DY. COMMISSIONER OF INCOME TAX- CENTRAL-CIRCLE-2(1), NAGPUR, NAGPUR vs. JAYMAHAKALI SHIKSHAN SANSTHA, WARDHA

Any other ground that may be raised during hearing.‖

Facts in Brief:– The assessee respondent is an Educational Trust registered under section 12A of the Income Tax Act, 1961 ("the Act") vide F– 713 dated 16/10/1965. During the financial year 2019–20, a survey under section 133A of the Act was conducted in Vedsiddha Products Pvt Ltd and also a search action was conducted under section 132 of the Act in the premises of its Director, Shri Prabhu Das Vyas. Both the above parties are third parties not directly or indirectly connected to the assesse trust. During the course of survey proceedings which was conducted in the premises of M/s Vedsiddha Procducts Pvt. Ltd, it was found that the assessee trust has paid an advance for purchase of land to the sister concern of M/s. Vedsiddha Products P. Ltd. The assessee trust, for the year under consideration, filed its return of income on 30/12/2017, claiming exemption under section 12A of the Income Tax Act,

Insofar as ground no.1, is concerned, during the course of assessment proceedings, it was observed that the assessee trust has provided an residential accommodation to the trustee of the trust and has recovered an annual rent of ` 1,20,000, from the trustee of the trust Shri Sachin Agnihotri. The Assessing Officer was of the opinion that fair rent of the residential accommodation was ` 3,00,000 per annum and accordingly, the assessee trust has charged rent on reduced rate to the extent of ` 1,80,000 per annum. However, the Assessing Officer not only disallowed the difference amount of ` 1,80,000, but also denied the assessee trust complete exemption claimed under the provisions of section 11 of the Act and accordingly brought to tax the entire surplus of trust of ` 5,07,32,612, as income taxable as per the provisions of section 164(2) of the Act i.e., in the status of AOP (Association of Persons) at the maximum marginal rate. The relevant findings of the Assessing Officer vide Para–3.9 is hereby extracted below for ready reference:–

Before us, the learned Departmental Representative vehemently opposed the part relief granted by the learned CIT(A).

On the other hand, the learned Counsel for the assessee trust, assailing the impugned order passed by the learned CIT(A), reiterated the submissions made before the authorities below. He further submitted that the Assessing Officer during, assessment proceedings, denied the assessee trust benefit of exemption and assessed the income of the trust as an AOP and brought to tax the total surplus of the trust at the maximum marginal rate as per section 164(2) of the statute. He further submitted that the sole reason on which the exemption was disallowed is the underlying observation of the Assessing Officer that the assessee trust has provided residential accommodation to the 5 Jaymahakali Shikshan Sanstha A.Y. 2017–18, 2018–19 & 2019–20 Managing Trustees in the building premises owned by the assessee trust and the rent charged from the trustees are below the fair market value. He submitted that according to the Assessing Officer, the fair rental should have been ` 3,00,000 per annum and the assessee trust has charged only ` 1,20,000, per annum from the trustee. The Assessing Officer not only disallowed difference amount of ` 1,80,000, but also denied the assessee trust benefit of exemption as per the provisions of section 11 of the Act and brought to tax the entire surplus of the trust of ` 5,07,32,612, as income taxable under section 164(2) of the Act which have been recorded by the Assessing Officer in his assessment order vide Para–3.9. The learned Counsel further relied on the order of the CIT(A) and prayed before the Bench to upheld the order of the first appellate authority.

We have heard the rival arguments, perused the material available on record and gone through the orders of the authorities below. We find that the Joint Secretary of the assessee trust was residing in the Bungalow belonging to the assessee trust by paying monthly rent of ` 10,000. The Assessing Officer was of the opinion that it ought to have been ` 25,000 per month. According to the Assessing Officer, the fair market value was ` 25,000. We find that the Joint Secretary who is working for the assessee trust, has been provided a residential accommodation by charging a nominal rent. The Assessing Officer added the difference amount of ` 15,000 per month i.e., ` 1,80,000 per annum and the same was confirmed by the learned CIT(A). The assessee trust has not challenged an addition of ` 1,80,000. Therefore, the issue of short charging of rent from the trustee is not in dispute before us.

Now, on the other hand, the ground no.2, raised by the Revenue relates to the disallowance of exemption should have been made in light of provisions of section 13(1)(c)(ii) read with section 13(3) of the Act. The relevant provisions of section 13 of the Act are reproduced below.

Provisions of section 11 of the Act provides that the income derived from the property held for charitable or religious purposes, subject to the 8 Jaymahakali Shikshan Sanstha A.Y. 2017–18, 2018–19 & 2019–20 fulfillment of the conditions of section 11 will be exempt from taxation. However, the statute while providing exemption has placed certain embargos under section 13 for claiming exemption. Provisions of section 13 further provide that exemption under section 11 will not be available in cases of violation of the provisions of section 13 of the statute. There are a total of 9 clauses in section 13. The relevant clause for the present appeal is section 13(1) and Section 13(2). The relevant section pressed by the Revenue in the present appeal is section 13(1)(c)(ii) of the Act. As per the said clause, if any part of income or property of the trust is applied directly or indirectly for the benefit of the persons referred in section 13(3), then the same will not be entitled to exemption under section 11.

In the given case, the assessee trust is an educational trust, running schools and colleges. The assessee trust has provided accommodation to the Managing Trustee Shri Sachin Agnihotri, in the college campus. The assessee trust has charged rent of ` 1,20,000 from Shri Sachin Agnihotri and according to the Assessing Officer, the fair rental income was ` 3,00,000. Therefore, according to the Assessing Officer, the assessee trust has charged at reduced rate of ` 1,80,000. It was for the sole reason that in charging of rent in reduced rate, the learned Assessing Officer has opined that the assessee trust has applied income of the trust for the benefit of assessee trustee and, therefore, there is violation of section 13(1)(c)(ii) and accordingly the assessee trust is ineligible for exemption under section 11. Therefore, the question, which came before us for the adjudication whether entire income of trust will be stripped of entire exemption under section 11

Whenever the exemption under section 11 is to be denied the income of the trust is to be computed as per the specific provisions of section 164(2) provided in the statute, which are reproduced below for ready reference:–

The section 164(2) is statute provides application of Maximum Marginal rate only on the relevant income and not on the entire income. The computation section clearly stated that the denial of exemption under section 11 should be limited only to the amount which was connected in violation of section 13. Therefore, the statute has unambiguously stated that only relevant income which is not exempt under section 11 can be brought to tax, as the income of an AOP and the balance income of the charitable trust, will be entitled to exemption. The learned CIT(A) rightly relied on the CBDT Circular No.387, dated 06/07/1984 [152 ITR (St)1]: issued by the CBDT, under the heading "Levy of income-tax at the maximum marginal rate in the case of charitable and religious trusts which forfeit tax exemption" is relevant. For our purpose, Para–28.6 of the aforesaid Circular is relevant, which is reproduced herein below:–

The aforesaid Circular, clarifies the stand of the CBDT as to where such a trust contravenes the provisions of section 13(1)(c) or 13(1)(d) of the Act, the maximum marginal rate of income-tax will apply only to that part of income, which has forfeited exemption under the said provisions. Even the jurisdictional Bombay High Court in the DIT (E) v/s Sheth Mafatlal Gagalbahai Foundation Trust [2001] 249 ITR 533 (Bom) and CIT(E) v/s Audyogik– shikshan Mandal [2019] 101 taxmann.com 247 (Bom.) has upheld the interpretation that the legislature did not contemplate the denial of the benefit of section 11 of the Act to the entire income of the trust/charitable institution. If the interpretation sought by the Revenue is accepted, it would lead to grave injustice as any mistake minor or contravention of provisions will lead to complete denial of the benefit of exemption which otherwise a trust registered under section 12A is legally allowed to claim. In view of the forgoing discussions, we hold that the maximum marginal rate shall be levied to the extent of relevant income, which has contravened provisions of section 13 and in the present case as contravention is of ` 1,80,000 only. The 11 Jaymahakali Shikshan Sanstha A.Y. 2017–18, 2018–19 & 2019–20 Assessing Officer erred in denying entire claim of exemption under section 11 and 12 of the Act. Therefore, we uphold the impugned order passed by the learned CIT(A) and the grounds no.1 and 2, raised by the Revenue are dismissed.

The next issue involved in ground no.3, raised by the Revenue is addition of ` 43.50 lakh.

In the assessment order, the Assessing Officer noted that based on documents impounded, the addition made by the learned Assessing Officer is based on the document impounded from the premises of the third party (M/s. Vedsiddha Products Pvt Ltd). The said document was found during the survey conducted under section 133A of the Act conducted at the office premise of M/s Vedsidha Products Pvt. Ltd. (unrelated third party). During the survey, few handwritten documents were found in the premises of M/s Vedsidha Products Pvt Ltd. which were impounded and were marked as Annexure–B/4. The Assessing Officer, on a perusal of the said Annexure-B/4, noticed that the assessee trust has given an unsecured loan of ` 3 crore in July 2016 to M/s. Harmony Homes, which is a related concern of M/s Vedsidha Products Pvt Ltd, through Shri Sachin Agnihotri, the Joint Secretary of the assessee trust. M/s. Harmony Homes, has been paying interest @ 11% on the said sum of ` 3 crore in cash to the assessee trust through Shri Sachin Agnihotri, and thus the Assessing Officer sought explanation on the this transaction. The assessee trust in response to the query raised by the Assessing Officer, filed reply dated 27/12/2019, by stating that the sum of ` 3 crore was given as advance for future purchase of land for building an education institution on 12 Jaymahakali Shikshan Sanstha A.Y. 2017–18, 2018–19 & 2019–20 the said land. The assessee said transaction of ` 3 crore, which was made by account payee cheques is reflected in Schedule–H of the Balance Sheet. The Assessing Officer, on a perusal of Page–3 to 9 of the impounded documents marked as Annexure–B/4, noted that there are entries of cash transaction of Shri P.D. Vyas, promoter of M/s. Vedsiddha Products P. Ltd. and he has been paying interest in cash to the trust through Shri Sachin Agnihotri. The Assessing Officer further noted that Shri Sachin Agnihotri was receiving interest on behalf of the assessee trust. It was further opined that the transactions were corroborated from the impounded diary found during the survey premises of M/s. Vedisddha Products Pvt ltd. These diaries were in the form of daily cash diaries in the handwritten format. Therefore, the Assessing Officer held that it has to be construed that the handwritten cash books reflect the true picture of Shri P.D. Vyas, and his related concerns with the respondent trust. Accordingly, the Assessing Officer as per these documents, opined that the assessee trust has received interest income from M/s. Harmony Homes. The Assessing Officer assessed interest income as unexplained income under section 69A to the tune of ` 43,50,000.

On appeal, the first appellate authority granted part relief and confirmed the addition of the interest income. However, the learned CIT(A) reclassified the interest income, which was earlier classified as unexplained money under section 69A to the interest income under head income from other sources, assessable as per normal provisions of the statute. The learned CIT(A) was of the opinion that invoking provisions of section 69A of the Act is 13 Jaymahakali Shikshan Sanstha A.Y. 2017–18, 2018–19 & 2019–20 unjustified as the source of interest is known and the deeming provisions of section 69A can be invoked only when source is unknown.

The learned Departmental Representative supported the impugned order passed by the learned CIT(A).

The learned Counsel for the assessee submitted that the books of accounts were seized from the possession of third party based on the loose sheets found from the third party. The addition was made in the hands of the assessee which are contrary to law. The learned Assessing Officer simply made addition which is based on the basis of dumb document marked as Annexure–B/4 impounded during survey which is not correct according to law.

We have heard the rival arguments, perused the material available on record and gone through the orders of the authorities below. The case of the Assessing Officer is that, assessee trust has given an unsecured loan of ` 3 crore and interest was received in cash through Shri Sachin Agnihotri, the Joint Secretary of the assessee trust. In the assessment order, the Assessing Officer has noted that the assessee trust has advance ` 3 crore to M/s. Harmony Homes, which is related concern of Shri P.D. Vyas. M/s. Harmony Homes, paid interest @ 16% in cash to the respondent trust through its Joint Secretary, Shri Sachin Agnihotri. When the Assessing Officer sought explanation, the assessee trust submitted that it is in fact an advance for purchase of property and same has been duly reported in the audited financial statements. It was further submitted that all payments were made through account payee cheque and no interest was received from M/s.

Ground no.4, relates to denial of exemption under section 11 of the Act. We have heard the rival arguments, perused the material available on record and gone through the orders of the authorities below. The facts of the case

Ground no.5, being general in nature hence no separate adjudication is required.

In the result, appeal by the Revenue for A.Y. 2017–18 is dismissed.

The grounds raised by the Revenue are as follows:– ―1. Ground on the fact and in the circumstances of the case the Id. CIT(A) erred in allowing the depreciation of Rs.5,57,40,754/- when the claim of depreciation on assets, already applied against the receipts of the trust. The depreciation cannot be allowed as deduction as per the provision of section 11(6) of I.T. Act as double application of income.

Any other ground that may be raised during the hearing.‖

As culled out from the facts available on record, the total receipts of the trust is to the tune of ` 51,20,41,731, and out of this total amount expended towards object of the trust is ` 46,55,68,022 which includes depreciation of ` 5,57,40,754. The Assessing Officer invoking provisions of section 11(6) of the Act disallowed depreciation by holding that the assessee trust had already claimed the purchase of asset as an application of income.

Before the learned CIT(A), it was the submissions of the assessee trust that it only claimed depreciation as an application of income and has not claimed the capital as an application of income. The assessee trust submitted that if the depreciation as per the Assessing Officer is disallowed, then the assessee trust may be allowed benefit of the investment which is not barred by any provisions of the statute and the assessee trust has not claimed the same as an application of income. The remand report furnished by the Assessing Officer did not mention any reservation on the said issue. The learned CIT(A) allowed the claim of the assessee by holding as under:–

Before us, the learned Departmental relied on the order of the Assessing Officer.

The learned Counsel for the assessee, on the other hand, submitted that the Assessing Officer has disallowed the claim of depreciation stating that the assessee trust already claimed the capital for purchase of asset as an application of income. He submitted that if not depreciation, then the assessee trust should be allowed benefit of the investment.

We have heard the rival arguments, perused the material available on record and gone through the orders of the authorities below. The assessee trust during the year has only claimed depreciation as an application of income and the capital expenditure towards fixed assets were not claimed as an application of income. The statute provides allowance of either deprecia– tion or application of income towards capital expenditure. Therefore, if the Assessing Officer disallows depreciation, he is duty bound to allow benefit of allowance towards application of income vis-à-vis capital expenditure. The learned CIT(A) was absolutely correct in in allowing the depreciation in 20 Jaymahakali Shikshan Sanstha A.Y. 2017–18, 2018–19 & 2019–20 holding that the assessee trust cannot be devoid of claiming at least one as an application of income, doing so will defeat the mandate of the Act, which provides either capital investment or depreciation as an application of income. Consequently, nothing warrants us to disturb the impugned order passed by the learned CIT(A). Accordingly, ground no.1, raised by the Revenue is dismissed.

The ground no.2, relates to the addition of ` 37,50,000, on account of undisclosed income under section 69A of the Act.

After hearing both the parties and on a perusal of the material available on record, we find that identical issue has been raised by the Revenue in its appeal being ITA no.335/Nag./2023, for the assessment year 2017–18, vide ground no.3, wherein, we have decided this issue in favour of the assessee and against the Revenue in Para-20 of this order. Since the issue for our adjudication being identical, except variation in figures, consistent with the view taken therein in assessee’s case cited supra and following the findings given therein, similar directions are issued on this issue as well. Accordingly, ground no.3, raised by the Revenue is dismissed by upholding the impugned order passed by the learned CIT(A).

Ground no.3, relates to allowance of exemption under section 11.

Having heard both the parties and while going through the material available on record, we find that identical issue has been raised by the Revenue in its appeal being ITA no.335/Nag./2023, for the assessment year 2017–18, vide ground no.4, wherein, we have decided this issue in favour of 21 Jaymahakali Shikshan Sanstha A.Y. 2017–18, 2018–19 & 2019–20 the assessee and against the Revenue in Para-21 and 22 of this order. Since the issue for our adjudication being identical, except variation in figures, consistent with the view taken therein in assessee’s case cited supra and following the findings given therein, similar directions are issued on this issue as well. Accordingly, ground no.3, raised by the Revenue is dismissed by upholding the impugned order passed by the learned CIT(A). Ground no.3, raised by the Revenue is dismissed

Ground no.4, being general in nature hence no separate adjudication is required.

In the result, Revenue’s appeal for A.Y. 2018–19 stands dismissed.

The grounds raised

After hearing both the parties and on a perusal of the material available on record, we find that identical issue has been raised by the Revenue in its appeal being ITA no.335/Nag./2023, for the assessment year 2017–18, vide ground no.3, wherein, we have decided this issue in favour of the assessee and against the Revenue in Para-20 of this order. Since the issue for our adjudication being identical, except variation in figures, consistent with the view taken therein in assessee’s case cited supra and following the findings given therein, similar directions are issued on this issue as well. Accordingly, ground no.1, raised by the Revenue is dismissed by upholding the impugned order passed by the learned CIT(A).

Grounds no.2 and 3, raised by the Revenue relate to denial of exemption under section 11 of the Act.

Having heard both the parties and while going through the material available on record, we find that identical issue has been raised by the Revenue in its appeal being ITA no.335/Nag./2023, for the assessment year 2017–18, vide ground no.4, wherein, we have decided this issue in favour of the assessee and against the Revenue in Para-21 and 22 of this order. Since the issue for our adjudication being identical, except variation in figures, consistent with the view taken therein in assessee’s case cited supra and following the findings given therein, similar directions are issued on this issue

In the result, Revenue’s appeal for A.Y. 2019–20 stands dismissed.

To sum up, all the appeals filed by the Revenue are dismissed. Order pronounced in the open Court on 03/04/2025