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PER DR. S. SEETHALAKSHMI, J.M. Because the assessee was dissatisfied with the finding given in the order of the Learned Commissioner of Income Tax (Appeals)-2, Udaipur [ for short CIT(A) ] all dated 15.05.2024 for the assessment years 2014- 15 to 2016-17 these appeals were filed. That order of the ld. CIT(A) arises because the assessee has challenged orders dated 19.12.2018 passed under section 147/148 read with section 143(3) of the Income Tax the assessee has raised the following grounds of appeal:- “1.That on the facts and in the circumstances and in law of the case, the ld. CIT(A) grossly erred in confirming the assessment proceeding u/s 147 r.w.s. 143(3) of the Act. 1.1 That on the facts and in the circumstances and in law of the case, the ld Assessing Officer grossly erred in making the addition beyond the reason recorded which is not permissible under the law and ld. CIT(Appeal) erred in confirming the same.
1. 2. That on the facts and in the circumstances of the case, the ld. CIT(A) grossly erred in enhancing the assessed income by making addition of Rs. 4,69,22,650/- on account of rejecting the books of account and on the basis of re-casted income and expenditure account without considering the facts and circumstances of the case.
3. That on the facts and in the circumstances and in law of the case, the ld. Lower Authorities grossly erred in denying the exemption benefits to the assessee appellant trust as per the provisions of section 11 to 13 of the Income- tax Act.
4. That on the facts and circumstances of the case ld. Lower Authorities grossly erred in making addition of Rs. 33,50,772/- to the income of the assessee appellant trust while disallowing the benefit of exemption under section 11(2) and 11(1)(a) of the Act as claimed by the assessee appellant trust.
5. That on the facts and in the circumstances of the case the ld. Lower Authorities grossly erred in making addition of Rs 16,75,286/- on account of unverifiable creditors.
6. That on the facts and in the circumstances of the case, the ld. CIT(A) grossly erred in the assessed income by making disallowance of Rs. 1,20,00,440/- being 15% of Rs 8,00,02,935/- on account of construction expenses and adding it in total income of the assessee appellant without considering the fact that it was never claimed by the assessee appellant.
7. That on the facts and in the circumstances of the case, the ld.Lower Authorities grossly erred in disallowing Rs 3,69,567/- out of total expenses of To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Rs 24,63,780/- without considering the facts that it was not claimed by the assessee appellant .
8. That on the facts and in the circumstances of the case, the ld.Lower Authorities grossly erred in disallowing Rs 2,18,50,444/- u/s 40(a)(ia) of the Act on account of non-deduction of TDS.
9. The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing.”
the assessee has raised the following grounds of appeal:- “1.That on the facts and in the circumstances and in law of the case, CIT(A) grossly erred in confirming the assessment proceeding u/s 147 r.w.s 143(3) of the Act. 1.1 That on the facts and in the circumstances and in law of the case, the ld Assessing Officer grossly erred in making the addition beyond the reason recorded which is not permissible under the law and ld. CIT(Appeal) erred in confirming the same.
2. That on the facts and in the circumstances of the case, the ld. CIT(A) grossly erred in enhancing the assessed income by making disallowance of Rs. 2,22,47,350/- on account of rejecting the books of account and on the basis of re-casted income and expenditure account without considering the facts and circumstances of the case.
3. That on the facts and in the circumstances and in law of the case, the ld. Lower Authorities grossly erred in denying the exemption benefits to the assessee appellant trust as per the provisions of section 11 to 13 of the Income-tax Act.
4. That on the facts and circumstances of the case ld. Lower Authorities grossly erred in making addition of Rs. 5,83,469/- to the income of the assessee appellant trust while disallowing the benefit of exemption under section 11(2) and 11(1)(a) of the Act as claimed by the assessee appellant trust.
5. That on the facts and in the circumstances of the case the ld. Lower Authorities grossly erred in making addition of Rs 66,94,824/- on account of unverifiable creditors.
6. That on the facts and in the circumstances of the case, the ld. Ld. Lower Authority grossly erred in disallowance of 15% of Rs 2,68,89,419/- i.e 40,33,412/- on account of construction expenses and added in total income of the assessee. without considering the fact that it was never claimed by the assessee appellant.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
7. That on the facts and in the circumstances of the case, the ld. Ld. Lower Authority grossly erred in confirming the disallowance of Rs 1,71,897/-/- out of total expenses of Rs 11,45,980/- without considering the facts that it was not claimed by the assessee appellant 8. That on the facts and in the circumstances of the case, the ld. Lower Authority grossly erred in confirming the disallowance of Rs 1,03,03,005/- and Rs 39,000/- u/s 40(a)(ia) of the Act on account of non-deduction of TDS.
9. The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing.” the assessee has raised the following grounds of appeal:-
1. That on the facts and in the circumstances and in law of the case, the ld CIT(A) grossly erred in confirming the assessment proceeding u/s 147 r.w.s 143(3) of the Act. 1.1 That on the facts and in the circumstances and in law of the case, the ld Assessing Officer grossly erred in making the addition beyond the reason recorded which is not permissible under the law and ld. CIT(Appeal) erred in confirming the same.
2. That on the facts and in the circumstances of the case, the ld. CIT(A) grossly erred in enhancing the assessed income by making disallowance of Rs. 2,28,93,362/- on account of on account of rejecting the books of account and on the basis of re-casted income and expenditure account without considering the facts and circumstances of the case.
3. That on the facts and in the circumstances and in law of the case, the ld. Lower Authorities grossly erred in denying the exemption benefits to the assessee appellant trust as per the provisions of section 11 to 13 of the Income- tax Act.
4. That on the facts and circumstances of the case ld. Lower Authorities grossly erred in making addition of Rs. 15,35,061/- to the income of the assessee appellant trust while disallowing the benefit of exemption under section 11(2) and 11(1)(a) of the Act as claimed by the assessee appellant trust.
5. That on the facts and in the circumstances of the case, the ld. Lower Authority grossly erred in confirming the addition made by ld. assessing officer of Rs 31,177/- on account of unverifiable creditors.
6. That on the facts and in the circumstances of the case, the ld. CIT(A) grossly erred in confirming the disallowance of Rs 44,02,650/- u/s 40(a)(ia) of the Act on account of non-deduction of TDS.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 7. The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing.” 3. As is evident from the grounds of appeal that the issue raised in all these bunch of appeal are identical and of the same assessee, we have heard these cases together with the consent of the parties and have decided to dispose these appeals by common order.
With the consent of the parties the facts of the case in is considered as lead case. The brief facts of the case are that the assessee is a Trust and registered under the Non-Trading Companies Act Raj. Vide Reg. Certificate No. 215/1976 dated 09.03.1976 and trust having main objects of to developing the cloth business in Kota and for the benefit of the general public or businessmen under the name of Wholesale Cloth Merchant Association Kota. The Trust is also registered u/s 12A of the IT Act vide registration certificate No. 8/1993-94/2609 dated 10.08.1994. The main source of receipts/income of the assessee is annual fees from its members, rent, interest and Misc. receipts.
In the present case the AO has issued the notice u/s 148 on 28.02.2018 on the reasons that "During the assessment year 2014-15, the assessee has not filed any return of income. As per AIR/CIB information generated on AST, it is noticed that assessee received amount of To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Rs.22,37,641/- as per 26AS and refund interest received for the A.Y. 2011-12 of Rs. 5,278/- as per AIR information. The cash of Rs.32,30,000/- was also deposited at State Bank of India and Cash Deposited is not verifiable as assessee has not filed return of Income. Therefore, thus it requires verification as the income earned as per 26AS for Rs.22,42,919/-, investment of Rs. 32,30,000/- in bank account.
Record further reveals that the assessee has also filed service tax return declaring gross value of services of Rs. 8,37,69,001/-which required verification. A survey was also conducted on 30.06.2016 and hard disk was impounded which also required examination. Therefore, ld. AO was satisfied that assessee has earned that much income during the year which has escaped from assessment. In view of the above facts, he had reason to believe that Income of the assessee to the extent of Rs.54,72,919/- has escaped assessment for the A.Y. 2014-15 and the services rendered by the assessee also required verification.
Statutory notice u/s 142(1) was also issued for 1TR filing on 11.09.2017 but no return was filed by the assessee. Therefore, notice u/s148 of the Act was issued. In response to the notice u/s 148 the assessee filed its return of income on 07.06.2018 declaring the total income of Rs. Nil. The case of the assessee was taken up for scrutiny by To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. issuing notice u/s 143(2) by issuance of notice dated 19.06.2018 and thereafter issued the notice u/s 142(1) on 14.09.2018 (PB 70-73) in response thereto the assessee filed the replies with details time to time. On examination of the details filed ld. AO issued a shows cause notice dated 06.11.2018 vide page 2 to 4 of assessment order in which he has asked to the assessee to show cause as under :
"(1) the trust is required to get its accounts audited under any provision of the Act, Assessee trust has not filed its return of income before issuing notice u/s 148 of the Act and asked to explain the reasons for not submitting ITR within time limit. If return is not filed by prescribed date then benefit of accumulation us 11(2) will not be available. (2) As per AIR/CIB information generated on AST, it is noticed that assessee had received amount of Rs.22,37,641/- as per 26AS and refund interest received for the A.Y. 2011-12 of Rs. 5,278/- as per AIR information. The cash of Rs. 32,30,000/ was also deposited at State Bank of India and Cash Deposited is not verifiable as assessee has not filed its regular return of Income. Thus the assessee has earned income of Rs. 22,42,919/- and made further investment of Rs.32,30,000/- in bank account. Assessee has also filed service tax return declaring gross value of services of Rs. 8,37,69,001/-which required verification. Hence asked to explain, how above transaction amounts are accounted for in the books of accounts of the assessee trust. Application of Funds deemed to have been made for the benefit of specified persons- [Sec 13(2)]:- Applications of the trust-income or the trust-property for the following purposes is deemed to have been made for the benefit of specified persons. (a) If a loan is given to a specified person for any period during the previous year without either adequate security or adequate interest or both; (b) If any land, building or other property of the trust, is allowed to be utilized by a specified person, without charging adequate rent or other compensation: (C) If payment is made by way of salary, allowance, etc. to a specified person for services rendered by him to the trust or institution, in excess of what may be reasonably paid for such services; (d) If the trust renders its services to a specified person without adequate remuneration Medical/Educational Institution)
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. (e) If any share, security or other property is transferred to the trust from a is more specified person, for a consideration which than adequate, any share, security or other property is transferred by the trust to specified person, for inadequate consideration; (f) if any income or property of the trust, exceeding Rs. 1000 in value, is diverted to a specified person; and g) If the trust-funds are invested, or remain invested, for any period In any concern wherein any of the specified persons has a substantial interest. In view of above provisions of the Act, it is gathered that a complaint has been filed against the trust that books of accounts for the A.Y 2014-15 to 2016-17 have not been written or Audit proceedings were also pending before issuing notice us 148 of the Act. The news regarding irregularities in financial records of the assessee trust has also been published in newspapers. President ShriTejendra Pal Sahni Rimpi' and Treasurer Shri Manohar Gotewalahave withdrawn huge amounts through Cheques from accounts of the Trust which are not accounted for in the books of accounts. Kindly, explain how withdrawn amounts are accounted for in the books of accounts. In response thereto the assessee has filed the reply on 16.11.2018 also reproduced at page 5 to 10 of the assessment order. In its reply assessee has explained and replied to all the issue with the details and explanation. However, the ld. AO did find it acceptable and stated that the assessee has not filed ITR for the year, the ITR was filed after reopening of the proceedings u/s 148. The ld. AO has stated that the total income of the trust before allowing the exemption u/s 11 and 12 exceed the total income which is not chargeable to tax. And required to file return in the form 7 before the specified date u/s 139 which is 30 September. The trust was also required to get its accounts audited under the act. The ld. AO had noted that section 12A(1)(b) provides that the exemption u/s 11 will be available only if the accounts are audited and audit report furnished To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. along with return. From the audit report so filed in the Form no. 10B dated 14.11.2017 it is evident that number of discrepancies have been noted by the Auditor, who mentioned in Sr. No.3(c) that as per FIR copy, 22 plots has been given to the person who are not the member of Association and received conversion charges from 17 persons @ 1,85,000/- and no details available regarding remaining 5 plots amount recoverable from concerning persons of all 22 plots has not been taken in books.
The ld. AO stated that Shri Tejendra Pal Singh has taken loan & advances of Rs.31,50,000/- from the trust and violated the provisions of Section 13(2), no books of accounts maintained, TDS provisions have not been complied properly, therefore the trust was not eligible for claiming exemption u/s 11 to 13. The president of the trust Shri Tejendra Pal has withdrawals huge amount from the trust account and utilized for personal benefit. The ld. AO has stated that assessee trust is not eligible for exemption u/s 11 & 12, the income of the trust will be charged at MMR u/s 164(2) as the trust doing business activity. With that observation ld. AO proceeded to make the following addition which the ld. AR of the assessee submitted that the same are made without issuing any show cause notice and not part of the reasons recorded:
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. (a)Alleged bogus creditors of Rs.16,75,286/-. (b) 15% of construction expenses of Rs.8,00,02,935/- which comes to Rs.1,20,00,440/- (c)15% of certain expenses payment of Rs.24,63,780/- which comes Rs.3,69,567/-. (d) Addition/disallowance of Rs.2,18,50,444/- u/s 40(a)(ia) on account of non- deduction of TDS. (e)The ld. AO has disallowed the income of Rs. 33,50,772/- (33,45,494/- +5,278/-) and also taxed the same @ Maximum Marginal Rate U/s 164(2). The Id. AO has alleged that the assessee trust is doing business activities in and not complying statutory provisions of the Act. Thus the AO has completed the assessment assessing the income of the assessee at Rs.3,92,46,509/- against the Nil Income.
5. When the matter challenged before the ld. CIT(A) the assessee challenged that order of the ld. AO on the legal ground which was not considered by the ld. CIT(A) and had confirmed the action of the ld. AO and had dismissed that legal ground. In that proceeding ld. CIT(A) called for the remand report of the ld. AO on the legal ground of challenging the proceeding u/s. 147/148 proceedings and thereby the assessment made. In that remand report of the Id. AO he has stated that in this case, the ld. AO clarified that the assessment proceedings u/s 147 was initiated after recording reasons of reopening and prior approval has been obtained from the Joint Commissioner of Income Tax, Central Range Udaipur vide his office letter number JCIT/CR/UDR/2017-18/1994 Dated 21.02.2018. The reasons of reopening the assessment proceedings were provided to the To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. assessee vide his office letter number DCIT/CC-Kota/2018-19/479 Date 11.06.2018. Assessee/AR has not objected to the assessment proceedings u/s 147 of the Act. He also reported that the income of Rs. 33,45,494/- + Rs. 5,278/- was added by the AO by disallowing exemption u/s 11(2) and 11(1)(a) of the Act. Further, addition of Rs. 5,278/- is made on account of interest on Income Tax Refund. Thus, all these additions made are part amount reflected as per 26AS. Therefore, addition has been made on this amount also part of reasons of reopening. Therefore, claim of the assessee cannot be accepted as correct that no addition is made on the reasons of reopening.
The Id. AO also stated that the assumption of jurisdiction by the AO by issuing notice u/s 148 of the Act is found to be justified as the appellant has not filed return of Income u/s 139(1). In the final assessment addition is made regarding one or more of the amounts which was mentioned in the reasons of reopening. It can be said that the amount of Rs. 22,37,641/- as per 26AS was part of the accounts of the assessee association and by denying the benefit u/s 11 of the Act, the AO has taxed the receipts as per correct amounts mentioned in the books of accounts. Ld. AO reported that the assessee has not filed the return of Income originally u/s 139(1) of the Act. The total income of the trust (before allowing exemption under sections 11 and 12) exceeds the maximum To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. amounts which is not chargeable to tax, and thereby the assessee was required to file its return in Form ITR-7, before the date specified in section 139. However, no return of income was filed. Therefore, the assumption of jurisdiction remained with the AO till passing of final assessment order. The ld. CIT(A) referred various plea and confirmed the action of the AO on the aspect of the reopening of the assessment.
6. Aggrieved from the order of AO, the assessee preferred an appeal before the ld. CIT(A). Apropos to the grounds so raised the relevant finding of the ld. CIT(A) is reiterated here in below:-
“4.8. I have considered the facts of the case and written submissions of the appellant as against the observations/findings of the AO in the assessment order for the year under consideration. The contentions/submissions of the appellant are being discussed and decided as under:- In this case, the AO noted that the assessment proceedings u/s 147 was initiated after recording reasons of reopening and prior approval has been obtained from the Joint Commissioner of Income Tax, Central Range Udaipur vide his office letter number JCIT/CR/UDR/2017-18/1994 Dated 21.02.2018. The reasons of reopening the assessment proceedings are provided to the assessee vide this office letter number DCIT/CC-Kota/2018-19/479 Date 11.06.2018, Assessee/AR has not objected the assessment proceedings u/s 147 of the Act. 4.8.1 Addition is made on the reasons of reopening The appellant has raised the issue that no addition made on the reasons recorded us 148. It is argued that the Id. AO has not made additions on these issue or on the issue recorded in the reason for reopening the case (except minor addition of IT refund interest which is already was on record of the revenue) and he has made different additions vide assessment order, which is illegal and now it is the settled legal position of law that if no addition on the reasons recorded has been made then no other addition can be made.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. It is admitted fact that in the reasons of reopening in addition to other amounts an amount of Rs. 5,278/- is mentioned which is interest on Income Tax Refund on which addition is made in the assessment order also. Therefore, claim of the appellant is not found to be correct that no addition is made on the reasons of reopening. It is noted that the income of 33,45,494/- + 5,278/-) is added by the AO by disallowing exemption u/s 11(2) and 11(1)(a) of the income Tax Act. Further, addition of Rs. 5,278/- is made on account of interest on Income Tax Refund. The amount of Rs. 33,50,772/- (33,45,494/- + 5,278/-) must have been part of amount received of Rs. 22,37,641/- reflected as per 26AS. Therefore, addition has been made on this amount also which is also part of reasons of reopening. Therefore, claim of the appellant is not found to be correct that no addition is made on the reasons of reopening. It is important to note that it is recorded by the AO that the assessee has not filed any return of income for AY 2014-15. The assessee claimed exemption u/s 12A of the I.T. Act, 1961. The total income of the trust (before allowing exemption under sections 11 and 12) exceeds the maximum amounts which is not chargeable to tax, it is required to file its return in Form ITR- 7, before the date specified in section 139. However, no return of income was filed. Therefore, the AO recorded reasons on the basis of limited information available as no return of Income was furnished by the assessee. The AO noted that assessee received amount of Rs. 22,37,641/- as per 26AS. The AO also noted that as per AIR information also Rs. 5278/- has been received by the assessee as income tax refund. The AO also noted that Cash of Rs. 32,30,000/- was also deposited in bank account of the assessee. The claim of the appellant is that no addition is made on these amounts. The argument of the appellant are considered. It is not that case that the information is found to be incorrect. The AO has considered the reply and made addition as per provisions of Income Tax Act. As such the addition made by the AO are based on return filed in response to notice issued u/s 148. Before the notice, there was no return filed by the assessee. Therefore, the notice issued u/s 148 is found to be valid The appellant has not challenged the validity of the notice. The only return filed by the assessee was in response to notice issued u/s 148 of the Income Tax act. Before that the assessee was non filer. It is not the case that the assessee was not required to file Return of Income. Once, the return is filed then it is duty of the AO to make assessment of the Income of the assessee which has been done by the AO The audit report in form Number 108 was performed on dated 14.11.2017 and a number of discrepancies have been noted by the Auditor Shri A.K.Lodha Partner of Raj Kishor & Associates (M. Number 007655). These documents were not filed by To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. the assessee on or before due date prescribed under Income Tax Act. Therefore considering peculiar facts of the case, the argument of the appellant are not found to be valid. The AO has made addition on the reasons of reopening but following the provisions of Income Tax Act. Arguments of the appellant in this regard are not found to be acceptable. 4.8.2 Assumption of Jurisdiction by AO is Valid and it remain till final assessment order. It is recorded by the AO that the assessee has not filed any return of income for AY 2014-15. The assessee claimed exemption u/s 12A of the I.T. Act, 1961. The total income of the trust (before allowing exemption under sections 11 and 12) exceeds the maximum amounts which is not chargeable to tax, it is required to file its return in Form ITR-7, before the date specified in section 139. However, no return of income was filed. There was information with the AO that assessee received amount of Rs. 22.37,641/- as per 26AS. The AO also noted that as per AIR information also Rs. 5278 has been received by the assessee as income tax refund. The AO also noted that Cash of Rs. 32,30,000/- was also deposited in bank account of the assessee. The AO further recorded that as per service tax return services of Rs. 8,37,69,001/-has been declared which required verification as no return of Income is furnished by the assessee. The AO also noted that a survey was also conducted on the assessee and services of the assessee require verification. In view of these facts assumption of jurisdiction by the AO by issuing notice u/s 148 of the Act is found to be justified as the appellant has not filed return of Income u/s 139(1). In the final assessment addition is made with regard to one or more of the amounts which is mentioned in the reasons of reopening. It can be said that the amount of Rs. 22,37,641/- as per 26AS was part of the accounts of the assessee association and by denying the benefit u/s 11 of the Act, the AO has taxed these receipts as per correct amounts mentioned in the books of accounts. It is important to note that the return of Income was not furnished originally u/s 139(1) of the Act. The total income of the trust (before allowing exemption under sections 11 and 12) exceeds the maximum amounts which is not chargeable to tax, it is required to file its return in Form ITR-7, before the date specified in section 139. However, no return of income was filed. Therefore, the assumption of jurisdiction remained with the AO till passing of final assessment order. The Supreme Court in Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC) has held that at the stage of issue of notice under section 148 what is required is only reason to believe but not the established fact of escapement of income. The proposition laid down by To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. the Supreme Court clearly goes to establish that the Assessing Officer is not confined to the grounds or reasons stated by him to reopen the assessment and he can make assessment after detailed enquiry. So much so, once the assessment is reopened for any valid reason recorded under section 148(2), then the entire assessment is open for the Assessing Officer to bring to tax any item of escaped income which comes to his notice in the course of such reassessment. Hon'ble High Court Of Kerala (FULL BENCH) in the case of Commissioner of Income-tax, Cochin v. Best Wood Industries & Saw Mills (2011) 11 taxmann.com 278 (Kerala) (FB)/[2011] 331 ITR 63 (Kerala) (FB)/[2011] 237 CTR 404 (Kerala) (FB)[21-12-2010] held as under- "3. In the first place we notice that in the decision of the Supreme Court relied on by the Tribunal, that is, in CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/ 64 Taxman 442, no such proposition canvassed by the assessee was laid down. Secondly section 147 of the Income-tax Act has undergone various changes and the provision applicable for relevant assessment years is extracted hereunder for easy reference: "147. Income escaping assessment-If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereinafter in this section and in sections 148 to 153 referred to as the relevant assessment year)." (Emphasis supplied) What is clear from the above provision is that once assessment is reopened for bringing to tax any income that escaped assessment in terms of sections 148 to 153, then the Assessing Officer has to assess or reassess such income and also any other income chargeable to tax which has escaped assessment. The purpose of this provision is that if in the course of reassessment initiated under section 147 to bring to tax any item of escaped income, it comes to the notice of the Assessing Officer that any other income also has escaped income, then the Assessing Officer should bring to tax such income also. The procedure for income escaping assessment under section 147 is contained in section 148 whereunder sub-section (2) makes it Mandatory for the Assessing Officer to record reasons before proceeding to issue notice. However, once assessment is reopened after recording reasons, the Assessing Officer has to complete the income escaping assessment by following the provisions of the Act as if the To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. return furnished against notice under section 148 as one filed under section 139 of the Act. This obviously means that so far as procedure to be followed is concerned, there is no difference between income escaping assessment and regular assessment because the provisions generally provide for issue of notice, hearing of the assessee and taking of evidence, etc., which are the same for regular assessment and income escaping assessment. Therefore in the course of income escaping assessment, if it comes to the notice of the Assessing Officer that any other item or items of income other than the item of escaped income for the assessment of which, assessment originally completed was reopened, also have escaped from original assessment, he is bound to assess such item or items of income also in the course of reassessment under section 147. In view of the specific provision providing for assessment of other items of income that have escaped assessment, and that comes to the notice of the Assessing Officer in the course of income escaping assessment, the reassessments made are valid and the orders of the Tribunal to the contrary are not sustainable." In this case also the AO was bound to assess such item or items of income also in the course of reassessment under section 147 which came escaped from assessment. In view of the specific provision providing for assessment of other items of income that have escaped assessment, and that comes to the notice of the Assessing Officer in the course of income escaping assessment, the reassessments made are valid. 4.8.3 Addition can be made on all issues which may come to notice of Assessing Officer subsequently during course of proceedings, even though reason for notice for 'such income' which may have escaped assessment, may not survive Hon'ble High Court Of Punjab And Haryana in the case of Majinder Singh Kang v Commissioner of Income-tax [2012] 25 taxmann.com 124 (Punjab & Haryana)/[2012] 344 ITR 358 (Punjab & Haryana) [13-09-2010] examined this issue. Head notes of this decision are as under- "Section 147 of the Income-tax Act, 1961 Income escaping assessment General -Assessment year 2001-02 In reassessment, Assessing Officer can make addition even on ground on which reassessment notice might not have been issued, but he arrives at a conclusion that such other income has escaped assessment which comes to his notice during course of proceedings for reassessment [In favour of revenue] A plain reading of Explanation 3 to section 147 clearly depicts that the Assessing Officer has power to make additions even on the ground on which reassessment notice might not have been issued during reassessment To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. proceedings, but he arrives at a conclusion that such other income has escaped assessment which comes to his notice during course of proceedings for reassessment under section 148. The provision no where postulates or contemplates that it is only when there is some addition on the ground on which reassessment had been initiated, that the Assessing Officer can make additions on any other ground on the basis of which income may have escaped assessment." This issue was examined by Hon'ble High Court Of Karnataka in the case of N Govindaraju v. Income-tax officer, Ward-8(2), Bangalore and held as under- "32. Circular No. 5 of 2010 issued by the Central Board of Direct Taxes (CBDT) after the amendment of 2009, provided for the "Explanatory Notes to the Provisions of Finance (No. 2) Act, 2009" by which Explanation 3 to section 147 of the Act had been inserted with effect torn 1.4.1989. The relevant paragraph 47 of this Circular is reproduced below "47. Clarificatory amendment in respect of reassessment proceeding under S. 147. 47.1: The existing provisions of S.147 provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of S. 148 to 153, assess or reassess such income and also any other income chargeable to tax, which has escaped assessment. Further Assessing Officer may also assess or reassess such other income which has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section. Assessing Officer is required to record the reasons for reopening the assessment before issuing notice under S.148 with a view to reassess the income of assessee. 47.2 Some courts have held that the Assessing Officer has to restrict the reassessment proceedings only to the reasons recorded for reopening of the. assessment and he is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent 47.3: Therefore, to articulate the legislative intention clearly Explanation 3 has been inserted in S.147 to provide that the Assessing Officer may examine, assess or reassess any issue relevant to income which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under sub-section (2) of S.148.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 47.4: Applicability - This amendment has been made applicable with retrospective effect from 1st April, 1989 and will apply accordingly in relation to assessment year 1989-90 and subsequent years."
It is thus clear that once satisfaction of reasons for the notice is found sufficient, i.e., if the notice under section 148(2) is found to be valid, then addition can be made on all grounds or issues (with regard to 'any other income' also) which may come to the notice of the Assessing Officer subsequently during the course of proceedings under section 147, even though reason for notice for 'such income' which may have escaped assessment, may not survive.
In the case of CIT v. Jet Airways (1) Ltd. [2011] 331 ITR 236/(2010) 195 Taxman 117 the Bombay High Court has held that "Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147 An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override or render the substance or core nugatory, Section 147 has this effect that the Assessing Officer has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, afresh notice under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee."
Thus, what has been held is that 'such income' in the first part of section 147 is joined with 'any other income of the second part of the section by the phrase "and also which is used in a "cumulative and conjunctive sense. Following the said judgment of the Bombay High Court, same view has been taken by the Delhi High Court in the cases of Ranbaxy Laboratories Ltd. v. CIT (2011) 336 ITR 136/200 Taxman 242/12 taxmann.com 74 and CIT v. Adhunik Niryat Ispat Ltd. (2011) 63 DTR 212 and also the Gujarat High Court in the case of CIT v. Mohmed Juned Dadani [2013] 214 Taxman 38/30 taxmann.com 1/(2014) 356 ITR 172 36. With due respect to the view taken in the aforesaid cases, we are unable to persuade ourselves to follow the same.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
Insertion of 'Explanation in a section of an Act is for a different purpose than insertion of a 'Proviso 'Explanation' gives a reason or justification and explains the contents of the main section, whereas 'Proviso' puts a condition on the contents of the main section or qualifes the same. 'Proviso is generally intended to restrain the enacting clause, whereas Explanation explains or clarifies the main section. Meaning thereby, 'Proviso limits the scope of the enactment as it puts a condition, whereas Exploriation clantes the enactment as it explains and is useful for settling a matter or controversy.
Orthodox function of an 'Explanation is to explain the meaning and effect of the main provision. It is different in nature from a 'Proviso', as the latter except, excludes or restricts, while the former explains or clarifies and does not restrict the operation of the main provision It is true that an "Explanation may not enlarge the scope of the section but it also does not restrict the operation of the main provision. Its purpose is to clear the cob-webs which may make the meaning of the main provision blurred. Ordinarily, the purpose of insertion of an "Explanation' to a section is not to limit the scope of the main provision but to explain or clarity and to clear the doubt or ambiguity in it. 39.Explanation is also different from Rules framed under an Act. Rules are for effective implementation of the Act whereas Explanation only explains the provision of the Section. Rules cannot go 'beyond or against the provision of the Act as it is framed under the Act and if there is any contradiction, the Act will prevail over the Rules. Same is not the position vis-à-vis the Section and its Explanation. The latter, by its very name, is intended to explain the provision of the Section, hence there can be no contradiction Section has to be understood and read hand-in-hand with the Explanation, which is only to support the main provision, like an example does to explain any situation.
In the present case, insertion of Explanation 3 to section 147 does not in any manner override the main section and has been added with no other purpose than to explain or clarify the main section so as to also bring in 'any other income' (of the second part of section 147) within the ambit of tax, which may have escaped assessment, and comes to the notice of the Assessing Officer subsequently during the course of the proceedings. Circular 5 of 2010 issued by the CBDT (already reproduced above) also makes this position clear. In our view, there is no conflict between the main section 147 and its Explanation 3. This Explanation has been inserted only to clarify the main section and not curtail its scope. Insertion of Explanation 3 is thus clarificatory and is for the benefit of the Revenue and not the assessee.
If there is ambiguity in the main provision of the enactment, it can be clarified by Insertion of an Explanation to the said section of the Act. Same has been done in the present case. Section 147 of the Act was interpreted To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. differently by different High Courts, ie whether the second part of the section was independent of the first part, or not. To clarify the same. Explanation 3 was inserted by which it has been clarified that the Assessing Officer can assess the income in respect of any issue which has escaped assessment and also 'any other income' (of the second part of section 147) which comes to his notice subsequently during the course of the proceedings under the section. After the insertion of Explanation 3 to section 147 it is clear that the use of the phrase "and also" between the first and the second parts of the section is not conjunctive and assessment of 'any other income' (of the second part) can be made independent of the first part (relating to 'such income' for which reasons are given in notice under section 148), notwithstanding that the reasons for such issue ('any other income') have not been given in the reasons recorded under section 148(2) of the Act. We are thus in agreement with the view taken by the Punjab & Haryana High Court in the cases of Majinder Singh Kang and Mehak Finvest (supra).
Considering the provision of section 147 as well as its Explanation 3, and also keeping in view that section 147 is for the benefit of the Revenue and not the assessee and is aimed at garnering the escaped income of the assessee (viz. Sun Engg. (supra)) and also keeping in view that it is the constitutional obligation of every assessee to disclose his total income on which it is to pay tax, we are of the clear opinion that the two parts of section 147 (one relating to 'such income' and the other to 'any other income') are to be read independently. The phrase 'such income' used in the first part of section 147 is with regard to which reasons have been recorded under section 148(2) of the Act, and the phrase 'any other income' used in the second part of the section is with regard to where no reasons have been recorded before issuing notice and has come to the notice of the Assessing Officer subsequently during the course of the proceedings, which can be assessed independent of the first part, even when no addition can be made with regard to 'such income', but the notice on the basis of which proceedings have commenced, is found to be valid.
In the end it was vehemently argued by the learned counsel for the appellant that the reason to be given under sub-section (2) of section 148 would be the very foundation of the issuance of notice and if it is false or baseless, then everything goes and the structure erected on such foundation would crumble 44. It is true that if the foundation goes, then the structure cannot remain. Meaning thereby, if notice has no sufficient reason or is invalid, no proceedings can be initiated. But the same can be checked at the initial stage by challenging the notice. If the notice is challenged and found to be valid, or where the notice, is not at all challenged, then in either case it cannot be said To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. that notice is invalid. As such, if the notice is valid, then the foundation remains and the proceedings on the basis of such notice can go on. We may only reiterate here that once the proceedings have been initiated on a valid notice, it becomes the duty of the Assessing Officer to levy tax on the entire income (including 'any other income') which may have escaped assessment and comes to his notice during the course of the proceedings initiated under section 147 of the Act.
In view of the aforesaid, we answer the first two substantial questions of law in favour of the Revenue and against the assessee." In this case also the proceedings have been initiated on a valid notice, it becomes the duty of the Assessing Officer to levy tax on the entire income (including 'any other income') which may have escaped assessment and comes to his notice during the course of the proceedings initiated under section 147 of the Act. Therefore, the argument of the appellant are not found to be acceptable. Further the addition made by the AO are based on return filed in response to notice issued u/s 148. Before the notice, there was no return filed by the assessee. Therefore, the notice issued u/s 148 is found to be valid. The appellant has not challenged the validity of the notice. The only return filed by the assessee was in response to notice issued u/s 148 of the Income Tax act. Before that the assessee was non-filer. It is not the case that the assessee was not required to file Return of Income. Once, the return is filed then it is duty of the AO to make assessment of the Income of the assessee which has been done by the AO. The audit report in form Number 108 was performed on dated 14.11.2017 and a number of discrepancies have been noted by the Auditor Shri A.K. Lodha Partner of Raj Kishor & Associates (M. Number 007655). These documents were not filed by the assessee on or before due date prescribed under Income Tax Act. Therefore, when the notice under section 148(2) is found to be valid, then addition can be made on all grounds or issues (with regard to 'any other income' also) which may come to the notice of the Assessing Officer subsequently during the course of proceedings under section 147, even though reason for notice for 'such income' which may have escaped assessment, may not survive. In the peculiar facts of this case, all the relevant information required for assessment is furnished by the assessee only after issuance of notice u/s 148 of the Income Tax act. Therefore, the notice issued u/s 148 and assumption of jurisdiction by the AO is found to be valid and upheld. 4.8.4 This is a case where no return of Income was furnished by the assessee even when having huge amount of transactions.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. It is recorded by the AO that the assessee has not filed any return of income for AY 2014-15. There was information with the AO that assessee received amount of Rs. 22,37,641/- as per 26AS. The AO also noted that as per AIR information also Rs. 5278 has been received by the assessee as income tax refund. The AO also noted that Cash of Rs. 32,30,000/- was also deposited in bank account of the assessee. The AO further recorded that as per service tax return services of Rs. 8,37,69,001/-has been declared which required verification as no return of Income is furnished by the assessee. The AO also noted that a survey was also conducted on the assessee and services of the assessee require verification. Therefore one or more addition made by the AO are therefore directly or indirectly reflected in the reasons of reopening. The disallowance of benefit of section 11 of the Income Tax Act questions all receipts of the assessee association and addition is made on net surplus amount after allowing the expenditure allowable. Hence, the receipts as per 26AS and services as per service tax return were considered while making addition. The case of the association has to be viewed from the peculiar fact that no return of Income was furnished by the assessee u/s 139(1). In view of the above facts and discussion made the reliance placed by the appellant on the decisions of in the case of CIT vs. Shri Ram Singh 306 ITR 0343 (Raj.) and in the case of CIT vs. Jet Airways (1) LTD 331 ITR 0236 (Bom) are not found to be applicable as addition have been made on the reasons recorded for reopening by the AO. In view of above discussion, this ground of appeal is treated as dismissed. Ground No. 2 5.6 I have considered the facts of the case and written submissions of the appellant as against the observations/findings of the AO in the assessment order for the year under consideration. The contentions/submissions of the appellant are being discussed and decided as under:- The AO noted that M/s Wholesale Cloth Merchant Association has not filed income tax returns for A.Y. 2014-15, 2015-16 & 2016-17. Returns were filed after reopening the assessment proceedings u/s 148 of the Act. It is also pertinent to mentioned here that the assessee claimed exemption u/s 12A of the I.T. Act, 1961. The total income of the trust (before allowing exemption under sections 11 and 12) exceeds the maximum amounts which is not chargeable to tax, it is required to file its return in Form ITR-7, before the date specified in section 139. The due date specified under section 139 is 30th To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. September every year where the trust is required to get its accounts audited under any provision of the Act. The assessee trust has not filed its return of income before issuing notice u/s 148 of the Act. The assessee trust would never filed its ITR if department has not carried out survey proceedings. The assessee trust is required to be audited as per provisions of section 12 of the I.T. Act, 1961. Though Section 12A(1)(b) provides that the exemption u/s 11 will be available only if the accounts are audited and audit report "furnished along with the return. It is further noted by the AO that the audit report in form Number 10B was performed on dated 14.11.2017 and a number of discrepancies have been noted by the Auditor. Auditor has also mentioned in serial number 3(c) that as per FIR copy, 22 plots has been given to the persons who are not the members of association. Association has received conversion charges from 17 persons (Who are not members) @ 1,85,000/- from each person. And this amount has been deposited with UIT. The amount received has been shown in the list of amount received from other members. No details available regarding 5 remaining plot. Amount recoverable (Being sale price) from the concerning person of all the 22 plots has not been taken in books. The AO also noted that Shri Tejndra Pal Singh has taken loan & advances of Rs. 31,50,000/- from the trust and violated the provisions of section 13(2) of the Act. Further no proper books of accounts have been maintained. TDS provisions have not been complied properly. Therefore, the trust is not entitled for claiming exemption under the section 11 to 13 of the I.T. Act, 1961. The AO further noted that the president of the trust Shri Tejendra Pal Singh Sahni has withdrawn huge amounts from the trust's account and utilized for personal benefit which is also evident from the submission of the AR. The submission of the AR is reproduced as under:- "Details of amount withdrawn by the past president of the association: As per records of the association and FIR filed by the association against the past president of the association total amounting Rs.2,52,00,000/- withdrawn by the past president. out of this amounting Rs. 1,08,00,000/- transferred in the account of Sh. Rajendra Gupta and remaining amount withdrawn from back through bearer Cheques and vouchers made in the name of some contractors of the association but out of these contractors some contractors denied the receipt of cheques from the association After that episode association tried to know the truth, therefore association went to bank and get all the copies of disputed cheques and found all the cheques are bearer. List of Disputed cheques for the year under consideration is here by produced for your kind reference:………………… To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. All of above mentioned details of cheques has already been conveyed to all the members of the association by its management through circulating a letter among its members copy of the letter is enclosed with this letter for your kind perusal and ready reference. The specified person has been allowed to use fund of the trust for his personal interest Assessee trust has shown gross receipts of income of Rs. 50,75,850/- and amount applied to charitable proposes in India During the previous year at Rs. 17,30,356/- AR filed that this amount is utilized as revenue expenditure. The remaining amount is claimed exempted u/s 11(2) and 11(1)(a) of the Act which is not allowable. The Trust is a public charitable trust and mainly formed for the upliftment of the cloth merchants of the city but fund of trust was utilized for personal benefit of president. The trust has received interest on refund of Rs. 5,278/- which was not shown in ITR filed under section 148 of the Act. Hence same is also added in total income of the trust. The legal requirements have also not been completed by the Trust i. e. filing ITR and get books of accounts audited. Therefore, the income of Rs.33,50.772/- (33,45,494/- + 5.278/-) will be taxed Maximum Marginal Rate u/s 164(2) as the assesse trust is doing business activities in India but not complying statutory provision of the Act.. The AO has denied the benefit u/s 11(2) and 11(1)(a) as claimed by the assessee because there are violations as noted by the AO. The major violations noted by the AO are as under 1. Not filing return of Income u/s 139(1) The total income of the trust (before allowing exemption under sections 11 and 12) exceeds the maximum amounts which is not chargeable to tax, it was required to file its return in Form ITR- 7, before the date specified in section 139. However, no return of Income was furnished.
2. Audit Report was not furnished The assessee trust is required to be audited as per provisions of section 12 of the I.T. Act, 1961. Section 12A(1)(b) provides that the exemption u/s 11 will be available only if the accounts are audited and audit report "furnished along with the return. However, no such report is filed.
3. Receipts are not shown in the books of accounts 22 plots has been given to the persons who are not the members of association. Hence, the objects of the trust have been violated. Amount recoverable (Being To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. sale price) from the concerning person of all the 22 plots has not been taken in books.
4. The trust property is used Personal benefit of the president Shri Tejndra Pal Singh has taken loan & advances of Rs. 31,50,000/- from the trust and violated the provisions of section 13(2) of the Act. Further no proper books of accounts have been maintained. TDS provisions have not been complied properly. The president of the trust Shri Tejendra Pal Singh Sahni has withdrawn huge amounts from the trust's account and utilized for personal benefit. Total amounting Rs.2,52,00,000/- withdrawn by the past president, out of this amounting Rs. 1,08,00,000/- transferred in the account of Sh. Rajendra Gupta and remaining amount withdrawn from back through bearer Cheques and vouchers made in the name of some contractors of the association but out of these contractors some contractors denied the receipt of cheques from the association. In the light of above observations made by the AO, the reply of the appellant is considered in the following paragraphs. The appellant argued that no denial of exemption u/s 11 and 12 for the misappropriation of fund by other persons. Further it is submitted that the id. AO has denied the exemption u/s 11 on the misappropriation of fund by other persons, which is also incorrect. It is undisputed fact that the funds were used for personal benefit of the president. Hence, the denial of exemption is found to be justified. The misappropriation is not made by simple employee but a president of the assessee. Hence, the denial of exemption u/s 11 is found to be justified. The appellant has relied upon the decision of Hon'ble ITAT against the order of the PCIT(Central) in the case of assessee. Hon'ble ITAT in its order has stated that the assessee has not violated the provisions of section 12AA(3)/12AA(4) of the Act. It is held that cancellation of registration u/s 12A cannot be done. However Hon'ble ITAT has not examined the violation of section 13(1)(c) therefore, denial of exemption u/s 11 is found to be justified by the AO. The appellant has relied upon the case of CIT Vis State Urban Development Agency (Suda) (2013) 85 CCH 0179 ANHC, it has been held that Chantable trust Registration u's 124-Denial of Assessee a registered co-operative society and State Autonomous body applied for registration u/s 124- CIT(A) declined registration u/s 12A to assessee on basis of report submitted by Accountant To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. General (GO), where & was mentioned that accounts were not property maintained and funds were not properly utilized and kept idle in bank This decision was rendered for declining registration u/s 12A of the Income Tax Act. The issue of denial of exemption u/s 11 is not decided in this decision. Hence, the decision is not found to be applicable in the facts of the case. The appellant has relied upon the case of CIT vs. A.S. Kupparaju Brothers Charitable Foundation Trust (2012) 205 TAXMAN 0009 It has been held that Charitable trust Registration under S. 12A-Genuineness of-Refusal to grant registration certificate to assessee trust on the ground that the trust does not exist genuinely for the purpose of the objects mentioned in the deed. Misappropriation of funds is not a ground to deny the registration-Exemptions under ss 11 & 124 are not automatic but available only when the assessee satisfies the requirement of section 13-Assessee entitled to the registration under & 12AA This decision was rendered for declining registration u/s 12A of the Income Tax Act. With regard to issue of denial of exemption u/s 11 it is held that Exemptions under ss. 11 are not automatic but available only when the assessee satisfies the requirement of section 13. In this case, the AO has clearly established violation of section 13. Hence, the decision is not found to be applicable in the facts of the case. The appellant has relied upon the case of Kunhitharuvai Memorial Charitable Trust vs CIT(Central) (2017) (1) TMI 1671 (Cochin) It has been held that the CIT was erred in withdrawing registration granted u/s 12AA, by using her powers u/s12AA(3) It is submitted that the ratio of the above judgment is also applicable in the present case because exemption is available on the registration u/s 12A and in the present case the assessee is registered u/s 12A This decision was rendered for declining registration u/s 12A of the Income Tax Act. The issue of denial of exemption u/s 11 is not decided in this decision. Hence, the decision is not found to be applicable in the facts of the case. It is argued that no denial of exemption for the reason not filling the ITR and Audit Report Further it is submitted that id. AO has cancelled the registration on the ground that the assessee has not filed its ROI and Audit report. The reason of not To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. filing of the same are that as the assessee is trust and was depended on the accountant and the president and the other members were under impression that the act of retum filling. Audit report and books are being care take by them. As they were on default since its registration from 1976 to 2013 and the fraud done by the president and books not completed by the accountant was not in the knowledge of the assessee. However when these facts have come to the notice of the assessee it fled its ROI income and Audit report. Hence for the negligence of the President and accountant the whole institute must not be punished. The claim of the appellant is not found to be acceptable if the institute is not following law with regard to legal compliances the institute has to suffer it is for the institute to punish the responsible person. The president is an important person for the institute. if he is doing fraud and not filing return of Income then consequential action has to be taken against the institute. it is argued that it is also settled legal position of law that if an assessee has not flet his ROI and fled ROI and not shown any claim or deduction in the ROI filed and claim the same during the course of assessment proceedings even although during the course of appellate proceedings. The Hon'ble courts has allowed the same by stating that if the assessee is entitled for any claim as per law cannot be denied for the reason that he has not claimed in the ROI It is argued that the assessee had file the ROI and Audit report in response to the notice u/s 146. The argument of the appellant are considered. Any new claim in the return filed u/s 148 of the act is not acceptable as the reopening proceedings are for the benefit of the revenue rather than assessee. The returns are filed u/s 148 of the act are as a consequence of income escaped from assessment and thus can't be advantageous for the assessee and these are proceedings for the benefit of Revenue and not that of the assessee. The assessee cannot be permitted, to convert these reassessment proceedings as his appeal or revision in disguise and seek relief in respect of items earlier not claimed in the original return of income. Reliance is placed on the the judgment rendered by the Hon'ble Bombay High Court in K. Sudhakar S. Shanbhag Vs ITO [2000] 161 CTR (Bom) 391 [2000] 241 1TR 865 (Bom). This decision was rendered by taking notice of the principle laid by the Hon'ble apex Court in CIT Vs Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209: [1992] 198 ITR 297 (SC) to the effect that in reassessment proceedings, an assessee can neither claim nor be allowed a deduction that was not claimed in the original return. New claim of deduction or exemption cannot be allowed in reassessment proceedings. If it is so allowed, then the same shall become discriminatory to To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. the other regular assessees who have lost a right as such to claim deduction by efflux of time or by mandate of the Act. Since, the assessee neither made any such claim in the original retum filed under Section 139(1) of the Act nor in revised return therefore returns filed in response to notice under Section 148 of the Act are not substitute of revised return for making claim of such benefits. Having regard to the provisions of s. 139(5) of the Act and since the assessments under s. 148 are in relation to income escaped from assessment, it is precisely for this reason that new claim of deduction or allowance cannot be made in the completed assessments. It is a settled principle of law that what cannot be done directly can also not be done indirectly. Reference can be made on the judgment rendered by Hon'ble Allahabad High Court in Anupam Sushil Garg v. CIT (2003) 185 CTR (All) 505 [2004] 265 ITR 474 (All). When rules of interpretation are applied it would not allow making of fresh claims as such Principle of interpretation laid by Hon'ble apex Court in Poppatlal Shah v. State of Madras 1953 AIR 274 (SC) reads as under: "It is a settled rule of construction that to ascertain the legislative intent, all the constituent parts of a statute are to be taken together and each word, phrase, or sentence is to be considered in the light of the general purpose and object of the Act itself. The title and preamble, whatever their value might be as aids to the construction of a statute, undoubtedly throw light on the intent and design of the legislature and indicate the scope and purpose of the legislation itself." It has been observed by the Hon'ble Supreme Court in K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 as under- ……………….. In this case of the appellant also, it is admitted fact in this case that there is a violation of sec. 13(1)(c) of the Act therefore, the Assessing Officer was correct in invoking the provisions of sec. 13(1)(c) of the Act and denying exemption to the assessee u/s 11 of the Act. Further, Section 13 has the title 'Section 11 not to apply in certain cases'. Section 13(1)(c) says that if any part of income or any property of the trust is used or applied directly or indirectly for the benefit of persons specified in section 13(3), it is not eligible for the benefits of section 11. Now the Finance Act, 2022 has amended section 13(1)(c) to state that the benefit of section 11 will not be available only to such part of income referred therein. This amendment is brought w.e.f. 1-04-2023. From this amendment itself it is evident that before this amendment the assessee it is not eligible for the benefits of section 11 if any part of income or any property of the trust is used or applied directly or indirectly for the benefit of persons specified in section To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 13(3). This year is relevant to the year before the amendment. Hence the claim of the appellant is not found to be acceptable. Once, exemption is denied, income shall be computed under normal accounting principles by considering all income and expenses to determine profit/loss. The section 164(2) of the Income Tax Act reads as under- (2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, "for which is of the nature referred to in sub-clause (a) of clause (24) of section 2.] for which is of the nature referred to in sub-section (4A) of section 11.] tax shall be charged on so much of the relevant income as is not exempt under section 11 for section 121, as if the relevant income not so exempt were the income of an association of persons: Hence, the AO shall assess the income of the assessee as income of an association of persons. This ground of appeal
is treated as dismissed. Ground No. 3
6. In Ground No. 3 of appeal the appellant has challenged the addition of Rs. 16,75,286/- on account of sundry creditors without providing any opportunity to file confirmation of creditors…………….. 6.9 I have considered the facts of the case and written submissions of the appellant as against the observations/findings of the AO in the assessment order for the year under consideration. The contentions/submissions of the appellant are being discussed and decided as under:- During the course of assessment proceedings, it had been noticed by the AO that on perusal of balance sheet as well as discrepancies noticed by the Auditor, the assessee trust had shown sundry creditors of Rs.16,75,286/- and auditor had also pointed out that amount credited in the personal account was not supported by proper bills/ vouchers and other supporting in most of the cases. During the course of assessment proceedings, the assessee was asked to explain discrepancies pointed by the Auditor but the trust had failed to explain it. Hence the then AO had concluded that the assessee had shown bogus creditors of Rs. 16,75,286/- and the same had disallowed and added in the total income of the assesse for the year under consideration. In the appellate and during the remand proceedings, the assesse has submitted the copy of ledger account of the sundry creditors.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. During the course of assessment proceedings, the assessee was asked to explain discrepancies pointed by the Auditor. However, the appellant claimed that confirmations were not specifically asked by the AO. In these circumstances, the ledger accounts submitted are admitted as additional evidence. However, these do not prove genuineness of creditors. The AO has pointed out that the assessee has not submitted bills and vouchers in support of these creditors or the ledgers of these creditors. The AO has objected admission of additional evidence. It is stated that the case of the assessee is not covered by the provisions of Rule 46A as conditions prescribed therein are not met in this case. It is therefore submitted that the additional evidences should not be admitted. The appellant has also not explained how conditions prescribed in rule 46A are met in its case. Therefore, the additional evidences are not found to be admissible. Without prejudice to the above, in the absence of any bills and vouchers and also no confirmation filed even during the appellate and remand proceedings, the addition made by the AO treating the creditors as bogus of Rs. 16,75,286/- is found to be justified and confirmed. This ground of appeal is treated as dismissed.
7. In Ground No. 4 of appeal the appellant has challenged the addition of Rs. 1,20,00,440/- on account of disallowance of construction expenses and in exemption u/s 12A and In Ground No. 5 of appeal addition of Rs. 3,69,567/- on account of disallowance of certain expenses. The A/R of the appellant has also clubbed the submissions in reply filed during the appellate proceedings. Therefore, both grounds are taken together for adjudication. 7.1 At the time of passing of assessment order u/s 147/148 r.w.s. 143(3) of the Income tax Act, 1961 the AO has briefly stated relevant facts and some of excerpts are reproduced as under:- "11. Construction expenses. The auditor has mentioned that construction expenses of Rs. 8,00,02,935/- has been paid vide bearer cheques without any details or supporting bills. After giving two opportunities of being heard, no details have been furnished by the trust Therefore, 15% of above expenses of Rs. 1,20,00,440/- is disallowed and added in total income.
12. Payments made but no vouchers produced for examination: The trust has made payments of Rs. 24,63,780/- without any supporting vouchers. After giving two opportunities of being heard, no details have been furnished by the trust Therefore, 15% of above expenses of Rs. 3,69,567/- is disallowed and added in total income."
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 7.2 The A/R of the appellant filed written submission during the appellate proceedings vide dated 11.01.2023, the same is reproduced as under:……………….. 7.8 I have considered the facts of the case and written submissions of the appellant as against the observations/findings of the AO in the assessment order for the year under consideration. The contentions/submissions of the appellant are being discussed and decided as under:- During the course of assessment proceedings, the AO noticed that the Auditor had mentioned in Audit report (Form No. 10B), that construction expenses of Rs.8,00,02,935/- has been paid vide bearer cheques without any details or supporting bills. The assessee trust was asked to explain the same but no details had been furnished by the assessee. Hence, the then AO had disallowed 15% of above expenses which comes to Rs. 1,20,00,440/- (15% of Rs.8,00,02,935/-) and added to the total income of the assessee. In the appellate proceedings, the assessee stated that the AO has made the addition without confronting or giving opportunity of being heard. The claim of the assessee is not found acceptable, as during the course of assessment proceedings, the assessee was given opportunity to produce the details or supporting bills of such construction expenses but the assessee had not furnished any details. 7.8.1 Enhancement of Income From the details furnished by the appellant it is evident that in balance sheet of Bajaj Nagar Awasiya Yojna advance from members Rs. 23,00,85,284/- has been shown whereas for the land and construction expenses Rs. 18,31,62,634/- has been shown. The action of the appellant is not found to be as per correct accounting method. The assessee is constructing houses for its members. Hence, the activity of the association is like a builder. As a builder, the assessee association is constructing houses for its members. The builder also takes money from prospective buyers and constructs house and delivers. Hence, the receipts from the members is not loan but income for the association and the expenditure made on the construction is to be considered as expenditure for the purpose of Income and Expenditure account of the association. Any surplus or loss will be taken into the balance sheet. The directly taking these receipts and expenses in the balance sheet is not found to be correct method. Therefore, the books of account of the assessee is not found to be correct. The books of accounts are therefore rejected by invoking section 145(3) of the To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Income Tax Act and income and expenditure account is to be recasted by applying correct method. The ITAT CHENNAI BENCH 'C' in the case of Deputy Commissioner of Income-tax (Exemptions)-II, Chennai v. Chennai Kammavar Trust [2017] 81 taxmann.com 365 (Chennai Trib.)/[2017] 166 ITD 196 (Chennai - Trib.)/[2017] 187 TTJ 674 (Chennai - Trib.) [11-05-2017] decided similar issue and held as under- "6. We have heard both the parties and perused the material on record. The issue before us is whether, on the facts and circumstances of the case and having regard to the terms of the Trust Deed, it can be said that the activities carried on by the assessee in the form of running of community hall, viz "Chennai Kamawar Kalyana Mahal" was itself held under the Trust. For this purpose it is proper to go through the objects for which assessee-Trust is formed. The objects for which the Trust established are enumerated in Trust Deed in clause 3 which reads as under- "3. The Objects of the Trust are: a. To establish and maintain educational institutions. b. To grant scholarships, donations and other incentives to benefit students and others in their education persuits. c. To establish, maintain and conduct orphanages. d. To establish and maintain hospital and dispensaries. e. To establish and maintain homes and institutions for the poor and disabled and physically and mentally handicapped persons. f. To aid and improve music, dance, drama and other fine arts and other popular arts. g. To construct a community hall for letting out to all peoples irrespective of casts, creed or religion for a nominal rent without making any point. h. To encourage and improve handicrafts. i. To render financial help to already existing institutions with objects similar to those of this trust."
7. It is to be noted that section 11(1) of the Act grants exemption to the income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India. There is no exhaustive definition of the words "property held under trust" in the Act, however, sub-section (4) says that for the purposes of section 11, the words "Property held under trust" "includes a business undertaking so held". Subsection (4A) as it stands amended by the Finance (No. 2) Act. 1991, with effect from April 1, 1992, is in the following terms: "(4A) Sub-section (1) or sub-section (2) or subsection (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business"
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
8. Thus, if a property is held under trust, and such property is a business, the case would fall u/s. 11(4) and not u/s. 11(4A) of the Act. Section 11(4A) of the Act would apply only to a case where the business is not held under trust. Thus, there is difference between property or business held under trust and business carried on by or on behalf of the trust.
9. This distinction was recognized by the Supreme Court in the case of Addi. CIT v. Surat Art Silk Cloth Manufacturers Association [1978] 121 ITR 1/[1979] 2 Taxman 501 wherein it was observed that if a business undertaking is held under trust for a charitable purpose, the income there from would be entitled to the exemption u/s. 11(1) of the Act. In the present case, the finding of the CIT(A) is that running of community Hall was incidental to the object of the trust, it was not business commenced/carried on by the assessee. Though the business was commenced by the trust and it was carried on by the Trust after its formation. it cannot be said to constitute property held under trust. U/s. 11(4), it is only the business which is held under the trust that would enjoy exemption in respect of its income u/s. 11(1) of the I.T. Act and there is a distinction between the objects of a trust and the powers given to the trustees to effectuate the purpose of the trust. Though the objects of the trust were charitable, they were mere powers conferred upon the trustees to carry on the business and the profits from such business would benefit the charitable objects. The exemption u/s. 11 cannot be granted on the reason that the business itself was not in existence at the time of formation of the trust and the property held under trust at the time of formation of the trust was not spelt out in the Trust Deed of the assessee. The running of Community Hall was not at all in existence at the time of formation of the trust so as to say that the business is property held under trust. Thus, the activities relating to running of "Community Hall was not even in the contemplation of the Trust Deed on the basis of which the Society is formed and therefore, could not have been settled upon trust. The business carried on behalf of a trust rather indicates a business which is not held in trust, than a business of the trust run by the assessee. In this case, the activities viz., running of community hall, was carried on by the assessee for and on behalf of the trust and it was not business held under trust. Section 11(1) of the Act confers exemption from tax only where the property is itself held under trust or other legal obligation; it does not apply to cases where a trust or legal obligation is not created on any property but only the income derived for a charitable or religious purpose. Surplus funds of a trust, which was claimed to be exempt on the footing that it was property held under trust within the meaning of sec. 11(1) of the Act, was not property held under trust since the property from which the surplus was generated was itself not held under trust In other words, merely carrying on business for and on behalf of the trust and applying the profits of the same for the object of the trust does To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. not entitle for exemption us. 11(4) of the Act unless the business is incidental to the attainment of the objects of the trust.
10. We now proceed to consider the question whether the said activities carried on by the assessed were --------- ----------In any event, if there be any ambiguity in the language employed, the provision must be construed in a manner that benefits the assessee", 13. Prima facie the above observation would appear to support the assessee's case in the sense that even if running of "Community Hall" is held not to constitute a business held under trust, but only as a business carried on by or on behalf of the trust, so long as the profits generated by it are applied for the charitable objects of the trust, the condition imposed u/s. 11(4A) of the Act should be held to be satisfied, entitling the trust to the tax exemption.
14. In our opinion, these observations have to be understood in the light of the facts before the Supreme Court in the case of Thanthi Trust (supra), wherein the trust carried on the business of a newspaper and that business itself was held under trust. The charitable object of the trust was the imparting of education which falls u/s. 2(15) of the Act. The newspaper business was incidental to the attainment of the object of the trust, namely that of imparting education and the profits of the newspaper business are utilized by the trust for achieving the object of imparting education. In this case, there is no such nexus between the activities carried on and the objects of the assessee that can constitute an activity incidental to the attainment of the objects, namely, to promote cause of charity, mission activities, welfare, employment, diffusion of useful knowledge. upliftment and education and to create an awareness of self- reliance among the members of the public etc. We are therefore, of the opinion that the observations of the Supreme Court must be understood and appreciated in the background of the fact in that case and should not be extended indiscriminately to all cases, Being so, we are inclined to hold that the assessee is not entitled for any exemption u/s. 11 of the I.T. Act.
In this case, it is brought on record by the AO that the assessee collected Rs. 11,28,000/- as corpus donation from 93 persons who performed functions at "Chennai Kamawar Kalyana Mahal". In addition to this, Rs.4,70,000/- was rent for utilizing the facilities of "Chennai Kamawar Kalyana Mahal" by 53 persons, totaling is Rs.15,98,000/-. As against this, in guise of corpus donation collected Rs.11,28,000/- from the persons, who have performed the functions in the "Chennai Kamawar Kalyana Mahal". That amount of Rs.11,28,000/- cannot be considered as corpus donation instead it should be a rental income. On enquiry by assessing officer. it was proved that the persons who paid rent of community hall and who paid the corpus donation were same. This is an act of quid pro for hiring the hall and no question of voluntary contribution in this payment. It is also to be noted that the dates exhibited in both cases were same. Being so, the provisions of sec.2(15) of the Act is squarely applicable as total receipts of rent from community hall exceeds Rs.10 lakhs, and we do not To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. find any infirmity in the order of AO in rejecting the claim of exemption u/s. 11 of the Act. Accordingly, the order of Ld.CIT(A) is reversed and the order of AO is restored.
In the result, the appeal of Revenue is allowed." As held in the above decision, if a property is held under trust, and such property is a business, the case would fall u/s. 11(4A) of the Act. Section 11(4A) of the Act would apply only to a case where the business is not held under trust. Thus, there is difference between property or business held under trust and business carried on by or on behalf of the trust. In the present case it is admitted fact that the property on which construction of houses is being done is owned by individual persons in their name and the land is not in the name of trust. Hence, the business activity is being undertaken by or on behalf of the trust and hence, section 11(4A) of the Act would apply in the present facts of the case. Further, the appellant has not established that the object of the trust was to act as builder for housing construction Therefore, the business activity as builder is not found to be as per objects of the trust. Hence, the section 11(4A) is clearly found to be applicable on the facts of the case. After having the books of accounts rejected, the receipts of the year are treated as income for Income and expenditure account and the expenditure for the construction etc. which are directly taken into balance sheet are treated as expenditure for the year. The accounts of the assessee are therefore treated as recasted accordingly. On recasting of the accounts, the expenditure made is subjected to normal provisions of Income Tax Act. The section 11(4A) of the Act empowers the AO to treat the such receipts as income from business and profession. The AO is accordingly directed to treat the receipts as business receipts and the surplus should be taxed as the benefit of deduction u/s 11 are not to be given on such amount The ITAT Delhi Bench 'G' in the case of UMAK Education Trust v. Joint Commissioner of Income-tax (Exemption) [2023] 146 taxmann.com 324 (Delhi -Trib.) decided similar issue. The head notes of the decision is read as under-………………. Officer treated said fee as income from business and professionIt was noted that main object of assessee was to give technical training of workmanship to those who were seeking employment However, as per MOU, assessee was merely responsible for organizing qualified trainers for conducting above mentioned training program and all remaining Infrastructural facilities were of two hotele Merely because at end of training of recruit they were green a To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. certificate by assessee could not change nature of its activity from commercial to charitatile Whether there was no force in claim of assessee that these training programs were incidental to main activities and thus, Assessing Officer was justified in treating aforesaid training fee as income from business and profession as per provisions of section 11(44) Hald, yss (Paras 19 and 21) (In favour of revenue)" In the present case also, the receipts of amounts for land and construction activity are treated as commercial nature and hence, the AO shall treat the receipts as business receipts and the surplus as per the accounts should be taxed as the benefit of section 11 are not to be given on such amount/As per details furnished Bajaj Nagar Awasiya Yojna advance from members Rs. 23,00,85,284/- has been shown whereas for the land and construction expenses Rs. 18,31,62,634/- has been shown. Hence, the surplus of Rs. 4,69,22,650/- becomes taxable as no benefit of section 11 is to be allowable. This is to be treated as enhancement to the Income of the assessee. With regard to addition made by the AO, it is evident that the assessee has violated section 13(1)(c) of the Income Tax Act. The benefit of section 11 is already found to be not available to the assessee. The activity of construction of houses for its members by the association is considered as business activity. The assessee association has admitted in its reply that during the year construction was done wherein non availability of supporting voucher cannot be denied. Only defense of the appellant is that we have not requested for allowing these expenses. We have not claimed these expenses in Income & Expenditure A/c also. Therefore, it is argued that question of disallowance/additions does not arise. The argument of the appellant are considered but not found acceptable. As discussed, the books of accounts have been rejected and the amount received from the members during the year is treated as turnover/sale receipts of the association and the expenditure made for construction etc. is treated as expenditure and the Income and Expenditure account is treated as recasted accordingly. On recasting of the accounts, the expenditure made is subjected to normal provisions of Income Tax Act. Coming to the disallowance made by the AO, the AO made disallowance because the amounts of Rs. 8,00,02,935/- has been paid vide bearer cheques without any details or supporting bills. The appellant also admitted this fact. The Auditor had mentioned in Audit report this fact and the association has failed to controvert these findings.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. The AO had disallowed 15% of above expenses which comes to Rs.1,20,00,440/- (15% of Rs. 8,00,02,935/-) and added to the total income of the assessee. The assessee association made expenditure without there being details or supporting vouchers. In these circumstances, the expenses may be manipulated and excess expenditure might have been booked. Therefore, the disallowance of only 15 per cent expenses by the AO is found to be reasonable and upheld. Similarly, the Auditor had mentioned in Audit report (Form No. 10B), that the assessee had made payments of Rs. 24,63,780/- vide bearer cheques or account payee cheque without any supporting vouchers. The assessee was asked to explain the same but no details had been furnished by the assessee. Hence, the then AO had disallowed 15% of above expenses which comes to Rs.3,69,567/- (15% of Rs.24,63,780/-) and added to the total income of the assessee. The appellant also admitted this fact. The Auditor had mentioned in Audit report this fact and the association has failed to controvert these findings. The assessee association made expenditure without there being details or supporting vouchers. In these circumstances, the expenses may be manipulated and excess expenditure might have been booked. Therefore, the disallowance of only 15 per cent expenses by the AO is found to be reasonable and upheld. In these circumstances, the disallowances made by the AO are found to be justified and upheld. The ground no. 4 and ground no. 5 of appeal are treated as dismissed and income is treated as enhanced as discussed above.
8. In Ground No. 6 of appeal the appellant has challenged the addition of Rs. 2,18,50,444/- on account of disallowance u/s 40(a)(ia) on account of alleged non deduction of TDS. 8.1 At the time of passing of assessment order u/s 147/148 r.w.s. 143(3) of the Income tax Act, 1961 the AO has briefly stated relevant facts and some of excerpts are reproduced as under:- "13. Non deduction of TDS: From the discrepancies mentioned by the Auditor at pointed at serial No. 6 of the audit report (From No. 10B) that the assessee trust has not deducted TDS or short TDS was deducted in the following cases:- ………………….. During the course of assessment proceedings, the assessee had simply submitted that this expenditure was not part of its Income & Expenditure account for the year under consideration and payments were made directly To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. from the Balance sheet. Further the assessee was asked to produce books of accounts & explain the reason of non deduction of TDS but same was not explained despite given opportunity. Hence the then AO had considered that charitable activities is not applicable in the case of the assessee during this year under consideration. Hence, the provisions of section 40(a)(ia) is applicable in this case considering it a business entity. Accordingly, as the assessee trust has not deducted TDS on the aforesaid expenses of as per provisions of section 1940, then the same amount of Rs.2,18,50,444/- was disallowed as per the provision of section 40(a)(ia) of the I.T. Act. 1961 and added to the total income of the assessee. Hence the then AO had rightly made the addition of Rs.2,18,50,444/- for the year under consideration & it should be sustained. Further, during the re-verification a proceeding, the assessee has submitted that the Ld.AO has made the addition without confronting or giving opportunity of being heard. The reply of the assessee has considered but not found acceptable, as during the course of assessment proceedings, the assessee was given opportunity to explain the reason of non deduction of TDS but the assessee trust had failed to explain the same. Hence the then AO had rightly made the addition of Rs.2,18,50,444/- for the year under consideration & it should be sustained."
Further, as required by your good office, the comments are being offered on the issues which are as under. Issues Comments On the issue of disallowance us The AO had rightly been made 40(a)(ia) of the IT Act disallowance as discussed in aforesaid para. 8.5 During the appellate proceedings the A/R of the appellant filed written submission vide dated 11.12.2023 in which clubbed the ground no. 4,5 and 6 the same is reproduced in forgoing para 7.5. Therefore, the same is not reproducing here for the sake of brevity. 8.6 I have considered the facts of the case and written submissions of the appellant as against the observations/findings of the AO in the assessment order for the year under consideration. The contentions/submissions of the appellant are being discussed and decided as under- The facts of the case are considered. The argument of the appellant with regard to disallowance made by the AO u/s 40(a)(ia) is that these are not To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. claimed by the appellant in the Income and Expenditure account or profit and loss account and that the section is not applicable in case of trusts. Both of these arguments are discussed and decided while deciding the ground no.4 and 5 of the appeal. The activity of the appellant are held to be of business nature similar to that of a builder. The books of accounts are not found to be correct and rejected as the association was not maintaining the books of accounts properly. In this case, section 11(4A) is found to be applicable as discussed in detail in para 7.8 of this order. In the present case it is admitted fact that the property on which construction of houses is being done is owned by individual persons in their name and the land is not in the name of trust. Hence, the business activity is being undertaken by or on behalf of the trust and hence, section 11(4A) of the Act would apply in the present facts of the case. Further, the appellant has not established that the object of the trust was to act as builder for housing construction. Therefore, the business activity as builder is not found to be as per objects of the trust. Hence, the section 11(4A) is clearly found to be applicable on the facts of the case. Since, the appellant is not eligible for benefit of section 11 as discussed earlier, the argument of the appellant that section 40(a)(ia) are not applicable are not found to be acceptable in the present case. The decisions relied upon by the appellant are therefore not found to be applicable on the facts of the case of the assessee. Therefore, considering the above provisions of the Income Tax Act, the action of the AO is found to be correct as the AO has calculated income of the business under the normal assessment related provisions of the Act. The expense are made are held to be normal business expenditure and hence, the section 40(a)(ia) is found to be applicable on the facts of the case of the association. Hence, the disallowance made by the AO is found to be justified and upheld. This ground of appeal
is treated as dismissed.
9. The last Ground of appeal is that the appellant craves leave to add, alter, modify or amend any ground of appeal on or before the date of hearing. 9.1 The appellant has added one additional ground of appeal which is discussed in forgoing para
4. The appellant has not altered, modified or amended any ground of appeal on or before the date of hearing. Accordingly To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. such mention by the appellant in his ground is treated as general in nature, no needing any specific adjudication and is accordingly treated as disposed of.
10. In the result, the appeal of the appellant is treated as dismissed.”
7. Feeling dissatisfied from the above order of the ld. CIT(A), the assessee preferred the second appeal before this tribunal. Apropos to the grounds so raised by the assessee, ld. AR of the assessee relied upon the following written submission which is reproduced here in below :- 1. “The brief facts of the case are that the assessee is a Trust and registered under the Non-Trading Companies Vide Reg. Certificate No. 215/1976 dt.09.03.1976(PB36)and trust having main objects of to develop the cloth business in Kota and for the benefit of the general public or businessmen under the name of Wholesale Cloth Merchant Association Kota. The Trust is also registered u/s 12A of the IT Act vide registration certificate No. 8/1993-94/2609dt. 10.08.1994 (PB 37). Since the issues challenged by way of these appeals are identical in nature in all the years and for sake of convenience we are submitting common submission. That year wise detail of issue under challenge and addition made by the ld. Assessing officer & CIT(A) is as under: A.Y. Ground Issue Addition by AO CIT(A) 2014-2015 1. Notice issued u/s 147 of - Confirmed the Action the Act is bad in law. of the Assessing Officer 3. Denial of exemption of - Confirmed by the Ld. Sec 11 and 12 of the Act. CIT(A) 4. Disallowance u/s section 33,50,772/- 33,50,772/- 11 (2) and 11(1)(a) of the Act 5. Unverifiable Creditors 16,75,286/- 16,75,286/- 6. 15% of Construction 1,20,00,440/- 1,20,00,440/- Expenses 7. Disallowance of Rs 3,69,567/- 3,69,567/- 3,69,567 out of total expenses of Rs 24,63,780 To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
8. Addition u/s 40(a)(ia) of 2,18,50,444/- 2,18,50,444/- the Act 2. Enhancement by the ld. 4,69,22,650/- 4,69,22,650/- CIT(A) 1.1. The main source of receipts/income of the assessee is annual fees from its members, rent, interest and Misc. receipts. In the present case the ld. AO has issued the notice u/s 148 on dt. 28.02.2018(PB38)on the reasons (PB 39) that “During the assessment year 2014-15, the assessee has not filed any return of income.As per AlR/CIB information generated on AST, it is noticed that assesseehad received amount of Rs.22,37,64 1/- as per 26AS and refund interest received for the A.Y. 2011-12 of Rs. 5,278/- as per AIR information. The cash of Rs.32,30,000/- was also deposited at State Bank of India and Cash Deposited is not verifiable as assessee has not filed return of Income. Thus the assessee has earned income of Rs.22,42,919/- and made further investment of Rs. 32,30,000/- in bank account. Assessee has also filed service tax return declaring gross value of services of Rs. 8,37,69,001/-which required verification. A survey was also conducted on 30.06.2016 and hard disk was impounded which also required examination. Therefore, I am satisfied that assessee has earned that much income during the year which has escaped from assessment.In view of the above facts, I have reason to believe that Income of theassessee to the extent of Rs.54,72,919/- has escaped assessment for the A.Y. 2014- 15. The services rendered by the assessee also required verification. Notice u/s 142(1) was also issued for 1TR filing on 11.09.2017 but no return was filed by the assessee. Therefore, notice u/s148 of the IT Act,1961 is required to be issued.” 1.2. That the ld. AO has issued a show cause notice dated 06.11.2018 vide page 2 to 4 of assessment order in which he has asked to the assessee that: “(1) the trust is required to get its accounts audited under anyprovision of the Act,Assessee trust has not filed its return of income before issuing noticeus 148 of the Act and asked to explain the reasons for not submitting ITRwithin time limit. If return is not filed by prescribed date then benefit ofaccumulation us 11(2) will not be available. (2) As per AlR/CIB information generated on AST, it is noticed thatassessee had received amount of Rs.22,37,641/- as per 26AS andrefund interest received for the A.Y. 2011-12 of Rs. 5,278/- as per AIRinformation. The cash of Rs. 32,30,000/ was also deposited at StateBank of India and Cash Deposited is not verifiable as assessee has notfiled its regular return of Income. Thus the assessee has earnedincome of Rs. 22,42,919/- and made further investment of Rs.32,30,000/- in bank account. Assessee has also filed service tax returndeclaring gross value of services of Rs. 8,37,69,001/- which requiredverification.Hence asked to explain, howabove transaction amounts are accounted for in the books of accountsof the assessee trust.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
3. Application of Funds deemed to have been made for the benefit ofspecified persons- [Sec 13(2)]:- Applications of the trust-income orthe trust-property for the following purposes is deemed to have beenmade for the benefit of specified persons. (a) Ifa loan is given to a specified person for any period during theprevious year without either adequate security or adequate interest orboth; (b) If any land, building or other property of the trust, is allowed to beutilized by a specified person,without charging adequate rent or othercompensation: (C) Ifpayment is made by way of salary, allowance,etc. to a specified person for services rendered by him to the trust orinstitution, in excess of what may be reasonably paid for such services; (d) If the trust renders its services to a specified person withoutadequate remunerationMedical/Educational Institution) (e) If any share, security or other property is transferred to the trustfrom a specified person, for a consideration which is more thanadequate,;anyshare, security or other property is transferred by the trust tospecified person, for inadequate consideration; (g) if any income or property of the trust, exceeding Rs. 1000 in value,is diverted to a specified person; and h) If the trust-funds are invested, or remain invested, for any period inany concern wherein any of the specified persons has a substantialinterest. In view of above provisions of the Act, it is gathered that acomplaint has been filed against the trust that books of accounts forthe A.Y 2014-15 to 2016-17 have not been written orAudit proceedings were also pending before issuing notice us 148 ofthe Act. The news regarding irregularities in financial records of theAssessee trust has also been published in newspapers. President ShriTejendra Pal SahniRimpi' and Treasurer Shri Manohar Gotewalahave withdrawn huge amounts through Cheques from accounts of theTrust which are not accounted for in the books of accounts. Kindly,explain how withdrawn amounts are accounted for in the books ofaccounts.
4. Further the section 12A(1)(b) states that: [(1)] The provisions of section 11 and section 12 shall not apply inrelation to the income of any trust or institution unless the followingconditions are fulfilled, namely:- (b)where the total income of the trust or institution as computedunder this Act without giving effect to [the provisions of section 11 andsection 12 exceeds the maximum amount which is not chargeable toincometo in any previous year], the accounts of the trust orinstitution for that year have been audited by an accountant as definedin theExplanation below sub-section (2) of section 288 and the personin receipt of the income furnishes along with the return of income forthe relevant assessment year the report of such audit in the prescribedform duly signed and verified by such accountant and setting forthsuch particulars as may be prescribed. Section 12A(1)(6) of1T Act 196l clearly provides for not allowingexemption u/s 11 & 12 when assessee trust has not filed its return ofincome before due date. The trust has TDS claim and also depositedhuge amount in bank accounts but failed to file ITR.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Therefore, it is notentitled for exemption u/s 11 & 12 of the Act. The income of the trustwill be charged@ Maximum Marginal Rate Us 164(2) as theassessee trust is doing business activities in India but not complyingstatutory provisions of the Act. Penalty proceeding in respect of thisis also required to be initiated for furnishing inaccurate particulars of income.” 1.3. That in response thereto the assessee has filed the reply on. 16.11.2018(PB74- 81) also reproduced at page 5 to10 of the assessment order. In its reply assessee has explained and replied all the issue with the details and explanation. 1.4. However the ld. AO did not feel satisfy and stated vide assessment order dated 19.12.2018 thatthe assessee has not filed ITR for the year, the ITR was filed after reopening the proceedings u/s 148. The ld. AO has stated that the total income of the trust before allowing the exemption u/s 11 and 12 exceed the total income which is not chargeable to tax. And required to file return in the form 7 before the specified date u/s 139 which is 30 Sep. where the trust is required to get its account audited under the act. The ld. AO has noted that sec. 12A(1)(b) provides that the exemption u/s 11 will be available only if the accounts are audited and audit report furnished alongwith return. 1.5. The ld. AO has further noted that audit report in form No.10B was performed on dt.14.11.2017 and a number of discrepancies have been noted by the Auditor, who mentioned in Sr. No.3(c) that as per FIR copy, 22 plots has been given to the person who are not the member of Association and received conversion charges from 17 persons @ 1,85,000/- and no details available regarding remaining 5 plots amount recoverable from concerning persons of all 22 plots has not been taken in books. The ld. AO stated that Sh. Tejendra Pal Singh has taken loan & advances of Rs.31,50,000/- from the trust and violated the provisions of Sec. 13(2), no books of accounts maintained, TDS provisions have not been complied properly, therefore the trust is not eligible for claiming exemption u/s 11 to 13. The president of the trust Sh. Tejendra Pal has withdrawals huge amount from the trust account and utilized for personal benefit. The ld. AO has stated that assessee trust is not eligible for exemption u/s 11 & 12, the income of the trust will be charged @ MMR u/s 164(2) as the trust doing business activity. Thus, after noting this the ld. AO further made the following additions without issuing any show cause notice and not part of the reasons recorded: (a) Alleged bogus creditors of Rs.16,75,286/-. (b) 15% of construction expenses of Rs.8,00,02,935/- which comes to Rs.1,20,00,440/- (c) 15% of certain expenses payment of Rs.24,63,780/- which comes Rs.3,69,567/- . (d) Addition/disallowance of Rs.2,18,50,444/- u/s 40(a)(ia) on account of non- deduction of TDS. (e) Income of Rs. 33,50,772/- (3345494+5278)and also taxed the same @ Maximum Marginal Rate U/s 164(2).
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. The ld. AO has alleged that the assessee trust is doing businessactivities and is not complying statutory provisions of the Act. Thus the ld. AO has completed the assessment at Rs.3,92,46,509/-. 1.6. In first appeal the assessee filed the detailed WS (PB1-35), with the legal position. However the ld. CIT(A) has confirmed the action of the ld. AO on the legality of 147/148 proceedings and assessment, while doing so he called the remand report of the ld. AO thereafter he has stated thatin this case, the AO noted that the assessment proceedings u/s 147 wasinitiated after recording reasons of reopening and prior approval has been obtained from the Joint Commissioner of Income Tax, Central Range Udaipur vide his office letter number JCIT/CR/UDR/2017-18/1994 Dated 21.02.2018. The reasons of reopening the assessment proceedings are provided to the assessee vide this office letter number DCIT/CC-Kota/2018-19/479 Date 11.06.2018. Assessee/AR has not objected the assessment proceedings u/s 147 of the Act. It is noted that the income of 33,45,494/- + 5,278/-) is added by the AO bydisallowing exemption u/s 11(2) and 11(1)(a) of the Income Tax Act. Further, additionof Rs. 5,278/- is made on account of interest on Income Tax Refund. The amount ofRs. 33,50,772/- (33,45,494/- + 5,278/-) must have been part of amount received ofRs. 22,37,641/- reflected as per 26AS. Therefore, addition has been made on thisamount also which is also part of reasons of reopening. Therefore, claim of theappellant is not found to be correct that no addition is made on the reasons ofreopening. The ld. AO also stated that the assumption of jurisdiction by the AO by issuing notice u/s148 of the Act is found to be justified as the appellant has not filed return of Incomeu/s 139(1). In the final assessment addition is made with regard to one or more of theamounts which is mentioned in the reasons of reopening. It can be said that theamount of Rs. 22,37,641/- as per 26AS was part of the accounts of the assesseeassociation and by denying the benefit u/s 11 of the Act, the AO has taxed thesereceipts as per correct amounts mentioned in the books of accounts. It is important tonote that the return of Income was not furnished originally u/s 139(1) of the Act. Thetotal income of the trust (before allowing exemption under sections 11 and 12)exceeds the maximum amounts which is not chargeable to tax, it is required to file itsreturn in Form ITR- 7, before the date specified in section 139. However, no return ofincome was filed. Therefore, the assumption of jurisdiction remained with the AO tillpassing of final assessment order. The ld. CIT(A) referred various plea and confirmed the action of the ld. AO.
1. Invalid notice or action and assessment proceedings u/s 148:Firstly we would like to submit that in the present case the notice u/s 148 as well as the assessment is invalid, is illegal, is bad in law and is without jurisdiction. Because the assessee is a trust registered u/s 12AA and coming in the jurisdiction of the ITO Ward Exemption Kota and Pr. CIT (Exemption), Jaipur. As the search u/s 132 was carried out at the residence of Bajaj Group and president of trust on 30.06.2016, consequent thereto or post search inquiry a survey u/s 133A was carried out in the case of assessee on dt. 30.06.2016. Thus in this case if it is deemed that this is a case of survey u/s 133A, To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. then the notice u/s 148 can be issued only by the jurisdictional AO which falls with the ITO Ward Exemption Kota not with the ACIT Central Kota. If it is deemed that some incriminating documents and material were found during the course of search or post search in the case of Bajaj Group and president of the trust, then only the notice can be given u/s 153C also by the ITO Ward Exemption Kota, after recording the satisfaction by the ACIT Central Circle Kota. The observations of the ld. CIT(A) was wrong because if any objection has not been raised during the course of assessment proceedings, then it does not mean that an invalid jurisdictions/action will be valid. If there is any illegality the same can be raised at any stage. The ld. CIT(A) has not rebutted our contention on this legal issue except that assessee has not raised the same before AO during the course of assessment proceedings. The Hon'ble Delhi High Court in case of PCIT v AnandKumar Jain (HUF) & Ors. 432 ITR 384(Del) held as under: "3. A search was conducted u/s. 132 on 18th November, 2015 at the premises of the Assessee {being Anand Kumar Jain (HUF), its coparceners and relatives} as well as at the premises of one Pradeep Kumar Jindal. During the search, statement of Pradeep Kumar Jindal was recorded on oath u/s. 132(4) on the same date, wherein he admitted to providing accommodation entries to Anand Kumar Jain (HUF) and his family members through their Chartered Accountant. The assessing officer framed the assessment order detailing the modus operandi as to how the cash is provided to accommodation entry operator in lieu of allotment of shares of a private company. Thereafter when the matter was carried up in appeal before the CIT(A), the findings of AO were affirmed. However, in further appeal before the ITAT, the said findings were set aside vide the impugned order.
4. The Revenue is aggrieved with the aforesaid impugned order and has filed the present appeal under Section 260A of the Act, proposing the following questions of law…… 10. Now, coming to the aspect viz the invocation of section 153A on the basis of the statement recorded in search action against a third person. We may note that the AO has used this statement on oath recorded in the course of search conducted in the case of a third party (i.e., search of Pradeep Kumar Jindal) for making the additions in the hands of the assessee. As per the mandate of Section 153C, if this statement was to be construed as an incriminating material belonging to or pertaining to a person other than person searched (as referred to in Section 153A), then the only legal recourse available to the department was to proceed interms of Section 153C of the Act by handing over the same to the AO who has jurisdiction over such person. Here, the assessment has been framed under section 153A on the basis of alleged incriminating material (being the statement recorded under 132(4) of the Act). As noted above, the Assessee had no opportunity to cross-examine the said witness, but that apart, the mandatory procedure under section 153C has not been followed. On this count alone, we find no perversity in the view taken by the ITAT.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Therefore, we do not find any substantial question of law that requires our consideration.
11. Accordingly, the present appeals, along with all pending applications, are dismissed.’’ (B) The same view has been reiterated by this Hon’ble ITAT Benchin the case of Jai Singh Yadav in and 168/JP/2022 dt. 15.06.2022. And the same thing is also applicable in the present case and the case of the assessee is on much strong footings. 1.1. The action taken by the ld. AO u/s. 148 is gross breach violation of the specific provision of sec. 151 of the IT Act. When for the search related matter there is specific provision (i.e Sec. 153Cin the present case) for assessment then in a general provision (i.e Sec. 148 as taken) no assessment can be taken. Assessment of income of any other person. 153C. (1) Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, where the Assessing Officer is satisfied that,— (a) any money, bullion, jewellery or other valuable article or thing, seized or requisitioned, belongs to; or (b) any books of account or documents, seized or requisitioned, pertains or pertain to, or any information contained therein, relates to, a person other than the person referred to in section 153A, then, the books of account or documents or assets, seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other personand that Assessing Officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of section 153A, if, that Assessing Officer is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person for the relevant assessment year or years referred to in sub-section (1) of section 153A: Provided that in case of such other person, the reference to the date of initiation of the search under section 132 or making of requisition undersection132Ain the second proviso to sub-section (1) of section 153Ashallbe construed as reference to the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person : Provided further that the Central Government may by rules made by it and published in the Official Gazette, specify the class or classes of cases in respect of such other person, in which the Assessing Officer shall not be required to issue notice for assessing or reassessing the total income for six assessment years immediately preceding the assessment year relevant to the previous year in which search is conducted or requisition is made except in cases where any assessment or reassessment has abated.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. (2) Where books of account or documents or assets seized or requisitioned as referred to in sub-section (1) has or have been received by the Assessing Officer having jurisdiction over such other person after the due date for furnishing the return of income for the assessment year relevant to the previous year in which search is conducted under section 132 or requisition is made under section 132A and in respect of such assessment year— (a) no return of income has been furnished by such other person and no notice under sub-section (1) of section 142 has been issued to him, or (b) a return of income has been furnished by such other person but no notice under sub-section (2) of section 143 has been served and limitation of serving the notice under sub-section (2) of section 143 has expired, or (c) assessment or reassessment, if any, has been made, before the date of receiving the books of account or documents or assets seized or requisitioned by the Assessing Officer having jurisdiction over such other person, such Assessing Officer shall issue the notice and assess or reassess total income of such other person of such assessment year in the manner provided in section 153A. 1.2. Under the same facts and circumstances Hon’ble Rajasthan High Court in the case of Shyam Sunder Khandelwal v. ACIT in [2024] 471 ITR 45 (Raj) has quashed the assessment proceedings-initiatedu/s 148 by holding as under: Reopening of assessment v/s assessment u/s 153C - Applicability of Sections 153C and 148 of the Act in case of seizure of material in search or requisition of books- documents relating to assessee other than on whom the search was conducted or requisitioned made - Petitioner contented basis of issuance of notice u/s 148 is the material seized during the search conducted on Manihar Group the proceedings should have been initiated u/s 153C HELD THAT: The reasons supplied in case in hand for initiation of proceedings u/s 147/148 are based on the incriminating material and documents including Pen Drives seized during the search carried out of the Manihar Group and the statements recorded during proceedings. From the information received the AO noticed that the loan advanced and interest earned thereon were unaccounted. The basis for initiation of Section 148 proceedings is the material seized relating to or belonging to the petitioner, during the search conducted of Manihar Group. In the case where search or requisition is made, the AO u/s 153A mandatorily is required to issue notices to the assessee for filing of income tax return for the relevant preceding years. AO assumes jurisdiction to assess/reassess ‘total income’ by passing separate order for each assessment. In cases of the person other than on whom search was conducted but material belonging or relating such person was seized or requisition, the AO has to proceed u/s 153C. The two pre-requisites are that the AO dealing with the assessee on whom search was conducted or requisition made, being satisfied that seized material belongs or relates to other assessee shall hand over it to AO having jurisdiction of such assessee. Satisfaction of AO receiving the seized material that the material handed To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. over has a bearing for determination of total income of such other person for the relevant preceding years. On fulfillment of twin conditions the AO shall proceed in accordance with the provisions of Section 153A. Special procedure is prescribed under Section 153A to 153D for assessment in cases of search and requisition. There cannot be a quibble with the proposition that the special provision shall prevail over the general provision. To say it differently the provisions of Section 153A to 153D have prevalence over the regular provisions for assessment or reassessment under Section 143 & 147/148. Section 153A and 153C starts with non-obstante clause. The procedure for assessment/reassessment in Section 153A, 153C in cases of search or requisition has an overriding effect to the regular provisions for assessment or reassessment under Sections 139, 147, 148, 149, 151 & 153. The language of explanation 2 to new Section 148 is akin to Section 153A and Section 153C. Corollary being that after seizing of operational period of Section 153A to 153D, the cases being dealt thereunder were circumscribed in the scope of newly substituted Section 148. Department has not set up a case that for initiating proceedings u/s 148 it had material other than the material seized during the search of Manihar Group. The contention was that though the material with regard to unaccounted loan advanced by the petitioner was received, the earning of interest on unaccounted loan was derivation of the AO from the material received. The submission is that the derived conclusion cannot be acted upon u/s 153C. The submission lacks merit and shall defeat the concept of single assessment order for each of relevant preceding years for assessing ‘total income’ in case of incriminating material found during search or requisition. The argument that by enactment of Section 153A to 153D has not eclipsed Section 148 does not enhance the case of respondent to initiate the proceedings u/s 148. On fulfillment of two conditions for invoking Section 153C the proceeding in accordance with Section 153A are to be initiated. The operating field of and Section 153A to 153D and Section 148 are different. Applicability of Section 153C in cases where the seized material related to or belonged to person other than on whom search is conducted or requisition made does not render Section 148 otiose. Section 148 shall continue to apply to the regular proceedings and also in cases where no incriminating material is seized during the search or requisition. The argument that Section 153C can be invoked in case there is incriminating material for all the relevant preceding years and otherwise Section 148 is to be resorted to, is misplaced. On satisfaction of the twin condition for proceedings under Section 153C, the AO has to proceed in accordance with Section 153A. Notice is to be issued for filing of the returns for relevant preceding years and thereupon proceed to assessee or reassessee the ‘total income’. As not obligatory on the AO to make assessment for all the years, the earlier orders passed may be accepted. But once there is incriminating material seized or requisitioned belonging or relatable to the person other than on whom search was conducted, Section 153C is to be resorted to.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Supreme Court in the case of Abhisar Buildwell P. Ltd. [2023 (4) TMI 1056 - SUPREME COURT] while dealing with the provisions of Section 153A held that in case of absence of incriminating material seized during the search, the department is not remediless for reassessing the unabated assessment on the basis of material received from the other sources and can proceed u/s 148. The decision does not support the contentions raised that Section 148 is rendered redundant if Section 153C is to be resorted to in the facts of the present case. If the Department has chosen not to proceed u/s 153C, no right is created to the petitioner for getting the notice under Section 148 quashed. Moreover, learned Single Judge was not having the benefit of the decision of Abhisar Buildwell P. Ltd. (supra). The appeal against the order was dismissed having rendered infructuous in view of the subsequent developments that the assessment order was passed. The decision of the Madras High Court in the case of Saloni Prakash Kumar [2023 (10) TMI 207 - MADRAS HIGH COURT] is of no help to the respondents. The High Court held that Section 153C does not preclude issuance of notice u/s 148. The field of applicability of two sections was not the issue before the Court. The notices issued u/s 148 and the impugned orders are quashed. 1.3. Same view has been expressed by Hon’ble Bombay High Court in the case of Sejal Jewellery v. Union of India in [2025] 2 TMI 870 by holding as under: Validity of reassessment proceedings on the basis of a search action u/s 132 - HELD THAT:- As in the event any incriminating material is found during the search, the Revenue necessarily would be required to take recourse to the provisions of Section 153A and in the event no incriminating material found during the search, then the power of the Revenue to have the reassessment u/s 147/148 stands saved, failing which, the Revenue would be left without remedy. Rajasthan High Court in Shyam Sunder Khandelwal s/o. Late Damodar Lal Khandelwal [2024 (4) TMI 196 - RAJASTHAN HIGH COURT] also had taken a similar view when the issue which had arisen before the Court was in regard to the notice issued u/s 148 the basis of issuance of such notice was the material seized during search. The contention of the assessee was to the effect that in the said circumstances, the proceedings ought to have been initiated u/s 153C. The Division Bench referring to the decision of Supreme Court in Abhisar Buildwell P. Ltd. [2023 (4) TMI 1056 - SUPREME COURT] as also the decision of Sri Dinakara Suvarna [2022 (7) TMI 800 - KARNATAKA HIGH COURT] allowed the petitions observing that the department had not set up a case, that for initiating proceedings under Section 148, it had material other than the material seized during the search of a related party. We are of the clear opinion that the foundation of the present case was certainly a search action which was undertaken by the Revenue against one Shilpi Jewellers Pvt. Ltd. and in such search and seizure action, materials were seized and such materials were further explored and enquired. Such enquiry revealed significant information in regard to M/s. Green Valley Gems Pvt. Ltd., which according to the Revenue had provided accommodation entries to the petitioner, in which it was also revealed that To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Green Valley Gems Pvt. Ltd. was a shell company. We do not find that the record would indicate something which is not on the basis of such new materials gathered under the search and seizure action under Section 132. There cannot be any doubt on the position in law when the Revenue intends to proceed purely on materials relevant for an action under Section 148 r.w.s.
147. The provisions of Sections 147, 148 vis-a-vis Section 153A and Section 153 are quite compartmentalized. To avoid any overlapping of these provisions, the legislature in its wisdom has thought it appropriate to provide for an independent effect, to be given u/s 153A r.w.s. 153C by incorporating the “non-obstante” clause, in these provisions, which carves out an exception to any normal/regular action being resorted u/s 147. We are of the clear opinion that the impugned notice u/s 147 and all actions consequent thereto are required to be held to be without jurisdiction and bad in law. The petition is accordingly allowed in terms of prayer clauses (a) and (b). 1.4. Same view has been expressed by Hon’ble Karnataka High Court in the case of PCIT v. VSL Mining Company Ltd. in [2024] 9 TMI 1383 by holding as under: Assessment u/s 153C - disallowance of deduction claimed u/s 10B - HELD THAT:- It is forthcoming that the Tribunal while adjudicating regarding the disallowance of deduction claimed u/s 10B has noticed that the said aspect is covered by a coordinate Bench judgment of this Court in the case of Tata Elxsi Ltd. [2015 (10) TMI 634 - KARNATAKA HIGH COURT] Having regard to the fact that the Tribunal has decided the matter in accordance with a judgment of this Court, the Revenue has not demonstrated as to how the same is erroneous. The substantial question of law No.1 is answered against the Revenue and in favour of the assessee. AO has not followed the procedure as envisaged u/s 153C - It is relevant to note that Chapter VI of the IT Act contemplates the procedure for assessment, wherein various stipulations are provided in terms of Sections 136 to 153 of the IT Act. Section 153A, 153B and 153C have been inserted by the Finance Act, 2003 w.e.f., 1.6.2003, which specifically contemplates assessments in cases of search or requisition. Section 153A of the IT Act contains various stipulations with regard to the person searched and Section 153C of the IT Act contains various stipulations with regard to such other person, other than the person searched. A coordinate Bench of this Court in the case of Dinakar Suvarna [2022 (7) TMI 800 - KARNATAKA HIGH COURT] while considering an appeal of the assessee, in a fact situation wherein an assessment was re-opened u/s 147 of the IT Act based on a search conducted and the procedure u/s 153 of the IT Act was not followed was under consideration. In view of the settled position of law as noticed above, once material pursuant to a search is relied upon, the AO is required to follow the procedure as contemplated under Section 153A, 153B and 153C and it is impermissible for the AO to continue the regular assessment. Decided in favour of the assessee and against the Revenue.
2. Further the trust is registered u/s 12A the Act and consequent to the above facts and proceedings the Registration u/s 12A was revoked by the Pr. CIT(Central), To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Jaipur. We had challenged the same before the Hon'ble ITAT on the ground of Jurisdiction and also on other grounds. The Hon'ble ITAT quashed the order of the ld. Pr. CIT on the grounds of Jurisdiction and also on other grounds vide its detail order in dt.06.01.2021(PB82-138). Thus it is also held that when there was no jurisdiction of the Pr. CIT(Central), then there is also no jurisdiction of the ACIT Central Circle-1 Kota, to issue the notice and to pass the assessment order. Hence on jurisdiction point kindly refer this order of Hon'ble ITAT here also. The ld. CIT(A) has also not spoken anything on the same, which shows his acceptance on our contentions. Hence the notice as well as the assessment is without jurisdiction and liable to be quashed.
3. No income escaped: Further the assessee is trust registered u/s 12A and its income is not taxable as per law, the issue raised by the ld. AO is not matching with the expenses and income claimed and shown in the Income & Expenditure accounts, and the receipts and income which is relating to the trust has already been taken in the books and audited accounts. If so, then how it can be said that any income has escaped.
4. No addition made on the reasons recorded u/s 148: Further it is submitted that as the ld. AO issued the notice u/s 148 on the reasons recorded vide para 1 of above in facts.However on perusal of the assessment order admittedly it has been come to know that the ld. AO has not made additions on these issue or on the issue recorded in the reason for reopening the case(except minor addition of IT refund interest which is already was on record of the revenue) and he has made different additionsvide assessment order, which is illegal and now it is the settled legal position of law that if no addition on the reasons recorded has been made then no other addition can be made, for this kindly refer following decisions: (a) In the case of CIT v. Ram Singh 306 ITR 0343 (Raj.)the Hon’ble Rajasthan High Court has held that It is only when, in proceedings under s. 147 the AO assesses or reassesses any income chargeable to tax, which has escaped assessment for any assessment year, with respect to which he had "reason to believe" to be so, then only, in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in the course of proceedings under s.
To put it in other words, if in the course of proceedings under s. 147, the AO were to come to conclusion, that any income chargeable to tax, which, according to his "reason to believe", had escaped assessment for any assessment year, did not escape assessment, then, the mere fact, that the AO entertained a reason to believe, albeit even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the AO may find to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings under s.
147. It is a different story that for such other income, the AO may have recourse to such other remedies, as may be available to him under law, but then, once it is found, that the income, regarding which he had "reason to believe" to have escaped assessment, is To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. not found to have escaped assessment, the AO is required to withhold his hands, at that only. Once the AO came to the conclusion, that the income, with respect to which he had entertained "reason to believe" to have escaped assessment, was found to have been explained, his jurisdiction came to a stop at that, and he did not continue to possess jurisdiction, to put to tax, any other income, which subsequently came to his notice, in the course of reassessment proceedings, which were found by him, to have escaped assessment.—CIT vs. Atlas Cycle Industries (1989) 180 ITR 319 (P&H) concurred with. (b) In the case of CIT v. Jet Airways (I) LTD 331 ITR 0236 (Bom):Held Reassessment—Scope—Items unconnected with escapement for which notice was issued—When Expln. 3 to s. 147 was introduced, Parliament stepped in to correct what it regarded as an interpretational error in the view which was taken by certain Courts that the AO has to restrict the assessment or reassessment proceedings only to the issues in respect of which reasons were recorded for reopening the assessment— However, Expln. 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of s. 147—AO has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings—However, if after issuing a notice under s. 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him to independently assess some other income—If he intends to do so, a fresh notice under s. 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee. (c) In the case of PCIT v. Sunlight Tour and Travels Pvt. Ltd. 2024 (11) TMI 1384the Hon’ble Delhi High Court has held that: Validity of Reopening of assessment u/s 147 - Addition on the ground other than assessment was reopened - Assessee contention that since no addition had been made on account of the reasons on the basis of which the reopening of the assessment was sustained no other addition was permissible accepted by ITAT - HELD THAT:- Section 147 of the Act enables the reopening of concluded assessments only in exceptional cases, where there the AO has reason to believe that Assessee’s income for the relevant period has escaped assessment. It is trite law that concluded assessment should not be lightly interfered with. If the ground on which the concluded assessment is sought to be re-opened, cannot be sustained, there would be little rationale for expanding the reassessment proceedings. In our view, it would not be apposite to accept an expansive interpretation to the provision of Section 147 of the Act. Given that the nature of the proceedings is to unsettle concluded assessment, a strict interpretation of the plain language of Section 147 of the Act, is warranted. We respectfully concur the view of this court as articulated in Ranbaxy Laboratories Limited [2011 (6) TMI 4 - DELHI HIGH COURT] and ATS Infrastructure Ltd.[2024 (7) TMI 1441 - DELHI HIGH To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. COURT] and Jaguar Buildcon Pvt. Limited. [2024 (8) TMI 517 - DELHI HIGH COURT] It is also relevant to note that various courts had taken a view that the reassessment proceedings were confined under Section 147 of the Act only to the issues (reasons to believe) on the basis of which the assessments were reopened. Thus, there was no scope for making any addition other than those which were circumscribed by the reasons to believe as recorded by the AO prior to the issuing a notice under Section 148 of the Act. However, this controversy was set at rest by introduction of Explanation 3 by virtue of the Finance Act, 2009 with retrospective effect from 01.04.1989. Explanation 3 to Section 147 merely clarified that the AO would assess or reassess the income in respect of the issue which had escaped assessment and such other issue, which came to the notice subsequently. However, the said explanation does not control the import of the plain language of Section 147 of the Act. Explanation 3 to Section 147 of the Act, merely clarifies that the jurisdiction of the AO was not confined to assessing or reassessing of the income of an Assessee only in respect of the issue, which formed a part of the reasons recorded for reopening the assessment. The said explanation cannot be interpreted to mean that the AO could assess other incomes of the Assessee even in cases where no addition is made on account of the reasons for which reassessment was initiated. No substantial question of law arises in the present appeal. (d) Also refer following decisions: Ranbaxy Laboratories Ltd. v. CIT 336 ITR 0136(Del),CIT v. Dr. Devendra Gupta 336 ITR 0059(Raj),AVG Construction Pvt. Ltd v. ITO in dt. 02.09.2021,Shambhu Dayal Saraf v. ITOin ITA No. 558/Jp/2013,Pappu Qureshi v. ITO in ITA No. 314//Jp/2019 dt. 28.04.2020, Vikram Singh v. ITO (2021) 63 CCH 0044 Lucknow Trib, CIT(EXEMPTION) v. B.P. Poddar Foundation For EducationSep 13, 2022 (2022) 115 CCH 0026 KolHC. 4.1. On the observation of the ld. CIT(A) we would like to submit that when we have already taken the income in the books of accounts, in audit report and in the ITR and no addition in the ITR on the income declared has been made, then how it can be said the addition has been made. The income declared in the ITR is not the part of income, as wrongly interpreted by the ld. CIT(A). The ld.CIT(A) misinterpreted our submissions.
5. Reason to believe and not reason to suspect: 5.1. It is further submitted that even under the amended law by the finance act 1989 the condition precedent or words, which continues right since inception till date, are “reason to believe" and not "reason to suspect". The word “believe” has to be understood in contradistinction of suspicion or opinion. Belief indicates something concrete or reliable. Kindly referGangasharan& Sons Pvt. Ltd. 130 ITR 1 (SC), and ITO v. Lakhmani Mewal Das, (1976) 103 ITR 437 (SC). 5.2. The belief of the Officer should be as to escapement of income and the belief should not be a product of imagination or speculation. There must be reason to induce To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. thebelief. The Court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the Court (Sheo Nath Singh v. AAC, (1971) 82 ITR 147 (SC). 5.3. In the case of Mukesh Modi & Ors. v. DCIT 366 ITR 418 (Raj) held that Evasion of tax was menace to society but Assessee contributing to the exchequer in form of tax could not be allowed to suffer on mere pretence that it had evaded payment of tax. Rowing and fishing enquiry in hands of AO on mere suspicion or change of opinion could not satisfy expression "reason to believe" exposing Assessee for reopening of assessment. Notice for reopening of assessment was not in consonance and in conformity with under Section 147 and made specified notice vulnerable. High Court pointed that, reasons given by AO for issuance of notice for Re-assessment were not plausible and convincing. In fact order, where objections were rejected by AO, was not self-contained speaking order. Upon perusal of the order, it was amply clear that the same contains conclusions and is bereft of reasons.(para 12) Notices issued to Assessee by AO under Section 147/148 were not satisfying the pre- requisites for same. There was no whisper in the notice, or iota of proof that while issuing same. AO had reason to believe that any income chargeable to tax had escaped assessment for the assessment year. Notice issued by AO simply for his own verification and to clear his doubts and suspicions to re-examine the material which were already available on record at the time of passing of t earlier assessment orders. The legislature under Section 147 has not clothed AO with such jurisdiction therefore the action could not be upheld in the background of facts of instant case. One more redeeming fact which had direct nexus with the subsequent re-assessment proceedings and ramification of the same had culminated into re-assessment orders was the impugned order where AO rejected the objections submitted by Assessees pursuant to notice under Section 147/148. Order passed by AO in this behalf was not a speaking order which could not be sustained. In view of legal infirmity in the notice under Section 147/148 and laconic order of AO while rejecting objections Assessee the consequential assessment Orders were liable to be annulled.(para16) In view of the above the impugned order as well as the notice are illegal invalid and liable to be quashed.
GOA-2: Enhancement of Rs.4,69,22,650/- by exercising powers u/s. 251(2) and invalid invoking of the provisions of Sec. 145(3) and rejecting the books of accounts by the ld. CIT(A): FACTS: 1. The facts of the issue are that in the appeal before the ld. CIT(A) assessee had taken the grounds on account of (i) 15% disallowance of Rs.1,20,00,440/- on construction expenses of Rs.8,00,02,935/- and during the course of appeal before the ld. CIT(A) we filed the detailed Written Submission on this issue vide page 64to 66 of CIT(A) order. However the ld. CIT(A) after seeing this has To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. called the remand report of the ld. AO on 11.01.2023 on the following points (Page 66 of CIT(A), para 7.3): (i) The appellant has argued that with regard to construction expenses disallowed- (i) No details were asked (ii) No show cause notice issued (iii) These expenses are not claimed in income and expenditure account onthis issue please furnish your specific comments.
2. In response thereto Remand report submitted by AO vide his office letter No.507 dated 31.10.2023 (Page 66 of CIT(A), para 7.4) as under:- “5. Addition of Rs.1,20,00,440/- made on disallowances of construction expenses: During the course of assessment proceedings, it had been noticed by the thenAO that the Auditor had mentioned in Audit report (Form No. 10B), that constructionexpenses of Rs.8,00,02,935/- has been paid vide bearer cheques without any detailsor supporting bills. The assessee trust was asked to explain the same but no detailshad been furnished by the assessee. Hence, the then AO had disallowed 15% ofabove expenses which comes to Rs.1,20,00,440/- (15% of Rs.8,00,02,935/-) andadded to the total income of the assessee. Further, during the re-verification a proceeding, the assessee has submittedthat the Ld.AO has made the addition without confronting or giving opportunity ofbeing heard. The reply of the assessee has considered but not found acceptable, asduring the course of assessment proceedings, the assessee was given opportunity toproduce the details or supporting bills of such construction expenses but theassessee had not furnished any details. Hence the then AO had rightly made the addition of Rs. 1,20,00,440/- for theyear under consideration & it should be sustained.
3. In response to this remand report assessee filed the WS on dt. 11.12.2023(Page 68 of CIT(A), para 7.5).
4. Thereafter the ld. CIT(A) has issued a show cause notice u/s 251(2)dated 01.03.2024 (PB 211-212) wherein he has stated that: With regard to following disallowances made by the AO from AY 2014-15 to AY 2017-18 the appellantclaimed that these expenses were not routed through P & L A/c or income and expenditure account. Detail of such expenses are as under- Amount of Addition Description A.Y. 1,20,00,440/- Construction Expenses 2014-15 3,69,567/- Payment without Voucher 2014-15 2,18,50,444/- Non deduction of TDS 2014-15 (i) Please explain ultimate source of these expenses right from the day when these amountswere received by the assessee in its accounts. Please furnish copy of such accounts andsupporting bank statement. (ii) Please explain the reason for not routing these expenses through income and expenditure orP&L A/c of the assessee. Explain the legal basis also.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. (iii) If your explanation is not found to be satisfactory, explain why the books of accountmaintained by you should not be rejected by invoking section 145(3) of the Income Tax Actand income and expenditure account should not be recasted by applying correct method. Thismay result in enhancement of income or reduction of refund. This may be treated as notice forenhancement as per provision of section 251(2) of the IT Act.
2. You are required to show cause as to why an order of enhancement of yourassessment/penalty or reduction of refund should not bepassed.
5. In response thereto the assessee filed his objection and reply dt. 05.03.2024(PB 213-217). However the ld. CIT(A) did not feel satisfy with the same and sate that: 5.1 In balance sheet of Bajaj Nagar AwasiyaYojna advance from members Rs. 23,00,85,284/- has beenshown whereas for the land and construction expenses Rs. 18,31,62,634/- has been shown. The action of the appellant is not found to be as per correct accountingmethod. The assessee is constructing houses for its members. Hence, the activity ofthe association is like a builder. As a builder, the assessee association isconstructing houses for its members. The builder also takes money from prospectivebuyers and constructs house and delivers. Hence, the receipts from the members isnot loan but income for the association and the expenditure made on theconstruction is to be considered as expenditure for the purpose of Income andExpenditure account of the association. Any surplus or loss will be taken into thebalance sheet. The directly taking these receipts and expenses in the balance sheetis not found to be correct method. Therefore, the books of account of the assesseeis not found to be correct. The books of accounts are therefore rejected by invokingsection 145(3) of the Income Tax Act and income and expenditure account is to berecasted by applying correct method. 5.2 The ld. CIT(A) has further stated that if a property is held under trust, and such property is abusiness, the case would fall u/s. 11(4A) of the Act. Section 11(4A) of the Act would applyonly to a case where the business is not held under trust. Thus, there is difference betweenproperty or business held under trust and business carried on by or on behalf of the trust. Inthe present case it is admitted fact that the property on which construction of houses is beingdone is owned by individual persons in their name and the land is not in the name of trust. Hence, the business activity is being undertaken by or on behalf of the trust and hence,section 11(4A) of the Act would apply in the present facts of the case. Further, the appellanthas not established that the object of the trust was to act as builder for housing construction. Therefore, the business activity as builder is not found to be as per objects of the trust.Hence, the section 11(4A) is clearly found to be applicable on the facts of the case. 5.3 After having the books of accounts rejected, the receipts of the year aretreated as income for Income and expenditure account and the expenditure for To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. theconstruction etc. which are directly taken into balance sheet are treated asexpenditure for the year. The accounts of the assessee are therefore treated asrecasted accordingly. On recasting of the accounts, the expenditure made is subjected to normalprovisions of Income Tax Act. The section 11(4A) of the Act empowers the AO totreat the such receipts as income from business and profession. The AO isaccordingly directed to treat the receipts as business receipts and the surplus shouldbe taxed as the benefit of deduction u/s 11 are not to be given on such amount.
6. The ld. CIT(A) has also stated that the receipts of amounts for land and construction activity are treated as commercial nature and hence, the AO shall treat the receipts as business receipts and the surplus as per the accounts should be taxed as the benefit of section 11 are not to be given on such amount. As per details furnished, Bajaj Nagar AwasiyaYojna advance from members Rs. 23,00,85,284/- has been shown whereas for the land and construction expenses Rs. 18,31,62,634/- hasbeen shown. Hence, the surplus of Rs. 4,69,22,650/- becomes taxable as no benefit of section 11 is to be allowable. This is to be treated as enhancement to the Income of the assessee. SUBMISSIONS: 1. Invalid action or rejections of books of accounts by the ld. CIT(A) and Wrong Enhancement has been made by the ld. CIT(A): 1.1 In this regard it is submitted that the ld. CIT(A) has wrongly made the enhancement of Rs.4,69,22,650/- only on the basis of entries made in the balance sheet the ld. CIT(A) has failed to understand the modus operandi of the assessee the real facts that: 1.2 As in balance sheet of Bajaj NagarAwasiyaYojna advance from members Rs. 23,00,85,284/- has been shown, whereas for the land and constructionexpenses Rs. 18,31,62,634/- has been shown. In page 62 of these papers details of construction account has also been given. Further vide page 63 of the papers consolidated balance sheet is also appended where from the amountreceived from members and land and construction expenses are verifiable very well. The assessee has no owner either on the amount received from the members nor the expenses incurred, the assessee was only acted as a trustee because assessee has not entitled to get any profit and loss on this account, assessee only has account of the members to avoid any litigation between the members. As we before the lower authorities had stated that as the disallowances and additions which have been made on account of sundry creditors, constructionExpenses, TDS certain expenses etc are related to the construction activities carried out on the lands for makingresidential house /flats for the members . The correct the facts and contentions are thatFirstly the trust has purchased or acquired an agriculture land in F.Y. 2008-09 and thereafter get it converted inresidential land and there after patta and lease has obtained or issued in the name of members of the trust not in the name of the trust, in support we filed Copies of some pattas are (Pg 146-152) against which the trust had received To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. thepayments/consideration/advances from the members. Thus the owner of the land and constructions are of therespective members not of the trust, as wrongly presumed by the ld. CIT(A).The Land with construction is being shown in the balance sheet in assets and money/advances received frommembers is being shown in liabilities in the balance sheet. As and when the construction is/shall completed thepossession of the land shall be given to the respective members. The construction work is being done through thetrust only to avoid any litigation among the members and to curtail the cost being the work in bulk. Hence the same has been shown in the balance sheet on the advice of the counsel and as per the accounting system and for the purpose of record. 1.3 As assessee we have already stated that to construct Residential Houses for its members the Association purchasedAgriculture land .Later on it was converted u/s 90 to residential. Out of 422 members of association 380 members opted for the scheme and therefore their residential plots were got converted in their names. Those members requested to the Trust Executives to construct their houses for them because to construct for 380 houses together will reduce their cost. As the money was paid by members and construction of houses are made for members. Thus neither the money received nor money spent/expenses are taken to trust income and expenditure a/c however interest earned on money deposited in Bank A/c is taken in Association Income & Expenditure A/c. Thus perusal of Balance Sheet (PB-57) of Bajaj Nagar AvasiyaYojna that till 31.03.2014 Rs. 23,00,85,284/- are received from members and construction expenses of Rs.18,31,62,634/- is made or incurred. Construction of Rs. 10,18,61,237/- was made till 31.03.2013 and during FY 2013-14 further construction of Rs. 8,13,01,397 (PB-62) is made. Sundry Creditors and Sunder Debtors relating to construction activities are at Rs.16,75,286/- (PB-60) and 3,02,67,118/- (PB-61) respectively." Thus the source of money as well as expenditure are very much appearing in books maintained by the Trust and books of accounts are audited by a Chartered Accountant. 1.4 The ld. CIT(A) has proceeded on his own assumption, presumption and suspicion,only on the basis of its own assumption and presumption, suspicion and guess he made the addition, which is against the settled law and it is the settled legal position that no addition can be the basis of suspicion, assumptions’ and presumption. An allegation remains a mere allegation unless proved. Suspicion may be strong however cannot take the place of reality, are the settled principles. Kindly refer Dhakeshwari Cotton Mills 26 ITR 775 (SC), R.B.N.J. Naidu v. CIT 29 ITR 194 (Nag), Kanpur Steel Co. Ltd. v. CIT 32 ITR 56 (All), CIT v. KulwantRai 291 ITR 36(Del).In CIT v. Shalimar Buildwell Pvt Ltd 86 CCH 250(All)it has been held thatthe AO made the addition merely on suspicion which was not desirable in the eye of law. 1.5 Due to this reason neither the advances/money received from the members has been claimed as income orreceipts of the trust nor the expenses incurred in construction has been claimed as expenditure of the trustbecause it is not for the trust. If so then how the addition/disallowance can be made in the hands of the assessee To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. trust. The same were to be made only when the same was incurred or claimed by the assessee trustin its Income & expenditure accounts. And the lower authorities have ignored these vital facts despite the audited BalanceSheet and Income & Expenditure accounts available before them. If they was having any doubt they should have made the in dependedinquiry from the respective members but failed, rather made a huge enhanced addition. The lower authorities has not made any inquiry from any members before making the additions. 1.6 The ld. CIT(A) has failed to appreciate the accounting treatment and above facts and circumstances. The ld. CIT(A) at the worst would have said that the addition of Rs.4,69,22,650/- is liable to be made in the hands of respective members after seeing all the facts and inquiry. The income and expenses of other cannot be treated of the person. The ld. CIT(A) nowhere proved with the help of the documentary evidences that the income and expenditure both are to the assessee and assessee was only keeping their accounts being as a head of family. The ld. CIT(A) has failed to appreciate the facts that the assessee trust itself with the honesty has shown the interest income on the funds of members laying in its bank account.
2. Further the ld. CIT(A) has invoked the provisions of Sec. 145(3) and rejected the books of account which is illegal and invalid because the ld. CIT(A) cannot be invoked the new provisions of the act and cannot rectify the mistake of the ld. AO. For this we rely upon the decision of Hon’ble ITAT Jodhpur Bench in the case ofBharti Construction Co. in to 134/Jodh/2024 dt.29.10.2024, where it has been held that…The Bench feels that notice u/s 251(2) can be given by the Ld. CIT(A) only to reduce, enhance or annulment of assessment but for not invoking the new provision which has not been invoked by the AO. In our view the Ld. CIT(A) cannot invoke new provisions of the Act in the appellate proceedings and he may enhance the assessment, while he has not enhanced the assessment but he rectified the mistake of the AO after making the submissions of the assessee before him. The CIT(A) has no power to rectify the mistake of the AO, if any by invoking the new provisions of Act, Further the AO has already made disallowance on account of material expenses @ 15% hence no further disallowance is required to be made and this is tantamount of double disallowances which is not permitted as per law and this is the rough estimated document and there is no proof that the assessee has really paid such cash amount. The AO has not made any further enquires in this regard and only on a rough estimate papers, no addition can be made.
3. Further when the books of accounts have been rejected no separate addition can be made only estimated N.P. rate should be applied as the Hon’ble ITAT Jodhpur Bench in the case of Pyrotech Electronics (P) Ltd v. PCIT Udaipur in dt. 10.01.2023 where it has been held that: “Further onperusal of the issue raised by the ld. Pr. CIT it is also observed that all the issue arerelated to the addition and disallowance on various accounts, which may result in thetrading additions, net income and in net profit. When the ld. Pr. CIT has already raisedthe issue regarding the fall in G.P. rate and if G.P. rate, if any, is To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. applied, then in thetrading result all the other issues are covered i.e closing stock or valuation of closingstock, purchases, trading result etc also include or Net profit rate is applied if any afterrejecting the books of accounts, then there is no requirement of making variousFurther onperusal of the issue raised by the ld. Pr. CIT it is also observed that all the issue arerelated to the addition and disallowance on various accounts, which may result in thetrading additions, net income and in net profit. When the ld. Pr. CIT has already raisedthe issue regarding the fall in G.P. rate and if G.P. rate, if any, is applied, then in thetrading result all the other issues are covered i.e closing stock or valuation of closingstock, purchases, trading result etc also include or Net profit rate is applied if any afterrejecting the books of accounts, then there is no requirement of making variousseparate disallowances and additions is also the settled law. Further as the G.P. rateslightly down by 0.25% in comparison to last year but at the same time the N.P. rate ison very higher side i.e 2.85% as against the last year 1.15% which have also beenignored by the ld. Pr. CIT. For the sake of convenience and brevity in the matter, theBench feels to note down the provisions of Section 263 of the I.T. Act. Hence in view of the above facts and circumstances the addition so enhanced by the ld. CIT(A) and addition/disallowance so made by the ld. AO may kindly be deleted in full.
3. Further the ld. CIT(A) has himself allowed the appeal of the assessee appellant for A.Y. 2017-2018 vide order dated 15.05.2024 (Copy enclosed) and has neither invoked the provisions of Sec. 145(3) or/and sec. 251(2) and has not made any addition on account of gross receipts received less amount incurred. The ld. CIT(A) has relied upon order dated 06.01.2021 passed by the Hon’ble ITAT and has infact allowed the appeal of the assessee appellant. Thus CONTRARY stand has been adopted by the ld. CIT(A) for A.Y. 2014-2015, 2015-2016, 2016-2017 viz. A.Y. 2017-2018. GOA-3 Disallowance of exemption u/s 11(2) & 11(1)(a): FACTS: 1. The ld. AO has noted that assessee trust has shown gross receipts of income of Rs. 50,75,850/- and amount applied to charitable proposes in India during the previous year at Rs. 17,30,356/- this amount is utilized as revenue expenditure. The remaining amount is claimed exempted u/s 11(2) and 11(1)(a) of the Act which is not allowable. The ld. AO stated that Trust is a public charitable trust and mainly formed for the upliftment of the cloth merchants of the city but fund of trust was utilized for personal benefit of president. The ld. AO has further stated that trust has received interest on refund of Rs.5,278/- which was not shown in ITR filed under section 148 of the Act. Hence same is also added in total income of the trust. The legal requirements i.e filing ITR and get books of accounts audited have also been not complied by the Trust. The ld. AO has computed the income of Rs. 33,50,772/- (33,45,494/- +5,278/-) and also taxed the same @ Maximum Marginal Rate U/s To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 164(2). The ld. AO has alleged that the assessee trust is doing business activities in and not complying statutory provisions of the Act.
2. In first appeal assessee filed the detailed WS and legal position of the law vide (PB1-35) also reproduced at page 24-30 of the CIT(A) order. The ld. CITA(A) also called the remand report of the ld. AO. The ld. AO has submitted his report dt. 31.10.2023(page 30 of the CIT(A) order). In response to the remand report assessee filed its comments dt. 11.12.2023(page 31-33 of CIT(A) order). However the ld. CIT(A) did not feel satisfy and confirmed the order of the ld. AO by observing that: The funds were used for personal benefit of the president.Hence, the denial of exemption is found to be justified. Hon’ble ITAT in its order has statedthat the assessee has not violated the provisions of section 12AA(3)/12AA(4) of theAct. It is held that cancellation of registration u/s 12A cannot be done. However,Hon’ble ITAT has not examined the violation of section 13(1)(c) therefore, denial ofexemption u/s 11 is found to be justified by the AO. The ld. CIT(A) has observed that Any new claim in the return filed u/s 148 of the act is not acceptable as the reopening proceedings are for thebenefit of the revenue rather than assessee. The returns are filed u/s 148 of the actare as a consequence of income escaped from assessment and thus can’t beadvantageous for the assessee and these are proceedings for the benefit of Revenueand not that of the assessee. The assessee cannot be permitted, to convert thesereassessment proceedings as his appeal or revision in disguise and seek relief inrespect of items earlier not claimed in the original return of income . returns filed in response to notice under Section 148 of the Act are not substitute ofrevised return for making claim of such benefits. Having regard to the provisions of s.139(5) of the Act and since the assessments under s. 148 are in relation to incomeescaped from assessment, it is precisely for this reason that new claim of deductionor allowance cannot be made in the completed assessments. 3 The ld. CIT(A) also contemptuously held that the amendment made is retrospective and is applicable on proceedings pending as on 1st April 2018. 4 The ld. CIT(A) has stated that the amount given to the president directly or indirectlywould not fall within any of forms or modes of investment or deposit of money asreferred to in section 11(5) and such amount also in violation of section 13(1)(c).Therefore, the denial of exemption u/s 11 is found to be justified. In support the ld. CIT(A) referred some of judgments which is not applicable looking to the facts of the case. SUBMISSIONS: 1. At the very outset it is submitted that the observations of the ld. CIT(A) thatthe funds were used for personal benefit of the president. Hence, the denial of exemption is found to be justified. Hon’ble ITAT in its order has stated that the assessee has not violated the provisions of section 12AA(3)/12AA(4) of the Act. It is held that cancellation of registration u/s 12A cannot be done. However, Hon’ble ITAT has not examined the violation of section 13(1)(c) therefore, denial of exemption u/s 11 is found to be justified by the AO.:-This is absolutely incorrect because the Hon’ble To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. ITAT has discussed about the violation of section 13(1)(c) vide page 15,16,24,43-45, 51,52 of ITAT order (PB 96-97,105-106,132-133). Hence now the matter is covered and no further question should be there for doubt.
2. The ld. CIT(A) has support to the ld. AO who has denied the exemption u/s 11(2) & 11(1)(a) only on the three issue that (i) funds of the trust was utilized for personal benefit of president (ii) trust has not filed the return (iii) trust has not get books of account audited. Only on these reasons the ld. AO denied the exemption u/s 11 of the act and the ld. CIT(A) has also confirmed the action of the by misinterpreting the submission of the assessee.
3. No denial of exemption u/s 11 and 12 for the misappropriation of fund by other persons:It is submitted that as the ld. AO has denied the exemption u/s 11 on the misappropriation of fund by other persons, which is also incorrect. 3.1. In the case of CIT v. State Urban Development Agency (Suda) (2013) 85 CCH 0179 AllHC.It has been held thatCharitable trust—Registration u/s 12A—Denial of— Assessee a registered co-operative society and State Autonomous body applied for registration u/s 12A—CIT(A) declined registration u/s 12A to assessee on basis of report submitted by Accountant General (GOI), where it was mentioned that accounts were not properly maintained and funds were not properly utilised and kept idle in bank—Tribunal granted registration to assessee u/s 12A—Held, defect in maintenance of account was curable—Refusal of registration u/s 12A on basis of report submitted by Accountant General was unjustified—Non utilization of fund and keeping same in Bank cannot be ground for cancellation of registration—Expression “any other object of general public utility” u/s 2(15) includes all objects which promote welfare of general public—Even if there is some profit in activity carried on by trust/institution, so long as dominant object is of general public utility, it cannot be said that the trust/institution was not established for charitable purposes—Tribunal had given a categorically finding that objects of assessee were of General Public utility—Registration u/s 12A was rightly granted to assessee 3.2. In the case of CIT v. A.S. Kupparaju Brothers Charitable Foundation Trust (2012) 205 TAXMAN 0009It has been held that Charitable trust – Registration under S. 12A – Genuineness of – Refusal to grant registration certificate to assessee trust on the ground that the trust does not exist genuinely for the purpose of the objects mentioned in the deed – Held, once it is admitted that in pursuance of the trust deed and in terms of the objects set out therein, schools and colleges are being run and educational institutions are being run, nothing more requires to be established to show that the trust in question is a genuine trust – Misappropriation of funds is not a ground to deny the registration – Exemptions under ss. 11 & 12A are not automatic but available only when the assessee satisfies the requirement of section 13 – Assessee entitled to the registration under s. 12AA To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 3.3. In the case ofKunhitharuvai Memorial Charitable Trust v. CIT(Central) (2017) (1) TMI 1671 (Cochin)It has been held that Admittedly, the students are being admitted every year. Students are studying in all courses. Thus, the object of the constitution of the Trust namely imparting of education is going on uninterruptedly. Therefore, it cannot be said that the activities of the Trust are not being carried out in accordance with the objects of the Trust. When the aforesaid two conditions are fully satisfied, the registration of the Trust cannot be cancelled for the reasons stated by the CIT in her order, i.e. non maintenance of books, non filing of returns of income or belated filing of returns of income, collection of additional fees and diversion of funds in violation of sections 11(5) and 13(1)(c) as these are passing remarks which are not relevant for the purpose of section 12AA(3) and also all observations of the CIT has been negated by the assessee with enough evidences which are discussed in detail in foregoing paragraphs. Therefore, we are of the considered view that the CIT was erred in withdrawing registration granted u/s 12AA, by using her powers u/s 12AA(3). Hence, we set aside order passed by the CIT u/s 12AA(3) and restored registration granted u/s 12AA of the Act. - Decided in favour of assessee 3.4. In the case of ST. PETERS EDUCATIONAL SOCIETY vs. Pr.CIT February 27, 2023 (2023) 67 CCH 0562 ChdTrib (2023) 223 TTJ 0145 (Chd). It has been held that 84. We therefore have a situation where a note pad has been found in personal possession of Mr. Shane John Khanna and therein, there are certain entries reflecting cheque payments and cash payments. The presumption therefore is that such note pad belongs to Mr. Shane John Khanna and the contents thereof are in his handwriting and he has to explain the contents thereof. He has however disputed and has stated that the entries of cash payments are not in his handwriting. Once he has objected and the note-pad is in possession of the Revenue authorities, the right course of action would have been to refer the matter to the handwriting expert in some government authorized forensic laboratory who could have confirmed whether the entries are in the handwriting of Mr. Shane John Khanna or not. However, no such reference has been made in the instant case and the ld PCIT has proceeded and held that basis his own analysis, the handwriting is that of Mr. Shane John Khanna and he accordingly reached the conclusion that cash has been paid as part of transaction coupled with inflating the transaction value. More so, such a conclusion has been reached without confronting the entries in the note- pad entries to the Chairperson who has signed the exchange deed on behalf of the assessee society as well as without taking any steps to reach out or summoning Mr Arun Kumar Dhir, the other signatory to the exchange deed and the person who is alleged to have paid part consideration in cash. In any case, where the Revenue chooses to take appropriate steps in this regard, it can be well be taken up at the time of assessing the income in the hands of the assessee society in the relevant assessment year as per law, and where needed, the addition can be made to the income of the assessee society and which should be restricted only to To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. the issue involved. However, as the matter stand today, we are of the considered view that basis aforesaid discussion, the same cannot lead to a situation where the approval granted u/s 10(23C)(vi) can be withdrawn and that too, from a retrospective effect. We find that similar view has been taken by the Coordinate Indore Benches in case of Shri Jairam Education Society vs PCIT (Central)(Supra). Further, we draw support from the decisions of Hon’ble Rajasthan High Court in case of DCIT vs. Cosmopolitan education Society 244 ITR 0494 (Raj.) wherein the Hon’ble High Court affirming the finding of the Tribunal held that where there is allegation of misutilisation of the funds of the Society or mismanagement of the activities of the Society, the action could be taken against the members of the society as per the provision of governing the Society. However, even such misutilisation and mismanagement by the members could not be the basis of rejection of the claim of exemption to the assessee education Society and the SLP against the judgement stood dismissed by Hon’ble Supreme Court reported in 241 ITR 132 (St). In this judgments the Hon’ble Madras High Court in case of Auro Lab vs ITO (2019) 102 taxmann.com 225, has also been followed which is also applicable in the present case. 3.5. It is also settled that if in case both the side has been referred then it is the settled legal position that to remove the undue hardship and considering the decision of supreme Court in case of CIT Vs. Vegetable Products Ltd. 88 ITR 192 (SC) where it is held that when two views are possible on an issue, the view in favour of the assessee has to be preferred. And also many High court also held the same. It is submitted that the ratio of the above judgment is also applicable in the present case because exemption is available on the registration u/s 12A and in the present case the assessee is registered u/s 12A 4. No denial of exemption for the reason not filling the ITR and Audit Report: 4.1 Further it is submitted that ld. AO has cancelled the registration on the ground that the assessee has not filed its ROI and Audit report. The reason of not filing of the same are that as the assessee is trust and was depended on the accountant and the president and the other members were under impression that the act of return filling, Audit report and books are being care take by them. As there was on default since its registration from 1976 to 2013. And the fraud done by the president and books not completed by the accountant was not in the knowledge of the assessee. However when these facts have come to the notice of the assessee it filed its ROI income and Audit report. Hence for the negligence of the President and accountant the whole institute must not be punished. 4.2 However it is also settled legal position of law that if an assessee has not filed his ROI and filed ROI and not shown any claim or deduction in the ROI filed and claim the same during the course of assessment proceedings even although during the course of appellate proceedings. The Hon'ble courts has allowed the same by stating that if the assessee is entitled for any claim as per law cannot be denied for the reason that he has not claimed in the ROI. For this purpose kindly refer.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 4.2.1. In the case of Amina IsmilRangari v. ITO (2017) 51 CCH 0595 MumTrib it has been held that Capital gains—Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house—Rejection of claim of exemption—Case of assessee was re-opened and notice u/s 148 was issued—Assessee filed her return of income declaring taxable income after claiming exemption u/s 54F against ‘Long-term capital gains’ arising from sale of shares—AO held that share transaction entered into by assessee resulting in long term capital gains were not genuine—Since long-term capital gains were not treated to be genuine, AO also rejected claim of assessee for exemption u/s 54F—CIT(A) held that, rejection of claim of exemption u/s 54F by AO, was in order—Held, section 54F, neither provided as pre-condition requirement of filing of ‘return of income’ by assessee within stipulated time period, nor places any embargo as regards claim of such exemption in case ‘return of income’ filed by assessee involves some delay—When assessee raised claim u/s 54F in ‘return of income’ filed by her in compliance to notice u/s 148, therefore, it was obligatory on part of AO to have deliberated on entitlement of assessee towards claim of exemption u/s 54F—Due to dismissal of claim of exemption in limine by AO, there was no occasion for lower authorities to have deliberated upon satisfaction of requisite conditions contemplated u/s 54F by assessee—As assessee had during course of hearing of appeal submitted complete details as regards his entitlement towards claim of exemption u/s 54F, AO was directed to verify genuineness and veracity of claim of assessee—Claim of exemption u/s 54F, as raised by assessee should be allowed—Assessee’s appeal allowed. 4.3 However the assessee had filed the ROI and Audit report in response to the notice u/s 148. And also much prior to issuance of show cause notice for cancellation. And at the time of issuance of Show cause notice u/s 12AA(3)/12AA(4)no return or Audit report were pending. As per the section 147 and section 148 of the Income Tax Act 1961 itself provide the opportunity to assessee for filing the return of income, hence we could not say that the Income Tax Return was late filed. And the Return filed u/s 148 is treated as filed u/s 139 and all the provision are applicable for the same. If there was any default why the show cause notice has been given when the default had come to the notice of the Revenue in July 2016 and the notice has been issued 31 Months i.e. Feb. 2019. And even in last three years i.e form F.Y. 2016-17 to 2018-19 no defaults have been found. 4.4 Further the ld. AO in the entire order has stated that the assessee has not filed Tax audit report. In this regard it is submitted that the assessee is trust registered u/s 12A and not a businessman and not doing the business. Hence Tax Audit u/s 44AB is not applicable in this case. The same is applicable for the person who is doing business or trading. Hence the allegation of the ld.AO is wrong or incorrect or invalid. And liable to be quash. The Audit of the trust comes u/s 12A(b) in form 10B. 4.5 Further if there was any procedure default for non-filing the ITR and Audit report, for that there many other penalties or provision has been given and in Sec.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 12AA(3)/12AA(4) it has not been provided anywhere that if an assessee has not filed ITR and Audit report the registration shall be cancelled. In the case CIT vs. Raj State Seed & Organic Production Certification (2018) 98 CCH 0466 RajHC It has been held that Charitable Trust—Charitable purposes— Denial of registration—Application for registration sought by assessee society u/s 12A came to be rejected on ground that its activities were not charitable within meaning of s. 2(15) and audit report was not filed in Form 10B—However, ITAT directed CIT(E) to grant registration—Held, Madras High Court in Director of Income Tax (Exemptions) vs. Spic Educational Foundation, observed that non-filing of audit report in Form No. 10B would not defeat claim of assessee for exemption under Ss 11 & 12—Activities of assessee were for advancement of object of general public utility, hence charitable within meaning of s. 2(15)—If an institution was having surplus, then after considering application and accumulation prescribed u/s 11, remaining amount was chargeable to tax—But that in itself does not lead to a conclusion that institution was not meant for charitable purpose—Delay in moving registration application was also explained that it was due to bona fide belief that assessee was a part of government hence, not liable to income tax—Revenue’s appeal dismissed. In the case of Cotton Textiles Export Promotion Council v/s ITO (Exemption) 117 ITD 90 (Mum) it has been held that notice for accumulation in form No.10 r/w s. 11(2) can be made not only in respect of current assessment year but also in respect of subsequent assessment year and it is not necessary to file form No. 10 for each assessment year. Exemption u/s 11 could not be denied on the ground that form no. 10 was not filed along with return for subsequent year. The above case is fully applicable in the present case because the assessee has filed form no. 10 in earlier year and also filing in subsequent year when there is no change facts and circumstance. Hence once the form 10 No. admittedly filed and accepted in earlier years then it should be deemed to be filed in subsequent year till there is no change. In the case of Additional Director of Income Tax (Exemption) v/s Manav Bharati Child Institute & Child Psychology 20 SOT 517(Del) held that though filing of Form No. 10 in respect of accumulation of Income of surplus income is mandatory to claim exemption u/s 11 and 12, the same can be filed at any time during the pendency of assessment proceeding and benefit of accumulation of income cannot be denied. Here the case of assessee is on much strong footing because the assessee had filed the same much before show cause notice by the Pr. CIT although after due date of return filling. In the case of Haryana Welfare Board v/s CIT 83 CCH 268(P&H) it has been held that information in form 10 was required to be furnished at any time before the finalization of the assessment proceedings. In the case of Association of Corporation & Apex Societies of Handlooms v/s ADIT 351 ITR 287(Del) it has been held that when the revenue re-open the assessment by invoking S. 147 of the said Act the assessee would not be remediless To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. and would not be barred from furnishing Form -10 during those assessment proceedings. Also refer Raghavan Nair vs. ACIT 402 ITR 0400 (Ker) (2018) 4.6. The ld. Pr. CIT stated that if a person fails to get audited his books of accounts from a chartered accountant, then he will not able to get benefit of section 11, 12 and 12A. But many provisions are in the nature of procedural compliance hence if that kind of provision are not satisfied even though assessee would not be punished for cancellation of registration u/s 12A. 4.6.1. In the case of Sir Kika Bai Prem Chand Trust Vs. ITO Mumbai ITAT it has been held that "Though s. 12A (1)(b) provides that the exemption u/s 11 will be available only if the accounts are audited and audit report “furnished along with the return”, the same is not mandatory but is directory. The audit report in Form 10B affirms the statements contained in the balance sheet and income-expenditure statement and is intended to enable the AO to allow the exemption by relying on the audit report and without having to ask the assessee to furnish supporting documents in support of the claim. Such a procedural provision cannot be construed as mandatory because the defect can be cured at a subsequent stage. It is not the intention of the Legislature that the exemption u/s 11 should be denied merely because the audit report was not filed with the return." "Aggrieved by the order of the Assessing Officer the assessee preferred an appeal before CIT(A). Before CIT(A) the assessee reiterated the stand as taken before the AO. The assessee further contended that in the event of Form No.10B not having been field along with return of income, the return of income ought to have been considered as defective and a notice u/s. 139(9) of the Act ought to have been issued to the assessee to rectify the defect. The asses see further relied on certain judicial pronouncements and submitted that the requirement of filing Form No.10B along with return of income is not a mandatory requirement and that the said form even if filed in the course of assessment proceedings should be treated as sufficient compliance. Further reliance was also placed on the decision of Hon’ble Supreme Court in the case of CIT vs. Nagpur Hotel Owners Association, 247 ITR 201, wherein the Hon’ble Supreme Court held that filing of Form No.10 as required under section 11(2) r.w.r. 17 is mandatory and the same can be filed during the course of assessment proceedings. Specific reference was made to decision of the Hon’ble Calcutta High Court in the case of CIT vs. RajbahadurBishwesharlal Motilal Malwasie Trust, 195 ITR 825(Cal) and CIT vs. HardeodasAgarwalla Trust ( 1992) 198 ITR 511 (Cal), wherein it was held that audit report field in Form No.10B in the course of assessment proceedings is sufficient to claim exemption u/s. 11 of the Act." 4.6.2. In the case of CIT v. HardeodasAgarwalla Trust 198 ITR 511(Cal) it has been held that It is now well-settled that a procedural provision, ordinarily, should not be construed as mandatory, if the defect in the act done in pursuance of it can be cured by permitting the appropriate rectification to be carried out at a subsequent stage. Procedural laws are devised and enacted for the purpose of advancing justice. It does To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. not mean that the procedural laws should be brushed aside by the Court. It depends on the facts and circumstances of a particular case as to whether a breach in the observance of any procedural law, if not excused or overlooked, would cause real and substantial injustice to the parties. Having regard to the object of s. 12A, it cannot be said that the legislature intended that, even where the trust has got its accounts audited and the certificate obtained in Form No. 10B before the assessment is completed, merely because such report could not be filed in the course of the assessment proceedings, it would deprive a trust of getting the exemption if it is otherwise entitled to it in law. As in this case, the audit report had been obtained before the assessment was completed. The ITO, before completion of the assessment, did not allow any opportunity to the assessee to furnish the audit report. The direction that the audit report should accompany the return is not mandatory as the omission to do it may be rectified by filing the report at a later stage before the assessment is completed. The result of ignoring such return or the audit report will be denial of exemption to the trust although the income has been spent for charitable or religious purposes. This was not intended by the legislators. If an assessee fails to obtain the audit report in the prescribed form before the assessment is completed, he may not, ordinarily, be entitled to get the benefit of exemption. In this case, however, the assessee was not given an opportunity to file audit report in the prescribed form which was available with assessee before assessment was completed. In such a case, appeal being a continuation of the original proceedings, the appellate authority has the power to accept the audit report and direct the Assessing Officer to re-do the assessment 4.6.3. In the case of CIT v. Lucknow Public Educational Society318 ITR 0223 (All HC) it has been held that Charitable trust—Exemption under s. 11—Effect of non- availability of exemption under s. 10(23C) vis-a-vis filing of return—Assessee, a registered society, filed original return claiming exemption under s. 10(23C)—Later, when it was known that it was not eligible for exemption under s. 10(23C), filed a revised return claiming exemption under s. 11 along with supporting documents like audit report—AO treated the revised return as non est, as original return has been filed after due date and completed assessment on the basis of original return denying exemption under s. 11—Not justified—AO himself had passed the order under s. 143(3) in respect of the original return—AO was aware that the assessee was entitled to exemption under s. 11, if not under s. 10(23C)—Department should not take advantage of the ignorance of the assessee—Duty cast on the AO to ask information at the time of scrutiny—AO had not done so in the instant case—Filing of audit report is only procedural and not mandatory—Same can be furnished before completion of assessment—Assessee is entitled to exemption under s. 11 4.6.4. In the case ofKunhitharuvai Memorial Charitable Trust v. DCIT (2019) 6 TMI 595 (Cochin)it has been held that Exemption u/s. 11 - filing of return of income belatedly - returns of income were filed consequent to the notice u/s. 153A - the assessee has not filed the regular return of income u/s. 139(4A) but filed the return of income u/s. 153A(a) consequent to search u/s. 132 - HELD THAT:- Compliance of To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. requirement of the Act will have to be at any time before the completion of assessment proceedings. However, for claiming the benefit of exemption u/s. 11 on the basis of information supplied consequent to the completion of the assessment proceedings would mean that the assessment order will have to be re-opened. The Act does not contemplate such reopening of the assessment. However, in the present case, it was filed consequent to the notice issued u/s. 153A(a). Further, in the present case, exemption u/s. 11 was denied because of non filing of return of income on time and also due to the discrepancies mentioned above. In our opinion, the returns of income were filed consequent to the notice u/s. 153A. The sections 11 & 12 of the Act nowhere prescribe filing of return by any due date for the assessment years under consideration so as to grant exemption u/s.
11. Therefore, the findings of the CIT(A) that the assessee having not filed its returns of income within the prescribed time had failed to comply with the requirement prescribed under the Act, is not tenable. - Decided in favour of assessee 5. Further all the above submissions and judgments have already been considered by the Hon’ble ITAT while deciding the appeal on the cancellations of 12A registration vide order of the Hon’ble ITAT. Hence there is no force or meaning of the observations made by the ld. CIT(A) rather he overlooked the same despite available before him.
6. Application of funds deemed to have been made for the benefit of specified person Section 13(2): In some earlier years there was a miss happening with the assessee association that his president deliberately withdraw cash from association's bank account for his personal use in the name of other person, out of that kind of withdrawal some amount has been debited to our ex-president account (Sh. Tejendra Pal Singh), by keeping the other members in dark or without their knowledge. For that kind of transaction association had also filed FIR against him for miss utilization of funds/ betray/ Forgery/imitation/ replica of signatures/ for unfaithful work and Misappropriation of funds of trust. Except above mentioned transactions no any mistakes is found in daily activities/transactions of the trust. As the assessee: a. No Loan given to any specified person during the year under consideration. b. None of any specified persons are allowed to use land, building or any other property. c. No Salary, allowances are paid to specified persons during the year under consideration. d. Association will not provide any kind of services to specified persons without inadequate remuneration. e. No property / Shares and security transferred by any specified person to association. f. No property / Shares and security transferred to any specified person from association. g. No income or property of trust diverted to a specified person.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. h. Trust has not invested any fund where specified person having substantial interest. 6.1. Only due to the negligence or cheating of past executive members and bad intention/intention of miss appropriation of funds of ex-president, they were not willing to maintained the books of accounts and get their accounts audited by a chartered accountant. But after change of management and involvement of new committee, books of accounts have been prepared and audit has also done and now all the work is going on in proper way. During the A.Y. form 2014-15 to 2016-17 heavy amount withdrawn by the ex-president, out of total amount some entries are debited in account of Sh. TejendraPal Singh and some entries are debited in other parties account because vouchers was made in the name of other parties name and later on came to know that these parties have not received amount and when management went to bank to trace out the truth all disputed entries were bearer cheques, but at that time books of accounts have been finalized and audited, so assessee was not able to change the account name. Hence at the time of filing FIR they include all the amount. This amount not given by the trust to the president but the same was misappropriated, pinched, embezzled and cheated by the ex-president therefore FIR filed by the trust against the ex-president (i.e. TejendraPal Singh). Copy of FIR is enclosed (PB 153- 159). And for the cheating or fraud by the Ex-President, if any, the whole trust cannot be suffered, which is against the principal of natural justice.
7. Further nowhere it has been proved that the Act of the President was in the knowledge of the assessee and the other members were involved knowingly. And was part of that fraud. And if any fraud has been done behind the assessee cannot be treated as done by the assessee. Assessee has not itself given any benefit to the assessee.
8. Further interestingly in the instant case, the ld. Assessing Officer & ld. Pr. Commissioner of Income-tax without any independent verification have allegedmisappropriation of funds. The assessment of the assessee appellant trust and its ex-president Shri Tejendra Pal Singh was done by the same Assessing Officer and in the assessment orders passed u/s. 153A of the Act dated 20-21.12.2018 for the A.Y. 2014-2015 to 2016-2017 in the case of Shri Tejendra Pal Singh, no addition has been proposed for so called misappropriated income. Thus, without carrying out any independent verification and on account of mere suspicion, without any proof the said allegation has been levelled against the assessee appellant Trust. 8.1. Hon’ble ITAT, Visakhapatnam Bench in the case of ACIT v. Sri Koundinya Educational Society (2019) 1 TMI 266 (ITAT Visakhapatnam) has held as under: Charitable activity - grating exemption u/s 10(23C)(vi) - exemption u/s 11 - CCIT observed that, assessee cannot be said to be existed only for educational purposes and accordingly rejected the contention of the assessee for grating exemption u/s 10(23C)(vi) - Held that:- ITAT Delhi Bench in the case of PuranchandDharmath Trust Vs. ITO, Wd-1, Gurgaon [2018 (5) TMI 630 - ITAT DELHI] held that where the assessee Trust advanced money as a loan to another Trust for which the assessee had To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. not received any interest and the said sum was returned by the Trust, the amount advanced not being investment could not be held to be in violation of section 13(1)(d), 11(5) of the Act. Therefore, respectfully following the view taken by this Tribunal in the assessee’s own case, and as per our findings, we hold that there are no violations and the revenue did not make out any case to substantiate the violations in respect of 13(1)(c), 13(2)(a), 13(2)(g) and 13(2)(h) of the Act. Therefore, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld.”
9. Further it is submitted that that the exemption of the assessee Trust cannot be denied for the reasons for not filing of income tax return and audit report for the A.Y. 2014-15 to 2016-17. In this regard, it was submitted that clause (ba) was inserted by Finance Act, 2017 to section 12A(1) of the Act, w.e.f. 01.04.2018: (ba) the person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section. 9.1. The memorandum explaining the relevant provisions of the Finance Bill, 2017 reads as under: "as per the existing provisions of said section, the entities registered under section 12AA are required to file return of income under sub-section (4A) of section 139, if the total income without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount which is not chargeable to income-tax. However, there is no clarity as to whether the said return of income is to be filed within time allowed u/s 139 of the Act or otherwise. In order to provide clarity in this regard, it is proposed to further amend section 12A so as to provide for further condition that the person in receipt of the income chargeable to income-tax shall furnish the return of income within the time allowed under section 139 of the Act. These amendments are clarificatory in nature. These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to assessment year 2018-19 and subsequent years . 9.2. Circular No.02/2018 dated 15.02.2018 containing "Explanatory Notes to the Provisions of the Finance Act, 2017” on insertion of clause (ba) in Sub section (1) of section 12A is quoted as under: 15.4 Further, as per the provisions of said section, the entities registered under section 12AA are required to file return of income under sub-section (4A) of section 139 of the Income-tax Act, if the total income without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount which is not chargeable to income- tax. However, there was no clarity as to whether the said return of income was to be filed within time allowed under section 139 or otherwise. 15.5 In order to provide clarity in this regard, further amendment to section 12A of the Income-tax has been made so as to provide for additional condition that the person in receipt of the income chargeable to income-tax shall furnish the return of income within the time allowed under section 139 of the Income-tax Act.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 15.6 These amendments are clarificatory in nature. 15.7 Applicability: These amendments take effect from 1st April, 2018 and will, accordingly, apply from assessment year 2018-19 and subsequent assessment years. Hence, the Assessing Officer can deny the grant of exemption u/s. 11 of the Act for belatedly filing of return from the assessment year 2018-19 onwards. Not for this year”
The Coordinate Bench of ITAT, Delhi Bench in the case of United Educational Society v. JCIT (2019) 7 TMI 738 (ITAT Delhi) has held as under: Reopening of assessment u/s 147 - exemption u/s 11 denied - assessee has not filed the return u/s 139 (4A) reads with section 12A (b) - assessee society was carrying out educational activities which fell within charitable activities u/s 2(15) , it was granted registration u/s 12A - whether, the filing of audit report alongwith the return filed in response to notice u/s 148 will entitle the assessee for benefit of computation of section 11 ? - HELD THAT:- We are of the view that, whether it is a case of a regular assessment or it is a case of an assessment consequent to issue of notice u/s 148, not only the procedure of return as given in section 139 has to be applied, but also such the income has to be computed on the basis of such return in accordance with the provision of the Act, which of course will be subject to any specific provision in the Act which itself bars a claim or an exemption. Section 148 provides that all the provision of the Act has to apply on such return furnished in response to notice u/s 148. The Ld. CIT DR has referred to the words ‘so far as may be’ to canvass the proposition that all the provision will not apply. This contention of the Ld. DR is not correct in view of our reasoning given above. The meaning of these words ‘so far as may be’ will not mean to exclude provision of section 11 of the Act. Our above view gets further supported from the amendment made by the Finance Act, 2017 whereby a further clause (ba) has been inserted imposing a further condition that such return of income is to be furnished in terms of section 139(4A), within the time allowed under that section. Firstly, this requirement was not there before this amendment; and secondly, this insertion of additional clause clearly shows that such condition was not there in existing clause (b) of section 12A. Had such condition being there in clause (b) itself, then there was no need to insert a further clause (ba) by the Legislature for denying benefit of section 11 & 12 in case return is not filed in time as per provision of section 139 (4A). We are also not in agreement with the contention of the Ld. DR that this amendment is clarificatory in nature. As rightly pointed out by the Ld. Counsel that this amendment has been made by the Finance Act, 2017 effective from A.Y. 2018-19, meaning thereby that this clause has not been made applicable even for the A.Y. 2017-18, the return of which were still to be filed. Thus, the Legislature has thought fit to make this amendment applicable from next assessment years onwards and not even to the current A.Y. 2017-18.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. While interpreting the amendment made by the Finance Act No. 2 of 2014 whereby section 11 (6) was inserted so as to exclude such assets while computing depreciation in respect of which deduction has been allowed as an application of income u/s 11. In view of the above, we hold that AO was not justified in denying the benefit of the exemption u/s 11 of the Act and we direct the AO to compute the income in accordance with the provision of section 11. Ground no.6 is accordingly allowed.
The Coordinate Bench of ITAT, Surat Bench in the case of Shri Siddhanath Mahadev Temple Trust v. CIT (2024) 11 TMI 1320has held as under: Revision u/s 263 - eligibility of exemption u/s 11 - assessee had not filed the original return of income u/s 139 within the due date and also the audit report (Form 10B) within the due date specified for filing the audit report. Hence, assessee was not eligible for any claim of exemption u/s 11 and 12 - HELD THAT:- There is no dispute regarding the fact that assessee had not filed its return of income u/s 139 of the Act. It filed the return of income, declaring total income only after receiving notice u/s 148 of the Act. The AO has passed the order accepting the returned income after considering explanation and details filed by assessee. As decided in case of United Educational Society [2019 (7) TMI 738 - ITAT DELHI] filing of income u/s 139(4A) of the Act was not statutorily compulsory in AY.2017- 18. Hence, the AO has rightly accepted the return of the assessee field u/s 148 of the Act. We find that clause (ba) to sub-section (1) of section 12A was inserted by Finance Act, 2017 w.e.f. 01.04.2018. The said clause provides w.e.f. 01.04.2018, and applicable for AY.2018-19 and subsequent years, that the person in receipt of income shall furnish the return of income referred to in sub-section (4A) of section 139 within the time allowed under that section. The assessment year involved in this appeal is AY.2017-18 which is prior to insertion of clause (ba) of section 12A(1) by Finance Act, 2017. When the provisions were not in the statute, the AO could not have invoked the provision and asked the assessee to fulfil the conditions included therein. AO has taken the correct view while passing the order and he has adopted one of the courses permissible in law. The CIT(E) has stated that the amendment is only clarificatory and the decision of ITAT is not mandatory. In the memorandum explaining the above provisions of the Finance Bill, it was explained that the amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to AY.2018-19 and subsequent years. The clause will not be applicable to the subject AY.2017-18. As clause (ba) of sub-section (1) of section 12A is applicable for AY.2018-19 onwards and not for AY.2017-18 with which we are concerned. Hence, we hold that the order of AO was not erroneous and prejudicial to the interests of revenue and therefore, it was not amenable to revision u/s 263. Appeal of the assessee is allowed.
Further kindly also consider the order of the Hon'ble ITAT in the case of assessee’s in dt. 06.01.2021 wherein all these issues have already been considered and given finding and decisions in the favour of the assessee.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. If when the Hon'ble ITAT has decided the issue then there is no meaning to deny the exemption u/s 11. And the finding given in the said order may also kindly be considered our WS and arguments before your honour.
IMPORTANTLY the revenue itself in appeal filed before Hon’ble Rajasthan High Court has admitted Substantial Question of Law vide order dated 27.07.2023 in DBITA No. 66/2021 only qua jurisdiction of PCIT(C) to pass order u/s. 12AA & Stay Application filed by the revenue was also dismissed as under:
1. 1. Heard.
2. Admit.
3. Following substantial questions of law arise for consideration in this appeal:- "(1) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in law in holding that the Principal Commissioner of Income Tax did not have any jurisdiction to pass order under Section 12AA(3) and 12AA(4) of the Income Tax Act 1961? (2) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred by not taking proper notice of jurisdiction Order No.CIT(E)/JPR/ ITO(Hqrs.)/ 2016-17/4555 dated 05/06.12.2013, validly passed u/s 127 of the Income Tax Act, 1961 by the Commissioner of Income Tax (Exemptions), Jaipur, whereby the case has been transferred to the jurisdiction of Principal Commissioner of Income Tax (Central), Rajasthan, Jaipur under whose jurisdiction the transferee Assistant Commissioner of Income Tax, being ACIT, Central Circle, Kota, functions?"
4. Let notice be issued to the respondents.
5. Mr. Siddharth Ranka, learned counsel accepts notice on behalf of the respondents on caveat being filed.
6. Caveat stand discharged.
7. Heard learned counsel for the parties on question of stay.
8. We do not find any ground for accepting the same, therefore, prayer for stay is rejected. Stay application (No.1263/2021) stands dismissed.
9. List on 15.09.2023. 13.1. Substantial Question of Law qua violation of section 13(1)(c)/13(2), amendment made by Finance Act, 2017 being retrospective or not has not even BEEN ADMITTED by the Hon’ble High Court. 13.2. Thus the stand of the CIT(A) in not following the findings recorded by the Hon’ble ITAT in assessee appellant’s own case is CONTEMPTOUS to say the least and it deserves to be deplored. GOA- 3 TO 6 Firstly we would like to submit Common WS on the addition /disallowances made as per GOA 3 to 6: COMMON SUBMISSIONS ON ADDITIONS/DSIALLOWANCES MADE AS PER GOA 3 to 6:
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
1. At the very outset it is submitted that the ld. AO has made all the additions without issuing any show notice. As he issued the notice u/s 142(1)(PB70-73) on dt14.09.2018 in response thereto the assessee filed the replies with details time to time. Thereafter the ld. AO has issued a show cause notice dt. 06.11.2018 vide page 2 to 4 of assessment order in response thereto the assessee filed the reply on dt. 16.11.2018(PB74-81) which is also reproduced at page 5-10 of the assessment order. In these there was no any query discussion regarding the additions made. Thereafter the A/R of assessee with accountant appeared before the ld. AO on dt. 14.12.2018 and the ld. AO stated that “ Sh. Ashish Jain FCA and accountant of the trust Sh. Manish Jain appeared. They produced books of accounts for examination. They failed to produce the following books of accounts’ (1) Auditors had mentioned various discrepancies in the audit report. They have failed to explain discrepancies or to file confirmation (2) TDS was not deducted properly (3) Cash payments were made through self made vouchers which are not verifiable (4) Brochures of the scheme and minute books not produced for examination Copy of order sheets are enclosed(PB139-145 ) 2. Thereafter the ld. AO straightaway passed the assessment order on dt. 19.12.2018 without issuing any show cause notice for making the additions. And in the show cause notice dt. 06.11.2018 there was no mentions of these additions.
3. Thus the AO made the disallowance/additions without issue any show cause notice before making the addition/disallowance. During the course of assessment proceeding the ld. AO only required the assessee to file the details and reasons of other issue. In response thereto the assessee filed details and reply of the same. After receiving details and reasons he did not ask the assessee that why these additions should not be done. The AO must have issued show cause notice in the interest of natural justice but he did not do so and made a huge disallowance. It is very settled legal position that a person(assessee) is entitled to opportunity to show cause as to why not the income of the assessee is determined in the manner as proposed by the assessing officer but in the instant case no such type of opportunity had been provided hence the addition so made may kindly be deleted in full kindly refer Sanghi Brothers (Indore)Limited v/s Inspecting ACIT 122 CTR 19(MP), Malik Packaging v/s CIT 284 ITR (All), T.C.N. Menon v/s ITO 96 ITR 148(Ker). 3.1. In the case CIT vs. Paramjit Singh (2014) 90 CCH 0499 PHHC(2015) 231 TAXMAN 0450 (P&H)Held :Assessing Officer did not comply with the statutory provisions of law, inasmuch, as that the assessee was not given sufficient opportunity to rebut the report of the Assessing Officer. Not only this, even the assessee was not confronted with letter obtained from the office of Ludhiana Stock Exchange in order to enable him to rebut or lead evidence in support of his stand, particularly when it has come on record that the forms were issued during the relevant period when the annual To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. returns were filed on 3.3.2007, on a duly stamped form, submitted by the Registrar of Companies on 29.1.2007. The effect of the same was also duly recorded in the board meeting of the Company held on 10.3.2007. There was no occasion for the Assessing Officer to disbelieve the explanation submitted by the assessee before the Assessing Officer. The clarification sought from the office of the Ludhiana Stock Exchange during the appellate proceedings leaves no manner of doubt that the entire transaction by the Company was done in accordance with the provisions of the Companies Act and there was no deviation from the Act, which could have led the Income Tax authorities to form an opinion different from the decision of the Registrar of Companies. The judgments cited in the proposed questions of law does not support the case of the revenue as admittedly in the instant case the assessee was not given opportunity to confront with the material relied upon by the Assessing Officer during the assessment proceedings and rightly, the Commissioner of Income Tax (Appeals) and as well as the ITAT found that a sum of Rs.52,46,062/- could not be treated as loan given by the Company to the assessee being deemed income as per provisions of Section 2(22)(e) of the Act. The Commissioner of Income Tax (Appeals) in its order also extracted the statement Mrs.Pooja Kohli, Executive Director of the Ludhiana Stock Exchange. From the perusal of the statement of Mrs.Pooja Kohli, it leaves no manner of doubt that the share transfer forms were purchased and submitted on 29.1.2007 and the share holding pattern was effected on 3.3.2007, which was duly approved by the Company on 10.3.2007 in the meeting of the Board of the Directors. CIT vs. VishishthChayVyapar ltd.(2015) 93 CCH 0070 DelHC CIT vs. Oasis Hospitalities (P) LTD.* (2011) 238 CTR 0402 : (2011) 51 DTR 0074 : (2011) 333 ITR 0119 Shreyas Builders & Anr. vs. M.d.Kodnani& ors.* (2000) 161 CTR 0527 : (2000) 242 ITR 0320 ACIT & ANR. vs. Sur buildconPvt. Ltd. & ANR. (2021) 62 CCH 0326 DelTrib 4. Further as the disallowances and additions which have been made on account of sundry creditors, construction Expenses, TDS certain expenses etc are related to the construction activities carried out on the lands for making residential house /flats. In this regard the facts and contentions are that: As we have already stated above that firstly the trust has purchased or acquired an agriculture land in F.Y. 2008-09and thereafter get it converted in residential land and there after patta and lease has obtained or issued in the name of members of the trust in the month of December 2013 or in the year copies some pattas are enclosed(PB 146-152) against which the trust had received the payments/consideration/advances from the members.Thus the owner of the land and constructions are the respective members not of the trust. The Land with construction is being shown in the balance sheet in assets and money/advances received from members is being shown in liabilities in the balance sheet. As and when the construction is/shall completed the possession of the land shall To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. be given to the respective members. The construction work is being done through the trust only to avoid the litigation among the members and to curtail the cost being the work in bulk. Due to this reason neither the advances/money received from the members has been claimed as income or receipts of the trust nor the expenses incurred in construction has been claimed as expenditure of the trust because it is not for the trust. If so then no addition/disallowance can be made in the hands of the assessee trust. The addition/disallowances were to be made only when the same was incurred or claimed by the assessee trust in its Income & expenditure accounts. And the ld. AO has ignored these vital facts despite the audited Balance Sheet and Income & Expenditure accounts available before him. Hence all the additions are deserve to be deleted in full on these ground alone.
5. Further the ld. AO while making the additions/disallowances has not pointed out the specific defects in the books of accounts. And while making the additions/disallowance he has overlooked the audited balance sheet and Income & Expenditure Accounts. As the assessee has not claimed the receipts and expenses both. And the ld. CIT(A) after filling the WS by the CIT(A) has invoked the provisions of Sec. 145(3) for that we have already submitted in GOA-2 which may kindly be considered here also.
6. Further the ld. AO has neither rejected the books of account nor invoked the provisions for addition, disallowances nor any provision for rejection books of accounts.
7. No provisions has been applied by the ld. AO: Furtherit is submitted thatthe ld. AO made all the additions on account of alleged sundry creditors of Rs.16,75,286/-, construction expenses of Rs.1,20,00,440/- and addition of Rs.3,69,567/- for payment. However while making the additions/disallowanceshe has not invoked or applied any provisions of law while making the addition. 7.1. The ld. AO has not stated under what provision of law he has made the addition and under what head whether, under business or trading income, agriculture income, capital gain or u/s 48, 56 or u/s 68 or 69. 7.2. Thus the addition so made without any provision of act is also against the law and liable to be deleted on this ground alone. 7.3. When the ld. AO has not invoked any provision of Act/law then also how the ld.AO can make the addition. 7.4. When in the law and in the Act for each and every offence specific provisions are given to held any person as victim defaulter, then without applying any provision for that a person cannot be taxed and penalized. 7.5. When the ld. AO himself has not stated that under what provision the assessee liable to be taxed or penalized or under what provision his offence falls then how the addition can be made.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 7.6. On this preposition we also would like to draw your kind attention toward the decision of this Hon’ble ITAT in the case of Arvind Kumar Nehra v. ITO Ward 7(1), Jaipur 32/Jp/2024 dt 10.04.2024 where it has been held: “It is also noteworthy to mention from the entire conspectus of the case that the AO has also not invoked any provisions of IT Act while making the lump Sum addition of Rs.50,00,000/- for cash deposits in the bank account during the Demonetization Period, Unsecured Loan & capital introduced. Hence, in our view lump-sum addition cannot be made under these accounts. The AO must have referred the specific amount with specific details and documents which he has not provided and as to what basis lump sum addition has been made and also failed to mention that on which account and as to what amount of addition consists of. It is also noted that the AO has not stated under which provisions or section he has made the lump-sum addition either u/s 68 or 69 or 69A or trading or u/s 56 i.e. other sources. It may be worthwhile to mention that when in the Act for every additions, the provisions or section has been provided by the legislature, otherwise there shall be no meaning of the Act. Hence the addition is wrongly made against the Act . (vide page 21-22 of the order).” 7.7. The same has also been reiterated recently in the case of Rajendra Kumar Meena v. ITO Sawaimodhopur in dt. 2507.2024. 7.8. In the case of Pasari Casting And Rolling Mills ... vs Income-Tax Department in W.P. (T) No. 1850/2022 dt. 25.01.2024 it has been held that “Furthermore, the recorded reason is also silent under which provision of the Act the additions are sought to be made i.e. whether Section 68, Section 69A, Section 69B, Section 69C or any other provisions of the Act. It is not the case of the Revenue that the Petitioner has paid any cash to the so-called accommodation entry provider to obtain the accommodation entry to plough back own funds, hence, there is no ground/material to form reasonable belief of any accommodation entry. (Refer PCIT Vs. Meenakshi Overseas P. Ltd. reported in [2017] 395 ITR 677 (Del). 7.9. In the case of Oryx Fisheries Pvt. Ltd. Vs. UOI reported in (2010) 13 SCC 427, it is held by the Hon'ble Supreme Court that the show cause notice should give the noticee a reasonable opportunity of making objections against proposed charges indicated in the notice and the person proceeded against must be told the charges against him so that he can make his defence and prove his innocence. In the entire course of the proceeding, at no stage the Petitioner is made aware of the provisions of law which have been contravened and/or under which the additions are sought to be made which is in gross violation of the principles of natural justice and the procedure adopted by the Department is not fair or proper. 7.10. In the case of New Delhi Television Ltd. Vs. DCIT reported in [2020] 424 ITR 607 (SC), it is held by the Hon'ble Apex Court that the Assessee must be put to notice of all the provisions on which the Department relies. 7.11. Recently the same has also been laid down by this Hon’ble ITAT in the case of Kajari Mineral Pvt. Ltd v. DCIT Central Circle-1 Udaipur in ITA No. 217 and To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 218/Jodh/2024 dt.21.11.2024 and also in Smt. Prabhati Devi v. ITO Ward Dausa in ITA No. 1031/Jp/2024 dt. 01.10.2024. Hence the additions so made by the ld. AO is illegal, invalid bad in law and liable to be deleted in full. GOA-3 Addition of Rs.16,75,286/- on account of sundry creditors:
1.
1. FACTS: The ld. AO has stated that the assessee trust has shown sundry creditors of Rs.16,75,286/- in the Balance Sheet and the auditor pointed out that amount credited in the personal account is not supported by proper bills/vouchers in most of cases, the ld. AO has alleged the assessee was asked to explain the discrepancy pointed out by the auditor and assessee has also not filed the confirmation of creditors. The ld. AO has alleged that assessee has shown bogus creditors of Rs.16,75,286/- and the same is disallowed and made the addition of Rs.16,75,286/- on account of alleged bogus sundry creditors, without issuing any show cause notice for this effect.
2. In first appeal assessee filed the detailed WS also vide page 53 to 55 of CIT(A) order, additional evidence and legal position. The ld. CIT(A) called the remand report and send the same to the ld. AO who has send his remand report. The ld. AO in the remand report has stated that that pursuant to thedirection of your good office the additional evidences produced by the assessee hasbeen entertained & taken on record. Further on perusal of ledger account of sundrycreditors, it is noticed that the ledger accounts are not supported with thebills/vouchers. Hence the additional evidences produced by the assessee are notacceptable & remains unexplained.
3. In response to the remand report assessee has submitted a detailed rejoinder vide page 59 to 62 of CIT(A) order. However the ld. CIT(A) was not satisfied with the contentions of the assessee and confirmed the addition vide page 62-63 of the CIT(A) order. The ld. CIT(A) has stated that the ledger accounts submitted are admitted as additional evidence. However, these do not prove genuineness of creditors in the absence of any bills and vouchers andalso no confirmation filed even during the appellate and remand proceedings, theaddition made by the AO treating the creditors as bogus of Rs. 16,75,286/- is foundto be justified and confirmed. SUBMISSIONS: 1. Regarding the Sundry creditors firstly it is submitted that the ld. AO never asked to furnish the confirmations of sundry creditors.
2. And the expenses related to disallowance of sundry creditors has not been debited in the P&L accounts nor claimed as expenses. In support we are enclosing herewith the Audited balance sheet and Income & Expenditure Accounts(PB57-68). The expenses has been incurred on behalf of the members and for the members for their construction work and the receipts were also from the members. The trust has only trustee for their work. If so than how the disallowances can be made. The disallowances if any was to be made in the hands of members in their shares. However we are enclosing herewith the copy of ledger account of sundry creditors (PB160-195). The ld. CIT(A) has ignored these vital facts and submissions.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
3. Further the ld. AO has made the disallowances of the entire sundry creditors of Rs.16,75,286/-, whether it is possible that all the sundry creditors bogus or not genuine. The ld. AO has not stated which sundry creditors bogus and not tried to make any inquiry and only on the basis of its own assumption and presumption, suspicion and guess he made the addition , which is against the settled law and it is the settled legal position that no addition can be the basis of suspicion, assumptions’ and presumption. An allegation remains a mere allegation unless proved. Suspicion may be strong however cannot take the place of reality, are the settled principles. Kindly refer Dhakeshwari Cotton Mills 26 ITR 775 (SC) also refer R.B.N.J. Naidu v/s CIT 29 ITR 194 (Nag), Kanpur Steel Co. Ltd. v/s CIT 32 ITR 56 (All).Also refer CIT v/s KulwantRai 291 ITR 36( Del). In CIT v/s Shalimar Buildwell Pvt Ltd 86 CCH 250(All) it has been held that the AO made the addition merely on suspicion which was not desirable in the eye of law.
4. No provisions has been applied by the ld. AO: The ld. AO made the addition on account of sundry creditors but he has not invoked or applied any provisions of law. The ld. AO has not stated under what provision of law he has made addition whether, under business or other sources or 41(1) or u/s 56 or u/s 68 or 69. Thus the addition so made without any provision of is also against the law and liable to be deleted on this ground alone.
5. Further the submissions on the issue without any show cause and other plea kindly consider our common WS as above as also here. (i) Trust auditors M/s Raj Kishore & Associates in relation to sundry creditors, listed in schedule ‘B’ ofBalance Sheet have stated as under:- “An amount of Rs.1675286/- has been shown as payable under the head sundry creditors as perschedule ‘B’ showing the outstanding balances is enclosed. Amount credited in the personal account is not supported by proper bills / vouchers and other supporting in most of the cases.” (i) Based on comments of Hon’ble Auditors the ld. AO vide para 10 page 13 of the assessment orderstated as under:- (a) These amount are not supported by proper bills / vouchers in most of the cases. (b) Assessee has not filed any confirmation on sundry creditors. (c) He therefore disallowed and added Rs.1675286/- in Total Income. 4(i) During appeal hearing we moved an application u/s 46A together with copies of accounts of sundrycreditors. Our stress was that neither copies of sundry creditors were called for from us by ld AO during assessment proceedings nor at any stage confirmation of sundry creditors were called for. (ii) Our further stress was that we were constructing residential houses for our members and thatreceiptsfrom members / expenditures on houses have not travelled through income & expenditure account of the trust.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. (iii) We have further stressed that during Ass.Year 2014-15 there are construction expenses of Rs.8,13,01,397/- & these sundry creditors of Rs.1675286/- were part of construction activities. 5(i) The ld. AO in his remand report has again requested you for sustaining addition of Rs. 1675286/- onfollowing reasoning’s:- (a) That amount credited in the personal account was not supported by proper bills / vouchers and othersupporting in most of the cases. (b) It is noticed that the ledger accounts are not supported with the bills/vouchers. (ii) From above it appears one thing is accepted by ld ACIT in his remand report that confirmation werenever called. However he is still insisting for sustaining additions. 6(i) Based on copies of accounts furnished to you as well as ld. AO in remand proceedings we have madea summary of transactions in accounts of25 creditorswhich is enclosed vide Annexure-A to this letter where from your honour will please find as under:- (a) Additions are made on closing balances (b) In account Sl no.1 there are transaction of over Rs. 400000/- and there is closing balance Rs.12600/- (c) In account Sl no.2 transactions of Rs. 322500/- and closing balance Rs. 4075/- (d) In account Sl no.13 addition of Rs. 965949/- is made whereas opening balance in this account isRs.1013801/- (ii) As is clear from assessment order the learned AO has disallowed expenses whereas as stated abovethese expenses have not travelled in Income & Expenditure Account and hence we have not claimed it and therefore question of disallowance does not arise. (iii) We therefore with utmost respect request you to please delete these additions in interest of justice, lawand equity.
7. In your letter your honour has asked us to file rejoinder on or before 25.01.2024. We are therefore filing itwithin schedule time.However we request you to please provide us opportunity for personal hearing beforedeciding appeals.The Wholesale Cloth Merchants Association, Kota 6. Also vide chart at page 60 to 62 of CIT(A) order.However the ld. CIT(A) has not considered this detailed reply and explanation in their true perspective and sense rather confirmed the addition on wrong basis and he has only stated that theledger accounts submitted are admitted as additional evidence. However, these do not prove genuineness of creditors in the absence of any bills and vouchers andalso no confirmation filed even during the appellate and remand proceedings, theaddition made by the AO treating the creditors as bogus of Rs. 16,75,286/- is foundto be justified and confirmed.The ld. CIT(A) has not brought any contrary evidence except above suspicion on the basis of which no addition should be made. The ld. CIT(A) has also not given any finding on the legal position and contentions of the assessee, which shows he was not having any adverse material against the assessee.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Hence in view of the above facts and circumstances the addition so made may kindly be deleted in full and oblige. GOA-4: Disallowance of Rs.1,20,00,440/- on account of construction Expenses.
1. FACTS: The ld. AO has stated that the auditors has mentioned that construction expenses of Rs.8,00,02,935/- has been paid vide bearer cheques without any details or supporting bills and no details have been furnished by the trust. Therefore 15% of the above expenses of Rs.1,20,00,440/- is disallowed without issuing any show cause notice for this effect.
2. As facts and Submission on this issue already mentioned in GOA-2 which may kindly be taken in to consideration.
3. Further the ld. CIT(A) has stated that the books of accounts have been rejected and the amount received from the members during the year is treated as turnover/sale receipts of the association and the expenditure made for construction etc. is treated as expenditure and the Income and Expenditure account is treated as recasted accordingly.On recasting of the accounts, the expenditure made is subjected to normalprovisions of Income Tax Act. Coming to the disallowance made by the AO, the AOmade disallowance because the amounts of Rs. 8,00,02,935/- has been paid videbearer cheques without any details or supporting bills. The appellant also admittedthis fact. The Auditor had mentioned in Audit report this fact and the association hasfailed to controvert these findings.
4. The ld. CIT(A) has further stated that the assessee association made expenditure without there being details or supporting vouchers. In these circumstances, the expenses may be manipulated and excess expenditure might have been booked. Therefore, the disallowance of only 15 per cent expenses by the AO is found to be reasonable and upheld. GOA-5: Addition of Rs.3,69,567/- on account of certain Expenses.
1. FACTS: The ld. AO has stated that the trust has made payment of Rs.24,63,780/- without any supporting vouchers and no details have been furnished by the trust. Therefore 15% of the above expenses of Rs.3,69,567/- is disallowed, without issuing any show cause notice for this effect.
2. The ld. CIT(A) has stated that the Auditor had mentioned in Audit report (Form No. 10B), that theassessee had made payments of Rs. 24,63,780/- vide bearer cheques or accountpayee cheque without any supporting vouchers. The assessee was asked to explainthe same but no details had been furnished by the assessee. Hence, the then AO 3. had disallowed 15% of above expenses which comes to Rs.3,69,567/- (15% ofRs.24,63,780/-) and added to the total income of the assessee. The appellant alsoadmitted this fact. The Auditor had mentioned in Audit report this fact and theassociation has failed to controvert these findings. The assessee association madeexpenditure without there being details or supporting vouchers. In thesecircumstances, the expenses may be manipulated and excess expenditure To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. mighthave been booked. Therefore, the disallowance of only 15 per cent expenses by theAO is found to be reasonable and upheld. SUBMISSIONS ON GOA 4&5:
1. 1. Firstly it is submitted that as the ld. AO has never issued any show cause notice before making the disallowance of 15% expenses on account of construction and certain expenses vide entire facts and orders and documents.
2. And these expenses have not been debited in the P&L accounts nor claimed as expenses. In support we are enclosing herewith the Audited balance sheet and Income & Expenditure Accounts(PB57-68). As we have already stated as above and in common WS that expenses has been incurred on behalf of the members and for the members for their construction work and the receipts were also from the members. The trust has only trustee for their work. If so than how the disallowances can be made. The disallowances if any were to be made in the hands of respective members in their shares. However we are enclosing herewith the copy of ledger account of these expenses.
3. Further the ld. AO has made the disallowances of the entire expenses on estimate basis and without pointing out any specific defect. The ld. AO has not stated which expenses are bogus and not tried to make any inquiry and only on the basis of its own assumption and presumption, suspicion and guess he made the addition or disallowances, which is against the settled law and it is the settled legal position that no addition can be the basis of suspicion, assumptions’ and presumption. An allegation remains a mere allegation unless proved. Suspicion may be strong however cannot take the place of reality, are the settled principleskindly refer Dhakeshwari Cotton Mills 26 ITR 775 (SC) also refer R.B.N.J. Naidu v/s CIT 29 ITR 194 (Nag), Kanpur Steel Co. Ltd. v/s CIT 32 ITR 56 (All).Also refer CIT v/s KulwantRai 291 ITR 36( Del). In CIT v/s Shalimar Buildwell Pvt Ltd 86 CCH 250(All) it has been held that the AO made the addition merely on suspicion which was not desirable in the eye of law.
4. There was no base for making such huge disallowance of Rs.1,20,50,444/- and 3,69,567/-. Further Rs.24,63,780/- on account of certain expenses is already included in the construction expenses of Rs. 8,00,02,935/-which is also ignored by the ld. AO.
5. The action of the ld. AO is showing that the assessee trust has earned profit more than 15% on these construction which is not possible. The ld. AO has nowhere stated that how he has reached on the conclusion that there must be 15% disallowances. The ld.AO nowhere has provided that these expenses in excess and not incurred for the purpose for which it have been incurred.
6. No provisions has been applied by the ld. AO: The ld. AO made the addition on account of sundry creditors but he has not invoked or applied any provisions of law. The ld. AO has not stated under what provision of law he has made addition whether, under business or other sources or 41(1) or u/s 56 or u/s 68 or 69. Thus the addition so made without any provision of is also against the law and liable to be deleted on this ground alone.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
7. Further the submissions on the issue without any show cause and other plea kindly consider our common WS as above as also here. Hence in view of the above facts and circumstances the addition so made may kindly be deleted in full and oblige. GOA-6: Addition/disallowance of Rs.2,18,50,444/- u/s 40(a)(ia) on account of alleged non deduction of TDS.
1. FACTS: The ld. AO has further noted that auditor pointed in audit report that the assessee trust has not deducted the TDS or Short TDS was deducted in some case vide page 13-14 of assessment order, according to that the amount of expenses of Rs.2,18,50,444/- on which no TDS was not deducted or short deducted. The ld. AO has alleged that an opportunity was provided to produce the books of account but failed to explain the reasons of non-deduction of TDS. Hence the ld. AO has made the disallowance of Rs.2,18,50,444/-.
2. In first appeal assessee filed the detailed WS vide page 82 to 85 of CIT(A) order, on this the ld. CIT(A) called the remand report from the ld. AO . The ld. AO has sent his remand report on dt.31.10.2023 vide page 87-88 of the CIT(A) order.
3. The ld. CIT(A) stated that the argument of the appellant that these expenses are not claimed by the appellant in the Income and Expenditure account or profit and loss account and that the section is not applicable in case of trusts. The activity of the appellant are held to be of business nature similar to that of a builder.
4. The books of accounts are not found to be correct and rejected as theassociation was not maintaining the books of accounts properly.
5. In this case, section 11(4A) is found to be applicable as discussed in detail in para 7.8 of this order.
In the present case it is admitted fact that the property on which construction ofhouses is being done is owned by individual persons in their name and the land is not in thename of trust. Hence, the business activity is being undertaken by or on behalf of the trustand hence, section 11(4A) of the Act would apply in the present facts of the case. Further,the appellant has not established that the object of the trust was to act as builder for housingconstruction. Therefore, the business activity as builder is not found to be as per objects ofthe trust. Hence, the section 11(4A) is clearly found to be applicable on the facts of thecase.
7. Since, the appellant is not eligible for benefit of section 11 as discussedearlier, the argument of the appellant that section 40(a)(ia) are not applicable are notfound to be acceptable in the present case. The decisions relied upon by theappellant are therefore not found to be applicable on the facts of the case of theassessee. Hence, the section 40(a)(ia) is found to be applicable on the facts of the case of the association. Hence, the disallowance made by the AO is found to be justified and upheld. SUBMISSIONS: 1. Books has already been rejected no disallowance u/s 40(a)(ia): At the very outset it is submitted that when the ld. CIT(A) himself has rejected the books of accounts then no disallowance can be made u/s 40(a)(ia). As the Hon’ble ITAT in the To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. case of Rakesh Construction Co. V/s ACT Circle -7 Jaipur in dt.23.09.2016 It has been held that “We have heard the rival contentions and perused the material availableon record. In the instant case, the books of accounts were rejected u/s 145(3) of the Act and thereafter the AO has estimated net profit @ 5.05% on contract receipt after deduction of depreciation, interest and remuneration paid to partners as against net profit of 2.39% declared by the assessee. From the perusal of the assessment order, it is noted that there have been discussions between the AO and the assessee in terms of estimating the net profit rate once the books of account have been rejected. As part of that discussion, it is noted that in response to AO’s show-cause as to why 8.5% net profit rate should not be allowed, the ld. AR has submitted that if the net profit at the rate of 8.5% is applied, then the deduction on account of payment of hiring charges for machinery taken on rent amounting to Rs. 22,41,600/- and Rs. 21,60,000/- are also to be allowed. The Ld. AO finally decided to apply net profit of 5.05% which has been agreed upon by the assessee. It is therefore seen that issue of allowance of payments of machinery hire charges has been duly taken into consideration by the AO while estimating the n.p. rate of 5.05%. Further, it is noted that the decision of Hon’ble Kolkatta High Court in the case of Arjun Bhowmick (supra) directly support the case of the assessee. In that case, the view taken by the Kolkotta Bench of the ITAT has been confirmed by the Honble High Court wherein it has held that “once the N.P. rate is estimated, the AO cannot based this disallowance on the same books of accounts for the purpose of disallowance by invoking provisions of section 40(a)(ia) of the Act or general disallowance u/s 37 of the Act. The estimation made by the AO of net profit will take care of every addition related to business income or business receipts and no further disallowance can be made.” It is also noted that Jaipur Bench of ITAT in the case of Banas Sand Toll Tax collection (supra) has taken a similar view in the matter following the decision in case of Hon’ble Andhra Pradesh High Court in the case of Indwell Construction (232 ITR 776). This has also been followed by this Hon’ble ITAT in the case of Power Liners v/s ACIT Circle-3 Jaipur in ITA No. 194/Jp/2017 dt. 08.01.2018 2. Further it is submitted that as the ld. AO has never issued the show cause notice before making the disallowance u/s 40(a)(ia) on account of non deduction of TDS on expenses vide entire facts and orders and documents. He has only stated in order sheet on dt. TDS was not deducted properly. In he has not stated whether provisions of Sec. 40(a)(ia) is to be invoked or not or other provisions of TDS are to be invoked or notAnd these expenses have not been debited in the P&L accounts not. He has not stated on what amount on which case these disallowance are to be made.
3. Further in support we are enclosing herewith the Audited balance sheet and Income & Expenditure Accounts(PB 57-68). As we have already stated as above and in common WS that the assessee has not incurred any expenses nor debited nor claimed any such expenses in the income & expenditure account. Assessee has been expenses incurred on behalf of the members and for the members for their To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. construction work and the receipts were also from the members. The trust has only trustee for their work. If so than how the disallowances can be made. The disallowances if any were to be made in the hands of respective members in their shares. The disallowance under this provisions of the act can only be made when the assessee has claimed the expense and debited to the Income & Expenditure A/c.
4. Further the lower authorities have ignored or overlooked the very vital facts and provision of law which are applicable in the case of assessee or trust. As the assessee is registered u/s 12A and provisions of Sec. 11 to 13 are applicable in the present case. The ld. AO has wrongly invoked the provisions of Sec. 40(a)(ia) and wrongly made the disallowance, because the sec. 40(a)(ia) is not applicable in the present case for the year under consideration. Because explanation-3of Sec. 11(1) which provides as under: Explanation 3.—For the purposes of determining the amount of application under clause (a) or clause (b), the provisions of sub-clause (ia) of clause (a) of section 40 and sub-sections (3) and (3A) of section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head "Profits and gains of business or profession". And the explanation 3 was inserted by the finance Act 2018 w.e.f 01.04.2019. Thus before 01.04.2019 these provisions of Sec. 40(a)(ia) was not applicable in the case of assessee for this year. Hence the ld. AO illegally or invalidly made this huge disallowances. This is clear breach and violation of the provision. Therefore the disallowance is liable to be deleted in full.
5. On this preposition kindly refer: 5.1 In the case of United Educational Society v JCIT (2019 (7) TMI 738 - ITAT DELHI) dt. 28.06.2019 it has been held: Addition u/s 40(a)(ia) - society has failed to deduct tax at source - HELD THAT:- . Chapter-III of the Income Tax Act is regarding incomes which do not found part of the total income. Section 11 which falls in this Chapter is regarding computation of income from property held for charitable/religious purposes and its mode of computation as per the condition prescribed in these sections itself. As against this section 40(a)(ia), 40A(3) and section 43B falls in Chapter IV-D which are applicable for computing profits and gains of business or profession. Thus, the provisions of these sections are applicable in respect of profit and gains of business or profession. This Chapter IV-D is not applicable in respect of charitable trust or institution whose income is to be computed under Chapter-III. Accordingly, no disallowance or adjustment can be made while determining the income of the society under section 11. 5.2. In the case ofITO v. Army Wives Welfare AssociationITA No. 157/LKW/2017 May 4, 2018 (2018) 53 CCH 0013 LucknowTribit has been held that Business Expenditure—Interest, commission, brokerage etc. to a resident — Charitable trust—Applicability of Provision—Assessee was charitable institution/society registered u/s 12A and its income was claimed as exempt u/s 11— Assessee filed return of income showing loss of certain sum—AO noted that assessee To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. had made payment to an event organizer during year for organizing event but assessee had not deducted TDS on same therefore provisions of section 40(a)(ia) were violated—Assessment was completed u/s 143(3) r.w.s 147 where total income was assessed after making addition—CIT(A) deleted disallowance made by AO—Held, ITAT Mumbai in case of Mahatama Gandhi Seva Mandir vs. DCIT(E), Mumbai for A.Y. 2007-08 in held that provisions of section 40(a) were not applicable in case of charitable trust or institution where income and expenditure was computed in terms of section 11—Section 40 was applicable only when deductions u/ss. 30 to 38 were being made in computing income chargeable under head profits and gains of business or profession u/s. 28—Disallowance made u/s. 40(a) would only enhance business profit of assessee whose income was assessable u/s.28 and not otherwise—Hence provisions of section 40(a)(ia) were not applicable in case of charitable trust or institution where income and expenditure was computed in terms of section 11—Order passed by CIT(A) sustained—Revenue’s appeal dismissed. 5.3 In the case of Paediatric Infectious Diseases Academy Vs ITO (ITAT Kolkata) in ITA No. 2355/Kol/2017 dt. 24.05.2018 it has been held “4. I have heard the arguments of both the sides and also perusedthe relevant material on record. It is observed that the assessee in thepresent case is an association of paediatric doctors with the principalobject of general public advancement. It is duly registered under theWest Bengal Society Registration Act, 1961 as well as under section12A of the Income Tax Act, 1961. During the year under consideration, it had published journal from the funds received from sponsorship fees and the journals so published were issued to themembers free of cost. The surplus from the activity of publishingjournal was offered to tax by the assessee under the head ‘incomefrom other sources’ and when the disallowance was sought to bemade by the A.O. u/s 40(a)(ia) for non-deduction of tax at sourcefrom the payment of printing charges, it was claimed by the assesseethat the said provision could be invoked only why computing incomeunder the head ‘profits and gains from business or profession’. TheA.O. however treated the surplus of the assessee from the activity ofpublication of journal as its business income by relying on the provisoto section 2(15) and made a disallowance on account of printingcharges u/s 40(a)(ia). As rightly contended on behalf of the assesseebefore the Ld. CIT(A) as well as before the Tribunal, the activity ofpublication of journal having been financed from the sponsorship feesand the said journals having been issued to the members free of cost,the same cannot be treated as in the nature trade, commerce orbusiness as envisaged in the proviso to section 2(15) and the incomeof the assessee from the said activity cannot be treated as its businessincome. I, therefore, find merit in the contention of the learnedcounsel for the assessee that the A.O. was not justified in reclassifyingthe income of the assessee from the activity of publicationof journals as business income and in making a disallowance u/s40(a)(ia).
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
5. In my opinion, the Ld. CIT(A) is also not justified in holding thatthe fact of the assessee being the charitable organisation is of norelevance for the applicability of section 40(a)(ia). As pointed out bythe learned counsel for the assessee, this view taken by the Ld. CIT(A)is contrary to the decision of the Hon’ble Bombay High Court in thecase of Bombay Stock Exchange vs DDIT 365 ITR 181 wherein it washeld that where the income of the assessee was exempt under section11 and the assessee was not carried on the business, section 40(a)(ia)had no application. Moreover, the insertion of Explanation 3 toSection 11 by the Finance Act, 2018 making inter alia the provisionsof Section 40(a)(ia) applicable in case of charitable or religious trustor institution with effect from 1st April, 2019 further shows thatsection 40(a)(ia) hitherto was not applicable in computing income ofentities registration u/s 12A of the Act. I, therefore, hold that the disallowance made by the A.O. under section 40(a)(ia) and confirmedby the Ld. CIT(A) is not sustainable and deleting the same, I allow thisappeal of the assessee.”
6. Further there is also contradictory approach of the ld. AO because one side he has already made addition on account of sundry creditors, construction expenses, certain expenses and other and other side he has invoked the provisions of sec. 40(a)(ia), which shows the contradictory approach of the ld. AO. And therefore also no addition/ disallowance is liable to be made. Also the contradictory approach of the ld. CIT(A) on the same grounds.
7. Hence in view of the above facts and circumstances the addition so made may kindly be deleted in full and oblige.
Note:-Further alternatively and without prejudice to the above it is submitted that one side the ld. CIT(A) has enhanced the income on account of the alleged business receipts and also confirmed various disallowance of expenses and also rejected the books of account. Hence when he has rejected the books of account then only recourse is to apply the N.P. rate looking to the comparable case of this line of business in place of making various additions and disallowances. The action of the ld. CIT(A) is very injustice with the assessee. Further when from starting we stated that the receipts and expenses both are belongs to the members of the trust not of the trust and at the worst all the additions/ disallowances were liable to made in their respective hands if any. As the lower authorities have not brought on record a single evidence that any inquiry or verifications have been made from the members and consequent thereto they have denied. If all these facts and material are absent then how a huge addition can be made in the hands of the assessee trust. Which is against the principal of natural justice.
Prayer : In view of the above facts, submissions and legal position your honours are requested to delete the entire additions/disallowance and quash the order of the ld. AO and oblige.”
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 7.1 To support the contentions raised in the written submission the ld. AR of the assessee has relied upon the following evidences/records/decisions :-
S.No. Particular Page No. From To 1. Copy of Written Submission dated 05.01.2023 filed 01 35 before ld. CIT(A).
2. Copy of notice dated 28.02.2018 issued u/s 148 of the 36 37 Act along with the reason recorded.
3. Copy of ITR, Computation along with the Audit 38 70 Report and Profit and loss A/c and Balance-sheet.
4. Copy of notice issued u/s 143(2) of the Act. 71 71 5. Copy of notice dated 14.09.2018 issued u/s 142(1) of 72 75 the Act.
6. Copy of reply filed before the ld. Assessing officer. 76 83 7. Copy of Order-sheet of the Assessment proceeding. 84 90 8. Copy of Application to take Additional documents 91 110 along with the ledger of Sundry creditors. 9.. Copy of Application to take Additional Ground of 111 112 appeal.
10. Copy of Remand report dated 09.01.2024 provided by 113 117 the ld. assessing officer vide notice dated 18.01.2024 11. Copy of Reply to the remand report dated 09.01.204 118 120 filed before the ld. CIT(A) on 25.01.2024.
12. Copy of Show-cause notice dated 01.03.2024 issued 121 122 by the ld. CIT(A) u/s 251(2) of the Act.
13. Copy of Reply dated 05.03.2024 in response to the 123 126 Show-cause notice dated 01.03.2024 issued by the ld. CIT(A) u/s 251(2) of the Act. S.No. Particulars Page No. From To 1. Copy of Written Submission 218 285 2. PCIT v. M/s Wholesale Cloth Merchant Association (D.B. 286 287 Income Tax Appeal No. 66/2021) Rajasthan High Court dated 27.07.2023 3. Arvind Kumar Nehra v. ITO (ITA No. 32/JP/2024) (ITAT 288 310 Jaipur Bench A) 4. M/s. Bharti Construction Company v. DCIT (ITA 128 to 311 361 134/ JODH/2023) 5. Shri Siddhanath Mahadev Temple Trust v. CIT(E) 2024 362 365 To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. (11) TMI 1320-ITAT SURAT 6. M/s Kajri Minerals Pvt Ltd v. DCIT (ITA No. 216- 366 397 2018/JODH/2024 dated 21.11.2024 ITAT Jodhpur Bench) 7. Rakesh Construction Co. v. ACIT (ITA No. 274/JPR/2014 398 404 dated 23.09.2016 ITAT Jaipur Bench) 8. Copy of order passed by ld. CIT(A) for the A.Y.2017-18 405 415 dated 15.05.2024
8. On the other hand, the ld. DR to counter the submission of the assessee has filed the following written submission:-
“REVENUE'S WRITTEN SUBMISSIONS I. Validity of Notice u/s 148 and Jurisdiction of AO 1. The reassessment proceedings initiated u/s 148 are valid, legal, and within jurisdiction. The assessee's argument that only Section 153C was applicable is misconceived and contrary to settled law.
2. As per the Supreme Court in Abhisar Buildwell Pvt. Ltd. [2023 (4) TMI 1056], in the absence of incriminating material directly belonging to or pertaining to the assessee, reopening under Section 148 remains a valid course. The Revenue is not remediless.
3. Section 153C applies only when: Incriminating documents or assets seized belong to or pertain to a person other than the searched person; and The AO of the searched person records satisfaction and transmits it t the AO of such other person. In the present case, there is no material on record showing satisfaction 153C or that any such documents seized from Bajaj Group belong to assessee-trust. Hence, invocation of Section 148 is valid and proper.
4. Hon'ble Madras High Court in Saloni Prakash Kumar [2023 (10) TMI 207] held that Section 153C does not preclude issuance of notice u/s 148. The field of operation of Sections 148 and 153C is distinct and not mutually exclusive. II. Competence of AO (Central Circle) to Issue Notice To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
The assessee is wrong in contending that only ITO (Exemption), Kota had jurisdiction. Once the case was centralized post-search, the Central AO lawfully acquired jurisdiction under Section 127, and all connected cases including that of the assessee-trust were validly dealt with by the ACIT, Central Circle, Kota.
6. The assessee has not produced any evidence to show that centralization was illegal or objected to. Hence, jurisdictional challenge is devoid of merit. III. Valid Approval u/s 151 7. Approval u/s 151 was duly obtained before issuing notice u/s 148. No defect in the approval mechanism or hierarchy has been demonstrated by the assessee. The legal presumption under Section 114 of the Evidence Act applies unless rebutted. IV. Reopening Not Restricted to 153C 8. The assertion that only Section 153C can be invoked in cases involving third-party search is incorrect. As held in PCIT v. Meeta Gutgutia [2017] 82 taxmann.com 287 (Del HC), if seized material does not conclusively pertain to the assessee, reassessment under Section 148 is permissible.
9. Further, mere reference to a third-party search does not automatically attract Section 153C, unless the strict conditions of that section are fulfilled, which is not the case here. V. Additions Outside Scope of Reasons - Legally Sustainable 10. As per Explanation 3 to Section 147, the AO is empowered to assess or reassess not only the escaped income referred to in reasons recorded, but also any other income which comes to his notice during the reassessment proceedings.
11. Delhi High Court in Ranbaxy Laboratories Ltd. [336 ITR 136] and Jet Airways [331 ITR 236] are distinguishable on facts. Subsequent decisions have clarified that no fetter exists if the AO makes addition on other issues discovered during reassessment, provided the original belief was genuine. VI. Registration u/s 12A Does Not Bar Reopening 12. Merely because the assessee is registered under Section 12A does not make it immune from reassessment. If there is material to believe that the income has escaped assessment due to misuse of charitable status, then proceedings under Section 147/148 are maintainable. VII. Reason to Believe v. Reason to Suspect To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
14. The AO has formed a reasonable belief based on tangible material and post- inquiry developments. It is well settled that at the stage of reopening. sufficiency of material cannot be questioned. (Raymond Woollen Mills Ltd. v ITO, 236 ITR 34 SC).
15. The AO's belief is not speculative or arbitrary. The post-survey and related party information furnished a prima facie cause to believe that income chargeable to tax had escaped assessment. VIII. No Bar to Additions Even if Original Ground Fails 16. Even if no addition is made on the recorded reason, so long as the reopening is validly initiated, additions discovered during reassessment proceedings can be sustained. Refer: Sun Engineering Works Pvt. Ltd. (1992) 198 ITR 297 (SC) Explanation 3 to Section 147 (w.e.f. 01.04.1989) Prashant S. Joshi v. ITO (2010) 324 ITR 154 (Bom) Conclusion and Prayer In light of the foregoing, the Revenue respectfully submits that: The action u/s 148 was validly initiated and within jurisdiction. The challenge on the basis of Section 153C is factually and legally misconceived. The AO had lawful jurisdiction and the assessee's registration u/s 12A does not preclude scrutiny. The reassessment order is valid and sustainable in law. PRAYER: It is most respectfully prayed that the appeal filed by the assessee be dismissed and the reassessment order passed u/s 147 r.w.s. 143(3) be upheld. I. Justified Enhancement by CIT(A) under Section 251(2) 1. Legitimate use of enhancement powers: The Ld. CIT(A) has rightly exercised powers under Section 251(2) after issuing a detailed show-cause notice and affording opportunity to the assessee. The enhancement flows from material already available on record, including: Balance sheet showing ₹23.00 crore as member advances, To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 18.31 crore of construction expenditure not routed through income and expenditure account.
2. Supreme Court in CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC) authoritatively holds that the appellate authority is vested with plenary powers in disposing of an appeal, and not confined only to the subject matter of appeal.
3. Delhi High Court in CIT v. Sardari Lal & Co. (251 ITR 864) held that the CIT(A) can consider all matters arising in the case and even enhance the assessment if justified. II. Section 145(3) Rightly Invoked - Books Incomplete and Misleading 4. The rejection of books under Section 145(3) was valid because: Substantial construction expenditure was not routed through the income and expenditure account. No proper correlation of receipts and payments was available. The trust acted more as a commercial builder and failed to maintain books that reflect the correct state of affairs.
5. The assessee itself admitted that land and construction belonged to individual members but the entire activity was conducted through the trust. This hybrid treatment where receipts and expenses are parked in the balance sheet but not in I&E-renders the books incomplete and misleading.
6. Genuine business-like activity: The nature of operations (collecting funds from 380 members, constructing houses, maintaining books) is akin to a real estate developer or builder. The trust acted as a contractor or developer, and hence Section 11 exemption rightly denied under Section 11(4A). III. Rs. 4.69 Crore Enhancement is Based on Real Surplus 7. The surplus of ₹4,69,22,650 (₹23 crore advances minus ₹18.31 crore expenses) is real, arising from a business-like activity run through the trust. Even if this surplus is to be later adjusted, at present it constitutes income arising from a systematic activity and is rightly brought to tax.
8. The trust cannot bypass the Income Tax Act merely by claiming it was acting on behalf of members, especially when: Funds were pooled centrally, Construction was centrally executed, To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. No member-wise income or expenditure reconciliation has been provided. IV. Arguments of Assessee Misplaced - No Case of Mere "Bookkeeping"
9. The assessee claims it was merely maintaining books on behalf of members and had no personal ownership. This plea is untenable because: The trust is the executing entity with control over receipts and outlays, The construction was executed in its name and responsibility, Funds were parked in its accounts and interest on those funds wa declared by the trust.
10. The nature and scale of operations, along with the absence of member-wise breakup and execution documents, clearly support the CIT(A)'s view that the trust functioned as a builder and not merely a pass-through conduit. V. Legal Precedents Cited by Assessee Not Applicable 11. The decisions like Dhakeshwari Cotton Mills or Pyrotech Electronics relate to estimation or rejection without basis. In contrast, the present case involves: Concrete figures available from audited balance sheet, Funds routed and expended under control of the assessee-trust, Discrepancies in accounting disclosure and non-application of correct method.
12. Bharti Construction Co. (ITA No. 128-134/Jodh/2024) is not applicable here. The CIT(A) is not invoking a "new provision" arbitrarily but correcting the accounting treatment based on balance sheet entries and assessing the correct income, which falls within powers under Section 251(2). VI. Section 11(4A) Applies - Business Activity Outside Purview of Charitable Object 13. The trust failed to demonstrate that this housing activity was in line with its registered objects under Section 12A.
14. As held by Hon'ble Supreme Court in Assistant CIT v. Thanthi Trust (2001) 247 ITR 785 (SC), any business income must be incidental to the objectives of the trust and separate books of account must be maintained. In the present case: The business activity (construction and land development) is not incidental to trust's object, No separate books have been maintained, Hence exemption u/s 11 is clearly not available.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. VII. Revenue's Prayer In view of the above submissions: The enhancement of ₹4,69,22,650 by the Ld. CIT(A) is based on facts, law, and supported by proper procedure. The invocation of Section 145(3) is justified as books are unreliable and incomplete. The assessee has failed to demonstrate how the said surplus is exempt or not part of its real income. The Revenue respectfully prays for upholding the enhancement and rejection of books by the CIT(A), and dismissal of the assessee's appeal.
1. Misuse of Trust Funds - Section 13(1)(c) Violation The assessee's repeated contention that the alleged misuse of funds by the President "not attributable to the assessee" is factually and legally untenable. The misuse occurred from the official bank account of the trust using bearer cheques issued under the trust's seal and financial control, and was not reported or acted upon by the management for years, indicating connivance or gross negligence. The FIR filed much later cannot undo the actual misuse during the relevant assessment years. Section 13(1)(c) specifically denies exemption where any part of the income is applied directly or indirectly for the benefit of specified persons the President qualifies as such a person. here, The Hon'ble ITAT's prior observation on Section 12AA(3)/(4) is irrelevant here, as this appeal pertains not to cancellation of registration, but to denial of exemption u/s 11/12 due to specific violations. Case law distinguished: The reliance on Kupparaju Brothers, Suda, and Kunhitharuvai Trust is misplaced, as in those cases: There was no proven personal benefit to specified persons. No finding of Section 13(1)(c) violation was upheld.
Non-Filing of Return and Audit Report - Not Mere Procedural Lapse To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. The assessee failed to file ROI and audit report u/s 12A(b) within time for AYs in question. It is only after initiation of proceedings that the documents were furnished. Explanation to Section 11(2) r/w Rule 17(1) makes filing of Form 10 within due date mandatory, as held in Nagpur Hotel Owners Association [247 ITR 201 (SC)]. The plea that procedural lapses can be condoned is not tenable when the assessee enjoys registration but breaches core compliance obligations. The case of Sir Kikabhai Trust cited by the assessee merely states that filing of Form 10B may be directory, but the Hon'ble Supreme Court and other binding precedents (Nagpur Hotel) clearly mandate timely compliance.
3. Misuse Not Reflected in President's Assessment - Irrelevant The assessee argues that since no addition was made in the president's individual assessment, the misuse stands unproved. This argument is flawed. Application of trust income for personal benefit attracts denial of exemption, regardless of whether addition is made in the hands of the recipient. Section 13(2)(g) and 13(2)(h) are breached where such use is documented the FIR itself confirms diversion and misuse.
4. Claim of Exemption via Return Filed u/s 148 - Legally Barred It is settled law that return filed in response to Section 148 is not a substitute for revised return. Refer Goetze (India) Ltd. v. CIT [284 ITR 323 (SC)]. Any fresh claim must be made through a revised return under Section 139(5) not permissible under reassessment. CIT(A) rightly held that reopening proceedings cannot be used to secure exemptions not claimed earlier.
5. Retroactive Application of Section 12A(1)(ba) Assessee misstates that the amendment introduced by Finance Act 2017 is not applicable. The CIT(A)'s finding that it is retrospective is legally debatable, but irrelevant here. Even prior to amendment, timely return filing and audit were essential to verify claim of application under Section 11.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Hence, default in filing audit report and ROI was not merely technical but disabled the Revenue from assessing true charitable application.
6. Misplaced Reliance on Section 139(9) or Natural Justice The assessee had full opportunity during assessment and appeal. Procedural delay in filing Form 10B/Form 10 is not a ground to compel Revenue to issue defect notice.
7. Exemption u/s 11(2) Not Automatic on Prior Filing of Form 10 Filing of Form 10 is assessment year-specific, and continuation without fresh filing is not valid unless facts remain unchanged and accumulation period is explicitly mentioned. Cotton Textiles Export Promotion Council case is distinguishable in that case, requisite declarations were made in time, unlike the present one.
8. Legal Position Summarized: Denial of exemption is justified due to:
1. 1. Violation of Section 13(1)(c) - benefit to President.
2. Failure to file ROI and audit report in time.
3. Improper claim of exemption u/s 148 return. The Revenue respectfully submits that the CIT(A)'s order confirming the AO's findings is valid in law. PRAYER: In view of the above, the Revenue humbly prays that the Hon'ble Bench may be pleased to uphold the denial of exemption under Sections 11(1)(a) and 11(2) and dismiss the assessee's appeal. PRELIMINARY SUBMISSIONS: 1. The assessee has made generalized allegations that no show-cause notices were issued prior to additions. However, the assessment order and order-sheet entries clearly reflect that several notices under section 142(1) and opportunities were provided, and assessee's representatives were heard.
2. The claim that construction was on behalf of members and not routed through the I&E account is an afterthought to escape tax liability and TDS obligations. The entire funding and expenditure trail has passed through the books of the trust. Therefore, the AO rightly treated it as income/expenditure of the assessee trust.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. REBUTTAL TO GOA-3: Addition of ₹16,75,286/- (Sundry Creditors) 1. Onus not discharged: The assessee failed to furnish confirmations, valid vouchers, or bills to establish the identity, creditworthiness, and genuineness of sundry creditors, either during assessment or remand. Mere ledger entries are not conclusive.
2. No bifurcation or party-wise reconciliation was offered. The AO is not expected to conduct roving inquiries where assessee fails to provide primary evidence. The addition is based on audited disclosures and unverified outstanding balances.
3. Absence of bills/vouchers makes these balances unsubstantiated liabilities under Section 68 or Section 41(1) (unexplained liabilities or cessation thereof), and therefore, addition is valid.
4. Legal Precedents cited by assessee (Dhakeshwari Mills, etc.) are distinguishable in those cases, the courts held against arbitrary estimation. Here, the AO has relied on audit report, books, and specific deficiencies. REBUTTAL TO GOA-4 & GOA-5: Disallowance of ₹1,20,00,440/- & 23,69,567/-on Construction & Other Expenses 1. Estimated disallowance of 15% is a well-accepted judicial principle in cases of unverifiable expenditure, especially when bearer cheques, absence of vouchers, and lack of itemized breakup is evident from the audit report.
2. The assessee's plea that the trust merely acted as a conduit for construction on members' behalf is untenable. The entire transaction-land purchase, conversion, construction-was operated through the trust, and hence, it cannot disclaim responsibility.
3. No evidence of sub-allocation to members was submitted. If expenses are unvouched and routed through the trust, the AO has full authority to disallow the same under the doctrine of real income and taxability of actual transactions.
4. The assessee relies heavily on the absence of show cause notice. However, the validity of assessment does not rest solely on the issuance of a separate SCN if proper opportunity and audit disclosures exist (refer Raymond Woollen Mills Ltd. v. ITO [236 ITR 34 (SC)]). REBUTTAL TO GOA-6: Disallowance u/s 40(a)(ia) - ₹2,18,50,444/- (Non-deduction of TDS) 1. Section 40(a)(ia) is fully applicable as the CIT(A) has rightly held that: The trust was engaged in business-like construction activity; The trust acted as a builder and not merely as a custodian; To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Section 11(4A) disqualifies charitable exemption when activities are commercial in nature and not incidental to the objects of trust.
2. The claim that expenses were not routed through P&L is irrelevant. The moment the trust incurs expenditure on behalf of others using its infrastructure, provisions of TDS are triggered (Refer CIT v. Kribhco [349 ITR 618J).
3. The CIT(A)'s finding on invoking Section 11(4A) is factually correct and unchallenged by rebuttal evidence. Once charitable exemption is denied, all regular provisions including TDS and disallowances under Chapter IV-D apply.
4. Legal Precedents cited by the assessee such as Oryx Fisheries and NDTV relate to natural justice and SCNs-those are distinguishable as this case involves documented audit findings and adequate opportunity through assessment/remand stages. PRAYER: In view of the above legal and factual rebuttals: The additions made by the Assessing Officer and sustained by the CIT(A) are legally valid, factually substantiated, and made after due opportunity. The assessee has failed to discharge its burden or rebut the findings with verifiable evidence. Hence, the appeal filed by the assessee deserves to be dismissed in entirety.
1. Disallowance u/s 40(a)(ia) remains valid even if books are rejected The assessee argues that once the books of accounts are rejected and net profit is estimated, no further disallowance can be made under Section 40(a)(ia). This submission is misplaced and contrary to settled legal position. The rejection of books under Section 145(3) only permits estimation of business income; however, it does not preclude the AO from making statutory disallowances under specific provisions, including Section 40(a)(ia), where specific defaults like TDS non-deduction are established based on available records. Hon'ble Gujarat High Court in the case of CIT vs. Ujjal Singh Bhullar [2016] 76 taxmann.com 204 (Guj) held that even after estimation of profit, specific disallowances under section 40(a)(ia) are independent and can still be made if relatable payments are found without TDS.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Further, in the case of M/s. Shiv Construction Co. vs. ITO [ITA No. 463/Ahd/2015], it has been held that estimation of income and disallowance under 40(a)(ia) operate on different footing and both can co-exist. Hence, the assessee's reliance on Jaipur ITAT in Rakesh Construction Co. and Power Liners is distinguishable on facts and cannot override the jurisdictional principles laid down by Hon'ble High Courts.
2. Applicability of Section 40(a)(ia) to Charitable Trusts - Misinterpretation of Explanation 3 to Section 11 The assessee argues that Explanation 3 to Section 11 was introduced w.e.f. 01.04.2019 and hence is not applicable to A.Y. 2017-18. This contention is misleading because: Explanation 3 to Section 11(1) is clarificatory in nature, brought to remove doubts and to codify the principle that Section 40(a)(ia) provisions will apply mutatis mutandis to application of income under Section 11. It does not create a new charge but affirms existing legal interpretation. The Hon'ble Bombay High Court in the case of Bombay Stock Exchange Ltd. vs. DDIT (Exemption) [365 ITR 181] was dealing with a different context, where no application of income u/s 11 was involved. It is settled law that application of income has to be genuine and as per law. If TDS was not deducted, the application cannot be allowed, as such an expense would not be regarded as "applied" for charitable purpose as per principles laid in CIT vs. Programme for Community Organisation [248 ITR 1 (SC)]. Even prior to insertion of Explanation 3, various benches of ITAT have disallowed application of income where TDS was not deducted. See: DCIT vs. Jaipur Vidyut Vitran Nigam Ltd. Charitable Trust (ITA No. 1471/JP/2012). Thus, the disallowance u/s 40(a)(ia) is perfectly valid even prior to 01.04.2019 in the context of application of income.
Claim that No Expense Debited or Claimed by Trust - Contradicted by Facts The assessee's claim that it has not claimed expenses in its income and expenditure account is factually incorrect: As per the assessment records and income & expenditure account, the assessee has shown gross receipts and has incurred expenses purportedly for construction or events.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. The trust has claimed exemption under Sections 11(1)(a) and 11(2) on such income after reducing the same expenses - hence it is directly claiming these as application of income. If the receipts and expenses were truly on behalf of individual members, then the entire receipts and expenses should have been routed through separate books, and not clubbed with trust's accounts. The argument that expenses should be disallowed in the hands of members is inapplicable, as the assessee trust has not demonstrated any bifurcation, ledger trail, or PAN-wise details of such alleged pass-through transactions. Thus, this plea is afterthought and contrary to facts on record.
4. Show Cause Not Issued Before Disallowance - Not Sustainable The assessee alleges that no specific show cause was issued before disallowance u/s 40(a)(ia). However: As per assessment order and order sheet entries, the AO had discussed the issue of TDS non-deduction, and assessee failed to justify the same. Procedural lapse, if any, does not negate statutory disqualification for claiming deduction or application under the Act.
5. Case Laws Relied Upon by Assessee Are Distinguishable In Army Wives Welfare Association (Lucknow ITAT) and Paediatric Infectious Disease Academy (Kolkata ITAT), the trust had shown no business activity, and the nature of payments and purpose of application were not disputed. In the present case, the trust has engaged in construction-like activity, received income from members, and incurred expenses where TDS default is apparent. The CIT(A) rightly held that Explanation 3 now affirms that such disallowance will apply and clarified the position from A.Y. 2019-20, but even earlier, the principle of genuine application of income with lawful compliance applies.
6. Contradictory Approach Argument - Without Substance The AO and CIT(A) are empowered to make multiple disallowances on different grounds - i.e., addition on expenses for non-TDS, and rejection of books are not mutually exclusive. unexplained creditors, disallowance of Each disallowance is independent in law and justified on merits.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Prayer In view of the above facts, settled legal position, and judicial precedents, the Hon'ble Bench is humbly requested to: Uphold the disallowance under Section 40(a)(ia); Reject the misleading arguments of the assessee regarding non-applicability prior to A.Y. 2019-20; Confirm the order of the ld. AO and CIT(A) in this respect.
1. Reassessment Jurisdiction (Section 148 vs. 153C) Saloni Prakash Kumar v. ITO (Madras HC, 2023): Held that Section 153C is merely "enabling" and does not prevent initiation of notice under Section 148 where conditions of Section 153C are not met. Abhisar Buildwell Pvt. Ltd. v. ITO (SC, 2023): Clearly states that lack of incriminating material in a search does not render Section 148 inapplicable Together, these confirm that when the statutory triggers under Section 153C (belonging/relating to the assessee) are absent, the AO may resort to Section 148.
2. Enhancement by CIT(A) under Section 251(2) CIT v. Kanpur Coal Syndicate (SC, 1964-53 ITR 225): Held that CIT(A)'s powers are "coterminous with those of the AO", including power to enhance assessment CIT v. Rai Bahadur Hardutroy Motilal Chamaria (SC): Restated that enhancement is allowable so long as based on matters on record. Five Roses, Kanpur (ITA): Held CIT(A) must consider all issues arising, even those not pressed by assessee, providing full appellate scope under Section 251. These authorities validate the CIT(A)'s power to amplify the taxable income if based on evidence already in the record and after due notice.
3. Rejection of Books under Section 145(3) Kachwala Gems vs. JCIT (SC, 2007-288 ITR 10): Held threats in records (e.g., no vouchers/stock register) justify rejection of books and that AO must make a "fair and honest estimate".
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Bastiram Narayandas v. CIT (Bombay HC, 1994): Affirmed the valid exercise of rejecting books under Section 145. These cases establish that presence of defective or incomplete books legitimizes rejection and estimation by AO.
4. Denial of Exemption under Section 11 due to Section 13(1)(c) Violation DIT v. Bharat Diamond Bourse (SC. 2003 - 259 ITR 280): Held loan to specified person without adequate security disqualifies entire exemption under Section 11. Charanjiv Charitable Trust v. CIT (Delhi HC. 1999) & Agappa Child Centre v. CIT (Kerala HC): Both held that even indirect benefit to a trustee prohibits exemption. These decisively underline that any benefit to a person specified under Section 13(3/2) results in full denial of exemption for the relevant year(s).
5. Disallowance under Section 40(a)(ia) CIT v. Ujjal Singh Bhullar (Guj HC, 2016): Held that rejection of books does not preclude disallowance of non-TDS payments under Section 40(a)(ia). Shiv Construction Co. (ITAT Ahmedabad): Asserted that book rejection and Section 40(a)(ia) disallowance may co-exist. Programme for Community Organisation (SC, 2001-248 ITR 1): Upheld that application of income (exemption) can be invalidated for statutory non- compliance - supporting that added liabilities follow. Finance Act 2018's Explanation 3 to Section 11: Although post-AY 2017-18, this amendment confirms that relevant disallowances-like Section 40(a)(ia) apply equally to trusts, echoing earlier judicial inference that exemption cannot override tax compliance. Conclusion Salient judicial support in each category shows:
1. 1. Section 148 is independently valid when Section 153C conditions fail.
2. CIT(A) may enhance assessments within record-based parameters.
3. Book rejection under Section 145(3) is upheld in presence of defective documentation.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 4. Section 13(1)(c) violation leads to complete denial of charitable exemption. 5. Disallowances under Section 40(a)(ia) stand even where accounts are rejected and post Explanation 3 confirmation affirms the position. Following are respectfully submitted as additional authoritative cases supporting the Revenue's stance on each issue:
1.
Reassessment Jurisdiction - Section 148 vs Section 153C In Saloni Prakash Kumar v. ITO (Madras HC, 2023), the Court clarified that Section 153C is merely "an enabling provision" and does not preclude the Revenue from initiating reassessment under Section 148 if the requisites of Section 153C are not satisfied. A recent ITAT ruling reiterated that it's critical to differentiate between Section 153C does not "belonging to" and "pertaining to" the assessee override Section 148 where the former is inapplicable.
2. Plenary Powers of CIT(A) - Section 251(2) CIT v. Kanpur Coal Syndicate (1964, SC) held that CIT(A)'s powers are co- extensive with those of the Assessing Officer, allowing for confirmation, reduction, or enhancement of assessments. In Sardari Lal & Co. (Delhi HC), the Court confirmed CIT(A) may act on grounds not expressly taken by the AO, emphasizing the wide appellate jurisdiction vested in CIT(A).
3. Rejection of Books - Section 145(3) Kachwala Gems v. JCIT (2007, SC) upheld best-judgment assessment where books were defective emphasizing AO's discretion to reject incomplete accounts under Section 145(3). ITAT and HC precedents (e.g. Diplomat Electricals) reinforce that absence of essential records (like stock registers) authorizes book rejection.
4. Denial of Charitable Exemption due to Section 13(1)(c) In DIT v. Bharat Diamond Bourse (2003, SC), the Supreme Court held that loan to a specified person without adequate security results in denial of Section 11 exemption. Courts in Delhi and Kerala (e.g. Charanjiv Charitable Trust, Agappa Child Centre) unequivocally state that any benefit to a person under Section 13(3) results in total denial of exemption.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. The case of Society for Integration... v. DCIT supports denial where trust assets were misused for personal liabilities.
5. Section 40(a)(ia) Disallowance Amidst Book Rejection In CIT v. Ujjal Singh Bhullar (Guj HC, 2016), the Court held that book rejection does not negate disallowance under Section 40(a)(ia). ITAT Ahmedabad in Shiv Construction Co. upheld co-existence of book rejection and Section 40(a)(ia) disallowance. The Supreme Court in Programme for Community Organisation affirmed that statutory compliance-like TDS-cannot be bypassed, even in exempt entities. The Finance Act 2018's Explanation 3 to Section 11 formally clarified that Section 40(a)(ia) applies to trusts, reinforcing Revenue's position. PRAYER: It is most respectfully prayed that the appeal filed by the assessee be dismissed and the order of Ld. CIT(A) must be upheld.”
We have heard the rival submission and perused the material available on record and thereby we deal with the grounds of appeal raised by the assessee one by one.
10. Ground No. 1: The assessee appellant is registered under the Non- Trading Companies Vide Reg. Certificate No. 215/1976 dt.09.03.1976 is having main objects to develop the cloth business in Kota and for the benefit of the general public or businessmen. The assessee appellant is also registered u/s 12A of the Act vide registration certificate No. 8/1993- 94/2609 dt. 10.08.1994, w.e.f. 01.04.1993. On 30.06.2016 search and survey action was carried out at the premises of ‘Bajaj Group’. Owner of Bajaj Group was ‘Shri Tejinder Pal Singh Sahni’ who was ex-president of the assessee appellant trust and To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. therefore, simultaneously survey was also carried out at the premises of the assessee appellant trust. It was noticed by the ld. AO that ITR & Audit Report has not been filed by the assessee appellant for A.Y. 2014- 2015, 2015-2016 & 2016-2017. Accordingly, after recording reasons and taking appropriate sanction from approving authority, notice dated 28.02.2018 was issued u/s. 148 of the Act to the assessee. In compliance, ITR & Audit Report was filed by the assessee. While assessment proceedings, ld. AO issued a Show Cause Notice dated 06.11.2018 and thereby assessment order was passed on 19.12.2018. When challenged the said order of the assessment ld. CIT(A) has vide its order dated 15.05.2024 confirmed the action of the ld. AO and also the challenge of legality of initiation of proceedings u/s. 148 of the Act. Before us the primary arguments raised by the ld. A/R in support of the Ground no. 1 is that (i) The 148 notice could have been issued by the ld. ITO, Ward Exemption, Kota where the jurisdiction lies but the same has been issued u/s. 148 was issued by ACIT, Central Circle, Kota who has no jurisdiction, (ii) Since, the entire action emanates from search carried out at premises of ‘Bajaj Group’ of Kota, hence, notice u/s. 153C ought to have been issued instead of notice u/s. 148 of the Act because the owner of Bajaj Group was ‘Shri Tejinder Pal Singh Sahni’ who was To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. ex-president of the assessee appellant trust was searched and consequent there upon the premises of the assessee was covered and (iii) the ld. AO has not made additions on the basis of reasons recorded viz-a-viz additions made by him (except minor addition of IT refund interest which was already on record). On the other hand, ld. DR has reiterated that the notice u/s. 148 was validly issued and thereby he stood up the finding recorded in the order of the ld. CIT(A). The bench noted that it is not in dispute that the assessee had not filed the Audit Report and ITR within time permitted as per provision of section 139 of the Act. The premises of the assessee was covered by way of survey by the revenue officials on 30.06.2016, consequent to search carried out at the premises of ‘Bajaj Group’ of Kota. As the all the case of that Bajaj Group were centralized even the case of the assessee was also centralized for limited purpose, i.e., for the Co-ordinate assessment with the cases of SPS Bajaj Group and accordingly an order dated 06.12.2016 was passed u/s. 127 by the competent authority whereby jurisdiction was transferred from ITO, Ward Exemption, Kota to ACIT, Central Circle, Kota. As per the record since the assessee has not filed the ITR u/s. 139 of the Act reasons were recorded on 31.01.2018 and after taking the To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. appropriate sanction on 21.02.2018, a notice u/s. 148 of the Act was issued to the assessee on 28.02.2018. Record reveals that the assessee has not undertaken regular Audit & has not filed the ITR for the year under consideration nor assessment proceedings u/s. 143(3)/144 were carried out earlier. Therefore, ld. AO has after recording appropriate reasons based on the information available has after taking appropriate approval reopened the case of the assessee. It is also evident that the said proceeding were initiated only after the survey action was carried out wherein the ld. AO has valid reason to issue the notice as per provision of section 148 of the Act. The ld. AO has valid reason that in absence of ITR & Audit Report, it cannot be assumed that though the trust is registered u/s. 12AA the benefit of section 11 & 12 can be available to the assessee automatically. Record also reveals that the receipts of the assessee without giving benefit of section 11 & 12 exceeds the maximum amount not chargeable to tax and considering the facts of the case the issue of notice u/s. 148 is appropriate action. So far as the contention of the assessee that notice u/s. 153C of the Act is required to be issued in this regard, that contention is not correct because the facts of the case suggest that since revenue did not relied upon any incriminating material issue of notice u/s. 153C of the Act cannot be given. Even in the search or survey proceeding does not reveal any records of having any To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. incriminating in nature and therefore, there is no cause of initiation of proceeding u/s. 153C of the Act. The action initiated by the department is on the basis of survey carried out at the premises of assessee and on the basis of information available on record with the ld. AO. For survey actions, proceedings u/s. 153C cannot be initiated. Further the argument that no addition was made on the reasons recorded could have been considered if the assessee had filed a regular Return & Audit Report, in absence of the same, the assessee cannot plead that no addition were made on the reasons recorded. Considering that overall facts of the case as discussed herein above we are of the considered view that proceedings u/s. 148 were validly initiated by the ld. AO against the assessee. Thus, we do not see any merits in the Ground No. 1 raised by the assessee and thereby the same is dismissed.
11. Ground No. 2 & 3: 11.1 Vide these two ground the assessee challenges the action of the ld. CIT(A) in making the addition of Rs. 4,69,22,650/- while also rejecting the books of account on the basis of re-casted income and expenditure account without considering the facts and circumstances of the case. The assessee also challenged the action of the ld. CIT(A) in denying the exemption benefits to the assessee appellant trust as per the provisions of To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. section 11 to 13 of the Income-tax Act. First, we will deal with the issue of denial of benefit of charitable trust to the assessee. As is evident from the facts recorded in the assessment order that ld. Assessing Officer denied the benefit of section 11 & 12 by holding that this benefit can only be granted if the Audit Report & ITR was filed by the assessee u/s. 139 of the Act. Whereas in the facts of the present case for the year under consideration the assessee filed the Audit Report & ITR upon issue of notice u/s. 148 of the Act and thereby the benefit was denied to the assessee. While holding so ld. AO noted that there were violation of section 13(2) of the Act in the facts of the case and therefore, the ld. AO also made addition in the income of the assessee appellant. That action of denial of benefit of section 11 & 12 was challenged before the ld. CIT(A). In that proceeding the assessee appellant submitted before the ld. CIT(A) that based on that assessment order and on the basis of proposal sent by the ld. AO to ld. PCIT(Central), who issued a notice to the assessee proposing to revoke the registration granted u/s. 12AA w.r.e.f. 01.04.2013 which culminated into an order dated 22.03.2019 passed u/s. 12AA(3)12AA(4) of the Act. The said order was challenged in appeal by the assessee appellant before the co-ordinate bench of this tribunal wherein the co-ordinate bench and vide order dated 06.01.2021 passed the order setting aside that To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. order of PCIT, Central for the reasons, i.e., (i) the ld. PCIT had no jurisdiction to pass an order u/s 12AA(3) & 12AA(4) of the Act and the same is not sustainable in the eyes of law, (ii) clause (ba) was inserted by Finance Act, 2017 to section 12A(1) of the Act, w.e.f. 01.04.2018, would be prospective in nature and would apply for A.Y. 2018-2019 and onward, thus non-filing of ITR for A.Y. 2014-15 will not be a ground to reject relief u/s. 12AA, more importantly once the same has been filed in compliance to notice u/s. 148 of the Act. The assessee is a trust registered u/s 12AA and is not a businessman and not doing the business, Tax Audit u/s 44AB is not applicable in this case, (iii) due to internal differences between the office bearers a FIR came to be filed for misappropriation of funds by the new management against the previous management. Subsequently, the Police after thorough investigation not finding any case for misappropriation of funds and thereby proposed FR (Final Report) in the instant FIR vide its report dated 31.01.2019. Further, the ld. AO & ld. PCIT, Central without any independent verification alleged misappropriation of funds. The assessment of the assessee appellant trust and its ex-president Shri Tejendra Pal Singh was done by the same Assessing Officer and in the assessment orders passed u/s. 153A of the Act dated 20-21.12.2018 for the A.Y. 2014- 2015 to 2016-2017 in the case of Shri Tejendra Pal Singh, no addition has been proposed for so To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. called misappropriated income and (iv) Registration cannot be cancelled from retrospective effects. All these aspects of the matter have not been appropriately appreciated by ld. CIT(A). 11.2 So far as the merits of the dispute it was submitted the additions have been made by the ld. Assessing Officer without rejecting the books of accounts not only that ld. AO made the addition beyond the show cause notice issued to the assessee. Even the ld. AO has not appreciated the fact that the expenses which was disallowed were not forming part of Income & Expenditure account of the assessee. When that issue of addition on merits challenged before the ld. CIT(A) the assessee preferred an application under Rule 46A for the additional evidence and also filed an application seeking additional grounds of appeal. Based on the additional evidence so filed the ld. CIT(A) called for remand report from the Assessing Officer to which reply was filed by the assessee and realizing the factual position as highlighted by the assessee, the ld. CIT(A) issued an enhancement notice dated 01.03.2024 u/s. 251(2) of the Act to the assessee. A detailed objection to the same was filed by the assessee vide letter dated 05.03.2024. Thereafter vide impugned order dated 15.05.2024 the ld. CIT(A) has rejected the books of accounts of the assessee and consequentially has confirmed the additions made by the AO, it has To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. further enhanced the income of the assessee by treating the receipts received from its members as its income and the amount incurred towards housing project as its expense and has taxed the surplus amount. On that aspect of the matter ld. AR of the assessee submitted that ld. CIT(A) has not even invoked the accounting principles such as % completion method or project completion method before arriving at profit and simpliciter excess amount received from the members has been put to tax. The trust carried out the activity at no-profit, no-loss basis. The construction activity was decided to be carried out through the common pool of the Trust by the members to save costs & time. The ld. AR has highlighted that the ld. CIT(A) surprisingly ignoring the order dated 06.01.2021 passed by the coordinate bench of ITAT qua insertion of clause (ba) inserted by Finance Act, 2017 to section 12A(1) of the Act, w.e.f. 01.04.2018 even though he held that: The assessee trust is required to submit audited accounts as per provisions of section 12 of the I.T. Act, 1961. Though Section 12A(1)(b) provides that the exemption u/s 11 will be available only if the accounts are audited and audit report “furnished along with the return. The ld. AR has highlighted that the ld. CIT(A) surprisingly has held that the co-ordinate bench of ITAT in its order has stated that the assessee has not violated the provisions of section 12AA(3)/12AA(4) of the Act. It was held that cancellation of registration To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. u/s 12A cannot be done. The ld. CIT(A) stated that ITAT has not examined the violation of section 13(1)(c) therefore, denial of exemption u/s 11 was found to be justified by the AO and accordingly he ordered so. The ld. AR has further submitted that against the order dated 06.01.2021 passed by the coordinate bench in assessee’s case, the revenue preferred an appeal before the Hon’ble Rajasthan High Court wherein substantial Question of Laws was admitted by Hon’ble High Court vide order dated 27.07.2023 qua the ITAT’s finding with regards to jurisdiction of ld. PCIT(C) to pass an order u/s. 12AA(3) / 12AA(4) of the Act. Ld. AR thereby also submitted that stay application of the revenue has been dismissed. Thus, the coordinate Bench’s order dated 06.01.2021 qua its finding that clause (ba) was inserted by Finance Act, 2017 to section 12A(1) of the Act, w.e.f. 01.04.2018, would be prospective in nature and would apply for A.Y. 2018-2019, no specific violation to section 13 found by the Assessing Officer and no addition was made in the hands of Shri Tejinder Pal Singh Sahni himself towards the so-called misappropriated income and that registration cannot be cancelled from retrospective effects thereby attained finality. The ld. AR has further highlighted that surprisingly, the appeal of the assessee for A.Y. 2017- 2018 was also decided by CIT(A) vide its order dated 15.05.2024, however, no such enhancement was made by the ld. CIT(A) towards the To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. housing project by treating it to be a commercial venture and neither notice u/s. 251(2) was issued nor books of accounts were rejected, further, benefit of section 11 & 12 was granted and the appeal of the assessee was allowed by holding that since benefit u/s. 11 & 12 is to be granted, hence, provisions of section 40(a)(ia) were in-applicable. The ld. AR further submitted that the ld. CIT(A) failed to appreciate the nature of activity carried out by the Trust and that neither the advances/money received from the members has been claimed as income or receipts of the trust nor the expenses incurred in construction has been claimed as expenditure of the trust because it is not for the Trust but for its members only. The ld. CIT(A) has not held that the income and expenditure both belong to the assessee trust and failed to appreciate that assessee was only keeping the accounts of its members being as a head of family. The ld. AR further submitted that the ld. CIT(A) cannot rectify the mistakes of the AO and therefore, invocation of section 251(2) bad in law. Per contra, ld. DR justified the action of the ld. CIT(A) and has submitted that the exercise of powers u/s. 251(2) were legitimately used and that CIT(A) exercises such power while deciding the appeal being co-terminus & plenary powers as that of AO and thereby he stood by the action of the rejection of the books of account also.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 11.3 We have considered the rival contentions and perused the material placed on record. As is evident from the record that for the reasons mentioned in the assessment order, the PCIT(Central) cancelled the registration granted u/s. 12AA w.r.e.f. 01.04.2013. That order was challenged before the ITAT and the co-ordinate bench in a detailed finding set aside that order cancelling the registration of the trust passed by PCIT(Central). As is evident from the order of the ld. CIT(A) who had taken note of the remand report of the ld. AO while dealing with the appeal of the assessee it was contended that appeal against the order passed by the ITAT has been filed by the revenue before the Hon’ble High Court and the same is pending. However, on what issue the appeal was pending, the ld. CIT(A) has not commented. The ld. DR has also not rebutted the arguments raised by the ld. AR to that extent. Thus, other issues already decided by the coordinate bench other than jurisdiction of the ld. PCIT(Central) to pass order u/s. 12AA(3) / 12AA(4) is required to be followed on being consistent to the finding already given. It is further noted that ld. CIT(A) has himself while passing order in assessee’s case for A.Y. 2017-2018 has neither invoked powers u/s. 251(2) nor rejected the books of accounts u/s. 145(3) and has relied upon ITAT’s order restoring registration granted u/s. 12AA of the Act.
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. To justify such action of the ld. CIT(A), the ld. DR has submitted that each year is independent year. But as serviced the decision of the Apex Court’s decision in case of Parashuram Pottery Works Co. Ltd Vs ITO [1977] 106 ITR 1 wherein the Apex Court held that; “At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity”.
Even in the case of Radha Soami Satsang v. CIT (1991) 11 TMI 2 the Apex Court noted that ; “We are aware of the fact that, strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasonings, in the absence of any material change justifying the Revenue to take a different view of the matter and, if there was no change, it was in support of the assessee-we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12 of the Income-tax Act of 1961.”
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. As is evident from the order of the ld. CIT(A) & the ld. AO, wherein they have primarily justified their action in treating the income of the assessee as business income on the ground that audit report & return of income was not filed u/s. 139, hence, benefit u/s. 12AA cannot be granted. It has also been alleged that there was misappropriation of funds as alleged to have taken place. On the issue ld. CIT(A) has held:- “5.6.1. The clarificatory amendment in statute is to be treated as retrospective: ……………It is an admitted fact that These amendments are clarificatory in nature. Onthe clarificatory amendment, Hon’ble ITAT Kolkata Bench 'B' in the case ofSubhlakshmiVanijya (P.) Ltd. v. Commissioner of Income-tax-I, Kolkata [2015] 60taxmann.com 60 (Kolkata - Trib.) observed as under- “Whether insertion of proviso to section 68 by the Finance Act, 2012 with effectfrom 1-4-2013 empowering the Assessing Officer to examine the genuineness of theshare capital in the case of a company in which public are not substantially interested,is prospective? As noted by Hon’ble ITAT the substantive provision, as originally enacted orlater amended, fails to clarify the intention of the legislature. In such a situation ifsubsequently some amendment is carried out to clarify the real intent, suchamendment has to be considered as retrospective from the date when the earlierprovision was made effective. Such clarificatory or explanatory amendment isdeclaratory. As the later amendment clarifies the real intent and declares the positionas was originally intended, it takes retroactive effect from the date when the originalprovision was made effective. It may also happen that the clarificatory or explanatoryprovision introduced later to depict the real intention of the legislature is notspecifically made retrospective by the statute. Notwithstanding the fact that suchamendment to the substantive provision has been given prospective effect, thejudicial or quasi-judicial authorities, on a challenge made to it, can justifiably holdsuch amendment to be retrospective. Following the above decision, it is held that the provision is retrospective and is applicable on proceedings pending as on 1st April,2018. …………. It is undisputed fact that the funds were used for personal benefit of the president. Hence, the denial of exemption is found to be justified. The misappropriation is not made by simple employee but a president of the assessee. Hence, the denial of exemption u/s 11 is found to be justified. The appellant has relied upon the decision of Hon’ble ITAT against the order of the PCIT(Central) in the case of assessee. Hon’ble ITAT in its order has stated that the assessee has not violated the provisions of section To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 12AA(3)/12AA(4) of the Act. It is held that cancellation of registration u/s 12A cannot be done. However, Hon’ble ITAT has not examined the violation of section 13(1)(c) therefore, denial of exemption u/s 11 is found to be justified by the AO. ………………………. In this case of the appellant also, it is admitted fact in this case that there is a violation of sec. 13(1)(c) of the Act therefore, the Assessing Officer was correct in invoking the provisions of sec. 13(1)(c) of the Act and denying exemption to the assessee u/s 11 of the Act. Further, Section 13 has the title 'Section 11 not to apply in certaincases'. Section 13(1)(c) says that if any part of income or any property of thetrust is used or applied directly or indirectly for the benefit of persons specified in section 13(3), it is not eligible for the benefits of section 11. Now the Finance Act, 2022 has amended section 13(1)(c) to state that the benefit of section 11will not be available only to such part of income referred therein. This amendment is brought w.e.f. 1-04-2023. From this amendment itself it isevident that before this amendment the assessee it is not eligible for the benefits of section 11 if any part of income or any property of the trust is usedor applied directly or indirectly for the benefit of persons specified insection 13(3). This year is relevant to the year before the amendment. Hence the claim of the appellant is not found to be acceptable.”
With regards to the afore-said issues, it is expedient to reiterate the findings of the coordinate bench vide its order dated 06.01.2021 wherein it was held that :- “22. Apart from above, the ld AR has also raised a technical ground that the registration of the assessee Trust cannot be denied or cancelled for the reasons for not filing of income tax return and audit report for the A.Y. 2014- 15 to 2016-17. In this regard, it was submitted that clause (ba) was inserted by Finance Act, 2017 to section 12A(1) of the Act, w.e.f. 01.04.2018 (ba) the person in receipt of the income has furnished the return of income for the previous year in accordance with the provisions of sub-section (4A) of section 139, within the time allowed under that section. The memorandum explaining the relevant provisions of the Finance Bill, 2017 reads as under: "as per the existing provisions of said section, the entities registered under section 12AA are required to file return of income under sub- section (4A) of section 139, if the total income without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount which is not chargeable to income-tax. However, there is no clarity as to whether the said return of income is to be filed within time allowed u/s 139 of the Act or otherwise. In order to provide clarity in this regard, it is proposed to further amend section 12A so as to provide for further condition that the person in receipt of the To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. income chargeable to income- tax shall furnish the return of income within the time allowed under section 139 of the Act. These amendments are clarificatory in nature. These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to assessment year 2018-19 and subsequent years Circular No.02/2018 dated 15.02.2018 containing "Explanatory Notes to the Provisions of the Finance Act, 2017” on insertion of clause (ba) in Sub section (1) of section 12A is quoted as under: “the entities registered under section 12AA are required to file return of income under sub-section (4A) of section 139 of the Income-tax Act, if the total income without giving effect to the provisions of sections 11 and 12 exceeds the maximum amount which is not chargeable to income-tax. Amendment to section 12A of the Income-tax has been made so as to provide for additional condition that the person in receipt of the income chargeable to income-tax shall furnish the return of income within the time allowed under section 139 of the Income-tax Act.” “Thus, for a trust registered u/s 12AA of the Act to avail the benefit of exemption u/s 11 shall inter-alia file its return of income within the time allowed u/s 139 of the Act. Accordingly, orders u/s 143(1)(a) in those cases in which demand has been raised on this issue may please be rectified.” Hence, the Assessing Officer can deny the grant of exemption u/s. 11 of the Act for belatedly filing of return from the assessment year 2018-19 onwards.” The Coordinate Bench of ITAT, Delhi Bench in the case of United Educational Society v. JCIT (2019) 7 TMI 738 (ITAT Delhi) has held as under: Reopening of assessment u/s 147 - exemption u/s 11 denied - assessee has not filed the return u/s 139 (4A) reads with section 12A (b) - assessee society was carrying out educational activities which fell within charitable activities u/s 2(15) , it was granted registration u/s 12A - whether, the filing of audit report alongwith the return filed in response to notice u/s 148 will entitle the assessee for benefit of computation of section 11 ? - HELD THAT:- We are of the view that, whether it is a case of a regular assessment or it is a case of an assessment consequent to issue of notice u/s 148, not only the procedure of return as given in section 139 has to be applied, but also such the income has to be computed on the basis of such return in accordance with the provision of the Act, which of course will be subject to any specific provision in the Act which itself bars a claim or an exemption. Section 148 provides that all the provision of the Act has to apply on such return furnished in response to notice u/s 148. The Ld. CIT DR has referred to the words ‘so far as may be’ to canvass the proposition that all the provision will not apply. This contention of the Ld. DR is not correct in view of our reasoning given above. The meaning of these words ‘so far as may be’ will not mean to exclude provision of section 11 of the Act. Our above view gets further supported from the amendment made by the Finance Act, 2017 whereby a further clause (ba) has been inserted imposing a further condition that such return of income is to be furnished in terms of section 139(4A), within the time allowed under that section. Firstly, this requirement was not there before this amendment; and secondly, this insertion of additional clause clearly shows that such condition was not there in existing To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. clause (b) of section 12A. Had such condition being there in clause (b) itself, then there was no need to insert a further clause (ba) by the Legislature for denying benefit of section 11 & 12 in case return is not filed in time as per provision of section 139 (4A). We are also not in agreement with the contention of the Ld. DR that this amendment is clarificatory in nature. As rightly pointed out by the Ld. Counsel that this amendment has been made by the Finance Act, 2017 effective from A.Y. 2018-19, meaning thereby that this clause has not been made applicable even for the A.Y. 2017-18, the return of which were still to be filed. Thus, the Legislature has thought fit to make this amendment applicable from next assessment years onwards and not even to the current A.Y. 2017-18. While interpreting the amendment made by the Finance Act No. 2 of 2014 whereby section 11 (6) was inserted so as to exclude such assets while computing depreciation in respect of which deduction has been allowed as an application of income u/s 11. In view of the above, we hold that AO was not justified in denying the benefit of the exemption u/s 11 of the Act and we direct the AO to compute the income in accordance with the provision of section 11. Ground no.6 is accordingly allowed.
Another submission of the assessee in order to counter the allegation of the department that the application of funds ‘deemed to have been made for the benefit of specified person’ has been countered by submitting that Due to internal differences between the office bearers a FIR came to be filed for misappropriation of funds by the new management against the previous management. Subsequently, the Police after thorough investigation not finding any case for misappropriation of funds has proposed FR (Final Report) in the instant FIR vide its report dated 31.01.2019. In the instant case, the ld. Assessing Officer & ld. Pr. Commissioner of Income-tax without any independent verification have alleged misappropriation of funds. The assessment of the assessee appellant trust and its ex-president Shri Tejendra Pal Singh was done by the same Assessing Officer and in the assessment orders passed u/s. 153A of the Act dated 20- 21.12.2018 for the A.Y. 2014- 2015 to 2016-2017 in the case of Shri Tejendra Pal Singh, no addition has been proposed for so called misappropriated income. Thus, without carrying out any independent verification and on account of mere suspicion, without any proof the said allegation has been levelled against the assessee appellant Trust. Hon’ble ITAT, Visakhapatnam Bench in the case of ACIT v. Sri Koundinya Educational Society (2019) 1 TMI 266 (ITAT Visakhapatnam) has held as under: Charitable activity - grating exemption u/s 10(23C)(vi) - exemption u/s 11 - CCIT observed that, assessee cannot be said to be existed only for educational purposes and accordingly rejected the contention of the assessee for grating exemption u/s 10(23C)(vi) - Held that:- ITAT Delhi Bench in the case of PuranchandDharmath Trust Vs. ITO, Wd-1, Gurgaon [2018 (5) TMI 630 - ITAT DELHI] held that where the assessee Trust advanced money as a loan to another Trust for which the assessee had not received any interest and the said To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. sum was returned by the Trust, the amount advanced not being investment could not be held to be in violation of section 13(1)(d), 11(5) of the Act. Therefore, respectfully following the view taken by this Tribunal in the assessee’s own case, and as per our findings, we hold that there are no violations and the revenue did not make out any case to substantiate the violations in respect of 13(1)(c), 13(2)(a), 13(2)(g) and 13(2)(h) of the Act. Therefore, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld.”
In view of the above facts and circumstances, we observe that the ld. Pr. CIT has cancelled the registration on the ground that the assessee has not filed its ROI and Audit report. The reason of not filing of the same according to the assessee are that as the assessee is trust and was depended on the accountant therefore the president and the other members were under impression that the act of return filling, Audit report and books are being taken care by them. As there was no default since its registration from 1976 to 2013. The fraud done by the president and books not completed by the accountant was not in the knowledge of the assessee. However, when these facts have come to the notice of the assessee it filed its ROI income and Audit report. Hence for the negligence of the President and accountant, the whole institute must not be punished. However, it is also settled legal position of law that if an assessee has not filed his ROI and filed ROI and not shown any claim or deduction in the ROI filed and claim the same during the course of assessment proceedings even though during the course of appellate proceedings. The Hon’ble courts have allowed the same by stating that if the assessee is entitled for any claim as per law, then the same cannot be denied for the reason that he has not claimed in the ROI. In this regard, the ld AR has relied on the decision in the case of Amina Ismil Rangari vs. ITO (2017) 51 CCH 0595 Mum Trib wherein it has been held that: Capital gains-Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house-Rejection of claim of exemption-Case of assessee was re-opened and notice u/s 148 was issued- Assessee filed her return of income declaring taxable income after claiming exemption u/s 54F against ‘Long-term capital gains’ arising from sale of shares-AO held that share transaction entered into by assessee resulting in long term capital gains were not genuine-Since long-term capital gains were not treated to be genuine, AO also rejected claim of assessee for exemption u/s 54F-CIT(A) held that, rejection of claim of exemption u/s 54F by AO, was in order-Held, section 54F, neither provided as pre-condition requirement of filing of ‘return of income’ by assessee within stipulated time period, nor places any embargo as regards claim of such exemption in case ‘return of income’ filed by assessee involves some delay-When assessee raised claim u/s 54F in ‘return of income’ filed by her in compliance to notice u/s 148, therefore, it was obligatory on part of AO to have deliberated on entitlement of assessee towards claim of exemption u/s 54F-Due to dismissal of claim of exemption in limine by AO, there was no occasion for lower authorities to have deliberated upon satisfaction of requisite conditions contemplated u/s 54F by assessee-As assessee had during course of hearing of appeal submitted complete details as regards his entitlement towards claim of exemption u/s To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 54F, AO was directed to verify genuineness and veracity of claim of assessee- Claim of exemption u/s 54F, as raised by assessee should be allowed- Assessee’s appeal allowed.
We also observe that the assessee had file the ROI and Audit report in response to the notice u/s 148 of the Act also much prior to issuance of show cause notice for cancellation and therefore, at the time of issuance of Show cause notice u/s 12AA(3)/12AA(4) no return or Audit report were pending. Section 147 and section 148 of the Act itself provide opportunity to the assessee for filing the return of income, hence it cannot be said that the Income Tax Return was late filed and the return filed u/s 148 is treated as filed u/s 139 and no show cause notice was given to the assessee when they had come to the notice of the Revenue in July 2016 and the notice has been issued 31 Months i.e. Feb. 2019. Even in last three years i.e form F.Y. 2016-17 to 2018-19 no defaults have been found. The ld. Pr. CIT in its order has stated that the assessee has not filed Tax audit report. In this regard we observe that the assessee is trust registered u/s 12A and not a businessman and not doing the business. In our view, Tax Audit u/s 44AB is not applicable in this case. Hence the allegation of the ld. Pr. CIT is wrong and invalid. The Audit of the trust comes u/s 12A(b) in form 10B.
26. We are also of the view that if there was any ‘procedural default’ for non- filing the ITR and Audit report, then it is nowhere provided that registration shall be cancelled. In this regard, the ld AR has relied on the decision in the case CIT vs. Raj State Seed & Organic Production Certification (2018) 98 CCH 0466 Raj HC wherein it has been held that Charitable Trust-Charitable purposes-Denial of registration- Application for registration sought by assessee society u/s 12A came to be rejected on ground that its activities were not charitable within meaning of s. 2(15) and audit report was not filed in Form 10B- However, ITAT directed CIT(E) to grant registration-Held, Madras High Court in Director of Income Tax (Exemptions) vs. Spic Educational Foundation, observed that non-filing of audit report in Form No. 10B would not defeat claim of assessee for exemption under Ss 11 & 12-Activities of assessee were for advancement of object of general public utility, hence charitable within meaning of s. 2(15)-If an institution was having surplus, then after considering application and accumulation prescribed u/s 11, remaining amount was chargeable to tax-But that in itself does not lead to a conclusion that institution was not meant for charitable purpose-Delay in moving registration application was also explained that it was due to bona fide belief that assessee was a part of government hence, not liable to income tax-Revenue’s appeal dismissed. In the case of Cotton Textiles Export Promotion Council v/s ITO (Exemption) 117 ITD 90 (Mum) it has been held that- notice for accumulation in form No.10 r/w s. 11(2) can be made not only in respect of current assessment year but also in respect of subsequent assessment year and it is not necessary to file form No. 10 for each assessment year. Exemption u/s 11 could not be denied on the ground that form no. 10 was not filed alongwith return for subsequent year. The above case is fully applicable in the present case because the assessee has filed form no. 10 in earlier year and also filing in subsequent year when there is no change facts To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. and circumstance. Hence once the form 10 No. admittedly filed and accepted in earlier years then it should be deemed to be filed in subsequent year till there is no change. In the case of Additional Director of Income Tax (Exemption) v/s Manav Bharati Child Institute & Child Psychology 20 SOT 517(Del) was held that “though filing of Form No. 10 in respect of accumulation of Income of surplus income is mandatory to claim exemption u/s 11 and 12, the same can be filed at any time during the pendency of assessment proceeding and benefit of accumulation of income cannot be denied. Here the case of assessee is on much strong footing because the assessee had filed the same much before show cause notice by the Pr. CIT although after due date of return filling.”
27. We also noticed that the ld. Pr. CIT stated that if a person fails to get audited his books of accounts from a chartered accountant, then he will not able to get benefit of section 11, 12 and 12A. In our view, the provisions are in the nature of ‘procedural compliance’ hence even if that kind of provision is not satisfied even then assessee would not be punished for cancellation of registration u/s 12A of the Act. In this regard, the ld AR has relied on the decision in the case of M/s Sir Kika Bai Prem Chand Trust Vs. ITO Mumbai ITAT wherein it has been held that "Though s. 12A (1)(b) provides that the exemption u/s 11 will be available only if the accounts are audited and audit report “furnished along with the return”, the same is not mandatory but is directory. The audit report in Form 10B affirms the statements contained in the balance sheet and income- expenditure statement and is intended to enable the AO to allow the exemption by relying on the audit report and without having to ask the assessee to furnish supporting documents in support of the claim. Such a procedural provision cannot be construed as mandatory because the defect can be cured at a subsequent stage. It is not the intention of the Legislature that the exemption u/s 11 should be denied merely because the audit report was not filed with the return." "Aggrieved by the order of the Assessing Officer the assessee preferred an appeal before CIT(A). Before CIT(A) the assessee reiterated the stand as taken before the AO. The assessee further contended that in the event of Form No.10B not having been field along with return of income, the return of income ought to have been considered as defective and a notice u/s. 139(9) of the Act ought to have been issued to the assessee to rectify the defect. The asses see further relied on certain judicial pronouncements and submitted that the requirement of filing Form No.1 0B along with return of income is not a mandatory requirement and that the said form even if filed in the course of assessment proceedings should be treated as sufficient compliance. Further reliance was also placed on the decision of Hon’ble Supreme Court in the case of CIT vs. Nagpur Hotel Owners Association, 247 ITR 201, wherein the Hon’ble Supreme Court held that filing of Form No.10 as required under section 11(2) r.w.r. 17 is mandatory and the same can be filed during the course of assessment proceedings. Specific reference was made to decision of the Hon’ble Calcutta High Court in the case of CIT vs. RajbahadurBishwesharlal Motilal Malwasie Trust, 195 ITR 825(Cal) and CIT vs. HardeodasAgarwalla Trust ( 1992) 198 ITR 511 (Cal), wherein it was held To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. that audit report field in Form No.10B in the course of assessment proceedings is sufficient to claim exemption u/s. 11 of the Act." In the case of CIT v/s Hardeodas Agarwalla Trust 198 ITR 511(Cal) it has been held that: It is now well-settled that a procedural provision, ordinarily, should not be construed as mandatory, if the defect in the act done in pursuance of it can be cured by permitting the appropriate rectification to be carried out at a subsequent stage. Procedural laws are devised and enacted for the purpose of advancing justice. It does not mean that the procedural laws should be brushed aside by the Court. It depends on the facts and circumstances of a particular case as to whether a breach in the observance of any procedural law, if not excused or overlooked, would cause real and substantial injustice to the parties. Having regard to the object of s. 12A, it cannot be said that the legislature intended that, even where the trust has got its accounts audited and the certificate obtained in Form No. 10B before the assessment is completed, merely because such report could not be filed in the course of the assessment proceedings, it would deprive a trust of getting the exemption if it is otherwise entitled to it in law. As in this case, the audit report had been obtained before the assessment was completed. The ITO, before completion of the assessment, did not allow any opportunity to the assessee to furnish the audit report. The direction that the audit report should accompany the return is not mandatory as the omission to do it may be rectified by filing the report at a later stage before the assessment is completed. The result of ignoring such return or the audit report will be denial of exemption to the trust although the income has been spent for charitable or religious purposes. This was not intended by the legislators. If an assessee fails to obtain the audit report in the prescribed form before the assessment is completed, he may not, ordinarily, be entitled to get the benefit of exemption. In this case, however, the assessee was not given an opportunity to file audit report in the prescribed form which was available with assessee before assessment was completed. In such a case, appeal being a continuation of the original proceedings, the appellate authority has the power to accept the audit report and direct the Assessing Officer to re-do the assessment 28. We further observe that due to the negligence or cheating of past executive members and bad intention of misappropriation of funds by ex- president, they had not maintained the books of accounts and get their accounts audited by a chartered accountant. But after change of management and involvement of new committee, books of accounts have been prepared and audit has also been done. During the A.Y. from 2014- 15 to 2016-17 heavy amount was withdrawn by the ex-president, out of total amount some entries are debited in account of Sh. Tejendra Pal Singh and some entries are debited in other parties account because vouchers was made in the name of other parties name and later on came to know that these parties have not received amount and when management went to bank to trace out the truth all disputed entries were bearer cheques, but at that time books of accounts have been finalized and audited, so assessee was not able to change the account name. Therefore, FIR was filed by the trust against the ex-president (i.e. Tejendra Pal Singh) for the cheating or fraud. Therefore, we are of the view that because of the misdeeds To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. of ex-president, the whole trust cannot be allowed to suffer, which is otherwise against the principles of natural justice. Further nowhere it has been proved that the Act of the President was in the knowledge of the assessee and the other members were involved knowingly and were part of that fraud. And if any fraud has been done behind the assessee, then the same cannot be treated as done by the assessee. Therefore, keeping in view our above discussion and observation, we are of the view that registration of the assessee could not be cancelled because of non-filing of I.T. return and audit report or on account of misdeeds of ex-president.
We further observe that the ld. Pr.CIT (Central) cancelled such approval from A. Y. 2014-15, though the assessee has already assessed from A.Y. 2014- 15 under section 143(3)/148 of the Act. It is also settled legal position of law that Registration cannot be cancelled from retrospective effects. In this regard, the ld AR has relied on the decision of the Hon'ble Supreme Court in case of State of Rajasthan and others vs Basant Agrotech India Ltd. and other 388 ITR 81(SC) wherein it has been decided that “only a legislation can make a low retrospective and prospectively subject justifiability and acceptability within the constitutional para-meters. The subordinate legislation can be given with retrospective effect if a power in this behalf is contained in the principle Act. In the absence of such conferment of power the Government the delegated authority has no power to issue a notification with retrospective effect. Therefore, in the absence of any provision contained in legislative Act the delegatee cannot make a delegated legislation with retrospective effect. When no power has been conferred by the act on the competent authority to withdraw the approval retrospectively, then the withdraw of the approval u/s 10(23C)(vi) of the Act can only be prospective. Hence such of approval gentled under section 12A from back date are also not according to the law and facts of the case and at the worst after the year of notice it can be done if any.” In the case of Indian Medical Trust V/s PCIT (Central) 2019 (6) TMI 996 (Rajasthan) it has been held that: 28. Indisputably, the order dated 16th Jan, 2018, made by the Commissioner of Income Tax thereby canceling the registration granted under section 12A and withdrawing the approval given under section 10 (23C) (v) & 10 (23A) (via) of the Act of 1961, to the petitioner Trust with retrospective effect from the date of 01st April, 2006, was arbitrary in the face of the provisions of the Act of 1961; and therefore, cannot be deemed to be in consonance with any possible interpretation to be valid or legal. This court is of the opinion that the provisions of section 12AA (3) of the Act of 1961, empowers the Commissioner of Income Tax to initiate steps for cancellation of the registration of a Trust, but, the legislation had no intention of giving the said provision, a retrospective effect. For in such a situation, the same would have been clearly specified in the said provision. Interpretation of the said provision has to be harmonious rather than being prejudicial to the institutions as it would instigate and create a fear of the Income Tax Department. I find support in my opinion from the following cases with reference to the issue of cancellation or withdrawal of registration with retrospective effect:
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. In the case of Oxford Academy for Career Development Vs. Commissioner of Income Tax: (2009) 315 ITR 382, it was thus observed that: 16. In the instant case, the petitioner is a registered society, which was earlier granted registration under Section 12A on 1-4-1999. A survey was conducted at the business premises on 20-9-2002, from where documents were impounded. The registration was cancelled for the assessment years 2000-01 and 2001-02 for the reasons that the surplus was quite heavy. In the impugned order, it was mentioned by the CIT that there was an unusual huge margin and the petitioner was engaged in the commercial activities rather than charitable. As per the balance- sheet, huge amount from the student was charged. The profit margin embodied in the charges taken from the students are so huge and it proves the profit motive of the petitioner. The funds were misused by the president and his family members of the petitioner.
The expression "charitable purpose" is defined in Section 2(15) of the IT Act, 1961. It is of inclusive nature as revealed in the language. Earlier the words "the advancement of any other object of general public utility" in this definition were succeeded by the words "not involving the carrying on of any activity for profit". These words were omitted by the Finance Act, 1983, w.e.f. 1st April, 1984.
In the light of the above discussion and by considering the totality of the facts and circumstances of the case, we hold that the order dt. 9th March, 2004, passed by the CIT (Annex. No. 15 to the writ petition) as per the then law is without power and jurisdiction and therefore, it is liable to be set quashed.
Accordingly, the impugned order dt. 9th March, 2004, passed by opposite party No. 2 withdrawing/rescinding the order granting registration on 1st April, 1999, to the petitioner's society under Section 12A of the Act, is quashed. Consequently, the registration granted to the petitioner's society on 1st April, 1999, stands restored for the assessment years under consideration.”
Thus, keeping In view of about above discussion we are of the opinion that in the present case the ld. Pr. CIT(C) has found or made allegation or objection of diversion or mis appropriations of funds and not filling the Audit report and ITR, if any only in A.Y. 2014-15 to 2016-17 & not in other years either prior years or later years, then the cancellation of Registration u/s 12A cannot be made for other years. Even otherwise we are also of the view that no retrospective cancellation could be made as neither in the Sec. 12AA(3) nor in Sec. 12AA(4) it has been provided or is seen to have explicitly provided to have a retrospective character or intend. Therefore, without a specific mention of the amended provisions to operate retrospectively no cancellation for the past years could be ordered. In this regard, the Hon’ble Madras High Court on the question as to whether the cancellation will operate from a retrospective date has dealt in the case of Auro Lab vs. ITO (2019) 411 ITR 0308 (Mad) 20 wherein it was held as under: the amendment to Section 12AA(3) is prospective and not retrospective in character. The courts reasoned that even when the parliament had plenary powers to enact retrospective legislation in matters of taxation, the amended section is not seen to have explicitly provided to have a retrospective To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. character or intend. Therefore, without a specific mention of the amended provisions to operate retrospectively, the cancellation cannot operate from a past date.
On the third question of the effective date of operation of the cancellation order, it was held that the cancellation will take effect only from the date of the order/notice of cancellation of registration. Since the act of cancellation of registration has serious civil consequences and the amended provision is held to have only a prospective effect the effect of cancellation, in the event the pending Tax Appeal is decided in favour of the Revenue, will operate only from the date of the cancellation order, that is 30.12.2010. In other words, the exemption cannot be denied to the petitioner for and up to the Assessment Year 2010-11 on the sole ground of cancellation of the certificate of registration. Also refer Indian Medical Trust v/s Pr. CIT &ors 182 DTR 252(Raj.) is held that cancellation of registration with retrospective effect is invalid.” Therefore, in view of the decision of Hon’ble High Court, we are also of the view that cancellation of registration with retrospective effect is invalid in the present case.
The issue has also been dealt by the co-ordinate bench of ITAT, Delhi in the case of United Educational Society v. JCIT (2019) 7 TMI 738 (ITAT Delhi) as regards to amendment made by Finance Act, 2017 and that amendment is whether prospective or retrospective. The relevant finding reads as under:- “Reopening of assessment u/s 147 - exemption u/s 11 denied- assessee has not filed the return u/s 139 (4A) reads with section 12A (b) - assessee society was carrying out educational activities which fell within charitable activities u/s 2(15) , it was granted registration u/s 12A - whether, the filing of audit report alongwith the return filed in response to notice u/s 148 will entitle the assessee for benefit of computation of section 11 ? - HELD THAT:- We are of the view that, whether it is a case of a regular assessment or it is a case of an assessment consequent to issue of notice u/s 148, not only the procedure of return as given in section 139 has to be applied, but also such the income has to be computed on the basis of such return in accordance with the provision of the Act, which of course will be subject to any specific provision in the Act which itself bars a claim or an exemption. Section 148 provides that all the provision of the Act has to apply on such return furnished in response to notice u/s 148. The Ld. CIT DR has referred to the words ‘so far as may be’ to canvass the proposition that all the provision will not apply. This contention of the Ld. DR is not correct in view of our To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. reasoning given above. The meaning of these words ‘so far as may be’ will not mean to exclude provision of section 11 of the Act. Our above view gets further supported from the amendment made by the Finance Act, 2017 whereby a further clause (ba) has been inserted imposing a further condition that such return of income is to be furnished in terms of section 139(4A), within the time allowed under that section. Firstly, this requirement was not there before this amendment; and secondly, this insertion of additional clause clearly shows that such condition was not there in existing clause (b) of section 12A. Had such condition being there in clause (b) itself, then there was no need to insert a further clause (ba) by the Legislature for denying benefit of section 11 & 12 in case return is not filed in time as per provision of section 139 (4A). We are also not in agreement with the contention of the Ld. DR that this amendment is clarificatory in nature. As rightly pointed out by the Ld. Counsel that this amendment has been made by the Finance Act, 2017 effective from A.Y. 2018-19, meaning thereby that this clause has not been made applicable even for the A.Y. 2017-18, the return of which were still to be filed. Thus, the Legislature has thought fit to make this amendment applicable from next assessment years onwards and not even to the current A.Y. 2017-18. While interpreting the amendment made by the Finance Act No. 2 of 2014 whereby section 11 (6) was inserted so as to exclude such assets while computing depreciation in respect of which deduction has been allowed as an application of income u/s 11. In view of the above, we hold that AO was not justified in denying the benefit of the exemption u/s 11 of the Act and we direct the AO to compute the income in accordance with the provision of section 11. Ground no.6 is accordingly allowed. “
Now so far as to the issue of invocation of section 145(3) by the ld. CIT(A), it would be appropriate to refer to the finding of the co-ordinate bench of Jodhpur in the case of Bharti Construction Co. in to 134/Jodh/2024 order dated 29.10.2024 wherein the co-ordinate bench has held that ; “The Bench feels that notice u/s 251(2) can be given by the Ld. CIT(A) only to reduce, enhance or annulment of assessment but for not invoking the new provision which has not been invoked by the AO. In our view the Ld. CIT(A) cannot invoke new provisions of the Act in the appellate proceedings and he may enhance the assessment, while he has not enhanced the assessment but he rectified the mistake of the AO after making the submissions of the assessee before him. The CIT(A) has no power to rectify the mistake of the AO, if any by invoking the new provisions of Act, Further the AO has already made To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. disallowance on account of material expenses @ 15% hence no further disallowance is required to be made and this is tantamount of double disallowances which is not permitted as per law and this is the rough estimated document and there is no proof that the assessee has really paid such cash amount. The AO has not made any further enquires in this regard and only on a rough estimate papers, no addition can be made.
The issue is also decided by our Rajasthan High Court in the case of CIT v. Associated Garments Makers (1992) 197 ITR 350 RAJ HC, the Court observed that: 7. ……………..A perusal of ss. 246 to 251 makes it clear that any questions arising out of the assessment orders in an appeal by the assessee can be possible and wide powers are given to the appellate authority, but these powers are circumscribed to the assessment order in the matters arising thereof or a matter arising out of the proceedings, even the appellate authority can suo motu consider the questions arising thereof but there is no provision to go beyond the matter arising out of the proceedings before the assessing authority, more particularly for which separate provisions are made in the Act. The Tribunal had elaborately discussed the provisions of the Act and the case law on the subject and has rightly come to the conclusion that new sources not mentioned in the return or considered by the ITO are beyond the scope of powers of the AAC. The case relied on by the Learned Counsel for the petitioner that power of setting aside the assessment order remanding the case for reconsideration of the whole matter including the evasion by the assessee, is not applicable in the facts of the present case because the matter arising in that case was one which arose out of the proceedings before the ITO. The question was not about new and fresh material for the purposes of enhancement. On the contrary, the case is clearly covered by the decisions of the Supreme Court, CIT vs. Shapoorji Pallonji Mistry (supra) wherein it has been held that, "In an appeal filed by the assessee the AAC has no power to enhance the assessment by discovering new sources of income not mentioned in the return of the assessee or considered by the ITO in the order appealed against", and the case reported in CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (supra) wherein it has been held that, "It is not, therefore, open to the AAC to travel outside the record, i.e., the return made by the assessee or the assessment order of the ITO, with a view to finding out new sources of income and the power of enhancement under s. 31(3) is restricted to the sources of income which have been the subject-matter of consideration by the ITO from the point of view of taxability. Their Lordships considered the meaning of the word 'consideration' and held that, "Consideration' does not mean, incidental' or 'collateral' examination of any matter by the ITO in the process of assessment, therefore, there must be something in the assessment order to show that ITO applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non- taxability and not to any incidental connection". In the instant case, the AAC To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. has, after issuing notice, himself considered the new material and has gone into new sources of income the consideration of which he had no jurisdiction.
In fact, we fail to understand as to why when the order was brought to the notice of the Commissioner himself proceeded into direction when he had ample powers under other provisions of this Act. There are various other provisions under the IT Act which can be evolved in cases of escaped income or such situation where the new sources had been left to be considered, but that would not give powers to the AAC to transgress his jurisdiction. We, therefore, find no case for reference and the Reference Application is rejected."
Similar issue also deal in the case of Trimurty Buildcon Pvt. Ltd. v. ITO(2021) (4)TMI 450 it was held by the coordinate that : 8. From perusal of the record, we observe that the ld. CIT(A) had enhanced the income of the assessee by disallowing interest expenditure, which was not the subject matter of assessment. Whenever, the question of taxability of income from a new source is concerned, which had not been considered by AO, the right manner to tax such new source is by invoking Section 147/ 148 or Section 263 of the Act. In view of such specific provisions, it is inconceivable that a similar power is available to CIT(A) u/s 251 of the Act. In this regard, we draw strength from the decision of Coordinate Bench of this Tribunal in the case of Jagdish Narayan Sharma, ITA 751/JP/2015, wherein the Coordinate Bench has held as under “We have also look at the recent decisions on the subject and find that the Hon'ble High Court of Kerala in case of Commissioner of Income Tax, Thrissur v. B.P. Sherafudin reported in [2017] 87 taxmann.com 330 (Kerala) had an occasion to examine a similar issue as to whether the Appellate Authority has the power under section 251 of the Act to add income not at all considered by the AO? Referring to the catena of decisions including the decisions of Hon'ble Supreme Court in case of CIT vs Shapoorji Pallonji Mistry (supra) and in case of CIT v. Rai Bahadur Hardutory Motilal Chamaria [1967] 66 ITR 443 (SC), the decision of the Full Bench of the Hon'ble Delhi High Court in case of CIT v. Sardari Lal & Co. [2001] 251 ITR 864 (Delhi) (FB), besides various other decisions, it held that the powers under section 251 are, indeed, very wide; but, wide as they are, they do not go to the extent of displacing powers under, say, sections 147, 148 and 263. We also draw strength from the decision in the case of BP Sherafudin in [2017] 87 taxmann.com 330, wherein the Hon’ble Kerala High Court has held as under “Undeniably, the precedential position on the powers of the first appellate authority under section 251 undulates. There are seeming contradictions. But, as held by Union Tyres, and as affirmed on reference by Sardari Lal, there is a consistent judicial assertion that the powers under section 251 are, indeed, very wide; but, wide as they are, they do not go to the extent of displacing powers under, say, sections 147, 148 and 263.”
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. 9. It is a trite law that the ld. CIT(A) cannot touch upon issues which do not arise from the order of assessment and was outside the scope of order of assessment. In this regard, we draw strength from the following decisions of different Coordinate Benches of the Tribunal. (i) Bikram Singh in [2017] 82 taxmann.com 230 (Del-Trib) (ii) Sundaram Medical Foundation in (2016) 45 ITR (Trib) 500 (Chennai– Trib)
As is evident from the record that ld. CIT(A) has neither applied % completion method nor project completion method before arriving at profit and simpliciter considered the excess amount collected from the members viz. spent at the year-end has been put to tax. The same is without any basis to tax that income. Powers u/s. 251(2) read with rejection of books u/s. 145(3) has wrongly been exercised by the ld. CIT(A), which primary aimed to cover up the lapses on the part of the in the assessment proceeding. Further, addition has been made in the hands of the assessee, without considering the detailed order and reasoning given by the order dated 06.01.2021 passed in assessee’s own case. Self- contradictory stand has been adopted by ld. CIT(A) in A.Y. 2017-2018. Consequently, the addition of Rs. 4,69,22,650/- made by the ld. CIT(A), exercising its powers u/s. 251(2) of the Act is bad in law and the same is set aside and the same is deleted. Thus, the Ground No. 2 and Ground No. 3 is decided in favour of the assessee. Ground No. 4:
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota.
12. Vide Ground no. 4 the assessee appellant challenged the addition of Rs. 33,50,772/- to the income of the assessee appellant trust while disallowing the benefit of exemption under section 11(2) and 11(1)(a) of the Act as claimed by the assessee appellant trust. As is evident from the record that the assessee has shown gross receipts of Rs. 5075850/- and against which expenses of Rs. 17,30,356/- was claimed as application of income and remaining amount was claimed as exempt u/s. 11(2) and 11(1)(a) of the Act. The ld. AO has held that the legal requirements, i.e., filing ITR and getting books of accounts audited have not complied by the Trust and therefore, the balance of Rs. 33,50,772/- has been held to be taxable at the maximum marginal rate. In an appeal before the ld. CIT(A) he confirmed the action of the AO. The ld. AR has relied upon its arguments that hereinabove that the grounds raised
by the ld. AO has been decided by the coordinate bench while deciding cancellation of registration u/s. 12AA(3) / 12AA(4). The ld. DR has reiterated its submission as noted hereinabove. On this issue we have considered the rival contentions, for the reasons recorded by the coordinate bench vide its order dated 06.01.2021 it is held that amendment made to Finance Act, 2017 was prospective in nature. Further, the ground with regards to misappropriation of fund has also been dealt with by the coordinate bench in its order. The said order To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. has come to a finality as no Substantial Question of Law has been admitted against the afore-said finding. In compliance with the notice issued u/s. 148 of the Act, ITR & Audit Report has been filed by the assessee. Proceedings u/s. 148 are akin to proceedings u/s. 139 of the Act. Hence, benefit u/s. 11 & 12 is to be granted to the assessee. Consequently, the addition of Rs. 3350772/- made by the ld. AO at maximum marginal rate is deleted and is set aside. Thus the Ground No. 4 is decided in favour of the assessee. Ground No. 5, 6, 7 & 8:
13. Vide Ground no. 5 the assessee challenges the addition of Rs 16,75,286/- on account of unverifiable creditors. Ground no. 6 deals with the disallowance of Rs. 1,20,00,440/- being 15% of Rs 8,00,02,935/- on account of construction expenses and adding it in total income of the assessee appellant without considering the fact that it was never claimed by the assessee appellant. Ground no. 7 deals with the disallowance of Rs 3,69,567/- out of total expenses of Rs 24,63,780/- without considering the facts that it was not claimed by the assessee appellant. Whereas ground no. 8 deals with the disallowance of Rs 2,18,50,444/- u/s 40(a)(ia) of the Act on account of non-deduction of TDS. On this issue ld. AR of the assessee submitted that ld. AO has disallowed (a) sundry creditors: Rs. 1675286/-, (b) construction expenses:
To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. Rs. 1,20,00,440/-, (c) expenses without vouchers: Rs. 3,69,567/-, (d) non- deduction of TDS: Rs. 2,18,50,440/-. When the matter challenged before the ld. CIT(A) he has confirmed those additions. Before us on these issues ld. AR of the assessee submitted that the findings arrived at by the Tribunal in Ground No. 2 - 4 would also have a bearing on these grounds. In support he has submitted that the AO issued SCN dated 06.11.2018 wherein there was no proposal to make the afore- said addition and subsequently the aforesaid additions were made and that action of the ld. AO is against the principles of natural justice. He submitted that principles of natural justice requires that before making any addition the assessee should be put to notice. He further submitted that it is settled law that the department cannot travel beyond the SCN. He further submitted that disallowances were made by the AO without rejecting the books of accounts. He further submitted that both the lower authorities failed to appreciate that the aforesaid disallowances were made with regards to construction activities which is not even the asset of the Trust. The CIT(A) has also justified the action on the ground that he is treating the activity as part of turnover of the assessee, whereas on the contrary the owners of land and construction activity carried out thereon remains to be the members. The trust carried out the activity at no-profit, To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. no-loss basis. Whatever advance was received from the members as well as whatever was incurred was shown in the balance sheet. The construction activity was decided to be carried out through the common pool of the Trust by the members to save costs & time. Since it is neither income nor expense of the Trust, no disallowance can take place in the hands of the assessee. The justification given by the CIT(A) to treat this as a business activity is completely contrary to his own order dated 15.05.2024 passed for AY 2017-2018 wherein he has not treated the activity carried out by the assessee to be a business activity. It is also submitted that no specific defect has been pointed out. Furthermore, which statutory provision has been violated or under which head the amount is being put to tax has not been spelt out in the assessment order. He has further submitted that the CIT(A) was not justified in ignoring the binding order passed by the this co-ordinate bench of Jaipur ITAT in assessee’s own case, which had in fact restored the registration u/s. 12AA of the Act. He has further submitted that surprisingly entire sundry creditors as at 31.03.2014 of Rs. 16,75,286/- has been held to be bogus. During the first appellate proceedings an application u/r 46A was filed to take additional documents on record and during which supporting evidence were filed. The CIT(A) has held that confirmation has not been filed, however, the AR submitted at first hand it was never desired from To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. the assessee. He has submitted that since no consequential expenses were debited in Income & Expenses A/c., hence, no question of disallowance is there. He has further submitted that 15% of construction expenses amounting to Rs. 1,20,00,440/- has been disallowed. He submitted that amount was incurred by bearer cheques. The CIT(A) has justified on the ground that he has rejected the books of accounts, which was not done by the AO. The CIT(A) has confirmed the disallowance by treating the activity carried out by the assessee as part of its business. He has submitted that since no consequential expenses were debited in Income & Expenses A/c., hence, there is no question of disallowance arise. He further submitted at one end sundry creditors have been disallowed and at the same time 15% of the construction expenses were also disallowed. This reflects double addition and non-application of mind while framing the assessment. He has further submitted that disallowance towards non- deduction of expenses could have been made only in case of business assessee. Ld. CIT(A) has justified that action on the ground that the assessee is carrying out business activity like a builder. The ld. AR has further submitted at one end; books of accounts have been rejected and on the other hand disallowance towards TDS has been made. This is contrary to settled law and reflects non-application of mind. He has submitted that since no consequential expenses were debited in Income & Expenses To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. A/c., hence, no question of disallowance is there. Section 40(a)(ia) is not applicable in the instant case for the years under consideration and further submitted that Explanation 3 inserted by Finance Act, 2018 to section 11(1) would be prospective in nature. The CIT(A) has himself deleted the addition made by the AO on account of disallowance of expenses on account of non-deduction of TDS in AY 2017-2018 by relying upon the order dated 06.01.2021 passed by the ITAT. Thus, the stand of the ld. CIT(A) is evidently contradictory. He further submitted at one end sundry creditors have been disallowed, thereafter 15% of the construction expenses has been disallowed and thereafter amount has been disallowed towards non-deduction of TDS. This reflects multiple additions and non- application of mind. The ld. DR has reiterated its submission as noted and as per written submissions. The ld. DR has justified the additions on the ground that the assessee’s cannot take advantage of procedural lapses. The ld. DR has submitted that apart from SCN the assessee was also asked queries during the course of assessment proceedings. The ld. DR has submitted that entire argument of construction activity being carried out by the assessee is an afterthought. The ld. DR has submitted that there was gross con- compliance on the part of the assessee and it deserves no relief. The ld. DR has submitted that Explanation 3 inserted by Finance Act, 2018 to To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. section 11(1) would be clarificatory in nature and hence would also apply for this year under consideration. With regards to contradictory stand adopted by the CIT(A) for A.Y. 2017-2018, the ld. DR has submitted that each year is independent year and may be due to tax effect, no appeal could be filed against the same, however, she is not in a position to make any statement with regards to same. We have considered the rival contentions and note that additions were made by the AO which has been confirmed by the ld. CIT(A) for the reasons mentioned hereinabove. The basic issue which first needs to be decided is whether the construction expenses is part of the business activity carried out by the trust. It is submitted that the pattas over the land belongs to the members, the members of the trust thought it expedient to carry out the construction activity of housing through the common pool of the trust at no profit, no loss basis to save costs and carry out work expediently. Even prior to A.Y. 2014-2015 the entries were made in similar nature in the books of accounts. Even subsequently the entries were made in similar nature in the books of accounts. There is no change in the presentation. Coordinate Bench has restored the registration granted u/s. 12AA w.r.e.f. 01.04.2013 vide order dated 06.01.2021. The ld. CIT(A) has held that the nature of activity for AY 2014-2015 to 2016- 2017 is of business nature, however, for AY 2017-2018 he has held the To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. assessee to carry out charitable activities. A close perusal of additions made by the AO reflects the same is beyond the show cause notice and further no reference to statutory provision under which the addition/disallowance is to be made is silent. Explanatory notes to Finance Act, 2018 also explicitly holds that these amendments take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent years. The reasons assigned while deciding Ground No. 2, 3 & 4 hereinabove will also apply in these grounds, which for the sake of repetition are not being repeated. Considering the overall discussion so recorded herein above we see no reason to sustained those addition made by the ld. AO and sustained by the ld. CIT(A) for the reasons and discussion made herein above and thereby the same are directed to be deleted. Hence, disallowance made by the AO & sustained by the ld. CIT(A) is deleted and is set aside. Thus, Ground No. 5, 6, 7 & 8 is decided in favour of the assessee. Ground no. 9 being general does not require our finding. In the result, the appeal of the assessee is allowed in ITA No. 961/JPR/2024.
The bench noted that the issues raised by the assessee in & 963/JPR/2024 for assessment year 2015-16 & 2016-17 are similar to the issues as we have decided in ITA no. 961/JPR/2024. Therefore, it is To 963/JPR/2024 Whole Sale Cloth Merchant Association, Kota. not imperative to repeat all the facts, arguments and findings in that appeal of the assessee in & 963/JPR/2024 for assessment year 2015-16 & 2016-17. Thus, we feel that the decision taken by the bench on the issue in ITA No. 961/JPR/2024 for A. Y. 2014-15 shall apply mutatis mutandis to the appeal of the assessee in ITA no. 962 & 963/JPR/2024 for assessment year 2015-16 & 2016-17.
In the result, the appeals of the assessee in & 963/JPR/2024 for assessment year 2015-16 & 2016-17 are also allowed.
Order pronounced in the open Court on 24/09/2025.