CASE OF RAUNAQ EDUCATION FOUNDATION-AN UNNECESSARY CASE OF PATENTLY WRONG LITIGATION BY REVENUE.

[C.A. DEV KUMAR KOTHARI]

References and links:

Sections 11,12, 13, 80G of Income-tax Act, 1961.

DIRECTOR OF INCOME TAX (EXEMPTION), NEW DELHI Versus RAUNAQ EDUCATION FOUNDATION 2013 (1) TMI 239 - SUPREME COURT

Commissioner of Income-Tax, Bombay South, Bombay Versus Ogale Glass Works Limited 1954 (4) TMI 3 - Dated - 19 April 1954 SUPREME COURT 

Facts of the case Raunaq Education Foundation (REF):

REF is a charitable trust duly registered and eligible for exemption of its income u/s 11 of the Act.

Previous year is year ended 31.3.2002 relevant to assessment year 2002-03 – a more than ten years old issue)

During March 2002, REF received a post-dated cheque dated 22.4.2002 from Apollo Tyres Ltd (ATL) for which it issued a receipt in month of March 2002.

As per AO some of Directors of ATL and trustees of REF were common and closely related and were persons referred to in section 13 (3). Therefore ATL was also a person referred to in section 13(3).

The AO held that the post-dated cheque had been accepted by the assessee to do undue favour to Apollo Tyres.

As per AO there was a violation of s. 13(2)(d)(h) by extending benefit or undue favor to ATL by accepting post dated cheques for donation.

Therefore, the AO denied benefit of s. 11 and exemption was denied. This was confirmed by the CIT(A).

On appeal the Tribunal reversed the order of AO and CIT(A)  and the High Court confirmed the order of ITAT.

The Tribunal and High court took view that the post dated cheque was given before 31.3.2002 and was duly honoured in April, 2002 when it was presented before the bank, the date of payment of the cheque should be treated as the date on which the cheque was received by the assessee.

Revenue preferred appeal before the Supreme Court and the Supreme Court, dismissed the appeal observing inter alia:

Though the assessee trust/REF issued a receipt in March 2002 when it received the cheque dated 22.4.2002, it was clearly stated in its record that the amount of donation was receivable in future and it was shown as donation receivable in the balance sheet as on 31.3.2002.

Also Apollo Tyres Ltd/ATL did not avail any advantage of the said donation during the FY 2001-2002.

When a post-dated cheque is issued, it will have to be presumed that the amount was paid on the date on which the cheque was given to the assessee and, therefore, it cannot be said that any undue favour was done by the assessee to Apollo Tyres Ltd.

Earlier judgment in Ogale Glass Works 1954 (4) TMI 3 - SUPREME COURT was followed to hold that A cheque, unless dishonoured, is payment

Wrong application of Section 13 (2)(d) or 13 (2) (h):

It seems that learned AO and CIT(A) both had applied the provisions of these clauses wrongly. Because these clauses are not applicable, even if a donor is allowed deduction u/s 80G based on post dated cheque. In fact, in this case such deduction was also not claimed.  In fact the aspect, whether receiving a post dated cheque amount to extend undue benefit or violation of S. 13 were not at all considered in terms of the exact provisions. The AO seems to have formed view that ATL was extended undue advantage, by enabling them to claim deduction for donations paid by post dated cheque, in their computation of income and therefore these clauses applied. However, in that situation these clauses are not applicable.  The effective portion of the   clauses relied on by the AO to deny exemption reads as follows:

[Section 11 not to apply in certain cases.

     13. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof—

                  [(d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year—

            (2) Without prejudice to the generality of the provisions of clause (c) ¹¹[and clause (d)] of sub-section (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-section (3),—

           (d) if the services of the trust or institution are made available to any person referred to in sub-section (3) during the previous year without adequate remuneration or other compensation;

          (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971), in any concern in which any person referred to in sub-section (3) has a substantial interest.

From reading of the above clauses we find that there is no provision to allow withdrawal of exemption if a donation is received by way of post dated cheque and even if the donor is a related person.

A reading of the above provisions suggest that enabling a person to claim deduction u/s 80G, in respect of donation received , itself does not amount to a benefit unduly extended to the donor. Such a situation is not at all covered by any of the clauses of S. 13 so as to withdraw the registration of assessee trust.

In the case of REF, even deduction u/s 80G was not claimed by the donor ATL in the PYE 31.03.2001. The deduction was in fact claimed in the year in which cheque of donation was actually cleared by the banker of ATL on presentation. Therefore, the reason given by the AO was patently wrong even on the basis of primary facts apparent from records of REF and ATL.

Though the AO had relied only on claused (d) and (h), author has gone through other provisions and find that merely receiving a post dated cheque for donation cannot in any way amount to violate any of the provisions of section 13. Receiving a post dated cheque does not mean that money or property of trust is lent or allowed to be used to the drawer of cheque.  

In this case even if a deduction u/s 80G was claimed by ATL on the basis of post dated cheque, in the year ended 31.03.2001 (Assessment Year 2001-02) it would not amount to violation of any of provisions of section 13 so as to enable the AO of REF to withdraws exemption and registration of the trust and assessee as unregistered AOP.  

Therefore, the case made out by the learned AO was patently wrong. In this case at least appeal should not have been filed by the revenue, before the High Court and then before the Supreme Court. When the Tribunal has categorically found that  REF has treated post dated cheque as donation receivable and  ATL has not claimed deduction u/s 80G before realization of cheque in April 2001, the  concerned counsels of revenue , the CCIT and CIT must have looked into the facts and legal provisions and decided not to prefer even appeal before High Court. It seems that the appeal was filed without proper application of mind and in a casual and routine manner.

Thanks for un-necessary litigation but with regrets:

On behalf of professional colleagues author express thanks to the revenue authorities for indulging into un-necessary litigation which provide considerable portion of professional jobs and assignments. In fact, if revenue authorities start acting properly, revenue and earnings of professionals will fall considerably. However at the same time author also regret to convey that such un-necessary litigation simply causes brain drain and wastage of public resources, though we professionals get some income- but such income is not with job satisfaction. We professionals can have income from other activities also with greater job satisfaction. Unnecessary litigation must come to an end to save public money and national human resources.

Case before the Supreme Court and decision:

In this case the decision of the Supreme Court center around a point, which in view of the author was not at all important and required for the decision on exact controversy about not allowing exemption under section 11 to REF.

The Supreme Court has held that date of handing over of cheque will be date of receipt or date of payment. The Supreme Court so held because though the cheque was tendered during March, it was dated April, and was cleared on presentation to the bank in due course during April. Really this aspect was not at all relevant for the question in hand. The controversy was whether assessee trust had extended any undue advantage and violated any provisions so as to withdraw exemption u/s 11. For this purpose, in view of author, examination of aspects related with dats of cheque were not at all relevant. The cheque was treated as donation receivable by REF and ATL also treated donation as actually made on the date of cheque and ATL accordingly claimd deduction u/s 80G in subsequent year beginning 1^st April,2001 instead of in the year ended on 31^st March 2001,

The ruling of the Supreme Court may lead to undesired consequences:

As per the ruling of the Supreme Court, date of payment will be date of handing over of cheque, even in case when cheque is post dated. For example, in this case cheque was of April but handed over in March. As per the Supreme Court, payment date will be considered the date of handing over of cheque in March. Author feels that this may lead to misuse of ruling and undesired consequences.

Suppose a payment was to be made within March. A cheque dated 20th May is handed over on say 30^th March and receipt dated 30^th March is also obtained. The cheque is honored and cleared on first presentation on 20^th May. As per the ruling, it can be said that payment has been made within March because the cheque was handed over in March and was cleared on presentation. This is likely to be misused.

With due respect to their lordship, the author have a different view  that  in case of handing over of post dated cheques, the date of payment should be the date of cheque and not the date on which cheque is handed over. In case of receiving a post dated cheque, the receiver takes delivery with understanding that it can be presented on or after the date written on the cheque. The date so written is the date of drawing the negotiable instrument- cheque. In such a case, before that date, there is no payment.

Date of handing over of cheque is important for drawer of cheque, because for delay on part of holder of cheque in depositing the cheque or enchashing the cheque, the drawer of cheque is not responsible.

If the cheque is of current date and can be presented immediately, then only it can be said that date of payment is date of handing over of the cheque. Such payment by current date cheque is subject to only one condition that is it should be cleared on presentation. In case it is dishonored, then there is no payment. As per commercial practices, only cheque received within banking hours, when the receiver can deposit the cheque, the date of delivery is considered as date of payment. In case cheque is handed over after banking hours/ clearing hours, the cheque is considered to have been received on the next banking day. Suppose a cheque is handed over on Saturday at 15:00 hours, this can be encashed or sent for clearly on next banking day say on Monday, in this case date of payment is considered as Monday. Many parties including banks, consider the date of realization of cheque as date of payment for the purpose of calculations of interest. Off course, in such cases, if there is considerable delay by holder of cheque, in realization of cheque, the drawer of cheque can ask for reversal of interest for period of delay in encashment of cheque by the drawee/ holder of cheque.

In view of author, in case of a post dated cheque one more condition is attached that it cannot be presented before the date written on cheque. This is because, the order on bank is of a future date and bank cannot honor such order to pay, before that date. Suppose in case of a post dated cheque, the drawer of cheque  (an individual in personal capacity) dies before the date written on the cheque, the bank has information of death,  then bank cannot pass such cheque, even if there are funds in account and cheque is properly written.   

Furthermore, in such cases, the date of payment can be date of cheque only if the cheque is honored on first presentation to the drawee bank.

Therefore, what is applicable in case of a cheque of present or current date, cannot be applied in case of a post dated cheque. It appears that in other cases considered by the Supreme Court, the issue was not related to post dated cheque handed over earlier then the date of cheque. Therefore, with due respect and honor the author feels that the judgment of the Supreme court on this aspect need reconsideration.