* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 3rd February, 2014
% Date of Decision: 18th March, 2014
+ ITA No.321/2013
+ ITA No.322/2013
+ ITA No.323/2013
DIRECTOR OF INCOME TAX (EXEMPTION) ..... Appellant
Through: Mr. N.P. Sahni, Sr. Standing
Counsel.
versus
CHARANJIV CHARITABLE TRUST ..... Respondent
Through: Ms. Shashi M. Kapila with Mr.
R.R. Maurya and Mr. Pravesh
Sharma, Advocates.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
R.V. EASWAR, J.
1. All the three appeals have been filed by the revenue under Section
260A of the Income Tax Act, 1961. They challenge the impugned order
of the Tribunal passed on 30.04.2012 in three appeals filed before it, two
by the assessee relating to the assessment years 2006-07 and 2007-08 and
one by the revenue relating to the assessment year 2006-07. In other
words, in respect of the assessment year 2006-07, there were cross-
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appeals before the Tribunal and in respect of the assessment year 2007-08,
it was the assessee which was in appeal. All the appeals were disposed of
by a common.
2. The brief facts giving rise to the present appeals are as follows.
The assessee is a Charitable Trust which was granted registration under
section 12A of the Act on 28.05.1976. In respect of the assessment year
2006-07, it filed a return of income declaring Rs.Nil as its income. On
31.10.2006 this return was processed under Section 143(1). Subsequently
a scrutiny of the return was initiated and notices under Sections 142(1)
and 143(2) were issued. A sum of Rs.8,60,1600/- was shown by the
assessee as the proceeds of the sale of assets, being land. It appears that
M/s. Ansal Properties and Industries Ltd. (APIL) owned certain plots of
land earmarked for schools, dispensaries, etc. The assessee in furtherance
of its objects to open a school, entered into agreements with APIL on
18.03.2004 and 14.03.2004 for purchase of the land situated at Palam
Vihar, New Delhi. In these agreements the assessee paid 95% of the price
of the land to APIL and simultaneously obtained possession of the plots.
It would appear that one of the conditions of the agreement was that in
case the allotment of plots is cancelled later, the assessee will be liable for
ITA Nos.321/2013, 322/2013 & 323/2013 Page 2 of 40
cancellation charges of 10% of the cost of plots. The advance paid by the
assessee was recorded in books of accounts for the financial year 2004-05
and the amount so advanced was added to the list of fixed assets. In the
assessee's books and as advances received in the books of APIL.
3. In April, 2005 the assessee cancelled the sale agreement and the
monies paid to APIL were returned to the assessee in instalments. No
cancellation charges were however levied by APIL. The entire amount of
Rs.8,60,1600/- which was earlier paid was returned by APIL. In the
course of the assessment proceedings, the AO doubted the genuineness of
the transaction of projects of the plots. He noted the following features: -
(i) Even after the lapse of more than one year from the date of
the agreement to sell, the sale was not completed and no
registered document was executed and in respect of the
delay, there was no explanation;
(ii) There was no evidence for taking possession of the land;
(iii) APIL did not declare any income by way of the transaction
(i.e. sale of the land to the assessee) in the relevant year when
ITA Nos.321/2013, 322/2013 & 323/2013 Page 3 of 40
the agreement to sell were executed which shows that even
possession of the land was not parted with; and
(iv) Though the agreements were cancelled on 21.04.2005 the
assessee-Trust made entries in its books for the cancellation
only on 31.03.2006 i.e. the last date of the accounting year.
4. The assessee's explanation was that the transactions were genuine,
were duly entered into the books, that the payments were made through
banking channels, that the plots were sought to be acquired in furtherance
of the objects of the trust and there was nothing to suspect the motives of
the assessee in entering into those transactions. This was, however, not
accepted by the assessing officer who took the view that the real motive
of the assessee was to advance its surplus monies to APIL without
charging any interest and since APIL was a prohibited person within the
meaning of Section 13(3), the provisions of Section 13(1)(c)(ii) were
attracted with the result that the assessee could not be allowed the
exemption under Section 11.
5. In the course of the assessment proceedings, the assessing officer
also noted that the assessee claimed to have received corpus donation of
Rs.1.5 crores from one S. Jagjit Singh, S/o. S. Bachan Singh through a
ITA Nos.321/2013, 322/2013 & 323/2013 Page 4 of 40
pay order. Under Section 12(1) of the Act, all voluntary contributions
received by a trust will be deemed to be income derived from property
held under trust wholly for charitable purposes, except those contributions
which are made with a specific direction that they shall form part of the
corpus of the trust. The effect of Section 12(1) is that non-corpus
donations which are treated as income derived from property held under
trust will have to be subjected to the provisions of Section 13. Corpus
donations, however, will not be treated as income derived from property
held under trust and, therefore, the provisions of Section 13 will not be
attracted. Having regard to the relevance of the corpus donations in the
assessment of a trust, the assessing officer issued notice under Section 131
and got the statement of Jagjit Singh recorded by the Additional Director
of Income Tax (Exemptions). It would appear that Jagjit Singh stated that
he had some disputes with regard to the clearance of title to the land with
DLF and in order to resolve the dispute, DLF was directed to pay Rs.1.5
crores to the assessee. He would, however, appear to have stated that
there was no specific direction given by him that the donation would be a
corpus donation. The assessing officer, on the basis of the statement of
Jagjit Singh, invoked the provisions of Section 68 of the Act and added
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the amount of Rs.1.5 crores as the assessee's income. A similar addition
was made in respect of another corpus donation of Rs.25 lakhs claimed to
have been received from one Piyush Jain through an account payee
cheque; the said donor failed to appear before the AO in response to the
notice issued under Section 131.
6. In the course of the assessment proceedings the assessing officer
found a debit balance of Rs.16,55,448/- in the name of Charanjiv
Charitable Educational Society. It was explained that the said society was
a charitable institution established in the State of Chhattisgarh by the
trustees of the assessee. It was formed as a separate institution as the
assessee desired to establish a private university in the State of
Chhattisgarh whose laws did not permit any institution outside the State to
establish any university in the State. According to the assessee, the said
society was formed only with the object of establishing a university in
Chhattisgarh, which was in conformity with the objects of the trust. It
was thus explained that the advancing of the money to the said society
without charging any interest did not in any manner violate the provisions
of Section 13(1)(c)(ii) of the Act. Detailed written submissions were also
filed before the assessing officer together with the correspondence with
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the government of Chhattisgarh in order to show that the debit balance in
the account of the society was not any interest free advance and therefore
there was no question of any application of the income or property of the
trust directly or indirectly for the benefit of any prohibited person. The
assessing officer did not accept the explanation and held that the Trust
was not entitled to the exemption.
7. In respect of the assessment year 2007-08, the assessing officer
took the same stand as he took in the assessment year 2006-07 on the
question of exemption under Section 11 and for the same reasons. He
also added an amount of Rs.25 lakhs claimed to have been received by the
assessee from M/s. Kuber Swamy Ashutosh Consultancy Pvt. Ltd. and
Rs.9,06,000/- from M/s. Sun System Institute of Information Technology
as corpus donations, disbelieving the assessee's version and invoking
Section 68 of the Act. He also took steps to verify both the donations.
M/s. Kuber Swamy Ashutosh Consultancy Pvt. Ltd. furnished the copy of
the bank statement to show the payment made to the assessee and also
furnished the copy of the receipt issued by the assessee, the PAN number
and copy of the bank certificate confirming the payment made to the
assessee. The assessing officer rejected the evidence on the ground that
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the donor never filed any return of income and did not submit its audited
balance sheet as on 31.03.2006. Moreover, the assessee did not produce
the Director of the donor company despite specific direction in this Court
by the assessing officer. As regards the corpus donation from Sun System
Institute of Information Technology the assessing officer took steps to
verify the same and issued a letter under Section 133(6) calling for
information but there was no compliance. He, therefore, added both the
corpus donations under Section 68. The assessing officer also disallowed
depreciation on certain assets on the ground that the cost of those assets
was allowed as application of the income of the trust for charitable
purposes and allowance of depreciation of those assets would amount to
double allowance which is not permissible.
8. There was an appeal to the CIT (Appeals) in which the assessee
challenged the findings recorded by the assessing officer. As regards the
violation of the provisions of Section 13(1)(c)(ii) on the ground that the
assessee advanced sums to APIL without charging any interest, the CIT
(Appeals) examined the relevant agreements under which the amount was
advanced and held that there were written agreements which were backed
by bank transactions and other documentary evidence to show that the
ITA Nos.321/2013, 322/2013 & 323/2013 Page 8 of 40
amount was advanced to APIL for purchase of land for setting up a
school, that the giving of possession is evidenced by the agreements and
the possession letters, that the payments were recorded in the books of
accounts as for purchase of land and in these circumstances the assessing
officer was not justified in holding that the provisions of Section
13(1)(c)(ii) read with Section 13(3) were attracted. As to the finding of
the assessing officer that an adjustment entry was passed in the accounts
of the assessee only on the last day of the financial year, he held that
considering the totality of the circumstances and the evidence available,
the accounting entry did not affect the genuineness of the transaction.
There were other findings recorded by the CIT (Appeals) based on the
accounts that the amount advanced by the assessee to the APIL did not
represent any loan or advance but represented payments made towards
purchase of plots reserved for school/ dispensary and, therefore, there was
no question of charging any interest or security. He, therefore, held that
there was no violation of provision of Section 13(1)(c)(ii) read with
Section 13(3).
9. As regards the objection of the assessing officer based on the debit
balance of Rs.16,55,448/- appearing in the assessee's balance sheet in the
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name of Charanjiv Educational Society on the basis of which he came to
the conclusion that there was a violation of Section 13(1)(c)(ii) read with
Section 13(2)(a)/ 13(3), the CIT (Appeals) held that the debit balance
arose on account of the desire of the assessee to establish an educational
institution (private university) in the State of Chhattisgarh. According to
the law prevailing in Chhattisgarh, no society established outside that
State could open a private university. In order to overcome this legal
hurdle the assessee formed and registered a trust by name "Chirajiv
Educational Society" as an independent unit in Chhattisgarh. The
signatories to the trust deed were the trustees of the assessee. The object
of the society was charitable and similar to the objects of the assessee
trust. The assessee provided the funds to the aforesaid society for the
purpose of meeting the expenditure required for establishing the private
university. These funds were utilised by Charanjiv Educational Society
for purchase of land, contribution to the endowment fund, etc. The
society received permission from the Chhattisgarh government and also
made the required payments in order to establish the private university.
However, in the year 2005 the Supreme Court struck down Sections 5 and
6 of Chhattisgarh Niji Khsetra Vishwavidalaya Regulatory Commission
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(Sthapana Aur Viniyaman) Adhiniyam, 2002 as a result of which the
Chhattisgarh government by letter dated June, 2006 informed the society
that the project could not be fulfilled and returned the deposit of Rs.2
crores by account payee cheque which in turn was returned by the society
to the assessee trust. The other amounts advanced by the assessee to the
society were also returned as and when they were received back by the
society. The establishment, legal and other expenses incurred by the
society were to be made good by the assessee on closure of operations by
the society in 2008 pursuant to the letter of the government. On these
findings, the CIT (Appeals) held that there was no violation of the
provisions of Sections 13(1)(d) read with Section 11(5) as this was not a
case of deposit of funds of the trust in unauthorised modes. On the
contrary, the amount was utilised for the purpose the educational object
and no benefit was derived by the society or their trustees or any other
interested party. In this view of the matter, the CIT (Appeals) held that
the assessing officer was not justified in denying the exemption under
Section 11 to the assessee on the ground that the funds of the assessee
were utilised for the benefit of a prohibited person.
ITA Nos.321/2013, 322/2013 & 323/2013 Page 11 of 40
10. So far as the ground relating to depreciation is concerned, the CIT
(Appeals) took note of the judgment of the Supreme Court in Escorts Ltd.
vs. UOI, (1993) 199 ITR 43 and held that in arriving at the real income of
the trust, deduction for depreciation cannot be allowed if the capital
expenditure incurred in acquiring the asset has been allowed as
application of income, since allowance of depreciation in such a case
would amount to double deduction. On the basis of this judgment the CIT
(Appeals) upheld the disallowance of the depreciation.
11. As regards the addition made under Section 68 in respect of the
donation received from Jagjit Singh, the CIT (Appeals) held after
examining the relevant facts that the assessee had filed a confirmation
letter from the donor which was found untrue on later inquiry. The CIT
(Appeals) noted that the donor had denied the making of any donation and
had made a statement to that effect before the ADIT (Investigation). On
the basis of the denial, the CIT (Appeals) held that the source of the
receipt of the amount of Rs.1.50 crores was not approved. He accordingly
upheld the addition.
12. As regards the addition of Rs.25 lakhs under Section 68, stated to
be received as corpus donation from Piyush Jain, the CIT (Appeals) after
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examining the evidence held that since the assessee failed to produce the
donor or any proof of donation towards the corpus of the trust and even
failed to demonstrate that the amount was received for a purpose other
than the corpus, the amount was rightly added by the assessing officer.
13. In the appeal for the assessment year 2007-08 a different incumbent
in the office of the first appellate authority, found himself unable to
follow the decision taken by his predecessor in respect of the
disallowance of the exemption under Section 11 on the ground of
violation of Section 13(1)(c)(ii) read with Section 13(3). According to
him, both in respect of the advances made to APIL and the debit balances
in the account of Charanjiv Educational Society, there was a violation of
the above statutory provisions disentitling the assessee from the benefit of
exemption under Section 11. The addition made under Section 68 of the
Act on account of corpus donations received from M/s. Kuber Swamy
Ashutosh Consultancy Pvt. Ltd. and Sun System Institute of Information
Technology were also confirmed.
14. The matter reached the Income Tax Appellate Tribunal in cross
appeals for the assessment year 2006-07. In the assessee's appeal the
challenge was to the addition of Rs.1.50 crores and Rs.25 lakhs made
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under Section 68 and the addition of the development fund charges of
Rs.59,58,384/- which represented the corpus of the trust which was
obliged to be spent on the objects of the trust. In the appeal by the
revenue, the decision of the CIT (Appeals) that there was no violation of
the provisions of Section 13(1)(c)(ii) read with Section 13(3) of the Act
was challenged. There was also a ground relating to certain amounts
which were held by the CIT (Appeals) to be eligible for the benefit of
Section 11(1)(d). The Tribunal in its consolidated order held that there
was no violation of the provisions of Section 13(1)(c)(ii) read with
Section 13(3) either on account of the monies belonging to the assessee
having been advanced to APIL without any interest or security or on
account of the existence of debit balances in the account of Charanjiv
Educational Society. So far as the advances made to APIL are concerned
the Tribunal accepted that they were made for acquisition of plots for the
objects of the trust and were not advances made without any interest or
security so as to attract the provisions of Section 13(1)(c)(ii)/ 13(3) of the
Act. The findings of the Tribunal, summarised in paragraph 19.3 of its
order, are as below: -
"(a) Assessee is a charitable institution, there is no
change in it's objects. It carried on educational
ITA Nos.321/2013, 322/2013 & 323/2013 Page 14 of 40
institutions and intended to further its objects by
opening new schools and a university.
(b) APIL owned reserved educational plots and it's
agreements to sale of such reserved plots with group
educational trust do not carry any element of primary
suspicion.
(c) The agreements are being held as colorable
devise as they are not registered and therefore, cannot
be considered evidence. Assuming even that
agreements cannot be produced as evidence; the
contemporaneous records for AY 2004-05; 2005-
2006; bank accounts and other relevant evidence does
support the explanation of the assessee. Besides its
trite law that an evidence which may not be
admissible in court of law can be admissible for
income tax purposes. This is so as in income-tax
proceedings there is no lis or adversarial proceedings
between assessee and department. Income tax
proceedings are not fettered by technical rules of
evidence and evidence which has bearing on the
subject matter and is primarily relied can be
considered in income tax proceedings. The
agreements and other record is complimentary to
each other, corroborative to each other. In our
considered view on the basis of contemporaneous
evidence like account books, bank accounts and
returns of income it cannot be held that assesses
explanation in this behalf is unbelievable. Some
minor issues here and there about posting a journal
entry at the end of the year or difference in
nomenclature cannot make a transaction colourable,
which otherwise has corroborative evidence.
(d) From APIL copy of account in the assesses
books it clearly emerges that more often than not
APIL had credit balance, thus it has been providing
monetary support to trust now and then. Therefore, a
ITA Nos.321/2013, 322/2013 & 323/2013 Page 15 of 40
presumption cannot be drawn that APIL diverted the
funds without proper justification for its use.
(e) Assessee debited 95% advance to asset
acquisition a/c itself indicate that because of
substantial advance and possession it treated the plots
as its assets. Treatment of these amounts as advances
in APIL books, does not militate against assessee's
method of accounting. Both maintain independent
accounts; assessee under Trust regulations and APIL
under normal Company Law and commercial
principles, method of accounting and revenue
recognition principles. Therefore, the alleged
variation in categorization of accounting in two
different set of books will not convert valid
transactions into colourable transactions.
(f) So far we have been unable to find any
motivation on the part of APIL to clandestinely divert
Trust Funds for its personal use. Before the
agreements and after the termination of agreements
APIL had interest free credit balance with assessee.
On cancellation of plots their amount has been duly
returned within reasonable time on running account
basis.
(g) Revenue has an objection that possession of
plots and valuable rights to insist for specific
performance were vested in assessee, they have been
relinquished. Apropos assessee contends that
cancellation of plots was in the interest of trust as by
that time it had moved on to better projects including
a university. Since no cancellation charges were to
be levied, it terminated the agreements. In our view
every entity has a right to carry on its objectives in the
manner it best considers. Revenue cannot step in the
shoes of the trustee in these matters. If the
explanation is prima facie convincing and reasonably
corroborated by record, evidence and explanation;
the same should not be rejected on ipse-dixit.
ITA Nos.321/2013, 322/2013 & 323/2013 Page 16 of 40
(h) In view of the foregoings we see no reason to
interfere with the finding of ld. CIT (A) which have
been arrived at after due consideration of evidence,
record, explanations and case laws mentioned above.
Revenues reliance on the case of Kanhaya Lal Punj
Trust (supra) has been rightly distinguished and held
to be not applicable to the assesses case in view of the
contemporaneous evidence."
15. So far as the debit balances in the account of Charanjiv Educational
Society is concerned, which was one of the grounds of the assessing
officer to deny the exemption under Section 11 is concerned, the finding
of the Tribunal is as under: -
"21. Apropos revenue ground about debit balances
against CES also we see no infirmity in the order of
CIT(A). It has been held that assessee in furtherance
of its objects intended to open a university at
Chhatisgarh, proper formalities were completed, due
to Supreme Court order the object could not be
achieved in the hands of the assessee. Therefore, it
formed this charitable society with same objects and
trustees and incurred the expenses which are shown
as advance to CEC. In our view, even if the same
amount was donated to CEC in place of advance, in
that eventuality also it would have been allowed as
application to objects. CIT (A) rightly dismissed this
ground which had no merit."
16. We are leaving out the finding of the Tribunal relating to the corpus
donations treated by the assessing officer as not being eligible for the
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benefit of Section 11(1)(d) since no question has been raised before us by
the revenue on this point.
17. The Tribunal's finding in the assessee's appeal with respect to the
addition made under Section 68 is that the assessee has successfully
demonstrated the identity of the donors, the source of the payment, the
PAN numbers, original confirmation, etc. and in the light of the
documentary evidence, which were not pursued by the assessing officer
by making further inquiries, and, therefore, the assessee has discharged
the onus of establishing the identity and creditworthiness of the donors as
also the genuineness of the donations. The additions of Rs.1.50 crores
and Rs.25 lakhs were accordingly deleted. As regards the assessee's
ground claiming allowance of depreciation in computing the real income
for the purpose of determining the application of income despite the
investment in the assets having been allowed as application of income, the
Tribunal, purporting to follow a judgment of this Court in DIT vs. Vishwa
Jagrati Mission in ITA No.140/2012 dated 29.03.2012 [since reported in
(2013) 262 CTR (Del) 558], held that in the light of this judgment the
assessee was entitled to claim depreciation on the cost of the assets, the
investment in which was already allowed as application of income.
ITA Nos.321/2013, 322/2013 & 323/2013 Page 18 of 40
18. We are leaving out the finding of the Tribunal in relation to the
treatment accorded to the development fund charges of Rs.59,58,384/-
recovered during the year and directly credited to the corpus of the trust
because no question of law has been raised on this aspect before us.
19. In the appeal by the assessee for the assessment year 2007-08, the
Tribunal took the same view so far as the claim for exemption under
Section 11 is concerned. It also deleted the additions made under Section.
20. The following substantial questions of law are framed: -
ITA Nos.321/2013 & 323/2013 (assessment year 2006-07)
(i) (a) Whether on the facts and in the circumstances of the case
the Tribunal was right in law in holding that there was no violation
of Section 13(1)(c)(ii) read with Section 13(3) of the Income Tax
Act, 1961 in respect of the transactions which the assessee had
with M/s. APIL and Charanjiv Educational Society and
consequently in holding that the assessee was entitled to the
exemption under Section 11?
(b) Was such decision perverse?
ITA Nos.321/2013, 322/2013 & 323/2013 Page 19 of 40
(ii) Whether the Tribunal was right in law in holding that the
assessee was entitled to depreciation on the assets, the cost of
which has been allowed as deduction as application of income?
(iii) Whether on the facts and in the circumstances of the case the
Tribunal was justified in deleting the addition of Rs.1.50 crores and
Rs.25 lakhs received from Jagjit Singh and Piyush Jain
respectively, by invoking Section 68 of the Act?
ITA No.322/2013 (assessment year 2007-08)
(i) (a) Whether on the facts and in the circumstances of the case
the Tribunal was right in law in holding that there was no violation
of Section 13(1)(c)(ii) read with Section 13(3) of the Income Tax
Act, 1961 in respect of the transactions which the assessee had
with M/s. APIL and Charanjiv Educational Society and
consequently in holding that the assessee was entitled to the
exemption under Section 11?
(b) Was such decision perverse?
(ii) Whether on the facts and in the circumstances of the case the
Tribunal was justified in deleting the addition of Rs.25 lakhs and
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Rs.9.06 lakhs being amounts claimed to have been received by the
assessee as corpus donations from M/s. Kuber Swamy Ashutosh
Consultancy Pvt. Ltd. and Sun System Institute of Information
Technology respectively by invoking Section 68 of the Act?
21. We may first take up the fundamental question as to whether the
assessee was ineligible for the exemption under Section 11 on the ground
that there was contravention of the provisions of Section 13(1)(c)(ii) read
with Section 13(3) of the Act. It is necessary to briefly notice the
statutory provisions in this regard. Section 11 exempts any income
derived from property held under trust wholly for charitable or religious
purposes to the extent to which it is applied to such purposes in India, to
the extent of 85% of such income. Charitable purposes are defined in
Section 2(15). There is no dispute that the objects pursued by the assessee
fall within the said definition. Even if the objects of a trust satisfies the
definition of "charitable purpose" as per Section 2(15), it does not
automatically confer exemption to the trust; it has to further get itself
registered under Section 12A. This condition is also satisfied in the
present case since the assessee was registered under Section 12A on
28.05.1976. There are further conditions for being eligible to the
ITA Nos.321/2013, 322/2013 & 323/2013 Page 21 of 40
exemption. Section 13(1) enumerates instances under which the
provisions of Section 11 granting exemption will not operate. One such
instance is furnished by clause (c)(ii) which says that if any part of the
income or any property of the trust is, during the relevant previous year,
used or applied directly or indirectly for the benefit of any person referred
to any sub-section (3), the exemption will not be allowed. Sub-section (3)
enumerates the prohibited persons and there is no dispute that the
assessee's case falls within clause (e) of sub-section (3). There is another
provision which we have to notice and that is Section 13(2) which in
clauses (a) to (h) thereof sets out illustrative instances where the income
or property of the trust may be deemed to have been used or applied for
the benefit of a prohibited person.
22. It is also to be noted that even if there is one instance of application
or use of the income or property of the trust directly or indirectly for the
benefit of any prohibited person, the trust will lose the exemption in
respect of its entire income. Therefore, if in respect of the monies paid
either to APIL or to Charanjiv Educational Society, it is found that the
provisions of Section 13(1)(c)(ii) read with Section 13(3) of the Act are
not followed, the trust would lose its exemption entirely, with the result
ITA Nos.321/2013, 322/2013 & 323/2013 Page 22 of 40
that the assessment of its income will be made according to the provisions
of the Act.
23. With the above prefatory observations we may examine the facts of
the case relating to the monies advanced to APIL. Before the assessing
officer the assessee submitted that the agreements were entered into with
APIL in the financial year 2003-04 for purchase of land in Palam Vihar
and advance of Rs.86,01,600/- was made. In its letter dated 26.11.2008
written to the assessing officer, the assessee admitted that though payment
was made possession was not taken by the trust. The payment was,
however, treated as application of income (towards charitable purposes) in
the said financial year. In the same letter it was further averred that due to
various reason the assessee changed its mind and the agreements were
cancelled; the amount was refunded to the assessee in the financial year
relevant to the assessment year 2006-07. The refunded amount was
reduced from the fixed assets to which they had been debited. Having
said this, in its subsequent letter dated 18.12.2008 the assessee appears to
have changed its stand. In this letter it was admitted that though no
registered deeds were executed but possession of the plots were given to
the assessee in the financial year 2003-04. The attention of the assessing
ITA Nos.321/2013, 322/2013 & 323/2013 Page 23 of 40
officer was drawn to the clauses 16 and 20 of the agreements dated
18.03.2004 and 24.03.2004 which stipulated that on receipt of 95% of the
amount, physical possession of the plots was handed over to the assessee
by APIL. It was explained that these clauses were unfortunately
overlooked by the assessee and the attention of the assessing officer was
not drawn to that in the earlier letter. The assessee also enclosed copies of
its letter dated 31.3.2005 to APIL and the reply of APIL dated
21.04.2005. It is significant that these letters had not been filed with the
assessing officer along with the assessee's earlier letter. The assessing
officer dealt with the assessee's submissions in both the letters and n oted
that there was a significant change in the assessee's stand vis-a-vis taking
over possession of the land. He issued summons to APIL under Section
131 of the Act in response to which APIL submitted that no income from
the transaction was shown in its return for the assessment year 2004-05.
Apparently the assessing officer was of the view that in case possession of
the land had been handed over to the assessee in the financial year 2003-
04 by APIL, as claimed by the assessee in the subsequent letter dated
18.12.2008, the provisions of Section 2 (47)(v) of the Act which defines
"transfer" inclusively for the purpose of levying capital gains, would be
ITA Nos.321/2013, 322/2013 & 323/2013 Page 24 of 40
applicable and capital gains would have been declared by the APIL but in
view of APIL's reply, the assessing officer concluded that possession of
the land was not given to the assessee. He further noted that the amount
of Rs.8,60,16,000/- continued to remain with APIL for the whole of the
next financial year i.e. 2004-05 without any progress in the transaction.
No sale deed was signed for more than one year even assuming that there
were agreement to sell entered into in the month of March, 2004. He
found it unusual that the assessee would part with 95% of the price of the
land without even taking possession of the same and would wait for such
a long period without getting the sale registered in its name. He also
found it unusual that it was on the last day of the financial year 2004-05
that the assessee claimed to have written to APIL cancelling the deal
which was accepted by the letter dated 21.04.2005. The assessing officer
also noticed that even though APIL agreed on 21.04.2005 to cancel the
agreements, the copy of the ledger account of APIL in the books of the
assessee did not reveal any corresponding entry made on the said date; the
entry reflecting the cancellation of the agreement to sell was passed in the
accounts only on 31.03.2006. He further noted from the account that even
after cancellation of the deal two cheques for Rs.80 lakhs and Rs.75 lakhs
ITA Nos.321/2013, 322/2013 & 323/2013 Page 25 of 40
were given to APIL on 29.11.2005 and 13.12.2005 for which there was no
explanation. On these facts and relying upon certain authorities including
the judgment of this Court in Kanahya Lal Punj Charitable Trust Vs.
Director of Income Tax (Exemptions) (Delhi), (2008) 297 ITR 66, the
assessing officer took the view that there was a violation of Section
13(1)(c)(ii) read with Section 13(2) read with Section 13(3)(e). These
findings were not accepted either by the CIT (Appeals) who decided the
appeal for the assessment year 2006-07 or by the Tribunal.
24. Counsel for the revenue submitted that the findings of the Tribunal
are perverse and have been recorded by taking into account irrelevant
considerations and by ignoring relevant material. We are inclined to
agree. The statutory provisions which we have referred to have to be
applied stringently by having regard to their object, viz., to prevent misuse
of the exemption provision. It is difficult to see how the assessee-trust
can advance about 95% of the price of the land allegedly purchased by it
for its objects and not insist on the lands being conveyed to it within
reasonable time or within the time which it normally takes. If the trust is
quite serious about pursuing its objects of running schools/ dispensaries, it
should have insisted on conveyance of the lands within a reasonable
ITA Nos.321/2013, 322/2013 & 323/2013 Page 26 of 40
period of time or at least stipulated for interest or adequate compensation
or damages in case of failure to honour the alleged agreements. Counsel
for the assessee pointed out that no advances were given in the previous
year relevant to the assessment year 2006-07 and that they were all given
in the earlier years and were only refunded in the accounting year ended
on 31.03.2006. This argument is bereft of any merit and in fact reinforces
the contention of the revenue that the monies were lying with APIL for a
longer period without any interest or security, even taking into account the
amounts refunded by APIL in the relevant previous year. Moreover, the
Tribunal failed to take note of the fact that the assessee had taken
contradictory stands before the assessing officer on a crucial aspect i.e.
possession of the land. In its letter dated 26.11.2008 the assessee
admitted that though payment of Rs.8,60,16,000/- had been made to
APIL, possession of the land was not taken. But in its letter dated
18.12.2008 the assessee filed copies of the agreement dated 18 th and 24th
March, 2004 to show that they contained clauses to the effect that
physical possession of the plots had been handed over by APIL and
explained that these clauses were overlooked by it while making
submissions vide letter dated 26.11.2008. It is difficult to believe how the
ITA Nos.321/2013, 322/2013 & 323/2013 Page 27 of 40
assessee could forget or could have overlooked that it had taken
possession of the land and admit to the contrary in its letter dated
26.11.2008, if in fact and truth it had taken possession of the land
pursuant to the relevant clauses in the agreements. Even if it is accepted
for the sake of argument that the assessee had taken physical possession
of the lands, there is no explanation as to why the agreements were
cancelled, except a vague statement in the letter dated 26.11.2008 that it
changed its mind due to "various factors". The assessee is a trust; surely,
such decisions are expected to be taken formally in meetings of the
trustees with reasons for the decisions being discussed and minuted. No
minutes were produced; a vague statement is made that the trust changed
its mind due to various factors, without being specific. The amount
advanced is quite substantial and particularly when it is admitted that the
amount was advanced to a prohibited person within the meaning of
Section 13(3), it was the burden of assessee to establish beyond any doubt
or suspicion that the advance was made bona fide and with the genuine
object of acquiring land for the pursuit of the objects of the trust. Further,
even though APIL accepted the request for cancellation of the agreements
by letter dated 21.04.2005, the entry reflecting the cancellation of the
ITA Nos.321/2013, 322/2013 & 323/2013 Page 28 of 40
agreement was passed in the assessee's account only after almost a year
i.e. on 31.03.2006 which is the last day of the relevant accounting year.
This fact will have to be noted and appreciated keeping in view the whole
perspective and not in isolation. Even if the agreements were cancelled
on 21.04.2005, there is no explanation why further amounts of Rs.80
lakhs and Rs.75 lakhs were advanced to APIL on 29.11.2005 and
13.12.2005 respectively. These amounts also did not bear any interest nor
was any security taken.
25. Counsel for the assessee would, however, contend that the chart set
out in the order of the Tribunal would show that the account between the
assessee and the APIL is a running account and if the entries are taken as
a whole it would be seen that it is APIL which is funding the assessee and
not the other way round. It was again submitted that in the 12 month
period ended on 31.03.2006, no monies flowed out from the assessee to
any prohibited person. This latter submission has already been dealt with
by us supra. As to the contention that it is only a running account
between the assessee and the APIL, we are unable to give effect to the
submission since Section 13(1)(c)(ii) read with Section 13(2) does not
appear to make any distinction between a running account where there is
ITA Nos.321/2013, 322/2013 & 323/2013 Page 29 of 40
inter-flow of funds and a case of pure advance. Section 13(2) makes it
clear that the instances listed in its clauses (a) to (h) are only illustrative
and without prejudice to the generality of the provisions of Section
13(1)(c). The prohibition is on the use or application of any part of the
income or property of the trust, during the relevant previous year, for the
direct or indirect benefit of any prohibited person. When funds of
assessee trust are lying with APIL even though they were not advanced
in the relevant accounting year and no interest or security is taken, it is a
case of direct use of the funds for the benefit of a prohibited person.
Clause (a) of Section 13(2) says that even if the income or property of the
trust continues to remain lent to any prohibited person for any period
during the relevant previous year without security or interest, it would be
a case of deemed misapplication. This shows that it is not necessary that
there should be any advance payment to the prohibited person in the
relevant accounting year. At this juncture it is relevant to point out a
crucial aspect. The provision makes reference to income or property of
the trust being "lent" or continued to be "lent" to any prohibited person.
If the funds of the assessee had been given to APIL without any
agreement to sell being entered into there would have been no defence to
ITA Nos.321/2013, 322/2013 & 323/2013 Page 30 of 40
the assessee as that would have been a clear case of monies lent or
continue to be lent without interest or security. It is only in order to get
out of the clutches of the said clause that the assessee appears to have
conceived of a device and entered into documentation with APIL to make
it appear as if the monies were not "lent" to APIL, but were given for the
purpose of acquiring lands under agreements to sell, for the objects of the
trust. This explains why the assessee admitted before the assessing officer
in its first letter that it had not taken possession of the lands, but resiled
from that position in its second letter, realising its faux par, citing some
clauses in the agreements. Taking possession of the lands has not been
established as a fact by adducing evidence.
26. The argument of the counsel for the assessee that the CIT (Appeals)
and the Tribunal have entered concurrent findings of fact which should
not normally be disturbed unless they are perverse is technically correct;
however, we are in agreement with the submission of the counsel for the
revenue that the findings of the CIT (Appeals) (for the assessment year
2006-07) and the Tribunal are superficial and have not taken note of the
normal course of human conduct and probabilities. A little probing or
scratching of the surface was all that was required on the part of the
ITA Nos.321/2013, 322/2013 & 323/2013 Page 31 of 40
Tribunal to find out the truth about the claim of the assessee. The
Tribunal has chosen, erroneously this we say with respect to ignore
the normal course of human conduct and probabilities of the case and has
preferred to be led simply by the documentation presented by the
assessee. Each and every objection taken by the assessing officer has
been attempted to be explained away by the assessee and the Tribunal
overlooked that the facts have to be looked at cumulatively and as a
whole; it failed to realise that and the real transaction between the
assessee and APIL is not just an aggregate of the several component parts
thereof; the authenticity of the transaction has to be examined by keeping
in view the conspectus of the facts without missing the woods for the
trees.
27. In the aforesaid view of the matter, we hold that the findings of the
Tribunal on this aspect cannot be upheld. We uphold the findings of the
assessing officer and hold that in advancing the amount of
Rs.8,60,16,000/- to APIL the assessee committed a violation of the
provisions of Section 13(1)(c)(ii) read with Section 13(2) and Section
13(3) of the Act. The trust was accordingly not eligible for the exemption
under Section 11 of the Act for both the years.
ITA Nos.321/2013, 322/2013 & 323/2013 Page 32 of 40
28. It is further necessary to examine whether the advance made to
Charanjiv Educational Society can be said to be in violation of the
aforesaid provisions. On this aspect we are unable to find fault with the
approach of the Tribunal. The relevant facts have already been noticed by
us. The amounts were advanced by the assessee to the society which in
turn deposited them with the Chhattisgarh government for the purpose of
establishing a private University. The relevant documentary evidence is
on record and has been noticed and relied upon by the Tribunal. It is only
after the judgment of the Supreme Court that the position became certain
that entities established outside the State of Chhattisgarh cannot be
permitted to open private universities in the State. The monies were
thereafter returned to the assessee. On these facts it is not possible to
question the correctness of the view taken by the Tribunal. We are
accordingly of the view that the assessing officer was not right, as held by
the Tribunal, in denying the exemption under Section 11 on the ground
that by advancing monies to Charanjiv Educational Society the assessee
committed a violation of Section 13(1)(c)(ii) read with Section 13(2) and
Section 13(3) of the Act.
ITA Nos.321/2013, 322/2013 & 323/2013 Page 33 of 40
29. It is now necessary to examine the other two questions of law. We
may take up the applicability of Section 68 in respect of the donations
received from Jagjit Singh and Piyush Jain in the previous year relevant to
the assessment year 2006-07. So far as the Jagjit Singh is concerned, the
Tribunal has deleted the addition on the ground that the assessee has
successfully demonstrated the identity of the donors, the source of the
payment, the PAN number and by filing the confirmation letters. These
were not pursued by the assessing officer by making further inquiries.
The Tribunal, however, has overlooked that Jagjit Singh, in some other
proceedings made a statement on oath denying the fact that he made any
corpus donations to the assessee trust. What he stated was that an amount
of Rs.1.5 crores was payable to him by DLF in a tripartite dispute
between him, APIL and DLF out of which a sum of Rs.1.5 crores was
paid by DLF directly to the assessee as corpus donation of Jagjit Singh.
The Tribunal has held that it is not possible to view the transaction with
suspicion merely because some other entity, which owes money to Jagjit
Singh, had made the donation on behalf of Jagjit Singh in discharge of the
debt to Jagjit Singh. It has also observed that Jagjit Singh was not cross-
examined by the assessee on the statement said to have been made by him
ITA Nos.321/2013, 322/2013 & 323/2013 Page 34 of 40
before another income tax authority in some other proceedings denying
the making of the donation. The Tribunal has also found that the money
has actually been given to the trust which has also used it. In these
circumstances the Tribunal deleted the condition. The findings recorded
by the Tribunal cannot be said to be perverse. Similarly in respect of the
donation received from Piyush Jain, the Tribunal has noticed that the
assessee was able to establish the identity of the donor and the source of
the payment which was through account payee cheque, and give the PAN
number and bank details. These details were not inquired into by the
assessing officer and nothing adverse was found. It is in these
circumstances that the Tribunal has deleted the addition. The findings of
the Tribunal which are based on relevant material cannot be called
perverse.
30. So far as the claim of depreciation is concerned the decision of the
Tribunal cannot be countenanced. The Tribunal has overlooked that the
cost of the assets has already been allowed as a deduction as application
of income, as held by the CIT (Appeals) as well as the assessing officer.
It was their view that allowing depreciation in respect of assets, the cost of
which was earlier allowed as deduction as application of income of the
ITA Nos.321/2013, 322/2013 & 323/2013 Page 35 of 40
trust, would actually amount to double deduction on the basis of the ruling
of the Supreme Court in Escorts Ltd. vs. UOI (supra). In respect of the
additions to the fixed assets made during the previous year relevant to the
assessment year 2006-07, the CIT (Appeals) held that since the cost of the
assets was not allowed as a deduction by way of application of income,
depreciation should be allow. The CIT (Appeals) has thus made a
distinction between assets the cost of which was allowed as deduction as
application of income and assets, the cost of which was not so allowed.
The Tribunal has not kept this distinction in view, but has proceeded to
rely upon a judgment of this Court in DIT vs. Vishwa Jagrati Mission
(supra). In the judgment of this Court the question was whether the
income of the assessee, which was a charitable trust, should be computed
on commercial principles and if so, whether depreciation on fixed assets
used for charitable purposes should be allowed as a deduction. This Court
noticed that there was a consensus of judicial opinion on this aspect and
held, after referring to those authorities as well as a circular of the CBDT
issued on 19.07.1968, that while computing the income of the trust
available for application for charitable purposes, depreciation on assets
used for charitable purposes should be allowed. The point to be noticed is
ITA Nos.321/2013, 322/2013 & 323/2013 Page 36 of 40
that in this judgment, this Court referred to and distinguished the
judgment of the Supreme Court in Escorts Ltd. (supra) on the ground that
in Escorts (supra), the Supreme Court was concerned with a case where
the deduction of the cost of the asset was allowed under Section 35(1) as
capital expenditure incurred on scientific research and, therefore, no
deduction for depreciation on the very same assets was held allowable
under general principles of taxation, as it would amount to double
deduction. The judgment of this Court in DIT vs. Vishwajagrati Mission
reinforces the principle that if the cost of the asset has been allowed as
deduction by way of application of income then depreciation on the same
asset cannot be allowed in the computation of the income of the trust.
The distinction has not been kept in view by the Tribunal which seems to
have erroneously relied on the judgment of this Court to direct allowance
of depreciation even in respect of assets, the cost of which has already
been allowed as application of income. We accordingly hold that the
Tribunal was not justified in directing the allowance of depreciation in
respect of such assets.
31. In ITA No.322/2013, which relate to the assessment year 2007-08
the issues are consequential. In that year the assessing officer denied
ITA Nos.321/2013, 322/2013 & 323/2013 Page 37 of 40
exemption to the trust under Section 11 on the ground that there was a
violation of Section 13(1)(c)(ii) read with Section 13(3) arising out of the
advances given to APIL and Charanjiv Educational Society. His attention
would appear to have been drawn to the order of the CIT (Appeals) in
respect of the assessment year 2006-07 in which both the issues were
decided in favour of the assessee and it was held that the exemption under
Section 11 cannot be denied on the aforesaid grounds. The assessing
officer, however, proceeded to complete the assessment by denying the
exemption under Section 11 since the department had filed an appeal
before the Tribunal against the order of the CIT (Appeals) for the
assessment year 2006-07. While computing the income of the assessee,
the assessing officer made several additions and disallowances and
determined taxable income Rs.3,64,64,753/-. By virtue of the order of the
Tribunal for the assessment year 2007-08, the trust has been given the
exemption under Section 11 of the Act. The Tribunal further held that
since the trust is eligible for exemption under Section 11, the additions
made under Section 68 of the Act have to be examined on the yardstick
applicable to donations received by a charitable trust. It then proceeded to
examine those additions and deleted the same. Since we have reversed
ITA Nos.321/2013, 322/2013 & 323/2013 Page 38 of 40
the order of the Tribunal on the question of exemption under Section 11
for the assessment year 2006-07.
32. In line therewith, we hold that the Tribunal was not right in law in
holding that the assessee was entitled to the exemption under Section 11
in respect the assessment year 2007-08. So far as the decision of the
Tribunal in respect of the corpus donations are concerned, which have
been added under Section 68, the Tribunal has deleted the addition of
Rs.25 lakhs in respect of the corpus donation received from M/s. Kuber
Swamy Ashutosh Consultants Pvt. Ltd. and Rs.9.06 lakhs received from
M/s. Sun System Institute of Information Technology Pvt. Ltd. (total
Rs.34.06 lakhs). The Tribunal has examined the evidence and deleted
them. No perversity has been pointed out in its decision to do so.
33. In the result both aspects of the first substantial question of law
which is common to both the assessment years 2006-07 and 2007-08 are
answered in the negative, in favour of the revenue and against the
assessee. The second question of law relating to the assessment year
2006-07 is also answered in the negative, in favour of the revenue and
against the assessee. The third question of law for the assessment year
2006-07 and the second question of law for the assessment year 2007-08
ITA Nos.321/2013, 322/2013 & 323/2013 Page 39 of 40
are decided in the affirmative, in favour of the assessee and against the
revenue. The appeals of the revenue are accordingly partly allowed.
(R.V. EASWAR)
JUDGE
(S. RAVINDRA BHAT)
JUDGE
MARCH 18, 2014
hs
ITA Nos.321/2013, 322/2013 & 323/2013 Page 40 of 40
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