9911796707
TMI Blog2014 (10) TMI 825X X X X Extracts X X X X X X X X Extracts X X X X ..... ground is that the assessee is a trust settled by Shri Rama Nagappa Shetty on May 2, 1975, with other trustee Smt. Sudha Rama Shetty and Shri Diwakar Todurkar, having the main object like charity by offering social, educational, medical facilities and facilities to poor and needy citizens of Hubly and surrounding areas. Right from inception, the assessee has been enjoying the charity status and exemption under sections 11 to 13 of the Income-tax Act, 1961. In the assessment years 2003-04 and 2004-05, assessments were made on March 15, 2006 and March 26, 2006 under section 143(3) of the Income-tax Act respectively. The learned Commissioner took cognizance under section 263 of the Income-tax Act and set aside those assessment orders. Dissatisfied with the order of the learned Commissioner under section 263, the assessee filed appeal before the Tribunal in I. T. A. Nos. 662 and 663/Bang/2008 and the Tribunal vide its order dated October 31, 2008, allowed the appeals and quashed the order of the learned Commissioner. Dissatisfied with the order of the Income-tax Appellate Tribunal, the Revenue went in appeal before the hon'ble jurisdictional High Court and the hon'ble High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law, for fresh consideration without influenced by its earlier orders. All contentions are kept open." 3. In the assessment year 2001-02 the assessee has challenged the reopening of the assessment before the Tribunal. This ground appears to have been rejected and the assessee took the matter in appeal before the hon'ble High Court vide I. T. A. No. 5041 of 2009. The hon'ble High Court has dismissed this appeal of the assessee on April 22, 2010 and upheld the reopening of the assessment. Against this order, the assessee went in appeal before the hon'ble Supreme Court and the hon'ble Supreme Court has reversed the orders of the High Court as well as of the Tribunal and quashed the assessment order on the ground that proper sanction was not taken by the Assessing Officer before reopening the assessment. The hon'ble Supreme Court has decided the civil appeal No. 10469 of 2010 on December 10, 2010. Thus we are called upon to decide the four appeals, i.e., three directed by the assessee in the assessment years 2005-06, 2002-03 and 2006-07 and one by the Revenue in the assessment year 2005-06. 4. The grounds of appeal by the Revenue in I. T. A. No. 1172/ Bang/200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment order in this year was passed on December 7, 2007, under section 143(3) and outcome of that has been considered in the other two years, where assessments have been framed under section 143(3) read with section 147 on December 30, 2008. The brief facts in this year are that the assessee has filed its return of income on October 31, 2005, declaring an income at nil. The source of income to the assessee are from different streams which are as under : (Rs.) (a) Donations 17,62,888 (b) Interest received 30,69,354 (c) Profit on sale of shares 68,96,831 (d) Rent received 43,00,000 (e) Dividend received 2,81,173 (f) Fees received 7,47,96,946 (g) Other receipts 11,66,706 (h) Receipts towards corpus 2,69,84,491 (i) Net agricultural income 34,76,212 6. As observed earlier, the trust came into existence on May 2, 1975, when it was settled by the settlor Shri Rama Nagappa Shetty and other trustee Smt. Sudha Rama Shetty and Shri Diwakar Saraswati Todurkar. On April 25, 1978, a supplementary deed was executed vide which an amendment was brought to the clause 2(1) of the deed incorporating letting out the Kalyanaman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer cannot deny the exemption admissible to the assessee under sections 11 and 12 of the Income-tax Act, 1961. On the other hand the learned Departmental representative pointed out that the Assessing Officer has narrated the circumstances whose accumulative setting would indicate that the trust is not adhering to its objects of charity, rather it is in the business of profit making. 9. On due consideration of the circumstances, we find that the hon'ble Supreme Court in these cases has propounded that even though concept of res judicata is not applicable in the Income-tax proceedings, but if there is no change in the basic facts and circumstances in a particular year and on the basis of those facts and circumstances, one view has been taken by the Revenue authorities, then principle of consistency to take similar view ought to be followed. In this connection, observations of the hon'ble Supreme Court in the case of Excel Industries Ltd. [2013] 358 ITR 295 (SC) in paragraphs 28 to 31 are worth to note which read as under (page 303) : "28. Secondly, as noted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter-and if there was no change it was in support of the assessee-we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-tax in the earlier proceedings, a different and contradictory stand should have been taken.' 31. It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) 20,000.00 Sriram Finance Mines Ltd. (100 shares) 1,20,000.00 L&T Ltd. (896 shares) 2,68,800.00 Auma India Ltd. (500 shares) 5,000.00 Maruti Udyog 1,68,750.00 ICICI Bank Ltd. (3,400 shares) 9,52,000.00 14. The Assessing Officer has confronted the assessee with regard to this investment. In response to the show-cause notice, it was contended by the assessee that it had purchased shares in Murudeshwar Ceramics Ltd. and ICICI Bank Ltd. for a total value of Rs. 71.25 lakhs. The purchase was made from out of the sale proceeds of shares in Canara Bank held by the trust at the commencement of the accounting year. The sale of share in Canara Bank during the accounting year ending on March 31, 2005 and investment of the same in shares of Murudeshwar Ceramics and ICICI Public Ltd. Companies do not violate the provisions of section 11(5) of the Act. Section 11(5) o the Act has to be read in conjunction with and not to be de hors the provisions of section 11A of the Act, where realisation of a capital asset and investment of the proceed in another capital asset is deemed to be adequate compliance for tax exemption. The Canara Bank shares were capital assets of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein the Assessing Officer had denied exemption under section 11 for having made investment in non-public companies. The hon'ble High Court had held that the assessee-society which was a charitable institution should not be denied exemption, merely because of inadvertent and bona fide investment made out of ignorance of the provisions on misrepresentation made by investee companies. The book value of the shares invested by the assessee with non-companies is 1.68 per cent. of the total assets of the trust. So it is such a meager investment which generates 0.23 per cent. of the total receipt of the trust, it cannot suggest that some undue benefit was given by the trust in favour of these companies. The total dividend income is Rs. 2,81,173. 18. In his second fold of submissions, he contended that according to the Assessing Officer the investment in non-public companies is in violation to section 11(5). It amounts an undue benefit to those companies where trustees are interested. Therefore, it is in violation to section 13(1)(c) of the Income-tax Act. Sub-section (4) to section 13 start with non obstante clause which provide that if the aggregate funds of the trust invested in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment per se would denude the assessee from its claim of exemption under sections 11 and 12 of the Act. On due consideration of the scheme of the Income-tax Act contained in sections 11, 12 and 13, we are of the view that the Assessing Officer has harboured wrong belief. The hon'ble jurisdictional High Court has considered almost an identical issue in I. T. A. No. 588 of 2007 in the case of CIT v. Fr. Mullers Charitable Institutions [2014] 363 ITR 230 (Karn). One of the question before the hon'ble court was (ii) Whether the Tribunal is correct in holding that when a part of income is held to be violative of the provisions of section 13(1)(d) only to the said extent maximum marginal rate of tax is to be levied and not for the whole income more particularly when there is violation of provisions of section 11(5) of the Act ? The hon'ble court after putting reliance upon the judgment of the hon'ble Bombay High Court in the case of DIT (Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 (Bom) has held that only the income from such trust would be taxed at maximum marginal rate. The findings of the hon'ble court on this aspect read as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the above two phrases shows that the Legislature has clearly indicated its mind in the proviso to section 164(2) when it categorically refers to forfeiture of exemption for breach of section 13(1)(d), resulting in levy of maxi mum marginal rate of tax only to that part of the income which has for forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. This interpretation is also supported by Circular No. 387, dated July 6, 1984 ([1985] 152 ITR (St.) 1 ). Vide the said Circular, it has been laid down in paragraph 28.6 that where a trust contravenes section 13(1)(d), the maximum marginal rate of Income-tax will apply only to that part of the income which has forfeited exemption under the said provision and not to the entire income. There is a vital difference between eligibility for exemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent. of the total asset. It is a very miniscule investment, if looked into the overall proportion of the activities of the trust. This should not be considered by the Assessing Officer as a substantial change which can goad him to depart from his stand right from 1975. 24. The next factor pointed out by the Assessing Officer is that agricultural lands are held in the name of the trust and no corresponding books of account have been maintained. With regard to this, the facts are as under : -that the assessee has shown net agricultural income of Rs. 34,76,212. The Assessing Officer has observed that land holding are being held in the names of the trustees. The assessee has not maintained separate books of account for agricultural activities. He brought this amount to tax under section 68 of the Income-tax Act. The reasons assigned by the Assessing Officer read as under: "(a) The assessee has not maintained the details of agricultural sale proceeds to verify the genuineness of the transaction. The Assessing Officer personally vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant maintained in the ordinary course of his duties assigned under the Land Reforms Act. It exhibits the survey number of the land, area, dimension and plantations. It is pointed out that at village Kadanakoppa the assessee had eight properties in different survey numbers having an area of 54.19 acres. At village Chalamati it had again eight properties and 54.19 acres of land. There are 1,000 coconut trees, 7,500 mango trees and 13,000 beetlenut trees are standing on these lands. It is an agricultural land. In other words, 108 acres of land is being possessed by the trust in the name of Shri Satish R. Shetty. The assessee had shown agricultural income of Rs. 34,76,212 in the assessment year 2005-06, Rs. 6,71,650 in the assessment year 2002-03 and Rs. 33,87,634 in the assessment year 2006-07. 27. On a perusal of the findings of the Assessing Officer extracted (supra) it reveals that the Assessing Officer has assumed that the assessee has not carried out any agricultural activities and it is trying to introduce money collected by way of donations by giving admission in engineering colleges by way of net agricultural activities. We fail to understand what is the evidence possessed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions that they should be used towards corpus. The receipts issued by the assessee represents oral directions by the donors made at the time of making the donations. It was also contended that nowhere in the Income-tax Act, it is expected that the assessee should receive specific letters from the donors. The Assessing Officer has observed that since the donations have come from third parties, therefore, it is the duty of the assessee to maintain and prove full identity of so called donors and their creditworthiness, otherwise it is taxable under section 68 of the Income-tax Act. He accordingly held that it is a step, which is contrary to the activities of the trust. 29. The appeal to the Commissioner of Income-tax (Appeals) did not bring any relief to the assessee. 30. Before us learned counsel for the assessee submitted that the Assessing Officer was of the view that if the donations were to be treated towards corpus, there must be specific directions from the donors. The receipts received by the assessee were with oral directions by the donors at the time of making donations. The Act does not stipulate that the corpus donations must be accompanied by letters and the oral instru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulations formulated by the Government of Karnataka. As far as the allegations, that the trust has returned corpus donations is concerned, learned counsel for the assessee submitted that the trust has not returned any corpus donations. There is no material available with the Assessing Officer. What was refunded was that some of the students sought admission in RNS Institute of Technology on the basis of their merit in the CET Exam. They paid the fees and other dues. However, later on either they got admission in some better institutions or near to their home. They cancelled the admission and the refund was of such deposits which was made by the students for admission. The Assessing Officer has totally misconstrued the facts. 32. On a perusal of the findings of the Assessing Officer available on pages 10 to 12, we are of the view that Assessing Officer failed to appreciate the controversies in right perspective. Let us take a note of section 11(1)(d) which read as under : "(1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- (d) income in the form of volunta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oying such an exemption for more than 25 years ? 34. The next factor considered by the Assessing Officer is that the assessee has diverted its income towards the trustees, their relatives and directors. In order to buttress this factor, he has observed that the assessee has constructed building and let out to sister concerns at a nominal rent which is in violation of section 13(1)(c). It has entrusted construction activities to the sister concerns in order to benefit the trustees directly or indirectly. In this connection the facts are recorded by the Assessing Officer on page 7. The Assessing Officer has observed that from the record it is seen that the trust has entrusted the construction activities of the trust to its sister concerns, wherein the trustees and their relatives are directors at nominal higher rate, thereby it benefited the trustees directly or indirectly. This is an activity in violation to section 13(1)(c) of the Income-tax Act. In response to the show-cause notice the assessee has contended as under and the Assessing Officer has recorded his findings : "It is true that the trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome to the trustees which is also in contravention of the provisions of section 13(1)(c) of the Income-tax Act, 1961. In this connection, a show-cause notice was issued as to why this should not be treated as direct or indirect benefits to the trustees. In response to this, the assessee in its letter dated October 11, 2007, stated as under : 'Some of the house properties of the trust which were not immediately required were let out to our sister concern by us acting as prudent persons so as to fetch adequate return by way of rent/ compensation. This is wholly consistent with section 13(2) of the Act. What we have stated in the immediately preceding paragraph with reference to paragraph 4 of your communication applies here mutatis mutandis. We state that the rent charged and paid by the connected concerns are adequate and there is nothing to doubt the bona fide of these transactions. We do not know the rents even if they were given to third parties and our letting out to our sister concern was so that we would get them back as and when we needed without getting into any legal tangle with the tenants.' The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub- section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution : Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3) in so far as such use or application relates to any period before the 1st day of June, 1970 ; Section 13(3) (3) The persons referred to in clause (c) of sub-section (1) and, sub-section (2) are the following, namely : (a) the author of the trust or the founder of the institution ; (b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r nowhere demonstrated with the supporting information of his view point. The hon'ble Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association reported in [1980] 121 ITR 1 (SC) has observed that in order to determine whether the activity of a trust is the activities of profit, one has to assess that whether the activities carried on with the objective of earning profit and not whether the activity results in profit, meaning thereby, if a trust is running educational institutions, it has to maintain its status and it has to create infrastructure in order to achieve the object. The income or profit is an incidental to such an activity. If the object is only based for making profit, then one can understand that the trust has deviated from its object of charity, but except making narrations, the Assessing Officer has not brought any substance on the record. This concept of existing for profits or the activity generate profit has been explained in the following decisions : * Pinegrove International Charitable Trust v. Union of India [2010] 327 ITR 73 (P&H) ; * Digember Jain Society for Child Welfare v. Director General of Income-tax (Exemptions) [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he record and the findings of the Assessing Officer on all the reasons assigned by him, we are of the view that the Assessing Officer has judged the issues peripherally, he has not collected any specific information about any particular issue except the investments made by the assessee in violation to section 11(5). We have observed that this violation is not in excess to 5 per cent. of the total paid up capital of the investee companies and it will not influence the activities of the trust to say that the assessee has extended undue benefit. Even for the sake of argument, it is construed that it was an attempt to make undue benefit to the investee companies, then also as per the decision of the hon'ble jurisdictional High Court the income from such investment would not qualify for exemption under section 11. Apart from this one aspect, the Assessing Officer failed to collect any substantial material which can goad him to say that the activities of the assessee are not charitable and it is to be treated differently in these years than the earlier years starting from assessment year 1975 when the trust came into existence. Therefore, we allow all the three appeals of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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