2020 (2) TMI 75 - AT - Income Tax

Exemption u/s 11 - Charitable activity u/s 2(15) - Total turnover from sweet shop business which is very higher the prescribed limit of ₹ 25 lacs - Transaction done with related party - certain purchases made by the assessee treating as transactions with specified persons u/s 13(3) of the Act which was allowed by the ld. CIT(A) by holding that assessee's activities are chartable in nature and there is no violation of section 13 (3) - HELD THAT - AO in the remand report has not disputed the core basic activity of the assessee as preparation of Prasad as per request of the devotees, offering the same to God and thereafter distribution of this Prasad to other devotees as well as general public and finally remaining Prasad is distributed to the children of various schools. The assessee has furnished the details of day today distribution of Prasad which is not in dispute. Therefore, when the assessee is not charging anything for providing the services of distribution of Prasad to the devotees, general public as well as school children in the state of Rajasthan then the receipts from the devotees who are requesting for preparation of Prasad and offering the same to God itself is not in the nature of trade, commerce or business. Hence, we do not find any error or illegality in the order of the ld. CIT(A) qua this issue. Violation of provisions of Section 13(1)(C)(ii) r.w.s.13(2)(g) - AO has invoked the provisions merely because the assessee has made purchases from M/s. Pawansut Trading Company Pvt. Ltd., New Delhi which is a related party. However, the AO has nowhere stated that the assessee has made excess payment to the said unrelated party. This payment ought to have been made in terms of fair market price. There is no allegation of the AO that the assessee has given more prices to the related party than to the unrelated third party. Merely because the transaction is done with the related party, if the same is done strictly as per normal terms and conditions and no undue benefit is given to the unrelated party then even if the transaction is done with specified persons, it will not amount to violation of provisions of section 13(1)(C)(ii) r.w.s. 13(2)(g) of the Act. Only when it is found that the assessee has given undue benefit to the related party then it would amount to violation of these provisions. Further, even if it is found that the assessee has give some benefit by making excess payment in comparison to the actual price in terms of fair market price then only excess payment found to be made to the related party would be considered as income not applied for charitable purposes. In this case, the AO has not made any such allegations and his finding is not based on any specific actual undue benefit but only on conjecture and surmises that since the transaction is with related party, it is a violation of provisions of section 13(1)(c)(ii) r.w.s. 13(2)(g). Once the income is not applied or used for direct or indirect benefit of specified person but it is only a transaction on a competitive rate then there would be no violation of section 13(1)(c)(ii) - when the income or the property of the trust is not diverted in favour of the any person specified in sub-section (3) then the provisions of section 13(2(g) are also not violated. In this case, it is only a transaction of purchase of materials by the assessee from the related party but when the purchases are made at the market rate and at competitive price then it would not amount to giving any benefit or utilizing the income for the benefit of related party. CIT(A) has decided this issue after giving opportunity to the AO to point out as to how any undue profit has been passed to the related party. In the absence of any facts or materials to indicate that the assessee has given any undue benefit or even applied its income or property for the benefit of the specified person, the mere transaction with the related party would not ipso facto attracts the provisions of section 13(1)(C)(ii) r.w.s. 13(2)(g) of the Act. Accordingly, we do not find any reason to interfere with the order of the ld. CIT(A) qua this issue. Disallowance of 5% of the purchases made from M/s. Pawansut Trading Company Pvt.Ltd., New Delhi by the AO which was deleted by the ld. CIT(A) - This issue is only a consequential disallowance made by the AO after denying the benefit of exemption u/s 11 and 12 of the Act in respect of purchases made by the assessee from related party. Since we have already considered and decided this issue of violation of 13(1)(c)(ii) r.w.s. 13(2)(g) of the Act, therefore, in the absence of any excess or extra payment made by the assessee to the said related party on account of purchases and the transaction is found at arms length, therefore, the adhoc disallowance of 5% made by the AO is arbitrary and unjustified. - Decided against revenue

Summary

Issues Involved:
1. Exemption under Section 11 of the Income Tax Act, 1961.
2. Violation of Section 13(1)(c)(ii) read with Section 13(2)(g) of the Income Tax Act, 1961.
3. Non-reporting of related party transactions in the audit report.
4. Genuineness of purchases from specified persons.
5. Disallowance of 5% out of purchases from M/s. Pawansut Trading Company Pvt. Ltd.

Detailed Analysis:

1. Exemption under Section 11 of the Income Tax Act, 1961:
The Revenue contended that the assessee's activities were commercial in nature, involving the sale of Prasad, which is not a charitable activity as defined under Section 2(15) of the Act. The AO noted that the total turnover from the sweet shop business exceeded the prescribed limit of ?25 lakhs, thus attracting the 2nd proviso to Section 2(15). The assessee argued that the preparation and distribution of Prasad were charitable activities, with the surplus arising from cancellations being set aside for charitable purposes. The CIT(A) found that the activities were charitable, involving the preparation of Prasad for devotees and its distribution to the general public and school children. The Tribunal upheld the CIT(A)'s decision, noting that the activities were consistent with previous years and did not involve a profit motive.

2. Violation of Section 13(1)(c)(ii) read with Section 13(2)(g) of the Income Tax Act, 1961:
The AO held that the assessee violated these provisions by making purchases from M/s. Pawansut Trading Company Pvt. Ltd., a related party, and thus denied the exemption under Sections 11 and 12. The CIT(A) found that the purchases were made at market rates and no undue benefit was given to the related party. The Tribunal agreed, stating that merely transacting with a related party does not constitute a violation unless undue benefit is proven.

3. Non-reporting of related party transactions in the audit report:
The AO noted that the auditor did not report the transactions with M/s. Pawansut Trading Company Pvt. Ltd. in the audit report furnished under Section 12A(1)(b) in Form No. 10B. The CIT(A) found that the purchases were genuine and at market rates. The Tribunal upheld this finding, stating that the non-reporting did not affect the genuineness of the transactions.

4. Genuineness of purchases from specified persons:
The AO doubted the genuineness of the purchases from M/s. Pawansut Trading Company Pvt. Ltd., citing the meager income declared by the company. The CIT(A) found that the purchases were at market rates and no undue benefit was given. The Tribunal agreed, noting that the AO did not provide evidence of any malpractice or undue advantage.

5. Disallowance of 5% out of purchases from M/s. Pawansut Trading Company Pvt. Ltd.:
The AO disallowed 5% of the purchases, citing the absence of comparable rates and non-disclosure in the audit report. The CIT(A) deleted the disallowance, finding that the purchases were at market rates and no undue benefit was given. The Tribunal upheld this decision, stating that the disallowance was arbitrary and unjustified.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the exemption under Sections 11 and 12 of the Act and to delete the disallowance of 5% out of the purchases from M/s. Pawansut Trading Company Pvt. Ltd. The Tribunal found that the assessee's activities were charitable in nature, there was no violation of Section 13(1)(c)(ii) read with Section 13(2)(g), and the purchases from the related party were genuine and at market rates.