Tuesday, 1 April 2014

Whether assessee-Trust would lose exemption for entire income even if there is one instance of application or use of income or property of Trust directly or indirectly for benefit of any prohibited person - YES: Delhi HC

THE issues before the Bench are - Whether the trust would lose exemption in respect of its entire income 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; Whether where assessee-trust pays advance to the extent of 95 per cent of cost of property purchased to prohibited person without taking possession and without concluding a proper sale deed even after one year from the date of deal and then cancelling the deal and getting the advance back without interest would amount to violation of section 13(1)(c)(ii) read with section 13(2)(a) and Whether it would amount to
violation of Section 13(1)(c)(ii) read with Section 13(2) and Section 13(3) of the Act, where assessee in furtherance of its objects intended to open a university, proper formalities were completed but due to Supreme Court order the object could not be achieved in the hands of the assessee and it formed this charitable society with same objects and trustees and incurred the expenses which were shown as advance to the educational society. And the verdict partly favours it.
Facts of the case

A) The
assessee is a Charitable Trust which was granted registration under section 12A of the Act. In respect of the assessment year 2006-07, it filed a return of income declaring Nil income. The 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 was shown by the assessee as the proceeds of the sale of assets, being land. The assessee in furtherance of its objects to open a school, entered into agreements with M/s A for purchase of land. In these agreements the assessee paid 95% of the price of the land to M/s A and simultaneously obtained possession of the 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 M/s A. In April, 2005 the assessee cancelled the sale agreement and the monies paid to M/s A were returned to the assessee in instalments. No cancellation charges were however levied by M/s A. In the course of the assessment proceedings, the AO doubted the genuineness of the transaction of projects of the plots. 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, 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 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 M/s A. 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. Assessing Officer noted that 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. Further, there was no evidence for taking possession of the land. It was also noted that M/s A did not declare any income by way of the transaction in the relevant year when the agreement to sell were executed which showed that even possession of the land was not parted with and 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. The assessee’s explanation that the transactions were genuine was not accepted by the assessing officer who took the view that the real motive of the assessee was to advance its surplus monies to M/s A without charging any interest and since M/s A 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.

B) In the course of the assessment proceedings, the assessing officer also noted that the assessee claimed to have received corpus donation from one J through a pay order. 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 J recorded by the Additional Director of Income Tax (Exemptions). The assessing officer, on the basis of the statement of J, invoked the provisions of Section 68 of the Act and added the amount of donation as the assessee’s income. A similar addition was made in respect of another corpus donation claimed to have been received from one P Jain through an account payee cheque; the said donor failed to appear before the AO in response to the notice issued under Section 131.

C) In the course of the assessment proceedings the assessing officer found a debit balance in the name of a 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 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.

D) 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 claimed to have been received by the assessee from M/s. K and another amount received from M/s. S as corpus donations by invoking Section 68 of the Act. He also took steps to verify both the donations. M/s. K 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 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 M/s S, 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.

In appeal, 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 amount was advanced to M/s A for purchase of land for setting up a school, that the giving of possession was 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. There were other findings recorded by the CIT (Appeals) based on the accounts that the amount advanced by the assessee to the M/s A 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).

As regards the objection of the assessing officer based on the debit balance appearing in the assessee’s balance sheet in the name of Educational Society, 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 as an independent unit in Chhattisgarh. 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. 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.

With regard to depreciation, the CIT (Appeals) took note of the judgment of the Supreme Court in Escorts Ltd. vs. UOI (2002-TIOL-621-SC-IT-LB) 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.

As regards the addition made under Section 68 in respect of the donation received from J, 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 was not approved. He accordingly upheld the addition.

With regard to addition amount under Section 68, stated to be received as corpus donation from P, the CIT (Appeals) after 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.

For assessment year 2007-08, CIT (Appeals) held that both in respect of the advances made to M/s A and the debit balances in the account of Educational Society, there was a violation of Section 13(1)(c)(ii) read with Section 13(3) 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. K and M/s. S were also confirmed.

In appeal, 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 M/s A without any interest or security or on account of the existence of debit balances in the account of Educational Society. With regard to the addition made under Section 68, tribunal held that the assessee had discharged the onus of establishing the identity and creditworthiness of the donors as also the genuineness of the donations. The additions 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 held that the assessee was entitled to claim depreciation on the cost of the assets, the investment in which was already allowed as application of income.

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.

Having heard the parties, the Court held that,

A) + 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;

+ the monies were lying with M/s A for a longer period without any interest or security, even taking into account the amounts refunded by M/s A 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 M/s A, possession of the land was not taken. But in its letter dated 18.12.2008 the assessee filed copies of the agreement dated 18th and 24th March, 2004 to show that they contained clauses to the effect that physical possession of the plots had been handed over by M/s A 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 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. 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 M/s A accepted the request for cancellation of the agreements by letter dated 21.04.2005, the entry reflecting the cancellation of the 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 M/s A on 29.11.2005 and 13.12.2005 respectively. These amounts also did not bear any interest nor was any security taken;

+ 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 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 M/s A – 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 M/s A without any agreement to sell being entered into there would have been no defence to 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 M/s A, 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;

+ in advancing the amount of Rs.8,60,16,000/- to M/s A, 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;

B) + 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;

C) + So far as the J 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 J, 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 was payable to him by DLF in a tripartite dispute between him, M/s A and DLF out of which a sum was paid by DLF directly to the assessee as corpus donation of J. The Tribunal has held that it is not possible to view the transaction with suspicion merely because some other entity, which owes money to J, had made the donation on behalf of J in discharge of the debt to J. It has also observed that J was not cross-examined by the assessee on the statement said to have been made by him 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 P, 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;

+ 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 trust, would actually amount to double deduction on the basis of the ruling of the Supreme Court in Escorts Ltd. vs. UOI. 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 that in this judgment, this Court referred to and distinguished the judgment of the Supreme Court in Escorts Ltd. on the ground that in Escorts, 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;

D) + 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 in respect of the corpus donation received from M/s. K and amount received from M/s. S. The Tribunal has examined the evidence and deleted them. No perversity has been pointed out in its decision to do so.

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