Income Tax Appellate Tribunal - Pune
Seth Ramdas Nathubhai Dharmadaya ... vs Income-Tax Officer,(Exemptions) -1,, ... on 14 December, 2022
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER
ITA No.928/PUN/2018
नधारण वष / Assessment Year : 2011-12
Seth Ramdas Nathubhai Dharmadaya Vs. ITO
Vishwasta Nidhi, (Exemptions)-1,
C/o. Shah Khandelwal Jain & Pune
Associates, Chartered Accountants,
Level 3, Business Bay, Plot No.84,
Wellesley Road, Near RTO,
Pune 411 001
PAN : AAATR6805N
Appellant Respondent
Assessee by Shri Rajiv Thakkar
Revenue by Shri Sardar Singh Meena
Date of hearing 29-11-2022
Date of pronouncement 14-12-2022
आदे श / ORDER
PER PARTHA SARATHI CHAUDHURY, JM :
This appeal preferred by the assessee emanates from the order of the Learned Commissioner of Income-tax (Appeals), dated 19-03-2018 for the Assessment Year 2011-12 as per the following grounds of appeal :
"1. On facts and circumstances prevailing in the case and as per provisions & scheme of the Act it be held that the claim of exemption u/s. 11 denied by the AO and that confirmed by the first appellate authority is unjustified, unwarranted, and not in accordance with the provisions of law. The claim of the appellant be held as allowable. The appellant be granted just and proper relief in this respect.
2. On facts and circumstances prevailing in the case and as per provisions & scheme of the Act it be held that the salary paid to the Managing Trustee and Secretary Trustee are reasonable within the meaning of 2 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi section 13(2)(c) RWS 13(1 )(c) of the Act, that vehicle (Mercedes Benz) purchased for Rs.89,00,000/- by the Trust and foreign travelling expenses amounting Rs.3,77,238/-incurred for attending seminar and conference at UAE is not misutilization of the funds of the trust within the meaning of section 13(2) of the Act. The appellant be granted just and proper relief in this respect.
3. Without prejudice to the above grounds, on facts and circumstances prevailing in the case and as per provisions & scheme of the Act it be held that the AO ought to have allowed claim of the appellant to the extent of income from activities compliant with the provisions of section 11,12 & 13 of the Act. The claim of the appellant, other than the alleged unreasonable expenses, be held as allowable. The appellant be granted just and proper relief in this respect.
4. Without prejudice to the above grounds, on facts and circumstances prevailing in the case and as per provisions & scheme of the Act it further be held that the AO ought to have charged tax at MMR only on the alleged income which infringed section 13 of the Act. The tax charged on income other than alleged income which infringed section 13 of the Act be deleted. The appellant be granted just and proper relief in this respect.
5. On facts and circumstances prevailing in the case and as per provisions & scheme of the Act it be held that capital gains assessed by the AO and that confirmed by the appellate authority is unjustified, improper and contrary to the provisions of law. The capital gains assessed by the AO be deleted. The appellant be granted just and proper relief in this respect.
6. On facts and circumstances prevailing in the case and as per provisions & scheme of the Act it be held that, appellant be allowed to claim the unabsorbed expenses & depreciation from earlier years against the income so assessed. The claim should have been admitted as per provisions of law and facts prevailing in the case of the appellant. The appellant be granted just and proper relief in this respect.
7. The appellant prays to be allowed to add, amend, modify, rectify, delete, raise any grounds of appeal at the time of hearing."
2. In the aforestated grounds 1 to 4, the assessee is aggrieved by the denial of exemption u/s.11 of the Act by the Assessing Officer (AO) and as confirmed by the CIT(A) since there is violation of section 13(2)(c) 3 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi r.w.s. 13(1)(c) of the Act and the related issues. In ground No.5, the assesee has contested the additions made on capital gains and similarly in ground No.6 the assessee prays for allowance of claim of unabsorbed expenses and depreciation from earlier years against the income so assessed.
3. The relevant facts in this case are that the assessee trust is registered under the Bombay Public Trust Act, 1950 vide No.E1150, Pune dated 13-10-1987. The assessee is registered u/s.12A of the Act vide registration No.4597 dated 21-06-1989. The assessee trust was formed with various aims and objects mainly to set up a hospital in the name of "Seth Ramdas Shah Memorial Hospital and Research Centre"
in Pune. For the year under consideration, the assessee had shown direct income in the form of gross hospital receipts at Rs.2,10,951/- and indirect income at Rs.73,64,84,002/- and, in this way, the credit side total of Income and Expenditure account was at Rs.73,66,94,952/-.
After claim of direct and indirect expenses at Rs.30,68,12,295/- the net income over the expenditure was arrived at Rs.42,98,82,657/-.
4. During the assessment proceedings, the ld. Assessing Officer (AO) had issued a show cause notice to the assessee asking to justify the payment made to trustees, being interested persons in view of the provisions of section 13(3) of the Act and therefore, provisions of 4 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi section 13(1)(c)(ii) r.w.s.13(2) of the Act were attracted. The details of payment to such trustees were as follows :
Name of Trustee Payment in Rs. Nature of payment
Mr. Vikram Chavan 1,20,00,000/- Salary to Managing
Trustee
Ms. Pratima Vikam 12,00,000/- Salary to Secretary
Chavan
Total payment of the 1,32,00,000/-
trustees
Therefore, the ld.AO asked the assessee that in view of provisions of section 13(1)(c) r.w.s.13(2)(c) of the Act, the assessee needs to justify the reasonableness of the amount paid to Mr. Vikram Chavan and Ms. Pratima Vikram Chavan as mentioned in the above stated table. In the show case notice, the AO also required the assessee to explain that in the light of provisions of section 13(2)(c) the assessee has not furnished the reasonableness of the amounts paid to these persons vis-à-vis the services performed by them as compared to the Fair Market Value. The ld. AO also issued a show cause asking the assessee to justify purchase of Mercedes Benz vehicle worth Rs.89.00 lakh and the corresponding vehicle expenses at a time specially when the entire hospital of the assessee was auctioned in August, 2010. There has been also expenditure incurred on foreign tour of the Managing Trustees under the head "Business Promotion" expenses of Rs.3,77,238/- and the AO had also sought information from the assessee regarding the justification for 5 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi such foreign tour expenses and why it should not be treated as mis- utilization of the funds of the trust within the meaning of section 13(2) of the Act.
5. Meanwhile, the assessee made application u/s.144A of the Act before the ld. Joint Commissioner of Income Tax (JCIT). In the said order, the ld. JCIT held that the AO has correctly invoked the provisions of section 13(1)(c) of the Act in respect of the payment of salary to Mr. Vikram Chavan. The JCIT also observed in the order u/s.144A of the Act that there was no justification for purchase of Mercedes Benz car and the same was for personal benefit of the Managing Trustee and similarly the foreign tour undertaken by Mr Vikram Chavan and Ms. Pratima Vikram Chavan (Ms.Pratima Chavan) was not in furtherance of the objects of the trust and it was for the personal benefit of the trustee in infringement to section 13 of the Act.
6. Thereafter, the assessee had filed detailed written submission before the ld. AO for each of the issues for which the AO had issued the show cause notice to the assessee and this finds place in the assessment order. From Para D.3, the ld. AO has decided on the issue of reasonableness of salary paid to the Managing Trustee and the Trustee Secretary. The ld. AO observed looking at the salary payment schedule for F.Y. 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11, specifically 6 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi for F.Y. 2006-07 and 2009-10, the salary paid to Mr. Vikram Chavan as Managing Trustee and Ms. Pratima Chavan as the Trustee Secretary has been at the rate of 70% and 35% of the gross receipts of the hospital. Even for F.Y. 2010-11 it was very much disproportionate and the ld. AO held that there has been an infringement of section 13(1)(c) r.w.s.13(2)(c) of the Act. In this regard, the ld. AO examined the facts of the assessee's case and observed that the salary of the Managing Trustee has gone up and there is no nexus with the hospital receipts. The hospital of the trust was auctioned during the year on 13-08-2010 due to default in payment of loan of the bank. However, this has not affected the payment of remuneration to the Managing Trustee and the Trustee Secretary. It was seen that the payment of remuneration continued even when the main activity of the trust of running a hospital has stopped. That regarding reasonableness and justification of payment of remuneration, it was argued during the hearing before the AO that the Managing Trustee had advanced a loan to the Trust at the rate of 8% whereas he has sustained the interest on loan at the PLR but the AO did not accept this argument because, on one hand, the Managing Trustee seems to help the trust by providing loan but at the same time he was drawing unreasonable salary from the sinking coffers of the trust. The ld. AO also observed that the rate of interest of 8% per annum was voluntarily offered to be taken by the Managing Trustee in the 7 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi applications made before the Charity Commissioner and therefore there was no nexus for advancing such loans and the salary taken by the Managing Trustee. The AO rightly refuted the explanation of the assessee that the Managing Trustee has sustained losses in payment of interest for the loan and if this loss is considered then payment of salary of Rs.10.00 lakhs per month would be justifiable. It was also stated by the AO that for F.Yrs. 2012-13 and 2013-14 there has been no payment of interest but still huge salary has been paid to the Managing Trustee. The ld. AO held that the trust has paid the entire due with interest of Mr. Vikram Chavan, i.e. Managing Trustee after the auction of the property and thereafter also the payment of huge salary when actually no charitable work has been done is therefore misappropriation of trust funds. It was clearly brought out by the AO that there was no reasonableness regarding the payment of salary to the Managing Trustee and the assessee was not able to prove the justification for such payment and whether at all the Managing Trustee was doing any activities in furtherance of the objects of the trust, and rather it was observed that the excess and unreasonable salary paid to him drained the coffers of the trust. This is so when the hospital of the trust was auctioned during the year but the payment of remuneration to the said Managing Trustee and the Trustee Secretary were not affected and it continued irrespective of the fact that the main activity of the trust of running a hospital had 8 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi stopped. The process of auction of the property was commenced by virtue of notice u/s.13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 dated 23-01-2009. Thereafter, the possession over the mortgaged hospital property was taken by Bank of Maharashtra. The trust hospital was auctioned on 13-08-2010 for total consideration of Rs.68,00,00,000/-. After repayment of loan of Bank of Maharashtra and the Trustee Mr. Vikram Chavan, there was surplus of Rs.13.00 crore which was deposited in FDR with State Bank of Mysore. It was observed by the AO that the same remuneration continued to be paid to the trustee thereafter as well in the F.Yrs. 2012-13 and 2013-14. In F.Y. 2012-13, the assessee trust had no income other than interest on FDR but still salaries to these trustees at Rs.1.32 crore were paid. In this way, the coffers of the trust were drained out by the trustees for their personal benefits. The remuneration of the trustees were excessive and unreasonable as compared to the services which they have performed in the context of the provisions of section 13(2)(c) of the Act. The ld. AO also verified the fact that prior to August, 2008 Mr. Vikram Chavan was paid salary at Rs.2.00 lakh per month which was increased to Rs.10.00 lakh per month without any reasonableness and justification. The ld. AO considered the payment of Rs.2.00 per month as salary as reasonable and the remaining amount of Rs.96.00 lakhs were held to be excessive 9 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi and unreasonable thereby infringing the provisions of section 13 of the Act. The said amount was disallowed as not deductible u/s.40A(2)(b) r.w.s.37(1) of the Act while computing the business income of the assessee.
7. Before the ld. CIT(A), regarding the salary paid to the Managing Trustee Mr. Vikram Chavan, the assessee tried to built up a case by submitting the contribution made by Mr. Vikram Chavan in setting up the hospital of the trust and referring to various degrees obtained by him including program completed regarding Hospital Management from Indian Institute of Management. It was also submitted that the said Managing Trustee was a man of experience regarding running a hospital and he was devoting 14 hours a day since 2004 and further receiving unsecured loan of Rs.15.00 crore @15% per annum by the trust by giving Personal Guarantee to the Bank of Maharashtra and the said loan was granted after due permission from the Charity Commissioner vide order dated 12-04-2006 and these were the fundamental basis regarding the explanation forwarded by the assessee for making the huge salary payment to the managing trustee. The assessee has also tried to justify that even after the sale of the hospital of the assessee trust the services of the Managing Trustee, i.e. Mr. Vikram Chavan was required since he was the key person of the trust having full knowledge about the activities 10 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi carried on by the trust since 1987 till date. It was also argued that the Managing Trustee has disputed the sale transaction by the Bank of Maharashtra under SARFASI Act and preferred appeal before the Debt Recovery Tribunal which was further referred to the Debt Recovery Appellate Tribunal, Mumbai and which was still pending before the said Tribunal. It was also contended by the assessee that the Board of Trustees after considering the devotion of the Managing Trustee Mr. Vikram Chavan had increased his salary from Rs.2.00 lakh per month to Rs.10.00 lakh per month w.e.f. 01-08-2008. The ld. CIT(A) vide para No.6.3.2.2 supporting the view of the Assessing Officer observed that the assessee trust cannot link and adduce its argument of personal guarantee given for taking loan with interest by the Managing Trustee or anyone whosoever, with that of the payment of salary to justify the unreasonableness of such payment of salary. The ld. CIT(A) further held that if the contention of the assessee are to be accepted then that would vitiate the very purpose of the provisions of section 13 of the Act. The restrictions imposed in the said section are not only to be followed in letter and spirit but the same are deterrent in the nature for a Public Charitable Trust which are created for the benefit of public at large and for the said cause its entire income is held as exempt, provided the Laws and Rules governing the trust under the Act are strictly followed by the said Trust/Institution. The ld. CIT(A) gives a categorical finding that the 11 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi assessee has failed to defend such huge unreasonable salary paid to the Managing Trustee at Rs.10.00 lakh per month even after the fact that the hospital for which such payment was scheduled as per the Trust Deed and decided in the meeting of the Board of Trustees to be paid had ceased its working and totally stopped after the auction sale of the same due to non-payment of loan taken. The ld. CIT(A) held that when the fact is after the auction of the hospital when there was no charitable activity performed by the trust and since the hospital was the only source of the trust for doing charitable activity and when this itself had stopped working after the auction and more so when the trust ceased to have any control on the hospital after the auction sale, then it cannot be said from any reasonable parameter that the salary of Rs.10.00 lakh per month paid to the Managing Trustee was justified. The ld. CIT(A) also supported the observations of the AO that litigation before various forums like Debt Recovery Tribunal and Appellate Tribunal if any would be argued by the counsels appointed by the trust and not by any employee or the Managing Trustee. Similarly, the assessee cannot take plea of making such huge salary payment to Mr. Vikram Chavan merely because he had absolute knowledge about the affairs of the trust right from the creation of the hospital till it was auctioned. Infact it is the counsel of the assessee trust who has to prepare the brief for litigation if any with the help of the assessee trust. The ld. CIT(A) upheld the view of the ld. AO 12 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi upholding the violation of provisions of section 13(2)(c) r.w.s.13(1)(c) of the Act. The ld. CIT(A) in his conclusion observed an important fact also appearing at para D 3.4 of the assessment order wherein it has been clearly held that even after the auction sale of the hospital the salary payment which used to be made earlier has not been reduced, which even continued till date and further in the resolution passed in the meeting of Board of Trustees "no basis for quantifying the salary @ Rs.10.00 lakh per month had been given".
8. We have heard both the rival contentions on the issue of excessive payment of salary to Managing Trustee Mr. Vikram Chavan and perused the relevant material on record. We observe the facts are that here is a case where the Managing Trustee is being given unreasonable and excessive salary which was increased from Rs.2.00 lakh per month to Rs.10.00 lakh per month and the Revenue authorities have examined the resolution passed by the Board of Trustees regarding this increase and therein also the reasons have not been brought out stating the justification and reasonableness of such increase in the salary of the Managing Trustee given the fact that the property of the trust has been auctioned and the said trust was doing charitable activity from the hospital only and after the said hospital was taken over by the Bank of Maharashtra and auctioned, the assessee trust did not had any control 13 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi thereafter with the operations of the said hospital. Irrespective of the auction sale of the hospital, the Managing Trustee continued to receive the same salary and it was definitely not for advancement of any charitable activity of the trust. When the hospital itself has been auctioned from which the charitable activities were being performed, in such, scenario, the assessee could not explain the justification and reason for payment of such huge salary even after the period of auction and whether at all these payments were in furtherance of any charitable activity. The various explanations that has been put forward by the assesse trying to justify the payment of salary has been with regard to the association of the Managing Trustee from the very beginning of the trust, the qualification of the Managing Trustee, the fact that he has ensured loan for the trust by giving his Personal Guarantee and even after auction sale and taking over of the hospital by Bank of Maharashtra, the Managing Trustee had filed appeal before the Debt Recovery Tribunal etc., has all been verified and examined by both the ld. AO and the ld. CIT(A) and we do not find any infirmity with the reasoning forwarded by the Revenue authorities. The exemption u/s.11 can be claimed "in respect of income derived from property held under a trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India, and where any such income is accumulated or set apart for application to such purposes in 14 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi India. . . . . . . . .". Therefore, the essential ingredient in claiming exemption u/s.11 requires that the property held under trust should be involved in charitable activities and this provision is subject to section 13 of the Act. The Finance Act, 1970 has changed the frame of the former section 13 and has further widened the scope of the ban therein. Section 13(1)(c) as substituted and newly re-numbered in 1970 we.f. 01-04-1971 provides that a charitable or religious trust or institution created or established on or before 01-04-1962 shall forfeit the exemption u/s.11 if any part of its income ensures to the benefit of any of the interested persons or any part of its income or property irrespective of the date of its creation or establishment used and applied by or for the benefit of any such interested person during any part of the previous year. What section 13(1)(c) (ii) does is to fetter the exemption provided by section 11 and to deny it to the assessee who have used or applied their income for the benefit of any interested person referred to in section 13(3) of the Act. We also observe that w.e.f. 01-04-1971 provisions of section 13(2) was also inserted to provide that the income or the property of a trust shall be considered to have been used or applied for the benefit of the author, founder etc., under certain circumstances therein enumerated. If any of such circumstances is found to exist, the benefit of section 11 shall not be available to the income of 15 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi the trust and one such circumstances is the payment of excessive or unreasonable salary out of the reserves of the trust.
9. In the case of Director of Income Tax Vs. Bharat Diamond Bourse (2003) 259 ITR 280, the Hon'ble Apex Court observed that where the assessee a charitable institution has lent the substantial amount of money to the extent of Rs.70.00 lakh to its founder without adequate security and interest, the assessee lost the benefit of exemption from tax u/s.11 of the Act as it fall within the mischief of the provisions of section 13(1)(c)(ii) r.w.s. 13(2)(d) and 13(3)(a) of the Act. In the case of Action for Welfare and Awakening in Rural Environment Vs. DCIT (2003) 263 ITR 13, the Hon'ble Andhra Pradesh High Court held that the finding of fact recorded by the AO and confirmed by the First Appellate Authority and the Tribunal to the effect that the assessee has violated the provisions of section 13(1)(c)(ii) r.w.s. 13(2)(b) and section 13(3)(c) gave rise to no question of law. The Hon'ble Delhi High Court has held in the case of CIT Vs. Shriram Memorial Foundation (2004) 269 ITR 35 (Delhi) that the violation of provisions of section 13(1)(c) r.w.s. 13(2) is essentially a question of fact to be determined on basis of factual analysis.
10. Reverting to the facts of the present case, there was no justification or reasonableness in paying Rs.10.00 lakh per month to the Managing 16 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi Trustee even when trust property, i.e. hospital has been auctioned and sold and the Bank of Maharashtra has taken possession of the said property. There were no charitable activities that was performed during the year by the assessee trust for which they can claim that they have paid such salary to the Managing Trustee. Whatever explanations has been given by the assessee in defending this issue has already been analysed by the Revenue authorities in their respective orders and here is a case where there is violation of the provisions of section 13(1)(c) r.w.s.13(2)(c) and correctly the exemption u/s.11 has been denied to the assessee trust on this issue. When there is no charitable activity conducted by the trust after the acquisition by the Bank of Maharashtra and sale of auction of the hospital, then there does not arise any need for the payment of salary at such huge rate to the Managing Trustee. That even in the Board of Directors decision, the Revenue has rightly observed that no reason has been specified as to why the salary of the Managing Trustee was increased from Rs.2.00 lakh per month to Rs.10.00 lakh per month. All throughout, such salaries have been paid to the Managing Trustees from the assessee's trust account for no reason when there was no charitable activity shown by the trust and therefore, it cannot be said that such payment was made in furtherance of any charitable objects of the trust. We do not find any infirmity therefore with the findings of the ld. CIT(A) nor with the findings of the ld. AO 17 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi and we hold that the Revenue authorities were correct in denying exemption u/s.11 in respect of violation of the provisions of section 13(1)(c) r.w.s.13(2) of the Act and the disallowance of the excess and unreasonable salary paid to the Managing Trustee is hereby upheld.
11. Similarly, the ld. AO has also issued a show cause notice to the assessee requiring justification for payment of salary to Ms. Pratima Chavan as Trustee Secretary when infact the hospital work itself has got discontinued due to the auction of the same. It was replied by the assessee that the Senior Trustee Dr. Deepak Kirpekar who was looking after the Marketing and Administration of the hospital of the trust did not impart his duties for the benefit of the hospital run by the trust and therefore, his services were terminated vide letter dated 03-05-2008. The ld. AO in this regard observed that on perusal of 26AS statement of Dr. Deepak Kirpekar, he had received professional fees for rendering of professional services as a Doctor. Therefore, the version of assessee that services of Dr. Deepak Kirpekar who was looking after the Marketing and Administration of the hospital was terminated did not seem to be correct proposition to the AO. The assessee was also not able to justify before the ld. AO as to the specific work attended by the Trustee Secretary, i.e. Ms. Pratima Chavan regarding the payment of salary to her post auction sale. The ld. AO further observed that the process of auction of hospital was commenced in the F.Y. 2008-09, i.e. 23-01-2009 18 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi whereas Smt. Pratima Chavan was appointed on August 2008. The public auction notice was published in the Newspaper on 24-05-2010. For the auction, the registered Sale Deed was executed on 18-08-2010 and the possession of the hospital was handed over to the buyer. Even before, some of the employees resigned on 15-07-2010. There were hardly any receipts of the hospital for the year under consideration. It has been stated that the Trustee Secretary Ms. Pratima Chavan was appointed as Director (Marketing Services). During the year under consideration, there was no question of Marketing and rendering services and thus for her job profile, there was no working after the auction of the hospital. The ld. AO, therefore, held the payment of salary to the Trustee Secretary upto 15-07-2010, on which date all the employees of the trust had resigned, at Rs.3,50,000/- which was held as reasonable and the remaining amount of Rs.8,50,000/- the ld. AO held as infringement of the provisions of section 13(1)(c) of the Act. This amount, therefore, was disallowed and added to the total income. The ld. CIT(A) at para No.6.3.4 gives a specific finding that neither before the AO nor before him the assessee could prove or establish as to what necessitated such huge payment of salary to the Trustee Secretary Ms. Pratima Chavan when all other employees had either resigned or their services were terminated before the auction sale of the hospital. The ld. CIT(A) further held that the contention raised by the assessee at the First 19 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi Appellate stage that Ms. Pratima Chavan had her expertise and experience in Training and Hospital administration, these were nothing but self-explanations in order to defend the unreasonable and excessive payment of salary to her. Infact, the hospital had ceased its operation and totally stopped after the auction sale of the same on 18-08-2010. When all employees had resigned or their services were terminated from the assessee trust, there was no basis for retaining the services of Ms. Pratima Chavan, Trustee Secretary of the trust. Before the Bench also, the ld. AR failed to establish the reason for payment of such unreasonable and excessively huge salary to the Trustee Secretary when the hospital of the trust itself ceased to exist and operate after the auction sale on 18-08-2010. Admittedly, all other employees have also resigned or their service were terminated. The observations of the ld. CIT(A) that when this has happened then what was the reason for continuing the services of the Trustee Secretary Ms. Pratima Chavan when infact with the auction sale of the hospital there were no charitable activities left for the assessee trust to be performed and when there has been no activities then what could have been the functions of the Trustee Secretary demanding such huge payment of salary to her. These payments do not commensurate to the services rendered by the Managing Trustee and the Trustee Secretary who are the interested persons u/s.13(3) of the Act. Both the ld. AO and the ld. CIT(A) has in detail demonstrated that 20 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi whatever activities have been stated to have performed by them were only in paper but nothing in reality and the ld. AR could not produce any document/evidence to refute the facts brought out by the Revenue authorities on record. We do not find any infirmity with the findings of the ld. CIT(A) on this issue also and therefore, the addition made in respect of excess salary paid to the Trustee Secretary, i.e. Pratima Chavan and as disallowed and added to her total income, is upheld.
12. We find force in our decision placing reliance on the judgment of Hon'ble Allahabad High Court in the case of Vijeta Educational Society, Lucknow in ITA No.132/2006 judgment dated 17-08-2011 wherein the Hon'ble High Court upheld the action of the AO in concluding that the assessee while giving interest free loan to one Mr. C.P. Singh had violated the provisions of section 13(1)(c) of the Act and have also given loan without any adequate surety which was in violation of section 13(2)(a) of the Act. In these circumstances, the Hon'ble Court held that the AO had rightly denied exemption to the assessee u/s.11 of the Act. We, therefore, hold that the excess payment of salary paid to the Managing Trustee as well as Trustee Secretary has been in violation with section 13(1)(c) r.w.s. 13(2)(a) of the Act and the Department had rightly denied the exemption u/s.11 of the Act to the assessee trust. 21 ITA No.928/PUN/2018
Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi
13. Regarding the purchase of Mercedes Benz car at Rs.89.00 lakh on 16-11-2010 even after when the hospital has been auctioned and sold on 18-08-2010, it has been held by both the ld. AO and the ld. CIT(A) that in the facts and circumstances there has been mis-utilization of the trust fund/income for the personal benefit of the Managing Trustee and the Trustee Secretary. The ld. AO had observed that after auction sale of the hospital on 18-08-2010 there was virtually no activities remained to be done by the trust since the only way the trust was doing charitable activity was through the said hospital and once that was auctioned on 18-08-2010, thereafter, there was no charitable activities that was performed by the trust. At this point of time, there were only five employees of the trust apart from the two interested persons u/s.13(3) of the Act, i.e. Mr. Vikram Chavan and Ms. Pratima Chavan. Therefore, there was no justification for purchase of Mercedes Benz car at a cost of Rs.89.00 lakh and incurring expenditure on fuel at Rs.2,46,096/- when infact the receipts of the hospital for the year were only Rs.2,10,951/- and that the assessee was not able to prove whether this vehicle which was purchased after the auction sale was used in furtherance of any charitable activity of the trust or not. The assessee also could not produce the log book of the vehicle to substantiate before the department regarding the utilization of the vehicle for the objects of the trust. The hospital of the trust was auctioned for non-payment of banks due's and 22 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi therefore, the trust had destroyed its reputation as a defaulter in repaying the bank loan and thereafter there was no possible justification in making such substantial expenses towards the cost of the Mercedes Benz car. It was also observed by the ld. AO that this Mercedes Benz car was sold during F.Y. 2011-12 relevant to A.Y. 2012-13 after an accident that had occurred and the Managing Trustee in his individual capacity had again purchased another Mercedes Car worth Rs.86.00 lakh and used the same for his purpose. The Revenue authorities in their respective findings have in detail examined the entire facts on this issue and have held that the reasoning given by the assessee for purchase of this vehicle is absolutely baseless and devoid of merits. The CIT(A) has held that it is unwanted proposition to purchase a costly car on 16-11-2010 when the auction sale of the hospital was itself done on 18-08-2010. Therefore, it signifies that the vehicle was not purchased for furtherance of any charitable activity or the objects of the trust. The assesee was also not able to prove that the vehicle was used for furtherance of any charitable activity of the trust. When the receipts of the hospital for the year was Rs.2,10,951/- then purchasing the vehicle worth Rs.89.00 lakh and incurring fuel expenses at Rs.2,46,096/- is nothing but mis-utilization of the trust funds/income for the benefit of the interested persons, i.e. Mr. Vikram Chavan, Managing Trustee and Ms. Pratima Chavan, Trustee Secretary and accordingly the ld. CIT(A) 23 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi upheld the disallowance of exemption u/s.11 invoking the provisions of section 13(2) r.w.s. 13(1)(c) of the Act.
14. Before this Bench also, the ld. AR could not justify the requirement for purchase of the Mercedes Benz car even after the auction sale of the hospital. The ld. AR also failed to substantiate by any document or evidence whether the said vehicle was used for any furtherance of the charitable objects of the trust. Admittedly, when this vehicle was purchased the auction sale of the hospital has already been taken place. It is further the fact that through this hospital only the trust was performing its charitable activity. When this hospital was sold, thereafter, there was no need to purchase any vehicle so to say that it was for furtherance of the charitable objects of the trust. The assessee also failed in every stage to reasonably explain the purchase of the vehicle and the running cost of such vehicle vis-à-vis the charitable objects of the trust. We, therefore, uphold the decision of the ld. CIT(A) in disallowing the exemption u/s.11 invoking the provisions of section 13(1)(c) r.w.s. 13(2) of the Act.
15. There was even an expenditure incurred on account of Foreign Tour both by Mr. Vikram Chavan, Managing Trustee and Ms. Pratima Chavan, Trustee Secretary respectively amounting to Rs.3,77,238/- as observed by the ld. AO in para Nos. 6.1. to 6.3.5 of the assessment order. The ld. CIT(A) on this issue had held at para No.6.3.6 that there 24 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi was no necessity of incurring such expenditure on account of Foreign Tour when the assessee trust had stopped running of the hospital due to transfer of the same to the buyer on auction sale vide sale deed dated 18- 08-2010. The ld. CIT(A) further held that whatever submission was placed before him was reiteration of the submissions already made before the AO and accordingly he held that these expenses were incurred for personal tour of the said two interested persons of the trust covered u/s.13(3) of the Act. The same was nothing but diversion of trust fund/income within the provisions of section 13(1)(c) r.w.s.13(2) of the Act as the amount was paid by way of "otherwise" for their benefits which has apparently no nexus with the furtherance of the objects of the trust as claimed by the assessee. The assessee was also not able to furnish any evidence in respect of certain payments and VISA stamping of UAE and in the documents concerned the profession of Mr. Vikram Chavan was mentioned as a "Businessman" which has nothing to do with the charitable activities of the trust and was concerned in the "Trading activity" other than Medical field. Even before the ld. CIT(A), the assessee could not produce any evidence to demonstrate that this foreign tour undertaken by Mr. Vikram Chavan, Managing Trustee and Ms. Pratima Chavan, Trustee Secretary, after the hospital activities ceased to exist due to sale of the hospital on auction sale, was carried out for furtherance of the charitable objects of the trust. Accordingly, the ld. 25 ITA No.928/PUN/2018
Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi CIT(A) upheld the denial of exemption u/s.11 for violation of section 13(2)(c) r.w.s.13(1)(c) for the diversion of trust income for the benefit of persons covered u/s.13(3) of the Act as made by the AO.
16. Even before this Bench also, the ld. AR reiterated the submissions placed before the subordinate authorities. However, he could not justify the reasons for undertaking of the foreign tour in furtherance of the objects of the trust by the Managing Trustee and the Trustee Secretary. Admittedly, the trust hospital has been sold through auction and therefore, there is no reasonableness involved in incurring the expenses on foreign tour by saying that the same was to further the charitable objects of the trust. We further observe that, in the decision of Vijeta Educational Society (supra), the Hon'ble High Court has held that in view of section 13(1)(c) even if only part of income was directed to be applied for the benefit of specific person, then it would render the entire income of the trust or charitable institution liable to tax. Further, the legislature, however, also creates a fiction and enumerates in clause (a) to (h) of sub-section (2) of section 13 the list of circumstances in which the income shall be deemed to have been used or applied for the benefit of specified person. These clauses encompasses various types of benefit such as by way of interest free loans, loans without security, permission or license to use land or other property without charging adequate 26 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi recompense, excessive payment for services, sale of property for identical consideration and investment of trust fund in concern belonging to specified person or in which he has substantial interest. Reverting to the facts of the present case, there has been payment of excessive salary to the Managing Trustee Mr. Vikram Chavan, there has been payment of excessive salary to the Trustee Secretary Smt. Pratima Chavan, and the trust funds have been used in activity where these interested persons were only benefitted, has already been observed in the preceding paragraphs with the purchase of high end Mercedes Benz car, undertaking foreign tour, all these were nothing but for the benefit of the said interested persons. Noting has been done in this regard so to say that it was for the furtherance of the objects of the trust or it was for serving any charitable purpose of the trust. We do not find any infirmity with the findings of the ld. CIT(A) and the AO that due to violations of section 13(2)(b)/ r.w.s. 13(1)(c) of the Act for making payment of excessive salary to the Managing Trustee and the Trustee Secretary and further due to mis-utilization of trust funds for purchase of Mercedes Benz car and undertaking foreign tour by them, the benefit of exemption u/s.11 has been denied. Once the assessee ceased to get the exemption u/s.11, income of the assessee was required to be computed following the various charging provisions of the Act. Ground Nos. 1 and 2 of the assessee are dismissed.
27ITA No.928/PUN/2018
Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi
17. In Ground Nos. 3 and 4, the assessee contends that the AO ought to have allowed the claim of the assessee to the extent of income from activities in compliance with the provisions of section 11, 12 and 13 of the Act and that the AO ought to have charged the tax at Minimum Marginal Rate (MMR) only on the alleged income which infringe section 13 of the Act. In this regard, the assessee has placed detailed written submission before the CIT(A) which is on record. The ld. CIT(A) after considering the assessment order and the submissions of the assessee held as follows :
"7.3 I have perused the submission of the appellant regarding its contention that when there was violation of the provision of section 13(1)(c) or 13(1)(d) of the Act, the maximum marginal rate of income tax will apply only to that part of the income which has forfeited exemption under the said provisions and not to the entire income. I find that the appellant trust has diluted the provisions of section 13(1)(d) and sections 13(2) r.w.s. 13(1)(c) of the Act for making an unwarranted claim. It is seen from the quoted submission that while deciding the cases.
(i) DIT (Exemption) V/s Sheth Mafatlal Gagalbhai Foundation Trust (2001) 249 ITR 533 (Bom); (ii) CIT V/s Fr. Mullers Charitable Institutions 363 ITR 230 (Kar.) and (iii) CIT Vs. Working Women's Forum [2015] 53 taxmann.com 85 (Mad), the Hon'ble Courts clearly had taken the view that only respect of the violation of section 13(1)(d) of the Act for non depositing of funds / income as per the specified modes as prescribed u/s 11(5) of the Act, the denial of exemption should be restricted to the portion of the income/receipt which has been earned out of such investments in non-specified modes. This violation of section 13(l)(d) has nothing to do with the violation of section 13(l)(c) of the Act. The violation of section 13(l)(c) r.w.s. 13(2) of the Act is only for diversion of income / funds of the trust for the benefit of the interested persons as provided in section 13(3) of the Act and that too for various nature of violations as prescribed u/s 13(2)(a) to 13(2) (h) of the Act.
Therefore, if any fund / income is applied / incurred for the benefit of such persons and not for objects of the trust as prescribed in the trust 28 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi deed, the same would tantamount to diversion of income / fund for the benefits of the said interested persons and entire income/ receipts shall forfeit the exemption, barring allowing the administrative or establishment expenses. It may clearly be seen from the citations relied upon by the appellant that the said cases had fully dealt with the violation of section 13(l)(d) due to investment of Trust fund to the non- specified modes other than as specified in section 11 (5) of the Act. The said decisions had decided that for such violation in respect of deposits to modes other than as specified in section 11(5), only the income pertaining to such investments would be qualified for denial of exemption u/s. 11 of the Act and in respect of other income, the appellant would be entitled to get the benefit of exemption u/s. 11 of the Act. There is no iota of connection of the interested persons u/s 13(3) of the Act which could attract infringement of section 13(l)(c) with that of the provisions of section 13(l)(d) of the Act. The benefit of exemption u/s 11 was denied in the case of the appellant due to violation under section 13(l)(c)/13(2) and, therefore, such partial disallowance in no case is permitted under the Act. In other words, in case of violation u/s 13(l)(c) r.w.s 13(2)(a) to (h), the assessee is to forfeit the benefit of exemption u/s 11 of the Act of its entire income barring the Administrative Expenses for earning the income and running the trust, which are only to be allowed. The application of income towards the objects of the trust and also the capital expenditure shall be denied. In connection with my aforesaid contention, it is pertinent to mention the very purpose of substituting the new section 13 by the Finance Act, 1970, w.e.f., 1st April, 1971. It is not necessary to quote extensively the objects and reasons for substituting the new section 13. However, relevant para may be reproduced from the objects and the reasons for the purposes as below:-
"Under one of the proposed amendment, all charitable or religious trust or institutions created or established after 31st March, 1962, will be denied the benefit of exemption from Income Tax if any part of their income or property enures or is, during the previous year, applied directly or indirectly for the benefit of the author, founder, substantial contributor or relative has substantial interest. In the case of the trust or institutions created or established before the 1st April, 1962, the exemption from tax will be denied if their income is applied for the benefit of the author, founder, etc., otherwise than in compliance with a mandatory term of the trust or a mandatory rule governing the institution."
7.4 The above clearly states the purpose for enactment of new section 13 of the Act. Reference may also be made in certain judicial decisions wherein the total exemption u/s.11 & 12 of the Act was denied by the AO for infringements of provisions of section 29 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi 13(2)/13(l)(c), which were also confirmed by the Hon'ble Courts. The same are as below :
1. Kanhya Lai Punj Charitable Trust Vs. DIT (Exemption), Delhi, 297 ITR 66 (Del)
a) Once the exception u/s. 11 &12 is withdrawn for violation of section 13(l)(c)/ 13(3) /13(2), all the receipts of the trust either by voluntary contribution or income derived from its property would be an income of the trust in the normal course and is chargeable to tax.
b) Money advanced without charging interest to interested persons, there is violation u/s. 13(3)/13(l)(c)/13(2)(a) of the Act. The Trust is not entitled to exemption u/s. 11.
2. Skin Institute & Public Service Charitable Trust Vs ADIT (Exemption ), 65 ITD 125 (Delhi-Trib) In this case, a part of the trust income was being used directly or indirectly for benefits of its Founders and Managing Directors. It was held that the Trust was not entitled to exemption u/s. 11 Or Sec. 10(22) of the Act.
3. CIT Vs. Nagarathu Vaisiyargal Sangam, 246 ITR 164 (Mad) It was held by the Hon'ble High Court that the payments made to interested persons u/s. 13(3) of the Act would attract violation of Section 13(l)(c ) / 13(3) / 13(2) and the assessee is not eligible for exemption u/s. 11
4. Agappa Child Centre Vs. CIT (Ker), 226 ITR 211 (Ker) In this case, a Refrigerator was purchased by the Trust and placed in the residence of the Managing Trustee till trust buildings were ready. It was held by the Hon'ble Court that the Trust was not eligible for exemption u/s. 11.
5. CIT Vs. Vijita Educational Society, 2011 - TIOL-591 -HC- ALL-IT In this case, the assessee Trust had granted interest free loan to its Manager without any surety. The Court held that the same was within the mischief of violation of section 13(l)(c)/13(2)(a). Therefore, entire income of the trust was liable to be taxed even if 30 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi only part of income was applied for the benefit of the specified person u/s. 13(3).
6. CIT Vs. Audh Educational Society , 202 Taxman 166 (All) In this case advance was given to the interested person (Treasurer) as prescribed u/s. 13(3) of the Act without any security. No details of interest rate were given. The Hon'ble Court held that there violation of section 13(3)/13(l)(c) and hence the society was not entitled to exemption u/s. 11
7. CIT Vs. Rattan Trust, 227 ITR 256 (SC) Proviso to section 13 of the I.T. Act and section 21A of the WT Act lays down that exemption will not be denied if part of the income is applied for benefit of a person referred to section 13(3) of the Act, if such use for application is in compliance to mandatory terms of the Trust which was created before 1.4.1962. The said mandatory terms in Trust deed should have existed before 01.04.1962. Any subsequent amendment of Trust Deed in this regard would not help the assessee to entitle it exemption u/s. 11 of the Act. 7.5 The above case otherwise says that the Trust willlose the benefit of exemption u/s. 11 of the Act, in totality if there was any diversion of income to the benefit of the interested persons u/s. 13(3) of the Act. 7.6 In view of above, I do not find any merit in the claim of the appellant regarding partial disallowance of its income as claimed in the letter dated 20/12/2017, thereby restricting the maximum marginal rate u/s. 164(2) of the Act on such amount pertaining to which violation was established u/s. 13(2) r.w.s. 13(l)(c) of the Act. The appellant is required to be taxed at the maximum marginal rate u/s. 164(2) of the Act on its income as has rightly been done by the AO in the assessment order. No interference in AO's order is called for. The issue raised without mentioning any ground in the letter dated 20/12/2017 and ground No.3 is, therefore, rejected, thereby confirming the findings of the Assessing Officer."
18. In the aforestated observation, the ld. CIT(A) has clearly brought out the purpose of substituting new section 13 by the Finance Act, 1970 w.e.f. 01-04-1971. The purpose was that all charitable or religious trust 31 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi or institution created after 31-03-1962 will be denied the benefit of exemption from income tax "if any part of their income during the previous year applied directly or indirectly for the benefit of the author, founder,. . . . . . . . or for the benefit of any concern in which such author, founder has substantial interest". The exemption from tax will be denied if the income of the trust is applied for the benefit of the author, founder etc. This proposition was further emphasized by the CIT(A) through various pronouncements which finds place in his order and in totality in all these decisions it has been held that if there is any diversion of income of the trust for the benefit of interested person u/s.13(3) of the Act in such a case, the benefit of exemption u/s.11 will be disallowed. The Revenue has already established that there has been a violation with regard to section 13(2) r.w.s.13(1)(c) of the Act and we have also examined in the preceding paras justifying the stand of the Revenue for denial of exemption u/s.11 of the Act to the assessee trust. We are of the considered view therefore that the assessee is required to be taxed at Maximum Marginal Rate u/s.164(2) of the Act on its income as had been held by the ld. CIT(A). We, therefore, do not find any infirmity with the findings of the ld. CIT(A) in this regard which is therefore upheld. Ground Nos. 3 and 4 of the assessee are dismissed. 32 ITA No.928/PUN/2018
Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi
19. In Ground No.5, the assessee is aggrieved with the addition upheld under the head capital gains. The assessee disputes the computation of long term capital gain of Rs.1,57,64,680/- and short term capital gain of Rs.29,77,91,095/-.
20.1 The brief facts on this issue are that as noticed from para G.2 regarding computation of long-term capital gains in respect of Hospital sold on auction, the AO asked the assessee to justify the opening WDV as on 01-04-2010 shown by the assessee trust in the balance sheet at Rs.1,86,12,000/- in respect of the land. The assessee submitted that the impugned land was purchased much before 01-04-1981 and trust had received the land as donation towards corpus fund on 17-08-1998 and hence the assessee was not in possession of the purchase deed. The value appearing in the balance sheet was considered as the market value of the trust in the year 1998. The AO noticed that the property was auctioned by the Bank of Maharashtra during this year, which consisted of land as well as hospital building / equipments etc. As the value of the land as on 01-04-1981 was not known either by the assessee or the AO, the AO had issued a notice u/s. 133(6) of the Act to the Joint District Registrar (Valuation Wing) on 20-03-2014 for furnishing the rate per sq.ft, for the year 1989 in respect of above property and total value of the property for the said year and further the rate per sq.ft, for the year 2010 along with the total value of the property for the said year. The AO found from the 33 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi information brought on record that as per ready reckoner rate available as on 01-01-1989, for per sq.mtr of land at Gokhale Nager Road, Shivaji Nagar, Pune was Rs.2,500/- per sq.mtr. As per Circular of Town Planning & Valuation Division dated 03/10/1989, the value for the year 1981 was to be adopted @ 40% of the value as on 01-01-1989. The AO, thereafter, adopting the said rate, had computed the cost of land as on 01/04/1989 as below S.No. Description Open land admeasuring 40000 Sq.ft, in Gokhale Nagar Road, Pune (3717
1. SM)
2. Value as on 01.01.1989 as per Assistant Director, Town Planning, Valuation Division, Pune is Rs.2500/- per sq. mtr. (i.e. Rs.232 per sq. ft)
3. Value as on 01.04.1981 is being adopted @ 40% of the value as on 01.01.1989
4. Value of the land determined as on 01.04.1981 @ Rs.93/- per sq.ft X 400000/- = Rs.37,20,000/-.
5. Indexed cost of acquisition (FY 2010-2011) Rs.37,20,000/- X 711/100 = Rs.2,64,49,200/-.
20.2 The AO, similarly, found that the value of the land as on 01-01-2010 was Rs.4,22,13,880/- as per the procedure of valuation for the purpose of stamp duty adopted by the State Govt., thereby working the same as below :
S.No Description .1. Value as on 01.01.2010 as per Asstt. Director, Town Planning, Valuation Division, is Rs. 13,300/- per Sq.mtr (i.e. Rs.1236 per Sq.ft) (Area 3717.47 sq.mt)
2. Value as on 01.01.2010 is being adopted as under:
For first 2000 sq.mtr. (90% of Rs.13,300/ ) i.e. (2000 X .9 + 1717.47 X .8) 13300= Rs.4,22,13,880
3. Value of the land determined as date of sale : Rs.4,22,13,880/-34 ITA No.928/PUN/2018
Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi 20.3. The AO, thereafter, in para G.2.4 had worked out the income from Long term capital gains in respect of the said land portion as below :
S.No. Description Amount in Rs.
1. Sales consideration adopted as per para G.2.3 Rs.4,22,13,880/-
2. Less: Indexed Cost of acquisition Rs.2,64,49,200/-
3. Long Term Capital Gain Rs.1,57,64,680/-
20.4. Accordingly, in para G.2.5, short term capital gains in respect of Depreciable asset was computed by the AO as below:-
S.No. Description Amount in Rs.
1. Sales consideration adopted (Rs.68,00,00,000/- Rs.63,77,86,120/-
minus Rs.4,22,13,880/-)
2. Less: Opening WDV of assets of same block (33,99,95,025)
excluding Vehicle WDV and Land WDV
3. Short Term Capital Gain chargeable to Tax 29,77,91,095
20.5. In the computation of total income at page no.25 of the assessment order, the total income was computed by the AO at Rs.28,66,11,047/- and taxed the same at the normal rates and the income of Rs. 1,19,22,193/- which had violated the provision of section 13 of the Act was taxed at the maximum marginal rate u/s. 164(2) of the Act. The total taxes and interest payable was determined at Rs. 12,94,61,945/- and thereafter giving credit to prepaid taxes of Rs.5,71,816/-, the net tax demanded at Rs. 12,88,90,130/-. 35 ITA No.928/PUN/2018
Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi 20.6. The assessee had also submitted detailed written submission on the issue before the ld. CIT(A) which finds place in his order. The ld. CIT(A), after considering the assessment order and the submissions of the assessee on the issue of capital gains, upheld the findings of the ld. AO by observing that the assessee had referred to the provisions of section 11(1A) of the Act for taxing income from capital gain of a charitable trust transferring a capital asset held for charitable purpose contending that if the consideration is invested in acquiring another new capital asset it would qualify for exemption, since it is deemed to have been applied for charitable purposes and further that there is no provision for computing the period of holding in case of trust and therefore, the sale of asset by the trust cannot be distinguished between long term capital gain and short term capital gain. Thereafter, the ld. CIT(A) at para 7.3 held that the submissions of the assessee are devoid of merits. The benefit of exemption u/s.11 of the Act had been denied to the assessee trust for violation of the provisions of section 13(2) r.w.s.13(1)(c) of the Act for diversion of the income of the trust for benefit of the interested persons u/s.13(3) of the Act. In such circumstances, the AO had to compute the income of the assessee in the status of normal AOP, without considering the assesee's income, be it a hospital receipt as income from business and be it sale of land and 36 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi hospital as income from capital gains, thereby invoking the respective charging provisions of the Act. The ld. AO has done exactly the same and there was no deviation from the principles of computation of total income with regard to the respective charging provisions of the Act. The AO had computed income from short term capital gain and long term capital gain on account of sale of property in the form of land and hospital after strictly following the provisions of the Act. The addition was, therefore, upheld.
21. At the time of hearing, the ld. AR of the assssee submitted before us that the hospital property of the assessee trust was auctioned at Rs.68.00 crore by the lender Bank of Maharashtra. After the repayment of outstanding loan of Rs.28,88,38,998/-, the Bank of Maharashtra returned the balance amount after withholding Rs.2.00 crore to the assessee. After paying of the bank loan and other liability, the excess Rs.13.00 crore was invested in fixed deposit with State Bank of Mysore. The construction of the hospital building and acquisition of various machinery was made by taking loan from banks and Managing Trustee after taking necessary approval of the charity commissioner. Hence, repayment of such loan is regarded as application of the income for charitable purpose.
37ITA No.928/PUN/2018
Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi
22. We have heard the rival contentions on this issue and we observe that admittedly the assessee trust has been denied exemption u/s.11 of the Act for violation of the provisions of section 13(2) r.w.s.13(1)(c) of the Act for diversion of the trust funds for benefit of interested persons u/s.13(3) of the Act. We have already examined during the course of this order that whether it is excess payment of salary to the Managing Trustee Mr. Vikram Chavan, whether it is excess payment of salary to the Trustee Secretary Ms. Pratima Chavan, whether it is purchase of Mercedes car and its running expenses and whether going on foreign tour have neither been for charitable purposes or in furtherance of charitable objects of the trust. We have observed that nothing has been proved by the assessee that these were done in furtherance of the charitable objects of the trust rather the Department has extensively verified the facts and we are convinced as held by us in the preceding paras that there has been mis-utilization of funds of the trust for benefit of interested persons and the trust has not performed any charitable activity or any activity in furtherance of charity to justify its claim for exemption u/s.11 of the Act. When there is violations of provisions of section 13 and there has been mis-utilization of trust funds only for benefit of interested persons of the trust, the exemption u/s.11 has been rightly denied to the assessee trust. It is in this factual scenario the ld. CIT(A) had held that the assessment has to be done regarding the 38 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi assessee as normal AOP and the charging provisions of the Act has to be applied. Therefore, the AO has applied while computing the income of the assessee as AOP from short term capital gain and long term capital gain on account of sale of property in form of land and hospital strictly following the provisions of the Act. This finding of the ld.CIT(A) is well reasoned based on the facts of the case. However, before us, the assessee has submitted that they had taken loan from bank and from Managing Trustee for construction of hospital building and acquiring various machinery following due procedure of law and therefore, repayment of such loan is to be regarded as application of income for charitable purposes. This requires detailed factual verification at the level of the AO to see and verify the contention of the assessee vis-à-vis the facts of the case. In the interest of justice, we set-aside the order of the ld. CIT(A) on this issue and remand the matter to the file of AO for re-adjudication while complying with the principles of natural justice. Ground No.5 is allowed for statistical purposes.
23. In Ground No.6, the assessee contends that the claim of unabsorbed expenses and depreciation from earlier year against the income so assessed should be allowed. In this regard, it is the contention of the assessee that the income derived from the trust property has also got to be computed on commercial principles. If commercial principles are applied, then adjustment of expenses incurred by the trust for 39 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi charitable and religious purposes in the earlier year against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the trust u/s.11(1A) of the Act.
24. We have observed in the preceding paras that here is a trust where the funds have been utilized for the benefit of interested persons of the trust and that there has been no activity of charitable nature performed by the trust. The charitable objects for which the trust has been formed, ceased to exist after the sale of the hospital and taken possession by the buyer. Whatever expenses were incurred namely, the excess salaries paid to the Managing Trustee and Trustee Secretary etc., are all application of the trust funds for the personal benefit of the interested persons. Therefore, the exemption u/s.11 of the Act has been rightly denied to the assessee and the assessee has been assessed as AOP by the department. In such background, the sanctity and validity of the argument forwarded by the assessee as aforestated does not come into picture. This is because there has to be some activity done by the charitable trust so as to further the charitable objects of the trust. In this case, the only charitable activity that was performed by the assessee was 40 ITA No.928/PUN/2018 Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi through the hospital which itself was auctioned and sold as per sale deed dated 18-08-2010. Thereafter, the trust has incurred huge expenses in form of payment of excessive salary, purchase of high end vehicles, foreign tour of the Managing Trustee and Trustee Secretary and none of these activities are held to be for the charitable purposes for which the assessee trust has been formed. Therefore, it is difficult at this stage by this Bench to analyse the argument of the trust that the expenses incurred for charitable and religious purpose in earlier year against the income earned by the trust subsequent year will have to be regarded as application of the income of the trust for charitable or religious purposes. To our understanding, when there has been no activity for charitable purposes conducted by the assesse trust, this argument on the very face of it does not have any legal basis for its sustenance. However, since income-tax is a Welfare Legislation in the interest of justice, this issue may be examined by the ld. AO. In view thereof, we set-aside the order of the ld. CIT(A) on this issue and remand the same to the file of ld. AO for re-adjudication while complying with the principles of natural justice. Ground No.6 is allowed for statistical purposes. Grounds of the assessee are partly allowed for statistical purposes. 41 ITA No.928/PUN/2018
Seth Ramdas Nathubhai Dharmadaya Vishwasta Nidhi
25. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the Open Court on 14th December, 2022.
Sd/- Sd/-
(R.S.SYAL) (PARTHA SARATHI CHAUDHURY)
VICE PRESIDENT JUDICIAL MEMBER
पण
ु े Pune; दनांक Dated : 14 December, 2022
th
Satish
आदे श क त ल प अ े षत/Copy of the Order is forwarded to:
1. अपीलाथ / The Appellant;
2. यथ / The Respondent;
3. The CIT(A) -Concerned
4. The Pr.CIT concerned
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे "B" /
DR 'B', ITAT, Pune
6. गाड फाईल / Guard file
आदे शानस
ु ार/ BY ORDER,
// True Copy //
Senior Private Secretary
आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
42
ITA No.928/PUN/2018
Seth Ramdas Nathubhai
Dharmadaya Vishwasta Nidhi
Date
1. Draft dictated on 05-12-2022 Sr.PS
2. Draft placed before author 13-12-2022 Sr.PS
3. Draft proposed & placed before the JM
second member
4. Draft discussed/approved by Second JM
Member.
5. Approved Draft comes to the Sr.PS/PS Sr.PS
6. Kept for pronouncement on Sr.PS
7. Date of uploading order Sr.PS
8. File sent to the Bench Clerk Sr.PS
9. Date on which file goes to the Head
Clerk
10. Date on which file goes to the A.R.
11. Date of dispatch of Order.