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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Shri S.S. Godara, JM & Shri M.Balaganesh, AM ]
ORDER Per M.Balaganesh, AM
This appeal by the Revenue arises out of the order of the Learned Commissioner of Income Tax(Appeals)-25, Kolkata [in short the ld CIT(A)] in Appeal No. 134/2015-16 dated 16.05.2016 against the order passed by the JCIT, Range-2, Hooghly [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 28.03.2013 for the Assessment Year 2010-11.
The first issue to be decided in this appeal is as to whether the ld CITA was justified in holding that the assessee trust is entitled for exemption u/s 11 of the Act in the facts and circumstances of the case.
The brief facts of this appeal are that the assessee is a society established on 18.9.2000 and registered u/s 12AA of the Act vide order dated 14.10.2008. The society is running an Engineering College known as Hooghly Engineering & Technology College at Vivekananda Road, Pipulpati, Hooghly. The assessee filed its return of income for the Asst Year 2010-11 on 8.10.2010 declaring Nil income after claiming exemption u/s 11 of the Act. The assessee produced the books of accounts and furnished various details and explanations before the ld AO , which fact is mentioned by the ld AO in para 2 of his order. The ld AO on perusal of the balance sheet observed that under the head ‘Loans and Advances’, there is an entry of ‘Deposit with Govt. and Others’ . Under this head, an amount of Rs 1,15,44,376/- was shown as ‘with trust’. The assessee was asked to explain such advances. The assessee explained that the amounts were advanced to People’s Centre for Skill Development (PCSD) of Rs 64,35,040/- and to M/s Lok Kendra Trust of Rs 47,03,542/- and Rs 4,05,794/- for registration and other expenses. It was explained that these are two independent trusts existing for the benefit of the society at large having charitable objects. The ld AO show caused the assessee as to why the said payment of advances should not be treated as violation of provisions of section 13 of the Act. The assessee replied that it had not violated the provisions of section 13(2)(a) read with section 13(3) of the Act and that the payments were made to independent trusts having separate legal status. Those two trusts had utilized the amounts received from the assessee trust for purchase of properties and payment of registration fees for carrying on their activities. Before the ld AO , the assessee pleaded that this payment is to be treated as donation given by the assessee trust to another trust and accordingly to be treated as application of income.
The ld AO observed that purchasing property by the assessee trust in the name of other organization is not at all permitted by the objectives of the society. This act of 2
3 Hooghly Engineering & Technology College Society A.Yr. 2010-11 the assessee tantamount to alienation of property which violate the principle of exemption granted u/s 12 of the Act. Moreover the other two trusts are not registered u/s 12AA of the Act. The ld AO observed that Mr Manas Dasgupta is the Secretary of assessee society and at the same time he is the President of PCSD and Lok Kendra Trust. Therefore, it is evident that the funds of the assessee society has been utilized for the benefit of its trustee and for this no security and / or any interest was charged by the assessee trust to either to PCSD or Lok Kendra Trust. Hence it is clear violation of provisions of section 13(1)(c )(ii) read with section 13(3)(cc)/ (e) of the Act. Accordingly, the ld AO denied the claim of exemption u/s 11 of the Act of the assessee . The ld AO also observed that the assessee was in receipt of Government Grant of Rs 10,00,000/- and fund received from Bikash Bhawan to the tune of Rs 3,00,000/- which had been shown as capital receipt by the assessee trust. The ld AO held that the same are revenue receipts and ought to have been credited in the Income & Expenditure Account of the trust. Accordingly, he brought to tax the Excess of Income Over Expenditure in the sum of Rs 69,69,683/- together with the Government grants in the sum of Rs 13,00,000/- and determined the total income of the assessee trust at Rs 82,69,683/- after denying claim of exemption u/s 11 of the Act.
The ld CITA observed that the term ‘concern’ used in section 13(3) of the Act does not include the trusts. Accordingly, he held that the monies advanced by the assessee trust to other two trusts would not tantamount to payments made to specified persons defined u/s 13(3) of the Act. He held that Mr Manas Dasgupta, who is the Secretary of assessee trust and President Trust had not derived any benefit out of interest free funds advanced by assessee trust to other two independent trusts. He placed reliance on Explanation 3 to section 13 of the Act and said that payments made to two independent trusts would fall outside the ambit of the term ‘concern’ and hence there is no violation of provisions of section 13(1)(c ) read with section 13(2)(a) of the Act. The ld CITA 3
4 Hooghly Engineering & Technology College Society A.Yr. 2010-11 further observed that since the two independent trusts are not registered u/s 12AA of the Act, therefore Explanation below sub-section (2) of section 11 of the Act is also not attracted . In any case, he held that the assessee trust had only paid advance and not donation.
5.1. With regard to Government Grants received by the assessee in the sum of Rs 13,00,000/-, the ld CITA observed that they are not in the nature of income specified in section 11(1) of the Act and also held that Government Grants are for specific purposes and the same were utilized during the year itself as is evident from the Balance Sheet. Accordingly, he deleted the addition made in the sum of Rs 13,00,000/-.
Aggrieved, the revenue is in appeal before us.
We have heard the rival submissions. It is not in dispute that the assessee is a society running institutions imparting education. It is affiliated to University of Burdwan. We find that the activity of imparting education falls within the ambit of definition of ‘charitable purpose’ u/s 2(15) of the Act . The assessee trust is registered u/s 12AA of the Act vide order dated 14.10.2008. . The ld CITA observed that all the office bearers of the society or trustees of the trust are eminent and distinguished persons mostly in the field of education. The assessee had made certain payments of Rs 1,15,44,376/- and had reflected the same in the assets side of its Balance Sheet under the head ‘Loans and Advances’ as on 31.3.2010 as against Rs 29,38,821/- as on 31.3.2009. The assessee had explained before the ld AO that the said payments were made to two trusts i.e PCSD and Lok Kendra Trust to enable them to set up their activities. The ld CITA had given a finding that the said payments represent only advances made by the assessee trust to two 4
5 Hooghly Engineering & Technology College Society A.Yr. 2010-11 independent trusts and not donations paid. It is not in dispute that the Mr Manas Dasgupta , Secretary of assessee trust is also the President of other two independent trusts. The ld AO had denied the claim of exemption u/s 11 of the Act of the assessee on the ground of violation of provisions of section 13(1)(c ) read with section 13(2)(a) of the Act in as much as payments have been diverted by the assessee trust for the benefit of interested persons specified in section 13(3) of the Act. Now the short question that arises for our consideration is as to whether the payments made by assessee trust to other two independent trusts would fall under the ambit of ‘specified persons’ defined u/s 13(3) of the Act. For this purpose, the relevant provisions of section 13 of the Act are reproduced below:-
Section 11 not to apply in certain cases. 13. (1) Nothing contained in section 11 [or section 12] shall operate so as to exclude from the total income of the previous year of the person in receipt thereof— (a) any part of the income from the property held under a trust for private religious purposes which does not enure for the benefit of the public; (b) in the case of a trust for charitable purposes or a charitable institution created or established after the commencement of this Act, any income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste; (bb) [***] (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof— (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3) : Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub- section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution : 5
6 Hooghly Engineering & Technology College Society A.Yr. 2010-11 Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3) in so far as such use or application relates to any period before the 1st day of June, 1970;
………………………… . (3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely :— (a) the author of the trust or the founder of the institution; (b) any person who has made a substantial contribution to the trust or institution, [that is to say, any person whose total contribution up to the end of the relevant previous year exceeds [fifty] thousand rupees]; (c) where such author, founder or person is a Hindu undivided family, a member of the family; [(cc) any trustee of the trust or manager (by whatever name called) of the institution;] (d) any relative of any such author, founder, person, [member, trustee or manager] as aforesaid; (e) any concern in which any of the persons referred to in clauses (a), (b), (c) [, (cc)] and (d) has a substantial interest.
In the instant case, Mr Manas Dasgupta is a trustee of the trust. He is also President of other two independent trusts. From the bare reading of provisions of section 13(3) of the Act, we find that the term ‘concern’ used in clause (e) of section 13(3) of the Act would cover ‘trust’ also. But the crucial question is whether Mr Manas Dasgupta would be entitled for 20% of profits of the said concern as per Explanation 3 to section 13 of the Act so as to state that he is holding substantial interest in the said trust. In the instant case, the two trusts i.e PCSD and Lok Kendra Trust are admittedly not registered u/s 12AA of the Act and hence they would be assessed to income tax only in the capacity of ‘Association of Persons’ (AOP) and income would be assessed by applying the regular commercial business principles. Once it is determined, Mr Manas Dasgupta, being the President of those two trusts, would be entitled to share of profits of the said AOP and 6
7 Hooghly Engineering & Technology College Society A.Yr. 2010-11 if the said share is more than 20%, then he would be deemed to be holding substantial interest in that AOPs as per Explanation 3. We find that the details of beneficiaries together with their respective holdings of other two trusts i.e PCSD and Lok Kendra Trust are not available on record. Hence we deem it fit and appropriate , in the interest of justice and fair play, to remand this limited aspect of the issue to the file of ld AO for factual verification , so as to find out the fact whether Mr Manas Dasgupta together with his relatives either individually or collectively is entitled to 20% of profits of the two trusts. If that is found to be correct, then the interest free advance payments made by the assessee trust to those two trusts would be falling squarely under the ambit of payments made to persons specified in section 13(3) of the Act which would in turn lead to violation of provisions of section 13(1)(c ) read with section 13(2)(a) of the Act. It is not in dispute that the advances paid to those two trusts did not carry any interest. We hold that if it is found by the ld AO that Mr Manas Dasgupta either individually or collectively through his relatives hold substantial interest in those two trusts, then the granting of advances without interest or any element of security itself, would result in benefit derived by the concern mentioned in clause (e) of section 13(3) of the Act, which in turn would lead to violation of provisions of section 13(2) of the Act. Subject to these directions, we remand this issue to the file of ld AO . Accordingly, the grounds raised in this regard by the revenue are allowed for statistical purposes.
7.1. With regard to receipt of Government Grants in the sum of Rs 13,00,000/-, we find both the ld AO as well as the ld CITA had not given any finding with regard to the nature of grant and the purpose of grant . The ld CITA had merely stated that the grants received by the assessee trust had been utilized during the year. We hold that without examining the purpose of grant together with supporting evidences, the nature of grant cannot be understood. We find that there is no finding in this regard in the orders of the lower authorities. Hence we deem it fit and appropriate in the interest of justice and 7
8 Hooghly Engineering & Technology College Society A.Yr. 2010-11 fairplay, to remand this issue to the file of ld AO for factual verification as stated supra. Accordingly, the grounds raised in this regard by the revenue are allowed for statistical purposes.
In the result, the appeal of the revenue is allowed for statistical purposes.