ITO (E)-II(1), MUMBAI vs. KALYANI CARTIABLE TRUST, MUMBAI

आदेश / O R D E R PER R.C.SHARMA (A.M):

This is an appeal filed by the Revenue against the order of CIT(A) for the assessment year 2010-11, in the matter of order passed u/s.143(3) of the I.T. Act wherein following grounds have been taken by the Revenue.

2 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust lease deed is of diverting the funds of the assessee to its interested concern. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A), erred in admitting additional evidence in the form of telephone bills, building taxes receipts and electricity bills, etc. without giving the Assessing Officer an opportunity to examine the same, thereby violating the provisions of Rule 46A of the IT Rules. 4. The Appellant prays that the order of the Commissioner of Income-Tax (Appeals) I, Mumbai be set aside and that of the Assessing Officer be restored. 5. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 2. Rival contentions have been heard and record perused. 3. Facts in brief are that the assessee is a charitable trust registered as such under Income Tax Act, 1961 & further registered u/s 80G of the Act. Objects of the trust include promotion of education & allied activities. Accordingly, trust is running school, college of engineering, pharmacy, management etc. During F.Y. 2009-10 assessee received donations towards its Building Fund from Mr. Nilesh J. Thakur (Proprietor of PRS Enterprises and PRS Developers) to the tune of Rs. 6.00 Cr. The donations were duly acknowledged by way of stamped receipts, from time to time. 4. The learned AO had completed the assessment proceedings u/s 143(3) for AY. 2010-11 with following additions: Cash credit received in the accounts in the name of Nilesh J. Thakur added as income u/s 68 6,00,00,000/-- Amount diverted to M/s. Kalyani Education Pvt. Ltd. During the year 5,68,00,000/- ------------------ TOTAL TAXABLE INCOME 11,68,00,000/-

3 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust 5. By the impugned order CIT(A) deleted the addition after observing as under:- 4.3 I have carefully considered the submissions of the appellant- assessment order and facts and circumstances of the case on this issue. It seems that the, AO was not satisfied with the reconciliation of amounts appearing at Rs.6.00 Cr. In the ledger account of Shri Nilesh J Thakur, Prop. PRS Enterprises and Rs.5,63,00,000/- in the balance sheet and Rs.5.00 Cr. in the donation letter. The detail of proceedings as noted in the assessment order on this issue reveal that copy of donation letter, copy of bank statement of PRS Enterprises, statement on oath of donor of Shri Nilesh J Thakur before the TRO.25(1), Mumbai, copy of balance sheet, copy of PAN Card were filed before the AO in support of the transaction of donation under reference (pg.6 of the assessment order). Under the circumstances the conclusion of failure of the appellant in proving identity, source and genuineness for the said amount in terms of section 68 is misplaced and by ignoring the uncontradicted/accepted documents like PAN, ledger account, bank accounts and statement of Shri Nilesh J Thakur. The' onus to prove identity, genuineness and creditworthiness in this case is discharged by the appellant in the context of the documentary evidence - PAN, number, copy of bank account and statement before the LT. Authority - filed and placed before the AO. The judicial pronouncement in the cases of Addl. CIT Vs. Bahri Brothers Pvt. Ltd. (1985) 154 ITR (Pat), Kamal Motors Vs. CIT (2003) Taxmann, and also in the case of CIT Vs. Mehrotra Brothers SLPI 37076/2004 holding that 'assessee had explained satisfactorily the'cash credits and the department had not brought any material to rebut the same' leads to conclusion that the appellant has discharged the onus of explaining the credit of Rs.6 Cr. appearing as donation and added u/s 68 of the LT. Act in the computation' of income. Hence same could not be added as unexplained income of the appellant. 4.4 The appellant has also filed explanation/reconciliation for the amount of donation of Rs.6.00 Cr. In addition to various documents in support of the said transaction stating that - In the FY:2007-08 Rs.75,OO,OOO/- was given to Laxmi Babu Mercating Pvt. Ltd. for purchase of office. But the transaction was cancelled and the money was returned by Laxmi Babu Marketing to the Trust in the FY:20D8-09. During the" FY:2008-

4 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust 09 accountant had make a technical accounting mistake and wrongly taken amount received RS.75 lacs form Laxmi Babu Mercating Pvt. Ltd. to building fund. The said mistake was rectified during the current Financial Year 2009-10 by Debiting building fund and crediting Advance Given to Laxmi Babu Markeing Pvt. Ltd. Building Fund received during the year Rs.6,38,00,000/- Less: Above Rectified Entry Rs.75,00,000/- Amount Transferred to Balance sheet Rs.5,63,00,000/- The books of account of the appellant were produced before he AO and as such same are accepted and not rejected b-y him. The appellant also enjoys Certificate and Registration u/s. 12 of the LT. Act in 'continuam'. Hence same are to be taken into consideration on the issue of the ground of-appeal, and support the case of appellant. 4.5 I have also considered the implication of addition u/s 68 of the LT. Act for, the assessee who has filed its Return of Income in the status of Charitable Trust and has been proceeded and its income computed under the relevant provisions of the Income tax Act i.e. Section 11, 12 and 13. The addition in the income of a charitable trust per se does not entail any taxation for being exempt subject to application of income as per law. At the same time whether section 68 is liable to be applied for computation of income of charitable institution under the provisions of section 11, 12 and 13, is also alive in this context. The appellant has relied on the decision in the case of DIT Vs. Keshav Social & Charitable Foundation (2005) 278 ITR (Del) where it was held that - Charitable trust - Exemption u/s 11 - Unverified donations - Assessee, a charitable institution, made disclosure of donations alongwith list of donors - Admittedly, more than 75 per cent of the donations were applied for charitable purposes - Fact that complete list of donors was not filed or that the donors were not produced does not necessarily lead to the inference that the assessee as trying to introduce unaccounted money by way of donation receipts - Sec. 68 has no application to the facts of the case as the assessee has in fact disclosed the donations as 'income. Accordingly, Tribunal rightly held that addition u/s 68 was not correct and exemption u/s 11 could not be denied - No substantial question of law arises.

5 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust It is also alternatively submitted that- However, Id. AO not allowed the set-off of loss of Rs.4,45,23,942/- (claimed in ROI of AY:10-11) from additions made. Similarly, brought forward loss of Rs.1,24,24,231/- of AY:2009-10 was also left to be set-off against the additions made for AY:2010-11. 4.6 This aspect of set-off of loss (excess application) also goes in favour of the appellant as far as computation of quantum is concerned. It has been argued by relying on the decision in the case of CIT Vs. Institute of Banking Personnel Selection (2003) 264 ITR 110 (Bom) where it was held that:- " In the present case, the AO did not allow carry forward of the excess of expenditure to be set off against the surplus of the subsequenly, ears on, the ground that in the' case of a charitable trust, their income was assessable under self- contained code mentioned in s. 11 to s: 13 of the IT Act and that the income of the charitable trust was not assessable under the head "Profits and gains of business" under s. 28 in which the provision for carry forward of losses was relevant. That, in the case of a charitable trust, there was no. provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of subsequent years. We do not find any merit in this argument of the Department. Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years against the, income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which adjustment has been made having regard to the benevolent provisions contained in s. 11 of the Act and that - such adjustment will have to be excluded from the income of the trust under s. 11(1)(a) of the Act....... " In view of above discussion on the various aspects 'of the additions, supporting the grounds of appeal, Ground No. 1 and 2 of appeal' is allowed. 5. In the overall context of above facts; I find that the addition of Rs.6.00 Cr. made by AO as undisclosed income of the appellant is totally misplaced uncalled for, having no implication to the taxability of the appellant for the year except and unless

6 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust the assessment of income u/s 11, 12, 13 is not available to the appellant/the exemption u/s 11 of the LT. Act is denied. The issue of denial of exemption- is also present in this appeal where exemption has been denied by the AO on the basis of transaction of total Rs.6,88,00,000/- (Rs.5,68,00,000/- during the year and Rs.1,00,00,000/- during FY:2007-08)" (Pg. 22 in para-3 of the assessment order - seems to be arithmetical error in the aggregation of amount which comes to Rs. 6,68,00,000/-) Therefore, the contention of the appellant and alternative arguments, being linked to exemption, lead to consideration of ground no. 3, 4 and 5 of appeal which are discussed below. The AO has noted in the assessment order in para 5.2 as under: 5.2 Diversion of Rs.6,68,00,000/- to M/s Kalyani Education Pvt. Ltd.(excluded person) During the course of assessment proceedings' it is seen that the' trust has shown an advance of Rs. 6,68,00,000/- to M/s Kalyani Education. Pvt. Ltd. (PAN:AACCK4122A) claimed to be 'Deposit for leased Assets'. Accordingly, a show-cause u/s 142(1) dd. 15.02.2013 was issued to the assessee. 5.1 After considering the reply of the appellant filed before AO vide letter dtd.23.02.2013, the AO has proceeded to examine the agreement dtd.01.07.2008 under which the said transaction has taken place. After detailed discussion the AO has concluded as follows: In view of the above, undersigned is constrained to conclude: a) That the said agreement is a colorable device, created with a view to divert money into an excluded person, to fund construction of premises form the trust, in a company viz. Kalyani Education Pvt. Ltd. (excluded person), so that on regular basis an amount of Rs.5,00,000 per month w.e.f. 1.4.2014 can be siphoned off from the assessee trust. Therefore, the agreement not being genuine cannot be relied upon as an evidence in the favour of the assessee, to conclude that 'the nature of transaction with the excluded person is in the nature of 'deposit "for leased assets. '

7 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust "b) That the agreement is just a facade to camouflage the diversion of funds of the trust to an excluded person in the garb of the said agreement. c) That the agreement is a colorable device, merely created, to legalise prohibited transactions, with a view to save tax liability and is sham and bad in law. d) That the agreement has been entered into with a deliberate and intentional mala fide design to divert the money of the charitable entity to the business concern of the trustees. The .agreement being colorable device, is liable to be treated non- est and cannot be relied upon as an evidence in support of the claim that the amount diverted is in the nature of 'deposit for leased assets'. e) Hon. Apex Court in 154 ITR 148 (SC) McDowell and Co. Ltd. Vs. Commercial tax Officer has observed as under: "Tax planning may be legitimate provided it is within the framework of law Colorable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is obligation of every citizen to pay the taxes honestly without resorting to subterfuges." In view of the said judgment I apply-the ratio to the instant case and hold the said agreement as a colorable device. The above view has been reiterated by Hon. Apex Court in ITR 706 (SC) Union of India vs. Azadi Bachao Andolan. In view of the above, it is concluded that the funds to the extent of Rs.6,88,00,000/- (Rs. 5,68,00,000/- during the year and Rs.1,00,00,000/- during FY:2007-08) of the Trust have been diverted for the benefit of excluded persons and therefore, the case of the trust is covered within the provisions of section 13(1)(c)(iii) & section 13(2)(g) r.w.s. 13(3)(cc) of the 1. T. Act. Therefore, in view of the applicability of section 13(1)(c)(ii) & section 13(2)(g) r.w.s. 13(3)(cc) of the I. T. Act, as above, the exemption u/s 11 is denied to the trust on the said amount. 5.2 The appellant has submitted before the AO also that - We are enclosing herewith following documents as required by you.

8 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust 1) ROC Annual Return of Mls Kalyani Education Pvt. Ltd. alongwith Profit and Loss Account and copy of Balance Sheet for the FY:2006-07 to FY:2009-10. 2) Copy of all accounts of the company in the books of trust. 3) Copy of Lease Deed. 4) Copy of relevant title deeds. Total cost of construction and purchase of land for the leased asset is Rs.27.00 Crore. Other School and college equipments is Rs.4 Crore. Total cost of the leased asset is Rs.31.00 Crore. Total land area in Sq. Meter: 34018.38 Total Construct area in Sq. Meters: 10100.24 Valuation of the Land and Building as on the date of lease agreement is Rs.33,80,22,960/-. Copy of valuation report is enclosed herewith. 5) Basis of computation of Deposit is Rs.7.00 Crore. In the normal market scenario Security Deposit is 10% of the Market' Value of the leased assets as on the Date of Lease and minimum 1 % is the lease rent per month. In our case market value is Rs.35.00 Crore as on the date of lease Deed. Minimum deposit will be Rs.3.50 Crore and rent will be Rs.35.00 Lacs per month and Rs.4.20 Crore Annually. Since, the Trust expenses are more han income which has resulted in deficit. Threfore, Kalyani Education Pvt. Ltd. has not charged a lease rent till today and up to Mar.2014. The company has forgone rent @ Rs.35.00 Lacs per month for 72 months which amounts to Rs.2S.20 crore against which the deposit kept by the trust is just RS.6.8O. Crore as on 31.03.2010. If he trust was required to pay rent as per the market trend the total amount payable amounted to Rs. 7. 70 Crore by the rust to Kalyani Education Pvt. Ltd. for the FY as under: Particulars Amount in Crores

Deposit for Equipment 3.50 12 Months Rent Rs.35 Lacs in advance 4.20 Total Amount Payable 7.70 However the trust has just kept only Rs.6.BO Crores for deposit for leased assets.

9 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust Respected Madam it is now very much Clear that no funds have been diverted from the trust to benefit of the excluded persons hence the section 13(l)(c)(ii) does not apply as it state as under. "Section 13(1)(c)(ii) reads as follows "if any of such income or any property of the rust or the institution' (whenever created or established) is during the previous year used or applied, directly of indirectly for the benefit of any person referred to in sub- section (3) "Section 13(2)(g) reads as follows "if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3)". However, the Kalyani Education Pvt. Ltd. has provided rent free facilities to the Trust as explained hereinebove. Since, no benefits has been diverted to the excluded persons therefore the condition of exemption u/s 11 of the income tax act ties been complied. We request you kindly continue the exemption granted u/s 11 - of the Income- Tax Act." (Noted on pg.11 & 12 of assessment order) 5.3 It has also been submitted before me that - Addition on a/c of alleged violation u/s1.3(1)(c)(ii): During the F. Y. 2007-0B & 2009-10 appellant paid Rs. 1.00 Cr. & Rs. 5.68 Cr. respectively to M/s Kalyani Education Pvt. Ltd. towards 'Deposits for Leased Assets' strictly as per agreement executed in that behalf on 24.12.08 & out of commercial expediency only for use of land, building & other infrastructure of company for running schools/colleges. Accordingly, school & colleges were running smoothly in the leased premises since 2007-08. Accordingly, the observation of AO that, there is no justification to give deposits for leased assets starting from F. Y. 2007-08, where the construction may not even have been started, and a significant amount of Rs. 5.68 Cr. During A. Y. 2010-11 when the construction is expected to be completed by Dec 2013 " is contrary to facts & not tenable. To substantiate our stand we are enclosing the following documents to establish that schools, colleges etc. were actually running in the premises under question from 2007-08 onwards: a) Telephone bill in the name of trust b) Receipts for building taxes paid from time to time' -

10 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust c) Electricity bills paid in the name of trust It is further to bring to Your Honours attention that, various institutions were running in the premises since 2007-08 only on the basis of approval of the same by competent authorities. [Please refer page No. 38 to 84 of the paper book] B. Addition on a/c of alleged violation u/s 13(1)(c)(ii):

7) The learned AO erred in law in treating the deposits given to M/s Kalyani Education Pvt. Ltd. as diversion of funds for the benefit of person referred to in sub-section (3) of section 13, without conclusively establishing any direct or indirect benefit accrued to said person/s. In this regard, it is worth Your Honour's attention that, the burden of proof that section 13 applies is on department. The onus lies on the revenue to bring on record, cogent material/evidence to establish that the Trust/Charitable Institutions were hit-by the provisions of section 13. (CIT vs. Kamla Town Trust (279 lTR 89 (All.)] 8) The learned AO erred in treating the payment of deposits- which is out of commercial expediency only, as diversion of funds for benefit of excluded person without appreciating the fact that, land & building worth Rs. 35 Cr. were taken rent free by trust for running schools & colleges at a nominal deposit & as such" there is-no undue benefit out of trust funds to the lessor company. 9) The learned AD failed to rebut the commercial expediency of the transaction as explained by the appellant in 'detail during the course of assessment proceedings with the help of relevant facts and figures. [page 11 and 12 of assessment order] Thus, AO's view is guided by the prejudices and preconceived notions about the payment of deposits and nothing is brought on record how the undue benefit is accrued to the payee company. 5.4 I have considered the facts and circumstances of the case and it is on record that the amount of Rs.6,68,00,000/-has been paid to M/s Kalyani Education Pvt. Ltd. as a deposit for leased asset in terms of agreement dtd.01.07.2008 for the use of premises.' As per clause 7.2 of the said lease agreement (noted in the assessment order) the appellant has obtained the, lease of the premises/property commencing from 1.4.2009. ~here is stipulation of monthly lease rent (Rs.5 lacs) to the total amount of Rs.9 Cr. by the end of 31.03.2014. The electrical charges, water charges on the user of the facilities and premises are also

11 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust to be borne by the appellant as per clause 7.3(i. ii. iii. & iv) of the agreement. As per clause 7. 7(ix), advance payment of rent every month is also stipulated. However, the AO has reached the conclusion of colourable device and diversion of funds to the benefit of 'specified person' as in section 13(2) of the I.T. Act. 5.5 It is on record that the deposit of Rs.6,68,00,000/- as above is in pursuance of a 'valid lease agreement for the user of premises and various other facilities and fixed assets in the nature of building, ground etc. by the appellant in the process of carrying out educational activities/charity. It has not been questioned by the AO that leased asset in the form of 'land,' construction and equipments (used by the appellant for its purpose as also noted in the assessment order at pg.12 in the reply of assessee) to the extent of Rs.7,70,00,000/- were utilised by the appellant during the year. It is proved from the copy of electricity bills and other state govt. records' like rent of the land, tax receipt, electricity bill etc. that the premises and the leased asset as envisaged in the agreement have actually been used by the appellant for its purposes. Thus, the findings of the AO on this issue are based on suspicion by ignoring the actual activities and transaction on this account where the leased assets were actually being used by the appellant for more than the amount of Rs.6,80,00,000/- deposit paid against investments/payable for assets of the leaser. (M/s Kalyani Education Pvt. Ltd.) to' the extent of Rs.7,70,00,000/- (Exhibited on pg.12 of the assessment order). After considering the above facts, and the judicial pronouncements relied upon by the appellant/ I find that there is no case of any benefit given/derived by specified person. Therefore, the conclusion reached by the AO and denying the exemption u/s 11 of the Act to the appellant for the year, solely based on the issue of undue benefit to specified person, is unjustified for being not based on facts hence liable to be rejected. In view of the above facts and the decision in the case of CIT Vs. Kamla Town Trust (Alld.) 279 ITR which clearly supports the ground of the appellant, where it was held that - "Even when there is some transaction involving the interested persons, it is not sufficient to attract section 13, unless some benefit is proved by the revenue." Hence, it is held that there is no applicabllity of section 13 of the LT. Act on the facts and issue during this year as decided by AO for denying exemption u/s 11 of the Act. 5.6 In view of facts and circumstances of the case on this issue, the appellant is entitled for exemption u/s.11 of the I.T.Act,

12 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust Hence, the AO is directed to delete the additions and allow exemption to the appellant u/s.11 r.w.s. 12 and 13 of the I.T.Act. 6. Against the above order of CIT(A) revenue is in further appeal before us. 7. We have considered rival contentions and carefully gone through the orders of the authorities below and found from record that assessee is a charitable trust engaged in promotion of education and allied activities. Assessee was running school, college of Engineering, Pharmacy, Management etc., With respect to each and every query of the AO, the CIT(A) has dealt in great detail and after giving detailed finding, reached to the conclusion that deposit of Rs.6,68,00,000 was in pursuance of valid lease agreement for the user of the premises and various other facilities and fixed asset in nature of building, ground etc., In the process of carrying out educational activities / charity, the assessee has used the premises and other leased assets for its purpose after recording detailed finding at para 4.32 -5.6, the CIT(A) reached to the conclusion that there is no case of any benefit being diverted by the assessee trust to the interested persons. Accordingly, denial of exemption u/s.11 by the AO was not correct. Accordingly there is no application of Section 13 of IT Act. Detailed finding recorded at para 4.32 to 5.6 has not been controverted by DR by bringing any positive material on record. The same do not warrant any interference on our part.

13 ITA No.198/Mum/2014 M/s. Kalyani Charitable Trust 8. In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on this 10/01/2017 Sd/- Sd/- (RAVISH SOOD) (R.C.SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 10/01/2017 Karuna Sr.PS Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. BY ORDER, 6. Guard file. सत्यापित प्रतत //True Copy// (Asstt. Registrar) ITAT, Mumbai