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Facts
The assessee, M/s. Sree Raghavendra Educational Society, is challenging the order of the NFAC which denied exemption under Section 11 and confirmed disallowances. The AO had invoked Section 13(1)(c) for alleged diversion of funds and violation of Section 40(a)(ia).
Held
For AY 2015-16, the Tribunal held that the loans advanced were from prior year's property sale advance, not income, and thus Section 13(1)(c) was not applicable. The lease arrangement for transportation fees was also not considered an undue benefit. For AY 2011-12, the appeal was remanded to the AO due to lack of opportunity for the assessee.
Key Issues
Whether the denial of exemption under Section 11 due to alleged violations of Section 13(1)(c) and disallowance under Section 40(a)(ia) were justified, and whether the assessee was provided adequate opportunity for the assessment year 2011-12.
Sections Cited
Section 11, Section 13(1)(c), Section 13(2)(a), Section 13(2)(b), Section 40(a)(ia), Section 201(1), Section 12AA, Section 143(3), Section 147
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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGH, HON’BLE & SHRI S. R. RAGHUNATHA, HON’BLE
आदेश /O R D E R
PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the common order passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi for the assessment years 2011-12 & 2015-16, vide order dated 03.01.2024.
834 & 835/Chny/2024 2. We find that both the appeals are filed with a delay of 25 days. The assessee filed an affidavit for condonation of delay explaining reasons for the said delay and prayed for condonation of that delay. On perusal of the condonation petition and upon hearing both the parties, we find that the reasons explained by the assessee are bonafide and therefore, the delay is condoned for both the assessment years.
The assessee has raised the following grounds of appeal: “1. The order of the National Faceless Appeal Centre (NFAC) is wrong, illegal and is opposed to law.
2. The National Faceless Appeal Centre (NFAC) erred in disposing the appeal without providing adequate opportunity to the appellant. The said order is opposed to the provision of law and principles of natural justice.
3. The NFAC erred in denying exemption u/s.11 to the appellant trust by invoking the provisions of section 13(1)(C) rws 13(2)(a) of the Income Tax Act without looking into the substance of the transaction and without ascertaining the real nature of the transaction.
4. The NFAC erred in confirming the disallowance made by the assessing officer by treating the entire rental amount of Rs. l, 75,02, 909/- as income of the appellant by invoking section 40(a)(ia) of the Income Tax Act.
5. The NFAC ought to have seen that the appellant was not treated as assesse in default in term of section 201 ( 1) and in accordance to the first proviso of the aforesaid section. The learned Commissioner ought to have seen that as per the second proviso to section 40(a)(ia) the appellant is deemed to have deducted and paid the tax on such sum and therefore disallowance under section 40(a)(ia) is not warranted.
834 & 835/Chny/2024 6. The National Faceless Appeal Centre (NFAC) erred in disallowing the appellants claim of depreciation. The said disallowance is wrong both on law and on facts. For these and other grounds that may be rendered at the time of hearing it is most humbly prayed that the Hon'ble Tribunal may be pleased to allow the appellants appeal and thus render justice.”
The brief facts of the case are that, the assessee is a society registered under Tamil Nadu Societies Registration Act, 1975 on 05.08.1991 with principal object of Education and other allied charitable objects. The assessee society is also registered under section 12AA of the Income Tax Act 1961, vide order of Director of Income Tax (Exemptions), Chennai - 600034, No:DIT(E) No.2(59)/98-99 dated 15.06.1998. The primary Object of the Society is for the purpose of education and the Society operates the following schools:
A) Ashram Matriculation Higher Secondary School, No.110, Race Course Road, Guindy, Chennai-600 032. B) Anandavana Campus, No:3/9, North Avenue, Srinagar Colony, saidapet, Chennai-600032 C) Ashram Matriculation Higher Secondary School, No.99A, Velachery High Road, Guindy, Chennai-600 032.
834 & 835/Chny/2024 5. The assessee society filed its return of income for A.Y.2015-16 on 10/03/2016 admitting NIL income. The assessee society also filed its revised return on 23/12/2106. The case of the assessee was selected for scrutiny under CASS and accordingly the Assessing Officer (AO) issued statutory notices to the assessee. During assessment proceedings assessee furnished details of loan given to related parties as sought for by the AO.
On the basis of details provided by the assessee and after scrutinising the same the AO invoked section 13(1)(c) of the Income Tax Act and denied the benefit of exemption under section 11 of the Income Tax Act to the assessee, observing that the assessee society has violated the provisions of section 13(1)(c) of the Act. The AO has discussed violations referred to u/s.13(1)(c) of the Act on account of the following transactions of the assessee; 1. Loans and Advances to related parties 2. Transportation fees received by M/s. Ashram Educational and Consultancy Pvt Ltd (AECPL)
834 & 835/Chny/2024 Details of the alleged Violation: 1. Loans and Advances to related parties: During the assessment proceedings the AO, on perusal audited financials for the A.Y. 2015-16, it was seen that total loans and advances outstanding as on 31/03/2015 was Rs.53,22,05,560/. The assessee furnished details of “loans due from related parties” and on perusal it was observed by the AO that loan to the extent of Rs.47.10 Crores was lent by the assessee society to the related parties since 2008 without any security or interest and that the same is outstanding for over a period of 8 years. Further it was observed that the loan account with Ocher Studios Pvt Ltd, Sultan Production(P) Ltd. and Ashram Educational Consultancy (P) Ltd. are running accounts and that the funds of the society is being used by the interested persons on regular basis. Thus, the AO observed that there is a clear violation of section 13(1)(c) r.w.s. 13(2)(b) of the IT Act.
Transportation fees received by M/s. Ashram Educational and Consultancy Pvt Ltd (AECPL). During the year under consideration the assessee society borrowed a sum of Rs.1,29,21,224/- from M/s.Cholamandalam Finance Ltd. for purchase of vehicles for transportation of its school children. On oral agreement made between the assessee and Ashram Educational and Consultancy Private Ltd (AECPL)
834 & 835/Chny/2024 the vehicles were leased out to AECPL for transportation of school children. The understanding between the assessee and AECPL is that, AECPL was to collect the transportation fees separately from the school children from which operational expenses are to be met and that AECPL would also pay a sum of Rs.40.00 Lakhs towards lease of vehicle to the assessee society. During the course of scrutiny proceedings the assessee produced the details regarding the transport fee collected by AECPL and also produced the financials of AECPL.
The case of the AO is that while the total revenue from operations for AECPL during the year is Rs.2,11,96,466/-, the assessee society receives only Rs.40.00 lakhs for vehicles lease. Thus, the AO was of the opinion, being a related party transaction, the society has violated the provisions of section 13(1)(c) r.w.s 13(2)(b) of the Act. The AO observed that since the society has received only Rs.40.00 lakhs towards lease of vehicles, the vehicles of the society were used by interested parties during the year without adequate compensation and concluded that it is violation of section 13(1)(C) r.w.s 13(2)(b) of the IT Act and crystalized the extent of violation at Rs.1,71,96,466/-.
834 & 835/Chny/2024 8. The AO thereafter computed the income of the assessee by applying commercial principles, denying the assessee society exemption under section 11 of the Income Tax Act and consequently brought to tax the ‘corpus donations’ received by the assesses society by observing that the sum of Rs.1,97,32,100/- would fall under the definition of income and includable in the total income of the Trust. The AO further disallowed 30% of Rs.83,18,230/- amounting to Rs.24,95,469/- being the rent paid by the assessee to the Guindy campus under the pretext that the TDS deducted has not been remitted into the government account. Aggrieved by the order of the AO the assessee society preferred an appeal before Ld.CIT(A) / NFAC and first appellate authority has affirmed the action of AO.
The Ld. Counsel for the assessee, submits that the Ld. CIT(A) erred in upholding the denial of exemption u/s.11 of the Act. The assessee further submitted that the AO and the Ld.CIT (A) failed to appreciate the fact that provisions of Sec.13(1)(c) of the Act, are not invocable in the facts and circumstances of the present case. The Ld. Counsel for the assessee further submitted that the AO & the Ld. CIT(A) erred in treating ‘corpus 834 & 835/Chny/2024 donations’ as income of the Trust without appreciating the fact that the ‘corpus donations’ forming part of corpus of the Trust, is capital receipt which cannot be included in the income of the Trust’. The assessee submits that the AO and the Ld. CIT(A) without appreciating the relevant facts simply treated ‘corpus donations’ as income of the Trust.
With respect to the loans and advances to the related party the assessee submits that a) no part of the trust funds has been diverted as loan to the interested parties, more so in the impugned assessment year, for the purpose of invoking section 13(1)(c) r.w.s. 13(2)(b) of the Act. As observed by the AO loan to the extent of Rs.47.10 Crores was lent by the assessee society to the related parties in the past years without any security or interest and the same is outstanding for over a period of 8 years. The case of the assessee is that it is not the case of the AO that the alleged loan amounts were advanced during the impugned assessment year for the purpose of invoking section 13(1)(c) r.w.s. 13(2)(b) of the Act. b) The assessee submits that the source of the loans mentioned aforesaid is out of the advance received by the 834 & 835/Chny/2024 assessee in the past year for sale of its Guindy land. The case of the assessee is that the advance received by the assessee trust from property is not the income of the trust and is only a liability of the assessee’s trust. The assessee submits that benefit under section 11 can be denied to the assessee society only if the income of the trust is used to confer undue benefit either directly or indirectly to the persons referred to in sub-section (3) of section 13 of the Income Tax Act. In the instant case, even in the past, no income of the assessee trust is used to confer undue benefit to the interested persons referred to in sub-section (3) of section 13 of the Income Tax Act and that only the advance received by the assessee society was used in the past to advance loan to the interested parties. Even otherwise it is not the case of the AO that loans were advanced during the current year to deny the assessee benefit under section 11.
In so far as the Transportation fees received AECPL, the assessee submits that there is no violation of provisions of section 13(1)(c) r.w.s. 13(2)(b) of the Act. The assessee submits that from the financials of AECPL it could be seen that total revenue from operations of AECPL is Rs.2,11,96,466/- and 834 & 835/Chny/2024 after deducting the corresponding expenses like vehicle maintenance & insurance, staff cost and other admn. Expenses the net income was only Rs.2,46,530/-. Thus, it could be seen that is no violation of section 13(1)(c) r.w.s 13(2)(b) to as to confer any undue benefit directly or indirectly to the persons referred to in sub-section (3) of section 13 of the Income Tax Act to deny the assessee benefit under section 11 for alleged violation.
In the above circumstance the assessee submitted the order of AO is computed the income of the assessee by applying commercial principles by denying the assessee society benefit under section 11 of the Income Tax Act and bringing to tax the ‘corpus donations’ of Rs.1,97,32,100/- has no legal basis and is liable to be deleted.
The Ld.DR relied on the orders of the lower authorities and submitted that the same may be confirmed.
We have heard the rival contentions and perused the material and orders of lower authorities below. It is undisputed fact that the assessee is registered under section 12A of the Act 834 & 835/Chny/2024 and claiming exemption under section 11 of the Act. We find that section 13(1)(c) applies when income or property of the trust is used to benefit persons referred to in Section 13(3). In the present case, it is not disputed that the loans were advanced in earlier years and were not extended during the relevant assessment year. The AO failed to demonstrate how any income of the assessee society was used to confer a benefit during A.Y. 2015-16. Further, the assessee’s claim that the loans were given out of advance received against proposed property sale and do not form income of the assessee, has merit. In our considered view the advances, being liabilities, do not constitute income of the society. Hence, the invocation of Section 13(1)(c) for AY 2015-16 is legally untenable. Further, with regard to the ‘Transportation Fees’ involving AECPL the assessee drew our attention to the audited financial statements as on 31/03/2015 of the company AECPL showing that after deducting operating expenses and agreed amount of Rs.40.00 Lakhs to the assessee Trust as vehicle lease charges, the net income of the Company from transportation fees was very nominal i.e. Rs.2.46 Lakhs for the whole year. There is no evidence that the assessee conferred an undue benefit to AECPL. The AO’s conclusion that the lease arrangement was 834 & 835/Chny/2024 disadvantageous is based purely on a comparison of gross receipts, without considering the associated costs. Hence, the denial of exemption under Section 11 on this ground is not justified.
In the present facts and circumstances, in our considered view, there is no violation of section 13(1)(c) of the Act, by the assessee, we direct the AO to allow the exemption u/s.11 of the Act and direct the AO to delete the addition made on account of the Corpus donation received during the year to the tune of Rs.1,97,32,100/-. Further, according to the submission of the Ld.AR section 40(a)(ia) is not applicable for the A.Y. 2015-16 to the institutions / funds eligible for exemption U/s.11 of the Act. On perusal of the provisions of section 40(a)(ia), the claim of the assessee is found correct and the disallowance of Rs.24,95,469/- i.e. 30% of the Rent of Rs.83,18,230/- is hereby deleted by allowing the grounds of the assessee.
In the result the appeal of the assessee is allowed.
for AY 2011-12: 17. At the outset, the Ld.AR drew our attention to the Assessment order wherein the assessee claim of exemption 834 & 835/Chny/2024 u/s.11 of the Act has been denied for violation of Section 13(1)(c) of the Act along with certain disallowances due to non- furnishing of details during the re-assessment proceedings. Despite many opportunities the assessee failed to furnish details relating to TDS and remittance to government account. In the above circumstance AO invoked section 40(a)(ia) and made disallowance of Rs.1,75,02,909/- and framed the Assessment order u/s.143(3) r.w.s. 147 of the Act on 29/12/2017.
Aggrieved by the order of the AO, the assessee preferred an appeal before the Ld.CIT(A)/ NFAC. The Disallowance made by the AO under section 40(a)(ia) along with denial of exemption u/s.11 for violation of provisions of Section 13(1)(c) of the Act was confirmed by the first appellate authority by passing an order on 03/01/2024, since the assessee did not substantiate his claim with documentary evidence. The opportunities provided by the Ld.CIT(A) is given in the order in para 4 as detailed below: Sr. Date of Date of Mode of Remarks No notices hearing service issued 1. 23/12/2020 07/01/2021 Serve by Response ITBA/email received on 834 & 835/Chny/2024 09/04/2021 2. 01/11/2022 Enablement of communication window issued by NFAC 3. 01/06/2023 16/06/2023 Serve by No Response ITBA/email 4. 02/06/2023 19/06/2023 Serve by No Response ITBA/email 5. 05/07/2023 20/07/2023 Serve by No Response ITBA/email 6. 21/12/2023 29/12/2023 Serve by No Response ITBA/email
Before us, the assessee pleaded for one more opportunity to provide details for substantiating the claim and prayed that the matter may be remanded to the Jurisdiction AO.
As discussed above, we note from the assessment order as well as impugned order, it is established that there was no opportunity for the assessee in prosecuting his case, but, however, on the undertaken given by the ld. AR that the assessee is ready to prosecute his case before the Assessing Officer without fail, we deem it proper in the interest of justice to remand the matter back to the file of the Assessing Officer. The assessee is at liberty to file evidence in support of his claim and the Assessing Officer shall conduct the assessment proceedings de novo, by allowing the appeal of the assessee.