2016 (2) TMI 77 - AT - Income Tax

Registration of the assessee trust u/s 12AA cancelled - exemption u/s 11 denied - cancellation on the grounds as the registration of the BMW car in the name of the trustee - Held that - We have observed that the assessee trust had purchased the BMW car for ₹ 32,20,000/- which is registered in the name of Prof. (Retd) Abdulqadir Abdulla Kazi, chairman and trustee of the assessee trust although the said car has been capitalized and reflected in the Balance sheet of the assessee trust and also in the audited accounts. The depreciation on the afore-stated BMW car was also availed by the assessee trust as provided under the Act. The assessee trust has also availed the loan facility from ICICI bank in the name of the assessee trust for which repayments of loan has been made from the asseseee trust bank accounts and ultimately the car has been sold in the subsequent year and sale proceeds were credited in the bank account of the assessee trust. The assessee trust has also submitted before us that there was a mistake inadvertently committed by the staff of the assessee trust in getting the same registered in the name of trustee of the assessee trust while buying the BMW car instead of getting it registered in the name of the assessee trust and it has been stated in the audited accounts for the financial year 2008-09 of assessee trust in Schedule P -Notes forming part of Accounts The audited accounts for the financial year 2008-09 was signed on 17th September 2009 in which above note was incorporated and signed by the Trustees and the auditors of the assessee Trust. This clearly evidences on the touch stone of preponderance of probabilities that there was a mistake happened at the time of purchase of the BMW car whereby it got registered in the name of the trustee instead of the assesssee trust although it was purchased by the assessee trust and once the mistake was detected, the steps were initiated to correct the mistake and to transfer the motor car in the name of the assessee trust. CIT(A) has rightly allowed the exemption u/s 11 of the Act to the assessee trust by passing a well reasoned order. We find no infirmity in the orders of the CIT(A) and accordingly we uphold the same and hold that the assessee trust is entitled for exemption u/s 11 of the Act - Decided in favour of assessee.

Summary

Issues Involved:
1. Contravention of provisions of Section 13 due to the purchase of a BMW car.
2. Entitlement to exemption under Section 11.
3. Validity of the assessment order and the decision of the CIT(A).

Detailed Analysis:

Issue 1: Contravention of Provisions of Section 13
The primary issue raised by the Revenue was that the purchase of a BMW car in the name of a trustee amounted to a contravention of Section 13(1)(c)(ii) and Section 13(2)(g) read with Section 13(3)(cc) of the Income Tax Act, 1961. The Assessing Officer (AO) argued that the funds of the trust were diverted for the benefit of an excluded person, as the car was registered in the name of the trustee and no log book was produced to show that the car was used exclusively for the trust's work. The AO held that the purchase of such a luxury car was not justified and could have been avoided by opting for a less expensive car. Consequently, the AO denied the exemption under Section 11 and made additions to the trust's income.

In response, the assessee trust contended that the car was purchased for the trust's activities and was erroneously registered in the trustee's name due to a communication gap. The trust provided evidence that the car loan was taken in the trust's name, the car was capitalized in the financial accounts, and the sale proceeds of the car were credited to the trust's bank account.

Issue 2: Entitlement to Exemption under Section 11
The CIT(A) examined the submissions and evidence provided by the assessee trust and found substance in them. It was noted that the car was purchased with the intention of using it for the trust's activities, and the loan was also in the trust's name. The CIT(A) observed that the AO had not conducted any independent inquiries regarding the actual use of the vehicle and had solely relied on the name mentioned in the invoice. The CIT(A) concluded that there was no contravention of Section 13, as the car was used for the trust's purposes and the mistake in registration did not negate this fact. The CIT(A) allowed the appeal of the assessee trust and held that the trust was entitled to exemption under Section 11.

Issue 3: Validity of the Assessment Order and the Decision of the CIT(A)
The Revenue appealed against the CIT(A)'s decision, reiterating that the purchase of the BMW car constituted a diversion of funds and a violation of Section 13. The assessee trust, in its defense, reiterated its earlier submissions and highlighted that the registration under Section 12AA was restored by the Mumbai Tribunal, which had also addressed the issue of the BMW car.

The Tribunal considered the rival contentions and the material on record. It noted that the car was capitalized in the trust's accounts, the loan was repaid from the trust's bank account, and the car was ultimately sold with the proceeds credited to the trust's account. The Tribunal observed that the mistake in registration was acknowledged in the audited accounts and steps were taken to rectify it. The Tribunal also referred to its earlier decision restoring the trust's registration under Section 12AA, where it was held that the purchase of the car did not warrant cancellation of the registration.

The Tribunal upheld the CIT(A)'s decision, affirming that there was no contravention of Section 13 and that the trust was entitled to exemption under Section 11. The appeal filed by the Revenue was dismissed.

Conclusion:
The Tribunal concluded that the purchase of the BMW car, although registered in the trustee's name due to a mistake, did not constitute a contravention of Section 13 as the car was used for the trust's purposes. The CIT(A)'s decision to allow the exemption under Section 11 was upheld, and the Revenue's appeal was dismissed. The order emphasized the importance of the trust's intention and actual use of the asset over the technical error in registration.