Income Tax Appellate Tribunal - Hyderabad
Society For Integrated Development In ... vs Dy. Commissioner Of Income-Tax on 27 December, 2002
Equivalent citations: [2004]90ITD493(HYD), (2004)84TTJ(HYD)968
ORDER
J. Sudhakar Reddy, Accountant Member
1. This appeal is filed by the assessee against the order of the Commissioner of Income-tax (Appeals)-I, Hyderabad, dated 12-11-2001, for asst. year 1997-98.
2. The assessee is a society registered under Section 12A of the Income-tax Act, 1961. The assessee had filed its return of income for the asst. year 1997-98 on 24-10-1997 declaring 'nil' income after claiming exemption under the provision of Section 11 of the I.T.Act. The Assessing Officer held that the assessee violated the provisions of Section 13(1)(c) of denied exemption under Section 11. Thus, the assessment was made under Section 143(3) on a total income of Rs. 1,09,12,615 and a sum of Rs. 43,65,048 was determined as tax payable thereon together with interest under Section 234B of Rs. 31,42,800, by assessment order dated 30-3-2000. The Assessing Officer had taxed all the receipts of the year. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer that there is violation of provisions of Section 13(1)(c) read with Section 13(2)(b). On the claim of the assessee that the entire receipts cannot be taxed as income, the learned Commissioner (Appeals) held that under Section 2(24)(iia) income includes voluntary contributions and that the entire receipts were income taxable under the Income-tax Act. Aggrieved by the above, the assessee is in appeal before us.
3. Before coming to the arguments of both sides, we deem it appropriate to extract the assessment order wherein the Assessing Officer has given the reasons for his decision. The assessment order reads as follows:-
"1. On 27-1-97 Mr. Vardhan, Executive Secretary, raised a loan of Rs. 3,40,000/- by pledging SIDUR's F.Ds 130/96 & 133/96 with South India Bank and withdrew the money from the loan /ac in cash for personal use by way of payment to Khatmandu Medical College. He thus availed a loan of 3.40 lakhs from Sidur. He claims to have repaid to the bank, the principal amount as well as the interest on the loan from his own sources, thus causing no loss to SIDUR which encashed the FDs in due course on their maturity. IT is seen that the security given by Mr. Vardhan to SIDUR was only a personal undertaking from him to indemnify for default of this loan as well as all future loans and stating that SIDUR was authorized in such a case to take over his property and his wife's. This undertaking is an affidavit signed by Vardhan and is omnibus covering all future loans and offering properties belonging to himself and wife without wife's endorsement nor any valuation or description of their properties. The undertaking is patently inadequate security as it is not backed by any mortgage of property by Vardhan or his wife in favour of Sidur.
Sidur also did not earn any interest on the funds lent by it to the Vardhans from out of loans raised against its own F.Ds with banks. The Vardhans paid the interest on the bank loan directly. SIDUR thus did not earn any interest on its funds made available to Vardhans for raising easy loans. Mr. & Mrs. Vardhan being Executive Secretary and Secretary of SIDUR respectively constitute interested persons as defined in Section 13(3) of the I.T.Act. Therefore, since the interested persons have obtained loans from SIDUR without any security and interest to SIDUR, Section 13(1)(c) read with Section 13(2) disentitles the Society from exemption Under Section 11 of the I.T.Act.
2. It is seen that the practice of raising loans by Mr. & Mrs. Vardhan using Sidur's name and assets which apparently began in early '97 continued as of date i.e., March '00. All such transactions which fall outside the purview of the financial year 1996-97 which is under consideration are being narrated here to show that the loan transaction entered into in the year 1996-97 was not an isolated incident but the beginning of a series or irregular transactions.
3. The following loans were further availed for the benefit of Mr. Vardhan and his wife from South Indian Bank as follows:
Loan Date Security Amount Borrower Bank
13/97 11-6-97 18/97 75,000 SIDUR South Indian
Bank
34/97 14-10-97 85/97 10,00,000 G. Sarma Kunda ''
40/97 19-11-97 179/96 1,80,000 Nanda Vardhan ''
06/98 8-6-98 55/98 9,00,000 SIDUR ''
11/98 22-6-98 154/98 7,20,000 SIDUR ''
It is seen that while in most cases the loan was applied for by Mrs. Vardhan on behalf of SIDUR and utilized by her and her husband for their personal needs, in two cases the loans were applied in the individual names of Nanda Vardhan and Sharma Kunda but all loans were sanctioned against SIDUR's FDs. These two persons Mr. & Mrs. Vardhan being interested persons as defined in Section 11(3) of the Act, have been raising loans for their personal needs, pledging the assets of the Society, with or without the knowledge and permission of the executive body and no tangible security was offered to SIDUR apart from an omnibus personal undertaking from Vardhan as referred above. The executive Committee did not even bother to find out why Mr. Vardhan, whose wife was in full charge of the day-to-day affairs including transacting in all bank and money matters and custody of securities of the Society, was raising such huge personal loans which they had no capacity to repay.
4. The memorandum of association of the Society provides that all bank transactions should be signed by two joint signatories either the Secretary and President or Secretary and Treasurer but never singly or jointly by the Secretary and Executive Secretary as they happen to be husband and wife. The Secretary is Mrs. Nanda Vardhan and she has applied singly in the loan applications to South Indian Bank pledging F.Ds of SIDUR as under; Loan No. 41/96 dated 27-1-97, 13/97 dated 11-6-97, 6/98 dated 8-6-98, 11/98 dated 22-6-98, disregarding the provisions of memorandum. The loan accounts were opened in the same bank and the amounts withdraw by cash for their personal use, specifically to be given to Khatmandu Medical College. The loan raised against foreign contributions ought to have been credited in the FCRA a/c at SBH, but against the rules the loans were credited to accounts in South India Bank and drawn from there, as otherwise every withdrawal from FCRA a/c has to be reported to Home Ministry. Loan No. 34/97 for Rs. 10 lakhs was granted by South Indian Bank on application by Mr. G. Sharma Kunda, a friend of Mr. Vardhan, said to be the Managing Director of Khatmandu Medical College. Mrs. Vardhan, the Secretary of the society pledged SIDUR's F.D. No. 86/97 to secure this loan to Sharma Kunda at the instance of her husband, as stated in her statement dt. 23rd March. Loan No. 40/97 dated 19-11-97 for Rs. 1.80 lakhs was applied in the name of Nanda Vardhan pledging SIDUR's F.D. No. 179/96. The Secretary has thus pledged SIDUR's F.D in favour of loan being given to herself by South Indian Bank once again, allegedly at the instance of her husband.
5. There is a mention of the above loans as being raised for personal reasons, in the minutes of the Executive Body from time to time but even so the lack of any security or interest being offered by Mr. Vardhan to SIDUR was not taken cognizance by the Committee. Members did express anxiety at the frequency of borrowals by Mr. Vardhan. Further, the loan of Rs. 10 lakhs being given to Kunda Sharma was also not mentioned to the Committee, it was represented as a loan to Mr. Vardhan himself. But Mrs. Vardhan, as Secretary filed a resolution before South Indian Bank to the effect that the committee approved giving a loan to Sarma Kunda. Obviously the resolution was fabricated by herself, at the instance of her husband Mr. Vardhan and submitted to the Bank. There is no resolution signed by all the members to this effect. This loan was outstanding as on 31-3-98 but was not shown outstanding in the audited Balance sheet. The auditor Sampath & Ramesh pleaded that the original receipts wee not shown to him and it was a lapse on their part not to insist on production of original FD receipts.
6. Some of the other committee members Sri Paul Diwakar, Smt. Stuthi Kumari, Treasurer Sri Siva Reddy have been examined and questioned about the above personal transactions of Mr. Vardhan. They all replied that they were aware of the loans being availed by Mr. & Mrs. Vardhan but that they had full faith in him not to act against the interests of the Society.
7. Mr. Vardhan applied to Charminar Bank for a loan in SIDUR's name in September 98. The application is signed by Mr. Vardhan showing SIDUR as the applicant/borrower and giving SIDUR's particulars against columns for nature of business, turn-over, profit & loss in the past three years etc. In order to service the debt, the bank made him open a current account which again had to be in the name of SIDUR because the borrower was SIDUR. He signed the application for opening the c/a using the stamp of Executive Director, SIDUR and issued post dated cheques against it towards instalment of the loan repayment as required to the bank. He also signed these cheques as Executive Secretary, SIDUR. Subsequently, there being no credit balance in the current account, the cheques bounced and the bank initiated recovery proceedings against the SIDUR as the first respondent, under the Negotiable Instruments Act and under the A.P. Co-operative Societies Act. When asked as to why he could not take a loan in his own name when he was mortgaging his own property, he replied in his deposition that the bank favoured giving a loan in the name of SIDUR. Apparently he did not hesitate in signing the application for SIDUR even though he was not even one of the joint signatories authorized for banking transactions as per memorandum. Neither did he inform the Committee about this loan.
8. In the course of Survey operations carried out by the Incometax Department at the premises of the Society on 8-7-99, Shri Vardhan admitted to having purchased 2.20 acres of loan at Dotanpally, R.R. district for 1.80 lakhs on behalf of SIDUR but registered in his own name. In the course of deposition before the Addl.CIT, Range-4, he stated that he intends to give the land to Sidur and that he had drawn funds from Sidur for land development, bore wells, pump sets etc. He later mortgaged the property in favour of Trinity Co-operative Bank for raising a personal loan of Rs. 4 lakhs. From what has been stated by him it is clear that the land is in his name and he has drawn funds from the Society for its development. This is another instance of misuse of funds of the Society by interested persons.
9. The Secretary Mrs. Vardhan raised a loan in favour of SIDUR for Rs. 12 lakhs on mortgage of her personal property with Trinity Bank in 1999. This term loan No. 8/99 was again obtained in the name of SIDUR as the borrower. Mr. Vardhan signed on the loan application form using the stamp of Executive Secretary, SIDUR. The loan was disbursed through the S.B. Account of Shri T.J.P.S. Vardhan, No. 1427 with Trinity Bank. He withdrew the amount to repay his earlier loans taken from South Indian Bank. This loan is outstanding as of date except for an amount of Rs. 1,01,482/- which was adjusted out of F.Ds 446 & 447 in the name of SIDUR on their maturity on 31-7-99. It can be thus seen that what were originally loans taken from South Indian Bank were partly repaid by loan from Trinity Bank to which part of SIDUR's F.Ds were adjusted on maturity. All along the original loan as well as the second loan raised to liquidate the first were for personal use by Mr. Vardhan. When asked as to why he applied for term loan 8/99 with Trinity Bank in the name of SIDUR when he was mortgaging his wife's property as collateral security he replied that the bank did not favour giving him a personal loan but was agreeable to giving in the name of the Society.
10. Mr. Vardhan misusing his position as executive secretary, availed another loan of 9.90 lakhs from Trinity Bank on 16-2-99 against the security of FDs 446 & 447 belonging to sidur for 11 lakhs in the aggregate with the same bank. He signed the application as executive Secretary, Sidur, though he was not among the authorized signatories and every banking operation had to be signed by joint signatories. This loan was drawn in the name of Sidur but utilized by him personally to repay loans taken earlier or sent to Kathmandu Medical College. This loan was finally adjusted against Sidur's FDs 446 & 447 with Trinity Bank even though the loan was utilized by Mr. Vardhan personally. He has submitted to the bank a resolution purportedly signed by the President of the Society Sri B. Franklin. This matter does not appear in the minutes of the meeting, and appears to be fabricated. Even if it was indeed signed by the President, it has been done without verifying the purpose and use of the funds so raised.
11. In the reply to the notice Under Section 144-A, signed by Mr. Vardhan, it was stated that Mr. Vardhan met the representative of Charity International, Nepal, an N.G.O. which was contemplating starting a Medical College to help Nepalies and that during the discussion it was decided that SIDUR would come forward to render financial aid to facilitate setting up of the college and repayment would be made once the college was established. That in this context he gave Rs. 32 lakhs to K.M.C. This explanation is indeed specious. Helping set-up a medical college for Nepalies is hardly a Charitable purpose which was further not put across to the Executive Committee of SIDUR. In his deposition Mr. Vardhan admitted that it was not as if SIDUR was making a donation to Charity International. Whether Mr. Vardhan was trying to help Charity International or promoting his own cause by becoming a Director in the K.M.C. or getting an admission for his children in the medical college, these are larger questions which need not be gone into at this stage because primarily the loan/donation to K.M.C. is a personal transaction, not in the knowledge or approved by the Committee and hence not officially on behalf of SIDUR. Further, part of the loans raised also went to Gulbarga Medical College (Rs. 15 lakhs) as stated in his personal assessments before his Assessing Officer, DCIT, Cri.4(1), Hyd. for his daughter's admission.
12. On 29th morning another reply was filed before the Addl.CIT, Range-4. It was urged that under the bye-laws, the Executive Secretary was authorized to conduct all affairs along with the Secretary including signing of bank papers but that he does not fall under the category of interested persons defined in Section 13(3) which covers only the author of the trust and therefore, implying that any irregularity done by Mr. Vardhan cannot attract Section 13(1)(c)(ii). This argument has to be rejected because Section 13(3)(cc) & (d) clearly cover any Manager by whatever name called or a trustee or any relative of a Member or Manager or trustee. Mr. Vardhan as Executive Secretary become an 'interested person' both directly as well as through his wife, who is the Secretary and signatory Member. As for his being authorized for bank transactions, he himself admitted in his deposition that under the F.C.R. (A) Act, husband and wife cannot be joint signatories and anyhow the Bye-laws relied upon in the reply do not empower him to apply singly for purposes of loans on behalf of SIDUR. As per the resolution dt.31-12-95, Mr. Vardhan was authorized to operate the FCR-A account along with the treasurer Mr. Siva Reddy, in the absence of Secretary but not singly.
The other plea taken was that all impugned transactions were entered into on the advice of Mr. Raghavan, C.A. of M/s Charles Prabhakar & Associates, Mr. Raghavan has been examined by the Addl.CIT, Range-4 in this context and he clarified that his advice was taken only as to whether loans raised on deposits from foreign contributions could be credited in other than designated account under the F.C.R.(A) Act and that he had advised Mr. Vardhan that the loan proceeds also should be credited in the F.C.R(A) Account. Further, even if Mr. Raghavan gave him wrong advice it does not absolve him of responsibility as he was in full knowledge of the fact that he was raising loans for personal use against SIDUR's F.Ds. Further, Mr. Raghavan stated that upon his pointing out certain irregularities in the Phase-II accounts of D.V.A.F. programme for the period ended 1-4-98 to 30-9-98, including debit of a payment of Rs. 1.45 lakhs to K.M.C., unpleasantness ensued resulting in the auditors being replaced. This plea is therefore rejected.
Further, it was urged that the loans were not personal. This plea is totally baseless and has to be rejected for the elaborate reasons discussed above.
13. To conclude, Mr. Vardhan and Mrs. Nanda Vardhan being Executive Secretary and Secretary of the Society constitute interested persons Under Section 13(3) of the I.T.Act. There has been misapplication of funds as per Section 13(2)(a) of the I.T.Act as for a part of the year, funds of the society were lent to such interested persons without adequate security or interest. These persons have been regularly misusing their position in the Society, signing loan applications against the procedure laid down in the Memorandum, implicating Sidur's name and assets in their personal liabilities. As per Section 13(1)(c) if any income or property are used or applied for the benefit of an interested person for any part of the year, the institution shall be denied exemption Under Section 11. The Society shall accordingly be denied exemption and its receipts taxed."
4. Against the assessment order, the assessee raised various grounds disputing the above reasoning, including grounds of natural justice, before the learned Commissioner (Appeals). The learned Commissioner(Appeals) agreed with the Assessing Officer. One of the new and alternative grounds in addition to disputing the above reasoning of the Assessing Officer, taken by the assessing as its second limb of argument is ground No. 16 which reads as follows:-
"The ld' Addl.CIT and the ld' DCIT both failed to note that even if Section 11 of the Income-tax Act is held to apply, all the receipts ipso facto become taxable. They ought to have seen that the entire receipts consist of grant received through regular banking channels from foreign funding agencies and thus do not form part of income at all. If Section 11 is held applicable only the income arising from the investment of these grants should have been brought to tax after deducting therefrom the concerned expenditure. This amply shows that the ld' DCIT did not apply her mind or cared to examine the books of account."
The Commissioner (Appeals) at para 14 on page 12 of his order has dealt with this ground as follows:-
"The appellant Society has raised one more ground stating that even if exemption Under Section 11 is denied the entire receipt cannot be taxed as income has to be computed under the provisions of the Act. The receipts of the Society are in the nature of grants and donations and also funds from foreign funding agencies through banking channels. The expenditure incurred in carrying out the objectives of the Society must be allowed and only the resultant income should be taxed and not the gross receipts. The argument of the Society cannot be accepted. As per Section 2(24)(iia) income includes voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes. In the light of this definition, the grants received by the Society either from donor in India or abroad has to be treated as income and is liable to be taxed in once exemption is denied Under Section 11. Hence I do not find any merit in this ground and the same is hereby rejected."
Aggrieved with these findings of the CIT(A) the assessee is before us. With this background, we now consider the arguments of both parties.
5. The learned counsel for the assessee, Sri K. Raji Reddy and Sri Ch. G. Muralikrishna Murthy, submitted a paper book consisting of pages 1 to 63. The learned counsel argued that the Assessing Officer made the assessment under Section 143(3) under the directions of the Addl. Commissioner of Income-tax under Section 144A of the I.T.Act, and that proviso to Section 144A is clear enough that the Addl. CIT should have given an opportunity of hearing when the directions are prejudicial to the interests of the assessee which was not followed or adhered to by the Assessing Officer, that invoking a substantive provision in framing the assessment without observing the fundamental principles of law makes such an assessment invalid in law and the same is void ab initio and that the assessment is vague and as per law it should be quashed.
6. The learned counsel further submitted that the Assessing Officer apparently invoked Section 13(1)(c) which in other words means the Society had violated certain provisions of the Income-tax Act in cases of only the enumerated classes of persons under Sub-section (3) of the said section. Section 13(1)(c) contemplates that only when certain classes of persons or people enumerated in Sub-section (3) for deriving a direct or indirect benefit mentioned therein, the same can be applied. The class of persons or people specified in Sub-section (3) is exhaustive but not illustrative. While applying a substantive provision like this, the Assessing Officer was vague and that he without proper application of mind framed the assessment. In other words, the assessment is based and is made in vacuum. The learned counsel argued that the Assessing Officer is vague and confused as to exactly which provision is applicable to the assessee's case, because the Assessing Officer applied Section 13(1)(c) without comprehending Sub-section (3) and further applied Section 13(2)(a), so as to say that the society lent its income/property to the Executive Secretary thereby causing benefit to him. But, the Assessing Officer could not establish any relationship of borrower and lender between the Executive Secretary and the society, because there was no loan/financial transaction between the assessee and the Executive Secretary, by any stretch of imagination. The learned counsel submitted that the matter was further confused at the appellate stage on the very foundation of assessment itself on the basis of which it was framed. As the Commissioner (Appeals) was of the view that the provisions that were invoked by the Assessing Officer, i.e. Section 13(1)(c) read with Section 13(2)(a) are not exactly applicable to the facts of the assessee's case, but the provisions of Section 13(1)(c) read with Sub-section (2)(b) and (2)(c) are only applicable, even for which he was under the inspiration of the judgment of ITAT, Hyderabad Bench 'A', dated 23-5-2001, in the assessee's case for asst. year 1998-99. In this context, the learned counsel submitted, with restraint and due respect, that perpetuating an error is no heroism as was held by the Honourable Supreme Court of India in Distributors (Baroda) of India Ltd., 155 ITR 120. This perpetuation resulted in utter chaos to the detriment of the assessee for the reasons that neither the Assessing Officer nor the Addl. Commissioner of Income-tax nor the first appellate authority, was clear as to exactly which provision is applicable in the assessee's case. The learned counsel contended that the provisions of Section 13 are tailor-made and every sub-section or clause or proviso or sub-clause is to be read independent of each other and it cannot be assumed that either Clause (a) or Clause (b) is applicable and the assessee be presumed to have violated all the provisions under one garb, irrespective of the purpose for which each sub-section or clause or sub-clause or proviso is meant to be invoked, by the Parliament. Both the Assessing Officer and the Addl. Commissioner of Income-tax had failed in their duty in invoking correct provision applicable to the assessee's case for its alleged violation of the same and at the first appeal stage a different provision i.e. Sub-section (2)(b) is made applicable instead of Sub-section (2)(a). Even otherwise, Sub-section (2)(b) contemplates that any land or building or other property of the institution or trust continues to be made available for the use of any person referred to in Sub-section (3), for any period during the previous year without charging adequate rent or other compensation. This provision, according to the learned counsel, has no application to the assessee's case for the following reasons:
(i) Sub-section (2)(b) of Section 13 is made applicable only when Section 13(1)(c) read with Sub-section (3) is applicable. However, in this case the authorities below failed in their duty in applying Sub-section (3) with a proper perspective identifying the clause under which the violation is made by the assessee.
(ii) Even Sub-section (2)(b) contemplates the invocation of Section 13(1)(c) since the Assessing Officer failed in applying her mind in applying and identifying the clause under which the assessee's case fell, Section 13(1)(c) itself became inapplicable.
(iii) Even assuming without accepting the department's contention, the assessee had not made available any property for the use of the assessee society. In otherwords, the financial securities of the society are intact and the same were pledged with the banker which did not mean that the same were used without charging adequate rent or other compensation. Even if the relationship for invoking the provisions of Sub-section (3)(b) is assumed, the relationship among the assessee, the Executive Secretary and the banker was only a trilateral one whereby the assessee stood as a mere guarantor. The guarantor's obligation can in no case be understood to have parted with any compensation unless the borrower is declared an NPA (non-performing asset) and till such time as the Executive Secretary's account is declared as NPA, the guarantor's obligation could not have been put in motion. As such, the question of losing a compensation by the assessee during the previous year did not arise, as the executive Secretary fulfilled all his obligations and the relationship of the assessee as guarantor was only a contingent one which had neither crystallised nor accrued. In that case, there was no case of parting with any compensation, let alone a rent, for the purpose of invocation of Section 13(2)(b).
In view of the above, the learned counsel submitted that the application of the provisions of Section 13 to deny exemption to the assessee-society is highly arbitrary, unilateral, abusive and without any application of mind in a proper and perspective manner. The provisions of Section 13 are couched in an independent manner without attracting or effecting one clause with another, and the provisions cannot be used in a manner of straight jacket formula to cover up all the incongruities and latches of the lower authorities.
7. Without prejudice to the arguments mentioned above, learned counsel for the assessee, Sri Raji Reddy and Sri Muralikrishna Murthy, alternatively submitted that in any view of the matter, the assessee-society has been rendering a good number of activities in the interest of public and if this Tribunal is of the view that the assessee's contentions are found not in consonance with the provisions of the Income-tax Act, then at least the actual disbursements that had been incurred in meeting the assessee's purposes may be allowed by applying a blend of all judiciousness in a just and fair manner as expected of this Tribunal. On this alternative plea, the assessee places reliance on the decision of the Hyderabad Bench of the Tribunal reported in 71 ITD 152 which is on all fours with the facts and circumstances of the assessee's case.
8. In support of the arguments with respect of applicability of Section 13(2)(a) and other grounds and contentions taken, the learned counsel relied upon the following judgments:-
Citation Proposition
138 ITR 585 (Mad) To constitute a loan there must be a
"positive act" of lending and its
acceptance. Relationship of borrower
and lender must come into existence.
168 ITR 516 (Raj) Material on record shows the
documentary evidence regarding
immovable property offered as security.
No criteria fixed under the Act for
adequacy or otherwise [Section 13(2)(a)]
176 ITR 169 (SC) Principles of natural justice having
been violated, the Court is concerned
with the procedure followed and not the
validity of the order.
183 ITR 377 (AP) Where the borrower is financially
sound, Section 13(2)(a) has no applicability.
203 ITR 764 (Patna) An employee of the settlor is not
covered by Section 13(3).
244 ITR 494 (Raj) For any misutilisation or mismanagement
action is to be taken against the member
of the society. SC dismissed the SLP filed
by the department as reported in 241 ITR
132 (Statutes).
245 ITR 437 (Mum) Where the monies were taken and returned,
there will be no violation of Section 11 of
the Act.
250 ITR 55/475 (Del) Even under Section 13(2)(h), the word "invest"
connotes that there must be a positive
act on the part of the trust whereby the
funds of the trust are laid out in any
particular property or business. Since
this sub-clause is in the same section,
the ratio also applies for Section 13(2)(a)/
13(2)(b).
252 ITR 84 (Cal) "Trust" and "institution" are different
from one another and Section 13(cc) speaks
of manager of institution and not manager
of trust.
With regard to Section 2(24)(ii)(a), "Voluntary contributions", the following case law were relied upon:
Citation Proposition
149 ITR 470 (Raj) Voluntary contributions received for
"specific purposes" are not assessable
as income.
192 ITR 615 (Raj) Donations received for "specific
purposes" cannot be treated as income.
71 ITD 152 (Hyd) Voluntary contributions received are not
to be taxed as income.
Reliance was also placed on the order of ITAT, Hyderabad Bench 'A', dated 25-6-2002 in I.T.A. No. 77/Hyd/2002 for asst. year 1998-99 in the case of Arya Vysya Abhyudaya Sangham, Secunderabad, v. DCIT.
9. On behalf of the Revenue, Sri R.P. Srivastava, Commissioner of Income-tax (DR), vehemently opposed the contentions of the assessee. He strongly relied on the orders of the Assessing Officer and the Commissioner (Appeals) and submitted that the findings therein have to be upheld as it is proved beyond doubt that the assessee-society had violated the provisions of Section 13(1)(c) read with Section 13(2)(b). He submitted a paper book consisting of pages 1 to 296 and took this Bench through various depositions, confirmation letters etc., to fortify his case that the Secretary of the assessee-society. Smt. Nanda Vardhan, has in fact obtained loans from South Indian Bank by pledging the fixed deposit receipts of the society and that this amount was given to her husband Sri T.J.P.S.Vardhan who is the Executive Secretary of the society.
10. Replying to the various arguments raised by the learned counsel for the assessee, Sri Srivastava submitted that it is clear from the provisions of Section 144A that opportunity is to be provided to the assessee by the Addl. Commissioner of Income-tax during proceedings under Section 144A and there is no provision in law requiring providing of opportunity by the Assessing Officer to the assessee while following the directions issued under Section 144A by the Addl.CIT. It is also relevant to mention that the directions issued under Section 144A are binding on the Assessing Officer.
11. As regards the contention of the assessee that the Assessing Officer/Addl.CIT did not specify as to which clause of Section 13(3) applies to the persons causing violation in this case, Sri Srivastava argued that this is only a technical kind of objection because there has never been any doubt that Mr. and Mrs. Vardhan, being Executive secretary and Secretary of SIDUR respectively, were interested persons as mentioned in Section 13(3). He submitted that during the arguments on 14-10-2002, the Bench requested the assessee's authorised representative to explain whether these persons are not covered by Section 13(3)(cc) and 13(3)(d) of the I.T.Act and there was no specific denial on this. He also drew our attention to the finding of ITAT, Hyderabad Bench 'B', at page 15 of its order dated 23-5-2001 in I.T.A.No. 787/Hyd/2000 for asst. year 1998-99 in the assessee's appeal against order under Section 263 (Revenue's paper book page 275). He further submitted that assessee's paper book (pages 50 & 51) also shows that Mr. Vardhan as Executive Secretary was in charge of day-to-day affairs of the society and also principal officer and leader of the SIDUR team. Thus, Mr. Vardhan clearly falls within the definition of 'manager' mentioned in Section 13(3)(cc). Even otherwise, in his capacity as husband of Mrs. Nanda Vardhan, he would be covered by Section 13(3)(d). Availing of loan on society's FDs by such a person would definitely attract the provisions of Section 13(1)(c) for denying exemption to the assessee-society.
12. Sri Srivastava further submitted that the assessee's argument that there was no relationship of borrower and lender is negatived by the fact that South Indian Bank had confirmed that a loan of Rs. 3.40 lakhs was taken in cash by Sri Vardhan on 27-1-1997 against F.Ds. of SIDUR (Nos. 130/96 and 133/96). A copy of the letter of the Bank was furnished to the Bench during the course of hearing. Further, the assessee-society's resolution dated 3-1-1997 (Revenue's paper book at page 211) contained in minutes book makes it clear that Sri Vardhan was allowed to raise a loan of up to Rs. 3.5 lakhs for his personal purposes. Still further, financial statements filed by Mr. Vardhan during his individual assessment proceedings for asst. year 1997-98 make it clear that he had himself shown to have received a loan of Rs. 3.4 lakhs from SIDUR on 27-1-1997. Copies of the said financial statements have also been furnished to the Bench. In his statement dated 8-7-1999 recorded during survey (pages 12 and 13 of Revenue's paper book) also, Sri Vardhan had admitted that he raised personal loans against SIDUR's FDs and utilised the properties of the trust (society) for availing the loan for his personal commitments. Thus, the society as well as Mr. Vardhan is clearly shown to have entered into a relationship of borrower or lender in this case and hence the provisions of Section 13(2)(a) are constructively attracted. Still, keeping in view the fact that this relationship was indirect (through Bank), it was held by learned Commissioner (Appeals) that there was violation as mentioned in the provisions of Section 13(1)(c) read with Section 13(2)(b) inasmuch as the property of the society had been utilised for the benefit of prohibited category of persons without adequate compensation. He submitted that this is also the view taken by the ITAT in its order dated 23-5-2001 in I.T.A.No. 787/Hyd/2000 in the assessee's case referred to above. Thus, while Section 13(1)(c) read with Section 13(2)(a) constructively applies in this case, Section 13(1)(c) read with Section 13(2)(b) strictly applies as held by the Commissioner (Appeals). The learned Commissioner (Appeals) has held additionally that the provisions of Section 13(2)(c) would also be applicable tin this case. From all angles, Sri Srivastava submitted, it is clear that the violation prescribed under Section 13(1)(c) has definitely taken place.
13. Adverting to the argument of the learned counsel for the assessee that the financial securities of SIDUR were intact and even if the relationship is assumed for invoking Section 13(2)(b), the relationship is trilateral in which the assessee stood as a mere guarantor and the question of losing the compensation by the assessee did not arise as the Executive Secretary fulfilled his obligations. Sri Srivastava submitted that firstly it has to be noted that the utilisation of the property of the society by its Executive Secretary, within the meaning of Section 13(2)(b), is primarily established. The pledge of FDRs of the society is not a meaningless exercise and, in case of failure by the Executive Secretary to pay back the loans, the same could be encashed by the bank to the detriment of the society. This has been so held by the Tribunal in its order dated 23-5-2001 in the assessee's case in Section 263 matter (referred to above).
14. The learned departmental representative further submitted that a reference to various statements of Mr. Vardhan and others (pages 7 to 24 of Revenue's paper book) will show clearly that all the loans were raised to meet personal commitments. If there was any relation of these loans to the society's objectives the same would be reflected in the society's accounts. Nothing prevented the society from making direct expenditure out of the funds in the designated account for meeting its objectives. Diversion of funds from the designated account to another account without permission of Government is also a serious offence under the FCRA Act. However, Mr. and Mrs. Vardhan continued the exercise of diverting funds to the non-designated account and raising loans on FDs over the years without bringing anything on record in the society's books of account. The clandestine nature of these transactions makes it clear that the same were not entered into on behalf of SIDUR and involved only the personal expenditure/investments of Mr. and Mrs. Vardhan who were utilising the society's funds to their own intents and purposes. The ultimate destination of the funds raised by way of loan is not very important in this connection. The KMC story brought in by the assessee has no relevance as the alleged payments to KMC are nowhere mentioned in the books of account of the assessee-society or in the minutes book of the society. The fact remains that loans were raised against the society's FDs by the Secretary/Executive Secretary, who are husband and wife, to meet personal expenses or commitments.
15. As for the contention of the assessee that since the assessee-society has rendered good number of public interest activities, at least actual disbursement incurred in meeting its purposes may be allowed. Sri Srivastava submitted that the provisions of Section 13(1)(c) of the I.T.Act and related provisions are very strict and whenever there is a violation as mentioned in Section 13, the exemption provided by Section 11 or Section 12 is to be withdrawn. In such a situation, the provisions of Section 2(24)(iia) will be squarely applicable as per which the voluntary contributions received by an institution will be deemed as its income. he argued that as rightly held by the learned Commissioner (Appeals), there is no scope for allowing expenditure in such a case and the entire grants received by the society are to be treated as income. In this connection, he also drew our attention to the order of the Tribunal, Hyderabad Bench 'A', in I.T.A. No. 743/Hyd/2000 for asst. year 1993-94 dated 17-5-2002 in the case of AWARE, Hyderabad, v. DCIT, where the total receipts of the assessee-society aggregating to Rs. 9,99,644 were taxed as income after withdrawal of exemption under similar circumstances and such action was confirmed in appeals. In that case, the Chairman of AWARE took a loan in his capacity as Chairman and gave it to an outsider without any adequate security or compensation. The offence of the assessee in the present case is somewhat more serious in the sense that the loan has been taken by the Executive Secretary against the FDs of the society for his own personal purposes. The learned departmental representative submitted that the learned counsel for the assessee has not been able to distinguish the case of AWARE from the present case.
16. Sri Srivastava further argued that the case laws cited by the learned counsel for the assessee are on different facts and circumstances and none of the case laws deals with a situation like the present one. Most of the case laws relied upon by the assessee have been distinguished by the Tribunal in the earlier order in I.T.A. No. 787/Hyd/2000 dated 23-5-2001 in the assessee's case. The decision of Honourable Supreme Court reported in 155 ITR 120 has no relation to the present case. On the other hand, the learned Commissioner (Appeals) has placed reliance on the decision of Honourable Kerala High Court in the case of Agappa Child Centre v. CIT, 266 ITR 211, where a smaller violation led to withdrawal of exemption. The decision of Honourable Andhra Pradesh High Court reported in 143 ITR 82 is also relevant to the present case.
17. The learned departmental representative finally submitted that the various aspects of violation of the provisions of Section 13 of the I.T.Act by the assessee over the years has already been discussed in detail by the Tribunal in the earlier order dated 23-5-2001 in I.T.A.No. 787/Hyd/2000 in the assessee's case in respect of Section 263 proceedings for asst. year 1998-99. In the case of AWARE (supra) total withdrawal of exemption has been upheld in almost similar circumstances. Hence, he requested the Bench to dismiss the assessee's appeal in the present case, following the decision in the case of AWARE (supra) and the observations in the case of the assessee in Section 263 matter for asst. year 1998-99 (supra).
18. We have heard both sides and gone through all the papers on record and the orders of the authorities below. On a careful consideration of the facts of the case, we have come to the conclusion that Smt. Nanda Vardhan, Secretary of the assessee-society, wife of Sri T.J.P.S. Vardhan, the Executive Secretary of the assessee-society, had used the fixed deposit receipts belonging to the assessee-society for raising loans. The reply of the South Indian Bank Ltd. dated 15-7-1999 giving details asked by the Assessing Officer under Section 133(6), a copy of which has been filed before us by the learned departmental representative, conclusively proves that the fixed deposits were used & pledged by the Secretary Smt. Nanda Vardhan for raising loans. The resolutions of the society highlighted by Sri Srivastava, learned departmental representative, prove that the Executive Secretary has been authorised by the society to obtain loans against F.D.Rs. The money so raised was used by Sri Vardhan, not for the society, but for some other purposes. The objects for which it was used, however, laudable, were not the objects of the society. The FDRs were used without compensation to the society. On a query from the Bench, the learned counsel for the assessee admitted that these loans are not reflected in the books of the assessee-society. Without the use of the FDRs of the society, it would not have been possible for Smt. Vardhan to help her husband Sri Vardhan to raise these loans, for whatever purposes. Thus for other than for the society's requirements or purposes, the asset has been used without security or compensation whatsoever.
19. In the case of AWARE, Hyderabad, v. DCIT, vide order dated 17-5-2002, ITAT, Hyderabad Bench 'A' consisting of the same Members, held as follows in para 30 of the said order:-
"We have perused the statements of Sri K. Babu Reddy, Smt. Rama Anantaram and Sri P.K.S. Madhavan and Other material evidences. We are of the considered opinion that the Revenue has proved its case against the assessee, viz., that the assessee violated the provisions of Section 13 of the I.T.Act. Sri Babu Reddy made a clear statement that he arranged the loan on the direction of Sri Madhavan after completion of all the formalities required by the bank for obtaining the loan of Rs. 12,00,000 against the pledge of FDRs of Rs. 16,00,000 belonging to the assessee. It is also proved from the record that the four pay orders of Rs. 3,00,000 each were prepared and given to Smt. Rama Anantaram on the instruction of Sri Madhavan. It has been admitted by Smt. Rama Anantaram in her statement that she received the said money and that the money was utilised by her for the salaries, phone bills and office administrative expenditure of M/s. Omnitel Industries Ltd., a company run by her husband Sri Anantaram. She also admitted that he repaid the loan amount with interest totalling Rs. 14,25,756. This proves that the loan had been arranged for Smt. Rama Anantaram against the pledge of FDRs worth Rs. 16,00,000 belonging to the assessee without any consideration, which is in violation of the provisions of Section 13. As regards the contention on behalf of the assessee that Section 13(3)(d) has no application in the present case, the learned departmental representative has stated that there was a typographical error in the assessment order and that the impugned transaction attracted the provisions of Section 13(3)(cc). We are of the opinion that mentioning of a wrong provision would not be fatal to the assessment proceeding when the Assessing Officer is justified in his action under some other provision. The Assessing Officer has not mentioned the word "relative" or held that the funds had been misused to give to a "relative" of Sri Madhavan or any other person. On the other hand, the Assessing Officer has specifically held that Sri Madhavan took the loan in the name of Chairman of AWARE. The income of the assessee is, therefore, assessable under the provisions of Section 13(1)(c)(ii) r.w.s. 13(2)(b) and 13(3)(cc). We have gone through the case laws cited by the learned departmental representative in this regard, mentioned in para 23 at page 20 of this order and we are of the considered opinion that they support representative." [Emphasis supplied by us] This Bench of the Tribunal in the assessee's own case in I.T.A.No. 787/Hyd/2000 for asst. year 1998-99, by order dated 23-5-2001, to which one of us was a party, had followed the judgment of the Honourable Kerala High Court in the case of Agappa Child Centre v. CIT, 226 ITR 211 (Ker), and in para 19 at page 19 it was held as follows:-
"We are of the view that the issue raised in this appeal is covered against the assessee by the decision of the Hon'ble Kerala High Court in the case of Agappa Child Centre v. CIT, 226 ITR 211 (Ker), wherein it was held that because a refrigerator belonging to the charitable society in question was installed in the residential premises of the founder, the provisions of Section 13(1)(c) were attracted and the assessee-society was not entitled to the exemption under Section 11 of the Act. The violation considered by the Hon'ble Kerala High Court is relatively minor compared to the utilisation of the fixed deposits of the assessee-society before us by its Executive Secretary. It has been argued before us that in the process of the pledge of the fixed deposits by the Executive Secretary, the assessee-society did not suffer any loss. To our mind, this contention is misconceived. The assessee-society might have received the interest due to it on the fixed deposits; loans taken by the Executive Secretary might also have been paid back; that does not mean that there was no utilisation of the property of the assessee-society by its Executive Secretary, within the meaning of Section 13(2)(b) of the Act. The pledge of the fixed deposits is not a meaningless exercise. They were meant to be security for the loans obtained by its Executive Secretary. There could have been a situation where the deposits had to be encashed for the payment of the loan in case there was a failure by the Executive Secretary to pay back the loans. That he paid back the loans without causing any injury to the assessee-society is not very material. The fact of utilisation of the fixed deposits itself attracts the provisions of Section 13(1)(c)."
We agree with the finding and reasonings given in this judgment and hold that the assessee-society had violated the provisions of Section 13(1)(c) read with Section 13(2)(b) of the Income-tax Act which necessarily means that the exemption under Section 11 has to be denied to the assessee.
20. On the issue of opportunity under Section 144A, we agree with the argument of Sri Srivastava that the assessee had replied to the notice given under Section 144A (para 11 on page 5 of the assessment order). The record disclosed that the Additional Commissioner has given a number of opportunities. Even otherwise, the learned counsel for the assessee submitted that he is not pressing this ground. Thus, this argument is dismissed.
21. As regards the assessee's contention that the Executive Secretary Sri T.J.P.S. Vardhan does not fall under the class of persons specified under Sub-section (3) of Section 13 of the I.T.Act, we agree with the argument of Sri Srivastava that it was the Secretary herself, i.e. Smt. Vardhan, who signed and pledged the FDRs of the society and had used the assets of the society without any compensation whatsoever to the society and being a person covered under Section 13(3), had violated the provisions of Section 13(1)(c). Section 13(1)(c) applies only in cases of enumerated classes of people in Section 13(3). We have no doubt that the Secretary Smt. Vardhan, who has pledged the FDRs falls under Section 13(3) and also that Sri Vardhan is covered by Section 13(3)(cc) and Section 13(3)(d). The learned counsel for the assessee could not reply to this query of the Bench. Sri Vardhan and Smt. Vardhan are not only founder members of the assessee-society [Ref. Page 22 of green paper book] but also are the executive committee members per page 23 of green paper book.
22. Coming to the case laws cited by the assessee, the judgment of Honourable Madras High Court in CIT v. Nachimuthu Industrial Association, 138 ITR 585, is not applicable to the facts of this case as the exemption was not denied for use of an asset by the society and the judgment of Honourable Kerala High Court in the case of Agappa Child Centre (supra) applies to this case. The judgment of Honourable Rajasthan High Court in Shree Poongalia Jain Swetamber Mandir v. CIT, 168 ITR 516, is also not applicable in this case, as that was a case of immovable property and was with reference to Section 13(2)(a). Similar is the judgment of Honourable Andhra Pradesh High Court in CIT/WT v. Polisetty Somasundaram Charities, 183 ITR 377. By the own admission of the assessee in the stay petitions, the borrower cannot be said to be financially sound. Our finding is that security and compensation are totally absent. Hence, the said judgment is not applicable in this case. Honourable Patna High Court in CIT v. Tata Steel Charitable Trust, 203 ITR 764, was dealing with an employee of the settlor and not a founder and executive secretary as in the present case, and hence this judgment is not applicable to the facts of this case. In the case of Dy. CIT v. Cosmopolitan Education Society, 244 ITR 494, Honourable Rajasthan High Court was dealing with misutilisation and mismanagement by a member of the society. In the case on hand, the society passed a resolution and consciously the amounts are not brought into its books of account. Coming to the judgment of Honourable Bombay High Court in Director of Income-tax (Exemptions) v. Bharat Diamond Bourse, 245 ITR 437, monies were taken and returned in that case, but in the instant case assets in the form of FDRs were used as financial guarantee and the assessee-society has a taken a great risk in violation of the provisions of the Income-tax Act. The facts are different and hence, the said judgment is not applicable to this case. Coming to the judgment of Honourable Delhi High Court in CIT v. Sir Shri Ram Foundation, 250 ITR 55, and in CIT v. Sir Sobha Singh Public Charitable Trust, 250 ITR 475, relied on by the learned counsel for the assessee, we find that the judgments in those cases advance the case of the Revenue as there is a positive act by the society by way of a resolution to pledge the FDRs for obtaining loans for utilisation by an individual other than for the purposes of the society and there is no rent or compensation or security for the same. For the reasons mentioned in para 21 above, the judgment of Honourable Calcutta High Court in CIT v. Rai Bahadur Bissweswarlal Motilal Kalwasiya Trust, 252 ITR 84, is not applicable to this case as the Secretary as well as the founder and the Executive Secretary have used the assets of the society and they are managers of the trust.
23. In view of the above discussion and in view of the fact that Smt. Nanda Vardhan and Secretary of the society, and Sri Vardhan, the founder, Executive Secretary and a relative of the Secretary and also a Manager, had used the FDRs of the society for obtaining loans other than for the society itself without compensation, the provisions of Section 13(1)(c) r.w.s. 13(2)(b) and 13(2)(cc) are attracted and the assessee-society is not entitled to the exemption under Section 11 of the I.T.Act. We uphold the orders of the lower authorities on this issue.
24. Coming to the second limb of the argument of the learned counsel for the assessee that the entire receipts cannot be taxed, we find that the issue is covered by the judgment of this Bench in Nirmal Agricultural Society v. ITO, 71 ITD 152. In that case, it has been held (as per head note) as under:-
"The assessee had not been granted registration under Section 12A, as the Commissioner thought it fit to refuse to condone the long delay caused by the assessee in applying for the registration. Therefore, the Assessing Officer had no other option but to complete the assessments in the status of AOP also closing his eyes towards Section 11 and Section 13. To that extent, the Assessing Officer was right as he had acted only according to will of law.
But as far as the contents of the assessments were concerned, even when the assessee had been assessed as AOP and deprived of Section 11 benefits, the Assessing Officer could assess only net income of the assessee and not gross receipts. As far as the assessee was concerned, construction of houses, reclamation of land, etc., were part of its regular activities. Houses were built on the land of poor agriculturists. The assessee-society had no legal title or right over the land or houses of those villagers/agriculturists who were the beneficiaries. The purpose and activity of the assessee-society was to engage in such charitable activities. Whatever amount had been spent on those programmes/projects, it was spent in the usual course of carrying on its acclaimed objects. Therefore, there was no basis whatsoever, factual or legal, to hold that the amounts spent by the assessee in constructing houses or reclaiming land were capital expenditure. As far as the assessee was concerned, those expenses were revenue expenses. The assessee had no right or title over those properties. Those expenses were incurred as part of its normal activities for which the society was formed. Therefore, the money spent by the assessee-society in constructing houses, reclaiming the land, for non-formal education, etc., had to be allowed as deduction in the computation of income.
The grants received from foreign donor were for specific purposes. The grants which were for specific purposes did not belong to the assessee-society; such grants did not form corpus of the assessee or its income. Those grants were not donations to the assessee so as to bring them under the purview of Section 12. Voluntary contributions covered by Section 12 are those contributions freely available to the assessee without any stipulation, which the assessee can utilise towards its objectives according to its own discretion and judgment. Tied-up grants for a specified purpose would only mean that the assessee which was a voluntary organisation, had agreed to act as a trustee of a special fund granted by donor with the result that it need not be pooled or integrated with the assessee's normal income or corpus. In the instant case, the assessee was acting as an independent trustee for that grant, just as same trustee could act as a trustee of more than one trust. Tied-up amount need not, therefore, be treated as amounts which were required to be considered for assessment for ascertaining the amount expended or the amount to be accumulated.
The assessee should have actually credited the grant in the personal account of the donor and any amount spent against that grant should have been debited to that separate account of the donor. That incoming and outgoing need not be reflected in the income and expenditure account of the assessee. At the end of the project, the balance, if any, available to the credit of the donor, could be treated as income of the assessee, if the donor did not insist for the repayment of the balance amount.
Therefore, the Assessing Officer was to be directed to redo the assessment on the following lines.
(1) The tied-up grants received from the donor, Bread for the World, will be taken out of the computation of income from the income-side.
(2) All the money spent under the tied-up programmes directed by the donor also will be taken out of the computation of income from the expenses-side.
(3) Any non-refundable credit balance in the personal account of Bread for the World will be treated as income in the year in which such non-refundable balance was ascertained.
(4) The expenses incurred by the assessee for house construction, reclamation of land, non-formal education programme (other than covered by the tied-up grants) will be deducted as revenue expenses."
25. Honourable Rajasthan High Court in the case of Sukhdeo Charity Estate, Ladnu v. CIT, 149 ITR 470, held as follows (as per head note):-
"It was for the specific purpose of implementation of the water supply scheme that the request for contribution had been made by the assessee-trust and it was in response to that request that the amount had been given by the Calcutta trust. It was clear that the intention of the donor and the donee was to treat the money as capital to be spent for the water supply scheme. The fact that the amount had not been paid over to the State Government and was kept unutilised in the account of the assessee-trust was not relevant. The amount could not be said to be "income" and could not be included as part of the assessable income of the trust under the provisions of Section 12(2)."
In Yet another judgment in the case of Sukhdeo Charity Estate v. ITO, 192 ITR 615, Honourable Rajasthan High Court held as follows (as per head note):-
"The intention of the donor-trust as well as the donee-trust was to treat the money as capital to be spent for the Ladnu Water Supply Scheme. It was of no significance whether the amount had since been paid to the State Government or kept in the account of the said scheme by the assessee-trust. The amount of Rs. 70,000/- did not constitute income of the petitioner. The reassessment proceedings were not valid and were liable to be quashed."
This Bench of the Tribunal in the case of Arya Vysya Abhyudaya Sangham v. DCIT, I.T.A.No. 77/Hyd/2002 for asst. year 1998-99, in its order dated 25-6-2002 to which one of us was a party, was inclined to uphold the view of the Commissioner (Appeals) in that case by holding in para 15 of that order as follows:
"Though we find considerable force in the other argument of the assessee's counsel i.e. the income should be computed on commercial principles, as we have held that the assessee-society is eligible for exemption Under Section 11 of the Act and as we have also held that the objects of the society were of charitable nature within the meaning of Section 2(15) of the Act, and as we have further held that there is no violation, whatsoever of the provisions of Section 13(1)(c) and (d) of the I.T.Act, 1961, the other grounds of the assessee need not be gone into, as it would be of academic interest only."
The Revenue has not brought to our notice any judgment from any High Court which has dealt at length on this issue and which is in its favour. It is also not clear whether the Revenue has accepted or gone on appeal against the judgment of this Bench in the case of Nirmal Agricultural Society (supra).
26. Honourable Andhra Pradesh High Court in the case of Chairman, Andhra Pradesh Welfare Fund v. CIT, as per head note, held as follows:-
"(i) That the finding of the Tribunal, that the assessee could not be regarded as a branch or as a part of the parent body, was a finding of fact and no question of law arose for reference.
(ii) That the mere fact that the rice millers paid contributions with an oblique motive would not affect the character of the contributions, as voluntary contributions.
(iii) That the finding of the Tribunal, that the assessee was not entitled to exemption as a trust under Section 12 because some of the funds were being utilised for purposes other than charitable and religious was a finding of fact and no question of law arose for reference."
This judgment was relied upon by the Reference. A careful reading of this judgment does not indicate that the question raised by the assessee before us was posed to the court. We do not feel that this is a precedent for laying down a proposition of allowability of expenditure for computation of income of a charitable institution which is denied benefit Under Section 11. Honourable Supreme Court in the case of Goodyear India Ltd. v. State of Haryana (1991) 188 ITR 402 (SC), as per head note, held as follows:
"Precedent -- Authority only for what it decides - Not for what may remotely or even logically follows - Decision on question not argued cannot be treated as precedent."
Thus, the judgment of Honourable Andhra Pradesh High Court (supra) does not help the case of the Revenue.
27. On other hand, learned authors Chaturvedi and Pithisaria in their book Income Tax Law, Fifth edition, Vol.1, at page 424, under the heading "Income, when falls into the tax net", observed as follows:-
"Although Section 14 of the 1961 Act classifies income under six heads, the main charging provision is Section 4(1) which levies income-tax, as only one tax, on the "total income" of the assessee as defined in Section 2(45) of that Act. AO income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the "total amount of income referred to in Section 5". Secondly, it must be "computed in the manner laid down in this Act". If either of these conditions fails, the income will not be a part of the total income that can be brought to charge [CIT v. Harprasad & Co. P. Ltd., (1975) 99 ITR 118, 125 (SC)].
28. As argued by the Revenue, though by virtue of Section 2(24)(iia) voluntary contributions are income, to our mind this by itself does not entitle the tax gatherer to ignore all other well settled principles of taxation and general law and levy tax on gross receipts without considering the claim for deductions. Principles such as capital versus revenue, doctrines of overriding title, form versus substance, interpretation of "deeming" provisions etc., have to be applied wherever necessary. Only the surplus or profit can be brought to tax and the same has to be computed in the manner laid down in the Act applying the normal principles of accountancy and taxation laws.
29. The learned authors Kanga and Palkhivala in the book The Law and Practice of Income Tax, Eighth edition, Vol.I, at page 387, state the legal position as follows:-
"Voluntary contributions towards corpus of recipient trust.--
The present Section 12 is expressly made applicable to voluntary contributions which are made with a specific direction that they shall form part of the corpus of the trust [original in italics]. Therefore, such contributions on capital account do not have to be applied to charitable purposes but can be retained as the corpus of the recipient trust without attracting any tax liability. Although the italicized words have now been omitted from Section 2(24)(ii-a), the exclusion of such capital donations from the definition of "income" implicit in that section. The correct legal position is as under:
(a) All contributions made with a specific direction that they shall form part of the corpus of the trust are capital receipts in the hands of the trust. They are not income either under the general law or under Section 2(24)(ii-a) rightly construed. (See under Section 2(24)(ii-a), "Voluntary contributions received by charity".)
(b) Section 2(24)(ii-a) deems revenue contributions to be income of the trust. It thereby prevents the trust from claiming exemption under general law on the ground that such contributions stand on the same footing as gifts and are therefore not taxable. (See under Section 10(3), "Voluntary payments ..." p.320.)
(c) Section 12 goes one step further and deems such revenue contributions to be income derived from property held under trust. It thereby makes applicable to such contributions all the conditions and restrictions under Sections 11 and 13 for claiming exemptions. (See also Expln. (1) to Section 11(1).]
(d) Section 11(1)(d) specifically grants exemption to capital contributions to make the fact of non-taxability clear beyond doubt. But it proceeds on the erroneous assumptions that such contributions are of income nature - "income in the form of voluntary contributions". This assumption should be disregarded."
30. In the case of AWARE (Supra), these issues were not argued before the Tribunal and hence that judgment cannot be taken as a precedent. Thus, that case also does not further the case of the Revenue.
31. We find that the Assessing Officer and the first appellate authority have not examined or dealt with these aspects of this case. Natural justice demands that these claims of the assessee be examined by the revenue authorities by applying the well settled propositions of taxation law.
32. In view of the binding nature of the judgment of this Tribunal in the case of Nirmal Agricultural Society (71 ITD 152) on the revenue authorities and the view taken in the case of Arya Vysya Abhyudaya Sangham (supra) and also in view of the ratio decidendi of the judgments of the Honourable Rajasthan High Court in the case of Sukhdeo Charity Estate (149 ITR 470 and 192 ITR 615) referred to above, we direct the Assessing Officer to redo the assessment de novo in accordance with law.
33. For statistical purposes, the appeal of the assessee is treated as allowed.