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TMI Blog2014 (10) TMI 825X X X X Extracts X X X X X X X X Extracts X X X X ..... d as a corroborative factor to say that the assessee is not carrying out its activities in consonance with its object. The investment in the non-specified companies is only 1.68 per 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. Agricultural lands are held in the name of the trust and no corresponding books of account have been maintained - held that:- 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 by the Assessing Officer for arriving at this conclusions. Even if the accounts are not maintained in a proper way of the agricultural activities, then also he could have called for the record of the Revenue authorities of the Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. For ascertaining these facts, we have reproduced the findings of the learned Assessing Officer. It is nowhere recorded, therefore, in our view, the Assessing Officer failed to collect any evidence with regard to justifying the violation of section 13(1)(c) and 13(3) of the Income-tax Act. Dominant part of the trust is to make profit - Held that:- The hon ble Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association reported in [1979 (11) TMI 1 - SUPREME Court] 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. Also see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected. Therefore, we heard them together and deem it fit to dispose of them by this common order. 2. Before adverting to the facts and disputes raised by the parties in these appeals, it is pertinent to give brief background of the litigation in these appeals including I. T. A. No. 607 of 2009. The brief background 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 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be allowed and the matter has to be remanded to the Income-tax Appellate Tribunal. 3. Accordingly, the appeals are allowed and matters are remanded to the Income-tax Appellate Tribunal without answering the substantial questions 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 deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Kalyanamantapa after construction and also provisions for resolution or winding up of the trust, clause was also incorporated. Thereafter supplementary deeds were executed on March 17, 1990, December 15, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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-flop on the issue and it ought let the matter rest rather than spend the tax payers' money in pursuing litigation for the sake of it." 10. This was not a direct issue but it was demonstrated before us only in order to apprise us how to approach the controversies raked up by the Assessing Officer in these assessment years. 11. As observed earlier, the Assessing Officer has narrated eight circumstances whose cumulative setting do indicate that the assessee was not carrying out its objects of charity in consonance with its deed. Let us evaluate each circumstances highlighted by the Assessing Officer and reappreciated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale 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 trust and the shares of Murudeshwar Ceramics and ICICI Bank Ltd. are also capital asset of the trust. It was further contended that the assessee had received dividend of ₹ 2,81,173 at the most, this dividend income would be brought under tax denying exemption on this amount only. This will not itself disqualify the trust as a whole from its entitlement of exemption under section 11. The Assessing Officer has rejected the contentions of the assessee. He was of the opinion that if any charitable institution entitled for exemption under sections 11 and 12 violates these provisions, then he will not be entitled for the benefit. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of these companies. The total dividend income is ₹ 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 a concern in which any person referred to in sub-section (3) has a substantial interest does not exceed 5 per cent. of the capital of that concern, the exemption under section 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or institutions from such investment by reason only that the funds of the trust or the institution have been invested in a concern in which such person has a substantial interest. He pointed out that the investment made by the assessee in these companies form a small fraction of 0.77 per cent. of the paid up capital of the investee company. Therefore, there cannot be any assumption for undue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under (page 236 of 363 ITR) : "11. With regard to the second and the third substantial questions of law are concerned, reading of section 13(1)(d) of the Act makes it clear that it is only the income from such investment or deposit which has been made in violation of section 11(5) of the Act that is liable to be taxed and that violation under section 13(1)(d) does not tantamount to denial of exemption under section 11 on the total income of the assessee. An identical question came before the Bombay High Court in the case DIT (Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust reported in [2001] 249 ITR 533 (Bom). The question before the Bombay High Court is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 and withdrawal of exemption/forfeiture of exemption for contravention of the provisions of law. These two concepts are different. They have different consequences. In the circumstances, there is merit in the contention of the assessee that in the present case the maximum marginal rate of tax will apply only to the divided income from shares held in contravention of section 13(1)(a) and not to the entire income. Therefore, income other than dividend income shall be taxed at normal rate of taxation under the Act.' A similar view has been taken by the Delhi High Court in a judgment reported in DIT (Exemption) v. Agrim Charan Foundation [2002] 253 ITR 593 (Delhi). Reading of the proviso to section 142 is very clear that the Legislature has clearly contemplated that in a case, where the whole or part of the relevant income is not exempted unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the details of agricultural sale proceeds to verify the genuineness of the transaction. The Assessing Officer personally visited the agricultural lands and found to be in an unmanageable state of affairs and no maintenance of agricultural lands and it looks like a jungle. It is very difficult to get any agricultural income from those lands if viewed from the maintenance. (b) Even if it is assumed without accepting that there is an agricultural income what prevents the assessee from adducing necessary evidence for having agricultural income. (c) On verification of the records, all converted lands are in the name of the trust and other agricultural lands are in the name of the trust. Even if it is assumed without accepting that the lands are in the names of the trustees due to certain technical problems, there is no check on the income from agricultural operations in a transparent manner. It looks as though the assessee is introducing its own funds by way of agricultural income in lump sum on a particular day. (d) The assessee instead maintaining accounts in respect of its agri cultural operations has chosen to estimate its agricultural income reveals its improper way of main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a proper way of the agricultural activities, then also he could have called for the record of the Revenue authorities of the State Government. It could be ascertained whether 1,000 coconut, 7,500 mango and 13,000 beetlenut and banana plants, etc., planted in a land of more than 100 acres could give rise of income of ₹ 34 lakhs or not. Even if a conservative figure is taken, then one acre can easily generate income of ₹ 20,000 to 30,000 per acre from normal agricultural activities. The findings of the Assessing Officer is thus purely based on guess work and assumption. It is also not discernible, how this one factor can indicate that the assessee was not doing charity work. Therefore, in our opinion the Assessing Officer failed to bring any substantial material with regard to this factor which can be considered as one of the reasons to say that the assessee is not entitled for exemption under section 11 of the Income-tax Act. 28. The next two factors are connected with each other, the reasons assigned by the Assessing Officer are that the trust has returned corpus donations which are against the object of the trust and collection of huge donations while giving admissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account to bring into existence of capital asset, then it would indicate that the donations were towards corpus, because ultimately the trust has been acquiring a capital asset which will be of enduring nature. On the strength of the hon'ble Delhi High Court decision in the case of DIT (Exemption) v. Keshav Social and Charitable Foundation reported in [2005] 278 ITR 152 (Delhi), he contended that the absence of identity of some of the donors would not disentitle the trust from exemption. The direction demanded by the Assessing Officer can be gathered from the facts and circumstances of the case. When the assessee had issued the receipts, it also indicate that the amounts were received towards corpus donations and it is a sufficient compliance. The corpus donations is straightway exempt under section 11(1)(d) of the Income-tax Act, but the assessee has recognised it as an income and applied it for the purpose of charitable object. In this situation the Assessing Officer was required to analyse whether 85 per cent. of the income is applied towards charity or not. The moment corpus donations has been recognised as an income and not claimed exempt under section 11(1)(d) as admissib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the corpus of the trust or institution." 33. The assessee is not claiming benefit of clause (d). It has recognised its alleged donations as an income. If that be so, then the Assessing Officer has to see whether that income if applied for the purpose of its object or not. Contrary to the contentions of the assessee, the Assessing Officer was of the view that since the assessee failed to produce the details of the donors, this income is to be treated as unexplained cash credit under section 68 of the Income-tax Act. The Assessing Officer himself has observed that with regard to a sum of ₹ 1,79,20,000 the assessee has given the list of donors. If that be so, then how it can be considered that it is an unexplained credit. The Income-tax Act has been amended by the Finance Act, 2006 with effect from April 1, 2007, by incorporating section 115BBC which deals with anonymous donations in certain cases. But this will be applicable with effect from April 1, 2007. By virtue of this section, educational institutions are required to maintain the list of donors indicating that the donation is being given towards the object of the institutions. This section has been incorporated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties. The civil contract work undertaken during the previous year relates to college building at Channasandra, Nursing College Staff Quarters, RNS Vidyanagar High School, etc. Such works have not been undertaken by these two concerns at any other time for any other person. But we state and reiterate that the charges paid to us for undertaking the work is consistent with the visions of section 13(2)(c) of the Act which specifically permits the payment of any sum for services rendered to the persons set out in section 13(3) provided it is reasonable when a work is entrusted to a contractor for doing certain work on behalf of a chari table trust, it cannot be said that any benefit is conferred upon the contractor. The contractor renders services and gets paid for such services an amount which otherwise would have been payable for any other contractor for a similar work. In fact section 13(2)(c) recognises this principle and it has to be read in conjunction with section 13(1). It is not your case and it cannot be your case that what has been paid is in excess of what could be reasonable paid for services. If your enquiries have revealed, ours have not, that the payments made to us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals) did not bring any relief to the assessee. 36. Learned counsel for the assessee has submitted that observation of the Assessing Officer are general in nature. He has not specified any particular activity. The assessee had given advance to sister concerns, but those were for the purpose of its day-to-day activities. He placed on record a table indicating the name of the entity and the object for making advance, it read as under : Entity Purpose Naveen Hotels Ltd. Rent receivable in respect of property leased Shri Murudeshwar Tiles (P.) Ltd. Advance paid in respect of capital goods procurements R. N. Shetty and Co. Pvt. Ltd. Advance paid for construction work undertaken on behalf of the trust Murudeshwar Ceramics Ltd. Advance paid for purchase of capital goods Mahashakti Constructions Co. Advance paid in earlier years towards the purchase of tiles being NSEC Pvt. Ltd. Advance paid towards repair charges 37. The learned Departmental representative on the other hand relied upon the orders of the Assessing Officer. 38. We have duly gone through the records and perused the findings of the Assessing Officer extracted (supra). Section 13 of the Income-tax Act provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st or manager (by whatever name called) of the institution ; (d) any relative of any such author, founder, person, member, trustee or manager as aforesaid ; (e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest." 39. A bare perusal of these provisions would indicate that if any undue benefit is being extended by the trust to the persons mentioned in sub- clause (3), then the exemption available to the assessee under sections 11 and 12 would not be applicable on that undue benefit. The Assessing Officer has made narration that the assessee has advanced money to various sister concerns where trustees or its relatives are directors. He nowhere demonstrated how advancement of the money is not commensurate with the market value of the services availed of from them, whether the payments made by the assessee for taking the work from those sister concerns are at arm's length price or not. There is no prohibition for the trust to take services of the persons specified in sub-clause (3) of section 13, the restriction is that the payment should not be more than the market value of such services. The Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Institution v. Addl. CIT [1997] 224 ITR 310 (SC). The observations of the Assessing Officer are not in consonance with the law propounded in these judgments. 41. In the assessment year 2002-03 the assessee has challenged the reopening of the assessment, but learned counsel for the assessee at the time of hearing did not press this ground of appeal. I. T. A. No. 1172/Bang/2008-assessment year 2005-06 42. In the Revenue's appeal, the grievance of the Revenue is that the learned Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to consider agricultural income for rate purposes. We find that the learned Commissioner of Income-tax (Appeals) has observed that the Assessing Officer should carry out the detailed inspection in respect of agricultural operations, standing crops, trees and agricultural yield and bring out in respect of actual agricultural income. He directed the Assessing Officer that agricultural income should be considered as exempt in case of denial of exemption of the trust is treated as allowed as per provisions of the Act. On due consideration of the findings of the Commissioner of Income-tax (Appeals) we are of the view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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