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1 IN THE INCOME TAX APPELLATE TRIBUNAL, NAGPUR BENCH, NAGPUR BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI RAM LAL NEGI, JUDICIAL MEMBER.. I.T.A. No. 384/Nag/2012 Assessment Year : 2008-09. Lokmanya Tilak Janakalyan Asstt. Commissioner of Income-tax, Shikshan Sanstha, Nagpur. Vs. Circle-2, Nagpur. PAN AAATL3003C. Appellant. Respondent. Appellant by : Shri K.P. Dewani. Respondent by : Shri A.R. Ninawe. Date of Hearing : 22-11-2016 Date of Pronouncement : 9th January, 2017.
O R D E R. PER SHAMIM YAHYA, A.M. : This appeal by the assessee is directed against the order of learned CIT(Appeals)- I, Nagpur dated 26-09-2012 and pertains to assessment year 2008-09. The grounds of appeal read as under :
On the facts and circumstances of the case the Commissioner of Income Tax (Appeals) erred in holding that the A.O. has rightly invoked the provision of section 13(1)(c) and denied the exemption under section 11 of the Income Tax Act. 2. On the facts and circumstances of the case the Commissioner of Income Tax (Appeals) erred in holding that the income or part of the income of the trust has been utilized for making the advances in violation of provision of section 13(1)(c) read with section 1`3(2)a and 13(3) of the Income Tax Act. 3. On the facts and circumstances of the case the Commissioner of Income Tax (Appeals) erred in observing that the Loans and advances given to Managing Committee Members were without security or interest. 4. On the facts and circumstances of the case the Commissioner of Income Tax (Appeals) erred in arriving at a conclusion that the AO has rightly disallowed payment of interest of Rs.52.79 lacs to Powers Financial Services Pvt. Ltd. under the provisions of section 40(a)(ia) of the Income-tax Act, 1961. 5. On the facts and circumstances of the case the Commissioner of Income Tax (Appeals) erred in holding that the A.O. rightly disallowed the amount of
2 Rs.2,74,79,379/- towards provision made for Salary and DA payable to staff as per statutory provisions. 2. Brief facts of the case are as under :
The assessee has filed a return of income on 28-01-2009 showing income of Rs. Nil as exemption u/s 11 has been claimed. The assessee trust runs several educational institutions in Nagpur and Mumbai. The majority of the trustees belong to the Chaturvedi family of Nagpur. The AO has observed in the course of assessment proceedings that during the financial year 2007-08 the trust has advanced interest free loans to two members of the trust who are also son and daughter of the founders of the trust namely Shri Satish Chaturvedi and Smt. Abha Satish Chatuvedi. The amounts advanced are as follows :
Sr. No. Name of assessee Amount. i) Pallavi Satish Chaturvedi Rs.76,54,799/- ii) Dushyant Chaturvedi Rs. 9,05,350/- The AO pointed out that these members are covered by the definition of specified persons given in section 13(3) of the Act and the loans and advances were outstanding in the books of the trust for financial year 2008-09. The AO has therefore, held that the assessee trust is hit by provisions of section 13(1)(c) r.w.s. 13(2)a of the Act and held that the income of the trust is not eligible for exemption due to contravention of section 13(1)(c). The surplus of Rs.1,70,07,523/- was hence treated as the business income of the assessee trust. Further the AO has disallowed deduction u/s 40(a)(ia) of Rs.52,79,636/- on interest payment and an amount of Rs.2,74,79,379/- being provision of salary and DA payable to the teaching and non teaching staff as it is in the nature of an unascertained liability. Income has therefore been assessed at Rs.4,97,66,540/-.
Upon assessee’s appeal, learned CIT(Appeals) elaborately considered the issue and also obtained remand report. As regards the issue of denial of exemption u/s 11, learned CIT(Appeals) upheld the AO’s action holding as under: 8. I have carefully considered the issue before me. The basic dispute that has crystallized is whether there has been a violation of provisions of section 13(1)(c) by the assessee trust r.w.t provisions of S 13(2) resulting in benefit to specified persons included in S 13(3). Section 13(1)(c) provides that if any part of the income or property of the trust is used or applied directly or indirectly for the benefit of specified persons as per section
13(3), then income of the trust will not be exempt u/s 11. The main thrust of the argument of the appellant is that there has been no application' of income of the trust in making advances to trustees and family members. Rather this is a case where interest free loans have been obtained from concerns in which trustees and their family members have ' substantial holding. Loans which have been obtained from such concerns viz from M/s Permanent Construction 'P. Ltd. and Smt. Sheetal Chaturvedi to the extent of Rs.l,45,72;578/- have been' utilized for advancing amounts to the two beneficiaries who' are members of the trust viz. Smt. Pallavi Chaturvedi and Shri Dushyant -Chaturvedl, Appellant has in fact" stated that if - this is taken into ' consideration, a net sum of Rs. 60,12A64/- can be said .to have been received by the trust in 'excess, than what was given to the specified 'persons and' members of the Governing Council to the Assessee Trust. Further according to 'appellant no part of income of the appellant trust has been utilized for making the advances.
8.1 However it is evident that this argument of the appellant is fallacious. It is worth taking into account that from the submissions of the appellant it is stated that while the total income and property accumulated upto 2008 amounting to Rs.142.78 crores and the total application on the object of the Trust is amountlnq to Rs.155.77 crores. Therefore according to appellant's own admission the trust was under compulsion to borrow amounts on loan of Rs. 13.82 crores from vari~us groups - concerns to meet the deficit utilized for appllcatlon of the trust. Accordinq to appellant these amounts orrowed are as follows.-
i) Rs. 1,32,34,526/- from Permanent Agro Tech. P. Ltd. ii) Rs. 13.36.056/- from Sheetal Chaturvedi iii) Rs. 12,58,52,299/- from Prowess Financial Services Pvt. Ltd.
8.2 Thus it is clear that the appellant trust was constrained to borrow amounts to discharge its obligations of meeting the objects of the trust. The natural corollary to this would be that amounts borrowed would therefore not be available for utilization towards any other purpose other than the objects of the trust and that includes for the purpose of making loans and advances to member trustees. It is also necessary to appreciate that the avowed objects of the trust are charitable and educational. Making trust funds available as loans and advances to family members and trustees, which are ultimately utilized for personal or business commitments by such trustees and family members cannot by any stretch of imagination be considered as falling within the scope of charitable activities undertaken by the trust.
8.3 In this regard I have carefully perused the revised memorandum of the association of the trust dt. 14-2-03 wherein there are 23 objects which includes education, public welfare, providing free medical aid and higher education. The amounts of interest free loans advanced to Smt Pallavi Satish Chaturvedi of Rs. 76,54,799/- and Sri Dushyant Chaturvedl of Rs. 9,05,350/- are therefore clearly not as per the objects of the trust. It is also necessary to examine whether the loans and advances are made in accordance with the regulations applicable to charitable institutions. It is seen from the rules to the memorandum dt. 24-02-2003 that institution can receive grants or
4 funds from any individual or institutions or banks with the prior permission of the Hon'ble Deputy. Charity Commissioner, Nagpur. This rule ensures that loans and advances taken are indeed utilized for the purported objects of the trust. Appellant was therefore specifically asked to clarify whether any prior permission was taken from the Charity Commissioner before obtaining loans from M/s Permanent Construction (P) Ltd and Smt Sheetal Chaturvedi and Prowess Financial Services (P) Itd. which is claimed to have been utilized for the purpose of making loans and advances to member trustees. In response to this query in the course of appellate. proceedings, appellant has furnished a copy of an order dt. 12-10-1999 issued by Joint Charity Commissioner, Nagpur stating that sanction has been accorded u/s 56A(3) of the Bombay Public Trust Act, 1959 for borrowing money by way of loan, deposits or advances from banks/public institutions/private companies or other individuals from time to time amounting to not more than Rs. 50 crore at interest rates which are not more than levied by nationalized bank rates. Further thtsl: order clearly lays down the condition that loan amount should be utilized for meeting the bjectives of the trust namely construction of the schools and college buildings and other allied uses. Thus it is seen that this general permission categorically and unequivocally states that loans are to be utilized to meet the objectives of the trust. Appellant has not produced before me any copy of any specific order or permission received from the Charity Commissioner regarding prior permission to receive loans or funds from any individual or institution and make them available as interest free loans and advances to member trustees. Therefore the appellant's explanation that the amounts received as loans from Permanent Construction (P) Ltd and smt Sheetal Chaturvedi have been utilised for making interest free advances to trustees Sri Dushyant Chaturvedi and Smt Pallavi Chaturvedi is neither feasible nor plausible.
8,4 Even if it is accepted hypothetically that the transactions of borrowing loans from related concerns and in turn advancing them to related concerns have taken place, it would be in violation of the memorandum and objectives of the trust deed. If loans have been obtained which are meant to be utilized towards the objectives of the trust, but have in reality and in contradiction of its avowed purpose been deployed for advancing loans to the members of trust and family members for activities unrelated to that of the trust, the very basis of the trust existing for the conduct of charitable activities comes into question. It would appear that even if this nexus is apparent the form of the trust has been used to mask the substance of transactions and the trust has been used as conduit for giving the interest free loans to trustees which would have otherwise been hit by provisions of section 2(22)(e) in the hands of Sri Dushyant Chaturvedi and Smt Pallavi Chaturvedi. It would therefore emerge that flow of funds through the trust has been facilitated for the fulfillment of a purpose which is not even remotely connected with
5 the objects of the trust.
8.5 In this connection the decision of the Patna High Court reported in 199 Taxman 395 (Patna) in the case of Budha Vikas Samity Vs CIT is relevant. It has been held that "registration of an organization as a charitable institution the provisions of section 12A leads to exemption from payment to income tax. Therefore it goes without saying that such an organization will have to measure up to the strict parameters laid down in the Act to continue to enjoy the benefit of exemption from payment of income tax, failing which it may be deprived of its registration as a charitable institution and the benefit of exemption from payment of income tax. If It would. appear that when the appellant has utilized the form and organization of the trust to confer benefits on members of the family who are trustees the strict parameters laid down in the act have not been adhered to and appellant has also violated the objectives of the trust.
8.6 The appellant has further contented that loans have been given after obtaining- adequate security vide document executed on 9th June, 2007 between Smt. Abha Chaturvedi and Directors of M/s Prowess Financial Services Pvt. Ltd and M/s Permanent Construction Co. Pvt. Ltd. The said concerns have credit balance to stand for security against the advance of total Rs. 85,60,114/- to Shri Dushyant Chatruvedi and Smt. Pallavi Chatruvedi. As pointed out by the A.O. the existence of such an agreement was never pointed out by the appellant during the course of investigation and in fact vide letter dt. 16-02-2010 Shri Dushyant Chaturvedi accepted that no loan agreement for the loans given to the trustees. It was only vide letter dt. 24-12-2010 in response to the final show cause notice that the security agreement suddenly materialized. AO has therefore held that this security agreement is dearly an afterthought. Aa has also pointed out that M/s Permanent Construction ep) Ltd. which has given purported security against the loan has withdrawn the amounts from the trust on 18-08- 2007 in violation of the agreement of indemnity and that another sister concern Mls Prowess Financial Services P. Ltd. has been paid interest of Rs. 52,00,000/- during the year. The question also arises as to why the security for the loans have not been provided by Shri Dushyant Chaturvedi and Smt. Pallavi Satish Chaturvedi who both have sufficient assets and property but been provided by third parties. The Allahabad High Court in the case of CIT Vs. Audh Educational Society 203 Taxman 166 (All.) has while addressing similar issue held that the security offered by a third party is not acceptable when the assessee itself has sufficient assets and funds. It is also necessary to point out that issue of guarantee being provided by M/s Permanent Construction P. Ltd. and M/s Prowess Financial Services P. Ltd. for making unsecured interest free loans to trustees is nowhere reflected in the audited statements of account of the appellant in AY 2008-09. There is thus no contemporaneous evidence in support of appellant's claim that
6 loans were offered on adequate security. The security guarantee of agreement of loan furnished by the appellant is thus an afterthought and has been rightly discarded by the AO. As regards the contention raised by the appellant that the loans are to be treated as advanced for adequate interest as no interest have been charged by sister concerns whose funds have been utilized for the purpose of making loans the "nexus between loans borrowed from group concerns and loans advanced to member trustees has been debunked in the findings in the foregoing paragraphs. Therefore the contention of the appellant that the loans cannot be treated as having been advanced interest free is without merit. As for the reliance of the appellant on the decision reported in 241 ITR 193 (Mad.) it has been pointed out by the AO that in the said case, the nuns who were members of the society were rendering service to the society in lieu of which their minimal needs were taken care of by the society. This decision does in no way support the case of the appellant as the facts are entirely different. After considering the issue in totality I am of the view that the reliance of AO on the decision of Supreme Court in the case of DIT Vs. Bharat Diamond Bourse 259 ITR 280 (SC) is categorically applicable on the facts of the case. The AO has pointed out that in the case of Bharat Diamond Bourse the amount advance was also without interest and without security. I therefore hold that the AO was entirely justified in concluding that the benefit of exemption u/s 11 will not be applicable to the trust as there is a clear violation of the provisions of section 13(1)(c) r.w.s 13(2) and S 13 (3) as income of trust has been utilized and interest free loans have been advanced to members of the trust without adequate security or interest.
Learned CIT(Appeals) further held as under :
“12. I have carefully considered te facts of the case. The appellant’s counsel has mainly relied on the provisions of section 164 interpreting it to contend that trust would not lose exemption in entirety but only the quantum of violation is to be treated as income subject to tax. It is necessary to note that the provisions of section 164(2) read with proviso is applicable in the case where income derived from property held under the trust where only part of such income is eligible for exemption u/s 11. The section relied upon by the appellant has no relevance to the facts of the case as pointed out by AO in the remand report. The perusal of the legislative history of section 13(1)(c) clearly shows that law contemplates denial of exemption u/s 11 when there is a violation u/s 13(1)(c). Further AO has elaborated the exceptions to the rule of complete denial in para 8 of the assessment order which is as follows :-
i) The exemption will not be denied merely because some funds of the trust or institution are invested in a concern in which the specified persons have a substantial interest unless such investment exceeds five percent of the capital of that concern.
7 ii) The exemption will also not be denied where the aggregate of the income and value of property diverted in favour of the specified person does not exceed Rs. 1,000/- iii) The second proviso to clause (c) of sub-section (1) of section 13 provides one exception. In the case of a religious trust or religious institution, wherever created or established, the exemption will not be denied, if the user of the trust income or the trust property related to any period before 1st day of June, 1970. iv) The second proviso provides one more exception. In the case of a charitable trust or a charitable institution created or established prior to 1st April, 1962, the exemption will not be denied if the user of the trust income or the trust property related to any period before 1st day of June, 1970. v) Another exception is provided in clause (h) of sub-section (2) of section 13. The exemption will not be denied where the investment of the funds in any concern in which the excluded persons have a substantial interest was done prior to the 1st day of June, 1971.
12.1 Thus the circumstances under which exemption is partly denied and when they are fully denied are clearly laid down in the provisions of the act itself. It is an established position in law that when any part of the income or property of the trust is directly or indirectly utilized for the benefit of any person referred to in sub section 3 of section 13 the trust will forfeit exemption from income tax. In the present case it is necessary to emphasis that the loans have not been advanced for any purpose which is evenly remotely connected to the objects of the trust. On the other hand the income of the trust has been utilized for the benefit of persons referred to in sub section 3 of section 13. AO’s action in this regard is therefore upheld.”
As regards the disallowance of interest paid of Rs.52,79,636/- by invoking provisions of section 40(a)(ia), learned CIT(Appeals) affirmed the AO’s action holding as under :
“15. I have carefully considered the issue before me. In this case AO has made a factual observation that tax has i not been deducted at source on interest payment of Rs. 52.79 lacs made to M/s! Prowess Financial Services Pvt. Ltd. It is seen that the basic justification offered by the appellant is that no tax is deductible since the assessee's income: is exempted uls 11 and income is not required to be computed as per sections 28 to 44. As pointed out by AO the assessee is liable to deduct tax at source on' payment of interest. Section 40(a)(ia) introduced in the Income tax Act by Finance Act, 2004 w.e.f. 1st April 2005 with the explicit purpose that certain sums would be admissible as deduction only if taxes due on such amounts are deducted as required by provisions of chapter-XVII. In the appellant's case there is no ambiguity that tax was required to be deducted at source on interest payments to Mls Prowess Financial Services Pvt. Ltd. Appellant has committed a default by not deducting the taxes due. Therefore the provision of
8 section 40(a)(ia) are clearly attracted. The main argument of the appellant is that the assessee trust is not engaged in any business or profession and does not: have any income under the head profits & gains of business or profession. However as it has already been held by me in ground no. 2 to 4 that assessee is not eligible for exemption u/s 11 this argument of the appellant is not tenable. The requirement to deduct tax at source does not exclude entities which are exempted u/s :11. The intent of the legislature was that deduction of tax at source is to be ensured in the case of all persons who are liable and obliged to do so. There are: no exceptions set out to this statutory obligation. Once income is to be computed as per the provisions laid down in section 28 to 44, all the relevant sections will have to be reckoned with in computing income under the head of bUFiness income. The appellant's argument is therefore without any merit. AO's action is therefore upheld. This ground is therefore dismissed.”
As regards the grounds of disallowance of Rs.2,74,79,379/- by holding that the liabilities in this regard were unascertained, learned CIT(Appeals) affirmed the AO’s action holding as under :
“ I have carefully considered the issue before me. It is relevant to take note of the fact that in form 108 the Auditor himself has made the following qualification, “Sundry creditors includes “salary arrears payable” total amounting to Rs.8,12,80,420/- (Rs.5,38,01,040/- upto last year 31st March, 2007). It is explained that provision has made as per Government GR for salary and DA payable to teaching and non teaching staff.” It is thus apparent that no verification has been made by the auditor on the claim of the appellant and in fact the auditor has relied on the explanation of the assessee. Further the fact that the salaries due to teaching and non teaching staff are itself shown as due and to be in arrears raises the fundamental question regarding the appellant’s claim that the assessee is adhering to Government’s regulations as huge amounts of salary are not paid and are shown as pending. The contention that these liabilities have crystallized is questionable and unsupported as evident from the audit report in form no. 108. The comments of the auditor clearly shows that no independent verification has been carried out by auditors and that they have merely relied on the explanation given by assessee trust that the provisions are made as per Government GR. AO has also emphasized that the basis of this quantification has not been furnished and the copy of the said GR relied upon by the appellant was not produced before him in spite of specifically being required to be produced. It is highly un-likely and un- characteristic that amounts due to salaried to the employee in the category of teaching and non teaching staff are kept outstanding for long periods when they have once crystallized. I am therefore of the opinion that AO has rightly disallowed an amount of Rs.2,74,79,379/- as the claim is unsupported. This ground is therefore dismissed.”
9 7. Against the above order, the assessee is in appeal before us.
We have heard both the counsel and perused the records. Learned counsel of the assessee’s submission in this regard is summarized as under :
Gr.No. 1 to 3: / Denial of exemption U/s. 11 of I.T. Act, 1961 A) Trust is holding registration U/s. 12A vide certificate dated 29/08/2003 and income of charitable institution is exempt U/s. 11 of I.T. Act, 1961.
B) The assessee is charitable institution running education institutions for past 12 years. It is enjoying benefit of income being exempt u/s 11 of I.T. Act 1961. The perusal of assessment order would indicate that assessee institution is pursuing the same objects of imparting education and all activities are in promotion of. its objects. The assessee institution is running many educational institution and is imparting education to approximately 15,000 students.
C) AO. has not granted benefit of exemption U/s. 11 of I.T. Act, 1961 according to him amount given to managing committee members Shri Dushyant Chaturvedi & Pallavi Chaturvedi is in violation of provision of Sec. 13(1 )(c) of I.T. Act, 1961. AO. otherwise than this has no Objection/dispute as to eligibility of its income being exempt u/s 11 of I.T. Act 1961.
D) AO has held that for there is violation of provisions of sec 13(1 )(c) no part of its income is exempt u/s. 11 of IT.Act, 1961. Gross Receipts 41.63 crores
Net Profit 1.70 crores 4.08%
Revenue Expenditure on object of Trust 39.93 crores 95.91%
Capital Expenditure on
Object of Trust. 8.63 crores. --------------- 48.56 crores.
1.70 crores Thus entire income of charitable institution is applied on charitable objects is undisputed fact on record. No income is received on advances to managing committee members which is sought to be claimed exempt u/s. 11 of the LT Act, 1961, nor amount given as advances is claimed to be application of income for claiming benefit u/s. 11 of the IT. Act, 1961. Benefit of exemption u/s 11 of LT. Act 1961 cannot be denied.
F) Issue covered in favour of assessee by decision of Apex Court in case of Karnataka Industrial Area Development Board.
i) SLP 4568/2015. Judgment dated 11/11/2016.
ii) ITA No. 557/2008. Judgment dated 17/06/2014 of Hon'ble Karnataka High Court
G) It was explained before A.O. that income of charitable institution is not applied for giving amount to aforesaid two persons and thus there is no violation of provision of Section 13(1 )(c).
H) Charitable institution has received interest free funds from Permanent Construction Pvt. Ltd. and Smt. Sheetal D. Chaturvedi which is belonging to managing committee members and same were sufficient to explain amount withdrawn by Dushyant Chaturvedi & Pallavi Chaturvedi.
I) Combined account of entities of managing committee memberswas submitted to explain that income of assessee trust is not applied for amount withdrawn by Dushyant Chaturvedi and Pallavi Chaturvedi same is reproduced at page 9 of assessment order. Factual position is not disputed by A.O.
J) A.O. was explained that interest at 5.5% on interest free fund of entities of interested persons available with assessee was Rs.6,39,545/- and interest on 'advances given to interested person was Rs.2,23,304/-. (P- 9 of assessment order). The net result is that interested person have not derived any advantage from assessee trust so as to take any adverse view of the matter. In fact assessee institution has not passed any benefit to interested persons. On the contrary assessee charitable institution has availed benefit considering the totality of fact situation.
K) The amount of interest receivable on amount given calculated at 5.5% was submitted before A.O. at Rs.2,23,304/-. Both the persons are working for the Charitable Institution. Shri Dushyant Chaturvedi and Smt. Pallavi Chaturvedi are members. Both the persons are not drawing any compensation for services rendered. Benefit for amount taken by them in monetary value is Rs.2,23,304/-. It is much less than reasonable compensation for services rendered. Thus there is no benefit in excess of fair market value to hold breach of provisions of Sec. 13 of I. T. Act, 1961. Without prejudice benefit of Sec. 11 is not applicable only to the extent of application of income in violation of provision of section.
L) Income arising from educational activities has been granted exemption u/s. 11 in past & subsequent years. Income arising during the year is solely from activities of imparting education & qualifies for being exempt u/s. 11 of the LT. Act, 1961. Benefit u/s. 11 cannot be denied to income from education which is charitable object.
M) Sec 11 (4A) envisage activities of business by trust which is not exempt u/s. 11 of the IT. Act, 1961. The concept of income being partly exempt & non exempt is built in the scheme of Exemption u/s. 11 of the I. T. Act, 1961. Provisions of sec 164(2) support this provision.
N) It is settled position of law that benefit of exemption u/s 11 cannot be denied for trivial breach u/s 13 of IT. Act 1961. It is only income arising out of such breach benefit of sec. 11 of IT. Act 1961 may not be granted.
Reliance on:
1) ITAT order in ITA NO.1712/PN/2007 in the case of M/s. Audyogik Shikshan Mandal vide order dated 03/11/2014
2) (2014) 365 ITR 353 (Mad.) CIT vs. Working Women's Forum
3) (2015) 235 Taxman 0516 (SC) Director of Income Tax vs. Working Women's Forum
4) (2001) 249 ITR 533 (Bom.) Director of Income Tax (Exemptions) Vs. Sheth Mafatlal Gagalbhai Foundation Trust
5) (2014) 363 ITR 0230 (Kar:) CIT vs. Fr. Mulles Chartiable Institutions 6) Hon'ble Gujarat High Court order in Tax Appeal No.187 of 2005 in the case of S.P. Mehta Memorial Trust vide order dated13/11/2014. ' 7) Hon'ble Karnataka High Court order in ITA No.557/2008 in the case of Karnataka Industrrial Area Development Board vide order dated 17/06/2014.
8) (2014) 98 DTR 0133 Karn.) CIT vs. KSTC Employees Death-Cum Retirement B. Fund.
9) Supreme Court order in SLP (C) .... C No.9776/2014 the case of KSTC Employees Death-Cum Retirement Benefit Fund.
(2003) 259 ITR 0280 (SC) Director of
Income Tax vs. Bharat Diamond Bourse
(2014) 364 ITR 0031 (SC) CIT vs. Dawoodi Bohara .Jarnat
12) (2002) 253 ITR 0593 (Delhi) Director of
Income Tax vs. Agrim Charan Foundation
13) (2000) 244 ITR 0494 (Raj.) DCIT vs. Cosmopolitan Education Society
14) (1988) 173 ITR 0248 (Guj.) CIT vs. Insaniyat Trust
15) Hon'ble Punjab & Haryana High Court order in ITA No.1 of 2011 (0 & M) in the case of M/s. Idicula Trust Society vide order dated11/04/2014.
16) ITAT order in ITA No.4514/De1/2011 in the case of M/s. Idicula Trust Society vide order dated 30104/2012.
17) ITAT order in ITA No.169/JP/2012 in the case of M/s. Santokba Durlabvhji Trust Fund vide order dated 05/11/2014
ITAT order in ITA No.5503/De1/2012 in the 18) case of Institute of Human Development vide order dated 10/10/2014. 19) ITAT order in ITA No.3807/Mum/2015 in the
case of Jamshetjee Tata Trust vide order dated 04/02/2016
(2014) 161 ITJ (Mum.) 0742 20) Jamshetji Tata Trust vs. Joint Director of Income Tax (Exemption)
21) (2016) 46 CCH 0040 (Del.) Institute of Haematology vs. Addl. Director of income Tax
22) ITAT order in ITA No.146/Nag/2013 in the case of Sushrut Hospital and Research Centre vide order dated 18/11/2015
23) (2012) 143 TTJ 0352 (Pune) Sinhgad Technical Education Society vs. ACIT
Gr. No.4: Disallowance u/s 40(a)(ia) of Rs.52,79,636/-.
A) Assessee, during the concerned assessment year has provided interest on unsecured advances received from M/s. Prowess Financial Services Pvt. Ltd. at the rate of 5.5% amounting to Rs.52,79,636/-.
B) The assessee is not deemed to be in default as mentioned under the second proviso to sec. 40a)(ia) of the I.T. Act 1961 as the conditions under the first proviso to sec. 201 of the I.T. Act 1961 are complied with i.e. Vol IV
i) M/s. Prowess Financial Services Pvt. Ltd. has furnished its return of income uls 139(1) on 30109/2008.
ii) M/s. Prowess Financial Services Pvt. Ltd. has taken into account such interest for computing income in such return of income.
iii) M/s. Prowess Financial Services Pvt. Ltd. has paid the tax due on the income declared by it in such return of income.
iv) Certificate from the Accountant under Form 26A has been furnished.
C) The second proviso to sec. 40(a)(ia) of the I.T. Act 1961 is declaratory and curative in nature and has retrospective effect from 01/04/2005. Reliance on:
i) (2015) 377 ITR 635 (Delhi) CIT vs. Ansal Land MarkTownship (P)Ltd.
D) 40(a)(ia) is not applicable whil;e computing income u/s. 11 of the I.T. Act, 1961. Issue covered in favour of assessee by decision of ITAT in the case of Vidarbha Cricket Association in ITA No. 136/Nag/2009 vide order dated 31/07/2009.
E) Considering above facts disallowance u/s 40 (a)(ia) is unjustified and unsustainable.
Gr.No.5: Addition of Rs.2,74,79,379/-.
17 ITA No.384/Nag/2012
A) Assssee made provision for arrears to be paid to employees s per the recommendation of 6th Pay Commission.
B) Even if above sum is excluded for the purpose of application of computing income u/s 11 of I.T. Act 1961. The application is more than 85% of income of charitable institution. Thus rendering decision on this ground may become academic nature.
Per contra learned D.R. relied upon the order of the AO and the learned CIT(Appeals).
First with regard to the issue of denial of exemption under section 11 of the Income Tax Act, The undisputed facts of the case are that the assessee is a charitable institution running educational institutions for the past 12 years. It is enjoying benefit of income being exempt under section 11 of the Income Tax Act. The perusal of the assessment order indicates that the assessee institution is pursuing the same objects of imparting education and all activities are in promotions of its objects.
The Assessing Officer has not granted exemption under section 11 of the Income Tax Act on the ground that assessee trust has given loans to its managing committee members Shri Dushyant Chaturvedi and Pallavi Chaturvedi in violation of provisions of section 13(1)c of the Income Tax Act. The Assessing Officer has otherwise no objection/dispute as to the eligibility of the trusts income being exempt under section 11 of the Income Tax Act.
18 ITA No.384/Nag/2012
The amounts advanced are as under Pallavi Chaturvedi Rs. 76,54,799 Dushyant Chaturvedi Rs. 9,05,350 The brief financial data of the trust's performance is as under :
Gross Receipts 41.63 crores
Net Profit 1.70 crores 4.08%
Revenue Expenditure on object of Trust 39.93 crores 95.91%
Capital Expenditure on Object of Trust. 8.63 crores. --------------- 48.56 crores.
It is further noted that in the past as well as subsequent assessment year's assessee has been granted exemption under section 11 of the Income Tax Act.
The learned counsel of the assessee has challenged the revenue's action in this regard on two counts. Firstly it has been assailed that there were sufficient interest-free funds available from related parties which has been utilised in giving these loans. Secondly it has been assailed that section 11 (4A) envisages activities of business by trust which is not exempt under section 11 of the Income Tax Act. Hence the concept of income being partly exempt and not exempt is built in this scheme of exemption under section 11 of the Income Tax
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Act. It has further been submitted that provisions of section 164 (2) support this proposition.
First we deal with the second limb of assessee's challenge the denial of exemption under section 11. The sum and substance of this submission is that if there is a default by the society under section 13 (1)c/13 (2) the same doesn't result in denial of exemptions under section 11 qua the entire receipts of the assessee trust and the same is to be restricted qua sum to which the default is attracted.
In this regard we may gainfully refer to the provisions of section 11(4A) and section 164(2) as under;
Section 11(4A):
“Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as th case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.” Section 164(2): “ In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, [or which is of the nature referred to in sub-clause (iia) of clause (24) of section 2], [or which is of the nature referred to in sub-section (4A) of section 11,] tax shall be charged on so much of the relevant income as is not exempt under section 11 [or section 12], as if the relevant income not so exempt were the income of an association of persons.” [Provided that in case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate]
The Honourable jurisdictional High Court had an occasion to expound on
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this subject in the case of Director of Income Tax (Exemptions) vs Sheth Mafatlal Gagalbhai Foundation Trust 249 ITR 533. It was expounded that as under :
"The proviso to section 164(2) of the Income-tax Act, was inserted by the Finance Act, It 1961, 1984. specifically refers to violation of section 13(1)(d) and its consequences. The proviso to section 164(2)refers to forfeiture of exemption for breach of section J 3(1) (d) resulting in levy of maximum marginal rate of tax only to that part of the income which has forfeited exemption. Where a trust contravenes section 13(1)(d), the maximum marginal rate of income-tax will apply only to that part of income which has forfeited exemption under the said provision and not the entire income. For the assessment year 1994-95, the assessee trust earned dividend as well as interest income as a holder of equity shares in M The trust claimed exemption on interest income. The Assessing Officer denied exemption holding that the trust had forfeited its exemption in respect of its entire income. On appeal, the Commissioner held likewise. The Tribunal allowing the appeal held that only dividend income was to be taxed at maximum marginal rate. On appeal by the Department:
Held, dismissing the appeal, that violation of section 11(5) read with section 13(1)(d) by the assessee trust would result in the maximum marginal rate of tax only on the dividend income on shares and not on the entire income. Therefore, income other than dividend income was to be taxed at the at the normal rate of taxation under the Act. "/
Similar view was expressed by the ITAT Delhi Bench in the case of ACIT vs Indicula Trust Society :
"Para 11. A bare perusal of section 13 (1 )(c) would suggest that whatever has been stated in sections 11 & 12 providing certain benefits to the assessee would not be available on the amounts which have been extended directly or indirectly for the benefit of any person referred to in sub-section (3) of section J 3 of the Act, meaning thereby, if an assessee has extended any undue benefit to the person mentioned in sub-clause (3) then those
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amounts would not be considered as application of income for the purpose of fulfilment of objects of the society and benefit of sections 11&12 would not be available to the assessee on those amounts. Thus, section 13(3)(1)(c)(ii) is analogous to section 40A(2a) of the Act. Learned CIT(Appeals) has rightly observed that restriction is applicable to those amounts which have been applied directly or indirectly for the benefit of any person referred to in sub-section (3) of the Act. It will not lead to any conclusion that assessee would loose its charity status. In other words if a small amount is to be disallowed that would not disqualify to enjoy the status of charity/ ITAT Delhi Bench in the case of ADIT vs. Institute of Human Development in ITA No. 5503/Del/2012 vide order dated 10-10-2014 referring to the above case laws has held as under : “ As far as ground no. 1 is concerned, the short point of consideration is that if there is default by a society registered u/s 13(1)(c)/13(2), whether that results in denying exemption u/s 11/12 qua the entire receipts of assessee society or to be restricted qua the amount to which default is attracted. We find that this issue is no more res integra and is covered by the decisions of various High Courts and the ITAT, holding that disallowance is to be restricted only qua amounts to which violation u/s 13(1)(c)/ 13(2) is attracted and the exemption in respect of other income cannot be forfeited.” 14. A reading of the above makes it amply clear that a harmonious construction of the relevant provisions is required.
Legislature has clearly contemplated that in a case where the whole or part of the relevant income is not exempt under section 11, by virtue of violation of section 13(1)(c) or (d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. Section 164(2) refers to the relevant income which is derived from property held under the trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of the association of persons. This is subject to application of other provisions of Act like exemptions, deduction etc. Therefore, a proviso was inserted by the Finance Act, 1984, with effect from April 1, 1985, under which in cases where the
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whole or any part of the relevant income is not exempt under section 11 or section 12, because of the contravention of section 13(1)(c) or (d), then tax shall be charged on such income or part thereof, as the case may be, at the maximum marginal rate. In other words, only non-exempt income portion would fall in the net of tax, as if it was the income of an association of persons.
In the case of Mafatlal Gagalbhai Foundation (supra) also it was held by the High Court that as per proviso to section 164(2), it is, inter alia, laid down that in cases where the whole or part of the relevant income is not exempt by virtue of section 13(1)(d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. The phrase “relevant income or part of relevant income” is required to be read in contradistinction to the phrase “whole income” under section 161(1A). This is only by way of comparison. Under section 161(1A) which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, then tax shall be charged on the whole of the income, in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the aforesaid two phrases show that the Legislature has clearly indicated its mind in the proviso to section 164(2), when it categorically refers to forfeiture of exemption for breach of section 13(1)(c) or 13(1)(d), resulting in levy of maximum marginal rate of tax only to that part of income, which has forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. This interpretation is also supported by Circular No. 387 dated July 6, 1984 [152 ITR (St.)1]. It was also held that in law, there is a vital difference between eligibility for exemption and withdrawal of exemption/forfeiture of exemption for contravention of the provisions of law. 1. 16. On the conspectus of aforesaid discussion and precedent we are of the considered opinion that assessee in this case does not deserve denial of
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exemptions under section 11. Only the amount which has not been utilised for the objects of the trust but has been advanced to the rated related persons should be subjected to denial of exemption and taxation thereof.
Accordingly we are of the opinion that the assessee is eligible for exemption under section 11 of Income Tax Act. Only the advancement of loan to the above related persons need to be brought under the purview of tax. The Assessing Officer is directed to disallow interest at the market rate on the sums advanced to the above persons.
Since we have already held that the trust deserves to be allowed exemption under section 11 of the Income Tax Act, adjudication on the other limb of assessee's contention will only be of academic interest.
Apropos issue relating to disallowance under section 40 (a)(ia): The Assessing Officer has disallowed is sum of Rs. 52,79,636/- on account of interest payment for non-deduction of tax deduction at source. The Ld CIT(Appeals) has affirmed the Assessing Officer's action.
In this regard Learned counsel of the assessee submitted that payee has furnished its return of income under section 139 (1) on 30/10/2008. That the payee has taken into account such interest for computing income. The payee has paid the tax due on the income declared. That certificate from the accountant under form 26A has been furnished. In this regard Learned counsel of the assessee has relied upon the decision of Honourable Delhi High Court in the case of CIT vs Ansal Land Marktownship 377 ITR 635 for the proposition that second proviso to section 40(a)(ia) of the Income Tax Act is declaratory and curative in nature and has retrospective effect from 1/4/2005.
We find that the above submission of the Learned counsel of the assessee is cogent. However the issue requires factual verification of the submissions
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made. Hence in the interest of justice we remit this issue to the file of the Assessing Officer. The Assessing Officer shall examine the factual aspects of the asseessee’s submission in this regard and decide as per the ratio emanating from the aforesaid case law from Honourable Delhi High Court.
Since we have principally affirmed the submission of the Learned counsel of the assessee the adjudication on the other limb of his argument in this regard is only of academic interest. Hence we are not engaging into the same.
Apropos the issue of disallowance of Rs. 2,74,79,379/- towards provision for salary and DA.
The Assessing Officer has made the above disallowance considering that the same as an unascertained liability. The CIT(Appeals) has affirmed the same by inferring that the auditor has not verified the same and that assessee had not submitted requisite documents in this regard before the Assessing Officer.
Upon careful consideration we find that the issue needs verification on the part of the Assessing Officer. Hence in the interest of justice we remit this issue to the file of the Assessing Officer. The Assessing Officer shall examine the issue afresh after giving assessee an opportunity of being heard.
In this regard it is another contention of the Learned counsel of the assessee that if the above some is excluded for the purpose of application of computing income under section 11 of the Income Tax Act, the application is more than 85% of the income of charitable institution. Hence rendering decision on this ground may become academic nature. We find that the aspect again needs examination of the computation and hence we leave the suspect of computation for the Assessing Officer.
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In the result, this appeal by the assessee stands partly allowed.
Order pronounced in the Open Court on this 9th day of January, 2017. Sd/- Sd/- (RAM LAL NEGI) ( SHAMIM YAHYA) JUDICIAL MEMBER. ACOUNTANT MEMBER.
Nagpur, Dated: 9th January, 2017. Copy forwarded to : 1. Lokmanya Tilak Janakalyan Shikshan Sanstha, Laxmi Nagar, Nagpur. 2. A.C.I.T., Circle-2, Nagpur. 3. C.I.T.-I, Nagpur. 4. CIT(Appeals) -I, Nagpur. 5. D.R., ITAT, Nagpur. 6. Guard File True Copy By Order Assistant Registrar, Income Tax Appellate Tribunal, Nagpur Bench, Nagpur. Wakode.