) 1 Amir Chand 2,00,495 12% 2 Anju Gupta 3,08,942 12% 3 O. P. Gupta 0 0% 4 Saroj Gupta 0 0% 5 Bal Kishan Sethi 3,24,292 8% 6 Shobha Gupta 0 0% 7 V. P. Gupta 0 0% 3 S. No. Name of Lender Interest Paid (Rs.) Rate of Interest (%) 8 Anubha Gupta 2,48,318 12% 9 Manju Gupta 2,41,935 12% 10 Nitesh Gupta 35,172 12% 11 C. L. Pardesi 0 0% 12 Manorama Arora 0 0% 13 Rahul Gupta 1,62,322 12% 14 Usha Rani 3,118 8% 15 Vidya Devi 2,36,219 12% Total Interest Paid: Rs.19,82,813 2.2 The Assessing Officer examined the ITRs and bank accounts of these lenders, many of whom were trustees or relatives with modest incomes, and concluded that the funds represented rotation of money routed through related concerns. He therefore treated the net increase of Rs . 3,07,33,450/- as income of the assessee. As the loans themselves were held non-genuine, the claim of interest payment of Rs . 19,82,813/- was also disallowed.
2.3 The Assessing Officer further observed that a donation of Rs . 5,00,000/- had been received from two individuals, but no evidence was available to treat it as corpus under section 11(1)(d). Accordingly, the same was treated as a voluntary contribution and added to income. 2.4 Finally, the Assessing Officer held that by paying interest and allowing benefits to trustees/relatives, the assessee had violated provisions of section 13(1)(c). Consequently, exemption under section 11 was denied, and the surplus of Rs . 24,96,956/- was assessed as income in the status of an AOP.
Feeling aggrieved by the order passed by the Assessing Officer, the assessee preferred the appeal before the Ld. CIT(A). The learned CIT(A), after considering submissions, substantially confirmed the action of the Assessing Officer.
4 4. On the issue of unsecured loans, the CIT(A) analysed the individual cases of lenders and held that the money was merely rotated among trustees, family members, and related concerns. He observed that several lenders had meagre incomes and lacked creditworthiness. After detailed examination, the CIT(A) confirmed the addition to the extent of Rs.1,82,50,000/- and deleted Rs.1,24,83,450/-.
On the interest disallowance, the CIT(A) held that the assessee had paid Rs.19,82,813/- to trustees and their relatives, which attracted section 13(3). By virtue of section 11 read with section 13, such payments could not be allowed as expenditure of the trust. The addition was therefore upheld. Regarding the corpus donation of Rs.5,00,000/-, the CIT(A) noted that no specific direction in writing was furnished from the donors to treat the sum as corpus. Since section 11(1)(d) requires a specific direction, he upheld the addition.
Finally, in respect of the denial of exemption under section 11, the CIT(A) endorsed the AO’s finding that the trust had extended benefits to specified persons by taking loans from them and repaying with interest at rates as high as 12%. He held that section 13(1)(c) was clearly attracted, disentitling the assessee from exemption under section 11. The surplus of Rs . 24,96,956/- was therefore correctly taxed as income of an AOP. The Ld. CIT(A), as mentioned hereinabove, has partly granted the relief to the assessee.
Now the assessee is in appeal before us on the grounds mentioned in the present appeal.
At the outset, the Ld. The AR submitted that an application filed under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963, seeking admission of additional evidence. It was submitted that during the assessment proceedings, the Assessing Officer did not call for the requisite certificate documents, nor was a sufficient opportunity given to the assessee to file them. The assessee, due to a lack of proper professional guidance, was 5 unable to produce the necessary confirmations, bank statements, and supporting documents from lenders at the relevant time.
It was further contended that the additional evidence now filed in the form of a paper book running into 66 pages includes confirmation of accounts, bank statements, and certificates from entities such as M/s VRP Buildtech Pvt. Ltd., M/s Lotus Exotica LLP, and other related parties. These documents, according to the assessee, are crucial to establish the identity, creditworthiness, and genuineness of the loans appearing in its books.
Per contra, the Ld. DR had opposed the application and submitted that the assessee failed to produce the evidences before the lower authorities and the fresh opportunity cannot be granted to the assessee.
We have heard the rival contention of the parties and perused the material available on the record. The assessee has moved an application for admission of additional evidence under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963. It has been explained that the non-production of the said evidence before the lower authorities was on account of lack of proper advice. It is true that the assessee may not have been properly advised at the relevant time to place all the material evidence on record. However, it cannot be ignored that the assessee had partly produced documents before the Assessing Officer and the CIT(A), while the present set of documents was withheld and filed only before us. Such conduct reflects a casual and callous approach on the part of the assessee in the matter of compliance with statutory proceedings.
11.1 At the same time, we are mindful that the ultimate object of adjudication is to do substantial justice. If relevant evidence having a material bearing on the determination of the issue is kept out of consideration, it may result in a miscarriage of justice. Therefore, balancing both aspects, we are of the considered opinion that the additional evidence now filed by the assessee deserves to be admitted, though not without conditions.
6 11.2 Accordingly, we direct that the additional evidence filed by the assessee shall be admitted subject to the payment of cost of Rs.3,000/- to be deposited with the State Legal Services Authority, Haryana (High Court). The assessee shall furnish proof of such deposit before the Assessing Officer, who shall verify compliance and thereafter proceed to consider the additional evidence in accordance with law.
We are also mindful that the relief already granted by the learned CIT(A) to the extent of deletion of Rs . 1,24,83,450/- should not be disturbed. Therefore, for the limited purpose of examining the genuineness of the loans sustained by the CIT(A) at Rs.1,82,50,000/-, the matter is remitted back to the file of the Assessing Officer. The AO shall examine the additional evidence, allow the assessee due opportunity, and decide afresh. Needless to say, the assessee shall cooperate in the remand proceedings.
Accordingly, ground no. 2 relating to unsecured loans is partly allowed for statistical purposes, with the issue remitted to the AO for limited examination.
Ground No. 3 – Disallowance of Interest 14.1 It was the submission of the learned AR that no undue benefit had been passed to the related parties to attract the mischief of section 13(1)(c) read with section 13(3) of the Act. The assessee argued that the payment of interest was a genuine expenditure incurred for raising funds, and merely because such interest was paid to persons connected with the trustees, the disallowance should not follow. It was further submitted that the prevailing interest rate at the relevant time was much more than 18% and therefore the payment of interest of 12% cannot be said to be exorbitant .
Per contra, the learned DR drew our attention to the tabulated details showing the various rates of interest paid by the assessee to related parties. It was submitted that while some loans were interest-free, in other cases the assessee paid interest at 8% . According to the DR, such payments of interest of 12% to related parties were clearly excessive, particularly when the 7 assessee had access to interest-free funds from certain parties and also availability of loan at the interest of 8%. It was therefore contended that the disallowance sustained by the lower authorities was justified.
Having heard the rival contentions, we are of the considered opinion that the issue of interest disallowance is inextricably linked with ground no. 2 concerning unsecured loans. Since we have already remanded the matter relating to unsecured loans back to the file of the Assessing Officer for fresh consideration in the light of additional evidence, we consider it appropriate also to remit this ground.
16.1 Accordingly, we direct the Assessing Officer to re-examine the claim of interest expenditure after verifying the additional evidence and after allowing the assessee a reasonable opportunity to substantiate that the interest paid to related parties was neither excessive nor in violation of section 13. The assessee shall demonstrate that the interest paid was commensurate with market conditions and did not confer an unjust benefit on specified persons. In light of the above, Ground No. 3 is allowed for statistical purposes.
Ground No. 4 – Corpus Donation of Rs.5,00,000/- 17.1 The learned AR submitted that the assessee had received a sum of Rs.5,00,000/- as corpus donation. According to him, the contribution was in the nature of voluntary donation, and the assessee treated the same directly in the Balance Sheet as corpus. The Assessing Officer, however, made the addition on the reasoning that there was no specific written direction from the donors, and therefore, it did not qualify as corpus within the meaning of section 11(1)(d).
17.2 The learned AR further contended that even assuming the donation was not corpus, it would then partake the character of a voluntary revenue receipt of the assessee. In such circumstances, the donation should be brought to tax in accordance with law after considering the provisions applicable to charitable trusts.
8 18. The learned DR, on the other hand, strongly supported the orders of the lower authorities. He argued that the assessee itself had not offered this donation as a revenue receipt in its return of income. Therefore, the AO was justified in treating the same as income in the absence of evidence to prove corpus-specific directions from the donors.
We have heard the rival contentions and perused the material available on record. Section 11(1)(d) clearly mandates that for a voluntary contribution to be treated as corpus, there must be a specific direction from the donor to that effect. In the present case, no such written directions were produced either before the AO, the CIT(A), or even before us. The assessee has only claimed it as corpus in the Balance Sheet without supporting confirmation from the donors. In such circumstances, we find no infirmity in the finding of the authorities below that the donation of Rs.5,00,000/- does not qualify as corpus. 19.1 As regards the plea that the donation, if not treated as corpus, should be regarded as voluntary revenue receipt, we note that the assessee did not offer the same as income in its return of income, nor has it substantiated its application towards charitable purposes. Therefore, this argument cannot be accepted at this stage.
19.2 Accordingly, the addition of Rs.5,00,000/- sustained by the CIT(A) is upheld. Thus, ground no. 4 is dismissed.
Ground No. 5 – Denial of Exemption under Section 11 20.1 The learned AR argued that the assessee is a duly registered charitable trust under section 12AA and also enjoys approval under section 80G. It was contended that the income of the trust ought to be exempt under section 11, and the lower authorities erred in denying such benefit. According to the AR, the mere fact that interest was paid on loans raised from trustees and relatives does not amount to conferring undue benefit upon specified persons, particularly when the borrowing was for the legitimate purposes of 9 the trust. It was thus submitted that the surplus of Rs.24,96,956/- should not have been taxed in the hands of the assessee.
In reply, the Ld. DR strongly relied upon the orders of the Assessing Officer and the CIT(A). He submitted that the details on record clearly establish that the assessee trust had availed loans from its trustees and their family members, and interest aggregating to Rs.19,82,813/- was paid thereon at rates as high as 12%. By paying interest to trustees and their relatives, the assessee conferred direct benefit upon persons specified in section 13(3). Once such violation is established, section 13(1)(c) squarely applies, disentitling the assessee from the benefit of exemption under section 11.
We have considered the rival contentions and perused the record. The Assessing Officer as well as the CIT(A) held that the assessee by paying interest to trustees and relatives conferred direct benefit upon specified persons, thereby attracting section 13(1)(c). On that basis, the exemption under section 11 was denied, and the surplus of Rs.24,96,956/- was taxed in the status of an AOP.
The learned AR contended that once the genuineness of loans and the allowability of interest is examined afresh in ground nos. 2 and 3, the determination of whether there is any violation of section 13(1)(c) would directly depend upon the findings in those grounds. Thus, the matter is interlinked and cannot be adjudicated independently at this stage. The learned DR, however, supported the orders of the lower authorities.
Having heard both sides, we are of the considered opinion that the issue of denial of exemption under section 11 is intrinsically connected with the genuineness of loans (ground no. 2) and the allowability of interest (ground no. 3). Since those issues have been restored to the file of the Assessing Officer, we deem it appropriate, in the interest of justice, to also remit ground no. 5 back to the file of the Assessing Officer for fresh consideration. The Assessing Officer shall re-examine the applicability of 10 sections 11 and 13 after deciding grounds 2 and 3, and pass a speaking order thereon. Thus, ground no. 5 is also allowed for statistical purposes.
In the result, appeal of the Assessee is partly allowed for statistical purposes.