BUDHA VIKAS SAMITY V. COMMISSIONER OF INC.TAX and ANR

MA/594/2007

AI Insights

Budha Vikas Samity, a registered charitable society, appealed against the decision of the Income Tax Appellate Tribunal, which upheld the rejection of part of their tax returns. The dispute centered on a Rs. 5,00,000 advance given to Smt. Shanti Rai, a member and landlady of the school run by the society, purportedly for expanding the school building. The tax authorities contended that this transaction was a diversion of funds to an 'interested person' and not for a charitable purpose, thus taxable under the Income Tax Act. The High Court dismissed the appeal, agreeing with the lower authorities that the funds were not used for charitable purposes and that the necessary legal formalities for such a transaction were not observed.

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 692356 (HC-PATNA)
• Appeal Type: Others
• Pronouncement Date: 28-04-2011
• Assessment Year: misc
• Other Referred Cases: Deputy Commissioner of Income Tax vs. Sulabh International Social Service Organisation, C.I.T. vs. Nizam's Charitable Trust, A.M. Shamsudeen vs. Union of India and others
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: HARSHWARDHAN PRASAD; RISHI SINHA
• Assessee Lawyers: AJAY RASTOGI
• Keywords: Charitable institution; Diversion of funds; Income tax exemption; Loan to interested person; Siphoning off resources
• Section: 12A; 260A; 11(5); 2(15); 13(3); 11(2)(b)

Judgement Text

"Misc. Appeal No.594 OF 2007 ******* Against the order dated 25.5.2007 passed by the Income-Tax Appellate Tribunal (SMC) Patna Bench, Patna, in I.T.A. No.391 (Pat.)/2004. ******* BUDHA VIKAS SAMITY, Budha Colony, P.O.- G.P.O., P.S. Budha Colony, District- Patna, through treasurer Abindra Kumar Sinha. .......Appellant. Versus 1. COMMISSIONER OF INCOME TAX-I, PATNA. 2. Assistant Commissioner of Income Tax, Circle-1, Patna. …….Respondents. ******* For the Appellant: Mr. Ajay Kumar Rastogi, Advocate For the Respondents: Mr. Harshwardhan Prasad, Sr. Standing Counsel with Mr. Rishi Raj Sinha, Assistant Standing Counsel. ----------- P R E S E N T THE HON'BLE MR. JUSTICE SUDHIR KUMAR KATRIAR THE HON'BLE MR. JUSTICE SAMARENDRA PRATAP SINGH ******* S.K. Katriar, J. The assessee has preferred this appeal under section 260A of the Income Tax Act 1961 (hereinafter referred to as „the Act‟), and is directed against the order dated 25.5.2007, passed by the learned Income Tax Appellate Tribunal, Patna Bench, Patna, in ITA No.391(Pat.)/2004, whereby the appeal preferred by the assessee has been rejected, and the Tribunal has upheld the orders passed by the learned Commissioner as well as the learned assessing officer. The three authorities have concurrently rejected part of the returns submitted by the appellant, rupees five lacs transferred by it to Smt. 2 Shanti Rai is not for charitable purpose, is really diversion of funds, and is taxable. It is with respect to the assessment year 2001-02. 2. The following substantial questions of law have been framed for our consideration: (i) Whether on the facts and in the circumstances of the case, the Tribunal is justified in upholding invocation of section 13(3) and 11(2)(b) of the Income Tax Act in respect of advance of Rs.5,00,000/- given to Shanti Rai? (ii) Whether on the facts and in the circumstances of the case the Tribunal is correct in holding that the landlady Shanti Rai is a person covered by section 13(3) of the Income Tax Act? (iii) Whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that no evidence was filed to support the utilization of sum advanced for investment in building let out to the appellant by the landlady? (iv) Whether on the facts and in the circumstances of the case, the Tribunal is justified in not considering the material/evidences placed before it and//or by ignoring the material/evidences furnished vide paper book dated 23.4.2007 (page 20) while deciding the appeal? 3 3. A brief statement of facts essential for the disposal of this appeal may be indicated. The assessee is registered as a Society under the provisions of the Societies Registration Act. It is also a charitable institution within the meaning of section 2(15) of the Act, and is so registered by the learned Commissioner of Income Tax under the provisions of Section 12A of the Act. It was a charitable institution during the period in question. 3.1) The primary aims and objects of the assessee are to establish educational institutions and to undertake other social and welfare works. It runs a school in the township of Patna, which is accommodated in the building owned by Smt. Shanti Rai, one of the members of the Society. The assessee submitted its returns for the period in question and had disclosed that it had lent a sum of Rs.5,00,000/- (rupees five lacs), out of its receipts to Smt. Shanti Rai for expansion of the school building. The learned assessing officer did not accept this part of the returns, and held that the money so given to Smt. Shanti Rai was given to an „interested person‟ within the meaning of section 13(3) of the Act, the advance was without any security or payment of interest within the meaning of section 13(2) (a) of the Act, and was in violation of section 11(5) of the Act which prescribes the manner in which such accumulation has to be invested in the schemes indicated thereunder. The learned 4 assessing officer also observed that the particulars in the prescribed proforma, namely, Form-10 read with section 11(5) of the Act, have never been filed. The learned assessing officer further observed that no material had been produced to show that the sum of rupees five lacs had at all been used for improvement or expansion of the school building. He, therefore, concluded that advance of the sum of rupees five lacs was really not for a charitable purpose, and the same has been siphoned off. Being aggrieved by the order, the assessee preferred appeal before the learned Commissioner of Income Tax, Patna, which has been dismissed by the order dated 30.9.2004, passed in Appeal No.0133/P/A-II/2004-05. The assessee challenged the same by preferring appeal before the learned Tribunal which has been dismissed by the impugned judgment. Hence this appeal at the instance of the assessee under the provisions of Section 260A of the Act. 4. While assailing the validity of the impugned order, learned counsel for the appellant submits that, if the assessee is able to satisfy the Court that the advance was for “adequate security”, or “adequate interest”, within the meaning of section 13(2) (a) of the Act, then it would be income contemplated by section 11 of the Act and would consequently be exempt from taxation. He submits in 5 the same vein that it was the assessee‟s confidence and subjective satisfaction that it will get back the money in a situation where the school is accommodated in the building owned by Smt. Shanti Rai which by itself is adequate security. He further submits that in case of non-refund of the amount in question, the assessee may refuse to vacate the premises, or may adjust the same against the rent due to Smt. Shanti Rai, or may refuse to enhance the rent in future. He also submits that it is because of such advance during the period in question, and similar advances in the earlier periods, that the assessee has been paying less than the market rate of rent to Smt. Shanti Rai. In his submission, the advance sum of rupees five lacs was thus fully secured by „adequate security‟ and/or „adequate interest‟. He also submits that the Tribunal has erred in applying the provisions of sections 13(2) (a), and 11(5) of the Act. 5. The learned Assistant Standing Counsel has supported the impugned judgment. He submits that the issues are concluded by concurrent findings of facts which do not give rise to any substantial question of law within the meaning of section 260A of the Act. He relies on the judgment dated 30.3.2011 of the present Bench in M.A. No.657 of 2010 (Deputy Commissioner of Income Tax vs. Sulabh International Social Service Organisation). He next submits that there has been non-submission of particulars in Form- 6 10, read with section 11(5) of the Act. The advance is in violation of sections 11, 11(3), and 11(2) (b) of the Act. He relies on the judgment of a Division Bench of the Andhra Pradesh in C.I.T. vs. Nizam’s Charitable Trust, (1981) Vol. 131 ITR 497. He has lastly advanced submissions on the strength of the judgment of a learned Single Judge of the Madras High Court in A.M. Shamsudeen vs. Union of India and others, (2000) Vol.244 ITR 266. 6. After the learned counsel for the appellant had concluded his submissions, and before we called upon the learned Assistant Standing Counsel to reply, we offered to the learned counsel for the appellant the option to withdraw this appeal unconditionally. He expressed his inability to do so. 7. We have perused the materials on record and considered the submissions of the learned counsel for the parties. The assessee claims to be a charitable institution within the meaning of section 2(15) of the Act, and is so registered by the learned Commissioner of Income Tax under the provisions of section 12A of the Act. In view of the provisions of the Act, its income is exempt from income tax if its affairs are carried out in due observance and compliance of the relevant provisions of the Act. We are at present concerned with the kind and nature of the 7 transaction involved in the amount of rupees five lacs given by the assessee to Smt. Shanti Rai by way of loan, allegedly for improvement and expansion of her building which accommodates the school being run by the assessee. The learned assessing officer in his fairly elaborate order has stated that the assessee had failed to supply the vital informations called for by him from time to time. He has further found that the total corpus of the assessee was not by way of voluntary contribution from students getting admitted to the school. The sum of rupees five lacs had been advanced to Smt. Shanti Rai, a member of the committee governing the assessee, allegedly for improvement and expansion of the building owned by her, which the assessee has taken on rent from her to accommodate the school. The learned assessing officer has held that no evidence was adduced before him that the amount had been utilised for the purpose it had been lent. He has further found that the amount was not spent over religious/charitable purposes and has been siphoned off. The findings of facts have been affirmed by the learned Commissioner as well as the learned Tribunal. The substance of the findings concurrently recorded by the three authorities is that it is a case of fraud, and the assessee, with the help of Smt. Shanti Rai, is engaged in draining the resources of the assessee, and thereby taking undue advantage of the benefit of exemption from payment 8 of income tax on account of its status as a charitable institution. We are of the view that the learned Tribunal has taken the right view while dismissing the appeal. 8. The learned Assistant Standing Counsel is right in his submission that the issues are concluded by concurrent findings of facts and no question at all, let alone a substantial question of law arises in this appeal. He rightly relies on the judgment in Deputy Commissioner of Income Tax vs. Sulabh International Social Service Organisation (supra), wherein the scope of section 260A of the Act has been considered. It has been considered therein as to under what circumstances this Court can interfere with findings of facts. This Court also dealt with the meaning and content of the expression „substantial question of law‟, occurring in section 260A of the Act, and section 100 of the Code of Civil Procedure. Paragraph 9.1 of the judgment is reproduced hereinbelow: “9.1) In Sir Chunilal v. Mehta & Sons Ltd. v. Century Spg. & Mft. Co. Ltd. (1962 Supp. (3) SCR 549: AIR 1962 SC 1314), the Supreme Court laid down the following tests to determine whether a substantial question of law is involved. The tests are: (1) whether directly or indirectly it affects substantial rights of the parties, or (2) the question is of general public importance, or (3) whether it is an open question in the sense that the issue is not settled by pronouncement of this Court or Privy Council or by the Federal Court, or (4) the issue is not free from difficulty, and (5) it calls for a discussion for alternative view. There is no scope for interference by the High 9 Court with a finding recorded when such finding could be treated to be a finding of fact.” In view of the position that the issues are concluded by concurrent findings of facts, no substantial question of law arises for consideration, the present appeal is not maintainable. 9. It appears to us from a perusal of the assessment order that, during the period in question and earlier periods, a sum of Rs.29,15,855/- was credited to the development fund of the assessee which were not voluntary contributions of the students at the time of their admission. The learned assessing officer further noticed that, during the earlier periods as well as the period in question, the assessee had been engaged in siphoning off resources of the Society, and draining it through Smt. Shanti Rai. Therefore, he had called upon the assessee to explain as to why its registration as a charitable institution under the provisions of section 12A of the Act be not cancelled. I regret to note that neither the learned assessing officer, nor the learned Commissioner of Income Tax, pursued this aspect of the matter in view of the gross finding of facts recorded against the assessee, and did not carry it to its logical conclusion. The learned authorities under the Act should have been mindful of the position that registration of an organization as a charitable institution under the provisions of section 12A of the Act leads to exemption from payment of income tax. Therefore, it goes 10 without saying that such an organization will have to measure up to the strict para-meters laid down in the Act to continue to enjoy the benefit of exemption from payment of income tax, failing which it may be deprived of its registration as a charitable institution and the benefit of exemption from payment of income tax. We regret to record that the learned authorities under the Act were not mindful of their responsibility, resulting in abdication of essential duties and functions, causing recurring loss of revenue. 10. In the result, we do not find any merit in this appeal. It is accordingly dismissed. In the circumstances of the case, there shall be no order as to costs. 11. Let a copy of this judgment be handed over to Mr. Rishi Raj Sinha, learned Assistant Standing Counsel, for onward transmission to the Chief Commissioner of Income Tax, Bihar, Patna. (S.K. Katriar, J.) S.P. Singh, J. I agree. (S.P. Singh, J.) Patna High Court, Patna. Dated the 28th day of April, 2011 S.K.Pathak/ (AFR). "