ITO (E) 1(3), MUMBAI vs. FREE TRADE UNION, MUMBAI

The assessee, more or less has raised common grounds of appeal for all assessment years. The assessee, from these grounds of appeal, has challenged, rejection of exemption claimed u/s 11 of the Income Tax Act, 1961, taxation of corpus donations, denial of credit for TDS and further challenged action of the ld. CIT(A) non adjudication of specific ground No. 8 taken for Asst. Year 2005-06. The assessee also filed additional ground challenging action of ld. AO and CIT(A) rejection of carry forward and set off of loss. The Revenue, more or less has taken common grounds of appeal for all Asst. years. The Revenue, from these grounds of appeal challenged order of the ld. CIT(A) allowing relief in respect of addition made by the AO towards loans and advances, for purchase of motor car and expenses incurred for objects of the trust.

The brief facts of the case are that the assessee is a charitable trust engaged in various charitable activities as per objects of trust deed. The Trust is affiliated to two trade unions, i.e. Engineering Mazdoor Sabha (EMS) and Mumbai Mazdoor Sabha(MMS). The assessee has filed regular returns of income u/s 139 of the Income Tax Act, 1961 for all assessment years declaring Nil total income, after claiming exemption u/s 11 of the Income Tax Act, 1961. A search and seizure operation u/s 132 of the Act, was carried out on 20-08-2009 in Chandbibi Group. During the course of search, it was revealed that the trustees have siphoned off money for ultimate benefit of two trustees. The investigation further reveals that the trustees have siphoned off money by booking expenditure on repairs to building which was not owned by the trust. Consequent to search, the case has been reopened u/s 147 of the Act, on the ground

The case has been selected for scrutiny and accordingly, notices u/s 143(2) and 142(1) of the Act, were issued. In response to notices, the authorized representative of the assessee appeared from time to time and filed various details, as called for. The assessments has been completed u/s 143(3), r.w.s.147 of the Act, for assessment years 2003-04 to 2009- 10, and for A. Y 2012-13 to 2014-15 u/s 143(3) of the Act, and rejected exemption claimed u/s 11 of the Income Tax Act, 1961 by invoking provisions of section 13(1)(c ) and 13(2) of the Act, for the reasons of siphoning of funds of the trust for ultimate benefit of trustees and for non genuine activities. The AO has determined total income by making additions towards, loans and dances given to Engineering Mazdoor Sabha (EMS) and Mumbai Mazdoor Sabha(MMS), corpus donations received, addition towards expenditure incurred for objects as per P & L account and purchase of Motor car in the name of R J. Mehta one of the trustee.

The assessee carried matter in appeal before the first appellate authority. Before the CIT(A), the assessee has challenged rejection of exemption claimed u/s 11 of the Act and also challenged various additions made by the AO towards loans and advances given to two trade unions, corpus donations, disallowances of expenditure incurred towards objects and addition towards purchase of motor car in the name of trustees. The Ld. CIT(A), for the detailed discussion in his appellate order, dismissed additional ground taken by the assessee challenging denial of exemption u/s 11 of the Act, and upheld findings of the AO for rejection of exemption by holding that various facts brought out by the AO in the assessment

The assessee as well as the revenue carried matter in further appeal before the Tribunal. The ITAT, Mumbai “F” bench vide its order dated 1612-2015 in ITA No. 352/Mum/2014 and ITA No. 1336/Mum/2014 for Asst. Year 2003-04 dismissed appeal filed by the assessee and upheld denial of exemption u/s 11 of the Act and also allowed appeal filed by the revenue without deciding the issues challenged by the revenue on merits towards deletion of additions made by the AO towards loans and advances and for purchase of motor car, repairs and expenses. The relevant portion of order is reproduced hereunder: -

Being, aggrieved the revenue filed miscellaneous application u/s 254(2) and requested to recall order passed by the Tribunal for the detailed reasons stated in their petition. The ITAT in MA No. 324/Mum/2017 dated 16-02-2018, recalled revenue appeal in ITA No. 1336/Mum/2014 and restored appeal filed by the revenue by observed as under: -

The recalled revenue appeal in ITA No. 1336/Mum/2014 is heard along with other appeals for subsequent Asst. years filed by the assessee as well as the revenue, as the issue involved in this appeal is identical to the issues in all appeals of the assessee and revenue for all assessment years.

The first issue that came up for our consideration from assessee appeal is denial of exemption u/s 11 of the Act. Although, the issue has been decided against the assessee by the ITAT, for Asst. year 2003-04 in ITA No. 352/Mum/2014, the ld. Authorized representative vehemently argued the matter at length with the help of certain judicial precedents to keep the issue alive. The ld. A R for the assessee submitted that the ld. AO as well as the Ld. CIT(A) failed to appreciate the fact is right perspective in the light of facts of the case before rejection of exemption u/s 11 of the Act. The AO on the basis of appraisal of incorrect facts came to wrong conclusion that there is violation of section 13(1)(c ) of the Act, insofar as loans and advances given to two trade unions without

The Ld. DR on the other hand submitted that the issue has been already decided against the assessee by ITAT Mumbai “F” Bench in ITA No. 1336/Mum/2014, and without any change in facts no contrary decision can be taken in subsequent years. The Ld. DR further submitted that the assessee failed to explain violations of section 13(1)(c ) pointed out by the AO and such violation is continued in subsequent years, therefore the AO has rightly rejected exemption and his order should be upheld.

We have heard both the parties, perused materials on record and gone through the orders of authorities below. We have also carefully

Facts remain unchanged. When the bench pose a specific question about continuation of violation referred to u/s 13(1)(c) for subsequent years, the ld. AR for the assessee fairly accepted that such violation is perpetuated in subsequent years, however tried to argued that violations brought out by the AO shall not be reason for denial of exemption, when the assessee continued to carry out its activities in accordance with its objects. We find that, the assessee failed to negate observation of the lower authorities in the light of provisions of section 13(1)(c ) of the Act. Therefore, consistent with the view taken by the Coordinate bench, we are of the considered view that the assessee is not eligible for exemption u/s 11 of the Act, and hence we are inclined to upheld finding of the ld. CIT(A) and reject ground of the assessee for all asst. years.

The next issue that came up for our consideration from assessee appeals is taxation of corpus donations. The Ld. CIT(A) dealt corpus donation issue in para 5.10 of his order. According to the lower authorities, corpus donation is forming part of income derived from property held under trust, once exemption u/s 11 is denied. The ld. CIT(A) further observed that, although assessee furnished letters indicating donors intention to donate for corpus of the trust, these letters are identically worded without any further evidences. The ld. CIT(A) further held that as per section 12(1) voluntary contributions will also deemed to be income derived from property held under trust, and provisions of section 11 and

We have heard both the parties, perused materials on record and gone through orders of authorities below. It is an admitted fact that exemption u/s 11 has been denied to the assessee. It is also an admitted fact that the assessee has failed to file necessary evidences to prove corpus donations are made with specific direction that they shall form part of corpus of the trust. No doubt, corpus donation received with a direction that they shall form part of corpus of the trust shall not be treated as income derived from property held under trust. But, the onus is on the assessee to prove that such donations are in fact corpus donations which shall not form part of income of the trust u/s 11(1) of the Act. In this case, on perusal of facts, we find that the AO as well as the ld. CIT(A) gave categorical findings that the assessee failed to file any evidences to prove that these donation are corpus donations. Once, these donations are not corpus donations, then, automatically all receipts including corpus donations shall be treated as receipts of the trust and income wherefrom shall be computed in normal commercial practices by deducting all expenses. The CIT(A) after considering relevant facts has rightly treated corpus donation as part of gross receipts to determine income. We do not find any error in the order of the ld. CIT(A). Hence, we are inclined to uphold the CIT(A) order and reject ground taken by the assessee for all years.

The next issue that came up for our consideration for A.Y.2005-06 is non adjudication of ground No.8. The assessee has taken ground on the issue of expenditure of Rs. 15,80,077 made out of corpus donations. Although, the AO has not made any specific additions for this amount in the assessment order, yet the assessee has taken a ground with abundant precaution for the reason that in para 2 of his order, the AO has said that exemption claimed towards corpus donation of Rs. 16,17,230 and expenditure of Rs. 15,80,077 is taxable.

Having heard both sides, we find that the AO did not made any addition towards expenditure of Rs. 15,80,077/- in the assessment, therefore, there is no cause of grievance for the assessee insofar this issue is concerned. But, fact remains that, the AO has said in para 2 of his order that the amount of expenditure is taxable. Once, exemption is denied, income shall be computed under normal accounting principles by considering all income and expenses to determine profit/loss, but at no stretch of imagination expenditure shall be treated as income, unless such expenses is unexplained or such expenses has not be substantiated with evidences. In this case, there are no findings from the AO on these aspects. Therefore, we are of the considered view that no addition can be made towards expenditure incurred for objects of the trust.

The next issue that came up for consideration for A.Y. 2013-14 is denial of credit for TDS. The assessee claims that the AO did not allowed credit for TDS amounting to Rs. 1,25,032/-. But, on perusal of orders of the ld. AO as well as the Ld. CIT(A), we find that facts with regard to claim of TDS is not emanating from orders of lower authorities. However, if the assessee able to prove the claim with necessary TDS certificates and corresponding income is already considered in books, then the AO is directed to allow credit for TDS. Hence, the matter is set aside to the file of the AO to cause necessary enquiries and allow credit for TDS.

The next issue that came up for our consideration from assessee additional ground of appeal is carry forward and set off of loss of earlier years. The assessee has taken additional ground in as much as, if benefit of exemption is denied and income is computed under commercial principles, then loses hall be allowed to carry forward and set off against income of subsequent years. We find that the assessee has claimed exemption u/s 11 and hence, not exercised option to carry forward and set off losses. The AO denied benefit of exemption u/s 11 and computed income under normal commercial principles. Once, benefit of exemption is denied and income is considered under normal commercial principles, then the benefit of carry forward and set off of losses shall be allowed, provided all other conditions of carry forward and set off of losses as provided under section 72 are satisfied. Therefore, we set aside the issue to the file of the AO to cause necessary enquiries and allow the benefit accordingly.

The next issue that came up for our consideration from revenue appeals is additions towards loans and advances given to two trade unions, i.e. Engineering Mazdoor Sabha(EMS) and Mumbai Mazdoor Sabha(MMS). The AO made additions to total income towards loans given to above two trade unions on the ground that trustees siphoned off money through above two trade unions as the said loan has been ultimately transferred to Chandbibi Account for purchase of property. The AO has made addition to loans for the reason that money has been siphoned off in contravention of provisions of section 13(1)(c ) r.w.s. 13(3) and this would be one of the reason for denial of exemption u/s 11 of the Act. The Ld. CIT(A) deleted addition made by the AO on the ground that loans given to two trade unions and transferred to trustees account could be a reason for denial of exemption u/s11, but loans could not be added as income of the assessee as the same was not debited to profit and loss account as expenditure, but has been treated as current assets in balance sheet.

The ld. DR submitted that the ld. CIT(A) failed to appreciate fact that end use of the funds from those trade unions provided to the trustees through the series of transactions is merely camouflage the intention and diversion of funds from trust to the trustees. The DR further submitted that the assessee has violated provisions of section 13(1)(c) and 11(5) of the Act, which needs to be taxed in the hands of the assessee, but the ld. CIT(A) deleted additions on the ground that loans and advances cannot be treated as income of the assessee without appreciating fact that trust funds has been siphoned off by the trustees.

The ld. AR for the assessee, on the other hand strongly supported order of the CIT(A). The AR further submitted that at no stretch of imagination loans and advances being assets cannot be treated as income of the assessee only for the reason that these loans are hit by the provisions of section 13(1)(c). The violation of section 13(1)(c) may be a ground for denial of exemption, but such loans cannot be treated as income of the assessee.

We have heard both the parties and perused materials on record. The AO made additions to loans and advances given to two trade unions only on the ground that the said loan is hit by the provisions of section 13(1)(c ) of the Act, by misconception of law and facts. There is no findings from the AO that assessee has claimed deduction for such loans against income. On the other hand, the ld. CIT(A) recorded categorical fact that these loans are not claimed as expenditure, but are treated as current assets in books of accounts. The facts gathered during assessment and violations of section 13(1)(c) brought out by the AO may be a good reason for rejection of exemption, but loans and advances being current assets cannot be treated as income of the assessee. The ld. CIT(A) after considering relevant facts has rightly deleted additions towards loan and advances. We do not find any error in the order of the ld.

The next issue that came up for our consideration from revenue appeals is additions towards purchase car in the name of trustee and repairs and also other expenses. The AO, while completing assessment made additions towards expenditure incurred for objects of the trust, purchase car in the name of trustee and non genuine repair expenses on the ground that the trustees have siphoned off money by purchasing car in personal name and booking non genuine expenditure. It is the contention of the assessee that the facts gathered by the AO to hold there is violation of section 13(1)(c ) may be a good reason for rejection of exemption, but purchase of car being capital expenditure and expenses incurred for objects of the trust cannot be treated as income.

Having heard both parties, we find that the ld. CIT(A) has recorded categorical facts that purchase of car has been treated as fixed assets in books. Similarly, amount paid to Shankar Gadam of M/s Mahalaxmi Enterprises has been treated as advance in books of account. The CIT(A) further observed that expenditure incurred for objects of the trust could not be treated as income, unless there is findings from the AO that these are non genuine expenditures. The revenue fails to bring on record any contrary evidences to controvert findings of the ld. CIT(A). We, therefore, of the opinion that once, exemption is denied, income shall be computed under normal accounting principles by considering all income and expenses to determine pofit/loss, but at no stretch of imagination expenditure shall be treated as income, unless such expenses is unexplained within the provisions of section 69C or such expenses has not be substantiated with evidences. In this case, there is no finding from the AO on these aspects. Therefore, we are of the considered view that no addition can be made towards expenditure incurred for objects of the trust, purchase of car being capital in nature and treated as such in books

In the Result, the appeals filed by the assessee in ITA No. 3080 to 3084/Mum/2016 and ITA No. 6952 To 6954/Mum/2017 are partly allowed for statistically purposes and the appeals filed by the Revenue in ITA No. 1336/Mum/2014, ITA No. 3793 to 3795/Mum/2016 and ITA No. 3800 to 3801/Mum/2016 are dismissed.