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TMI Blog2012 (8) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... gh for the Appellant. Anadi Verma for the Respondent. ORDER N. K. Saini, Accountant Member This is an appeal by the assessee against the order dated 27-4-2010 of the ld. CIT(A)-II, Kanpur. 2. The following grounds of appeal have been raised: 1.That the Ld. CIT (A)-II Kanpur has erred in law and on facts in holding that the exemption under sections 11 and 12 of the Income-tax Act 1961 is available only when the funds are invested or deposited on the specified form or modes as provided in sub section (5) of section 11 of the Income-tax Act, 1961. 2.That while sustaining denial of exemption under sections 11-13 of the Income-tax Act, and the findings of the Ld. Assessing Officer, the Ld. CIT(A) II, Kanpur has erred in law and on facts in not considering that giving of loans out of monies not set apart under section 11(2) of the Income-tax Act, 1961 is not restricted under the provisions of section 11(5) of the Income-tax Act, 1961. 3.That the Authorities below have also failed to consider and appreciate that the loans given by the Appellant Trust are not covered by the scope of investment and/or deposits, hence the invocation of provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the provisions of section 13(1) of the Act. The assessee objected to the proposed show cause notice and submitted its replies vide leters dated 16-12-2008 and 18-12-2008, which read as under : Reply dated : 16-12-2008 (1)That the society was formed on 17-9-1977 with very meager resources by Shri Ram Lakhan Bhatt, who is a founder member and manager of the society since inception. Gradually with the dedication and whole hearted efforts of Shri Ram Lakhan Bhatt; the Society raised an Intermediate School and got it approved by Central Board of Secondary Education, New Delhi for High School and Intermediate Examinations. (2)A chart showing excess of income over expenditure for last seven years is attached to show that upto March, 2003, it had accumulated savings, after spending 75-85 per cent of earning, amounting to ₹ 1,16,19,274. (3)That in the year 2002-03, Shri Ram Lakhan Bhatt, started another society under the name and style of Ram Lakhan Shiksh Samiti for starting a Degree College in South, Kanpur. To provide Financial support for acquisition of Land and Building for Degree College, the assessee society provided short term fund to the said society out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 11(5) so far as free accumulated profits of the trust are concerned. 4.That condition provided under section 11(3)( d ) also does not apply because it provides for making investment in accordance with the provisions of section 11(5) which are again applicable only to such funds as are covered (remained unutilized) under section 11(2) of the Income-tax Act, 1961. 5.That the assessee society gave a loan to another society i.e. M/s. Ram Lakhan Shiksha Samiti for purchase of land and for construction of College Building over the same. This object is similar to the objects of the society and therefore, the same cannot be said to be diversion of funds for an object other than the objects of the assessee society. 4.2 The assessee also submitted a chart of its Income and Expenditure from Financial years 1996-97 to 2002-03, which the AO had reproduced vide para 4.3 of the assessment order dated 20-12-2008, for the cost of repetition, the same is not reproduced herein. The AO held that the assessee was not entitled for claim of deduction under sections 11 and 12 in view of the exclusion provided by section 13(1) of the I.T. Act by observing as under : 4.4 Furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led for claim of deduction under sections 11 and 12 in view of exclusion provided by section 13(1) of I.T. Act. Reliance was placed on the judgment of the Hon'ble Kerala High Court in the case of Mundakapdam Mandiram's Society v. CIT , [2002] 258 ITR 395 5. Being aggrieved the assessee carried the matter to the ld. CIT(A)and the submissions made before him are reproduced verbatim as under : The appellant has submitted that the relevant catch words in the provisions of section 13(1)( d )( i ) are any funds of the trust and or institution are invested or deposited .... . It was further argued that giving of loan to another institution was neither invested nor deposited . In this connection, the learned A. R. has invited my attention to following decisions: ( a ) AN Shamsudeen v. Union of India [2000] 244 ITR 266 (Mad.). In this decision Hon'ble Madras High Court distinguished loan from deposit. The mere presence of some of the attributes of the loan transaction in a deposit would not be sufficient to regard a loan as a deposit. They are two different transactions in the commercial word. ... ( b ) Baidya Nath Plastic Industries ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne the provisions of section 11(2) of the LT. Act, which states, inter-alia , that the income so accumulated or set apart shall not be included in the total income of the financial year of the person (in receipt of the income), provided the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5). 4.2 The wording of this section is clear unambiguous. It means that the exemption under section 11 of the Act is available only when that money is invested or deposited in the form or modes specified. On analysis we find that this provision has 2 parts:- ( i ) That the accumulated funds have to be used by the trust in a manner which amounts to invested or deposited and ( ii ) such amount invested or deposited has to be in the specified form or modes. In case of failure to adhere the either of the conditions, the exemption under section 11 will not be available. In the instant case, the appellant's A.R. has himself admitted that giving loan is not the same thing as invested or deposited . Therefore, by giving loan there has been a clear violation of the provisions in-limine. Further, even assuming that giving loan i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n support of the above, a copy of the assessment order dated 24-12-2010 for the assessment year 2008-09 is submitted which is placed on record. Reliance was placed on the following case laws : ( i ) DIT v. Acme Educational Society [2010] 326 ITR 146(Delhi), ( ii ) DIT v. Pariwar Sewa Sansthan ( iii )Decision of the I.T.A.T. ,Delhi Bench in I.T.A. No. 829 (Delhi)/1999 in the case of DIT ( Exemption ) , v. Parwar Sewa Sansthan. ( iv )Decision of the I.T.A.T., Madras Bench in the case of Kumudam Endowments v. ITO [1990] 32 ITD 210 , ( v )Decision of the I.T.A.T.Delhi Bench in the case of Alarippu v. ITO [1997] 60 ITD 478, ( vi ) DIT ( Exemption ) v. Alarippu [2000] 244 ITR 358 (Delhi) 8. In his rival submissions, the ld. D.R. strongly supported the orders of the authorities below and further submitted that the source of loan given by the assessee to Ram Lakhan Shiksha Samiti was from the funds included in accumulated funds proposed to be utilized for the purposes of section 11(5) of the Act. Therefore, the funds which were set aside for the purposes as per section 11(2) could only be utilized in the manner provided in section 11(5) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance is placed on the decision of Hon'ble ITAT Lucknow in ITA No. 625/LUC./2007 in the case of Asstt. CIT-I, Kanpur v. Seth Anandram Jaipuria Educational Society, Kanpur . 4.5 The Ld. AO has mentioned in para 3 of the assessment order that (Quoted) However, while calculating the application of income, the assessee has excluded the amount of depreciation allowance .. The appellant may be due to ignorance of law has not been claiming depreciation as an expenditure as a part of application of income or as a charge on the Profit Loss account although the same was admissible. Even in the assessment year 2000-2001 the appellant did not claim depreciation as a part of total expenditure or as application of income for the year. A Copy of Audited Balance Sheet as on 31/3/2000 filed along with the Return of income of AY 2000-2001 before the Ld. A.O. are again enclosed for your honour's ready reference, marked as Annexure 3. The depreciation amounting to ₹ 8,69,002.50, if added to the total expenditure for the A.Y. 2000-2001, as shown in the table given by the Ld. A.O. in para 4.3 of the Asstt. Order, shall increase the total expenditure to ₹ 64 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the previous year is left to be dealt with, and to be considered for the purpose of income-tax exemption, sub-section (2) of section 11 can be pressed into service. However on the facts and circumstances of appellant's case, in the AY 2006-07, sub-section(2) of section 11 of the Income-tax Act, 1961 cannot be pressed. Reliance is placed on the following judgments of Hon'ble Supreme Court of India : ( i ) Addl. CIT v. A.L.N. Rao Charitable Trust [1995] 216 ITR 697 ( ii ) S.R.M. M. CT. M. Tiruppani Trust v. CIT [1998] 230 ITR 636 Reliance is also placed on the decision of Hon'ble ITAT Lucknow, in the case of Murlidhar Sohanlal Foundation [2005] 92 TTJ 1054 held :- .We also find that the Hon'ble Supreme Court in the case of A.L.M. Rao Charitable Trust ( supra ) has held that the purpose of section 11(2) was not to restrict the scope of exemption under section 11(1)( a ) of the Act. The observations made by the Hon'ble Supreme Court in this connection have been mentioned earlier. In view of this decision, the claim of the assessee deserves to be allowed. We also find that the Hon'ble Supreme Court in the case of S. RM. M. CT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts income for the purposes. To similar effect a decision was taken in the case of Indian National Theatre Trust (supra). On the facts, it has been held that in case the objects of both the donor and the donee are the same, the loan advanced to the donee trust could not but be said to be application of income in furtherance of objects of the assessee. No contrary decisions has been cited by the learned DR on this proposition. It has also not been denied that the objects of both the donor and the donee are not similar. Applying the ratio in the case of Indian National Theatre Trust (supra) it could not be said that the amount given to Mahila Haat did not constitute the application of income. Thus on the facts of the case it is held that there is no violation of section 13(1)( d ) of the Act and the amount as given to Mahila Haat would constitute applications of the income .. Reliance is also placed on the order of Hon'ble ITAT, Delhi in the case of Indian National Theatre Trust v. ITO [1985] 13 ITD 588. The Hon'ble ITAT held :- .There is another aspect we would like to touch upon here as it is very relevant, i.e. the loan advanced to Shri Ram Centre for Art and Cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or sub-clause ( v ) or sub-clause ( vi ) or sub-clause (via) of clause (23C) of section 10,] shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or [set apart or ceases to remain so invested or deposited or credited or paid or] as the case may be, of the previous year immediately following the expiry of the period aforesaid. Therefore, considering the legal provisions of section 11(3) of the Income-tax Act, 1961 even if it is assumed that accumulated funds have been utilized in giving temporary loan to Ram Lakhan Shiksha Samiti in the FY 2002-03 then the taxability of such accumulated amount under section 11(2) which ceases to be accumulated may have been considered for taxability as per law in FY 2002-2003 4.12 In view of above submissions and on the facts and circumstances of the case the first issue raised by the Ld. DR is in-fructuous and non-existent and therefore liable to be dismissed. 9.1 As regards to the objection of the ld. D.R. that the recipient was not registered under section 12AA of the Act at the relevant time, the ld. Counsel for the assessee in his rejoinder vide written sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and irrelevant .. 7. The judgment of Hon'ble Kerala High Court in the case of Mundkapadam Mandiram Society v. CIT 258 ITR 395 relied on by the Ld. A.O. and Ld. DR is clearly distinguishable from the facts of the present case. In the case of M. Mandiram Society (supra) the Hon'ble High court gave the finding as :- . It is admitted and there is finding to the effect an amount of ₹ 25000 was deposited by the petitioner with Integrated Finance Company .. . In that case a 'DEPOSIT' was made with a private finance company but in the present case of appellant a interest free 'LOAN' was given by the appellant society out of its charitable objects to another charitable society having similar objects. 8. Without prejudice to all submissions here in above, your humble appellant submits that after finding that the appellant has violated the provisions of section 13(1)( d ) of the Income-tax Act, 1961 the Ld. AO could not have taxed the entire income on Maximum Marginal Rate in any case in the AY 2006-07. Interest free temporary Loan was given by the appellant to Ram Lakhan Shiksha Samiti and no interest was received in the impugned assessment year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in the case of relevant income which is derived from property held under trust for charitable purposes, which is of the nature referred to in section 11(4A), tax shall be charged on so much of the relevant income as is not exempt under section 11 section 164(2) was reintroduced by the Direct Tax Laws (Amendment) Act, 1989 with effect from 1-4-1989. Earlier, it was omitted by the Direct Tax Laws (Amendment) Act, 1987. However, the Legislature inserted a proviso by the Finance Act, 1984 with effect from 1-4-1985. By the said proviso, it is inter alia , laid down that where whole or part of the relevant income is not exempt by virtue of section 13(1)( d ), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. The phrase relevant income or part of the relevant income' is required to be read in contradistinction to the phrase 'whole income' under section 161(1A). This is only by way of comparison. Under section 161(1A), which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, the tax shall be charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the income earned by it on its funds. Sub-section (2) of section 11, which was introduced with effect from 1-4-1971, requires that where 75 per cent of the income of the trust is not applied, or is not deemed to have been applied, to charitable or religious purposes, such income, which is accumulated, will not be included in the total income if certain conditions are satisfied. One of the conditions prescribed is that money so accumulated is set apart for investment in the forms or modes specified in sub-section (5). This condition is to be found in clause ( b ) of sub-section (2) which as it stand today, was introduced by the Finance Act, 1983, which became effective from 1-4-1983. The same Finance Act introduced sub-section (5) which prescribes the forms and modes of investing and depositing moneys accumulated by the trust which are referred to in clause ( b ) of sub-section (2). Now, the requirement of investment of accumulated funds in specified securities, which has been introduced in the form of sub-section (5), is likely to create difficulties for old trusts which have been granted exemption under section 11 [as it stood before the introduction of sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. In the instant case, it is noticed that the assessee-society advanced a loan of ₹ 1,28,06,709 in the period relevant to the assessment year 2003-04. The said loan was received back in the month of March, 2009. According to the AO, since the assessee had given loan to another-society, it was violation of the provisions of section 13(1)( d ) read with section 11(5) of the I.T. Act,1961. In the instant case, it is noticed that in the earlier year when the loan was given and remained with the recipient no such disallowance has been made and also in the subsequent year when the loan was received back, no such disallowance was made. It is noticed that the AO while framing the assessment for assessment year 2008-09 vide order dated 24-12-2010 in para 4.1 clearly observed that the loan given to M/s. Ram Lakhan Shiksha Samiti has been repaid during financial year 2008-2009 and M/s. Ram Lakhan Shiksha Samiti is also engaged in charitable activities of education, copy of byelaws and registration certificate under section 12A has also been filed. In the instant case, the provisions of section 13(1)( d ) read with section 11(5) of the I.T. Act have been invoked by the AO while den ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier years that the assessee was entitled for exemption under section 11 of the Act, then by keeping in view the principles of consistency , the AO was not justified in denying the benefit of exemption under section 11 of the I.T. Act to the assessee for the year under consideration. In the instant case, the AO never disputed this fact that the assessee as well as Ram Lakhan Shiksha Samiti i.e., the society, who received the loan, were having similar objects, therefore, the temporary loan was given by the assessee to another society having similar object and nothing is brought on recorded by the AO that the said loan was out of the accumulated surplus of the year under consideration set apart because the AO himself in para 3 of the assessment order has mentioned that, Since the surplus of income over expenditure is less than 15 per cent of its gross receipts, then the income of the assessee works out to Nil in case the computation is made under sections 11 and 12 of I.T. Act , which clearly shows that the said loan was not out of the surplus of the year under consideration or accumulated surplus funds which is evident from the observations of the AO at page 2 of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted to the trust or institution; ( ii )any assets (being debentures issued by, or on behalf of, any company or corporation) acquired by the trust or institution before the 1st day of March, 1983; ( iia )any asset, not being an investment or deposit in any of the forms or modes specified in sub-section (5) of section 11, where such asset is not held by the trust or institution, otherwise than in any of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 1993, whichever is later; ( iii )any funds representing the profits and gains of business, being profits and gains of any previous year relevant to the assessment year commencing on the 1st day of April, 1984 or any subsequent assessment year. Explanation. -Where the trust or institution has any other income in addition to profits and gains of business, the provisions of clause ( iii ) of this proviso shall not apply unless the trust or institution maintains separate books of account in respect of such business. Explanation. -For the purposes of sub-clause ( ii ) of clause ( c ), in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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