IT : Director (Exemption) having allowed accumulation of income of assessee-trust in terms of section 11(2) after being satisfied with objects of trust, exemption under section 11 could not be denied to assessee on ground of non-application of income for charitable purpose
IT : Before making enhancement or rejecting assessee's claim on some new grounds which were not before Assessing Officer, Commissioner (Appeals) should afford reasonable opportunity to assessee
■■■
[2013] 36 taxmann.com 370 (Hyderabad - Trib.)
IN THE ITAT HYDERABAD BENCH 'B'
Spandana Foundation
v.
Assistant Director of Income-tax, (Exemptions)-III, Hyderabad*
CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
IT APPEAL NO. 670 (HYD.) OF 2012
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
JUNE 28, 2013
Section 11, read with section 13, of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under [Accumulation of income] - Assessment year 2007-08 - Assessee, a trust registered under section 12AA, claimed exemption under section 11 - Exemption was denied on ground that trust had not undertaken even a single activity as per objectives of trust during relevant financial year and only transaction of trust pertained to buying and selling of shares which was not covered by its objectives - Admittedly, assessee's application seeking permission for accumulation of income in terms of section 11(2) had been approved by Director (Exemption) on being satisfied with purpose or object for which income was accumulated or set apart - Whether, on facts, exemption under section 11 could be denied to assessee - Held, no [Para 13] [In favour of assessee]
Section 251 of the Income-tax Act, 1961 - Commissioner (Appeals) - Powers of [Power of enhancement] - Assessment year 2007-08 - Whether though Commissioner (Appeals)'s powers are co-terminus with that of Assessing Officer, but before making enhancement or rejecting assessee's claim on some other new grounds which were not before Assessing Officer, he should afford reasonable opportunity to assessee for explaining same - Held, yes [Para 11] [In favour of assessee]
FACTS
| ■ | The assessee, a charitable trust registered under section 12AA, declared Nil income for relevant assessment year after claiming exemption under section 11. | |
| ■ | During assessment proceedings, the Assessing Officer noticed that after creation of trust on 23-8-2006, 'N', who was settler and one of trustees of the trust, had taken loan of Rs. 40 crores on 26-8-2006 and purchased 20 lakhs equity shares of MLL on behalf of the trust. On 7-1-2007, the assessee-trust sold all the shares and after repaying the interest-free loan of Rs. 40 crores a capital gain of Rs. 21.2 crores resulted to the assessee. The Assessing Officer noted that the assessee-trust had not undertaken a single activity as per the objectives of the trust during the financial year and the only transaction of the trust pertained to buying and selling of shares which was not covered by its objectives. He, therefore, held that the assessee was not entitled to exemption under section 11. | |
| ■ | On appeal before the Commissioner (Appeals), the assessee contended that it had filed Form 10 along with an application for condonation of delay seeking accumulation of entire amount and the Director (Exemption), after considering object of trust and report of the Assessing Officer, had allowed such accumulations and, therefore, assessee was eligible for exemption under section 11. | |
| ■ | The Commissioner (Appeals) observed that even if the stated aim of the transaction of purchase and sale of shares was to strengthen the corpus of the trust, however, the assessee was made to invest in shares of MLL where N, the settler of the trust, was the promoter and the company from which the loan was taken was also a concern where 'N,' was holding 80 per cent of the equity shares and, therefore, funds were applied for the benefit of the settler of the trust himself in violation of the provisions of section 13(2)(h). He, therefore, held that the assessee was not entitled to exemption under section 11. |
HELD
| ■ | Sub-section (1) of section 11 provides that income from property held for charitable or religious purposes shall not be included in the total income of the previous year to the extent to which such income is applied to such purpose in India and where any such income is accumulated or set apart for application to such purpose in India to the extent to which the income so accumulated or set apart is not in excess of 15 per cent of the income from such property. Sub-section (2) however, provides an exception to the extent that where 85 per cent of the income is not applied or is not deemed to have been applied to charitable or illegal purposes in India during the previous year but is accumulated or set apart either in whole or in part for application to such purpose in India, then such income so accumulated or set apart shall not be included in the total income of the previous year on satisfaction of the following condition: |
| 1. | Such person specified, by notice in writing given to the Assessing Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart which in no case exceed 10 years. | |
| 2. | The money so accumulated or set apart is invested or deposited in the form or modes specified in sub-section (5). [Para 9] |
| ■ | In the instant case, assessee's application seeking permission of accumulation of income in terms of section 11(2) had been approved by the Director (Exemption). The order of the Director (Exemption) further reveals the fact that he has passed the said order having been satisfied with the purpose or object for which the income was accumulated or set apart. The order of the Director (Exemption) further reveals the fact that it was passed after considering the report of the Assessing Officer. Thus, it is very much clear that not only the Director (Exemption) but the Assessing Officer himself was satisfied with the object and purpose for which the surplus fund was accumulated or set apart. This being the factual position, the Commissioner (Appeals) was not justified in sitting in judgment over the order passed by the Director (Exemption) in condoning the delay and approving the accumulation and setting apart of the surplus fund by the assessee as per section 11(2). From the order of the Commissioner (Appeals), it is very much clear that the Assessing Officer, in his remand report, has also very clearly submitted that after condonation of delay in accepting revised Form No. 10, the assessee is eligible for deduction under section 11. That being the case, the Commissioner (Appeals) was not justified in denying exemption under section 11. It is very much clear from the assessment order that none of the reasons on the basis of which the Commissioner (Appeals) came to a conclusion that assessee is not entitled to exemption under section 11 was considered by the Assessing Officer in the assessment order. Therefore, it is fair and keeping in principles of natural justice that the Commissioner (Appeals) should have afforded a reasonable opportunity to explain or have his say on the issues on the basis of which the Commissioner (Appeals) finally came to a conclusion that exemption under section 11 is not available to the assessee. Though the Commissioner (Appeals)'s powers are co-terminus with that of the Assessing Officer, but before making enhancement or rejecting the assessee's claim on some other new grounds which were not before the Assessing Officer, he should have afforded a reasonable opportunity to the assessee for explaining the same. In this view of the matter, the order passed by the Commissioner (Appeals) rejecting the claim of the assessee on the grounds which were not considered by the Assessing Officer and also not allowed to be contested by the assessee is illegal and unsustainable as it is in violation of principles of natural justice. [Para 10] | |
| ■ | The provisions invoked by the Commissioner (Appeals) for denying exemption under section 11, are also not applicable to the facts of the case. Section 13(2)(h) provides that the income or the property of the trust be deemed to have been used or applied for the benefit of a person referred to in sub-section (3), if any funds of the trust or institution continue to remain invested during the previous year in any concern in which such person as referred to in sub-section (3) has a substantial interest. The persons referred to in sub-section (3) are the Author of the trust or founder of the Institution, any person who has made a substantial contribution to the trust or institution where his contribution up to the end of the relevant previous year exceeds Rs. 50,000, any trustee of the trust or manager of the institution any relief of such other founder person, member, trustee or manager any concern in which any of the persons referred to hereinabove has a substantial interest. Though 'N'. is a person covered under sub-section (3), however, as per the shareholding disclosed from the certificate submitted by 'N.', shareholding in MLL is only 17.09 per cent which cannot be considered as substantial for the purpose of section 13(2)(h) in view of Explanation 3 to section 13. Similarly, section 13(1)(d) would also not be applicable to the assessee in view of clause (iia) of proviso to section 13(1)(d) since the assessee has deposited in the specified modes under sub-section (5) of section 11 within the prescribed period. The aforesaid factual position also has not been controverted by the department. [Para 11] | |
| ■ | So far as the purposes of accumulation mentioned in the revised Form No. 10 is concerned, they are very much explicit from the order of the Commissioner (Appeals) itself. The objects for accumulation are very much clear and specific and cannot be considered as general in nature. Besides the Director (Exemption) having condoned the delay in filing Form No. 10 (a) and according permission for accumulation of income after being satisfied with the objects as mentioned in the said application, the Commissioner (Appeals) cannot sit in judgment over the order passed by the Director (Exemption) approving assessee's claim for accumulating or setting apart the surplus fund. Therefore, considering the entire facts and circumstances of the case and also the fact that the Director (Exemption) has approved the accumulation of fund vide his order passed under section 119(2), exemption under section 11 cannot be denied to the assessee. Accordingly, order of the Commissioner (Appeals) is set aside and the Assessing Officer is directed to grant exemption to the assessee under section 11. [Para 12] |
CASES REFERRED TO
Sera Foundation v. ITO (Exemption) [2013] 55 SOT 303/[2012] 26 taxmann.com 126 (Delhi) (para 6), DIT(Exemption) v. Govindu Naicker Estate [2009] 315 ITR 237 (Mad.) (para 6), DIT(Exemption) v. Span Foundation [2009] 178 Taxman 436 (Delhi) (para 6), CIT v. Janmabhoomi Press Trust [2000] 242 ITR 703/[2001] 118 Taxman 749 (Kar.) (para 6) and CIT v. Trustees of HEH of the Nizam's Charitable Trust [1981] 131 ITR 497/7 Taxmann 178 (AP) (para 7).
K. Sai Prasad for the Appellant. D. Sudhakara Rao for the Respondent.
ORDER
Saktijit Dey, Judicial Member - This appeal has been filed by the assessee against the Order of the CIT(A)-IV, Hyderabad dated 30.03.2012 for the A.Y. 2007-08 on the following grounds :
| "1. | In the fact and circumstances of the case, the learned CIT(A)-IV, Hyderabad is not justified in not allowing the exemption u/s. 11 of the I.T. Act. | |
| 2. | The learned CIT(A) is not justified in holding that there were violations of the provisions of Sec. 13(2)(h) and 13(1)(d) ignoring the exceptions provided for the same. | |
| 3. | The learned CIT(A) is not justified in not granting exemption u/s. 11 in spite of the fact that the Director of Income Tax (Exemptions) did condone the delay u/s.119(2)(b) in filing a revised Form-10 wherein the figure of accumulation was duly revised. | |
| 4. | In the fact and circumstances of the case, the learned CIT(A)-IV, Hyderabad is not justified in holding that the accumulation requested by the appellant is not valid. | |
| 5. | For the above and any ground or grounds that may be urged during the course of hearing, it is prayed that the Hon'ble Income Tax Appellate Tribunal be pleased to direct the learned Assessing Officer to allow exemption u/s.11, as claimed by the appellant." |
2. Briefly the facts relating to the issue in dispute are the assessee is a trust created by virtue of a registered trust deed dated 23.8.2006. The objects of the assessee as set out in clause 3 of the Trust Deed are as under:
"3. OBJECTS:
The Trustees shall hold and stand possessed of the Trust Fund upon the following trusts:
| (a) | to manage the Trust property and to collect and recover the interest, dividend and other income if any from the property described in the Schedule hereunder, or out of the investments of the Trust property or any part thereof; | |
| (b) | to pay and to discharge out of the income or the corpus if required, all expenses and charges for collection and for recovery of the Trust property and all other costs, charges, expenses and outgoings relating to the administration of the Trust; | |
| (c) | to pay or utilise the balance of such interests, dividends and other income of the Trust Fund (hereinafter called the "net income of the Trust Fund") and if the Trustees so desire, the corpus of the Trust or any corpus of the Trust for all or anyone or more of the following charitable purposes in such shares and proportions and in such manner in all respects as the Trustees shall in their absolute discretion think fit, that is to say :- |
| (i) | for the relief of the poor including the establishment maintenance and support of institutions or funds for the relief of any form of poverty; | |
| (ii) | for the advancement and propagation of education and learning including the establishment, maintenance and support of colleges, schools or other educational institutions, professorship, lectureships, scholarships and prizes particularly for the benefit of the inhabitants of the State of Andhra Pradesh; | |
| (iii) | for giving medical aid and relief including the establishment, maintenance and support of institutions or funds for medical aid and relief; and | |
| (iv) | for the advancement of any other object of general public utility." |
3. The assessee is also registered as a charitable trust under section 12AA of the Act vide order dated 11.9.2007 with effect from the date of creation of the trust. For the A.Y. under dispute, the assessee trust filed its return of income on 26.3.2008 declaring NIL income after claiming exemption u/s. 11 of the Act. The assessee's case was selected for scrutiny assessment. In the course of scrutiny assessment proceedings, the Assessing Officer noted that Shri N. Prasad is not only a settlor and one of the trustee of assessee trust viz., Spandana Foundation but also the promoter of M/s. Matrix Labs Ltd. He also owns 80% of the equity shares in M/s. G2 Corporate Services Ltd. After creation of the trust on 23.8.2006, Shri N. Prasad had taken loan of Rs. 40 crores from M/s. G2 Corporate Services Ltd. on 26.8.2006 and purchased 20 lakhs equity shares of M/s. Matrix Labs Ltd. on behalf of the trust @ Rs.200/- per equity share as against the then prevailing rate of Rs.275/- per share. On 7.10.2007, the trust sold all the shares at the rate of Rs.306/- per share for a total consideration of Rs.61,20,00,000/- to M/s. Mylam Inc. USA. Out of the sale consideration received, the assessee trust repaid the interest free loan of Rs. 40 crores to M/s. G2 Corporate Services Ltd. on 24.1.2007 resulting in a capital gain of Rs.21.2 crores to the assessee. It was further noted by the Assessing Officer on examining the receipt and payment account of the trust for the period ending 31.3.2007, the activities of the trust was only limited to buying and selling of 20 lakhs of shares of M/s. Matrix Labs Ltd. by taking and repaying interest free loan from M/s. G2 Corporate Services Ltd. It was noted by the Assessing Officer that the assessee trust has not undertaken a single activity as per the objectives of the trust during the financial year and the only transaction of the trust pertain to buying and selling of shares which is not covered by the objectives of the trust. The Assessing Officer, therefore, issued a notice to the assessee directing to show cause as to why the assessee should not be treated as Association of Person (AOP) instead of Trust and the entire capital gain of Rs.21,20,00,000/- should not be treated as short term capital gain for the A.Y. under dispute. In response to the notice of the Assessing Officer, the assessee submitted that the trust had commenced operations of charitable activities in full swing only during April, 2007. The Assessing Officer, however, did not accept the contention of the assessee by observing that the trust had started receiving funds from 8.1.2007 and has not spent a single pie on charitable activities till the end of financial year 2007-2008. The Assessing Officer, further opined that though the assessee trust had surplus cash of Rs. 21,20,00,000/- from 24.1.2007 to 31.3.2007, the same was kept idle and further the trust had derived interest of Rs.48,87,486/- on fixed deposits from Bank. The Assessing Officer, therefore, completed the assessment by holding that the assessee is not entitled for exemption under section 11 of the Act and brought the amount of Rs.21,20,00,000/- to tax as capital gains and the interest on which fixed deposit amounting to Rs.48,87,486/- as Income from other sources. Thus, the total income was determined at Rs.21,68,87,486/-. The assessee being aggrieved of the assessment order passed for the impugned A.Y. preferred an appeal before the CIT(A).
4. In the course of hearing of the appeal before the CIT(A), it was contended on behalf of the assessee that the trust was created on 28.3.2006. It started receiving funds from 8.1.2007 only and it took some time to formulate the policies and activities to be carried out. The charitable activities commended in full strength from April, 2007. It was further contended that the assessee's registration under section 12A of the Act has not been withdrawn. Hence, the status of assessee as a charitable trust cannot be altered till the assessee remains as a registered trust under section 12A of the Act. It was further contended that the trust had taken loan of Rs. 40 crores for purchasing the shares and sell them at a profit only with a view to strengthen the corpus of the trust. It was further submitted that the assessee had also submitted Form No. 10 for accumulation of Rs.41,54,363/- being the income for the financial year 2006-2007 as per the provisions of section 11. It was submitted that the consideration received from sale of shares on 24.1.2007 after repayment, was invested in fixed deposits which is another capital asset as provided in section 11(1A) of the Act. It was further contended that the assessee had decided to accumulate the interest income from fixed deposits as provided under section 11(2) of the Act by filing intimation in Form No.10 along with the return of income. The assessee further contended that the Managing Trustee during a meeting on 23.2.2007 at Care Hospital, Hyderabad, had publicly announced a donation of Rs. 1 crore to Care Hospital promoting part cost of heart surgeries of 400 poor children. It was further submitted that the trust ha spent a substantial amount in the succeeding A.Y. towards charitable activities. In support of such contention, the statement of accounts for the subsequent A.Y. was also submitted. It was contended that the first cheque of donation was Rs. 1 lakh was issued on 14.4.2007 to Sriram Social Welfare Trust.
5. During the appellate proceedings, the assessee also raised an additional ground contending therein that the assessee had filed a revised Form-10 showing the surplus income at Rs.12,22,75,585/- for accumulation as per section 11(2). The CIT(A) after considering the submissions of the assessee on the additional ground and additional evidence submitted with regard to revised Form No.10, called for a remand report from the Assessing Officer. In the remand report the Assessing Officer stated that the assessee trust was required to file Form No. 10 within the time allowed under section 139(1) of the Act and any delay in filing the same, should be condoned by the Director of Income Tax (Exemption) on application made by the Trust with such a request. He further stated that the assessee's contention with regard to revised Form No. 10 and additional ground should not be entertained, as DIT (Exemption) is the only competent authority to condone the delay in filing Form No.10. When the CIT(A), confronted the remand report to the assessee, the assessee submitted that section 119(2)(b) empowers the Board, for avoiding genuine hardship in any case or class of cases, authorise the Income Tax authorities to entertain any application or claim etc., under the Act after the expiry of the time limit in certain cases by making general or special orders. In support of such contention, the assessee relied upon various judicial precedents. The CIT(A) again forwarded a reply to the Assessing Officer seeking his comments. The Assessing Officer finally submitted his comments in letter dated 16.5.2011 stating therein that in assessee's case the addition was made in the absence of Form No.10 enclosed to the return of income. However, since the Director of Income Tax (Exemption) had condoned the delay in filing the same vide order under section 119(2)(b) dated 8.4.2011, the assessee is eligible for exemption under section 11 of the Act. In spite of the report of the Assessing Officer for accepting assessee's claim of exemption, the CIT(A), however, was of the view that the assessee is required to mandatorily fulfil the conditions laid down in section 11 to 13 of the Act for availing exemption under section 11 of the Act. It was further observed by the CIT(A) that Shri N. Prasad who is a trustee of the assessee trust took a loan of Rs. 40 crores from M/s. G2 Corporate Services Ltd. and purchased 20 lakhs equity shares of M/s. Matrix Labs Ltd. on behalf of the assessee trust and within a few months, all those shares were sold resulting in a capital gain of Rs. 21.20 lakhs after the repayment of loan of Rs. 40 crores by the trust. The CIT(A) observed that even if the stated aim of the transaction of purchase and sale of shares was to strengthen the corpus of the trust, however, the assessee was made to invest in shares of M/s. Matrix Labs Ltd. where Mr. N. Prasad the settlor of the trust was the promoter. He further observed that the loan taken from M/s. G2 Corporate Services Ltd. is also a concern where Shri N. Prasad was holding 80% of the equity shares. He, therefore, came to a conclusion that funds were applied for the benefit of the settlor of the trust himself as he was also the promoter of M/s. Matrix Labs Ltd. Hence, there is violation of the provisions of section 13(2)(h) of the Act. He, further opined that the funds of the assessee even though coming in its hands as borrowed funds were invested in shares of M/s. Matrix Labs Ltd. which is not in accordance with the provisions of section 13(1)(d) as the investment in shares are not as per the modes of investment prescribed in section 11(5) of the Act. Therefore, the assessee is not entitled to exemption under section 11 of the Act. The CIT(A), further held that the repayment of loan of Rs. 40 crores also cannot be considered as application of income towards objects of the trust. The CIT(A) observed that as per section 11(1)(a) only when a trust or institution applies 85% of the income for its objects the income shall be exempt from tax. The CIT(A) was of the view that since the assessee during the year had incurred expenses of Rs. 45,483/- only for the objects of the trust, besides claiming the repayment of loan of Rs. 40 crores as an application of fund, the assessee is not eligible for exemption. So far as the condonation of delay in filing Form No.10 for the revised accumulation of Rs.12,22,70,585/- is concerned, the CIT(A) observed that the purpose of accumulation stated therein is general in nature and not specific one. He further observed that while accumulation has to be a conscious act, the assessee while mentioning the same in the purpose in Form 10 or resolution has not mentioned anything specific with regard to purpose and has merely mentioned some objects of the trust. He further observed that acquisition of immovable properties being mentioned as one of the purpose is not an object of the trust. On the basis of the aforesaid consideration, the CIT(A) held that the assessee is not entitled for exemption under section 11 of the Act.
6. The learned A.R. apart from making his oral submission has also filed written submission before us. The learned A.R. submitted before us that though the Assessing Officer while denying exemption under section 11 and bringing the entire amount of Rs.21,68,87,486/- to tax did not specifically mention it in the assessment order, but the fact remains that the reason on the basis of which he denied the exemption, which has been expressed in the remand report dated 16.5.2011, this exemption could not be granted in the absence of Form No.10 enclosed to the return of income. It was submitted that since the submission of revised Form 10 seeking permission for accumulation has been accepted by DIT (Exemption) the issue of non-application of any part of income towards charitable activities no longer survive and the Assessing Officer himself in the remand report has stated that the assessee is entitled for exemption under section 11 of the Act. Hence, the assessee is entitled for exemption under section 11 of the Act. So far as the grounds on which the CIT(A) denied the assessee's claim of exemption under section 11 of the Act is concerned, the learned A.R. submitted that the CIT(A) has tried to make out a new case for the department without calling for any details from the assessee or without giving an opportunity to the assessee to make his submissions on them. It was submitted that the CIT(A) presumed certain things which are factually incorrect and invoked certain provision of law which are not applicable to the facts of the case while coming to his conclusion. The learned A.R. submitted that the CIT(A)'s observation with regard to violation of provisions of law under section 13(2)(h) on account of investment in shares of M/s. Matrix Labs wherein the settlor Mr. N. Prasad is promoter is totally misconceived. It was submitted that section 13(2)(h) prohibits an investment in any concern in which the person referred to in sub-section (3) has substantial interest. It was submitted that the settlor Mr. N. Prasad though is a person covered by sub-section (3), he is not having substantial interest in M/s. Matrix Labs as provided in Explanation 3 to Section 13. The total shareholdings of Mr. N. Prasad and his associates referred to in sub-section 30 was 262700506 shares out of total shares of 153616540 in M/s. Matrix Labs. Thus, the relevant shareholdings is only 17.09%. In this context, the learned A.R. submitted a letter from the company showing the shareholdings of Mr. N. Prasad along with a petition for admitting it as an additional evidence. So far as the CIT(A)'s observation with regard to violation of provision of section 13(1)(d) while investing in shares of M/s. Matrix Labs is concerned, the learned A.R. submitted that clause (iia) of proviso to section 13(1)(d) carves out an exceptions as per which an asset which is prohibited to be held under section 13(1)(d) if is not held for a period of more than one year from the end of previous year in which it is acquired, there is no violation of section 13(1)(d). It was submitted that in the case of the assessee, the asset was disposed of within the previous year itself by investing it in one of the specified mode under section 11(5) of the Act. Hence, there can not be any violation of provision of section 13(1)(d). In this respect, the learned A.R. relied upon the decision of the I.T.A.T. Delhi Bench in the case of Sera Foundation v. ITO (Exemption) [2013] 55 SOT 303/[2012] 26 taxmann.com 126 (Delhi). With regard to the CIT(A)'s conclusion that repayment of loan is not an application of income for charitable purpose, the learned A.R. refuted such conclusion by placing reliance on the following decisions.
| (i) | DIT (Exemption) v. Govindu Naicker Estate [2009] 315 ITR 237 (Mad.) | |
| (ii) | DIT (Exemption) v. Span Foundation [2009] 178 Taxman 436 (Delhi) | |
| (iii) | CIT v. Janmabhoomi Press Trust [2000] 242 ITR 703/[2001] 118 Taxman 749 (Kar.). |
7. With regard to CIT(A) observation that the purpose mentioned in revised Form No.10 is general in nature and the condonation of delay by Director of Exemption cannot be considered as holding the accumulation itself as valid, the learned A.R. submitted that as per the provision of the Act, on filing Form No.10, the Assessing Officer, if satisfied, will grant exemption under section 11 of the Act. It was submitted that in case of the assessee revised Form 10 was filed and the Director of Income Tax (Exemption) condoned the delay after verifying the purpose for accumulation. It was submitted that as per Board Circular No. 273 dated 3.6.1986 it is incumbent on the part of the DIT to satisfy himself about certain conditions. Examination of the issue that the accumulation or setting apart of income was necessary for carrying out the objects of the trust is one amongst such condition. Hence, it is deemed that objection raised by the CIT(A) were already examined by the DIT (Exemption) while condoning the delay. Further, the Assessing Officer at the time of remand had also examined the purposes and submitted that the assessee is eligible for deduction under section 11 of the Act. Hence, the CIT(A) was not justified to sit in judgment over the Orders of the DIT (Exemption) in condoning the delay approving accumulation of income. Learned A.R. submitted that even otherwise also as per the purposes mentioned in revised Form 10, extracted at para 88 of CIT(A) order, they clearly reveal that there is nothing general in nature. They clearly spell out the purpose for which accumulation is sought for. It was submitted that the assessee in fact, had donated generously to L.V. Prasad Eye Institute for the treatment of the poor public in addition to other charitable donations. In this context, the learned A.R. submitted the details of charitable activities carried out by the trust in succeeding years. It was submitted that even investment in immovable properties is also a mode of investment under section 11 (5) of the Income Tax Act. The learned A.R. in this context relied upon the decision of the Hon'ble A.P. High Court in the case of CIT v. Trustees of HEH of the Nizam's Charitable Trust [1981] 131 ITR 497/7 Taxmann 178 wherein it is held that in order to secure exemption under section 11(1)(a) of the Act, it is sufficient if the assessee provides or sets apart the funds for a charitable purpose and it is not necessary that the assessee must have spent the amount specified for a charitable purpose during the relevant A.Y. This intention of the legislature is evident from the word used namely 'applied' in section 11(1)(a). If the intention of the legislature was otherwise, nothing prevented the legislature from using the words 'spent' instead of 'applied' in section 11(1)(a). Relying upon the aforesaid ratio of the jurisdictional High Court, it was submitted that the assessee has kept funds in scheduled bank and as early as February 2007, it has decided and formulated a programme to donate Rs. 1 crore for the treatment of children with cardiac problem. This activity carried on in association with Care Hospital and A.P. State Government helped lot of children with cardiac ailment. That besides the delay in filing revised Form No. 10 having been condoned the issue of application of fund towards objects does not arise and cannot be a pre-condition for granting exemption under section 11 of the Act.
8. Learned D.R. submitted that since the settlor of the Trust had taken loans from a company for investment in shares of M/s. Matrix Labs which has been promoted by him, there is clear violation of section 13(2)(h) of the Act. He further submitted that since the assessee has not made investment in specified objects, there is violation of section 13(1)(d) of the Act. Learned D.R. further submitted that the activities of the assessee trust in making investment in share transaction, is a normal business activity and not a charitable activity. Hence, the denial of exemption under section 11 of the Act is justified.
9. We have heard rival submissions and perused the material on record. We have also applied our mind to the decisions cited before us. The undisputed facts are, the assessee is a trust created under registered trust deed. It is also a fact that assessee has been granted registration under section 12AA of the Act. As could be seen from the observation made by the Assessing Officer in the assessment order, exemption under section 11(1) and 11(5) is denied on the ground that assessee has not applied the surplus fund available with it for charitable purpose as per its objects. At this stage, it would be profitable to look into the provisions regarding the grant of Exemption under section 11 of the Act. Sub-section (1) of section 11 provides that income from property held for charitable or religious purposes shall not be included in the total income of the previous year to the extent to which such income is applied to such purpose in India and where any such income is accumulated or set apart for application to such purpose in India to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property. Sub-section 2 however, provides an exception to the extent that where 85% of the income is not applied or is not deemed to have been applied to charitable or illegal purposes in India during the previous year but is accumulated or set apart either in whole or in part for application to such purpose in India then, such income so accumulated or set apart shall not be included in the total income of the previous year on satisfaction of the following condition :
| 1. | Such person specified by notice in writing given to the Assessing Officer in the prescribed manner the purpose in which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart which in no case was exceed 10 years. | |
| 2. | The money so accumulated or set apart is invested or deposited in the form or modes specified in sub-section (5). Sub-section (5) provides mode for investing or depositing the money accumulated or set apart as per sub-section (2). |
10. It is a fact that the assessee initially has submitted Form 10 seeking permission for accumulation to the extent of Rs.48,87,486/-. However, subsequently the assessee had field revised Form 10 along with an application for condonation of delay seeking accumulation of entire amount of Rs.21,68,87,486/-. The DIT (Exemption) condoned the delay in filing Form No. 10 which in otherwords, means that assessee's application seeking permission of accumulation of income in terms of section 11(2) of the Act was approved by the DIT (Exemption). The Order dated 8.4.2011 of DIT (Exemption) (page 38 of paper book) further reveals the fact that he has passed the said order having been satisfied with the purpose or object for which the income was accumulated or set apart. The Order of the DIT (Exemption) further reveals the fact that it was passed after considering the report of the Assessing Officer. Thus, it is very much clear that not only the DIT (Exemption) but the Assessing Officer himself was satisfied with the object and purpose for which the surplus fund was accumulated or set apart. This being the factual position, the CIT(A) was not justified in sitting in Judgment over the order passed by the DIT (Exemption) in condoning the delay and approving the accumulation and setting apart of the surplus fund by the assessee as per section 11(2) of the Act. From para 7.2 of the CIT(A)'s order, it is very much clear that the Assessing Officer, in his remand report, has also very clearly submitted that after condonation of delay in accepting revised Form No. 10, the assessee is eligible for deduction under section 11 of the Act. That being the case, the CIT(A) was not justified in denying exemption under section 11 of the Act. So far as the issues on consideration of which the CIT(A) has rejected assessee's claim of exemption under section 11, we find substantial force in the contention of the learned A.R. that these issues were never considered by the Assessing Officer for denying claim under section 11 and the CIT(A) has considered them on his own without giving an opportunity to the assessee to explain. It is very much clear from the assessment order that none of the reason on the basis of which the CIT(A) came to a conclusion that assessee is not entitled for exemption under section 11 of the Act was considered by the Assessing Officer in the assessment order. Therefore, it is fair and keeping in principles of natural justice that the CIT(A) should have afforded a reasonable opportunity to explain or have his say on the issues on the basis of which the CIT(A) finally came to a conclusion that exemption under section 11 of the Act is not available to the assessee. Though the CIT(A)'s powers are co-terminus with that of the Assessing Officer but before making enhancement or rejecting the assessee's claim on some other new grounds which were not before the Assessing Officer he should have afforded a reasonable opportunity to the assessee for explaining the same. In this view of the matter, the order passed by the CIT(A) rejecting the claim of the assessee on the grounds which were not considered by the Assessing Officer and also not allowed to be contested by the assessee is illegal, unsustainable as it is in violation of principles of natural justice.
11. Even, so far as the validity of the grounds for rejection of the assessee's claim under section 11 is concerned, we find force in the contention of the learned A.R. that the provisions invoked by the CIT(A) for denying exemption under section 11, are also not applicable to the facts of the case. Section 13(2)(h) of the Act provides that the income or the property of the trust be deemed to have been used or applied for the benefit of a person referred to in sub-section (3), if any funds of the trust or institution are continue to remain invested during the previous year in any concern in which such person as referred to in sub-section (3) has a substantial interest. The person referred to in sub-section (3) are the Author of the Trust or founder of the Institution, any person who has made a substantial contribution to the trust or institution where his contribution up to the end of the relevant previous year exceeds Rs.50,000/-, any trustee of the trust or manager of the institution any relief of such other founder person, Member, Trustee or Manager any concern in which any of the persons referred to hereinabove has a substantial interest. Though Shri N. Prasad is a person covered under sub-section (3) however, as per the share holding disclosed from the certificate submitted by Shri N. Prasad shareholding in Matrix Laboratories is only 17.09% which cannot be considered as substantial for the purpose of section 13(2)(h) of the Act in view of Explanation 3 to section 13 of the Act. Similarly, section 13(1)(d) would also not be applicable to the assessee in view of clause (iia) of proviso to section 13(1)(d) since the assessee has deposited in the specified modes under sub-sections (5) of Section 11 of the Act within the prescribed period. The aforesaid factual position also has not been controverted by the department. The decision of the ITAT, Delhi Bench in the case of Sera Foundation (supra) also supports this view.
12. So far as the purpose of accumulation mentioned in the revised Form No. 10 is concerned, they are very much explicit from the order of the CIT(A) itself which has been extracted at para 8.8 of his order. The objects for accumulation are very much clear and specific and cannot be considered as general in nature. That besides the DIT (Exemption) having condoned the delay in filing Form No. 10 (a) and according permission for accumulation of income after being satisfied with the objects as mentioned in the said application, the CIT(A) cannot sit in judgment over the order passed by the DIT (Exemption) approving assessee's claim for accumulating or setting apart the surplus fund. Therefore, considering the entire facts and circumstances of the case and also the fact that the DIT (Exemption) has approved the accumulation of fund vide his Order passed under section 119(2) of the Act, exemption under section 11 to the assessee cannot be denied. Accordingly, we set aside the Order of the CIT(A) and direct the Assessing Officer to grant exemption to the assessee under section 11 of the Act. The grounds raised by the assessee are allowed.
13. In the result, appeal of the assessee is allowed.
VARSHARegards
Prarthana Jalan
__._,_.___
No comments:
Post a Comment