2013 (6) TMI 218 - AT - Income Tax

Exemption u/s 11 & 12 denied - matter referred to Valuation Officer for determining the cost of construction of building and adopting the same - allegation of violation of provision of section 13(1)(c) read with section 13(3) - inflated construction cost of the building - assessee society is running an educational school & during the assessment proceedings A.O noticed that the assessee has constructed a building - Held that - The onus lies on the Revenue to bring on record, cogent material/evidence to establish that the trust/charitable institution is hit by the provisions of section 13. As in the present case A.O. has completely failed to bring any sort of evidence or material based on which it can be said that the Managing Trustee Shri Vipin Varshney benefited directly or indirectly to invoke section 13 of the Act. The Revenue failed to discharge burden in this regard. Therefore, in absence of the material, the view of Revenue authorities cannot be up held. The Revenue is of the view that as per the provisions of section 13(1)(c)(ii) it is deemed to benefit to the Managing Trustee as covered by the words 'directly and indirectly'. It is to note that the Revenue authorities have failed to distinguish difference between indirect benefits and presumption of benefits. Both are separate situations. Even in case of indirect benefit, there must be certain evidences, it can not be held on presumption basis that Managing Trustee was benefited by inflating construction cost. In the case under consideration, entire basis of the A.O. is on presumption and such presumption is not sustainable in law. A.O. referred the matter during the assessment proceedings to the D.V.O. under section 142A which is contrary to the law laid down in the case of Sargam Cinema v. CIT 2009 (10) TMI 569 - Supreme Court of India wherein held that reference under section 142A cannot be made unless the books of account is not rejected. In the case under consideration AO referred the matter to DVO without rejecting books of account which is contrary to the law. Reference under section 142A can be made by the A.O. only under those circumstances for estimating the value of the investment referred in the section 69 to 69B or fair market value of any property provided in the section. As per section 69 if the investment was not recorded in the books of account and under section 69B under the circumstances where the A.O. was of the view that the investment acquiring prescribed asset exceeds the amount recorded in the books of account. In the case under consideration, section 69 is not applicable since the investment has been recorded in the books of account. Section 69B is also not applicable. As per the A.O. the assessee has shown excess investment in the books of account. Therefore, as per condition prescribed under section 142A(1) read with section 69 and 69B the reference itself is an invalid reference. In favour of assessee.

Issues Involved:
1. Denial of exemption under sections 11 and 12 of the Income-tax Act, 1961.
2. Reference to the Valuation Officer for determining the cost of construction.
3. Alleged violation of provisions of section 13(1)(c) read with section 13(3) of the Income-tax Act.
4. Addition of donations received for the corpus of the society as the assessee's income.
5. Validity of the orders passed by the authorities.

Issue-wise Detailed Analysis:

1. Denial of exemption under sections 11 and 12 of the Income-tax Act, 1961:
The assessee, a registered society under section 12AA, was denied exemption under sections 11 and 12 by the Assessing Officer (A.O.) due to alleged violations of section 13(1)(c)(ii). The A.O. concluded that the assessee inflated the construction cost of a building, leading to the siphoning of funds by the Managing Trustee. The A.O. computed the income in a normal commercial manner, withdrawing the exemption under sections 11 and 12. The CIT(A) upheld the A.O.'s decision, linking the findings to a previous year's adjudication.

2. Reference to the Valuation Officer for determining the cost of construction:
The A.O. referred the matter to the District Valuation Officer (D.V.O.) to estimate the actual investment in the construction of the building. The D.V.O.'s report showed a significant difference between the cost of construction declared by the assessee and the estimate. The A.O. rejected the assessee's objections to the D.V.O.'s report, concluding that the difference indicated funds were siphoned out to benefit the Managing Trustee, thereby violating section 13(1)(c)(ii). The assessee argued that the reference to the D.V.O. was invalid as the books of account were not rejected, citing the Supreme Court's decision in Sargam Cinema v. CIT, which states that a reference under section 142A cannot be made unless the books of account are rejected.

3. Alleged violation of provisions of section 13(1)(c) read with section 13(3) of the Income-tax Act:
The A.O. and CIT(A) concluded that the Managing Trustee benefited from the inflated construction costs, violating section 13(1)(c). However, the Tribunal found no evidence that the Managing Trustee actually benefited from the inflated costs. The Revenue failed to provide any bills, vouchers, or other records proving that the funds were used for the Managing Trustee's personal benefit. The Tribunal emphasized that the burden of proof lies with the Revenue to establish that the trust is hit by the provisions of section 13. The Tribunal concluded that the A.O.'s findings were based on presumption rather than evidence.

4. Addition of donations received for the corpus of the society as the assessee's income:
The A.O. added donations received for the corpus of the society to the assessee's income, concluding that the funds were siphoned out to benefit the Managing Trustee. The Tribunal found no basis for this conclusion, noting that there was no evidence that the donations were used for personal benefit. The Tribunal referenced the case of CIT v. HPS Social Welfare Foundation, where the court held that the A.O. could not dispute the genuineness of donations without summoning the office bearers of the organization that received the donations.

5. Validity of the orders passed by the authorities:
The Tribunal found that the A.O. and CIT(A) failed to provide sufficient evidence to support their conclusions. The Tribunal noted that the Revenue's approach was inconsistent, as no additions were made in similar cases in other assessment years. The Tribunal also found that the reference to the D.V.O. under section 142A was invalid, as the books of account were not rejected. Consequently, the Tribunal set aside the orders of the authorities, quashing all additions and allowing the benefits under sections 11 and 12.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for Assessment Years 2006-07, 2007-08, and 2008-09, and dismissed the appeal filed by the Revenue for Assessment Year 2008-09. The Tribunal concluded that the A.O. wrongly invoked section 13 of the Act and withdrew the benefits of sections 11 and 12 based on presumptions rather than evidence. The Tribunal emphasized the need for the Revenue to provide cogent material evidence to establish violations of section 13.

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