IT : Advertisement published in various newspapers on occasion of birthdays of trustees of assessee-trust highlighting achievement of various institution run by trust could not be said to be image building of trustees, which would violate provision of section 13(1)(c)
IT : When Assessing Officer had allowed expenditure on account of various other cars owned by trust, expenditure and depreciation on Mercedez Car should not be disallowed merely because assessee had purchased Mercedez car to be used by VVIP guests
IT : Where assessee-trust had advanced interest free loan to another charitable trust engaged in educational activity, granting of such loan was neither a deposit nor an investment under section 11(5)
IT : Where assessee-trust had own funds much higher than amount advanced to its sister concern and there was no nexus of funds advanced with loan funds of assessee, disallowance of interest was not justified
IT : Where Assessing Officer did not state what should be reasonable remuneration to trustees, disallowance under section 40A(2) was not warranted
IT : Where payment on account of telephone expenses was, in fact, reimbursement of expenses incurred for purposes of trust, disallowance of telephone expenses could not be upheld
IT : Where payment of employees' provident fund and ESI were made prior to due date of filing return of income, such payment was eligible for deduction
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[2013] 39 taxmann.com 138 (Pune - Trib.)
IN THE ITAT PUNE BENCH 'B'
Dr. D.Y. Patil Pratisthan
v.
Deputy Commissioner of Income-tax*
SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND R.K. PANDA, ACCOUNTANT MEMBER
AND R.K. PANDA, ACCOUNTANT MEMBER
IT APPEAL NOS. 1592 & 1612 (PUNE) OF 2011
[ASSESSMENT YEAR 2006-07]
[ASSESSMENT YEAR 2006-07]
DECEMBER 14, 2012
I. Section 13, read with section 11, of the Income-tax Act, 1961 - Charitable or religious trust - Denial of exemption [Sub-section (1)(c)] - Assessment year 2006-07 - Whether advertisement published in various newspapers on occasion of birthdays of trustees of assessee-trust highlighting achievement of various institutions run by trust could not be said to be image building of trustees and, therefore, such advertisement expenses did not violate provisions of section 13(1)(c) - Held, yes [Para 13] [In favour of assessee]
II. Section 13, read with section 11, of the Income-tax Act, 1961 - Charitable or religious trust - Denial of exemption [Sub-section (1)(c)] - Assessment year 2006-07 - Assessing Officer disallowed expenditure incurred on Mercedez car and depreciation thereon holding same to be personal benefit to trustees and, therefore, there was violation of provisions of section 13(1)(c) - Whether when Assessing Officer had allowed expenditure on account of various other cars owned by trust, merely because assessee had purchased Mercedez car to be used by VVIP guests, Assessing Officer should not have disallowed expenditure and depreciation on such motor car especially when Assessing Officer in past had not disallowed any expenditure on Mercedez car owned by trust - Held, yes - Whether therefore, Assessing Officer was to be directed to allow impugned expenditure - Held, yes [Para 17] [In favour of assessee]
III. Section 11, read with section 13, of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under [Sub-section (5)] - Assessment year 2006-07 - Whether where assessee-trust had advanced interest free loan to another charitable trust engaged in educational activity, granting of such loan was neither a deposit nor an investment and, therefore, there was no violation of section 13(1)(d) - Held, yes [Para 27] [In favour of assessee]
IV. Section 36(1)(iii), read with section 13, of the Income-tax Act, 1961 - Interest on borrowed capital [Interest free advances] - Assessment year 2006-07 - Whether where assessee trust had own funds much higher than amount advanced to its sister concern and there was no nexus of funds advanced with loan funds of assessee, disallowance of interest was not justified - Held, yes [Para 30] [In favour of assessee]
V. Section 13, read with section 40A(2), of the Income-tax Act, 1961 - Charitable or religious trust - Denial of exemption [Sub-section (1)(c)] - Assessment year 2006-07 - Assessing Officer disallowed part of remuneration paid to trustees on ground that such payment was unreasonable considering their experience and qualification and, therefore, money had not been utilized for objects of trust for which provisions of section 13(1)(c) were attracted - Whether since Assessing Officer had not brought on record how much should have been reasonable remuneration to trustees and their relatives and what was amount paid by similarly placed organizations to their employees, disallowance of remuneration could not be sustained - Held, yes [Para 37] [In favour of assessee]
VI. Section 13, read with section 11, of the Income-tax Act, 1961 - Charitable or religious trust - Denial of exemption [Sub-section (1)(c)] - Assessment year 2006-07 - Telephone and mobile charges of trustees paid by assessee-trust were disallowed by Assessing Officer on ground that such payment violated provisions of section 13(1)(c) - Assessee claimed that payment on account of telephone expenses was not for benefit of any trustees but were reimbursement of expenses - Whether since Assessing Officer did not bring on record anything to controvert statement of that payment on account of telephone expenses was, in fact, reimbursement of expenses incurred for purposes of trust and that such expenses were allowed in earlier assessment years, disallowance on account of telephone and mobile expenses could not be sustained - Held, yes [Para 41] [In favour of assessee]
VII. Section 13, read with section 11, of the Income-tax Act, 1961 - Charitable or religious trust - Denial of exemption [Sub-section (1)(c)] - Assessment year 2006-07 - Assessing Officer disallowed maintenance expenses of flats on ground that those flats were exclusively used by founder of assessee trust and, therefore, there was violation of provisions of section 13(1)(c) - Assessee justified expenses on ground that its founder had not been given any salary and if he would have stayed in any hotel expenditure would have been much more than expenditure incurred on account of maintenance of guest houses - Whether since similar expenses were allowed in past and no disallowance was made in preceding year, following rule of consistency impugned disallowance was to be deleted - Held, yes [Para 45] [In favour of assessee]
VIII. Section 36(1)(va), read with section 13, of the Income-tax Act, 1961 - Employees' contribution [Time limit for payment] - Assessment year 2006-07 - Whether where payment of employees' provident fund and ESI were made prior to due date of filing return of income, such payment was eligible for deduction - Held, yes [Para 48] [In favour of assessee]
FACTS-I
| ■ | The assessee-trust, engaged in the business of running of educational institutions, was granted registration under section 12A. | |
| ■ | In assessment proceedings, the Assessing Officer disallowed advertisement expenses on the ground that those were incurred on the occasion of birthdays of the trustees which benefited their image building and not that of the trust and therefore same could not be said to be incurred for objects of trust. | |
| ■ | The Commissioner (Appeals) restricted such disallowance to 50 per cent of the expenses on the ground that such advertisement expenses have resulted in some amount of image building of the trustees as well as image building of the various institutes run by the assessee trust. | |
| ■ | On cross-appeals: |
HELD-I
| ■ | There is no dispute to the fact that advertisements were published in various newspapers on the occasion of the birthdays of the trustees highlighting the achievements of the various institutes run by the trust. In the present day, when there are hundreds of institutions imparting education in various fields. It is very difficult for the common man to find out which is the best institution. It is only when he comes to know of the persons behind running of the educational institutions that the confidence level of the layman increases. Therefore, highlighting the achievements of the institutions run by the trust along with the names of the trustees on their birthday cannot be said to be image building of the trustees. Rather it indirectly helps the various institutes run by the trust in getting more number of students. Further, the submissions of the learned counsel for the assessee that similar expenses were allowed in the past, therefore, no adverse view should be taken for the impugned assessment year also finds some force in it. [Para 13] | |
| ■ | Considering the fact that similar expenses were allowed in the past, no part of the advertisement expenses should have been disallowed especially when there is no dispute about the genuineness of such expenditure. Therefore, there is no violation of provisions of section 13(1)(c). Accordingly, the order of the Commissioner (Appeals) is to be set aside and the Assessing Officer is directed to allow the entire amount of advertisement expenditure as allowable expenditure. [Para 13.1] |
CASES REFERED TO
H.A. Shah & Co. v. CIT [1956] 30 ITR 618 (Bom.) (para 10.1), Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) (para 10.1), National Engg. Co.-ordination Committee v. Asstt. CIT [1992] 43 ITD 612 (Pune) (para 20), DIT (Exemption) v. Acme Educational Society [2010] 326 ITR 146 (Delhi) (para 20), Kanpur Subhash Shiksha Samiti v. Dy. CIT [2011] 133 ITD 182/10 taxmann.com 100 (Luck) (para 20), DIT (Exemption) v. Alarippu [2000] 244 ITR 358/111 Taxman 511 (Delhi) (para 20), CIT v. Sarladevi Sarabhai Trust No. 2 [1988] 172 ITR 698/40 Taxman 388 (Guj.) (para 20), Young Scholars Educational Society v. ITO [2012] 25 taxmann.com 422 (Chd.) (para 35), Kishinchand Chellaram v. CIT [1980] 125 ITR 713/4 Taxman 29 (SC) (para 44), CIT v. Eastern Commercial Enterprises [1994] 210 ITR 103 (Cal.) (para 44),Jivatlal Purtapshi v. CIT [1967] 65 ITR 261 (Bom.) (para 44.1), C. Vasantlal & Co. v. CIT [1962] 45 ITR 206 (SC) (para 44.1), Asstt. CIT v.Mahesh T. Patodia [2001] 79 ITD 40 (Pune) (para 44.1) and Bansal Strips (P.) Ltd. v. Asstt. CIT [2006] 99 ITD 177 (Delhi) (para 44.1).
Sunil Pathak and Nikhil Pathak for the Appellant. S.K. Singh for the Respondent.
ORDER
1. These are cross-appeals. The first one is filed by the assessee and the second one filed by the Revenue and are directed against the order dt. 29th Aug., 2011 of the CIT(A), Central, Pune relating to asst. yr. 2006-07. For the sake of convenience, these were heard together and are being (disposed of by this common order.
2. Facts of the case, in brief, are that the assessee Dr. D.Y. Patil Prathishthan came into being on 27th Dec, 1990 and got registration under s. 12A of the IT Act, from the CIT, Kolhapur on 15th Nov., 1991. The assessee is engaged in the business of running of educational institutions. However, it has not filed its return of income for the year under consideration under s. 139 of the IT Act, 1961. A search and seizure action under s. 132 was conducted on 20th July, 2005 in the case of Dr. D.Y. Patil Group. The assessee being one of this group was covered under survey action under s. 133A of the IT Act, 1961. On the basis of the documents seized/impounded during the course of search/survey and the enquiries conducted later on, it was concluded by the CIT(C), Pune vide his order dt. 30th Nov., 2007 that activities of the trust are neither genuine nor are being carried out in accordance with the objects of the trust. The CIT(C), Pune therefore for the various reasons mentioned in his order cancelled the registration of the assessee under s. 12AA(3) of the IT Act, 1961.
3. Without prejudice to the order of cancellation of the registration under s. 12AA(3) the AO noted that even otherwise also the assessee is required to be assessed like any other assessee and is not entitled to the benefit of ss. 11 and 12 because it is hit by s. 13. The AO discussed provisions of s. 13 and observed that the IT Act bestows special privilege on the assessee if it is a trust, which is recognized by the provisions of the IT Act under s. 12A. For enjoying the privilege under s. 12A, the assessee has to adhere strictly to the provisions of ss. 11 and 12. The legislature, in its own wisdom, has taken special care for introducing s. 13 to punish persons, who enjoy, this special status so that in case there are certain violations of provisions, which are enumerated in s. 13, the assessee will not be entitled to the benefit of ss. 11 to 12. The assessee, therefore, has to adhere strictly to the scheme of the Act relating to the assessment of the trust and any deviation made has to be viewed very seriously. The AO noted that the assessee, in the instant case, is a habitual offender and is freely committing acts which are specifically mentioned under s. 13. Therefore, even otherwise, assessee's income has to be computed without applying the provisions of ss. 11 and 12 as the case of the assessee is hit by s. 13. The AO discussed the violation of provisions of s. 13 which are as under :
I. Expenses incurred other than for the objects of the trust
3.1 On perusal of Annex. XII at page No. 96 of the audit report under s. 142(2A), the AO noticed that expenses incurred not on the objects of the trust to the extent of Rs. 52,40,819 were debited by the assessee to the P&L a/c. On being questioned by the AO to explain as to why the same should not be disallowed as per s. 37(1) of the IT Act, 1961 the assessee vide letter dt. 30th June, 2008 submitted inter alia as under :
We summarize the items included in the audit report under this head.
| (i) | Advertisements on the occasion of the birthdays of the trustees. | |
| (ii) | Donations to the charitable trusts. |
(B) The advertisements on the occasions of the birthdays of trustees are for the purpose of image building of the institutions and the trust takes the opportunity on such occasions to highlight the achievement of the trust by enlisting the details of various institutions run by the trust. There it is submitted that the same may considered as an expenditure incurred on the objects of the trust and by no stretch of imagination does it result in any benefit to the trustees nor is this expenditure incurred at the instance of the concerned trustees.
(C) The donations given by the trust are only to the charitable institutions. It is submitted that all these trusts are in the field of spreading aadhyatmik, philosophical and yoga studies etc. It is from that angle, the trust has considered it proper to give donations to these trusts as the above activities also form part of educational activities. In view of above, we submit that the donations given to the various trusts are on 1 objects of the trust.
3.2 However, the AO was not satisfied with the explanation given by the assessee. According to him as per provisions of s. 37(1) for allowability of any expense, it should be incurred wholly and exclusively for the purpose of the business. He observed from the details so mentioned in Annex. XII of the audit report, that advertisement expenses are incurred on the birthdays of the trustees. These advertisement expenses on birthdays of trustees are for the purpose of image building of the trustees and their personal benefit and in no way can be considered for being incurred for the objects of the trust. The same is nowhere mentioned in the objects of the trust deed. As regards donation expenses, he noted that donations are given to the institutions to whom provisions of s. 80G do not apply and, therefore, these donations to the other institutions cannot be considered for deduction. He further observed from the appraisal report that besides the advertisement and donation expenses are also made with regard to payments to Mahendra Holidays for the trustees. The AO further noted that assessee has incurred the following expenses through credit card :
| Year | Date | Head of expenditure | Amount | Remark |
| 2005-06 | 19-5-2005 | Office & miscellaneous expenses | 9,000 | Credit card expenses |
3.3 The AO came to the conclusion that these expenses are incurred for e personal benefit of the trustees and are not in any way connected with the objects of the trust. Further, the expenses not incurred on the objects of the trust as per Annex. XII of the audit report also contain bank interest on the money used by D.Y. Paul Education Society. According to the AO it cannot be considered to be incurred for the objects of the trust. Therefore, he disallowed the expenses to the tune of Rs. 52,40,819 incurred not on the objects of the trust as per Annex. XII of audit report.
3.4 The AO further noted that without prejudice to the cancellation of stration under s. 12AA(3) of the IT Act, 1961, vide CIT(C), Pune's order dt. 30th Nov., 2007, the expenses incurred on the advertisements of the birthdays of the trustees and payments to Mahendra Holidays for trustees are clearly for the benefit of the trustees and the provisions of s. 13(1)(c) are applicable and clearly fall within the ambit of s. 13(1)(c) of the IT Act, 1961.
II. Maintenance of flats at Gulmohar Society, Pane
3.5 The AO noted that the assessee trust owns flat Nos. G1, G2 and F8 in Gulmohar Housing Society, Pune which are in the name of D.Y. Patil Pratishthan and flat F10 is in the name of Shri Sanjay Patil. Physical verification was carried out on 6th Sept., 2007 by the AO and it was found that flat Nos. G1 and G2 have been combined together and are exclusively used by Dr. D.Y. Patil. Further, flat No. 8 is being used by three servants, who do cleaning of flat Nos. G1, G2 and F10. Thus, it was found that flat Nos. G1, G2 and F8 are not being used as a guest house of the trust as claimed by the assessee and in fact it is being used only by Dr. D.Y. Patil when he comes to Pune. However, the expenses are being borne by the assessee trust. The AO therefore asked the assessee to explain as to why provisions of s. 13(1)(c) should not be applied to its case and why the expenses should not be disallowed. In response, assessee vide its letter dt. 5th July, 2008 submitted as under :
"Flat No. 8 is being used by the caretakers and servants of the trust. Flat Nos. G-l and G-2 are being used as a guest house for the valued guests and dignitaries. And also used by the new recruits for their temporary stay till they make their long-term arrangements. Please note that, flat Nos. G-l and G-2 have a common kitchen. The dinner set is kept in kitchen. Please note that, above flats are not utilized by Dr. D.Y. Patil. These flats are also used for the meeting purpose of the institutions run by our trust. So we hereby submit that these flats are exclusively used for the object of the trust. So we pray that, the provision of s. 13(1)(c) should not be applied in our case."
3.6 However, the AO was not satisfied with the explanation given by the assessee. He noted that during the course of physical verification of the flats, statement of the servant, Shri Sadashiv Bapu Patil, caretaker, who do cleaning of the flats G1, G2 and F8 was recorded on 6th Sept., 2007. In response to question No. 5 it was specifically stated by him that flat Nos. G1 and G2 was exclusively used by Shri D.Y. Patil whenever he comes to Pune. He extracted the English translation of the relevant portion of the statement which is as under :
"Q.5 Who lives in flat Nos. G1, G2 and F8 ?
Ans. In F8 the caretaker, driver, cleaner and guest live whereas, in G1 and G2, Shri D.Y. Patil, who comes once or twice in a month lives."
3.7 The AO therefore came to the conclusion that the contention of the assessee that flat Nos. G1, G2 and F8 are used for the guests is not tenable and, therefore, rejected the same and concluded that these flats are used for the personal benefit of the trustee, Shri D.Y. Patil and not for the objects of the trust.
3.8 The AO requested the assessee to furnish details of maintenance expenses of these flats including salary to the servants. As per the assessee, the maintenance charges of the flats are Rs. 1,59,676 for the year under consideration. He therefore made addition of Rs. 1,59,676 to the total income of the assessee being the expenses not spent for the objects of the trust. Without prejudice to the cancellation of registration under s. 12AA(3) of the IT Act, 1961, vide CIT(C), Pune's order dt. 30th Nov., 2007, the AO held that flats are used for the personal benefit of Dr. D.Y. Patil, the maintenance charges on these flats attract provisions of s. 13(1)(c) of the IT Act, 1961.
III. Payment to specified persons under s. 40A(2)(b)
3.9 The AO noted from Annex. IX at p. 74 of the audit report under s. 142(2A) that payments made to persons specified under s. 40A(2)(b) and to the persons specified under s. 13(1)(c) to the extent of Rs. 40,41,914 were debited to the P&L a/c. The AO asked the assessee to justify that the expenses were incurred for the objects of the trust and that the same was not excessive or unreasonable. Assessee was also requested to explain as to why the provisions of s. 13(1)(c) should not be applied to its case for the assessment year under consideration without prejudice to cancellation of registration under s. 12AA(3) of the IT Act, 1961. in response, assessee vide letter dt. 30th June, 2008 submitted the justification of remuneration/telephone charges/car charges/electricity charges paid to the trustees and their relatives on the basis of their educational qualification and experience. However, the AO rejected the contention of the assessee for the following reasons :
| (i) | Assessee, despite being specifically asked to furnish minutes book of the meeting of the board of directors, has failed to furnish the same. The minutes book should have been instantly available if those have been maintained. | |
| (ii) | That the assessee is paying unreasonable money to the trustees and their relatives is also evident from the so-called justification furnished by the assessee. For e.g. in case of Smt. Bhagyashree Patil, though she is just a BA, she has been given high remuneration, in lacs, for the year under consideration, the payment is Rs. 5,40,000. Though on paper, she has been appointed as administrative officer of D.Y. Patil Public School, no details of what were the actual duties performed by her and as to how many times she has visited the school are given by the assessee. It is a known fact that wives of the trustees are being given salary/remuneration though they are housewives and are actually performing no duties to justify the high remuneration paid to them. Similarly, in the case of Rajshree Kakade, who has been paid Rs. 3,25,000 during the year, assessee has stated that she has played major role in setting of IACST (C-DAC) Centre in Kolhapur. However, how she has played that role and what were the duties basically assigned to her has not been mentioned at all. After financial year 2002-03 she started working for the trust. It all shows that the payments are made to the trustees as per their needs and their sweet will and are for their personal benefits. | |
| (iii) | Assessee has purposely kept mum on the telephone charges on the payments made to the trustees and their relatives by the Kolhapur Division. | |
| (iv) | Even the Auditor in its report under s. 142(2A) has marked the payments in Annex. IX as "expenditure incurred for the benefit of the persons specified under s. 13(1)(3)". This shows that even the Auditor is satisfied that payments are for the personal benefits of the trustees and their relatives. |
3.10 The AO therefore came to the conclusion that the payments are being made to the trustees and their relatives arbitrarily, payments have no authorization and are totally unreasonable and excessive and for the personal benefit of the trustees. The money, which should have been used for the objects of the trust is being siphoned off by the trustees and their relatives as per their needs and benefits. Therefore, he disallowed these payments made to the trustees and their relatives specified under s. 40A(2)(b) amounting to Rs. 40,41,914 added back to assessee's income. Without prejudice to the order of cancellation of registration, as these payments are considered for the personal benefits of the trustees, having no authorization, provisions of s. 13(1)(c) applies to the assessee's case.
IV. Expenses on car, its repairs and maintenance
3.11 The AO noted that during the course of search it was noticed that \ assessee has purchased a Mercedes car by taking a loan of Rs. 27 lakh. During the course of assessment proceedings on being questioned by the AO it was stated by the assessee that the car is exclusively used for the purpose of VIP guests of the trust and thus, expenditure is made for the objects of the trust. The figures given by the assessee during the course of the assessment proceedings are as under :
| F.Y. | Rs. |
| 2000-01 | 69,721.94 |
| 2001-02 | 1,42.502.94 |
| 2002-03 | 1,63,774.17 |
| 2003-04 | 2,81,146.62 |
| 2004-05 | 2,54,942.50 |
3.12 The AO specifically asked the assessee to explain as to how the above expenses incurred on maintenance of the Mercedes car are for. objects of the trust and not for the personal benefits of the trustees. He, noted that the CIT(C), Pune, in his order of cancellation of registration under s. 12AA(3) has remarked that mere look at the figures would show that car is not being used for the purpose of VIP guests but is being used for the personal purposes of the trustees. Further, despite being asked to give details of the personal cars owned by the trustees and the expenditure incurred by them on the same, no such details were filed by the assessee. The assessee also did not give any separate vouchers or detailed accounts as to how much has been spent on the petrol and how much has been spent on the repairs either before the CIT(C), Pune, during the hearing for withdrawal of registration under s. 12AA(3) or before him. According to the AO the facts regarding the utilization of that Mercedes car are within the special knowledge of the assessee. How v was used, why it was used and what purpose did it serve, is known only to the assessee. He therefore came to the conclusion that the Mercede; car has been used for personal purposes of the trustees and not for the purpose of the trust. Besides disallowing the depreciation on the car which comes to Rs. 2,13,259 the AO disallowed the expenditure and held that this is a serious violation of s. 13(1)(c).
V. Donations received for admissions
3.13 The AO noted that during the course of search, certain documents were seized, which showed that assessee was in a habit of collecting donations for the admission to various courses. He referred to the assessment order for asst. yr. 2005-06, where it has been discussed in detail as to how concrete evidences of receiving donations by the assessee were found during the course of search at the premises of Shri R.S. Yadav, who is one of the brokers through whom admissions to various, institutions were made. It has been discussed in the said order as to how this money which has been received as donation is being siphoned off by the trustees and their relatives for their personal benefits. He therefore came to the conclusion that similar modus operandi of receiving money from students outside its books of account and diverting the same to the trustees must have been adopted by the assessee trust during this year. He accordingly held that assessee's case is hit by provisions of s. 13 of the IT Act, 1961.
VI. Trust/Corpus fond
3.14 The AO noted that since the registration of the assessee was cancelled under s. 12AA(3) of the IT Act, 1961 by the CIT(C), Pune, vide order dt. 30th Nov., 2007, the appointed auditor was directed to treat all the receipts including donations in the balance sheet of the assessee whether shown under corpus fund or any other fund as revenue receipts in income and expenditure account. He noted that the total receipts including donations to the extent of Rs. 9,25,22,312 were required to be credited to the income and expenditure account of the assessee for, the year under consideration. The AO asked the assessee to explain as to why the same should not be considered as assessee's income for the year under consideration. The assessee submitted details explaining why the same should not be treated as income. However, the AO rejected the explanation of the assessee on the ground that whether the money is received in the form of fee or in the form of donation, it is practically the same thing. Instead of crediting the same to the fee account, assessee has named it as 'development fee'. According to the AO just by changing the name of the money received, the donations cannot be treated as capital receipts and these have to be treated as revenue receipts only. He noted that Shri Sanjay D. Patil, trustee of the trust in his statement recorded on 20th July, 2005 during the course of search action has confirmed that the amounts transferred to the building funds are accepted from the students against which no receipts are issued and no names are written. The amounts in the building fund are ultimately transferred to the trust fund and as such the donors are unidentifiable. The AO therefore held that the assessee's contention is not tenable and these receipts are clearly taxable receipts.
3.15 Without prejudice to the above, the AO noted that the corpus donation of the trust or any other specific donation gets the benefit of exemption under s. 11 only when the trust is registered under s. 12A of the IT Act, 1961 or its registration is valid. He observed that since the registration under s. 12A is withdrawn in the case of the assessee and since even otherwise also the assessee is not eligible for benefits of ss. 11 and 12 as the case of the assessee is hit by s. 13, therefore, there is no question of treating the donation receipts as exempt. According to the AO, the computation of income considering the provisions of ss. 11 and 12 can give the benefits of exemption of corpus donation or application of income for the objects of the trust. However, once the benefit of s. 12A is withdrawn, income has to be computed by applying normal accounting principles and normal provisions of the IT Act and what assessee has stated has no meaning. He observed that the various decisions cited by the assessee would have been relevant had the trust been assessed with exemption under s. 12A. Since the assessee trust is not so assessed, therefore, he held that the decisions cited are not relevant at this juncture. Accordingly the AO by applying the normal accounting principles and provisions of the IT Act, 1961 treated all these receipts in the form of donation received by the assessee as revenue receipt and considered the amount of Rs. 9,25,22,312 as income of the assessee for the year under consideration.
VII. Capital expenditure debited to P&L A/c
3.16 The AO noted from Annex. II at page No. 44 of the audit report under s. 142(2A) that capital expenditure to the extent of Rs. 95,49,642 were debited by the assessee to the P&L A/c. He asked the assessee to explain as to why the same should not be disallowed, being capital in nature as per the provisions of the IT Act, 1961. In response to the same, the assessee vide letter dt. 30th June, 2008 submitted its explanation. However, the AO rejected the contention of the assessee by holding as under:
"The contention of the assessee is not acceptable fully. First the assessee stated in its submission dt. 8th June, 2008 that as the capital expenditure should also be considered as application of income for the purpose of s. 11 of the Act, therefore, all the capital expenditure debited to income and expenditure account be allowed to the assessee. In this regard, it is reiterated that registration of the assessee under s. 12A has been withdrawn and so its income has to be computed by applying the normal provisions of the IT Act, 1961 under Chapter IV. An analysis of s. 37(1) of the IT Act, 1961 shows that any expenditure not being in the nature of capital expenditure wholly and exclusively used for the purpose of business or profession shall be allowed in computing the income chargeable under the heads 'Profits and gains of business or profession'. Thus, the phraseology of s. 37(1) expressively excludes the allowability of capital expenditure even though wholly and exclusively laid out or expended for the purpose of the business. Therefore, capital expenditure debited to the P&L A/c of the assessee has to be disallowed and added back to assessee's income for the year under consideration.
The assessee's contention that the auditor has wrongly interpreted certain items of repairs as capital expenditure, is not acceptable. Assessee was given 180 days' time to submit its audit report under s. 142(2A) of the IT Act. The appointed auditor, after going through each and every bill and voucher of the assessee, on the basis of settled law, has decided whether the expenditure is capital or not. Further, during assessment proceedings also, assessee could furnish no evidence, as such, as to why certain expenditures, which have been treated by the auditors as capital expenditure, should be treated as revenue expenditure. Therefore, assessee's contention in this regard is rejected. However, for asst. yr. 2005-06, assessee's contention that certain amounts were already transferred in the books of account to capital expenditure, is acceptable and accordingly appropriate changes in the depreciation allowable under the Act is made for asst. yr. 2005-06.
Therefore, in view of the above discussion, capital expenditure of Rs. 95,49,642 debited to the P&L A/c of the assessee is hereby disallowed and added back to the assessee's income for the year under consideration."
VIII. Payment of provident fund
3.17 The AO noted from Annex. IV at page No. 54 of the audit report under s. 142(2A) that payment of employees' provident fund not paid within the due date to the extent of Rs. 21,55,881- were debited by the assessee to the P&L A/c. Similarly employer's contribution to PF amounting to Rs. 11,65,981 has also been deposited belatedly. After considering the explanation of the assessee the AO disallowed an amount of Rs. 1,16,598 being late payment of employer's contribution to PF and ESI and an amount of Rs. 21,55,881.50 as late payment of employee's contribution to PF and ESI.
IX. Penalty/Fine paid
3.18 The AO observed from Annex. V at page No. 64 of the audit report under s. 142(2A) that penalty/fine paid to the extent of Rs. 1,24,860 was debited by the assessee to the P&L A/c. The AO asked the assessee to explain as to why the same should not be disallowed as per provisions of s. 37(1) of the IT Act, 1961. In response to the same, the assessee vide letter dt. 5th July, 2008 submitted inter alia as under :
"In this context, it is submitted that we are a charitable trust and therefore, such payments should not be considered for any disallowance. We request your honour to consider that we ,are entitled to the benefit under s. 11 and therefore, the provisions of Sub-Chapter D of Chapter IV as regards business income should not be made applicable to us. What is important is, whether we have applied the income for the object of the trust or in the course of activities carried out for the purposes/objects of the of the trust. So the expenditure by way of penalties/fines should please be allowed us as application of the income in view of the aforesaid discussion."
3.19 However, the AO rejected the above explanation of the assessee on the ground that assessee's registration under s. 12A has been withdrawn and therefore its income has to be determined by applying the normal provisions of the IT Act, 1961 including s. 37 of the IT Act, 1961. According to the AO as per Explanation to s. 37(1), any expenditure incurred by an assessee for any purpose, which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Thus, penalty/fine paid cannot be allowed as a deduction to the assessee while computing its income as per normal provisions of the IT Act. Without prejudice to the same, he held that even if income is computed as per application of ss. 11 to 13, in no way, payment of penalty/fine can be considered as for the objects of the trust and, therefore, cannot be allowed even then also. The AO accordingly added back the penalty/fine paid amounting to Rs. 1,24,860 to the total income of the assessee.
X. Prior period expenses
3.20 The AO noted from Annex. VII at page No. 68 of the audit report under s. 142(2A) that prior period expenses to the extent of Rs. 13,43,097 were debited by the assessee in the P&L a/c. The AO asked the assessee to explain as to why the same should not be disallowed and added back to its income for the year under consideration. In response to the same the assessee replied as under :
"These are all the payments for the bills pertaining to the last two months of the earlier financial year and which have been received in the current financial year. Hence, they are not prior period expenses in true sense of the term. As the bills are received during the year, the corresponding liabilities have arisen in this year. Although we submit that, the items treated in the audit report as prior period items, in law, are not prior period item as the bills of most of the items were received after the date of respective balance sheets. We further submit that, in any case, these payments are application of money in the year in which the same are paid."
3.21 However, the AO was not satisfied with the explanation of the assessee. He observed from the records maintained by the assessee that assessee is following mercantile system of accounting, since mixed system of accounting is not at all recognized by the Act. He came to this conclusion on the ground that some of the expenses are provided in the books even when no payment is made for those expenditures. According to the AO once the method of accounting is decided as mercantile, assessee has to provide all the expenses either on the basis of actual bills or on estimated basis. He therefore rejected the contention of the assessee that the bills were received late and, therefore, they accrued in the year in which bills are received. According to the AO the date of bill is relevant and if the date pertains to the earlier year, then expense cannot be said to accrue in the current year. He noted that auditors have clearly specified the dates of bills of earlier year, hence, the said expenses are accrued in the prior period and, therefore, disallowable. The AO accordingly disallowed prior period expenses of Rs. 13,43,097 and added back the same to assessee's income.
4. The AO made further addition of Rs. 67,040.80 under s. 40A(3) of the IT Act. Similarly he disallowed an amount of Rs. 78,10,710.50 being revenue expenses not supported by vouchers. The AO also made addition of Rs. 7,11,837 being sale of car, Rs. 5 lakh on account of unsecured loans/deposits and an amount of Rs. 14,03,050 being interest accrued on fixed deposit in D.Y. Patil Pat Sanstha. The AO thus determined the total income of the assessee at Rs. 20,68,28,820.
5. In appeal the learned CIT(A) gave partial relief to the assessee. He deleted an amount of Rs. 11,42,81,113 being the amount advanced by the assessee trust free of interest to its related concerns D.Y. Patil Education Society by holding that the provisions of s. 13(1)(d) of the IT Act are not attracted. Similarly he deleted 50 per cent of the advertisement expenses as expenditure towards objects of the trust. The learned CIT(A) deleted proportionate disallowance of Rs. 22,91,016 out of interest to financial institutions debited by the assessee by holding that assessee's own funds are much more than the funds advanced to sister concern. He also deleted an amount of Rs. 38,37,221 being remuneration paid to relatives of the trustees by holding that nothing has been brought on record by the AO to show that market value of the services/jobs was less than the payments made to them. The learned CIT(A) further allowed development fee of Rs. 5,37,83,688 as capital receipt and deleted the addition of Rs. 1,59,676 being maintenance of flat at Gulmohar Society by holding that the assessee trust has not violated the provisions of s. 13(1)(c) of the IT Act. He also deleted the addition made by the AO being delayed deposit of employees contribution to PF. However, he confirmed the rest of the additions made by the AO and held that the assessee trust is not entitled to exemption under sec. 11 since it has violated provisions of ss. 11 to 13 of the IT Act.
6. Aggrieved with such part relief by the CIT(A) the assessee as well as the Revenue are in appeal before us by taking the following grounds :
Grounds by assessee:
"1. The learned CIT(A) erred in not appreciating that the asst. under sec. 143(3) passed by the learned AO was null and void.
1.1 The learned CIT(A) failed to appreciate that the assessment order under sec. 143(3) is null and void since no notice under sec. 143(2) was issued to the assessee trust.
2. The learned CIT(A) erred in not appreciating that the reference under s. 142(2A) for special audit was an illegal one as the AO had not given an opportunity of hearing to the assessee as required under proviso to sec. 142(2A) and consequently, the asst. order passed is barred by limitation.
2.1 The learned CIT(A) further failed to appreciate that the reference to special auditor was invalid in law and therefore, the assessment order passed was time-barred.
3. The learned CIT(A) erred in holding that the appellant trust was not entitled to the exemption under s. 11 as it had violated the provisions of ss. 11 to 13 and consequently, the income of the appellant was taxable under the normal provisions of the Act.
4. The learned CIT(A) ought to have granted exemption under sec. 11 to the appellant trust since the registration under sec. 12A was restored by Hon'ble Tribunal, Pune and therefore, the appellant was entitled to claim exemption under sec. 11.
5. The learned CIT(A) erred in holding that the appellant trust had violated the provisions of s. 13(1)(c) on account of the following payments made by it:
| Sl.No. | Particulars | Amount | |
| 1. | Advertisement expenses | 10,33,402 | |
| 2. | Expenditure on Mercedez car | 2,13,259 |
5.1 The learned CIT(A) erred in holding that 50 per cent of the advertisement expenses resulted in image building of the trustees and thereby the appellant had granted a personal benefit to the trustees resulting in violation of sec. 13(1)(c).
5.2 The learned CIT(A) failed to appreciate that the advertisement expenditure incurred by the appellant did not result in any benefit to the trustee and the expenditure incurred was in the course of achieving the objects of the appellant and there was no violation of s. 13(1)(c).
5.3 The learned CIT(A) erred in holding that the Mercedez car of the appellant being used for the personal benefit of the trustees and not for the objects of the trust and hence, the appellant had violated the provisions of sec. 13(1)(c).
5.4 The learned CIT(A) failed to appreciate that the Mercedez car was being used for the purpose of the trust and there was no evidence that the said car was being used for the benefit of the trustees and hence, the appellant has not violated the provisions of sec. 13(1)(c).
6. The learned CIT(A) further erred in holding that the following expenses were not allowable as a deduction while computing the income of the appellant because the appellant had violated the provisions of s. 13(1)(c) :
| Sl.No. | Particulars | Amount | |
| 1. | Advertisement expenses | 10,33,402 | |
| 2. | Expenditure on Mercedez car | 2,13,259 |
6.1 The learned CIT(A) failed to appreciate that the above expenses were incurred for the objects of the trust and hence, the same ought to have been allowed while computing the income of the appellant.
7. The learned CIT(A) erred in holding that part of the development fee amounting to Rs. 57,44,467 collected by the appellant from the students as per the circulars issued by the Government was a revenue receipt chargeable to tax.
7.1 The learned CIT(A) failed to appreciate that the entire development fee collected by the assessee from the students as per the circulars issued by the Government was a capital receipt and no amount was chargeable as a revenue receipt.
8. The learned CIT(A) erred in holding that the donations received by the appellant of Rs. 3,29,94,157 was taxable as income of the appellant without appreciating that the said donations were received towards the corpus of the trust and hence, the same were exempt from tax.
9. The learned CIT(A) erred in disallowing revenue expenditure of Rs. 37,19,654 on the ground that the said expenses were not supported by proper evidences.
9.1 The learned CIT(A) failed to appreciate that the disallowance of such expenses was not warranted since most of the expenses were paid by cheque and incurred for the objects of the trust.
10. The learned CIT(A) erred in confirming the disallowance of depreciation on the capital expenditure of Rs. 13,44,428 on the ground that the said capital expenses were not supported by proper evidences.
10.1 The learned CIT(A) failed to appreciate that the disallowance of depreciation in respect of such capital expenses was not warranted since most of the capital expenses were paid by cheque and therefore, the depreciation ought to have been allowed.
11. The learned CIT(A) erred in confirming the following disallowances without appreciating that since the assessee was entitled to claim exemption under sec. 11, such disallowances were not warranted while computing the income of the appellant under sec. 11.
| Sl No. | Particulars | Amount | |
| a. | Disallowance on account of late payment of employees provident fund | 27,977 | |
| b. | Disallowance on account of late payment of employer's contribution to provident fund | 27,976 | |
| c. | Penalty/Fine paid | 1,24,860 | |
| d. | Disallowance under sec. 40A(3) (20% of cash payments) | 67,041 | |
| e. | Donation paid | 8,50,000 | |
| f. | Capital expenditure debited to income and expenditure account | 95,49,642 |
12. The appellant craves leave to add, alter, amend, or delete any of the above grounds of appeal."
Grounds by Department:
"1. (i) Whether on the facts and in the circumstances of the case and in law the learned CIT(A) was justified in holding that advancing interest-free loan of Rs. 11,42,113 by the assessee to its related concern D.Y. Paul Education Society does not attract provisions of sec. 13(1)(d) of the IT Act, 1961.
(ii) Without prejudice, CIT(A) erred in not appreciating the fact that D.Y. Patil Education Society is an interested person as per s. 13(3) of the Act and therefore, advancing interest-free loan of Rs. 11,42,81,113 by the assessee to D.Y. Patil Education Society is violation of provisions of sec. 13(1)(c) of the IT Act, 1961.
(iii) CIT(A) erred in not appreciating the fact that even in case wrong provision is invoked, mentioning wrong section, i.e. sec. 13(1)(d) instead of 13(1)(c), is not fatal and it is merely a procedural lapse as held by many judicial authorities including Hon'ble Madras High Court in the case of R.P. Kandawami & Ors. v. CIT (1963) 49 ITR 344 (Mad).
2. Whether on the facts and in the circumstances of the case and in law the learned CIT(A) was justified in allowing 50 per cent of the advertisement expenses as expenditure towards objects of the trust, when the expenses were in fact for the image building of the founder trustee and not for the objects of the trust, thus squarely in violation of provisions of s. 13(1)(c).
3. (i) Whether on the facts and in the circumstances of the case and in law the learned CIT(A) was justified in deleting the proportionate disallowance of Rs. 22,91,016 from out of interest to financial institutions debited by the assessee holding that assessee's own funds are much more than the funds advanced to sister concern without appreciating the fact that assessee's own funds and borrowed funds are part of common pool of funds and assessee's own funds are not in liquid form and are in fact locked as investment in building, furniture, working capital etc.
(ii) CIT(A) failed to appreciate the fact that had the assessee not advanced interest-free loans to sister concern, there would have been no need to borrow funds from financial institutions to that extent and accordingly no need to pay interest to that extent.
4. (i) Whether on the facts and in the circumstances of the case and in law the learned CIT(A) was justified in allowing remuneration paid to relatives of trustees to the tune of Rs. 38,37,221 holding that nothing has been brought on record to show that market value of the services/jobs was less than the payments made to them when the payments were squarely covered under sec. 40A(2)(b).
(ii) CIT(A) erred in not appreciating the fact that the accounts were subject to special audit under s. 142(2A).
(iii) Without prejudice to the above, learned CIT(A) has erred in not exercising his plenary powers which are coterminous with that of AO as per the ratio laid down by CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC).
5. (i) Whether on the facts and in the circumstances of the case and in law the learned CIT(A) was justified in allowing entire amount of Rs. 24,693 on account of telephone and mobile expenses paid to the trustees at the residence of the trustees without considering the personal use of telephones and mobiles and without appreciating that no evidence was produced before the AO and were covered under s. 40A(2)(b).
(ii) CIT(A) erred in not appreciating that the accounts were subject to special audit under sec. 142(2A).
6. Whether on the facts and in the circumstances of the case and in law the learned CIT(A) was justified in allowing development fee of Rs. 5,37,83,688 as capital receipt ignoring the fact that the same was to be treated as income in view of cancellation of registration under sec. 12A and also in view of violation of sec. 13(1)(c) which automatically rendered the income chargeable to tax.
7. (i) Whether on the facts and in the circumstances of the case and in law the learned CIT(A) was justified in holding that employees contribution which was not deposited within due date under that Act is allowable as expenditure when the same was rightly disallowed by the AO.
(ii) Whether the decision of learned CIT(A) ignoring the clear distinction between employee's contribution to ESI, PF and pension fund and employer's contribution is bad in law ?
(iii) Whether the decision of learned CIT(A) ignoring the provisions of s. 2(24)(x) r/w s. 36(1)(va) as per which employee's contribution to ESI, PF and pension fund is deductible only if payment is made before the due date as prescribed in the respective Act, rule, order or notification governing such funds is erroneous and contrary to provisions of IT Act, 1961 ?
(iv) Whether the decision of Tribunal ignoring the fact that the amendment to s. 43B is applicable only to employer's contribution and not to employee's contribution is bad in law ?
(v) Whether on the facts and in the circumstances of the case and in law the learned CIT(A) was justified in ignoring the decision of Special Bench of Kolkata in the case of Jt. CIT v. I.T.C. Ltd. [2008] 115 TTJ (Kol)(SB) 45/[2008] 5 DTR (Kol)(SB)(Trib) 59/[2008] 112 ITD 57 (Kol) (SB).
8. Whether on the facts and in the circumstances of the case and in law the learned CIT(A) was justified in allowing maintenance expenses of flats at Gulmohar Society when the said flats were used exclusively by the founder of the trust violating the provisions of sec. 13(1)(c) of the Act.
9. The appellant prays that the order of the learned CIT(A) be vacated and that of the AO may be restored.
10. The appellant craves leave to add, alter, amend, modify any of the above grounds raised, any other grounds at the time of proceedings before the Hon'ble Tribunal which may be granted."
7. The learned counsel for the assessee did not press grounds of appeal, Nos. 1 to 2.1 for which the learned Departmental Representative has no objection. Accordingly Grounds of appeal Nos. 1 to 2.1 are dismissed as not pressed.
8. Grounds of appeal Nos. 3 and 4 by the assessee relate to the order of 'the CIT(A) in holding that assessee trust was not entitled to exemption under sec. 11 since it has violated the provisions of ss. 11 to 13. The learned counsel for the assessee referring to page Nos. 17 to 22 of the paper book submitted that the registration cancelled under sec. 12A was restored by the Tribunal. Therefore, there is no reason to deny exemption on this ground. He submitted that the assessee has not at all violated any of the provisions of ss. 11 to 13. However, the outcome of the results of various grounds taken by the Revenue and the assessee will have a bearing on the outcome of these 2 grounds. The learned Departmental Representative also agreed with the above propositions of the learned counsel for the assessee. We therefore deem it proper to take up these grounds later on.
9. The first issue in grounds of appeal Nos. 5 to 6.1 by the assessee and founds of appeal No. 2 by the Revenue relates to the part relief given by the CIT(A) by holding that 50 per cent of the advertisement expenses as expenditure towards objects of the trust.
10. The learned counsel for the assessee submitted that the AO disallowed the advertisement expenses on the ground that those were incurred on the occasion of birthdays of the trustees which benefited their image building and not that of the trust. Therefore, the AO disallowed the same holding that the same cannot be said to be incurred for the objects of the trust and therefore the assessee has violated provisions of ss. of s. 13(1)(c). He submitted that in appeal the CIT(A) held that although the advertisements have resulted in some amount of image building of the trustees the same too certainly resulted in image building of the various institutions run by the trustees which is evident from the space occupied by the names, highlights and achievement of the various institutions in the advertisements. He accordingly gave 50 per cent relief. The learned counsel for the assessee submitted that the advertisement expenses were incurred for the purpose of image building of the trust by highlighting the achievements of the various institutions run by the trust. Referring to some of the sample copies of advertisements issued by the trust placed at paper book page Nos. 238 to 242 he submitted that these were incurred for the purpose of image building of the trust by highlighting the achievements of the various institutes run by the trust. He submitted that the advertisements issued on the occasion of birthdays of the trustees was just incidental but the main purpose was to advertise the various institutes run by the trust. Therefore, it did not result into any benefit for the trustees and therefore the provisions of s. 13(1)(c) were not attracted.
10.1 Referring to the copy of the asst. orders for asst. yr. 2000-01 to asst. yr. 2002-03 placed at paper book page. Nos. 293 to 307 he submitted that similar expenditure claimed by the assessee trust in the preceding years were accepted by the Department and no objections were raised. He submitted that although principles of res judicata do not apply to income tax proceedings, however, the rule of consistency prevails over the doctrine of res judicata where the facts and circumstances of the case are identical. For this proposition, he relied on the following decisions :
| (i) | H.A. Shah & Co. v. CIT [1956] 30 ITR 618 (Bom); | |
| (ii) | Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC). |
He accordingly submitted that the entire advertisement expenses has to be treated as incurred for the objects of the trust and it be held that the assessee has not violated the provisions of s. 13(1)(c) of the IT Act.
11. The learned Departmental Representative on the other hand heavily relied on the order of the AO. He submitted that the advertisement expenses incurred on the birthdays of the trustees highlighting the various achievements of the institutes run by the trust are nothing but the image, building of the trustees and to improve their social image. He submitted that even though photographs of the trustees are not there in the advertisements on the birthdays of the trustees but the same amounts to publicising the trustees and this is nothing but use of public money. According to him, everybody is aware of the institutes run by the trust and therefore, the expenditure incurred on advertisements on the occasion of the birthdays of the trustees is certainly not for the objects of the trust but for the benefit of the trustees and therefore the assessee trust has violated the provisions of sec. 13(1)(c) of the IT Act. He accordingly submitted that the CIT(A) is not justified in holding that 50 per cent of the expenditure on advertisement relates to the object of the trust.
12. The learned counsel for the assessee in his rejoinder submitted that since names of the institutes are given, therefore it is enhancement of the image of the trusts and the institutes run by it only and not of the trustees. According to him, a layman comes to know about the institutes from the advertisements only. Therefore, there is no personal benefit to the trustees.
13. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find in the instant case the AO disallowed the entire amount of advertisement expenses on the ground that such expenses incurred on the occasion of birthdays of the trustees benefited the image building of the trustees and not of the trust. The learned CIT(A) restricted such disallowance to 50 per cent of the expenses on the ground that such advertisement expenses have resulted in some amount of image building of the trustees as well as image building of the various institutes run by the assessee trust. It is the submission of the learned counsel for the assessee that advertisement expenses were incurred for the purpose of image building of the trust by highlighting the achievements of the various institutes and that such expenses were allowed in the past. We find some force in the above arguments made by the learned counsel for the assessee. There is no dispute to the fact that advertisements were published in various newspapers on the occasion of the birthdays of the/trustees highlighting the achievements of the various institutes run by the trust. In the present day, when there are hundreds of institutions imparting education in various fields, it is very difficult for the common man to find out which is the best institution. It is only when he comes to know of the persons behind running of the educational institutions that the confidence level of the layman increases. Therefore, in our opinion, highlighting the achievements of the institutions run by the trust along with the names of the trustees on their birthday cannot be said to be image building of the trustees. Rather it indirectly helps the various institutes run by the trust in getting more number of students. Further, the submission of the learned counsel for the assessee that similar expenses were allowed in the past, therefore, no adverse view should be taken for the impugned assessment year also finds some force in it. The Hon'ble Supreme Court in the case of Radhasoami Satsang (supra) has observed as under :
"We are aware of the fact that, strictly speaking, res judicata does not apply to income-tax proceedings and each assessment year being a unit, what is decided in one year may not apply in the following year. But where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."
13.1 Considering the totality of the facts of the case and considering the fact that similar expenses were allowed in the past, we are of the considered opinion that no part of the advertisement expenses should have been disallowed especially when there is no dispute about the genuineness of such expenditure. Therefore, in our considered opinion there is no violation of provisions of s. 13(1)(c) of the IT Act. Accordingly, we set aside the order of the CIT(A) and direct the AO to allow the entire amount of advertisement expenditure as allowable expenditure as allowable expenditure. The ground raised by the assessee is allowed and the ground raised by the Revenue on this issue is dismissed.
14. The second issue in grounds of appeal Nos. 5 to 6.1 by the assessed relates to disallowance of expenditure on Mercedez car by holding the same to be in violation of sec. 13(1)(c) of the IT Act.
15. The learned counsel for the assessee submitted that the assessee trust had acquired the Mercedez car for the purpose of the trust and incurred expenditure on repairs and has debited such expenses and depreciation to the income and expenditure account. He submitted that various VVIP guests keep visiting the trust and therefore the assessee had purchased the Mercedez car. He submitted that the AO has simply rejected the claim of the assessee without any contrary evidence and therefore he has not discharged the burden cast on him under s. 13 of the IT Act. He submitted that the gross receipts of the assessee trust for the impugned assessment year was more than 75 crore and the assessee trust is one of the leading educational institution in the country. Therefore, by purchasing the Mercedez car for the use of the VVIP guests such as the President and the Prime Minister of India, the Chief Minister and the Governor of the State, Judges of the Supreme Court and various High Courts cannot result into any violation of provisions of s. 13(1)(c) of the IT Act. He submitted that the trust is not paying any salary to Dr. D.Y. Patil. Therefore, assuming but not admitting that the said car was used by Dr. D.Y. Patil who is the founder of the trust and because of whose efforts the trust has achieved tremendous success it cannot be said that providing the car to him for official purpose is a benefit to him. He submitted that the AO allowed the expenditure of various other cars owned by the trust but has simply disallowed the expenditure and depreciation on the Mercedez car on the ground that it has benefited the trustees under s. 13(1)(c) which has been upheld by the learned CIT(A). According to the learned counsel for the assessee for invoking the provisions of sec. 13(1)(c) the AO has to concretely demonstrate that the benefit has been actually conferred to the trustees. Merely because the assessee trust has not submitted the list of personal cars owned by the trustees the AO cannot hold that Mercedez car used by the trustees are for their personal benefit and is violation of provisions under s. 13(1)(c). He submitted that similar expenditure claimed by the assessee in the past years were accepted by the Department and no objections were raised. He submitted that even in subsequent years also no such disallowance of expenditure and depreciation on Mercedez car has been made by the AO. According to the learned Authorised Representative when the AO has no problem for other cars owned by the trust and utilised by the trustees he should not have problem for the Mercedez car. He accordingly submitted that there is no violation of provisions of sec. 13(1)(c) of the IT Act. He also relied on the following decisions :
| (i) | H.A. Shah & Co. (supra) | |
| (ii) | Radhasoami Satsang (supra). |
16. The learned Departmental Representative on the other hand heavily v relied on the orders of the AO and CIT(A). He submitted that despite being asked by the AO the assessee did not produce the details of various cars owned by the trustees. According to the learned Departmental Representative anything which is within the specific knowledge of the assessee has to be given to the AO. Since the assessee in the instant case failed to discharge the burden cast on him, therefore, the AO was justified in holding that there is violation of provisions of sec. 13(1)(c) of the IT Act.
17. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find in the instant case the AO disallowed the expenditure incurred on the Mercedez car and depreciation thereon holding the, same to be personal benefit to the trustees and therefore there id violation of provisions of sec. 13(1)(c)of the IT Act. The learned CIT(A) upheld the above proposition of the AO. It is the submission of the learned counsel for the assessee that the car is being used for the VVIP guests and that similar expenditure has been allowed in the past by the AO. We find from the copy of the assessment order for asst. yr. 2001-02 that no such disallowance has been made by the AO on account of expenditure and depreciation on the Mercedez car which was purchased during financial year 2000-01 relevant to asst. yr. 2001-02. We find merit in the submission of the learned counsel for the assessee that only because of the brand name of the Mercedez car the AO has problem whereas he has no problem on account of expenditure incurred by the assessee for various other cars owned by the trust. In our opinion, then the AO has allowed the expenditure on account of various other cars owned by the trust, therefore, merely because the assessee has purchased the Mercedez car to be used by the VVIP guests, the AO should not have disallowed the expenditure and depreciation on such motor car especially when the AO in the past has not disallowed any expenditure on the Mercedez car owned by the trust Therefore, in view of rule of consistency and in absence of any adverse material before the AO to take a contrary view we find no justification on the part of the AO and CIT(A) to hold that there is violation of provisions of sec. 13(1)(c) of the IT Act. In this view of the matter, we set aside the order of the CIT(A) and direct the AO to allow the expenditure claimed by the assessee and hold that there is no violation of provisions of sec. 13(1)(c) of the IT Act.
18. In ground of appeal No. 1 the Revenue has challenged the order of the CIT(A) in holding that advancing interest-free loan of Rs. 11,42,81,113 by the assessee trust to D.Y. Patil Education Society, a related concern, does not attract provisions of sec. 13(1)(d) of the IT Act.
19. The learned Departmental Representative submitted that initially this amount was not disallowed by the AO in the order passed under sec. 143(3). However, during the course of appeal proceedings the AO brought to the notice of the learned CIT(A) that the assessee trust had violated the provisions of s. 13(1)(d) of the Act by advancing interest-free loan of Rs. 11,42,81,113 to D.Y. Patil Education Society by investing the funds in modes other than those specified under s. 11(5) of the IT Act. He submitted that the learned CIT(A) without appreciating the fact that D.Y. Patil Education Society is an interested person as per sec. 13(3) of the Act held that advancing interest-free loan by the assessee to its related concern does not attract provisions of sec. 13(1)(d) of the IT Act. The learned Departmental Representative submitted that the assessee by giving interest-free advance to sister concern has invested its surplus money in a mode other than those prescribed under sec. 11(5) of the IT Act. He accordingly submitted that the order of the CIT(A) be set aside and the interest-free loan advanced to related concern D.Y. Patil Education Society be held to be a violation of sec. 13(1)(d) of the IT Act.
20. The learned counsel for the assessee on the other hand while strongly relying on the order of the CIT(A) submitted that D.Y. Paul Education Society is a charitable trust which is also engaged in educational activity. Since the above trust was in need of funds the assessee trust had given interest-free loan to the said trust. Referring to the provisions of sec. 11(5) he submitted that it provides various modes of investing or depositing of money. He submitted that the loan given by the assessee trust to D.Y. Patil Education Society is neither an investment nor a deposit, therefore, granting of such loan is outside the purview of sec. 11(5). Further the loan given was in order to promote the charitable objects of the trust and therefore it was not in the nature of an investment but an application of money. For the above proposition the learned counsel for the assessee relied on the following decisions :
| (i) | National Enqq. Co-ordination Committee v. Asstt. CIT [1992] 43 ITD 612 (Pune); | |
| (ii) | DIT (Exemption) v. Acme Educational Society [2010] 326 ITR 146 (Delhi) | |
| (iii) | Kanpur Subhash Shiksha Samiti v. Dy. CIT [2011] 133 ITD 182/10 taxmann.com 100 (Luck.) | |
| (iv) | DIT (Exemption) v. Alarippu [2000] 244 ITR 358/111 Taxman 511 (Delhi) | |
| (v) | CIT v. Sarladevi Sarabhai Trust No. 2 [1988] 172 ITR 698/40 Taxman 388 (Guj.) |
He accordingly submitted that the assessee has not at all violated the provisions of sec. 13(1)(d) of the Act.
21. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the fact that the assessee trust had advanced interest-free loan of Rs. 11,42,81,113 to another charitable trust D.Y. Patil Education Society. It is the case of the Revenue that by advancing such interest-free loan to D.Y. Patil Education Society the assessee trust has invested the funds in modes other than those specified under sec. 11(5) of the IT Act and therefore there was violation of provisions of sec. 13(1)(d) of the IT Act. It is the case of the assessee that it has given the interest-free loan to another trust also engaged in educational activity and that granting of such loan is outside the purview of provisions of sec. 11(5). It is also the submission of the learned counsel for the assessee that such advance was neither a deposit nor an investment and therefore granting of such loan is outside the purview of provisions of sec. 11(5). We find the learned CIT(A) while allowing the claim of the assessee stated that advancing a loan does not amount to an investment or deposit and provisions of sec. 13 also permit a charitable trust to lend money and therefore there is no violation of provisions of sec. 13(1)(d) The relevant operative part of the learned CIT(A)'s reads as under :
"49.3 In respect of loan given to D.Y. Patil Education Society, it has been clarified by the appellant that giving of such loans does not result in any violation of sec. 13(1)(d). It is to be noted that sec. 13(1)(d) prohibits investments being made in any other forms other than those prescribed in sec. 11(5). However, giving of loan is not an investment. Further, sec. 13, itself permits a charitable trust to give loans. These legal provisions make it clear that no violation has been done by the appellant. In view of these legal and factual positions, I am of the considered view that a loan given by one charitable trust to another with similar object cannot be treated as an investment but an application of income. This view was held by Delhi Tribunal in the case of Alarippu v. ITO [1997] 60 ITD 478 (Delhi). This decision of Tribunal was confirmed by Delhi High Court in Director of IT (Exemption) v. Alarippu [2000] 161 CTR (Delhi) 432 : (2000) 244 ITR 358 (Delhi). In the judgment in (2000) 161 CTR (Delhi) 432 : (2000) 244 ITR 358 (Del) (supra) Hon'ble Delhi High Court pointed out that the words 'investment', 'deposit' and 'loan' have different meaning. Relevant portion of the judgment is reproduced below :
The expressions used in both the provisions quoted above, are 'investment' and 'deposit'. The former expression means to layout money in business with a view to obtain an income or profit. Deposit, on the other hand, means that which is placed anywhere, as in any one's hands for safe-keeping, something entrusted to the care of another. These two expressions have been used in a cognate sense and have to be, understood as such. In order to constitute an investment the amount laid down should be capable of any result of any income, return or profit to investor and in every case of investment, the intention and positive on the part of the investor should be to earn such income, returns, profit in order to constitute an investment, the monies shall be laid out in such a manner as to acquire some species of property which would bring in an income to the investor. A loan, on the other hand, is granting temporary use of money, or temporary accommodation. The words investment', 'deposit' and loan' are certainly different. Sec. 11(5) refers to pattern 'of investment by the appellant sec. 11(5) was introduced by the Finance Act, 1983, w.e.f 1st April, 1983, i.e., for and from asst. yr. 1983-84. It prescribes the forms and modes of investing and depositing money referred to in sec. 11(2)(b). Subsequently, new forms and modes have been added. Sec. 13(1)(d) as amended by the Finance Act, 1983, provides that the income of any charitable or religious trust or institution will not be entitled to exemption under ss. 11 and 12, it certain conditions stipulated therein are not complied with. The word deposit does not cover transaction of loan which can be more appropriately described as directed bailment. The essence of deposit is that there must be a liability to return it to the party by whom or on whose behalf has been made on fulfilment of certain conditions. In the commercial sense, the term is used to indicate the aforesaid transaction as deposit of money for employment, in business, deposits for value to initiate security for deposit of title deeds, similar documents as security for loan, deposit of money bills in a bank in the ordinary course of business of current account and deposits of a sum at interest at a fixed deposit in a bank.'
49.3.1 In Baidya Nath Plastic Industries (P) Ltd. & Ors. v. K.L. Anand, ITO [1998] 146 CTR (Delhi) 421 : (1998) 230 ITR 522 (Delhi) it was pointed out that the distinction between loan' and 'deposit' is that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement, while in the case of the latter it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and make a demand for it.
49.3.2 A Division Bench of Delhi High Court in case of Director of IT v. Pariwar Sewa Sansthan [2002] 254 ITR 268 (Delhi) has held that no question of law arises from the order of Tribunal holding that there was no violation of provision of sec. 13(1)(d) of Act, 1961 where loan had been given by one society to another society having similar objects.
49.4 In view of the aforesaid exposition of law 1 am of the view that the loan given by the appellant to the D.Y. Patil Education Society was neither an 'investment' nor a 'deposit'. Therefore, there is no violation of provision of sec. 13(1)(d) by the appellant by giving loan to D.Y. Patil Education Society. The point raised by the AO in respect of loan given by the appellant to D.Y. Patil Education Society vide letter dt. 6th Oct., 2008 is treated as decided accordingly."
22. We find the Hon'ble Delhi High Court in the case of Acme Educational Society (supra) has observed as under :
"10. Having heard both the parties at length, we are of the view that the issue that arises for consideration in the present case is whether advancing of an interest-free temporary loan by one society to another society having similar objects is an 'investment' or a 'deposit' and whether the assessee-society had violated the provisions of sec. 13(1)(d) r/w s. 11(5) of Act 1961 ?
11. Secs. 11(5) and 13(1)(d) of the Act, 1961 are reproduced hereinbelow :
'11. Income from property held for charitable or religious purposes ……
(5) The forms and modes of investing or depositing the money referred to in cl. (b) of sub-s. (2) shall be the following, namely :
| (i) | investment in savings certificates as defined in cl. (c) of s. 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government; | |
| (ii) | deposit in any account with the post office savings bank; | |
| (iii) | deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a cooperative land mortgage bank or a co-operative land development bank). | |
| Explanation : In this clause, 'scheduled bank' means the SBI constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under s. 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under s. 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934); | ||
| (iv) | investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963); | |
| (v) | investment in any security for money created and issued by the Central Government or a State Government; | |
| (vi) | investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government; | |
| (vii) | investment or deposit in any public sector company : | |
| Provided that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company,- | ||
| (A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company; | ||
| (B) such other investment or deposit shall be deemed to be an investment made under this clause for the period upto the date on which such investment or deposit becomes repayable by such company; | ||
| (viii) | deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India and which is eligible for deduction under cl. (iii) of sub-s. (1) of s. 36; | |
| (ix) | deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under cl. (viii) of sub-s. (1) of s. 36; | |
| (ixa) | deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India. | |
| Explanation-For the purposes of this clause,- |
| (a) | 'long-term finance' means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years; | |
| (b) | 'public company' shall have the meaning assigned to it in sec. 3 of the Companies Act, 1956 (1 of 1956); | |
| (c) | 'urban infrastructure' means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport; | |
| (x) | investment in immovable property. | |
| Explanation—'Immovable property' does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth; | ||
| (xi) | deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964); | |
| (xii) | any other form or mode of investment or deposit as may be prescribed.' |
12. This Court in the case of Director of IT (Exemption) v. Alarippu (2000) 161 CTR (Delhi) 432 : (2000) 244 ITR 358 (Delhi) has pointed out that the words 'investment', 'deposit', and 'loan' have different meanings. The ; relevant observations in the said judgment are reproduced hereinbelow :
The expressions used in both the provisions quoted above, are 'investment' and 'deposit'. The former expression means to layout money in business with a view to obtain an income or profit. Deposit, on the other hand, means that which is placed anywhere, as in anyone's hands for safe-keeping, something entrusted to the care of another. These two expressions have been used in a cognate sense and have to be understood as such. In order to constitute an investment the amount laid down should be capable of any result of any income, return or profit to the investor and in every case of investment, the intention and positive act on the part of the investor should be to earn such income, returns, profit in order to constitute an investment, the monies shall be laid out in such a manner as to acquire some species of property which would bring in an income to the investor. A loan, on the other hand, is granting temporary use of money, or temporary accommodation. The words 'investment', 'deposit' and loan' are certainly different. Sec. 11(5) refers to pattern of investment by the assessee. Sec. 11(5) was introduced by the Finance Act, 1983, w.e.f. 1st April, 1983, i.e., for and from asst. yr. 1983-84. It prescribes the forms and modes of investing and depositing money referred to in s. 11(2)(b). Subsequently, new forms and modes have been added. Sec. 13(1)(d) as amended by the Finance Act, 1983, provides that the income of any charitable or religious trust or institution will not be entitle to exemption under sections. 11 and 12, if certain conditions stipulated therein are not complied with. The word deposit does not cover transaction of loan which can be more appropriately described as directed bailment. The essence of deposit is that there must be a liability to return it to the party by whom or on whose behalf has been made on fulfilment of certain conditions. In the commercial sense, the term is used to indicate the aforesaid transaction as deposit of money for employment, in business, deposits for value to initiate security for deposit of title deeds, similar documents as security for loan, deposit of money bills in a bank in the ordinary course of business of current account and deposits of a sum at interest at a fixed deposit in a bank.'
13. In Baidya Nath Plastic Industries (P) Ltd. & Ors. v. K.L. Anand, ITO [1998] 146 CTR (Delhi) 421 : (1998) 230 ITR 522 (Delhi) a learned Single Judge of this Court pointed out that the distinction between 'loan' and 'deposit' is that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement, while in the case of the latter it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and make a demand for it.
14. A Division Bench of this Court in case of Director of IT v. Pariwar Sewa Sansthan [2002] 254 ITR 268 (Delhi) has held that no question of Jaw arises from the order of Tribunal holding that there was no violation of provision of sec. 13(1)(d) of Act, 1961 where loan had been given by one society to another society having similar objects.
15. Keeping in view the aforesaid exposition of law, we are of the opinion that interest-free loan of Rs. 90,50,000 given by the assessee-society to Nav Bharti Educational Society does not violate s. 13(1)(d) r/w sec. 11(5) of Act, 1961 as the said loan was neither an 'investment' nor a 'deposit'. This is more so as both the societies had similar objects and were registered under s. 12A of Act, 1961 and had approvals under sec. 80G of the Act, 1961. The fact that the loan was interest-free and had been subsequently returned is also significant. In view of the order passed by the CIT(A) in the case of Nav Bharati Educational Society, Ms. Bansal's allegation with regard to 'entry scam' also does not survive. Consequently, there is no substantial question of law involved in the present appeal and accordingly, appeal is dismissed but with no order as to costs."
23. We find the Pune Bench of the Tribunal in the case of National Engg. Co-ordination Committee (supra) has observed as under :
"61. We shall now deal with the issue regarding the forms and modes of investing or depositing the money as per s. 11(5) r/w s. 13(1)(d) of the Act. At the outset, we make it clear that this issue cannot arise in asst. yrs. 1984-85 and 1985-86. In giving effect to the order of the CIT which did not give any finding or direction regarding this issue, the Asstt. CIT could not have travelled beyond the mandate given by the CIT. The learned Departmental Representative very rightly did not dispute this fact. It is a moot question whether the assessee will loose the benefit of exemption under sec. 11 on account of the fact that it had made advances in accordance with sec. 11(5) r/w s. 13(1)(d) of the Act. Sec. 11(5) prescribes the modes of investing or depositing the money referred to in cl. (b) of sub-sec. (2) of s. 11. Sec. 11(2)(b) refers to the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-s. (5), and it required that such money should be invested or deposited in the forms or modes prescribed under sec. 11(5). The question that arose is, whether the money advanced to ACIL is part of the money 'applied'. The question of its investment under s. 11(5) will not arise. It is therefore, necessary first to see what is the amount that was 'applied'. Both the Asstt. CIT and the CIT and the CIT(A) have equated the word 'applied' to 'spend'. The CIT(A) in para 32 of his order states that the amount advanced to ACIL cannot be considered as an application of the assessee's income. He states that the amounts have not gone out irretrievably and, therefore, it cannot be considered as an expenditure and hence there is no application of money. This approach of the CIT(A) regarding the application of income is erroneous and not keeping with the decided cases cited by the assessee's representative and even the Board's Circular No. 100, dt. 29th Jan., 1973. If the interpretation of the CIT was correct then the Board's instructions to consider the loans, scholarships granted by the educational trusts as application of income would become erroneous and contrary to law.
62. As per the settled legal position, which has been laid down in numerous decisions, it is clear that any amount which is laid out by the charitable trust or institution for achieving its charitable object constitutes an application of income to charitable purposes irrespective of whether the amount in question has been laid out irretrievably or whether the amount continued to belong to the charitable trust or the institution or it is recoverable by it. Consequently if the charitable trust lends and advances money for the purposes which are connected with its basic charitable object then such advances even though recoverable by the charitable trust from the persons to whom the same has been paid would still constitute application of income in the year in which the advances are made. We have now to see whether the amount which has been advanced by NECC to ACIL achieved the charitable purpose of NECC. We have to see the memorandum of association of ACIL and we find that its objects are harmonious and supplemental to the basic object of NECC. The activities of ACIL are also confined to operation and transaction for the benefit of poultry industry as a whole. The ACIL has been promoted by NEC for the purpose of carrying out the market operations in eggs with object of ensuring that there should not be disparity of supply and demand in different areas.
63. It was emphasised on behalf of the assessee that NECC's basic object of protecting the interest of poultry farmers would never be fully achieved unless and until it was possible to carry out such market operations in eggs on large scale. The shareholders of NECC are exclusively the poultry farmers as explained to us by Shri Ganesh. The main reason why ACIL was promoted is because the assessee could not undertake the activity of stabilising the market process which would have required large scale operations of purchase and sale of eggs. There was also need to construct cold storage in order to provide them the facilities. Large funds were necessary for these purposes. For securing financial assistance from the financial institutions public limited company would have been suitable. For all these reasons, the assessee promoted the ACIL. We find that the assessee does not hold any share in this concern.
64. We also find that the NECC is the division of ACIL for the purpose of carrying on its activities. There is no allegation or suggestions made even by the Department that the advances which were made by the NECC were for ulterior motive. We therefore, hold that the amounts advanced to ACIL constituted monies applied by the NECC to its charitable object and activities. Further the minutes of NABARD meeting wherein the said proposal to carry out the market operations was discussed and contains considerable light on the matter which makes it clear that by establishing ACIL and by carrying on regular operations the interest of poultry industries as a whole would be correctly protected. We also agree with the assessee's submissions, which were very fairly accepted by the learned Departmental Representative, that the provisions of sec. 11(5) r/w s. 13(1)(d) have no application at all whereas monies or income of the trust have already been applied to the charitable objects of the trust. Consequently, the mischief of sec. 13(1)(d) is not attracted to the present case for that reason alone. It was also contended by the assessee's representative that in any event the amounts advanced by NECC to ACIL are neither investments nor deposits as these two terms signify the lending the monies for the purposes of earning income or return in some form such as by way of interest, dividends, rents or capital gains. In the present case, the monies have been advanced to ACIL on interest-free basis and not with the object of earning any income or return therefrom but only in order to further the basic object of NECC. Further in our opinion, the decision of the Andhra Pradesh High Court in the case of Polisetty Somasundaram Charities is of no application. In that case, it was held that the term 'investment' implies that there is certain amount of risk involved in the money in question. In the present case the assessee did not advance any amount to ACIL as a lender involving such risk. Further, in lending the investment, risk is undertaken for the purpose of getting return such as interest, profit, capital gains etc. In the present case, there was no such object involved. For this reason also, we are of the opinion that such advances made by the NECC to ACIL did not constitute any investment.
65. The word 'deposit' is used in association with the word 'invest' and following the principles of 'noscitur a sociis'. The word 'deposit' has to be understood in the cognate sense with the word 'invest'. Thus the word 'deposit' considered with reference to the return thereof and the wider meaning of deposit, i.e., 'repaying money for safekeeping or by way of security performer's obligation' cannot be considered to be relevant. It can only be considered that the advancing of money is not for the purpose of earning interest. In the context of s. 11(5) this would appear to be a proper and correct interpretation. If we apply this meaning to deposit then also the advances to ACIL cannot be considered to be 'deposit' because no monetary interest was accepted therefrom. We therefore, hold that the advances to ACIL cannot be a deposit either. We are supported in this finding by the Finance Minister's Budget Speech and the notes on clauses explaining the provisions of the Finance Act, 1983 which clearly brings out that the expression 'invest' or 'deposit' used in sec. 13(1)(d) only directs the modes of investment. Once it is held that the advances made to ACIL was not investment or deposits and advances made in the asst. yr. 1988-89 also stand on the same footing. The question of contravention of s. 11(5) r/w s. 13(1)(d) does not arise and there would be no question of withdrawing the exemption under sec. 11 and sub-section of income to the maximum marginal rate also does not arise. Incidentally, we may observe that the Asstt. CIT was not justified in applying the maximum marginal rate to the gross receipts. Even though exemption under s. 11 was not available, it does not mean that the income of the assessee-trust became equal to that of gross receipts. The income of the assessee in that case should have been computed in a commercial sense, i.e., after allowing all the expenses that were laid out for the purposes of activities. If the entire activity of the assessee was business income then the Asstt. CIT should have applied the maximum rate to the business income separately computed by him and not to the gross receipts. These observations are only incidental and they would arise only if there was any justification for applying the maximum rate at all.
66. For the reasons given above, we hold that the assessee was entitled to claim exemption under sec. 11 for all the years under appeals. We, therefore, set aside the order of the CIT, Pune under s. 263 for the asst. yrs. 1984-85 and 1985-86 and of the CIT(A) for the asst. yrs. 1984-85 to 1988-89 and those of the Asstt. CIT for the asst. yrs. 1984-85 to 1988-89. We direct the Asstt. CIT to compute the income of the assessee after allowing the exemption.
67. In the result, the appellant succeeds and all the appeals are allowed."
24. We find the Lucknow Bench of the Tribunal in the case of Kanpur Subhash Shiksha Samiti (supra) has observed that granting of a loan to another society with similar objects is neither an investment nor a deposit and hence, exemption under sec. 11 was allowable.
25. We find the Hon'ble Delhi High Court in the case of Alarippu (supra) has also taken a similar view by upholding the order of the Tribunal. In that case the assessee trust had advanced Rs. 50,000 as a temporary loan to another similar society on the direction of the donor. The AO denied the exemption under sec. 11 to the assessee holding that there was infringement of provision of sec. 13(1)(d) r/w s. 11(5). On appeal, the Tribunal held that the advance was neither a deposit nor an investment and there was no infringement of provisions of s. 13(1)(d). On further appeal, the Hon'ble High Court dismissed the appeal filed by the Revenue on the ground that no question of law arises out of the order of the Tribunal since the conclusion was essentially factual.
26. We find the Hon'ble Gujarat High Court in the case of Sarladevi Sarabhai Trust No. 2 (supra) has held that if the trust makes an investment in the course of attaining its objectives, that investment is an application of income and it cannot be considered to be violative of sec. 11(5).
27. Since in the instant case the assessee trust had advanced interest-free loan of Rs. 11,42,81,113 to another charitable trust engaged in educational activity, therefore, in view of the decisions cited above we hold that granting of such loan is neither a deposit nor an investment and therefore there is no violation of provisions of s. 13(1)(d) of the IT Act. In this view of the matter and in view of the detailed discussion by the CIT(A) on this issue on the basis of various decisions we find no infirmity in the same and accordingly uphold his order on this issue. Grounds raised by the Revenue are accordingly dismissed.
28. In grounds of appeal No. 3(i) to 3(ii) the Revenue has challenged the order of the CIT(A) in upholding the proportionate disallowance of Rs. 22,91,016 from out of interest to financial institutions debited by the , assessee.
29. After hearing both the sides, we find the AO on the basis of the Special audit report held that assessee trust has incurred expenditure on account interest on loan used by Dr. D.Y. Patil Education Society which is not incurred on the objects of the trust. According to the AO the assessee had advanced funds to Dr. D.Y. Patil Education Society without charging any interest and, therefore, the interest paid by the assessee to the bank cannot be allowed as a deduction. In appeal the learned CIT(A) deleted such disallowance made by the AO by holding as under :
"21.4 I have considered the facts of the case and the submissions of the appellant. The appellant in the course of appellate proceedings has submitted a chart giving details of the own funds and the amount advanced to Dr. D.Y. Patil Education Society. As per the chart, the appellant had own funds amounting to Rs. 54.34 crore while the amount advanced to Dr. D.Y. Patil Education Society was Rs. 11.18 crore. In my opinion, since there is no nexus of the funds advanced with the loan funds of the appellant, the case of the appellant is covered by Hon'ble Bombay High Court decision in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 221 CTR (Bom.) 435 : (2009) 18 DTR (Bom) 1 : (2009) 313 ITR 340 (Bom). In this case, Hon'ble High Court has held that if the appellant has own funds much higher than the amount advanced to the sister concerns, the disallowance of interest is not justified. Accordingly, in view of the said decision, I hereby hold that the interest disallowed of Rs. 22,91,016 is not justified. Therefore, this ground of appeal is allowed."
30. We find the learned CIT(A) has given a factual finding according to which assessee trust had own funds amounting to Rs. 54.34 crore whereas the amount advanced to Dr. D.Y. Patil Education Society was Rs. 11.85 crore. He had also given a finding that there is no nexus of the funds advanced with the loan funds of the assessee. The above factual findings could not be controverted by the learned Departmental Representative. In view of the above and in view of the detailed discussion by the learned CIT(A), we find no infirmity in his order on this issue. Accordingly the same is upheld and the ground raised by the Revenue on this issue is accordingly dismissed.
31. In grounds of appeal No. 4(i) to 4(iii) the Revenue has challenged the ""order of the learned CIT(A) in deleting disallowance of Rs. 38,37,221 made by the AO being remuneration paid to relatives of the trustees.
32. The learned Departmental Representative while supporting the order of the AO submitted that the remuneration paid to the trustees and their relatives are unreasonable and not utilised for the objects of the trust Further, the assessee has failed to furnish the minute books authorising the said payments. The assessee had also not explained the nature of duties performed by Smt. Bhagyashree Patil and Shri Rajshree Kakade in order to justify the remuneration paid to them. Therefore, the remuneration paid to the various persons covered under sec. 40A(2)(b) are nothing but violation of provisions of s. 13(1)(c) of the IT Act. He accordingly submitted that remuneration paid to the trustees and their relatives to the tune of Rs. 38,37,221 was rightly disallowed by the AO under sec. 40A(2)(b) and was in violation of provisions of sec. 13(1)(c) of the IT Act.
33. The learned counsel for the assessee on the other hand heavily relied 1-on the order of the CIT(A) and submitted that in the remand report submitted during the appeal proceedings the AO has categorically stated that the above persons seemed to possess reasonable qualifications and experience. It has been further stated in the remand report that instead of disallowance of the total salary paid to all trustees and their relatives only the unreasonable payment should be disallowed. He submitted that the learned CIT(A) after considering the additional evidences produced before him and after obtaining the remand report from the AO deleted the disallowance made by the AO. He further submitted that nothing has been brought on record by the AO to prove excessiveness of the payments made to the various persons as compared to the market value of the services rendered by them and therefore the disallowance made is not justified.
34. The learned counsel for the assessee further submitted that similar payments have been made in past years by the assessee trust which was accepted by the AO and no objections were raised. For this proposition, he referred to the assessment order for asst. yrs. 2000-01 to 2002-03 placed at paper book Page Nos. 293 to 307. He submitted that although principles of res judicata do not apply to income-tax proceedings, however, rule of consistency would apply. For this proposition he relied on the following two decisions :
| (i) | H.A. Shah & Co. (supra); | |
| (ii) | Radhasoami Satsang (supra). |
35. The learned counsel for the assessee also relied on the decision of Chandigarh Bench of the Tribunal in the case of Young Scholars Educational Society v. ITO [2012] 25 taxmann.com 422 wherein it has been held that the onus to prove the excessiveness of the salary/remuneration paid to the specified persons lies on the Department and where the same has not been shown by the AO it cannot be held that the provisions of s. 13(1)(c) have been violated.
36. We have considered/the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions relied on by the learned counsel for the assessee before us. We find the AO disallowed the remuneration paid to the trustees amounting to Rs. 38,37,221 on the ground that such payment was unreasonable considering their experience and qualification and therefore the money has not been utilised for the objects of the trust for which the provisions of sec. 13(1)(c) are attracted. We find the learned CIT(A) very exhaustively analysed the facts and held that such disallowance made by the AO was unjustified and uncalled for. The relevant observation of the learned CIT(A) at paras 24.11 to 24.16 of the order reads as under :
"24.11 From the justification narrated in the preceding paras, it is obvious that the appellant, during the course of assessment proceedings, itself, gave detailed justification in respect of, among other things, remuneration/consultancy charges paid to the persons specified under sec. 40A(2)(b)/13(3) of IT Act. In its justification, the appellant specifically pointed out the nature of services/jobs rendered by these persons and has contended that payments made to them were reasonable. Under the circumstances, the appellant discharged its onus to prove reasonableness of the payments made to the persons specified under sec. 40A(2)(b)/13(3) of IT Act. The AO contended that the payments were totally unreasonable, excessive and for the personal benefit of trustees. As stated above, the AO drew this inference as the appellant failed to furnish minutes books of the meeting of board of directors. In pursuance of this failure on the part of the appellant, she concluded that payments to these persons were without any authorization. As stated above, she gave very general remark in respect of Smt. Bhagyashree Patil and Smt. Rajashree Kakade to the effect that no details of duties performed by them were available. However, a careful consideration of the material available on record reveals that the AO did not bring anything on record to prove the fact that market value of the services rendered/jobs done by these persons was less than the payment made to them. As stated above, the appellant discharged its onus in respect of proving reasonableness of payment made to these persons. Under the circumstances, onus was on the AO to prove the fact that market value of these services/jobs were less than the amount paid to these persons. However, nothing to prove the fact that market value of the services rendered/jobs done by the persons specified in s. 40A(2)(b)/13(3) was brought on record. Under the circumstances, the action of the AO in disallowing the whole amount of remuneration/consultancy charges paid to all persons specified in s. 40A(2)(b)/13(3) of IT Act was not at all justified.
Reliance of the AO on the report of the auditor under sec. 142(2A) to prove the fact that the payments were for the personal benefit of the trustees as stated in para 22(iv) is also not correct. In fact, the auditor gave a categorical statement that in the absence of relevant information excessiveness, unreasonableness of such expenses cannot be determined. This statement of the auditor has been given at serial No. 9(a) of statement of particulars which is reproduced below :
| 9. Details of amounts not deductible under sec. 40A | ||
| (a) Particulars of payment which appear to be excessive or unreasonable in terms of sec. 40A (2)(a). | Refer Annex. IX (forming part of additional report) specifying payments made to persons referred under sec. 40A(2)(b). In the absence of relevant information excessiveness/unreasonableness of such expenses cannot be determined. | |
24.12 As far as the specific compliance relating to the number of visits Smt. Bhagyashree Patil paid to the school and relating the major role played by Smt. Rajashree Kakade in the setting up of IACST (C-DAC) Centre at Kolhapur is concerned, there is nothing on record to show that such specific queries were made by the AO in the assessment proceedings and the appellant did not make compliance to these specific queries. Under the circumstances, disallowance of the whole amount of remuneration to the trustees and their relatives on the basis of, among other things, non-furnishing of details of the number of visits Smt. Bhagyashree Patil made to the school and the role played by Smt. Rajashree Kakade in the setting up of IACST (C-DAC) Centre at Kolhapur was not proper.
24.13 Even during remand proceedings, the AO has not brought on record anything to prove the fact that the market value of the services rendered/jobs done by these persons were less than the payments made to them. He has not given any specific comments in respect of the authorization of the payments to these persons by various minutes of meetings of trustees. He has pointed out that salary payment has been made to Smt. Rajashree Kakade and Smt. Supriya P.C. Patil since asst. yr. 2000-01. No resolution passed by the trust was either filed at the time assessment proceedings or at the time of current proceedings. He further observed that justification of salary payment specifically to Smt. Rajashree Kakade and Smt. Supriya P.C. Patil was never given to the satisfaction of the AO during assessment proceedings. He further stated that the AO who made the assessment had expressed her opinion only about Smt. Bhagyashree Patil and Smt. Rajashree Kakade. According to him, the AO who made the assessment had categorically held that payments made to these two ladies were disproportionate and excessive as compared to the services rendered by them. As stated above, the AO has not brought on record any material to prove that market value of the services rendered/jobs done by the persons specified in sec. 40A(2)(b)/13(3) was less than the payments made to them. Under the circumstances, the statement of the AO in the remand report to the effect that the AO who made the assessments has categorically proved that the payments made to Smt. Bhagyashree Patil and Smt. Kakade were disproportionate/excessive is not correct. The issue relating to authorization of payments to these persons has been discussed in the preceding paras.
24.14 Under the circumstances, the AO during the course of remand proceedings did not bring any material to prove the fact that excessive/disproportionate payments were made to these persons. In fact, he is of the view that there is no specific yardstick to determine whether a payment is excessive or not. He is also of the view that arm's length payment can be made to these persons. He also pointed out that the AO made the addition saying that these are the persons classified under s. 13(3). He has further stated that there is no ban in the IT Act on payment to such persons by a trust provided the payment is reasonable and proportionate to the services rendered by them. In other words, if the payment is at 'arm's length then the IT Act does not treat this as a violation. The AO has not given any categorical finding as to how the payment made to these persons is excessive and how it constitutes violation under sec. 13(1)(c). The appellant has now provided details of the educational qualifications of the persons and the duties and roles played by them. At the outset, it cannot be commented as to whether the payment is excessive or not as there is no specific yardstick to determine the same. The persons seem to possess reasonable qualifications and experience. However, whether the payment of salaries is commensurate with the qualification and experience is a subjective matter. The AO has not opined on the same. The decision on the same may be taken on merits as deemed fit. If held as unreasonable; this will indeed constitute a violation under s. 13(1)(c). However it is opined that total disallowance of salary to all trustees and their relatives is not proper. Only unreasonable salary paid to other persons will have to be disallowed.
As discussed above, nothing has been brought on record either during assessment proceeding or during remand proceeding to prove that the payments made to the persons specified under s. 40A(2)(b)/13(3) were excessive or disproportionate in comparison to the market value of the services rendered/jobs done by these persons. Under the circumstances, no disallowance on account of excessive/dispuoportionate/unreasonable payment to these persons can be made. Therefore, the disallowance on account of remuneration/consultancy charges paid to trustees/their relatives is directed to be deleted.
24.15 The AO's contention that provisions of sec. 13(1)(c) apply to the appellant's case is also not correct and is against judicial rulings on the subject. In various judicial rulings, it has been held that AO has to collect material to show that the payment to the persons specified in sec. 13(3) is unreasonable compared to the market rate for the services rendered. This view has been held recently by Hon'ble Tribunal Lucknow in the case ofITO v. Virendra Singh Memorial Shiksha Samiti (2009) 18 DTR (Lucknow) (Trib) 502. The relevant portion of the judgment is reproduced below :
17. In this regard, we refer to sec. 13 as under :
'13. (1) Nothing contained in sec. 11 or sec. 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof……...
(c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof—
| (i) | if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or | |
| (ii) | if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-sec. (3): |
(2) Without prejudice to the generality of the provisions of cl. (c) and cl. (d) of sub-s. (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-s. (3)........
(c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-s. (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services.........
(g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub-s.(3)........
(3) The persons referred to in cl. (c) of sub-s. (1) and sub-s. (2) are the following, namely :
(a) the author of the trust or the founder of the institution;
(b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution upto the end of the relevant previous year exceeds fifty thousand rupees;
(c) where such author, founder or person is an HUF, a member of the family;
(cc) any trustee of the trust or manager (by whatever name called) of the institution;
(d) any relative of any such author, founder, person, (member, trustee or manager) as aforesaid;
(e) any concern in which any of the persons referred to in cls. (a), (b), (c), (cc) and (d) has a substantial interest.'
18. Let us examine whether case of the Revenue falls under cl. (2) of sec. 13(1)(c) or under s. 13(2). It is not disputed that the person referred to in sub-s. (3) is the founder member of the trust. The condition mentioned in sec. 13(1)(c)(ii) is that income of the trust should be used or applied directly or indirectly for the benefit of any person falling in the prohibited category. Benefit here would mean some ex gratis expenditure without any contribution by such person to the society. The term 'benefit' exclude from its ambit a two way process. If the person in the prohibited category renders services and in lieu thereof a benefit is provided then the case does not fall in cl. (ii) of sec. 13(1)(c). The expenditure incurred on those interested persons would be a compensation for such services. A benefit would be said to have been given to the persons of prohibited category, if they in return do nothing but only enjoy the fruits of the trust/society and take away the funds/income of the society for their personal benefit or discharging personal obligation, but where persons of prohibited category render services to the society and in turn, get some remuneration, salary and allowances etc. as a member then provisions of sub-s. (2) would be applicable and not of sub-s. (1) and for applying the provisions of sub-s. (2) of sec. 13, it has to be shown by the Revenue that amount paid to the persons of prohibited category was in excess of what may be reasonably paid for such services. In other words, the AO has to collect material to show that payment to the persons of prohibited category was unreasonable as compared to the market rates for the services rendered. In the present case, there is no material on record firstly to show that alleged inflated expenditure has gone to the persons of prohibited category, therefore, the case of the Revenue made out on the basis of sec. 13(1) cannot be upheld. The question of invoking sec. 13(2) in the present case also does not arise because sec. 13(2) could be invoked only when there is a claim of expenses in the form of salary/allowances or perquisites to the persons of prohibited category for some services (rendered. The AO has not made out a case on these premises. Thus, 'neither sec. 13(1) nor sec. 13(2) is applicable on the facts of the present case.'
24.16 The AO in her order has stated that the payments to these persons were not authorized by the minutes of the meeting of board of directors. As discussed in the preceding paras, the AO was prevented by sufficient cause from production of minutes of meeting of trustees in which payments to various persons were authorized. In the cases where payments were not authorized by minutes of the meeting of trustees, they were authorized by the persons competent to authorize them. In any case, the issue to be examined here is whether the market value of the services rendered/jobs done was less than the payments made to the respective persons. As discussed above, nothing has been brought on record to show that market value of these services/jobs were less than the payments made in respect of them. Under the circumstances, I am of the considered view that disallowance on account of remuneration/consultancy charges to trustees and their relatives amounting to Rs. 38,37,221 cannot be made. Therefore, part of these grounds of appeal relating to the payments to the trustees and their [relatives on account of salary and consultancy charges are allowed."
37. The learned Departmental Representative could not controvert the findings given by the learned CIT(A). Further we find nowhere in the assessment order the AO has brought on record how much should have been the reasonable remuneration to the" trustees and their relatives and what amount paid by similarly placed organisations to their employees. The submission of the learned counsel for the assessee that in the past also such type of payments were made and it was accepted by the Department in scrutiny assessments for asst. yrs. 2000-01 to 2002-03 (placed at paper book page Nos. 293 to 307) and no disallowance has been made could not be controverted by the learned Departmental Representative. Under these circumstances and in view of the exhaustive order passed by the learned CIT(A) giving reasons for such deletion and in absence of any contrary material brought to our notice against the findings given by the CIT(A), we do not find any infirmity in the order of the learned CIT(A) deleting the disallowance made by the AO under sec. 40A(2)(b) of the IT Act. Since the disallowance has been deleted by us, therefore, we hold that there is no violation of provisions of sec. 13(1)(c) of the IT Act. Accordingly, the grounds raised by the Revenue are dismissed.
38. In grounds of appeal No. 5 the Revenue has challenged the order of the CIT(A) in deleting the disallowance of Rs. 24,693 made by the AO on account of telephone and mobile expenses incurred by the assessee trust.
39. After hearing both sides we find the AO has discussed this issue at para Nos. 21 to 24 of the assessment order. According to the AO the assessee has not offered any explanation regarding the payment of telephone and mobile expenses of some of the trustees. The AO also referred to the report of the special auditor wherein it has been mentioned that such expenditure incurred is for the benefit of the persons specified under sec. 13(3) of the IT Act. The AO therefore disallowed such payments by holding that the assessee had violated the provisions of sec. 13(1)(c) of the Act. In appeal the learned CIT(A) deleted the addition on the ground that the assessee had duly explained the justification of the telephone and mobile charges of the trustees incurred by the trust during the assessment proceedings itself. He further held that the AO had not brought any concrete evidence on record to prove that the said expenses resulted in a benefit to the concerned persons and therefore there is no violation of provisions of sec. 13(1)(c) of the IT Act.
40. It is the submission of the learned Departmental Representative that since the assessee had not offered any explanation regarding such payments during the assessment proceedings, therefore, expenses incurred for the trustees is a violation of the provisions of sec. 13(1)(c) of the IT Act. It is the submission of the learned counsel for the assessee that the trustees whose telephone and mobile expenses are borne by the assessee-trust are the key persons of the trust and because of their whole-hearted efforts the trust had grown remarkably. Further, similar expenses were allowed in the past and there was no disallowance on this account. We find merit in the above arguments by the learned counsel for the assessee. From the copy of the assessment order for asst. yrs. 2000-01 to 2002-03 placed at paper book page Nos. 293 to 307 we find no such disallowance has been made by the AO in the scrutiny assessments on account of telephone and mobile expenses incurred by the trust for the trustees. We find that the learned CIT(A) while deleting the disallowance has discussed the issue at para 26.4 of his order which reads as under :
"46.4 I have considered the submissions of the appellant. There is no doubt that the appellant trust has incurred telephone/mobile expenses of the trustees. The appellant has argued that the trustees are working for the trust and it is in the interest of the trust that telephone/mobile are provided to the trustees. Payments in respect of telephone/mobile are basically reimbursement of the expenses incurred for the purposes of the trust. The AO disallowed these expenses and considered them resulting into personal benefit to the trustees mainly on account of the fact that, according to him, the appellant purposely kept mum on the telephone charge on the payments made to the trustees and their relatives. However, a closer look at the assessment proceedings reveals that the appellant during the course of assessment proceedings, itself, clarified that, among others, (payment on account of telephone expenses was not for the benefit of any trustees but were reimbursement of expenses. The relevant portion of the submission dt. 30th June, 2008 of the appellant, which was received in the office of the AO during assessment proceedings on 1st July, 2008 is as under :
Query No. 6 :………
The auditor's report points that apart from remuneration, items like travelling expenses and telephone expenses incurred on the trustees. It is submitted that, both the payments are not for the benefit of any trustee but are the reimbursement of expenses, (sometimes direct payment by us) incurred by them for the purposes of the trust.
Therefore, the statement of the AO that the appellant purposely kept mum on telephone charges is not correct. The AO did not bring on record anything to controvert the statement of the-appellant that the payment on account of telephone expenses was, in fact, reimbursement of expenses incurred for tile purposes of trust. Therefore, I find merit in the contention of the appellant that the AO has simply disallowed the expenditure without pointing out any specific violation committed by the appellant trust. The appellant has also placed reliance on the decision of Tribunal Cochin in the case of George Educational, Medical & Charitable Society v. Asstt. Director of IT (Exemption) (2002) 75 TTJ (Coch) 186 : (2002) 80 ITD 619 (Coch) wherein it has been stated that for invoking the provisions of sec. 13(1)(c), onus is on the Department to prove that the appellant has committed any violation. Honable Tribunal in the case of George Educational, Medical & Charitable Society (supra) has held that in the case of a charitable trust, disallowance of expenditure for personal use if made, has serious consequences by way of attracting the provisions of s. 13(1)(c) or higher rate of tax under s. 164(2). For invoking these sections, onus is on the Department to prove personal element in the context of use of assets or incurring of expenditure. Relevant portion of the judgment is reproduced below :
'18.............
It may be observed that the genuineness of the expenditure is not doubted. It is not as though the expenditure is not doubted. It is not as though the expenditure is unvouched. The claim of the assessee is that the governing council members, inclusive of the chairman, were normally residing outside India. The work of the trust took them to different places like Palghat, Trivandrum, Mavelikara, etc. There are also sufficient withdrawals from the NRE account of the chairman to explain his personal visits. We see no reason for the above disallowances. The disallowances aggregating to Rs. 44,048 is deleted in this context we may mention that in the computation of business income, normally certain disallowances are made for probable personal use of assets/expenditure on the ground that there is no sufficient evidence by way of logbook, etc. However, in the case of a charitable trust, such disallowances for personal use if made have serious consequences by way of attracting the provisions of s. 13(1)(c) or higher rate of tax under sec. 164(2) of the IT Act. For invoking these sections, we are of the view that the onus is on the Department to prove personal use in the context of use of assets or incurring of expenditure. Such onus has not been discharged in respect of the disallowance of the travelling expenses.'
19. Similar is the position with regard to the disallowance of Rs. 13,475 out of telephone expenses ……………….
Again it is not the case of the Revenue that the expenditure is not vouched. They have made the impugned disallowance only on surmises or estimate for the possible personal use of telephone by the chairman. Simply because the calls are frequent between Singapore and Trivandrum, it cannot be assumed that they are not relatable to the work of the trust. As the assessee admittedly has a centre in Trivandrum and the governing council members are staying in Singapore, it is quite possible that the directions of the governing council members were sought or that they gave instructions to their office at Trivandrum. In respect of the disallowance, of telephone expenses at the office, the CIT(A) reduced the disallowance, but confirmed a portion, again only on surmises. Considering the serious consequences that could flow, like the denial of exemption under sec. 11, disallowance for personal user by trustees cannot be countenanced, unless proved.
There is no such proof in respect of the disallowances in the present case. We accordingly delete the disallowance of Rs. 13,475 out of telephone expenses.
Accordingly, in view of the above decision, I hold that in the absence of concrete evidence brought on record by the AO to indicate that the assessee has given benefit to the concerned persons, there is no violation of sec. 13(1)(c). Further, the disallowance made by the AO is also deleted. Accordingly, this ground of appeal is allowed."
41. The learned Departmental Representative could not controvert the above findings given by the learned CIT(A). In view of the detailed discussion by the learned CIT(A) and considering the fact that no such disallowance was made in the scrutiny assessments for asst. yrs. 2000-01 to 2002-03 and in absence of any contrary material brought to our notice we find no infirmity in the order of the learned CIT(A) deleting the disallowance on account of telephone and mobile expenses. Accordingly, the order of the CIT(A) on this issue is upheld and the grounds raised by the Revenue are dismissed. Since the expenses are allowed as for the objects of the trust, there is no violation of provisions of sec. 13(1)(c) of the IT Act.
42. In ground of appeal No. 8 the Revenue has challenged the order of the CIT(A) in allowing the maintenance expenses of flats at Gulmohar Society which were exclusively used by the founder of the trust violating the the provisions of sec. 13(1)(c) of the IT Act.
42.1 The learned Departmental Representative submitted that during the physical verification of the flats it was noticed that flat No. F8 in Gulmohar Society is occupied by the caretaker who takes care of the maintenance of the other 3 flats. Referring to the statement of one of the caretaker Sri Sadashiv Bapu Paul recorded on 6th Sept., 2007 he submitted that the said caretaker has stated that combined flats belonging to the trust were being used by Dr. D.Y. Patil during his visit to Pune. Therefore, the flats claimed as being the guest house of the trust are in fact being used for the exclusive benefit of Dr. D.Y. Patil. Therefore, the AO was justified in holding that the maintenance expenses incurred by the assessee-trust on the flats were in violation of provisions of sec. 13(1)(c) of the IT Act. He accordingly submitted that the order of the AO be upheld.
43. The learned counsel for the assessee on the other hand submitted that on the basis of the remand report obtained from the AO and the affidavit of the caretaker Sri Sadashiv Bapu Patil the learned CIT(A) has deleted the addition. He submitted that the learned CIT(A) has categorically given the finding that the statement of Sri Sadashiv Bapu Patil was recorded at the back of the assessee and no opportunity of cross-examination was offered to the assessee in this regard. The learned counsel for the assessee further submitted that Dr. D.Y. Patil frequently visits Pune for the work of the assessee trust and he stays at the guest house as he does not own any residence at Pune. Further, the said flats are also used as guest house of the trust for its guests including some professors until they arrange their own accommodation. He submitted that the premises are also used for the official meetings of the trust as the main office of the trust is at Pimpri which is faraway from the city. All the above facts have been confirmed by Shri P.D. Patil who is the trustee looking after the administrative matters of the assessee-trust and his confirmation has been placed at page No. 244 of the paper book. He accordingly stated that it cannot be said that the above flats were used for the exclusive benefit of the trustee Dr. D.Y. Patil. Referring to the affidavit of Sri Sadashiv Bapu Patil (placed at page No. 243 of the paper book) the learned counsel for the assessee submitted that he has clarified that the said flats were also used by other guests along with its use by Dr. D.Y. Patil.
44. The learned counsel for the assessee further submitted that copy of statement of Sri Sadashiv Bapu Patil was not available to the assessee and he was not given any opportunity of cross-examination, therefore, any material collected at the back of the assessee and utilisation of the same against the assessee without confronting the same to the assessee is against the principles of natural justice and therefore such material has got no evidentiary value. For this proposition, the learned counsel for the assessee relied on the following two decisions :
| (i) | Kishinchand Chellaram v. CIT [1980] 125 ITR 713/4 Taxman 29 (SC); | |
| (ii) | CIT v. Eastern Commercial Enterprises [1994] 210 ITR 103 (Cal.) |
44.1 The learned counsel for the assessee submitted that similar expenses were claimed by the assessee in the past has been accepted by the AO in scrutiny assessments for asst. yrs. 2000-01 to 2002-03 (paper book pp. 293 to 307). Further the AO in the remand proceedings has accepted that salary paid to the caretaker cannot be disallowed because the assessee was having a guest house. Therefore, it is not proper on part of the Revenue to agitate the same in appeal. For this, proposition the learned counsel relied on the decision of Hon'ble Bombay High Court in the case of Jivatlal Purtapshi v. CIT [1967] 65 ITR 261. He also, relied on the following decisions :
| (i) | C. Vasantlal & Co. v. CIT [1962] 45 ITR 206 (SC); | |
| (ii) | Asstt. CIT v. Mahesh T. Patodia [2001] 79 ITD 40 (Pune); | |
| (iii) | Bansal Strips (P.) Ltd. v. Asstt. CIT [2006] 99 ITD 177 (Delhi) | |
| (iv) | H.A. Shah & Co. (supra). | |
| (v) | Radhasoami Satsang (Supra) |
He submitted that the learned CIT(A) after discussing exhaustively has deleted the disallowance. Therefore, the order of the CIT(A) should be upheld and the grounds raised by the Revenue should be dismissed.
45. We have considered the rival arguments made by both the sides, persued the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO disallowed the maintenance expenses of flats at Gulmohar Society on the ground that those flats are exclusively used by Br. D.Y. Patil and therefore there violation of provisions of sec. 13(1)(c) of the IT Act. We find the learned CIT(A) had given a categorical finding that the said flats are not exclusively used by Dr. D.Y. Patil but also by other guests. It is the submission of the learned counsel for the assessee that the statement recorded from the caretaker Sri Sadashiv Bapu Patil was not given to the assessee and the assessee was not afforded an opportunity to cross-examine Sri Sadashiv Bapu Patil. It is also the submission of the learned counsel for the assessee that affidavits of certain other professors who stayed at the guest house were furnished who have confirmed that they have stayed in the guest house. Therefore, it cannot be said that such guest house is exclusively used by Dr. D.Y. Patil. It is also the submission of the learned counsel for the assessee that no salary has been paid to Dr. D.Y. Patil and if he would have stayed in any hotel the expenditure would have been much more than the expenditure incurred on account of maintenance of the flats used as guest houses. Further there is nothing adverse in the remand report given by the AO. It is also the submission of the learned counsel for the assessee that similar expenses were allowed in the past and no disallowance was made in the preceding year. We find merit in the above submissions of the learned counsel for the assessee. From the copy of the assessment orders for asst. yrs. 2000-01 to 2002-03 we find no such disallowance has been made. Therefore, in view of the rule of consistency alone no disallowance should have been made on account of maintenance of flats. We also find merit in the submission of the learned counsel for the assessee that Dr. D.Y. Patil has not been given any salary and if he would have stayed in any hotel the expenditure would have been much more than the' expenditure incurred on account of maintenance of the guest houses.
45.1 We find that the learned CIT(A) while deleting the disallowance has exhaustively discussed the issues at paras 22.8 to 22.17 of his order which read as under :
'22.8. I have considered the facts of the case, the submissions made by the appellant, remand report of the AO, rejoinder of the appellant thereon and other material available on record. The AO, while making this addition, has placed heavy reliance on the statement of the caretaker of the guest house. Perusal of the assessment proceedings reveals that the only query made in respect of guest house was relating to the details of the expenses incurred thereon. The AO did not disclose her intention to make disallowance of the expenses incurred on the maintenance of guest house on the basis of the statement of the caretaker. Nor did she give the statement of caretaker of the guest house to the appellant for its comments/rebuttal etc. In fact, the appellant was not told anything about this statement during the course of assessment proceedings. The appellant came to know about the contents of the statement of the caretaker only after assessment order was passed. After it received the assessment order, the appellant objected to the use of the statement of the caretaker which was taken at its back. It contended that the statement taken at its back could not be used without giving an opportunity to cross-examine. It gave one note during appellate proceeding. In its note, it vehemently argued that certain statement recorded of certain person in the course of assessment proceeding were used to its disadvantage without giving an opportunity to it to examine the statement and exercise its right to cross-examine the person who made the statement. The relevant portion of the note is as under :
| (1) | The learned AO has completed the assessment for asst. yrs. 2000-01 to 2006-07. While making the assts, the learned AO has relied upon the statements of a few persons. In respect of asst. yr. 2005-06, the learned AO has made an addition of Rs. 50.85,000 on the ground that the assessee had received the said amount from Shri R.S. Yadav. For giving admissions to certain students. From paras 62-66 of the order for asst. yr. 2005-06, the learned AO has. referred to the facts and has also relied upon the evidence found with Shri R.S. Yadav in the search proceedings conducted on him. The learned AO has also relied upon the order of learned CIT cancelling the registration under sec. 12A. The assessee had requested the learned CIT in the context of cancellation of registration under sec. 12A and also the learned AO during the asst. proceedings for an opportunity to cross-examine Shri R.S. Yadav. The learned CIT in his order cancelling the registration has stated that no useful purpose would be served by allowing cross-examination of Shri R.S Yadav to the assessee. The relevant paras has been reproduced by the learned AO on pp. 29 and 30 of the asst. order for asst. yr. 2005-06. The AO following the order of CIT(C) did not grant any opportunity to cross-examine Shri R.S. Yadav and made an addition of Rs. 50,85,000. | |
| (2) | Secondly, for asst. yr. 2001-02 to asst. yr. 2006-07, the learned AO has disallowed the expenses incurred on the guest house of the assessee society at Gulmohar Hsg. Soc, Pune. The learned AO has stated that the expenditure resulted in benefit to the trustees. While making the disallowance, the learned AO recorded the statement of Shri. Sadashiv Bapu Patil, caretaker of the guest house. She has reproduced the relevant portion of his statement on p. 14 of the order for asst. yr. 2001-02. Thus, the learned AO has relied upon the statement of Shri S.B. Patil while making the disallowance. The assessee submits that the learned AO did not even give the copy of the statement of Shri S.B. Patil to the assessee. It is submitted that this disallowance has been made without giving any opportunity to the assessee society to cross-examine Shri S.B. Patil. | |
| (3) | In view of the above, it is clear that the AO has relied upon the statements of third parties and also the evidence found with' them while making the addition. However, she did not give any opportunity to the assessee to cross-examine Shri Yadav or Shri Patil before making the addition. It is submitted that this action on the part of the learned AO in not granting cross-examination is not justified. Supreme Court in the case of Kishinchand Chellaram v. CIT [1980] 19 CTR (SC) 360 : [1980] 125 ITR 713 (SC) has held that if any statement of a third party is to be used against the assesses, an opportunity should be given to the assessee to cross-examine the third party before any inference can be drawn from the statement. On p. 720, Hon'ble Supreme Court has held that 'it is true that the proceedings under the income-tax law are not governed by strict rules of evidence and therefore, it may be said that even without calling the manager of the bank to prove this letter, it could be taken into account as evidence. But before the IT authorities could rely upon it, they were bound to produce it before the assessee so that the assessee could controvert the" statements contained in it by asking for an opportunity to cross-examine the manager of the bank with reference to the statements made by him'. | |
| (4) | Similarly, in the case of CIT v. Eastern Commercial Enterprises [1995] 123 CTR (Cal) 217 : (1994) 210 ITR 103 (Col), Hon'ble High Court held that the assessee must be given an opportunity to cross-examine the witness. In this case, the learned AO had relied upon a statement of Shri Ram Sevak Sukla while Making the addition. High Court held that the learned AO ought to have given an opportunity to the assessee to cross-examine Shri Sukla before making an addition. Further, Supreme Court in the case of C. Vasantlal & Co. v. CIT[1962] 45 ITR 206 (SC) has held that the learned AO can collect material to facilitate the asst. However, if he desires to use the material so collected, the assessee must be informed of the material collected and should be given an opportunity of explaining it. Similar view has been taken in the following decisions : |
| (a) | Bansal Strips (P) Ltd. & Ors. v. Asstt. CIT [2006] 100 TTJ (Delhi) 665 : (2006) 99 ITD 177 (Delhi);; | |
| (b) | Asstt. CIT v. Mahesh T. Patodia (2001) 73 TTJ (Rune) 975 : (2001) 79 ITD 40 (Pane). |
| (5) | In view of above decisions that the learned AO was duty-bound to give an opportunity to the assessee before relying on the statements of Shri Yadav and Shri S.B. Patil. The contention of the AO and the CIT(C) that no useful purpose would be served by granting an opportunity to cross-examination is without any merit and against the principles laid down by the Supreme Court and High Courts. |
22.9 The above note was sent to the AO for his comments. He was also requested by the then CIT(A) to consider the request of the appellant, furnish the document and allow the appellant to cross-examine the person. The AO was also requested to give reasons in case he was of the view that request of the appellant cannot be granted to. Relevant portion of the letter of the then CIT(A) is reproduced below :
The above appeals are being heard in the course of hearing of the above appeals, the appellant has vehemently argued that certain statement recorded of certain persons in the course of assessment proceedings have been used to the disadvantage of the appellant without giving an opportunity to the appellant to examine the statement and exercise its right to cross-examine the persons who have made the statements. The appellant has submitted a detailed note pointing out such instances where evidences relied upon by the AO was not furnished to the appellant. The note is enclosed at Annex. A to this letter.
2. You are requested to consider the request of the appellant and furnish the documents to the appellant and as well as allow the appellant to cross-examine the persons. The action taken by you may kindly be reported to this office. In the event, you are of the view that the request of the appellant cannot be granted, the reasons for the same may kindly be included in the report.
3. In the course of appellate proceedings, the appellant has submitted 15 items of evidence which were not submitted before the AO at the time of assessment. The evidence is therefore in the nature of additional evidence. The list of 15 items is at Flag AA of the volume titled 'index'. The evidence appears to be relevant in taking a decision on the issues in appeal. It is stated by the appellant that the evidence could not be produced before the AO due to non-availability of documents at the time of assessment due to paucity of time and other reasons. The written submission and paper book in 10 volumes is enclosed. The additional evidence is present in different volumes. The set number and the page number of the documents are mentioned in the list at Flag AA of the annexed volume.
3.1 You are requested to kindly examine the additional evidence submitted by the appellant and submit your comments on the admissibility on the same along with reasons. You are also requested to kindly offer your comments on the additional evidence furnished by the appellant.
4. At Flag BB of the annexed volume, there is a list of items of evidence which according to the appellant were with the AO but were not considered, this evident from the fact that there is no mention of such evidence in the relevant portion of the assessment order. The appellant has requested that the evidence which is with the Department and which appears not to have been considered should be considered while taking a decision in appeal. Cross-reference to the documents including set and page number of the paper book is given in the list at Flag BB.
5. You are requested to kindly study the above evidence and offer your comments as to whether any such evidence influences the decision taken in the assessment on the relevant issue, in any significant manner. At the same time, you may also confirm whether such evidence was on record at the time of assessment.
6. The paper books filed by the appellant in 10 volumes are enclosed It is requested that the report on the above issues may kindly be sent expeditiously. If there is any further issue you would like to bring to my notice, the same may kindly be incorporated in your report.
22.10 The AO did not give opportunity to the appellant to cross-examine caretaker of the guest house, on the basis of whose statement, addition in respect of disallowance of guest house expenses was made. However, he gave copy of the statement of the caretaker to the appellant. In his report, he stated that the issue relating to cross-examination has been dealt with not only by the AO in her assessment order but even by CIT(Central), Pune while deciding the issue in respect of registration under sec. 12AA of IT Act. He also stated that right of cross-examination is not an absolute right. The relevant portion of the report of the AO is reproduced below :
(C) Kind reference is invited to paras 1 and 2 of your office letter dt. 17th March, 2009 wherein it is directed to consider the request of the appellant and furnish the documents to the appellant and as well as allow the appellant to cross-examine the persons whose statement recorded and have been utilized while finalizing the assessment.
24. In this regard it is submitted that statements of two persons namely (1) Shri R.S. Yadav, a broker between the assessee-trust and aspiring students and (2) Shri Sadashiv Bapu Patil, caretaker of the guest house 'are utilized while finalizing the assessment. A copy of statement of Shri R.S. Yadav was made available to the assessee. This is evident from the assessee's own submission on Statements of Shri Yadav filed before the AO vide letter dt. 11th July, 2008. At this time the assessee has never asked for cross-examination of Shri Yadav. Now the assessee cannot ask for such cross-examination. The ethos underlying the principles of natural justice make it sufficiently clear that once an adequate and reasonable notice is given, it is for the assessee to avail of that opportunity; when for no good reason, opportunity is not taken, the assessee cannot complain that principles of natural justice are violated [Vineet Enterprises v. State of Andhra Pradesh [1996] 101 STC 426 (AP)].
25. Similarly a copy of statement of Shri Sadashiv Bapu Patil, caretaker of the guest house is now made available to the assessee. As such direction in respect of furnishing the document to the assessee is complied. In respect of affording opportunity to cross-verify the persons mentioned above it is submitted that this issue has been dealt with not only by the AO in her assessment order but even by the CIT(C), Pune, while deciding the issue in respect of registration under sec. 12AA of the IT Act. It is further submitted that the right of cross-examination is not an absolute right. (Nath International Sales v. Union of India 1992 AIR Delhi 295), the right of hearing does not necessarily include right of cross-examination [State of J&K v. Bakshi Gulam Mohammad AIR 1967 SC 122).
26. Not only that, it is humbly submitted that CIT(A)'s powers are coterminous with that of AO. He holds a good enough jurisdictions over the issue and therefore, the CIT(A) may call these persons at his office and may afford an opportunity to the assessee subject to granting an opportunity to the AO to cross-verify the witnesses.
22.11 The issue relating to the statement of Shri R.S. Yadav has been dealt with in the appeal order of the relevant assessment year.
22.12 As far as issue relating to the statement of Shri Sadashiv Patil, caretaker of the guest house is concerned, a careful perusal of the remand report of the AO reveals that he has relied mainly on the discussion of the AO in the assessment order and of the CIT (Central) while deciding the issue in respect of registration under sec. 12AA of the IT Act. However, he has not brought on record the discussion of the AO and CIT(Central) where they specifically dealt with the issue relating to cross-examination of Shri Sadashiv Bapu Paul, caretaker of the guest house. In fact, while discussing the issue relating to disallowance of guest house Expenses, the AO has not discussed the issue relating to cross-examination of caretaker of the guest house at all, nor any reference of any such discussion of CIT(Central) was made. Under the circumstances, the statement of the AO that the issue relating to cross-examination of Shri Sadashiv Bapu Patil, caretaker has been discussed by the AO in the assessment order and by the CIT(Central) while deciding the issue of [registration under sec. 12AA of IT Act is not correct. Reliance of the AO on the case laws of Nath International Sales v. Union of India (supra) and State of J&K v. Bakshi Gulam Mohammad (supra) is, as discussed in paras 20.11.2 and 20.11.1, also not correct.
22.12.1 Reliance of the AO on the observation of Hon'ble Supreme Court to the effect that right of hearing does not necessarily include right of cross-examination in the case of State of Jammu & Kashmir v. Bakshi Ghulam Mohammad (supra) is misplaced. The AO misunderstood, misinterpreted and misquoted this observation of the Hon'ble Supreme Court. The above observation was made by the Supreme Court with reference to the right of cross-examination of the persons who had sworn affidavit supporting allegation against petitioner under Jammu & Kashmir Commission of Inquiry Act. This observation was given by Hon'ble Court in the particular set of facts and circumstances of that case. Facts and circumstances of the appellant's case are entirely different. In fact, the ratio of judgment given by the Hon'ble Court in the case of State of Jammu & Kashmir v. Bakshi Ghulam Mohammad (supra) supports cross-examination of the caretaker in the appellant's case. In the case of State of Jammu & Kashmir v. Bakshi Ghulam Mohornmad (supra), the first respondent became a member of the Council of Ministers of the State of Jammu and Kashmir in 1947 and was the Prime Minister of the State from 1953 to January, 1963, when he resigned. Thereafter a notification was issued by the State Government under sec. 3 of the Jammu and Kashmir Commission of Inquiry Act, 1962 setting up a Commission to inquire into the wealth, acquired by the first respondent and certain specified members of his family during his period of office, the Commission was also to inquire whether in acquiring this wealth there was any abuse of his official position by the first respondent or the said relatives. The CIT so appointed held certain sittings between February, 1965 and August, 1965 in which the first respondent took part. In September, 1965 he filed a writ petition before the High Court of Jammu and Kashmir and the High Court, allowing the said petition, set aside the notification instituting the inquiry and quashed the proceedings of the Commission. The State appealed to the Supreme Court. Hon'ble Supreme Court, among other things, examined the issue relating to cross-examination of the persons who gave affidavits against first respondent. This issue was examined with reference to the relevant Act i.e. Jammu and Kashmir Commission of Inquiry Act. After examination of the issue, Hon'ble Court was of the view that right of cross-examination must depend upon circumstances of each case and also on the relevant statute. In Jammu & Kashmir Commission of Inquiry Act, right to cross-examination has been assured in respect of witnesses called to depose against the person demanding the right. However, there is no such provision in respect of the person who gave affidavit against the person demanding such rights. Therefore, this judgment ensures, in unambiguous terms, right of cross-examination against the witness who has deposed against the person. The case of the appellant falls under this category. The AO while making disallowance in respect of guest house expenses, relied, substantially, on the statement of the caretaker. Under the circumstances, in view of the ratio pronounced by the Hon'ble Court in the case of State of Jammu & Kashmir v. Bakshi Ghulam Mohammad (supra), cross-examination of caretaker should have been allowed by the AO as he relied on his statement and used the same against the appellant. It is not the case of the AO that caretaker filed an affidavit against the appellant. Even in the case where affidavits are filed, cross-examination of the person giving the affidavits may be allowed after considering facts and circumstances of the case. However, in this case, Hon'ble Supreme Court upheld that when evidence is given viva-voce against the person, he (the person against whom such evidence in the form of viva voce has been given) must have the opportunity to hear it and to put the witness question in cross examination. The relevant portion of the judgment is reproduced below :
The next point is as to the right of cross-examination. This claim was first based on the rules of natural justice. It was said that these rules require that Bakshi Ghulam Mohammad should have been given a right to cross-examine all those persons who had sworn affidavits supporting the allegations against him. We are not aware of any such rule of natural justice. No authority has been cited in support of it. Our attention was drawn to Meenglas Tea Estates v. Their Workmen, but there all that was said was that when evidence is given viva voce against a person be must have the opportunity to hear it and to put the witnesses questions in cross-examination. That is not our case. Furthermore, in Meenglas Tea Estate case the Court was not dealing With a fact finding body as we are. rules of natural justice require that a party against whom an allegation is being inquired into should be given a hearing. Bakshi Ghulam Mohammad was certainly given that It was said that the right to the hearing included a right to cross-examine. We are unable to agree that is so. The right must depend upon the circumstances of each case and must also depend on the statute under which the allegations are being inquired into. This Court has held in Nagendra Nath Bora v. Commr. of Hills Division and Appeals, Assam that 'the rules of natural justice vary with the varying constitution of statutory bodies and the rules prescribed by the Act under which they function; and the question whether or not any rules of natural justice had been contravened, should be decided not under any preconceived notions, but in the light of the statutory rules and provisions'. We have to remember that we are dealing with a statute which permits a Commission of Inquiry to be set up for fact-finding purposes. The report of the Commission has no force proportion vigorous. This aspect of the matter is important in deciding the rules of natural justice reasonably applicable in the proceedings" of the Commission of Inquiry under the Act. Then we find that sec. 10 to which we have earlier referred, gives a right to be heard but only a restricted right of cross-examination. The latter right is confined only to the witnesses called to depose against the person demanding the right. So the Act did not contemplate a right of hearing to include a right to cross-examine. It will be natural to think that the statute did not intend that in other cases a party appearing before the Commission should have any further right of cross-examination. We, therefore, think that no case has been made out by Bakshi Ghulam Mohammad that the rules of natural justice require that lie should have a right to cross-examine all, the persons who had sworn affidavits supporting the allegations made against him.
In view of the ratio laid down by the Hon'ble Supreme Court in the above-mentioned case to the effect that when evidence is given viva voce against the person, he must have the opportunity to hear and to cross-examine the person giving such evidence, the AO's contention that cross-examination of the caretaker was not required is not correct.
24.12.2 Reliance of the AO of the judgment of Hon'ble Delhi High Court in the case of Nath. International Sales v. Union of India (supra) is also misplaced. In this case, Hon'ble Delhi High Court relied on the decision of Supreme Court in the State of Jammu & Kashmir v. Bakshi Ghulam Mohammad (supra) and came to the conclusion that in the facts of that case, cross-examination was not required. Hon'ble Delhi High Court gave this decision in the particular set of facts and circumstances in that case. In fact, facts of that particular case [Nath International Salesv. Union of India) did not require opportunity of cross-examination. The case was in relation to the black listing of one of the suppliers of Diesel Locomotive Works (DLW), Indian Railways, Varanasi namely, Nath International Sales and its sister concern. Black listing was done because the supplier furnished a test certificate from the manufacturer which was bogus as the manufacturer concern was not in existence. The manufacturer concern already stood taken over by some other concern who was not manufacturing the brand of the product in respect of whom the test certificate was submitted by the supplier before the Inspector of DLW. The manufacturer concern/the concern which took over the manufacturer concern denied having issued such test certificate. The authorities of Indian Railways blacklisted the supplier and its sister concern on the basis of, among others, production of the fake certificate from the alleged manufacturer. Before Delhi High Court, two sets of report of the Inspector of DLW were produced. One set 'was produced by the petitioner i.e. M/s Nath International Sales. Other set was produced by the respondent i.e.Union of India represented by DLW, Indian Railways. These two sets of Inspector's report were not exactly identical. Hon'ble Delhi High Court considered these facts and was of the view that the petitioner i.e. M/s Nath International Sales had full knowledge that the original manufacturer had been taken over by other concern and at the relevant time, neither valves of the required make (the product which was to be supplied to DLW) were the manufactured nor were marketed under the trade name which was to be supplied to DLW. On the basis of these vital pieces of evidence, namely, denial of the manufacturer concern/concern which took over the manufacturer concern and two sets of Inspector's report containing, among others, test certificate of the manufacturer, Hon'ble Court strongly suspected the motive of the petitioner and rejected its contentions. Advocate of the petitioner demanded opportunity to cross-examine the inspector to elicit the truth as to which of the two reports is genuine. On this demand, Hon'ble Court held that there is no difference in both the reports on the crucial point of filing of TRW's work test certificate and, therefore, in the circumstances of this case, cross-examination is not required. Relevant portion of the judgment is reproduced below :
"(24) Lastly, it is urged by Mr. Jaitly that the principles of natural justice demand that an opportunity should be given to the petitioners to cross-examine Mr. S.A. Khan, DLW's Inspector, to elicit the truth as to which of the two inspection reports is genuine. We do not feel persuaded to do so. As is observed by the Supreme Court in State of J&K v. Bakshi Gulam Mohammad (supra), a right of hearing does not include a right to cross-examine and the right to cross-examine must depend upon the circumstances of each case. As already observed, there is no difference in both the reports on the crucial point of filing of TRW's works test certificate, which is sufficient to support respondents action."
Therefore, cross-examination in the above-mentioned case was not allowed as it was not required in the facts and circumstances of the case because the petitioner was found to be pursuing its case on the basis of a certificate which, after inquiry from the relevant party, was found to be fake. Under these set of circumstances, cross-examination of the person before whom the certificate was produced, would have not served any purpose. However, in this case also, Hon'ble Court followed decision of Hon'ble Supreme Court in the case of State of Jammu & Kashmir v.Bakshi Ghulam Mohammad (supra). This case has been discussed in detail in the preceding paras. In fact, as stated in the preceding paras, the ratio of this judgment gives opportunity of cross-examination of the caretaker to the appellant.
22.13 In view of the discussion in the preceding paras, I am of the considered view that the AO was not right in holding that cross-examination was not to be given in this case. I am in agreement with the submission of the appellant that in view of various judicial rulings, the AO was duty-bound to give opportunity of cross-examination of the caretaker to the appellant. Supreme Court in the case of Kishinchand Chellaram (supra) has held that if any statement of a third party is to be used against the assesses, an opportunity should be given to him to cross-examine the third party before any inference can be drawn from the statement. On p. 720, Hon'ble Supreme Court has held that 'it is true that the proceedings under the income-tax law are not governed by strict rules of evidence and therefore, it may be said that even without calling the manager of the bank to prove this letter, it could be taken into account as evidence. But before the IT authorities could rely upon it, they were bound to produce it before the appellant so that the appellant could controvert the statements contained in it by asking for an opportunity to cross-examine the manager of the bank with reference to the statements made by him. Similarly, in the case of CIT v. Eastern Commercial Enterprises (supra), Hon'ble High Court held that the assessee must be given an opportunity to cross-examine the witness. In this case, the AO had relied upon a statement of Shri Ram Sevak Sukla while making the addition High Court held that the AO ought to have given an opportunity to the appellant to cross-examine Shri Sukla before making an addition. Further, Supreme Court in the case of C. Vasantlal & Co. (supra) has held that the AO can collect material to facilitate the asst. However, if he desires to use the material so collected, the appellant must be informed of the material collected and should be given an opportunity of explaining it. Similar view has been taken in the following decisions :
| (a) | Bansal Strips (P) Ltd. (supra); | |
| (b) | Asstt. CIT v. Mahesh T. Patodia (supra). |
In view of above decisions, the AO was duty-bound to give an opportunity to the appellant before relying on the statement of Shri S.B. Patil.
22.14 It may not be out of place to mention that the statement recorded under survey, on itself, has no evidentiary value. This view was held by Hon'ble Kerala High Court in the case of Paul Mathews & Sons v. CIT [2003] 181 CTR (Ker) 207/[2003] 263 ITR 101 (Ker). In this case, Hon'ble Court held that sec. 133A(3)(m) enables the authority to record the statement of any person which may be useful for, or relevant to, any proceeding under the Act. Sec. 133A however, enables the IT authority only to record any statement of any person which may be useful, but does not authorise for taking any sworn-in statement. The IT Act, whenever it thought fit and necessary to confer such power to examine a person on oath, the same has been expressly provided whereas s. 133A does not empower any ITO to examine any person on oath. Thus, in contradistinction to the power under sec. 133A, sec. 132(4) enables the authorised officer to examine a person on oath and any statement made by such person during such examination can also be used in evidence under the IT Act. On the other hand, whatever statement recorded under s. 133A is not given any evidentiary value obviously for the reason that the officer is not authorised to administer oath and to take any sworn statement which alone has the evidentiary value as contemplated under law. The relevant portion of the judgment is reproduced below :
"11. The provision also enables the IT authority to impound and retain in his custody for such period as he thinks fit any books of account or other documents inspected by him, provided the authority records his reasons for doing so and also shall not retain the books of account for a period not exceeding 15 days. Sec. 133A(3)(iii) enables the authority to record the statement of any person which may be useful for, or relevant to, any proceeding under the Act. Sec. 133A however, enables the IT authority only to record any statement of any person which may be useful, but does not authorize for taking any sworn-in statement. On the other hand, we find that such a power to examine a person on oath is specifically conferred on the authorised officer only under s. 132(4) of the IT Act in the course of any search or seizure. Thus, the IT Act, whenever it thought fit and necessary to confer such power to examine a person on oath, the same has been expressly provided whereas sec. 133A does not empower any ITO to examine any person on oath. Thus, in contra-distinction to the power under sec. 133A, sec. 132(4) of the IT Act enables the authorised officer to examine a person on oath and any statement made by such person during such examination can also be used in evidence under the IT Act. On the other hand, whatever statement recorded under sec. 133A of the IT Act is not given any evidentiary value obviously for the reason that the officer is not authorised to administer oath and to take any sworn-in statement which alone has the evidentiary value as contemplated under law. Therefore, there is much force in the argument of the learned counsel for the appellant that the statement, elicited during the survey operation has no evidentiary value and the ITO was well aware of this. In making disallowance out of guest house expenses, the AO, substantatively, relied on the statement of the caretaker which, according to above judgment, did not have any evidentiary value."
22.15 In view of the discussion in the preceding paras, it is obvious that the AO made disallowance of guest house expenses on the basis of the statement which was recorded at its back and in respect of which no opportunity was given to the appellant for cross-examination. This statement, on its own, did not have evidentiary value. Under the circumstances, the AO's action in respect of disallowance of the guest house expenses cannot be upheld.
22.16 During the course of appellate proceedings, the appellant has submitted, among other things, affidavit of the caretaker of the guest house and affidavit of certain other persons. The affidavit of the caretaker is a clarification that the flat Nos. G1 and G2 were being used by other guests (other than Shri D.Y. Patil) also. Affidavit of Shri P.D. Patil was also in this respect as well as to add that this particular portion (flat Nos. G1 and G2) was used for official purposes also. Affidavits from other persons were in respect of their stay in the guest house. These evidences were sent to the AO for their admissibility or otherwise. The AO gave a general statement quoting provisions of r. 46A of IT Rules. The AO also stated that the appellant was never restricted from submission of evidences/documents etc. On the contrary, it was given sufficient opportunity during the course of assessment proceedings, to justify its return of income by submitting necessary detail in support of its claim. However, a careful persual of material available on record reveals that the AO did not give any notice to the appellant of his intention to disallow guest house expenses, substantively, on the basis of the statement of the caretaker, during the course of assessment proceedings, and, therefore, the appellant did not have any occasion or opportunity to file any evidence in support of its claim of guest house expenses. In fact, the appellant was not in the possession of the statement on the basis of which the AO was to make this addition. Under the circumstances, I am satisfied that the appellant was prevented by sufficient cause from producing these evidences before the AO during the course of assessment proceeding and therefore, admit them. These affidavits were sent to the AO for his comments on their impact on the assessment of the appellant. The AO has not given any specific comment on these affidavits. He has simply stated that these affidavits represent afterthought. He has also stated that payment of salary to the guest house staff does not result in violation of sec. 13(1)(c) of IT Act. He has also recommended a reasonable relief on account of disallowance of guest house expenses as he accepts the fact that the appellant was maintaining a guest house. It is an undisputed fact that disallowance of guest house expenses was made because of the fact that AO came to the conclusion that one particular, portion of the guest house (flat Nos. G1 and G2) was used by Shri D.Y., Patil, trustee, exclusively. This conclusion was arrived at, substantively, on the basis of the statement of the caretaker of the guest house. As discussed in preceding paras, disallowance of guest house expenses cannot be made on the basis of statement of the caretaker on which reliance was placed by the AO. Under the circumstances, this disallowance of guest house expenses was not justified and is, therefore, directed to be deleted. I further hold that no personal benefit has accrued to any person on account of these expenses. Therefore, the above mentioned grounds of appeal are allowed.
22.17 The AO in his remand report has pointed out that the powers of CIT(A) are coterminus with those of the AO. Therefore, he submitted that CIT(A) may call these persons (including Shri Sadashiv Bapu Patil) in his office and may afford opportunity to the appellant subject to granting an opportunity to the AO to cross-verify the witnesses. Intention of the AO in making this submission is not understandable. It is not the CIT(A) who recorded statement of the caretaker at the back of the appellant and used the same against it. It was the AO who conducted the inquiry and recorded statement of the caretaker at the back of the appellant and used the same against it, without disclosing details of the material gathered, without confronting them with the appellant, without giving any opportunity to the appellant for its comments/rebuttal and without giving any opportunity of cross-verification/examination in violation to the established law of the land . It is the AO who, even after a specific opportunity was given to him to give opportunity of cross-examination to the appellant during remand proceedings, did not give the same to the appellant. Under the circumstances, submission of the AO to CIT(A) to give opportunity of cross-examination to the appellant by calling the witness whose statement was used by him without giving proper opportunity of cross-examination, in violation to the law of land, in his, office [in the office of CIT(A), and granting opportunity to the AO to cross-verify the witness, being absurd, unwarranted and uncalled for, is rejected.'
46. Considering the totality of the facts of the case, considering the detailed order passed by the learned CIT(A) on this issue and in absence of any contrary material brought to our notice by the learned Departmental Representative against the order of the learned CIT(A) we find no infirmity in the same and accordingly uphold the same. The grounds raised by the Revenue are accordingly dismissed.
47. In ground of appeal No. 7 the Revenue has challenged the order of the CIT(A) in holding that employees' contribution which was not deposited within due date under the Act or deposited before the due date of filing of the return is an allowable expenditure.
48. After hearing both the sides, we find the AO disallowed an amount' of Rs. 21,55,881.50 being late payment of employee's provident fund and ESI since they were not deposited before the statutory dates prescribed under the PF and ESI Act. In appeal the CIT(A) relying on various decisions directed the AO to delete the disallowance wherein the payments are made prior to the due date of filing of the return. We find various Benches of the Tribunal are taking the consistent view that employee's contribution to PF and ESIC, if paid before the due date of filing of the return, is an allowable deduction. We therefore find no infirmity in the order of the CIT(A) on this issue. Accordingly, the grounds raised by the Revenue on this issue are dismissed.
49. So far as the other grounds by the assessee and the Revenue are concerned, we find those additions/disallowances were made since benefit of deduction under sec. 11 was denied to the assessee. We find the AO denied benefit of sec. 11 to the assessee on the ground that assessee has advanced interest-free loan to related concern D.Y. Paul Education Society for which it has violated provisions of sec. 13(1)(d) of the IT Act. Similarly since the assessee has incurred expenses on advertisements on the birthday of the trustees, has utilised the Mercedez car and the guest house for the benefit of the trustees and incurred expenditure on telephone and mobile bills for the trustees and paid excessive remuneration to the trustees and their relatives, therefore, it has violated the provisions of s. 13(1)(c) of the IT Act. The learned counsel for the assessee has also clarified that there is no expenditure on account of payment to Mahendra Holidays for the trustees during the year. Since we have already held in the preceding paras that there is no violation of provisions of sec. 13(1)(d) and 13(1)(c) of the IT Act on any of the above issues and since the Tribunal has already restored the registration under sec. 12A of the IT Act, therefore, the assessee is entitled to benefit of sec. 11 of the IT Act and these grounds in our opinion being consequential in nature become academic and therefore are not being adjudicated.
50. In the result, the appeal filed by the assessee is allowed and the appeal filed by the Revenue is dismissed.
USPRegards
Prarthana Jalan
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