Income Tax Appellate Tribunal - Lucknow
Kanpur Subhash Shiksha Samiti, Kanpur vs Assessee on 27 April, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL, A - BENCH, LUCKNOW. Before Shri H.L.Karwa, Hon'ble Vice President and Shri N.K.Saini, Accountant Member I.T.A.No.456(LKW.)/2010 A.Y. : 2006-07 Kanpur Subhash Shiksha Samiti, vs. The Dy.CIT-1, 127/470,Saket Nagar, Kanpur. Kanpur. PAN AAATK6164B (Appellant) (Respondent) Appellant by : Shri Sudhindra Jain, C.A. Shri Swarn Singh, C.A. Respondent by : Shri Anadi Verma, Sr.D.R. O R D E R PER N.K.SAINI, ACCOUNTANT MEMBER
This is an appeal by the assessee against the order dated 27.4.2010 of the ld.CIT(A)-II, Kanpur.
2. The following grounds of appeal have been raised:
"1. That the Ld. C.I.T.(A)-II Kanpur has erred in law and on facts in holding that the exemption u/s 11 and 12 of the Income Tax Act 1961 is available only when the funds are invested or deposited on the specified form or modes as provided in sub section (5) of Section 11 of the Income Tax Act 1961.
2. That while sustaining denial of exemption u/s 11-13 of the Income Tax Act, and the findings of the Ld. Assessing Officer, the Ld. C.I.T.(A) II, Kanpur has erred in law and on facts in not considering that giving of loans out of monies not set apart under section 11(2) of the Income Tax Act, 1961 is not restricted under the provisions of section 11(5) of the Income Tax Act 1961.
3. That the Authorities below have also failed to consider and appreciate that the loans given by the Appellant Trust are not covered by the scope of investment and/or deposits, hence the invocation of provisions of section 13 (1)( d) of the Income Tax Act 1961 is unwarranted and unsustainable in law.
4. That the order of the Ld. C.I.T.(A)-II Kanpur to the extent indicated in the above grounds of appeal is insupportable in law and on facts and is also contrary to the principles of natural justice and equity.
5. That any other relief or reliefs as may be deemed fit on the facts and circumstances of the case be granted."
3. From the above grounds, it would be clear that the only grievance of the assessee relates to the exemption under Section 11 denied by the AO by invoking the provisions of Section 13(1)(d) of the Income-tax Act,1961. The said action of the AO has been confirmed by the ld.CIT(A).
4. The facts of the case, in brief, are that the assessee is registered under Section 12A of the I.T.Act and is running an education institution in the name of following schools:
(i) Subhash Institute of Software Technology,
(ii) Subhash Balika Inter College, Subhash Public School 4.1 The assessee filed the return of income on 30.10.2006 declaring nil income. The said return was processed under Section 143(1) of the I.T. Act on 9.7.2007. Later on, the case was selected for scrutiny. The assessee had submitted its Balance Sheet and its Income and Expenditure Account alongwith its return of income and declared excess of income over expenditure at Rs.28,58,466 on total receipts of Rs.1,55,49,884. The AO, while going through the documents furnished by the assessee, observed that since the surplus of income over expenditure was less than 15% of its gross receipts, then the income of the assessee worked out to be nil in case the computation is made under sections 11 and 12 of the I.T.Act. According to the AO, the assessee violated the provisions of section 13(1)(d) of the I.T.Act since the assessee trust had given loans ofRs.1,28,06,709 to Ram Lakhan Shiksha Samiti in the Financial year 2002-03,which continued to be lent during the year under consideration. Apart from this, another loan of Rs.1 lac was given to Subhash Degree College. Therefore, the AO was of the view that the assessee violated the provisions of section 13(1)(d)(i) of the I.T.Act. He accordingly asked the assessee to show cause as to why its income be not computed without giving the benefit of exemption of sections 11 and 12 of the I.T.Act as per the provisions of Section 13(1) of the Act. The assessee objected to the proposed show cause notice and submitted its replies vide leters dated 16.12.2008 and 18.12.2008,which read as under :
"Reply dated : 16.12.2008
1) That the society was formed on 17.09.1977 with very meager resources by Shri Ram Lakhan Bhatt, who is a founder member and manager of the society since inception. Gradually with the dedication and whole hearted efforts of Shri Ram Lakhan Bhatt; the Society raised an Intermediate School and got it approved by Central Board of Secondary Education, New Delhi for High School and Intermediate Examinations.
2) A chart showing excess of income over expenditure for last seven years is attached to show that upto March, 2003, it had accumulated savings, after spending 75%-85% of earning, amounting to Rs.1,16,19,274/-.
3) That in the year 2002-03, Shri Ram Lakhan Bhatt, started another society under the name and style of Ram Lakhan Shiksh Samiti for starting a Degree College in South, Kanpur. To provide Financial support for acquisition of Land and Building for Degree College, the assessee society provided short term fund to the said society out of its free reserves i.e. out of savings and above threshold limit of 75%-85% for minimum expenditure required to be spent out of current income in each year. The said society purchased land for raising a Degree College Building and has already been submitted its Building Plan to Kanpur Development Authority which is still pending. The said land was wholly and exclusively purchased for raising Degree College Building for the poor and deserving students in the area of South, Kanpur.
4) That the amount given to M/s Ram Lakhan Siksha Samiti is thus not out of 75%/ 85% minimum expenditure or any other set apart fund within the meaning of section 11(2) of the Income Tax Act, 1961.
Your goodselt will also kindly appreciate that the funds given to Mis Ram Lakhan Siksha Samiti are wholly and exclusively for the purpose of advancement of education ( Degree College) in south Kanpur and hence the same meets the objects of the assessee society.
Your goodself will also kindly appreciate that provisions of section 11(5) of the Income Tax Act, 1961 are also not applicable in the present case as the funds given to M/s Ram Lakhan Siksha Samiti are non earmarked or set apart funds i.e. out of shortfall of unutilized funds to the extent of 75%/ 85% of income in each year. "
Reply dated 18.12.2008 "With reference to the queries vide order sheet entry dated 16.12.2008, we wish to explain and submit as follows;-
1. That the assessee society is submitting a chart showing total income, total expenses, 75%/ 85% of total income meant to be spent for the objects of the trust and excess of income after meeting out minimum threshold expenditure limit of 75%/ 85% for the F.Y. 1996-97 to 2002-03. The last column showing excess of income which in other words was the free reserve with the society aggregated to Rs.1,16,19,273/- as on 31.03.2003.
2. That the accumulated income over and above 75%/85% of total income meant to be spent for the purposes and objects of the trust is not governed by the provisions of section 11(5) and section 13(1) (b)(i ) of the Income Tax Act, 1961 because these two provisions are relevant and applicable for the investment of income is not incurred but set apart for some earmarked purposes.
3. That there is no restriction for the investment of the trust funds in accordance with the provisions of section 11(5) so far as free accumulated profits of the trust are concerned.
4. That condition provided under section 11(3) (d) also does not apply because it provides for making investment in accordance with the provisions of section 11(5) which are again applicable only to such funds as are covered ( remained unutilized) u/s 11(2) of the Income Tax Act, 1961.
5. That the assessee society gave a loan to another society i.e. M/s Ram Lakhan Shiksha Samiti for purchase of land and for construction of College Building over the same. This object is similar to the objects of the society and therefore, the same can not be said to be diversion of funds for an object other than the objects of the assessee society."
4.2 The assessee also submitted a chart of its Income and Expenditure from Financial year 1996-97 to 2002-03, which the AO had reproduced vide para 4.3 of the assessment order dated 20.12.2008, for the cost of repetition, the same is not reproduced herein. The AO held that the assessee was not entitled for claim of deduction under sections 11 and 12 in view of the exclusion provided by Section 13(1) of the I.T.Act by observing as under :
"4.4 Further it has been noticed that the loans were given to Ram Lakhan Shiksha Samiti in F.Y. 2002-03 and during F.Y. 2002-03 the donee society was not registered u/s 12A A of the Act. M/s Ram Lakhan Shiksha Samiti was granted registration U/s 12AA on 25.5.2005 with effect from 1.4.2004 by the Ld.CIT-1, Kanpur. Thus, the assessee society had given loan to M/s Ram Lakhan Shiksha Samiti which was not registered u/s 12A in the year of giving such loans. Further, the submissions made by the assessee that the loans were given out of general reserve created year after year upto 25% of its income is incorrect on the basis of figures shown in table above which reflect only funds of Rs.71,85,439/- under the head General Reserve and funds of Rs.6,08,552/ -were surplus funds over and above 25% specified u/s 11 (2) of I.T. Act. Since the assessee has advanced loan of Rs.1.28 crores in F.Y. 2002~03, therefore, the advance could only be given out of funds which includes accumulated balances over the above 25% under section 11(2) of the Act. In view of this, the submission made by the assessee that the advance was given to M/s Ram Lakhan Shiksha Samiti out of the General Reserve created out of its surplus funds upto 75% of its income is factually incorrect. It is therefore, held that the assessee had made advance of Rs.1.28 crores to M/s Ram Lakhan Shiksha Samiti and Rs.1,00,000/- to Subhash Degree College out of its accumulated balance which includes the funds accumulated u/s 11 (2) apart from the funds available upto 25% of its income . The funds continued to be lent from F.Y. 2002-03 till the end of the year under consideration.
4.5 Shri Ram Lakhan Bhatt is founder trustee and Manger of the assessee trust as well as that of M/s Ram Lakhan Shiksha Samiti to whom loans were advanced. The donee trust was not registered u/s 12AA when the advance were made.
4.6 Notwithstanding with the observation that the loans of Rs.1.28 crores was given by the assessee society to M/s Ram Lakhan Shiksha Samiti out of .its accumulated balance which includes balance over and above 75%, it is held that even if the advances were made out of funds over and above 75%, still in view of provisions contained in section 13(1)( d) (i), the assessee is not entitled for claim of deduction u/s 11 and 12 in view of exclusion provided by section 13(1) of I.T. Act."
Reliance was placed on the judgment of the Hon'ble Kerala High Court in the case of Mundakaadam Mandiram Society vs.CIT, 258 ITR 395(Ker.).
5. Being aggrieved the assessee carried the matter to the ld.CIT(A)and the submissions made before him are reproduced verbatim as under :
" The appellant has submitted that the relevant catch words in the provisions of Section 13(1)( d)(i) are " any funds of the trust and or institution are invested or deposited .... " It was further argued that giving of loan to another institution was neither "invested nor deposited". In this connection, the learned A. R. has invited my attention to following decisions:
a) AN Shamsudeen Vs. Union of India and others (2000) 244 I.T. R. Page 266 (Mad). In this decision Hon'ble Madras High Court distinguished loan from deposit.
"......... The mere presence of some of the attributes of the loan transaction in a deposit would not be sufficient to regard a loan as a deposit. They are two different transactions in the commercial word. ... "
b) Baidya Nath Plastic Industries (P) Ltd. and others Vs. K.L. Anand, Income Tax Officer (1998) 230 I.T.R. 522 (Del). In this decision the Hon'ble Delhi High Court laid down the difference between a deposit and a loan.
" ... The distinction between a loan and a deposit is that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement and in the case of the latter it is generally the duty of the depositor to go to the Banker or to the depositee, as the case may be, and make a demand for it. While articles 19 and 21 of the Limitation Act fix the period within which a suit for recovery of a loan can be filed, article 22 deals with the period of limitation for suits for money on account of deposit ... "
c) C.I.T. Vs. Motilal Subhash Kumar Jain (1995) 277 I.T.R. 524 (M.P.), the Hon'ble Madhya Pradesh High Court followed the findings of the Apex Court in the case of C.I.T. Vs. Bazpur Co-operative Sugar Factory Ltd. (1988) 172 I.T.R. 321 and held that-
"....The loan is distinguishable from deposit ...."... The essence of the deposit is that there must be a liability." to return it to the party by whom or on whose behalf it is made on the fulfillment of the certain condition. .. "
d) I.T.O. Vs. Raghunathrai Hanumandas Charitable Trust (1979) 8 TTJ 109 (Cal). The Hon'ble I.T.A.T. held that the provisions of Section 13 as amended were not applicable to the loan.
c) Sri Telaprolu Bapaniah Vidya Dharma Nidhi Trust Vs. I.T.O. (1982) 1 I.T.D. 32 (Hyd). The Hon'ble I.T.A.T. Hyderabad Bench distinguished between a loan and the investment and followed the C.B.D.T. Circular No. 45 dated 02.09.1970.
In the light of the above decisions, it is clear that the provisions contained u/s 13(l)(d) prohibits granting of benefit of section 11 and 12 of the Income Tax Act 1961, if the Trust Funds are invested or deposited in any manner in contravention to the provision to Section l1(5) of the Income Tax Act, 1961 but loans are not prohibited, therefore, your honor may be pleased to grant the benefit of section 11 and 12 to the appellant society and allow appropriate relief in this regard."
6. The ld.CIT(A), after considering the submissions of the assessee, confirmed the action of the AO by observing as under :
"4. To understand the issue in its proper perspective, it will be worthwhile to examine the provisions of Section 11(2) of the LT. Act, which states, inter-alia, that the income so accumulated or set apart shall not be included in the total income of the financial year of the person (in receipt of the income), provided the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5) 4.2 The wording of this section is clear &. unambiguous. It means that the exemption u/s 11 of the Act is available only when that money is invested or deposited in the form or modes specified. On analysis we find that this provision has 2 parts:- (i) That the accumulated funds have to be used by the trust in a manner which amounts to "invested" or "deposited" and (ii) such amount invested or deposited has to be in ..... the specified form or modes. In case of failure to adhere the either of the conditions, the exemption u/s 11 will not be available. In the instant case, the appellant's A.R. has himself admitted that giving loan is not the same thing as "invested" or "deposited". Therefore, by giving loan there has been a clear violation of the provisions in-limine.. Further, even assuming that giving "loan' is a form of deposit or investment, even then, the 2nd condition which is "such deposit/investment has to be in specified assets" has not been met in this case. There is no difference in the wording of Section 13(1)(d)(i) and Section 11(2) of the Act in this regard.
4.3 The cases cited by the ld. A. R. are in different context and, therefore, not applicable to the facts of the impugned case."
Now the assessee is in appeal.
7. The ld. Counsel for the assessee submitted that the assessee is a registered charitable society since 1977 and was also registered under Section 12A (now section 12AA) of the Income-tax Act,1961 continuously with effect from 1.4.1996 by the CIT, Kanpur. It was further stated that the society is running three educational institutions, namely, (i)Subhash Institute of Software Technology, (ii) Subhash Balika Inter College, and (iii) Subhash Public School and the assessee-society also planned to establish a Degree College,namely, Subhash Degree College and applied for recognition which was received from the authorities with effect from 1.7.2007. The ld. Counsel for the assessee stated that the assessee-society had given an interest free loan of Rs.1,28,06,709 between 20th February to 24th February, 2003 through four cheques to another educational institution having similar objects, namely, Ram Lakhan Shiksha Samiti, out of the said loan a sum of Rs.15 lacs was repaid on 23.3.2009 and the balance amount of Rs.1,13,06,709 was repaid through various cheques on 23.3.2009 to the assessee. It was pointed out that the said society Ram Lakhan Shiksha Samiti got registered with the Registrar of Societies on 19.2.2003 and the CIT-I, Kanpur granted registration under Section 12A of the I.T.Act,1961 on 25.5.2005 with effect from 1.4.2004 and that the society was also engaged in charitable activity of education.
7.1 The ld. Counsel for the assessee further submitted that the AO wrongly invoked the provisions of Section 13(1)(d) of the I.T.Act, which are not applicable to the facts of the present case because the said provisions are applicable to the investment or deposit, but in assessee's case it was neither a deposit nor an investment, rather a loan was given to the society for same object and the said loan was received back in the subsequent years. In the said year, no disallowance was made by the AO. In support of the above, a copy of the assessment order dated 24.12.2010 for the assessment year 2008-09 is submitted which is placed on record. Reliance was placed on the following case laws :
(i) Director of Income-tax (Exemption) vs. Acme Educational Society (2010) 326 ITR 146(Del.), Director of Income-tax vs. Pariwar Sewa Sansthan (2001)118 Taxman 587(Del.), Decision of the I.T.A.T.,Delhi Bench in I.T.A.No.829(Del.)/1999 in the case of Dy.Director of Income-tax(Exemption),New Delhi vs. Parwar Sewa Sansthan, New Delhi, Decision of the I.T.A.T., Madras Bench in the case of Kumudam Endowments vs. ITO, 32 ITD 210, Decision of the I.T.A.T.Delhi Bench in the case of Alaripppu vs. ITO (1977) 60 ITD 478,
(vi) DIT (Exemption) vs.Alarippu (2000) 244 ITR 358(Del.).
8. In his rival submissions, the ld. D.R. strongly supported the orders of the authorities below and further submitted that the source of loan given by the assessee to Ram Lakhan Shiksha Samiti was from the funds included in accumulated funds proposed to be utilized for the purposes of Section 11(5) of the Act. Therefore, the funds which were set aside for the purposes as per Section 11(2) could only be utilized in the manner provided in Section 11(5)of the Act. Reliance was placed on the judgment of the Hon'ble Calcuttra High Court In the case of Director of Income-tax (Exemption) vs. Trustees of Singhania Charitable Trust (1993) 199 ITR 819(Cal.). It was further submitted that at the relevant time, no registration under Section 12AA of the I.T. Act was available to the recipient society in the financial year in which the loan was given to it, hence the cases relied upon by the assessee have no relevance as regards to the facts of the present case. It was further stated that the fact of repayment in subsequent year was not relevant because firstly, it was an event which happened after the close of the relevant financial year and secondly, the violation of condition laid down in Section 11(2)of the I.T.Act was there.
9. The ld. Counsel for the assessee, in his rejoinder, submitted that the assessee-society had never given any loan from the unspent income set apart or accumulated in accordance with the provisions of Section 11(2) of the I.T.Act. In support of the above contention, the ld. Counsel for the assessee had filed the written submissions which read as under :
"4.1 The appellant's income for the A.Y. 1997-98 was exempt under section 10(22) of the Income Tax Act, 1961. A copy of the Return of income and the Computation are enclosed for your honour's ready reference, marked as Annexure 1 & 2.
4.2 The Section 10(22) of the Income Tax Act, 1961 does not require accumulation and investment of any surplus or unspent income in accordance with section 11(2) r/w section 11(5) of the Income Tax Act, 1961.
4.3 The finding of the Ld. AO in the chart given in para 4.3 of the Asstt. Order that the assessee had accumulated income (Surplus) of Rs 388217/- in the FY 1996-97 relevant to AY 1997-98 which has been utilized in giving Loan(s) to the said Ram Lakhan Shiksha Samiti is misconceived,unfounded and incorrect.
Reliance in this regard is placed on the decision of Hon'ble Madras High Court in the case of CIT Vs Rao Bahadur Calavala Cunnan Chetty Charities 135 ITR 485.
4.4 The depreciation is to be allowed while computing the income from business on Commercial principles under section 11 of the Income Tax Act, 1961.
Reliance in this regard is placed on the judgment of Hon'ble Bombay High Court in the case of CIT Vs Institute of Banking Personnel Selection (2003) 264 ITR 110. . Reliance is placed on the decision of Hon'ble ITAT Lucknow in ITA No. 625/LUC/2007 in the case of ACIT-I, Kanpur Vs Seth Anandram Jaipuria Educational Society, Kanpur.
4.5 The Ld. AO has mentioned in para 3 of the assessment order that (Quoted) "... However, while calculating the application of income, the assessee has excluded the amount of depreciation allowance ....."
The appellant may be due to ignorance of law has not been claiming depreciation as an expenditure as a part of application of income or as a charge on the Profit & Loss account although the same was admissible.
Even in the assessment year 2000-2001 the appellant did not claim depreciation as a part of total expenditure or as application of income for the year. A Copy of Audited Balance Sheet as on 31/3/2000 filed along with the Return of income of AY 2000-2001 before the Ld. A.O. are again enclosed for your honour's ready reference, marked as Annexure 3.
The depreciation amounting to Rs.8,69,002.50, if added to the total expenditure for the A.Y. 2000-2001, as shown in the table given by the Ld.A.O. in para 4.3 of the Asstt. Order, shall increase the total expenditure to Rs 6471126.50 (5602124.00+869002.50) which shall exceed 75% of total Income for the year hence there would not have been any need to accumulate or set apart any unspent income for that year in accordance with the provisions of section 11(2) of the Income Tax Act, 1961.
4.6 Without prejudice to the aforesaid submissions and presuming without admitting that depreciation is not admissible as an expenditure, then also no amount was required to be accumulated in accordance with the provision of section 11(2) of the Income Tax Act 1961.
From the table given by Ld. A.O., in para 4.3 of the Asstt. Order, it may be evident that in AY 1999-2000 there existed a deficit of Rs.8,10,120.00 even without reducing the aforesaid depreciation amounting to Rs. 6,66,071.60 for the A.Y. 1999-2000 from income of that year.
The deficit for the A.Y. 99-2000 had to be adjusted against the Income of the A.Y. 2000-2001 as carried forward excess expenditure which again had to be treated as an application of Income in that year.
Reliance in this regard is placed on the judgment of Hon'ble Bombay High Court in the case of CIT Vs Institute of Banking Personnel Selection (2003) 264 ITR 110.
4.8 The finding of the Ld. A.O. that the funds accumulated under section 11(2) of the Income Tax Act, 1961 were utilized in giving loan to Ram Lakhan Shiksha Samiti is perverse and also against the guidelines laid down by the CBDT in the circular No. 14(XL-35), DT. 11-4-1955 (Clari.) which provides :- ...... "Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him...."
4.9 Section 11(2) does not operate to whittle down or to cut across the exemption provisions contained in section 11(1)(a) so far as such accumulated income of the previous year is concerned. It has also to be appreciated that sub-section (2) of section 11 does not contain any non obstante clause like notwithstanding the provisions of sub-section (1)". Consequently, it must be held that after section 11(1)(a) has full play and if still any accumulated income of the previous year is left to be dealt with, and to be considered for the purpose of income-tax exemption, sub-section (2) of section 11 can be pressed into service. However on the facts and circumstances of appellant's case, in the AY 2006-07, sub-section(2) of section 11 of the Income Tax Act, 1961 cannot be pressed.
Reliance is placed on the following judgments of Hon'ble Supreme Court of India :
(i) Addl. CIT Vs A.L.N. Rao Charitable Trust [1995] 216 ITR 697
(ii) S. RM. M. CT. M. Tiruppani Trust v. CIT (1998) 230 ITR 636 Reliance is also placed on the decision of Hon'ble ITAT Lucknow, in the case of Murlidhar Sohanlal Foundation (2005) 92 TTJ 1054 held :- "....We also find that the Hon'ble Supreme Court in the case of A.L.M. Rao Charitable Trust (supra) has held that the purpose of section 11(2) was not to restrict the scope of exemption under section 11(1)(a) of the Act. The observations made by the Hon'ble Supreme Court in this connection have been mentioned earlier. In view of this decision, the claim of the assessee deserves to be allowed. We also find that the Hon'ble Supreme Court in the case of S. RM. M. CT. M. Tiruppani Trust v. CIT (1998) 230 ITR 636 (SC), has considered similar issue. In that case, the Hon'ble Supreme Court held that accumulation beyond 25 per cent of the receipts could be done and the procedure laid down in section 11(2) will apply to such accumulation. But, the accumulation of income of less than 25 per cent could be done without following the procedure laid down in section 11(2) of the Act. In the instant case, the assessing officer has not allowed even the exemption of 25 per cent which was accumulated by the assessee. In this case also, the Hon'ble Supreme Court reiterated that section 11(2) does not in any manner restrict the operation of section 11(1). The accumulated income which is exempt under section 11(1)(a) need not be invested in government securities. It is only in respect of any additional accumulated income beyond 25 per cent that, if the assessee wants exemption of this additional accumulated income also, the assessee is required to invest the additional accumulated income in the manner laid down in section 11(2) after following the procedure laid down therein. Keeping in view these facts we hold that the learned CIT (A) has not correctly appreciated the facts of the case in disallowing the claim of the assessee......".
In the above case, the Hon'ble ITAT Lucknow considered the judgment of DIT (exemption) Trustees of Singhania Charitable Trust 199ITR 81 (Cal.) which has been relied by the Ld. DR.
4.10 The loan granted by the appellant society to Ram Lakhan Shiksha Samiti in FY 2002-2003 constitutes application of Income in the year 2002-2003, therefore also no violation of section 11(2) of the Income Tax Act, 1961 can be said to have been done. Reliance is placed on the decision of ITAT Delhi bench in the case of Alarippu Vs ITO (1997)60 ITD 478, approved by Hon'ble Delhi High Court in the case of Director of Income Tax (Exemption) Vs Alarippu (2000) 244 ITR 358. The Hon'ble ITAT held :-
".......In case of Sarladevi Sarabhai Trust (supra) after considering the dictionary meaning of the term apply as "to put to use", it has been held by their Lordship of Gujarat High Court that when the charitable Trust donates its income to another charitable trust the provisions of section 11(1)(a) can be said to have been met by such donor trust and the donor trust can be said to have applied its income for the purposes. To similar effect a decision was taken in the case of Indian National Theatre Trust (supra). On the facts, it has been held that in case the objects of both the donor and the donee are the same, the loan advanced to the donee trust could not but be said to be application of income in furtherance of objects of the assessee. No contrary decisions has been cited by the learned DR on this proposition. It has also not been denied that the objects of both the donor and the donee are not similar. Applying the ratio in the case of Indian National Theatre Trust (supra) it could not be said that the amount given to Mahila Haat did not constitute the application of income. Thus on the facts of the case it is held that there is no violation of section 13(1)(d) of the Act and the amount as given to Mahila Haat would constitute applications of the income....."
Reliance is also placed on the order of Hon'ble ITAT, Delhi in the case of Indian National Theatre Trust Vs ITO (1985) 13 ITD 588. The Hon'ble ITAT held :- "....There is another aspect we would like to touch upon here as it is very relevant, i.e. the loan advanced to Shri Ram Centre for Art and Culture. On a careful examination of the objects of the assessee-trust as well as Shri Ram Centre for Art and Culture, we found that the objects are similar if not in identical terms. Both of them stand and are established for the promotion of music, dance and drama and spread of education relating to music, dance and drama. The dissemination of information relating to the promotion of these art cannot but be achieved by providing for libraries and reading rooms. The provision of library or a reading room and stocking the library with books on these subjects and reading rooms with the magazines concerning these subjects cannot be said to be an object different from the main object. This is one of the means, if no more perfected and better means, to achieve the main objects. There was, thus confusion in the mind of the Commissioner (Appeals) when he says that the objects were dismilar. The departmental representative, though he took great pains, could not point out the dissimilarities. Therefore, the loan advanced to Shri Ram Centre for Art and Culture cannot but be said to be application of income..."
4.11 Without prejudice to the submission made at paras 4.1 to 4.9 here above and presuming without admitting that funds accumulated under section 11(2) of the Income Tax Act, 1961 have been utilized by the appellant in giving temporary loan to another charitable society then also it cannot be said that the assessee has violated the provisions of section 11(2) of the Income Tax Act, 1961 in the impugned assessment year 2006-07. Section 11(3) of the Income Tax Act, 1961 is reproduced as under:
(3) Any income referred to in sub-section (2) which
(a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or [(b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or]
(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof, [(d) is credited or paid to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10,] shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or [set apart or ceases to remain so invested or deposited or credited or paid or] as the case may be, of the previous year immediately following the expiry of the period aforesaid.] Therefore, considering the legal provisions of section 11(3) of the Income Tax Act, 1961 even if it is assumed that accumulated funds have been utilized in giving temporary loan to Ram Lakhan Shiksha Samiti in the FY 2002-03 then the taxability of such accumulated amount under section 11(2) which ceases to be accumulated may have been considered for taxability as per law in FY 2002-2003 4.12 In view of above submissions and on the facts and circumstances of the case the first issue raised by the Ld. DR is in-fructuous and non-existent and therefore liable to be dismissed."
9.1 As regards to the objection of the ld.D.R. that the recipient was not registered under Section 12AA of the Act at the relevant time, the ld. Counsel for the assessee in his rejoinder vide written submissions, placed at pages 11 to 15 of the assessee's Compilation has stated as under :
"5.1 It is not in dispute that donee society Ramlakhan Shiksha Samiti is a charitable society is engaged in 'education'. Education is per-se a charitable purpose as defined in section 2(15) of the Income Tax Act, 1961.
5.2 The Ld. CIT-I, Kanpur after making due enquiries and examining the Balance Sheet as on 31/3/2003 of Ram Lakhan Shiksha Samiti granted registration under section 12A w.e.f. 1/4/2004 on 25/5/2005. This proves that the Ram Lakhan Shiksha Samiti is a charitable society pursuing its objects for which it was established.
5.3 In view of aforesaid facts, the issue raised by the Ld. DR has no bearing on the present appeal.
6. Kanpur Subhash Shiksha Samiti and Ram Lakhan Shiksha Samiti are two different societies separately registered with The registrar of societies and also separately registered under section 12A of the Income Tax Act, 1961 with the CIT-I, Kanpur. The observation that Shri Ram Lakhan Bhatt is founder trustee and manager of the assessee trust as well as that of Ram Lakhan Shiksha Samiti is IRRELVANT. Reliance is placed on the decision of Hon'ble ITAT Delhi in the case of DDIT(Exemption), New Delhi Vs Pariwar Sewa Sansthan, New Delhi in ITA No. 829/Del/1999, in that case one Mrs. Sudha Tewari was Chief executive Officer and a member of governing body of charitable institution PARIWAR SEWA SANSTHAN. Mrs Sudha Tewari along with Mrs Dhall established another society in the name of TYAGI FOUNDATION and gave a Loan of Rs.9380750/-. The Hon'ble ITAT while deciding a similar issue held :- ".... Again, we have carefully gone through the orders of the assessing officer and the learned Commissioner (Appeals) for the assessment years 1995-96 and 1996-97 on the issue of loan to Tyagi Foundation and considered the submissions and contentions made by the learned ARs of both the sides. We are of the view that the learned Commissioner (Appeals) was justified in holding that there was no violation of provisions of section 13(5) in giving the loan to Tyagi Foundation. The learned Commissioner (Appeals) found that Tyagii Foundation was a separate registered society engaged in similar charitable activities and the allegation of the assessing officer of this society being controlled by Mrs. Sudha Tewari and others was wrong and irrelevant....."
7. The judgment of Hon'ble Kerla High Court in the case of Mundkapadam Mandiram Society Vs CIT 258 ITR 395 relied on by the Ld. A.O. and Ld. DR is clearly distinguishable from the facts of the present case. In the case of M. Mandiram Society (supra) the Hon'ble High court gave the finding as :- ".... It is admitted and there is finding to the effect an amount of Rs 25000/- was deposited by the petitioner with Integrated Finance Company.....". In that case a 'DEPOSIT' was made with a private finance company but in the present case of appellant a interest free 'LOAN' was given by the appellant society out of its charitable objects to another charitable society having similar objects.
8. Without prejudice to all submissions here in above, your humble appellant submits that after finding that the appellant has violated the provisions of section 13(1)(d) of the Income Tax Act, 1961 the Ld. AO could not have taxed the entire income on Maximum Marginal Rate in any case in the AY 2006-07. Interest free temporary Loan was given by the appellant to Ram Lakhan Shiksha Samiti and no interest was received in the impugned assessment year. Reliance is placed on the judgment of Hon'ble Bombay High Court in the case of Director of Income Tax (Exemptions) Vs Sheth Mafatlal Gaglbhai Foundation Trust [2001] 249 ITR 533. The Hon'ble Court considered the issue - "Whether violation of section 11(5) read with section 13(1)(d) by the assessee-trust attracts Maximum Marginal Rate of tax on entire income of trust?" The Hon'ble Bombay High Court held : "......Section 164 does not create a charge on the income of a discretionary trust. The word 'charge' in section 164 means 'levy'. Section 164(2) refers to the relevant income which is derived from property held under trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of an association of persons. Therefore, a proviso was inserted by the Finance Act, 1984 with effect from 1-4-1985 under which in cases where the whole or any part of the relevant income is not exempt under section 11 or section 12 because of the contravention of section 13(1)(d), the tax shall be charged on such income or part thereof, as the case may be, at the maximum marginal rate. In other words, only the non-exempt income portion would fall in the net of tax, as if, it was the income of an association of persons. Section 11(5) lays down various modes or forms in which a trust is required to deploy its funds. Section 13(1) lays down cases in which section 11 shall not apply. Under section 13(1)(d)(iii), it has been laid down that any share in a company, not being a government company held by the trust after 30-11-1983 shall result in forfeiture of exemption. By virtue of the proviso (iia), it has been laid down that any asset which does not form part of permissible investment under section 11(5) shall be disposed of within one year from the end of the previous year in which such asset is acquired or by 31-3-1993, whichever is later. In the present case, the assessee was required to dispose of the shares under the said proviso by 31-3-1993 (See the judgment of this court in IT Appeal No. 81 of 1999 dated 14-9-2000). The shares have not been disposed of even during the assessment year in question. Now, under section 164(2), it is inter alia laid. down that in the case of relevant income which is derived from property held under trust for charitable purposes, which is of the nature referred to in section 11(4A), tax shall be charged on so much of the relevant income as is not exempt under section 11. Section 164(2) was reintroduced by the Direct Tax Laws (Amendment) Act, 1989 with effect from 1-4-1989. Earlier, it was omitted by the Direct Tax Laws (Amendment) Act, 1987. However, the Legislature inserted a proviso by the Finance Act, 1984 with effect from 1-4-1985. By the said proviso, it is inter alia laid down that where whole or part of the relevant income is not exempt by virtue of section 13(1)(d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. The phrase relevant income or part of the relevant income' is required to be read in contradistinction to the phrase 'whole income' under section 161(1A). This is only by way of comparison. Under section 161 (1A), which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, the tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the above two phrases shows that the Legislature has clearly indicated its mind in the proviso to section 164(2) when it categorically, refers to forfeiture of exemption for breach of section 13(1)(c), resulting in levy of maximum marginal rate of tax only to that part of the income which has forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. This interpretation of ours is also supported by Circular No. 387, dated 6-7-1984. Vide the said circular, it has been laid down in Para 28.6 that where a trust contravenes section 13(1)(d), the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provision and not to the entire income. We may also add that in law there is a vital difference between eligibility for exemption and withdrawal of exemption/forfeiture of exemption for contravention of the provisions of law. These two concepts are different. They have different consequences. It is interesting to note that although the Legislature withdrew section 164(2) by the Direct Tax Laws (Amendment) Act, 1987 which provision was reintroduced by the Direct Tax Laws (Amendment) Act 1989, the Legislature did not touch the proviso to section 164(2) which has been on the statute book right from 1-4-1985. The said proviso was inserted by the Finance Act, 1984. The proviso specifically refers to violation of section 13(1)(d) and its consequences. In the circumstances, we find merit in the contention of the assessee that in the present case the maximum marginal rate of tax will apply only to the dividend income from shares in Mafatlal Industries Ltd. and not to the entire income. Therefore, income other than dividend income shall be taxed at normal rate of taxation under the Act....."
Reliance is also placed on the decision of Hon'ble ITAT Bombay in the case of Gurdayal Berlia Charitable Trust Vs ITO [1990] 34 ITD 489 where it was held that :- "......We have carefully considered the rival submissions of the parties and the material already brought on record and find force in the stand taken on behalf of the assessee. It is not in dispute that his is a trust which has been granted exemption u/s. 11 of the Act in respect of the income earned by it on its funds. Sub-section (2) of sec. 11, which was introduced with effect from 1-4-1971, requires that where 75% of the income of the trust is not applied, or is not deemed to have been applied, to charitable or religious purposes, such income, which is accumulated, will not be included in the total income if certain conditions are satisfied. One of the conditions prescribed is that money so accumulated is set apart for investment in the forms or modes specified in sub-section (5). This condition is to be found in clause (b) of sub-section (2) which as it stand today, was introduced by the Finance Act, 1983, which became effective from 1-4-1983. The same Finance Act introduced sub-section (5) which prescribes the forms and modes of investing and depositing moneys accumulated by the trust which are referred to in clause (b) of sub-section (2). Now, the requirement of investment of accumulated funds in specified securities, which has been introduced in the form of sub-section (5), is likely to create difficulties for old trusts which have been granted exemption under sec. 11 [as it stood before the introduction of sub-section (5)], but which are not in a position to invest in specified securities, its accumulated funds for some reason or the other. In the instant case it is a known fact that during the relevant previous year it was not possible to dispose of the shares in question, as there was hardly any buyer. Now, the income of the trust, which is receivable by the trustees, is called relevant income under Sec. 164(1) of the Act. A portion of such relevant income in the present case would suffer tax mainly because the condition of investment in specified securities as prescribed under Sec. 11(5) has not been fulfilled. But, non-fulfillment of such condition cannot be said to deprive the trust of the exemption of its other income which has already been granted to it in the earlier years. Therefore, in a case of this type, the provisions of sub-sec. (2) of Sec. 164 along with the proviso there to would come income operation and only such income would be brought to tax at the maximum marginal rate which cannot be treated as exempt by virtue of non-fulfillment of condition of investment in specified securities as prescribed by Sec. 11(5). According to us, the line of argument/reasoning advanced by the learned Counsel for the assessee is fully fortified by the aforesaid circular No. 387 issued by the CBDT. There is nothing in Sec. 11(5) which can be interpreted to mean that if a portion of the accumulated income of the Trust is not invested in specified securities, the exemption u/s. 11 of the Act which has already been granted to the trust in earlier years would be withdrawn. In this view of the matter, we are of the opinion that the trust cannot be denied exemption u/s. 11 and only its income from dividend on 12,000 shares should be brought to tax at prescribed rate because such income is not from specified securities. We would, therefore, direct the ITO to accept the assessees contention in this regard and modify the assessments accordingly....".
PRAYER In view of above submissions and on the facts and circumstances of the case, your honours may be pleased to allow the appeal of the appellant and quash the impugned order of CIT(A)-II, Kanpur.
For Kanpur Subhash Shiksha Samiti Sd.
CA Swaran Singh AR 7.2.2011"
10. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the instant case, it is noticed that the assessee-society advanced a loan of Rs.1,28,06,709 in the period relevant to the assessment year 2003-04. The said loan was received back in the month of March, 2009. According to the AO, since the assessee had given loan to another-society, it was violation of the provisions of Section 13(1)(d) read with Section 11(5) of the I.T. Act,1961. In the instant case, it is noticed that in the earlier year when the loan was given and remained with the recipient no such disallowance has been made and also in the subsequent year when the loan was received back, no such disallowance was made. It is noticed that the AO while framing the assessment for assessment year 2008-09 vide order dated 24.12.2010 in para 4.1 clearly observed that " the loan given to M/s. Ram Lakhan Shiksha Samiti has been repaid during financial year 2008-2009 and M/s. Ram Lakhan Shiksha Samiti is also engaged in charitable activities of education, copy of byelaws and registration certificate u/s 12A has also been filed." In the instant case, the provisions of Section 13(1)(d) read with Section 11(5) of the I.T.Act have been invoked by the AO while denying the benefit of exemption under Sections 11 and 12 of the I.T.Act. On a similar issue, the Hon'ble Delhi High Court in the case of Director of Income-tax (Exemption) vs/ Acme Eductional Society (2010) 326 ITR 146 (Del.), has held as under :
"that the interest-free loan of Rs. 90,50,000 given by the assessee-society to the other society did not violate section 13(1)(d) read with section 11(5) of Act, 1961 as the loan was neither an "investment" nor a "deposit". Moreover, both societies had similar objects and were registered under section 12A of the Act and had approvals under section 80G. The fact that the loan was interest-free and had been subse-quently returned was also significant."
10.1 The ratio laid down in the aforesaid referred to case is squarely applicable to the facts of the present case because in the said case, the assessee-society had given a loan of Rs.90,50,000 to another educational society and the AO held that there was a violation of Section 13(1)(d) read with Section 11(5) of the I.T.Act and denied the assessee the benefit of Section 11 of the Act. In the instant case also, the assessee had given a loan of Rs.1,28,06,709 to another educational society, namely, Ram Lakhan Shiksha Samiti and the AO held the same view which was taken in the case of Director of Income-tax (Exemption) vs. Acme Educational Society (supra) i.e. the AO held that there was a violation of Section 13(1)(d) read with Section 11(5)of the I.T.Act and accordingly he denied the assessee the benefit of Section 11 of the I.T.Act. Therefore, the ratio laid down in the case of Director of Income-tax(Exemption) vs. Acme Educational Society (supra) is squarely applicable to the facts of the present case. We accordingly hold that the assessee while giving the impugned loan to another society did not violate the provisions of Section 13(1)(d) read with Section 11(5) of the I.T.Act as the loan was neither an investment nor a deposit. Furthermore, the AO invoked the provisions of Section 13(1)(d) read with Section 11(5) of the I.T.Act in the assessment year under consideration i.e. assessment year 2006-07, while the loan was given in the period relevant to the assessment year 2003-04 and nothing is brought on record that such a disallowance was also made in the years falling between the assessment year in which loan was given and the assessment year under consideration. In other words, when the AO himself in the similar circumstances has accepted in the earlier years that the assessee was entitled for exemption under Section 11 of the Act, then by keeping in view the "principles of consistency", the AO was not justified in denying the benefit of exemption under Section 11 of the I.T. Act to the assessee for the year under consideration. In the instant case, the AO never disputed this fact that the assessee as well as Ram Lakhan Shiksha Samiti i.e. the society, who received the loan, were having similar objects, therefore, the temporary loan was given by the assessee to another society having similar object and nothing is brought on recorded by the AO that the said loan was out of the accumulated surplus of the year under consideration set apart because the AO himself in para 3 of the assessment order has mentioned that, "Since the surplus of income over expenditure is less than 15% of its gross receipts, then the income of the assessee works out to Nil in case the computation is made u/s 11 and 12 of I.T.Act", which clearly shows that the said loan was not out of the surplus of the year under consideration or accumulated surplus funds which is evident from the observations of the AO at page 2 of the assessment order dated 20.12.2008 for assessment year under consideration i.e. 2006-07, wherein it has been mentioned that total receipts of the assessee were at Rs.1,55,49,885 and the total expenditure incurred by the assessee was at Rs.1,34,38,260, as such excess of income over expenditure was at Rs.21,11,624, which was less than 15% of the gross receipts i.e. Rs.23,32,483. Therefore, it cannot be said that the loan given by the assessee was out of the surplus. Moreover, the loan was not in the period relevant to the assessment year under consideration, rather it was given way back in between 20th February to 24th February, 2003 i.e. in the period relevant to the assessment year 2003-04. Furthermore, the provisions of Section 13(1)(d) of the I.T.Act, which have been invoked by the AO were not applicable to the facts of the assessee's case. The said provisions read as under:
"13. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof--
x x x x x x x x x
(d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year--
(i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11; or
(ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983; or
(iii) any shares in a company, other than--
(A) shares in a public sector company ;
(B) shares prescribed as a form or mode of investment under clause (xii) of sub-section (5) of section 11, are held by the trust or institution after the 30th day of November, 1983:
Provided that nothing in this clause shall apply in relation to--
(i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1st day of June, 1973;
(ia) any accretion to the shares, forming part of the corpus mentioned in clause (i), by way of bonus shares allotted to the trust or institution;]
(ii) any assets (being debentures issued by, or on behalf of, any company or corporation) acquired by the trust or institution before the 1st day of March, 1983;
(iia) any asset, not being an investment or deposit in any of the forms or modes specified in sub-section (5) of section 11, where such asset is not held by the trust or institution, otherwise than in any of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 1993, whichever is later;
(iii) any funds representing the profits and gains of business, being profits and gains of any previous year relevant to the assessment year commencing on the 1st day of April, 1984 or any subsequent assessment year.
Explanation.--Where the trust or institution has any other income in addition to profits and gains of business, the provisions of clause (iii) of this proviso shall not apply unless the trust or institution maintains separate books of account in respect of such business.
Explanation.--For the purposes of sub-clause (ii) of clause (c), in determining whether any part of the income or any property of any trust or institution is during the previous year used or applied, directly or indirectly, for the benefit of any person referred to in sub-section (3), in so far as such use or application relates to any period before the 1st day of July, 1972, no regard shall be had to the amendments made to this section by section 7 other than sub-clause (ii) of clause (a) thereof] of the Finance Act, 1972."
10.2 In the instant case, the assessee neither invested the impugned amount nor deposited the same otherwise than in any one of the forms or modes specified in sub-Section (5) of Section 11 because the loan is neither an investment nor a deposit as has been clarified by the Hon'ble Delhi High Court in the aforesaid referred to case of Director of Income-tax (Exemption) vs. Acme Educational Society (supra) as such the provisions of Section 13(1)(d) are not applicable to the facts of the assessee and accordingly the assessee has not violated the provisions of the said Section 13(1)(d) of the I.T.Act, 1961. We, therefore, considering the totality of the facts, are of the view that the ld.CIT(A) was not justified in confirming the action of the AO for denying the exemption under Section 11 of the I.T.Act to the assessee by invoking the provisions of section 13(1)(d) read with Section 11(5) of the I.T.Act. In that view of the matter, we set aside the order of the ld.CIT(A) and direct the AO to allow the claim of the assessee.
11. In the result, the appeal is allowed.
(The order pronounced in the open Court on 28.02.11 )
Sd. Sd.
(H.L.Karwa) (N.K.Saini)
VICE PRESIDENT ACCOUNTANT MEMBER
February 28th ,2011.
Copy to the :
1. Appellant 2. Respondent 3. CIT(A) (4) CIT 5.DR.
A.R.,ITAT, Lucknow.
Srivastava.
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