2017 (3) TMI 79 - AT - Income Tax

Denial of exemption u/s.11 - Held that - There is no dispute to the fact that the assessee is a charitable trust running various educational institutions. It is the allegation of the revenue that the trust is collecting capitation fee in the garb of donation and was therefore running with a profit motive. However, we find neither the Assessing Officer nor any of the persons who have stated before the department that they have given donation for getting admission has complained to the Government or appropriate authority for any such violation under the Maharashtra Educational Institutions (Prohibition of Capitation Fee) Act, 1987. Nothing has been brought on record that any student has been denied admission for not giving donation. Therefore, merely because some of the donors have stated that they have given donation for admission, which have been retracted later on, the same in our opinion will not dis-entitle the assessee trust from getting exemption which is existing solely for educational purposes. There cannot be wholesale denial of exemption u/s.11 for violations of provisions of section 13(1)(c) and income which is subject matter of violation only can be brought to tax. Now having held so, we have to see the extent of violation yearwise. Expenditure on account of vehicle maintenance - Held that - We find from the details furnished by the assessee that the Assessing Officer has disallowed expenditure of ₹ 21,850/- for A.Y. 2001-02, ₹ 1,43,893/- for A.Y. 2002-03, ₹ 2,24,077/- for A.Y. 2003-04 and ₹ 2,45,991/- for A.Y. 2004-05. It is an undisputed fact that Shri B.E. Avhad is a lawyer and is also attending to the various works of the trust. Apart from using his own car he has also used the vehicle of the trust. Therefore, disallowance of the entire expenditure on account of vehicle maintenance under the facts and circumstances of the case is not justified. Considering the totality of the facts of the case, we hold that 50% of the vehicle maintenance expenses can be held as for the objects of the trust and the balance 50% is to be disallowed and brought to tax. Depreciation on motor car is concerned an amount of ₹ 1,71,388/- for A.Y. 2002-03, ₹ 1,37,111/- for A.Y. 2003-04 and ₹ 4,37,589/- for A.Y. 2004-05 have been disallowed. Since the motor car is owned by the trust, therefore, disallowance of depreciation in our opinion is uncalled for. Accordingly, it is held that such depreciation is for the objects of the trust and cannot be disallowed as a facility given to Shri B.E. Avhad. Expenditure on foreign tour - Held that - The visit to Katmandu by Shri Rahul V. Karad, in absence of full details given before the Assessing Officer and in absence of furnishing of the passport despite being asked to do so by the Assessing Officer, the expenditure is held to be not for the objects of the trust. So far as visit to Australia by Shri Rahul V. Karad and Shri V.D. Karad during A.Y. 2001-02 is concerned the Assessing Officer has made addition of ₹ 1,52,930/-. Although the assessee has produced the plane tickets, however, there were purchases of personal articles like, sun glasses, perfumes, shirt etc. The assessee could not explain the source. It is also a fact that the daughter of Shri V.D. Karad was staying in Australia. Therefore, although the assessee has claimed that such expenditure is on account of attending the World Peace Tour, however, we do not find any merit in the argument of the Ld. Counsel for the assressee and the expenditure of ₹ 1,52,930/- for A.Y. 2001-02 is held as not for the objects of the trust. Similarly, the foreign tour expenses of ₹ 24,700/- for A.Y. 2002-03, ₹ 2,66,154/- for A.Y. 2003-04 and ₹ 3,75,442/- for A.Y. 2004-05 are held to be not for the objects of the trust and accordingly the same has to be brought to tax. Fee concession u/s.13(6) in case of an educational institution - Held that - We find from the details given by the assessee that it is the policy of the trust to give concession in fee to the children of the employees. We also find merit in the argument of the Ld. Counsel for the assessee that provisions of section 13(1)(c) are not applicable to any concession in fee given to the relatives of the employees. However, the same in our opinion is not applicable to the relatives of the trustees as defined in explanation 1 to section 13. The Assessing Officer is accordingly directed to bring to tax the concession in fees given to the relatives of the trustees only. So far as interest free loan of ₹ 18 lakhs given Mr. Rahul Karad is concerned, we find such interest does not relate to any of the years under appeal since nothing has been brought on record by the revenue that any such interest relate to any of the years under appeal. Even otherwise also, as held earlier there cannot be wholesale denial of exemption u/s.11. Expenditure incurred on account of credit card expenses of Shri B.E. Avhad - Held that - We find the Assessing Officer disallowed the same on the ground that the credit card was used for meeting expenses of hotel bills at Mumbai and New Delhi and air tickets to Mumbai and Delhi etc. It is also his allegation that the assessee being a Senior Advocate is regularly appearing before the Bombay High Court and Supreme Court and therefore his personal expenses has been met through such credit card. It is an undisputed fact that the matter of the assessee has also gone before the Hon ble Bombay High Court and Hon ble Supreme Court. Therefore, it cannot be said that Shri B.E. Avhad had travelled to Bombay or Delhi only for his clients and not for the trust. However, in absence of full particulars given by the trust on account of each and every expenses we hold that 50% of such expenditure is for the objects of the trust and the balance 50% is towards his personal expenditure which has to be disallowed and brought to tax. We hold and direct accordingly. Local tour by trustees and their family members to places where trust does not have activity is concerned, we find the assessee has incurred an amount of ₹ 47,697/- for A.Y. 2004-05. We find the assessee has given details at Page 884 of the paper book No.4. A perusal of the same shows that the tours are only by the trustees and in particular mainly by the President and the Managing trustee. We further find from the details filed that the visits are to Nagar Pathardi near Shirdi where trust has started a school during 1999-2000. The visit to Gondavale, Cochin, Mumbai, Madurai and Trivendrum are for administrative matters. The visit to Udaipur is also to attend the conference at Mount Abu and the visit to Solapur and Akkalkot was in connection with purchase of land to start educational complex at Solapur. Therefore, the local tours by the trustees in our opinion is for the objects of the trust and cannot be held as not for the objects of the trust. In view of the above discussion the Assessing Officer is directed to compute the amount of disallowance that has to be brought to tax and there cannot be wholesale denial of exemption. The grounds of appeal No.5, 6, 8 and 11 are decided accordingly. Disallowance u/s.43B, 40A(3) and 40A(7) etc - Held that - Since in the instant case the Tribunal has restored the registration u/s.12A to the assessee trust, therefore, the income in our opinion has to be computed u/s.11. It has been held in various decisions that the income u/s.11 has to be computed in a commercial manner and not as per the provisions of I.T. Act. The various heads of income u/s.11 are not relevant in case of a charitable trust and therefore we find merit in the argument of the Ld. Counsel for the assessee that while computing the income u/s.11 the various disallowances/additions u/s.40A(3), 40A(7) and 43B etc. cannot be made u/s.28 to 43. 162. We find the Hon ble Madras High Court in the case of CIT Vs. Rao Bahadur Calavala Cunnan Chetty Charities 1979 (8) TMI 17 - MADRAS High Court has held that income for purposes of section 11(1)(a) has to be computed on normal commercial basis without reference to provisions attracted by section 14. The ground raised by the assessee on this issue for the respective assessment years under appeal are accordingly allowed. Addition on account of treating certain expenses as capital expenses - Held that - We find although the assessee has raised the ground before the CIT(A) as per ground of appeal No.14, however, he has not given any decision on this issue. Further, treating the expenses as capital or revenue will not be material since the income in the case of a charitable trust has to be computed in a commercial manner as held by us in the preceding paragraph. Accordingly, the capital expenditure will also be considered as application of income. Accordingly, this ground by the assessee is allowed. However, the Assessing Officer is directed to make necessary verification and if there is double disallowance, make necessary correction. This ground is accordingly allowed for statistical purposes. Disallowance on account of income tax debited - Assessing Officer disallowed the above amounts on account of income tax debited in the books of MIMER college and DBSR hospital, Talegaon which is one of the constituent units of the assessee trust - Held that - We find merit in the above submission of the Ld. Counsel for the assessee. Since we have already held that the assessee trust is eligible for claiming exemption u/s.11, therefore, the income of the assessee trust has to be computed in commercial manner and such expenditure which is on account of TDS arrears of earlier year will be considered as application of income. Even otherwise also according to Ld. Counsel for the assessee, after disallowance of the same, application of income of the assessee trust for both the years will be higher than the income/receipts and therefore after granting exemption u/s.11 there will be no taxable income in the hands of the assessee. However, this needs verification at the level of the Assessing Officer. We therefore direct the Assessing Officer to make necessary verification and if the application is more than the income, there will be no taxable income. Accordingly, ground of appeal No.9 for A.Yrs. 2002-03 and 2003-04 are allowed for statistical purposes. Disallowance of excess provision for refund of fees - Held that - We find the assessee has made a provision of ₹ 50 lakhs for refund of fees in A.Y.2002-03 in respect of MIT SFS which is one of its constituent unit. The unit was closed during A.Y. 2003-04. Certain amount was repaid out of the provision of ₹ 50 lakhs and an amount of ₹ 30,96,750/- remained outstanding during A.Y. 2003-04 which remained unpaid even upto 31-03-2006. The Assessing Officer accordingly added back the excess provision in the year of closure of the unit, i.e. A.Y. 2003-04. It is the submission of the Ld. Counsel for the assessee that even if the amount is added as income for A.Y. 2003-04 the application of income in this year is still higher than the income/receipts and therefore after exemption u/s.11 there is no taxable income in the hands of the assessee. Since we have already held that the assessee is entitled to exemption u/s.11, therefore, we restore this issue to the file of the Assessing Officer to find out as to whether after disallowance of the same the application of income is more than the receipt and if there is no taxable income in the hands of the assessee. The Assessing Officer will pass appropriate order. The ground is accordingly allowed for statistical purpose. Incorrect addition by adopting wrong surplus - Held that - After hearing both the sides, we find the Assessing Officer of the assessment order for A.Y. 2004-05 has stated that the auditor has recasted the income and expenditure account of the assessee and arrived at surplus of ₹ 7,23,46,742/- for the year. According to the Ld. Counsel for the assessee this figure is incorrect since the auditor has recasted the surplus of ₹ 2,61,02,700/- in the recasted income and expenditure account for A.Y. 2004-05. According to him this typographical error needs to be corrected. In view of the above, we restore this issue to the file of the Assessing Officer with a direction to verify the records and if the contention of the assessee is correct then adopt the correct surplus of ₹ 2,61,05,700/- and not ₹ 7,23,46,742/-. This ground by the assessee is accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of reassessment proceedings.
2. Validity of special audit orders under section 142(2A).
3. Denial of exemption under section 10(23C)(vi).
4. Denial of exemption under section 11 due to alleged commercial activity and violation of section 13(1)(c).
5. Disallowance of expenses on World Peace Centre.
6. Disallowance under sections 40A(3), 40A(7), and 43B.
7. Additions on account of unexplained credits and capital expenses.
8. Enhancements made by CIT(A).

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The Tribunal found that the reassessment proceedings for A.Y. 1999-2000 were invalid. The reason for reopening the assessment was rental income, but no addition was made on this ground. Citing the decisions of Hon’ble Bombay High Court in Jet Airways India Ltd. and Hon’ble Delhi High Court in Ranbaxy Laboratories Ltd., the Tribunal held that if the reason for reopening is not addressed, other additions cannot be made. Therefore, the reassessment proceedings were deemed invalid.

2. Validity of Special Audit Orders under Section 142(2A):
The Tribunal held that the special audit orders were invalid as the Assessing Officer did not provide an opportunity of being heard to the assessee before recommending the special audit. This was in violation of the principles established by the Hon’ble Supreme Court in Rajesh Kumar and others vs. DCIT and the Hon’ble Bombay High Court in Nikunj Eximp Enterprises Pvt. Ltd. Consequently, the assessments for A.Y. 1999-2000 and 2000-01 were barred by limitation.

3. Denial of Exemption under Section 10(23C)(vi):
The Tribunal upheld the CIT(A)’s decision to deny exemption under section 10(23C)(vi) as the assessee did not have the necessary approval for the relevant assessment years. Despite the High Court quashing the DGIT’s withdrawal of exemption, the CBDT subsequently withdrew the exemption, and the writ petition challenging this was still pending.

4. Denial of Exemption under Section 11 due to Alleged Commercial Activity and Violation of Section 13(1)(c):
The Tribunal found that the assessee trust was entitled to exemption under section 11, despite allegations of commercial activity and violations of section 13(1)(c). The Tribunal noted that the trust’s activities were educational and charitable. It emphasized that violations of section 13(1)(c) should not lead to wholesale denial of exemption; only the income subject to violation should be taxed. The Tribunal directed the Assessing Officer to compute the disallowance accordingly.

5. Disallowance of Expenses on World Peace Centre:
The Tribunal allowed the expenses on World Peace Centre, holding that these activities were educational in nature. It rejected the objections regarding non-intimation of amendments to the trust deed and expenditure incurred abroad, citing that such expenses were for the objects of the trust.

6. Disallowance under Sections 40A(3), 40A(7), and 43B:
The Tribunal held that the income of the assessee trust should be computed in a commercial manner under section 11, and disallowances under sections 40A(3), 40A(7), and 43B were not applicable.

7. Additions on Account of Unexplained Credits and Capital Expenses:
For A.Y. 2001-02, the Tribunal found that the CIT(A) did not address the issue of double disallowance of capital expenses and directed the Assessing Officer to verify and correct this. For A.Y. 2002-03 and 2003-04, the Tribunal directed the Assessing Officer to verify whether the application of income was more than the receipts and adjust the taxable income accordingly.

8. Enhancements Made by CIT(A):
The Tribunal held that the CIT(A) was not justified in enhancing the income by disallowing various expenses, as these were for the objects of the trust. It directed the Assessing Officer to restrict disallowances to the extent of violations under section 13(1)(c).

Conclusion:
The Tribunal allowed the appeals for A.Y. 1999-2000 and 2000-01, and partly allowed the appeals for other years, directing necessary adjustments and verifications by the Assessing Officer.