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TMI Blog2019 (1) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... iolations in respect of 13(1)(c), 13(2)(a), 13(2)(g) and 13(2)(h) of the Act. Therefore, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. The cars are used for the purpose of the assessee’s regular activity and the department did not place any material to establish that the cars were used for the personal benefit of directors/ authors/ promoters of the society. During the appeal hearing the revenue did not place any material to controvert the finding of the LD.CIT(A). Therefore we uphold the order of the ld.CIT(A) and dismiss the appeal of the revenue on this ground. Expenses related to the liquor and tobacco products and other entertainment expenses - Held that:- AO during the assessment proceedings observed that the assessee has incurred certain expenditure on cigarettes, in the name of Godavari Institute of Engineering which is run by the Society. Since the expenditure was not incurred for furtherance of the objects of the Society, the AO disallowed the said expenditure holding that it is gross violation of the objects of the Society. The Ld.CIT(A) examined the account of boarding and lodging and observed that a sum of 24,035/- relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts are extracted from the appeal for the A.Y.2004-05 which are identical for all the assessment years involved. 2. Brief facts of the case are that the assessee is a Society registered under the Societies Registration Act, 1860 and also got registered u/s 12A of the Income Tax Act, 1961 (hereinafter called as 'Act'). The assessee is carrying on educational activity and running technical and degree colleges affiliated to JNTU and Andhra University. For the A.Y. 2004-05, the assessee filed the return of income on 01.11.2004 admitting total income of ₹ 95,81,560/- and claimed the exemption of the entire income u/s 10(23C) of the Act. The said assessment was taken up for scrutiny and after examining the books of accounts and the details furnished by the assessee, the assessment was completed u/s 143(3) accepting the income returned. However, the Assessing Officer (AO) denied the exemption claimed u/s 10(23C) of the Act, since the approval u/s 10(23C) was not received by the assessee from the CCIT before completion of assessment. Subsequently, on receipt of approval from the prescribed authority, the AO passed the modification order u/s 154, granting exemption u/s 10(23C) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 29.10.1977 and held that the presence of several noneducational objects in the MoA shows that the Society is having discretion to divert funds of the educational institution towards non-educational purposes. Therefore, cannot be said to be existed only for educational purposes and accordingly rejected the contention of the assessee for grating exemption u/s 10(23C)(vi) of the Act. 2.3. The Ld.CCIT further observed from the Balance Sheet of the assessee that it had advanced a sum of ₹ 6 lakhs to Sri P.V.Krishnam Raju who happens to be the Joint Secretary of the Society. On an enquiry, the assessee submitted that the Society has not given any advance and the transaction was entered in the normal course of society activities. Since the Balance Sheet shows that the amounts were advanced to Sri P.V.Krishnam Raju, the Ld.CCIT did not believe the assessee's contention and taken adverse inference for violation of section 12(23C) of the Act. The Ld.CCIT also observed from the Balance Sheet that the assessee advanced the amounts to various institutions / individuals and are outstanding as follows: Name of the Society / Individual Amount Outstanding as on 31.03.2009 (Rs.) GS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee claimed exemption u/s 11 alternately AO viewed that the claims u/s 10(23C) and 11 are pari materia and hence held that the assessee entitled for exemption u/s 10(23C) would be disentitled for exemption of income u/s 11 of the Act. The AO further observed certain violations and diversion of funds for the personal benefit of authors, promoters of the society and accordingly rejected the exemption claimed by the assessee u/s 11 of the Act. The AO discussed the violations of section13(1)(c), 13(2)(a), 13(2)(g), 13(2)(d) and 13(2)(h) in detail in para No.3.3 to 3.4 of the assessment order which is reproduced as under : "3.3. During the year, it is observed that the assessee, while continuing the loans standing in the names of M/s Priyadarshini Enterprises, Sri M.Padmanabham, Sri A.S.R.Balasubruhmanyam, M/s Chaitanya Engineering College, Godavari Degree College and M/s Systronics, it obtained fresh loans from M/s Kaundinya Educational Society at ₹ 25,70,000 which was routed through bank account, The assessee did not pay any interest to the said educational society wherefrom the loans were obtained. In Koundnya Educational Society, M/s Chaitanya Engnneering College and in M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reliance can also be placed on the decision of CIT Vs. Charat Ram Foundation 250 ITR 64 (Delhi)(2001) to have a better understanding of the interpretation of 'founder member' to the effect that the persons who subscribed to the memorandum of association of the assessee society could be described as 'founders' of the assessee society for the purpose of 13(3)(c) of the Act. The decision of ITAT-Calcutta bench in the case of ITO Vs. Chagunlal LaIji Valia Charitable Trust 32 TTJ is relied upon here to hold that where a loan has been given without adequate security by the assessee trust to a prohibited person enumerated in section 13(3) of the Act, the fact that loan was replaced after three months was of no consequence. According to section 13(2)(a) also, no part of income should be treated either without adequate security or without adequate interest or both. Section 13(1)(h) of the Act, however, provides that no society should continue to remain invested for any period during the previous year in connection with such interested persons have substantial interest, This analogy clearly applies in the assessee's case particularly with reference to its keeping the funds with the siste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled for the exemption u/s 11 of the Act. The CIT(A) called for the remand report from the AO on the written submissions made by the assessee and in the remand report, the AO supported his action in rejecting the claim of the assessee u/s 11 and the computation of income under the head 'business' and the disallowances made in the assessment. After considering the submissions of the assessee, remand report and the rejoinder submitted by the assessee to the remand report, the Ld.CIT(A) upheld the validity of issue of notice u/s 147. 5.1. The CIT(A) with regard to alternate plea for exemption u/s 11 held that both the sections are not pari materia and operate independently. If the assessee is granted registration u/s 12A of the Act, the assessee would be entitled for exemption u/s 11 subject to satisfaction of the conditions under section 12A and 11. The Ld.CIT(A) further held that there is no restriction at least upto A.Y.2014-15 on any of these two provisions. The Ld.CIT(A) further held that the assessee would be entitled for exemption u/s 11 even when conditions u/s 10(23C) are not fulfilled. The Ld.CIT(A) further held that exemption u/s 11 is not automatic and it is subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccepting the assessee's plea that there are no violations of diversion of funds to the author/founder members of the Society in spite of the categorical assertion by the assessee that it had not charged interest on those loans. 3. The Ld.CIT(Appeals) is not correct in concluding that there are no violations u/s 13(1)(c) whereas the specific violations / findings by the Department are as per the provisions of section 13(2)(a), 13(2)(g) and 13(2)(h) of the I.T.Act. 4. The Ld.CIT(Appeals) erred in accepting the assessee's submissions and concluding that the expenditure for maintaining luxury cars like BMW and Volks Wagen is for the purpose of charity. 5. The Ld.CIT(Appeals) erred in accepting the assessee's plea that the expenditure made on liquor and tobacco products and on other types of general entertainment can be construed as expenditure incurred in furtherance of the objectives of the Society as the same was recovered and credited back into the Society's account. 6. Any other ground(s) that may be urged at the time of hearing. 7. Ground Nos. 1 to 3 are common for all the appeals. Ground No 4 is related to the use of maintenance of luxury cars viz. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o is beneficial owner of shares of the company and in respect of other than a company AO viewed that the author of the trust who manages the key affairs of the other society are interested persons. The AO further viewed that every signatory to the MoA has to be treated as a founder and therefore an interested person. The AO relied on the decision of Director of Income Tax Vs. Bharat Diamond Bourse [259 ITR 280 (SC)] and held that where the same person is a trustee for two different trusts, such trustee becomes an interested person, merely because of the definition of interested person. The AO further observed that Shri Ganni Krishna, Shri Vaddi Beerabhadra Rao, Shri Bommana Rajkumar were founder members of the society and the assessee society have provided the funds to it's sister concerns and the above individuals without any specific purpose, adequate security and without charging any interest therefrom. Therefore, held that the persons who subscribed to the MoA of the assessee society could be described as 'founders' of such society for the purpose of section 13(3) of the Act. Accordingly AO held that the assessee had violated the provisions of section 13(2)(a), 13(1)(d) r.w.s.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 13(2)(h) of the Act and it's income is eligible for exemption u/s 11 of the Act. As per section 13(1)(c) of the Act, any income of the Trust or part of the income of the Trust is diverted for the purpose of personal benefit of any of the persons referred to in sub-section 3 of section 13, in such case, section 11 is not to be applied. 11.1. In the instant case, as observed from the assessment order and the details furnished, the assessee has advanced sums to other institutions which are having registration u/s 12A and carrying on the similar objects as under : Sl. No. Name of the society Purpose A.Y. (a) Mother Theresa Educational Society For construction of building and equipment for running hospital 2004-05 to 2010- 11 (b) Badarilakshmi Educational Society For initiation of its operation 2009-10 & 2010- 11 (c) GSL Educational Society Loan given without interest 2004-05 to 2009- 10 The above societies are registered u/s 12A of the Act and carrying on the similar objects of the society. 11.2. Similarly, the assessee made the payments for the specified purpose to the following enterprises : Name of the society Purpose A.Y. (a) M/s Priyadarshini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational Society for the Asst. Year 2009-10 and in the case of Badirilakshmi Educational Society, two different societies running educational institutions for the Asst. Year 2009-10, my predecessor have held that the income of These societies to be exempted u/s 11 of the Act, following the judgement of Hon'ble Tribunal Mumbai in the case of Mahatma Gandhi Seva Mandir Vs. DDIT (Exem) 52 SOT 26. The decision of Karnataka High Court in the case of Shamnur Savitramma Kallappa Public Trust reported in 53 DTR 117 wherein it was held that when the objects permit to extend services to other charitable institutions and financial assistance is provided to such institutions carrying on the charitable activities exemption uls.11 cannot be denied. The Madras High Court in the case of M.C.T. Muthaiah Chettlar Family Trust reported in 245 ITR 400 wherein their lordships held that amount handed over to another trust having similar object would amount to application of its income. Respectfully following the above decisions and on the facts of the case, I am of the opinion that the amounts paid to the said society by the appellant is within the objects of the society and in fulfillment of it objects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and author of the society is having substantial interest in other institutions. Thus, the Assessing Officer held that the loans are in violation of Section 13(3) of the Act. The AR of the appellant on the other hand held that the amount of ₹ 21,00,000/- is an outstanding amount as on 31.03.2004 against the purchase of computers. The amount payable was paid in the financial year 2004-05. There is no violation of provisions of Section 13 in this transaction as the appellant purchased computers from the said concern and did not provide any benefit to any other members or persons mentioned in the Section 13(3) of the Act. I have perused the Balance Sheet as on 31.03.2004 and found that the said amount of ₹ 21,00,000/- is outstanding as on 31.03.2004 against the purchase of computers. It is also seen that the repayment was made during the financial year 2004-05. Therefore, no benefit appears to have conferred to any of the persons mentioned u/s.13(3) of the Act. Further, I have noticed that the appellant had no relation with M/s. Priyadarshini Enterprises and the finding of the Assessing Officer that the payment was made without specific purpose is not correct. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d author of the society is having substantial interest in other institutions. Thus, the Assessing Officer held that the loans are in violation of Section 13(3) of the Act. The AR of the appellant held that the appellant received an amount of ₹ 32,36,495/- from the said institution. The said institution is also a society with objects of providing education. There is no violation of any of the provisions of Section 13 of the Act in the said transaction. I have perused the account copy and the records as well, I found that the said institution is also a society with similar objects of providing education. The Hon'ble jurisdictional ITAT, Visakhapatnam in appellant's own case for the Asst. Year 2008-09 held that there is no violation in advancing loans to the institutions having similar objects. My decision in the cases of M/s. Priyadarshini Enterprises and Mother Theressa Educational Society holds good. Respectfully following the decisions mentioned in those Instances, I find no violation in this case also. 11.5) Godavari Degree College :- The Assessing Officer, in the assessment order, has held that the appellant is continuing the Loans standing in the name of Godavar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iety would have conferred some benefit to these individuals as they are founding members of the society which is in violation of Section 13(l)c) of the Act. I have verified the account copies of each individual and found that in the case of Sri Vaddi Veerabhadra Rao, it is the payment of advance towards expenditure for repairs. in the case of Sri Ganni Krishna, the amount of ₹ 9,05,000/- remained as a closing balance as on 31.03.2004. In fact, this amount was paid to him on 12.06.2001 for the purpose of construction of college building, In the case of Sri Bommana Rajakumar, the amount was paid as an advance for purchase of property meant for educational institution. Since the deal was not materialized due to the acquisition of property by the Government, the amount is remained in the books of the appellant as advance, in all the three cases, I find that the amounts were paid with specific purpose, it is explained by the AR of the appellant that at the time of making payments to other persons, the founder member, Sri KV.V. Satyanarayana Raju has given an undertaking to the society that he would make the repayment in case of necessity out of his credit balance of ₹ 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial requirements of the society. The revenue did not make out a case for payment of excess interest to any of the interested persons to hold violations. The assessee has furnished the details of amounts lent with the purpose and the repayment of loans etc.. as under: (a) Details of amounts lent to Societies S. No. Name of the Society A.Y. Transaction made with the society 1. Mother Theresa Educational Society 2004-05 to 2010-11 For construction of building and procurement of equipment for running hospital attached to the medical college 2. Badarilakshmi Educational Society 2009-10 to 2010-11 For funding the establishment. 3. GSL Educational Society 2004-05 to 2009-10 Given loan to the society registered u/s 12A (b) Details of amounts lent to Enterprises S. No. Name of the Enterprise A.Y. Transaction made with the Enterprise 1. M/s Priyadarshini Enterprises 2004-05 to 200708 Assessee society has purchased computers from M/s Priyadarshini Enterprises. There is an outstanding balance of ₹ 21 lakhs as on 31.03.2004 which was repaid in the A.Y.2007-08. 2. M/s Systronics 2004-05 to 200708 Assessee society has purchased laboratory equip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and due security was taken for the advances such as personal guarantees of founder director. The Ld.CIT(A) also observed that there were no violations which attracts section 13(1)(c) of the Act. In fact, in the remand report, the Ld.AO submitted that the recipients are not members of the society and amounts were advanced with specific purpose. The department could not make out a case that the advances were given to interested persons for their personal benefit. Therefore, we do not find any reason to interfere with the order of the Ld.CIT(A). 14. The assessee has borrowed the funds from the following persons: S. No. Name of the Individual A.Y. Transaction made with the Individual 1. Ganni Krishna (Member Trustee) 2004-05 to 2007-08 and 2009-10 to 2010-11 Assessee society paid an amount of ₹ 9,05,000/- to Ganni Krishna Rao towards construction of college building on dt.12.06.2011 2. VaddiVeerabadrarao 2004-05 to 2007-08 and 2009-10 to 2010-11 Assessee society made payment of ₹ 1,23,163/- which is an advance given towards expenditure to be incurred for repairs. 3. Bommana Raj Kumar (Member trustee) 2004-05 to 2007-08 and 201011 Assessee society ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reassessment proceedings. It is necessary to conduct independent enquiries before coming to a conclusion that there were violations and diversion of funds. Merely because of the common promoters are involved, it cannot be held that the funds were utilized for the personal benefit of the directors and authors of the society. The individuals are permitted to be directors, authors, trustees of various societies. The AO relied on the decision of Bharat diamond Bourse of Hon'ble Apex court and facts of the case are completely different and not applicable in the assessee's case. similarly the definition given in section 2(32) cannot be made applicable in assessee's case since the same is related to the company but not to the trusts. In the instant case, the assessee is not carrying on any commercial or business activity, but carrying on the activity of imparting education without any profit motive and except subscribing to the Trust deed and managing the institution, there is no personal interest or the personal gains of the individual members was established. In the instant case, original assessments were completed u/s 143(3) for the A.Y. 2004-05, 2006-07, 2007-08 and 2008-09. Not sing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O. was not correct in holding that the assessee has diverted the funds in violation of the provisions of section 13(1)(d) of the Act. Therefore, we are of the view that advancing loans to other societies having similar object whether or not registered u/s 12A of the Act, is not a violation of the provision of section 13(1)(d) of the Act. 11. Coming to the other observations of the Assessing Officer. The A.O. observed that the society's activities are not in accordance with the objects of the society. The society is existed for the purpose of imparting education, however, involved in the activity of let out of properties on commercial lines to telecom companies and also running hostels on commercial lines. The A.O. further observed that the assessee society is maintaining luxury cars like BMW and Volks Wagon, however failed to prove the purpose of maintaining luxury cars for the objects of the society. We do not see any merits in the findings of the A.O. for the reason that the A.O. has borrowed the findings of the Chief Commissioner of Income Tax, Visakhapatnam while withdrawing the exemption granted u/s 10(23C)(vi) of the Act. We further observed that the A.O. has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der: "Advancing of interest-free temporary loan by assessee society to another society having similar objects is not an "investment" or a 'deposit',' hence there was no violation of provision s. 13(1)(d) r.w.s. 11(5) to render withdrawal of exemption under s. 11' 13. The assessee relied upon the decision of High Court of Delhi, in the case of Director of Income Tax (Exemption) Vs. Alarippu (2000) 244 ITR 358. The Hon'ble Delhi High Court, under similar circumstances held that advancing temporary loan to another similar society was neither an investment nor deposit. The relevant portion of the order is reproduced hereunder: The expressions used in both the provisions i.e. ss. 11(5) and 13(1)(d) are 'investment' and 'deposit'. Former expression means to lay out money in business with a view to obtain income on profit. Deposit, on the other hand, means that which is placed anywhere, as in any one hands for safe-keeping, something entrusted to the care of another. These two expressions have been used in cognate sense and have to be understood as such. In order to constitute an investment the amount laid down should be capable o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 25.5.2005, with the same objects and purpose as that of the assessee. 15. Considering the facts and circumstances of this case and also following the judicial precedents, we are of the opinion that the A.O. was erred in denying exemption u/s 11 of the Act. The CIT(A) without appreciating the facts has confirmed the order passed by the A.O. Therefore, we set aside the order passed by the CIT(A) and direct the A.O. to allow the exemption u/s 11 of the Act. 16. On the similar issue, ITAT Delhi Bench in the case of Puranchand Dharmath Trust Vs. ITO, Wd-1, Gurgaon held that where the assessee Trust advanced money as a loan to another Trust for which the assessee had not received any interest and the said sum was returned by the Trust, the amount advanced not being investment could not be held to be in violation of section 13(1)(d), 11(5) of the Act. 17. Therefore, respectfully following the view taken by this Tribunal in the assessee's own case, and as per our findings, we hold that there are no violations and the revenue did not make out any case to substantiate the violations in respect of 13(1)(c), 13(2)(a), 13(2)(g) and 13(2)(h) of the Act. Therefore, we do not find any reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture on cigarettes, in the name of Godavari Institute of Engineering which is run by the Society. Since the expenditure was not incurred for furtherance of the objects of the Society, the AO disallowed the said expenditure holding that it is gross violation of the objects of the Society. The Ld.CIT(A) examined the account of boarding and lodging and observed that a sum of ₹ 24,035/- relating to the expenses incurred for liquor and cigarettes was recovered and credited to the account. Ultimately, no expenditure was claimed relating to liquor and cigarettes etc. Therefore, allowed the appeal of the assessee and held that there are no violations for granting of exemption u/s 11 of the Act. During the appeal hearing, the revenue could not controvert the finding of the Ld. CIT(A) with tangible material. Therefore, we uphold the order of the CIT(A) and dismiss the appeal of the revenue on this ground. In the result, appeals of the revenue 2004-05 to 2007-08 and A.Ys 2009-10 to 2010-11 are dismissed. 21. The assessee filed cross objections for the A.Y. 2004-05 and 2005-06 stating that no notice u/s 148 could be issued from the end of four years from the relevant assessment year a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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