IME TRUST,GHAZIABAD vs. CIT, GHAZIABAD

The Ground of appeal

The assessee submitted before the Commissioner of Income Tax that the trust could not clear the cheques tendered against purchase of land due to non- availability of the funds. In view of the facts observed, the learned Commissioner of Income Tax held that the affairs of the trust were not maintained in the transparent and logical manner and he was not satisfied with the affairs and activities of the trusts and accordingly he rejected the application of the assessee seeking registration under Section 12AA of the Act. Aggrieved, the assessee is before us 6. The learned Authorized Representative of the assessee submitted that while granting the registration Commissioner of Income Tax is required to examine whether the objects of the trust are charitable in nature and about the genuineness of the activities of the trust. He further submitted that the learned Commissioner of Income Tax has not given any adverse findings in respect of either the charitable objects of the trust or about the genuineness of the activities and the Commissioner of Income Tax has only concluded that the affairs of the trust was not maintained in a transparent and logical manner. Further, the 4 6202/Del/2013 IME Trust learned Authorized Representative submitted that there was nothing wrong in extending loan to the trust by managing trustee or transferring land by one of the trustees to the trust through registered sale deed and having sale consideration at arm’s length price. Learned Authorized Representative also drawn our attention to the object clauses of the trust deed placed at page no. 3 of the assessee’s paper book and the application of the funds at page 7 to 9 of the assessee’s paper book. The learned Authorized Representative also submitted that the subordinate officer in his report has not found anything adverse in the activities of the trust and he recommended for grant of registration. In support of his proposition that at the time of registration of trust only genuineness of objects are to be examined, he relied on the judgement in the case of CIT Vs RS Bajaj Society (2014) 42 taxmann.com 573 ( Allahabad) and other cases submitted in the form of paper book.

On the other hand, ld. Commissioner of Income-tax (DR) submitted that the seller of the land was one of the relatives of the trustees and the trust was not having any funds to finance the property, and for that purpose the trust has obtained loan from the managing trustee. According to him, in other way, transfer of property to the trust was a colorable transaction. The learned CIT (DR) also filed submission before us. In the written submission has submitted that the assessee trust was having meager financial capacity and purchased land worth Rs. 16.54 crores without any plan arrangement of funds and thus the deal of purchase appeared colourable to the Commissioner of Income Tax. Further, 5 6202/Del/2013 IME Trust he submitted that seller Sh. Rahul Venkatesh Prasad was close relative to Managing Trustee and funds of Rs. 15 lakhs paid to the seller and Rs. 1.1 crore for stamp duty at the time of registration were provided by the Managing Trustee as unsecured loan. He further submitted that the Managing Trustee provided further loan of Rs. 3.25 crores under colour of unsecured loan and the balance amount of Rs. 11.55 crores was outstanding till 12.09.2013. He further submitted that in view of the transactions, the trust was separated from the family only on the paper and not in conduct of its affairs. In his submission, he further noticed that the settler of the trust was the Chairman-cum-Managing Trustee of the Trust. He thus submitted that settler by principle of proprietary should not be the trustee of the Trust settled by him. In his submission, he further submitted that the Commissioner of Income Tax (Appeals) was obliged to satisfy himself about the object of the trust as well as the genuineness of its activities. In the written submission filed, the learned Commissioner of Income Tax has distinguished the cases relied upon by the learned Authorized Representative in support. In rejoinder, the ld AR submitted that the CIT has no where stated the transaction a colorable transaction and interpretation by the ld CIT DR was without proper understanding of the facts and circumstances od the case. He stated that the transaction of sale and purchase of land is registered sale transaction and transaction was at the value prescribed as per the stamp duty purpose. Further, he stated that it was in correct on the part of the ld CIT DR

We have heard the rival submissions and perused the material on record. It is settled law that for grant of Registration under Section 12AA of the Act, the Commissioner of Income Tax is required to satisfy the twin conditions of charitable nature of the objects of the trust and genuineness of the activities carried out, but where the trust is new, the Commissioner of Income Tax cannot reject registration merely on the ground that no activity have been carried out. The assessee trust was constituted on 02.11.2011 and thereafter the assessee has commenced the activity of purchase of land for the purpose of achieving one of its objects of education. In the present case the first condition of charitable nature of object has not been disputed by the Revenue. In respect of the second condition, the learned Commissioner of Income-tax given finding that the trust has not maintained its affairs in transparent and logical manner and transaction made by the trust for purchase of land were highly disproportionate to the known funds available with the trust. The learned CIT(DR) has interpreted the said transaction of purchase of land from one of the relatives of the trustee as a colorable transaction. The learned Authorized Representative has denied such allegations of CIT(DR). We are also in agreement with the argument of the ld AR. It was apparent that the assessee trust has purchased land for commencing of its activity of education. We don’t find anything wrong in buying land by the trust from one of the relative of the trustee unless some undue advantage has 7 6202/Del/2013 IME Trust been passed on to the seller or the trust is adversely affected by the transaction. Further, we find nothing wrong in extending loan to the trust by the trustees. In the case in hand, the trustees or their relatives have extended loan and transferred land at arm’s length price as trustees and their families to fulfill the desire of charitable activity have extended loans or transferred the property to the trust. By these actions of the trustees or their relatives, the trust is not at disadvantage or the transactions are not prejudicial to the interests of the trust. Thus, we find that the finding of the ld CIT that trust has not maintained its affairs in transparent and logical manner and transaction made by the trust for purchase of land were highly disproportionate to the known funds available with the trust are completely devoid of merit and deserve to be rejected. Further, interpretation of the fact and circumstances of the assessee as a colorable transaction by the ld CIT DR, is also without correct appreciation of facts and circumstances. The ld CIT DR contended that in view of the purchase of land and extending loan by trustee shows that the trust and family members of the trust are acting as one entity is not convincing. In India, generally, the families keep the affairs of the trust with them so that they can advance the purpose of charitable nature for which the trust is established. But, if the family or any trustee abuse his power and authority and take undue and unlawful advantage from the trust, in that circumstances, it may be called as a colourable device, but in the facts of the case till the stage there is nothing, which could constitute a colorable transaction. A colourable transaction is a transaction, which is 8 ITA Nos. 6201& 6202/Del/2013 IME Trust apparently a valid transaction but really unlawful and illusory. We don’t find any such circumstances in the present case. In the case of ACIT vs. Biraj Investment Pvt. Ltd reported in (2012) 210 TAXMAN 0418 , the Hon’ble High Court of Gujarat has held that sale of shares at loss by the assessee, was not a colourable transaction. The relevant part of the judgment is reproduced as under:

We are not inclined to accept the Revenue's contention that this was a colourable device and that the entire arrangement was a paper arrangement. Firstly, there is no provision in the Act which would prevent the assessee from selling loss making shares. Simply because such shares were sold during the previous year when the assessee had also sold some shares at profit by itself would not mean that this is a case of colourable device or that there is a case of tax avoidance. Further, there is no restriction that such sale or transaction cannot be effected with a group company. As long as the Revenue could not doubt the sale price of the shares, it would not be open for the Revenue to contend that the assessee had shown loss which it did not really suffer. In the present case, it is not even the case of the Revenue that shares were sold at a price lower than the market rate. If that be so, the question of inflating the loss by transferring the shares to group company would not arise. Under ordinary circumstances, it is always open to the assessee in his own wisdom to either hold on to certain bunch of shares or to sell the same to avoid further loss, if he finds that market value of the shares is fast diminishing. It is equally open for the assessee to effect such sale during the same year when he also chooses to dispose of certain profit making shares. In the present case, of course, there is a further angle of the shares in question being pledged to IDBI and therefore it would not be possible for the assessee to deliver the original share certificates to its purchaser along with the duly signed transfer forms. As already noted, such special angle may have repercussion insofar as the legal relation between the assessee and the IDBI is concerned and insofar as the purchaser's right to have shares transferred in its name is concerned. This, however, by itself would not establish that the sale of shares was only a paper transaction and a device contrived by the assessee to claim loss which it did not suffer and thereby seek set off against the capital gain received by it during the year under consideration.

In the case of Commissioner of Income Tax v. Sakarlal Balabhai, 69 ITR 186, a Division Bench of this Court observed that avoidance of tax cannot include every case of reduction of tax liability of an assessee. The 9 6202/Del/2013 IME Trust assessee may enter into a transaction which has the effect of diminishing his income and consequently reducing his tax liability. In such a case, there would be no avoidance of tax, For example, a case where the assessee makes a gift of shares to his son. By reason of gift income from the shares would not accrue to the assessee but would accrue to the son and to that extent the income of the assessee would be diminished and his tax liability reduced. This cannot be regarded as a case of tax avoidance even if the motive of the assessee in making the gift was to save tax on the income from shares at a higher rate applicable to him.

Under the circumstances, even without referring to the decision of the Apex Court in the case of Azadi Bachao Andolan (supra) and the observations made in the later decision in the case of Vodafone (supra), we do not find that this a case which would fall within the parameters of the decision in the case of McDowell & Company Ltd (supra). Thus, in our opinion, the transactions carried out by the assessee are not colourable transactions and the activities of the trust are genuine till the relevant period of time. Further, the learned Commissioner of Income Tax has not given any finding as regard to the fact that the objects of the assessee were not charitable in nature.

In view of the above discussion, we hold that the assessee is entitled for registration under Section 12AA of the Act and accordingly we direct Commissioner of Income Tax to grant registration to the assessee under Section 12AA of the Act. Accordingly, the appeal is allowed. ITA No.6202/Del/2013 10. The facts in this appeal are identical to the facts the appeal bearing ITA No. 6201/Del/2013. Grounds of appeal are also identical, therefore, we hold that the assessee is eligible for registration under Section 80G of the Act. In fact, the Learned Commissioner of Income Tax (Departmental Representative) in his written submission in appeal in ITA no. 6201/Del/2013 has submitted as under:

Thus, following our decision in ITA No. 6201/Del/2013, we direct the Commissioner of Income Tax to grant registration under Section 80G of the Act. Hence, the appeal is allowed.

In the result, both the appeals filed by the assessee are allowed. The decision is pronounced in the open court on 13th January, 2016.