Income Tax Appellate Tribunal - Indore
The Acit, Circle 2(1), Indore vs M/S. Vajdi Educational Society, Indore on 9 February, 2018
आयकर अपील
य अ धकरण, इ दौर यायपीठ, इ दौर
IN THE INCOME TAX APPELLATE TRIBUNAL
INDORE BENCH, INDORE
BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER
AND
SHRI MANISH BORAD, ACCOUNTANT MEMBER
ITA No.653/Ind/2013
Assessment Year: 2010-11
M/s. Vajdi Education Society, ACIT-2(1)
F-12, Jhoomer Ghat Rau, बनाम/ Indore
Indore
Vs.
(Appellant) (Revenue )
P.A. No.AAAAC1063F
ITA No.720/Ind/2013
Assessment Year: 2010-11
ACIT-2(1) M/s. Vajdi Education Society,
Indore बनाम/ F-12, Jhoomer Ghat Rau,
Indore
Vs.
(Revenue) (Respondent)
P.A. No. AAAAC1063F
Appellant by Shri Deshpande, CA
Respondent by Shri K.G. Goyal, Sr. DR
Date of Hearing: 10.01.2018
Date of Pronouncement: 09.02.2018
आदे श / O R D E R
PER KUL BHARAT, J.M:
These two cross appeals by the assessee and Revenue are directed against order of Ld. Commissioner of Income Tax- (Appeals)-I, Indore dated 20.09.2013 pertaining to the A.Y. 2010-11.
Vajdi Education Society First, we take up assessee's appeal in ITA No.653/Ind/2013, the assessee has raised following grounds of appeal:
"The order of the Ld. CIT(A) is bad in law.
2.the Ld. CIT(A) has erred in upholding the addition and in not considering the fact that the assessee is an educational institution registered u/s 12A and hence the provisions of section 12 to 13 where applicable and no demand could be raised, if the income is applied for the objects of the trust. 2.1 The Ld. CIT(A) has been observing that the AO shall be free to decide the claim of exemption u/s 11 and 12 wherein no such provision exists in the statute book. The Ld. CIT(A) did not considered the case laws cited before him.
2.2 All the additions maintained by the Ld. CIT(A) and the demand raised may please be cancelled.
3. The Ld. CIT(A) has erred in upholding the addition of Rs.15,36,486/- for alleged labour expenses incurred by the assessee. The Ld. CIT(A) has based his conclusion on totally wrong facts. The Ld. CIT(A) did not considered by opening balance on the construction of the building. The material expenses taken by the Ld. CIT(A) at Rs.17,68,243/- is totally wrong.
3.1 The addition maintained at Rs.15,36,486/- based on the decision of the apex court which is totally irrelevant may please be deleted.
4. The Ld. CIT(A) has erred in maintaining the addition of Rs.30,00,000/- being the cash credit in the name of K.K. Patel Finance Ltd. and Jain Securities, on the wrong assumption that they are related to the Lunkad Group.
4.1 Completed details with bank statements, confirmation and the balance sheet were filed before the authorities and as such provisions of Section. 68 are not attracted.
4.2 The Ld. CIT(A) has erred in not considering the case laws cited before him regarding the application of Section.11 to 13 in which it has been held that once the income is applied for the object of the trust no addition could be made. The Ld. CIT(A) has based his conclusion on irrelevant case laws which are not applicable to the case of charitable trust.
2Vajdi Education Society
5. The ld. CIT(A) has erred in maintaining the fixed asset disallowance of Rs.45,81,092/- on the ground that the loans taken in earlier year were not guanine weans as such the interest expenses cannot be allowed.
5.1 The Ld. CIT(A) has allowed the assessee's appeal in respect of East West Finvest Indi Ltd. on the same basis he should have deleted the addition in other cases."
2. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s 143(3) of the Income Tax Act, 1961(hereinafter called as 'the Act') was framed vide order dated 07.01.2013. The Assessing Officer made various additions on the returned income namely disallowance made on account of non-deduction of tax of Rs.9,13,795/- & Rs.1,25,800/-. Apart from this the AO made addition on account of construction expenses of Rs.47,18,448/- and additions on account of loan alleged to have been obtained from Lunkad Group of companies of Rs.30,00,000/- and other disallowance of Rs.3,94,378/- and Rs.33,103/- in respect of claim of VAT(Local Sales Tax) and disallowances of travelling expenses for non-deduction of tax.
3. Aggrieved by this the assessee preferred an appeal before the Ld. CIT(A) who after considering the submissions partly allowed the appeal. While partly allowing the appeal, Ld. CIT(A) reduced the addition made on account of disallowance of labour expenditure out of the addition of Rs.47.18 lacs, the Ld. CIT(A) sustained addition of Rs.15,36,486/-. In respect of the addition made on account of loan of Rs.30,00,000/- and also confirmed addition of Rs.45,01,732/-, made by disallowing the interest expenditure.
3Vajdi Education Society
4. Aggrieved by this both the assessee and Revenue have filed separate appeals.
5. Ground No.1 is not pressed at the time of hearing, hence same is dismissed as not pressed.
6. Ground No.2 to 2.2 are in respect of demand raised by the AO whether the addition confirmed by the Ld. CIT(A). Ld. counsel for the assessee submitted that the assessee society is registered with Income Tax Act, u/s 12A of the Act. The assessee, therefore, is entitled for exemption. The Ld. DR opposed these submissions.
7. We have heard the rival contentions and perused material available on record. The contentions of the Ld. counsel for the assessee is that since the assessee society is registered u/s 12A of the Act, no demand can be raised in our view this contention is misconceived, as per the relevant provision of the Act there is no blanket exemption upon registration u/s 12A. Hence ground nos. 2 to 2.2 raised in this appeal are dismissed.
8. Ground No.3 to 3.1 is against the upholding the addition of Rs.15,36,486/-.
The Ld. counsel for the assessee reiterated the submissions as made in the written submissions. The submissions of the assessee are reproduced as under:
"The Ld. AO has made the addition of Rs.47,18,448/- on the hypothetical ground that the assesse has incurred extra labour cost of this amount. The conclusions have been drawn on the basis of the copy of the account of Building Construction reproduced on page 4 of the assessment order. In para 7.4 the Ld. AO observed that the assessee has incurred the material cost of Rs.70,77,672/- and as such he must have incurred 40% 4 Vajdi Education Society of this expenditure by way of labour payments which comes to Rs.47,18,448/-. This addition has been made by ignoring the actual facts on records and the copy of account reproduced at page 4 of the assessment order which clearly shows that the opening balance in this account is Rs.60,77,069/- and the additions during the year are only to the tune of Rs.10,00,603/- . From this copy of account it would be revealed that assessee has made payment to M/s. Gupta Construction of Rs.92,703/- and Rs.1,39,054/- for labour payments. On these labour payments the TDS has also been made. For keeping the record of building construction all the expenses have been debited in this account and have been entered under the head purchases for building under construction. Without raising any query in this regard on a wrong assumption the additions have been made on the hypothetical ground that the assessee might have incurred 40% as labour payments.
1.1 The ld. CIT(A) vide para 11 page 10 has upheld the addition on the ground that 50% of the total expenses should be for labour expenses which would be to the tune of Rs. 17,68,243/-. How this figure of Rs.17,68,243/- is arrived is not known. He however, sustained the addition of Rs.15,36,486/- on this account.
1.2 it is humbly submitted that the Ld. CIT(A) has totally ignored the building account given from pg. 45 to 51 which consist of the account of building under construction and the account of labour contractor, Gupta Construction. The assessee had the opening balance of Rs.66,77,069/- including the various labour payments made. The assessee has incurred further expenses of Rs.10,00,503/- during the year under consideration which includes the labour payment of Rs.2,31,757/- to Gupta Construction. There is no question of any undisclosed investment in the building and the addition so sustained by the ld. CIT(A) is illegal and unwarranted for.
The Ld. DR opposed the submissions and supported the order of the AO.5
Vajdi Education Society
9. We have heard the rival contentions and perused material available on record and gone through the orders of the authorities below. The AO made addition by observing that on verification of details of TDS submitted by the assessee it is seen that no entry of TDS return details u/s 194C is matched with the details of building under construction submitted by the assessee. As such the submission of the assessee is a cooked up story, totally wrong, baseless and without any evidence hence not acceptable at all. Further considering the provision of MPVAT Act, the AO treated the labour cost as 40% of the total cost of construction. However, the Ld. CIT(A) sustained this addition by observing as under:
"Appellant has not successfully explained the issue raised by AO. Appellant has nowhere given total amount of labour expenses debited in the amount of Rs.70,77,672/- and not explained whether there was a right proportion in material expense on one hand and labour expense on the other. What is most striking in that though most important finishing work takes place at the end involving floor/wood work/electric work/toilets etc. and such labour charges of finishing work are highest ranging about 50% of the cost, yet very small bills were debited towards labour cost. Out of total expenses debited this year of Rs.10 lakhs, only Rs.2,31,757/- is debited towards labour expenses. Even if opening stock of construction material as on 01.04.2009 is taken as Rs.10 lakh, the labour expenses shown by appellant were not commensurate with material expenses of Rs.17,68,243/- and explanation offered by appellant was not found satisfactory. Since in this year the work of construction was completed and only finishing work was done which involves labour of around 50% of total expense, hence labour expense in this year should have been equal to material expense, i.e., labour expense should also be of Rs.17,68,243/- but appellant has debited such expense at only Rs.2,31,757/- which shows unexplained expenditure towards labour or 6 Vajdi Education Society Rs.15,36,486/-. For this purpose reliance is placed on the decision by Apex Court in case of Orissa State Warehousing Corp. (1999) 239 ITR 509(Hon'ble Supreme Court), because the word "any income" as used u/s 10(22) is not there in section 11 where words used are "derived from" which make it restrictive in its application and does not give blanket exemption to such income. Reliance is also placed in case of Kedar Nath Modi (1993) 200 ITR 685(Del), wherein application of section 69C of the Income Tax Act was upheld and even estimation of unexplained expenses was confirmed. Therefore, Ground No.(4) of the appeal is partly allowed."
10. There is no dispute with regard to the fact that the accounts of the assessee are audited. The auditors have not made any adverse observation regarding the labour expenditure. Both the authorities below have made addition and sustained the same on the basis of guess work which in our view is not a proper approach, therefore, such addition cannot be sustained. The Assessing Officer is directed to delete the same. Thus ground no.3 and 3.1 of assessee's appeal are allowed.
11. Ground No.4 to 4.2 are against sustained addition of Rs. 30,00,000/- and ground no. 5 to 5.1 are against disallowance of interest expenditure, since the grounds are interconnected. These grounds were heard together and are being disposed of together for the sake of brevity. The ld. counsel for the assessee reiterated the submissions as made in the written submission.
Per contra Ld. DR supported the orders of the authorities below.
12. We have heard the rival contentions and perused material on record. The sole basis of addition by revenue is that upon specific 7 Vajdi Education Society investigation it was found that Lunkad Group of Co. was providing entries of unsecured loans. The entire modus operandi was to provide loan entries through circuitous rule the authorities below are of the view that the assessee obtained loan from M/s. K.K. Patel Finance Ltd. and M/s. Jayant Securities and Finance Ltd. of Rs.20,00,000/- & Rs.10,00,000/- respectively. During the year under consideration the authorities below are of the view that the transactions with these companies were not genuine. The ld. CIT(A) has observed as under in respect of these transactions:
"This year the appellant has receive Rs.20 lakhs from M/s. K.K. Patel Finance ltd. and Rs. 10 lakhs M/s. jayant Securities finance ltd. Ongoing through the returns of these two creditors, both creditors are returning huge losses every year which puts serious question mark on their creditworthiness. M/s. K.K. Patel Finance Ltd. has retuned loss of Rs.59.67 lakhs in A.Y. 2010-
11. Creditors have not given such unsecured loan on their won but the modus perandi is to rotate such amount through varuous account, so as to conceal the cash deposits in original accounts. In this year creditours have received funds from M/s. Purvi Finvest Ltd. which is a Lunkad Group Company, a known accommodation entry provider. In both A.Y. 2008-09 and A.Y. 2009-10 whose assessment order u/s 143(3) is furnished by appellant, entire funds received from M/s. Lunkad Securities Ltd., M/s. Purvi Finvest Ltd, M/s. Trimurthi Finvest Ltd. were treated as unexplained in case of M/s. K.K. Patel Finance Ltd. & added u/s 68 of the Income Tax act. The loss from sale of shares is also disallowed. Clearly this company M/s. K.K. Patel Finance ltd. is into providing the accommodation entries of two kinds namely entry of unsecured loan and entry of share capital & share premium. Points which prove thme as accommodation entry provider is that they give huge amounts of "unsecured loans" though they are themselves very ordinary persons, incurring huge losses in returns. Such loans continue year after year. The loans are given on the basis of quid pro quo 8 Vajdi Education Society by receiving cash from such parties like appellant and after rotating it through many accounts, such money is ultimately given to appellant. Similarly they provide huge accommodation entries for share capital and whom on paper that they have purchase shares of such companies at huge premium. After this transaction they sale such shares to directors at a hugely discounted price and thus incur huge losses year after year. Such loss incurred on share of M/s. Bindal Reality Pvt. Ltd. and M/s. Bhairavi Real Estate Pvt ltd. was disallowed by AO in case of M/s. K.K. Patel Finance Ltd. In A.Y. 2008-09.
14. The profit and loss account and balance sheet of M/s. Jayant Securities & finance ltd. are similar to that of M/s. K.K. Patel Finance Ltd. In this case also they have returned a loss of Rs.26,89,435/-. Year after year they have returned loss. It is common sense that person incurring losses year after year cannot give huge unsecured loans and share capital and share premium to large number of companies as they have no creditworthiness unless such credit is in nature of accommodation entries.
15. The nature of these two companies as accommodation providers is quite obvious from their balance sheets and balance sheets are proof of the activities carried out by them. M/s. Jayant Securities & Finance ltd. has shown receipt of inter corporate deposit of Rs.40.20 crores and they have given "loans and advances" of Rs.40.92 crores in A.Y. 2010-11. similar M/s. K.K.Patel Finandc Ltd. has received loan to Rs.47.71 crores and given loan of Rs.58.41 crores in A.Y. 2010-11. Though receipt of deposits and giving of advances could be a normal business also. But in that case persons who carry such genuine loan business are known moneylenders of the city. Such moneylenders who were an integral part of traditional business have disappeared because of secured loans available from banks, as the interest rates have gone down substantially and giving huge loans without any security became a risky business as the most important component of traditional society known as faith just disappeared.
16. What makes these transactions questionable is that persons behind these companies are man of small means. The receipts of loans by such companies like M/s. K.K. Patel Finance Ltd.9
Vajdi Education Society and M/s. Jayant Security & Finance Ltd. remain unexplained wherever it is examined as in case of M/s. K.K. Patel Finance Ltd. because either they fail to give name and address of their creditors or if they provide such name, their creditors are mostly some other entry providers like Lunkad Group because they act in tandem to create a maze of accounts to rotate unaccounted cash received from their clients, which ultimately reaches to their clients such as applicant in the name of unsecured loans.
17. Besides this such entry providers being person of small means, have provided entries to only big and known industries of the city. This reverse flow of money from poor to rich is not possible and poor person cannot act as "Robinhood", unless they have simply taken upon them role of cleaning whereby they convert slush money of big people into accounted funds in the guise of unsecured loans or share capital and share premium and they are motivated to do this in order to receive their commission for doing this.
18. The other proof of their being accommodation provider is that they simply give loans but do not take it back for several years unless their client needs reversal of entries if clients need unaccounted cash back.
19. Similarly invariably these accommodation providers purchase shares of newly launched companies at a huge premium when worth of shares of such companies is very low and within 2-3 years, such shares are sold back to directors of those companies at very low rates, whereby accommodation provider incurs huge losses. It is not that M/s. K.K. Patel Finance Ltd. has incurred such loss in one year, but in several years, they incur such losses and even after such losses, they survive in market and again give loans to same companies. This is because in reality such accommodation providers do not incur any real loss as they convert black money of clients into white by giving it appearance of a real share transaction.
20. As a charitable institute, appellant has even greater responsibility to keep away from such accommodation providers. Not only that unsecured loan is received from such tainted persons, but it remained in hands of appellant and it is being seen as FDR of Rs.2 crores and bank balance of Rs.70.89 lakhs, as if it was own money of appellant.10
Vajdi Education Society
21. As a result of aforesaid discussion, addition u/s 68 of the Income Tax Act as done by AO is fully justified. Section 68 is applicable to all types of assessee's including charitable trusts and the only conditions is that a sum should be found credited in the books of assessee and assessee either offers no explanation or explanation offered by him is not found satisfactory and the second condition directly applies to the present case."
13. The contention of the assessee is that the opinion of AO these companies belong to Lunkad Group. The assesse had filed the confirmations from the creditors, the balance sheet, the copy of bank statement and copy of income tax return of the said creditors. It is contended on behalf of the assessee that the companies do not belong to Lunkad Group. The confirmation along with balance sheet and the income tax returns with the bank statement were filed in the case of M/s. K.K. Patel Finance Ltd. and M/s. Jayant Securities Finance ltd. and if the Ld. counsel drew our attention to paper book page nos. 62 to 68 and 95 to 99 in support of this contention. There is no dispute with regard to the fact that the law is well settled. The assessee is required to prove identity of the creditors genuineness of transactions and creditworthiness of the creditors. In the present case, the revenue has doubted about the genuineness of the transactions. It is stated by the Ld. counsel for the assessee that the company from whom loan was taken does not belong to the Lunkad Group which was involved into the business of entry providing. The counsel for the assessee has demonstrated that the companies were having sufficient amount for giving such loans, however, we find that the Ld. CIT(A) doubted the genuineness of the 11 Vajdi Education Society transactions, on the basis that the assessee had no requirement of loan as the assessee itself having sufficient fund available with it. In our view this suspicion of the Ld. CIT(A) is justified, no sane person would take loan thus make himself liable for interest expenditure when he is himself having sufficient fund, however, contention of the assessee is that was required for construction of building. We therefore, considering the totality of the fact, deem it proper to set aside this issue to the file of the AO to verify whether the companies for which loan has been taken belong to Lunkad Group and give a specific finding whether the transactions in the question were executed through circuitous route suggesting that money belonging to the assessee is routed through the channel of loan. With these observations the issue is restored to the file of the AO for decision afresh. The ground nos. 4 to 4.2 are allowed for statistical purposes.
14. Ground no.5 to 5.1 are related to disallowance of interest expenditure in respect of loan obtained from M/s. K.K. Patel Finance Ltd. and M/s. Jayant Securities and Finance Ltd. are connected with ground No.3. We, therefore, set aside the order of authorities below on this issue and restore this issue to the file of AO to decide it afresh. Needless to say that the AO would afford reasonable opportunity to the assessee. Thus, ground no. 5 to 5.1 are allowed for statistical purposes.
15. As a result appeal of the Assessee is partly allowed for statistical purposes.
12Vajdi Education Society Now we take up Revenue's appeal in ITA No.720/Ind/2013
16. Ground No.1 is against deletion of addition made on account of disallowance of expenditure incurred on maintenance of road building and maintenance charges, water charges and travelling expenses.
Ld. DR supported the order of the AO and the Ld. counsel for the assessee supported the order of Ld. CIT(A).
17. We have heard the rival contentions and perused material available on record. We find that the Ld. CIT (A) observed that these expenses were disallowed by AO mainly on the ground that since TDS was not deducted before making of such payments, provision of section 40(a)(ia) of the Act was applied by AO and disallowed entire amount of such expenses. Though charitable trust have not been made exempt u/s 190 & 194 of the Act and they are made liable to deduct TDs on contractual payment, yet failure to do so would only make then liable for payment to tax and penalty u/s 201(1)/201(1A) of the Act. But in such cases section 40(a)(ia) could not be invoked because the section itself says that "following amounts shall not be deducted in computing the income chargeable under the head "profits & gains of business or profession". Hence this section has no application to computation of income of charitable trust u/s 11 of the Act. Besides AO has not raised any real problem in claim of such expenses.
13Vajdi Education Society Ld. DR could not controvert this finding of Ld. CIT(A). We, therefore do not see any reason to interfere with the finding of Ld. CIT(A) and confirm the same. Thus, the ground no.1 is dismissed.
18. Ground No.2 and 2.1 with regard to restriction of the addition to Rs.15,36,486/- in respect of construction expenditure.
Ld. Counsel for the assessee submitted that submissions made in ground no.3 of the assessee's appeal may also be treated as submission for this ground as well. Ld. DR also adopted the same argument.
We have heard the rival contentions. The connected ground in assessee's appeal i.e. ground no.3 has been decided in favour of the assessee by directing the AO to delete the disallowance. We therefore, for the same reasoning dismiss this ground of revenue's appeal. Ground no.2 of Revenue's appeal is dismissed.
19. Ground No.3 with regard to deletion of the addition of Rs.77,360/-.
Both the representative of the parties submitted that arguments are same to assessee's appeal in ITA No.653/Ind/2013.
20. We have heard both the parties, we decided this issue in assessee's appeal by observing as under:
"13. The contention of the assessee is that the opinion of AO these companies belong to Lunkad Group. The assesse had filed the confirmations from the creditors, the balance sheet, the copy of bank statement and copy of income tax return of the said creditors. It is contended on behalf of the assessee that the companies do not belong to Lunkad Group. The confirmation 14 Vajdi Education Society along with balance sheet and the income tax rules with the bank statement were filed in the case of M/s. K.K. Patel Finance Ltd. and M/s. Jayant Securities Finance ltd. and if the Ld. counsel drew our attention to paper book page nos. 62 to 68 and 95 to 99 in support of this contention. There is no dispute with regard to the fact that the law is well settled. The assessee is required to prove identity of the creditors genuineness of transactions and creditworthiness of the creditors. In the present case, the revenue has doubted about the genuineness of the transactions. It is stated by the Ld. counsel for the assessee that the company from whom loan was taken does not belong to the Lunkad Group which was involved into the business of entry providing. The counsel for the assessee has demonstrated that the companies were having sufficient amount for giving such loans, however, we find that the Ld. CIT(A) doubted the genuineness of the transactions. On the basis that the assessee had no requirement of loan as the assessee itself having sufficient fund available with it. In our view this suspicion of the Ld. CIT(A) is justified, no sane person would take loan thus make himself liable for interest expenditure when he is himself having sufficient fund, however, contention of the assessee is that was required for construction of building. We therefore, considering the totality of the fact, deem it proper to set aside this issue to the file of the AO to verify whether the companies for which loan has been taken belong to Lunkad Group and give a specific finding whether the transactions in the question were adjudicated through circuitous route suggesting that money belonging to the assessee is routed through the channel of loan. With these observations the issue is restored to the file of the AO for decision afresh. The ground nos. 4 to 4.2 are allowed for statistical purposes.
21. By following the above the Revenue's ground is also restored to the file of the AO for decision afresh. Accordingly the same is allowed for statistical purposes.
15Vajdi Education Society
22. In the result, Both the appeal of assessee and revenue in ITA No. 653/Ind/2013 & ITANo270/Ind/2013 are partly allowed for statistical purposes.
Order was pronounced in the open court on 09 .02.2018.
Sd/- Sd/-
(MANISH BORAD) (KUL BHARAT)
CCOUNTANT MEMBER JUDICIALMEMBER
Indore; दनांक Dated : 09 / 02/2018
ctàxÄ? P.S/. न.स.
Copy to: Assessee/AO/Pr. CIT/ CIT (A)/ITAT (DR)/Guard file.
By order Private Secretary/DDO, Indore 16