The Coorg Foundation, Bangalore V. DIT(Exemptions), Bangalore

ITA 618/BANG/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5332 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 06-04-2010
• Assessment Year: misc
• Appeal Filed On: 12-06-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JASAON P BOAZ CITI
• Assessee Lawyers: G SARANGAN
• Keywords: Charitable institution
• Section: 143(3); 80G; 12A; 12AA; 250; 201; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE A BENCH, BANGALORE BEFORE DR. O.K.NARAYANAN, VICE PRESIDENT AND SHRI GEORGE GEORGE, K. JM ITA NO.618(BNG.)/2009 (ASSESSMENT YEAR : N.A) THE COORG FOUNDATION, NO.57, RAILWAY PARALLEL ROAD, KUMARA PARK WEST, BANGALORE APPELLANT VS THE DIRECTOR OF INCOME-TAX (EXEMPTIONS), CR BUILDINGS, QUEENS ROAD, BANGALORE RESPONDENT ASSESSEE BY : SHRI G. SARANGAN, SR. ADVOCATE REVENUE BY : SHRI JASAON P. BOAZ, CIT-I O R D E R PER GEORGE GEORGE, K, JM : THIS APPEAL OF THE ASSESSEE TRUST IS DIRECTED AGAI NST THE IMPUGNED ORDER OF LD. DIT(E), BANGALORE, REJECTING ITS APPLI CATION FOR RENEWAL OF RECOGNITION U/S 80G OF THE ACT. 2. THE ASSESSEE TRUST HAS RAISED SIX GROUNDS WHICH ARE IN THE NATURE OF EXHAUSTIVE AND ILLUSTRATIVE MANNER. ON A PERUSAL, THE CRUX OF THE ISSUES RAISED WERE REFORMULATED IN CONCISE MANN ER AS UNDER: THE DIT (E) HAS ERRED IN HOLDING THAT : (I) THE IMPUGNED ORDER OF THE LD. DIT (E) WAS BARRED BY LIMITATION; ITA NO.618(B)/09 2 (II) THE TRUSTS INCOME RECEIVED IN LIEU OF COMMERCIAL T RANSACTION OF SALE OF PRODUCTS WAS IN VIOLATION OF THE PROVISIONS OF THE ACT; (III) THE REPAYMENT OF INTEREST FREE LOAN BY THE TRUST TO TATA COFFEE LIMITED WAS IN VIOLATION OF S.13 OF THE ACT; (IV) THE LOSS ON REDEMPTION OF INVESTMENTS COULD NOT BE AN OUTGOING OR APPLICATION OF INCOME OF THE TRUST; (V) THE DONATIONS BY THE ASSESSEE TRUST TO OTHER ELIGIB LE TRUSTS WAS NOT AN APPLICATION OF INCOME UNDER THE ACT; & (VI) IN HOLDING THAT THE TRUST HAVING PAID CERTAIN SUMS TO THE TRUSTEES HAD VIOLATED THE PROVISIONS OF THE ACT 3. BRIEFLY STATED THE FACTS ARE FOLLOWS. THE ASS ESSEE TRUST WAS FORMED ON 23.9.1994. ITS EARLIER APPLICATION FOR RE NEWAL OF RECOGNITION U/S 80G FOR THREE YEARS W.E.F. 1.4.2003 WAS REJECTED BY THE THEN DIT (E)VIDE ORDER DATED 28-11-2003. THE DIT(E) ORDER DATED 28- 11-2003 WAS CHALLENGED IN A WRIT BEFORE THE HONBLE JURISDICTIO NAL HIGH COURT. THE HONBLE COURT AFTER DUE CONSIDERATION, REVERTED THE ISSUE BACK TO THE DIT (E) WITH A DIRECTION TO RECONSIDER THE APPLICATION FOR EXAMINING ALL THE RELEVANT DOCUMENTS. THEREAFTER, RECOGNITION WAS GR ANTED BY DIT(E) U/S 80G OF THE IT ACT FOR THE PERIOD 01-04-2003 TO 31-0 3-2006 VIDE ORDER DATED 27-12-2007. 4. TURNING BACK TO THE ISSUE ON HAND, THE ASSESSEE TRUST FURNISHED AN APPLICATION FOR RENEWAL OF RECOGNITION U/S 80G O F THE ACT ON 16.9.2008 (FOR THREE YEARS FROM 01-04-2006 TO 31-03-2009). IN COMPLIANCE TO THE ITA NO.618(B)/09 3 QUERIES OF THE REVENUE, THE ASSESSEE TRUST FURNISHE D CERTAIN DETAILS VIDE ITS COMMUNICATION (RECEIVED) ON 24.11.08, 24.12.08 AND 6.4.2009. 5. AS THE JURISDICTIONAL HONBLE HIGH COURT HAD LAID DOWN CERTAIN GUIDELINES IN THE CASE OF BANGALORE EDUCATION TRUST VS DIT (E) REPORTED IN 267 ITR 549, THE DIT (E), WHILE EXAMINING THE AP PLICATION OF THE PRESENT TRUST FOR RENEWAL OF EXEMPTION U/S 80G, HA D LISTED OUT THE FOLLOWING DISCREPANCIES: - THE ASSESSEE HAD DEBITED CERTAIN LOSSES FROM REDEMP TION OF UNITS TO THE INCOME AND EXPENDITURE ACCOUNT; AND SHOWN THESE AS AN APPLICATION OF INCOME. THE LOSS ON REDEMPTION OF U NITS WOULD NOT TANTAMOUNT TO APPLICATION OF MONEY FOR CHARITABLE P URPOSES AND, THUS HIT BY THE DISCIPLINE OF 85% OF APPLICATION OF RECE IPTS SINCE APPLICATION TO THAT EXTENT WOULD FALL SHORT OF THE CONDITIONALI TY AND RESULT IN INCOME TAXABLE U/S 11 WHICH IN TURN ELIGIBILITY U/S 11 WAS IN VIOLATION OF CONDITIONALITY OF S.80G(5)(I); - THE ASSESSEE TRUST HAD DEALINGS WITH TCL WHERE-UNDE R DONATION TO CORPUS MADE BY THE COMPANY WAS SUBSEQUENTLY CONVERT ED INTO AN INTEREST FREE LOAN. THE FIRST CONDITION FOR A DONA TION WAS A VOLUNTARY ACT WITHOUT ANY EXPECTATION OF RETURN WHICH WAS NOT BORNE OUT. IT VIOLATES S.13(1)(C); - NO DETAILS REGARDING THE COMPUTATION OF CAPITAL LOS S FORM PART OF THE AUDITED ACCOUNTS WERE FURNISHED WITH THE APPLICATIO N. CERTAIN DETAILS FURNISHED SUBSEQUENTLY WERE MAINLY SHOW SWI TCH-IN AND SWITCH-OUT OF DIFFERENT SCHEMES OF MUTUAL FUNDS; - IT CANNOT BE DEEMED TO BE AN APPLICATION FOR CHARIT ABLE PURPOSE UNLESS MAKING INVESTMENTS WERE CONSIDERED CHARITABL E PURPOSE; - THE TRUST HAD MADE INTER-TRUST DONATIONS YEAR AFTER YEAR AND SHOWN AS APPLICATION TOWARDS CHARITABLE PURPOSE. IT REQU IRES THE AOS SATISFACTION THAT THE FUNDS WHICH HAVE BEEN DONATED TO THE DONEE TRUST WILL BE UTILIZED ONLY FOR THE CHARITABLE PURP OSE [CBDTS INSTRUCTION NO.1582/19.10.1984]; ITA NO.618(B)/09 4 - THE ABOVE FACT HAS BEEN CANDIDLY ACCEPTED BY THE AS SESSEE IN ITS NOTES ON ACCOUNT; - THE ASSESSEE HAD RECEIPTS FROM SALE OF PAPER PRODUC TS. THIS PLACES THE ASSESSEE UNDER THE FOURTH LIMB OF THE DEFINITIO N OF CHARITABLE PURPOSES AS DEFINED IN S.2(15) OF THE ACT; - THE INCOME RECEIVED IN LIEU OF THE COMMERCIAL TRANS ACTION OF SALE OF PRODUCTS BY IT WAS HIT BY THE CHANGE IN LAW REGARDL ESS OF THE USE OR APPLICATION OF SUCH INCOME; - AS PER S.80G(5), THE FUND IS ELIGIBLE ONLY IF IT IS ESTABLISHED FOR A CHARITABLE PURPOSE, THE ASSESSEE IS DISQUALIFIED BE FORE EXAMINING ITS ELIGIBILITY AS LAID DOWN IN CLAUSES (I) TO (IV) OF S.80G(5). THE CONDITIONS LAID DOWN IN S.80G(5) AND 80G(5)(I) HAVE NOT BEEN M ET BY THE ASSESSEE. 6. TAKING RECOURSE TO RULE 11AA(4) OF I.T. RULES, THE ASSESSEES APPLICATION FOR RENEWAL WAS REJECTED AS THE LD. DIT (E) WAS OF THE VIEW THAT THE ASSESSEE TRUST WAS NOT A FIT CASE FOR RENE WAL OF RECOGNITION U/S 80G OF THE ACT. 7. AGGRIEVED, THE ASSESSEE-TRUST HAS COME UP WIT H THE PRESENT APPEAL. THE ELABORATE SUBMISSIONS OF THE LD. A R O N THE ISSUE ARE SUMMARIZED AS UNDER: (I) THE DIT (E) OUGHT TO HAVE PASSED THE IMPUGNED ORDER WITH IN SIX MONTHS FROM THE DATE OF MAKING THE APPLICATION I.E. , 16.3.2009 FAILING WHICH THE RENEWAL WAS PRESUMED TO HAVE BEEN GRANTED; - RELIES ON THE FINDING OF THE JURISDICTIONAL TRIBUNA L IN THE CASE OF KARNATAKA GOLF ASSOCIATION V. DIT (E) 272 ITR (AT )123 (II) THE TRUSTS INCOME RECEIVED IN LIEU OF THE COMMERCI AL TRANSACTION OF SALE OF PRODUCTS WAS NOT IN VIOLATION OF THE PROVIS IONS OF THE ACT REGARDLESS OF THE USE OR APPLICATION OF SUCH INCOME ; - THE ACTIVITY OF SALE OF PRODUCTS AND THE CONSIDERAT ION RECEIVED AS PART OF SWASTHA PROJECT WAS ONLY FAILING WITHIN THE AMBIT OF ADVANCEMENT OF EDUCATION AND NOT FALLING UNDER TH E CATEGORY ITA NO.618(B)/09 5 OF ADVANCEMENT OF ANY OTHER OBJECT OF GENERAL PUBL IC UTILITY AND, HENCE, DOES NOT TRIGGER ANY VIOLATION OF THE P ROVISIONS OF THE ACT; - THE SALE OF PAPER WAS NOT AN ACTIVITY IN THE NATUR E OF TRADE, COMMERCE OR BUSINESS. THE PAPER WHICH WAS SOLD WAS MADE BY THE INMATES OF SWASTHA AS PART OF THE ACTIVITY T O PROVIDE THEM WITH NECESSARY SKILLS, IT WAS IN THE FURTHERA NCE OF THE OBJECT OF THE TRUST; - RELIES ON CBDTS CIRCULAR NO.11/2008 DATED: 19.12. 2008; (III) THERE WAS NO VIOLATION OF S.13 OF THE ACT IN THE RE PAYMENT OF INTEREST FREE LOAN BY THE ASSESSEE TRUST TO TATA CO FFEE LIMITED [TCL] RELIES ON THE JURISDICTIONAL H.CS ORDER IN THE ASSESSEES OWN CASE [SOURCE: P. 32 OF PB AR]; (IV) THE DIT (E) ERRED IN HOLDING THAT LOSS ON REDEMPTIO N OF INVESTMENTS COULD NOT BE AN OUTGOING OR APPLICATION OF INCOME OF THE TRUST; - THE CIT(A), IN THE ASSESSEES OWN CASE FOR THE AY 0 5-06, HAS HELD THAT THE INCOME TO BE APPLIED FOR CHARITABLE P URPOSES WOULD BE THE INCOME ARRIVED AT BY FOLLOWING THE GEN ERAL ACCOUNTING PRINCIPLES AND, THUS, THE LOSS ARISING F ROM REDEMPTION OF INVESTMENTS SHOULD BE REDUCED FROM TH E INCOME AND THE BALANCE SHOULD BE CONSIDERED FOR DETERMININ G THE AMOUNT AVAILABLE FOR APPLICATION FOR CHARITABLE PUR POSES; - RELIES ON CIRCULAR 5-P DATED: 19.6.1968 - (A) M.CT.M. CHIDAMBARAM CHETTIAR FOUNDATION V. ITO 35 ITD 313 (MAD.TRIB) (B) CIT V. RAO BAHADUR CALAVALA CUNNAN CHETTY CHARI TIES 135 ITR 485 (MAD) (C) CIT V. ETHIRAJ (ESTATE OF VL) 136 ITR 12 (MAD) (D) CIT V. TRUSTEES OF HEH THE NIZAMS SUPPLEMENTAL RELIGIOUS ENDOWMENT TRUST 127 ITR 378 (AP) (E) CIT V. GANGA CHARITY TRUST FUND 162 ITR 612 (GU J) (F) CIT V. PROGRAMME FOR COMMUNITY ORGANIZATION 228 ITR 620 (KER) (V) WITH REGARD TO DONATIONS MADE BY THE TRUST TO OTHER TRUSTS, RELIANCE WAS PLACED ON THE DECISIONS OF VARIOUS COU RTS THAT WHEN A DONOR TRUST WHICH WAS ITSELF A CHARITABLE AND REL IGIOUS TRUST DONATES ITS INCOME TO ANOTHER TRUST, THE DONOR TRUS T CAN BE SAID TO ITA NO.618(B)/09 6 HAVE APPLIED ITS INCOME FOR RELIGIOUS AND CHARITABL E PURPOSES. THE UTILIZATION BY THE DONEE TRUST IN ANY YEAR WOULD NO T BE RELEVANT FOR THE PURPOSE OF DECIDING WHETHER THE DONOR TRUST CAN GET EXEMPTION OR NOT; (VI) THE DIT (E)S STAND WAS THAT THE TRUST HAVING PAID CERTAIN SUMS TO THE TRUSTEES HAD VIOLATED THE PROVISIONS OF THE ACT ; - NONE OF THE TRUSTEES HAVE RECEIVED ANY REMUNERATION RIGHT FROM THE TIME OF ITS INCEPTION; - THE PAYMENTS MADE WERE IN THE NATURE OF HONORARIUM PAID TO THE DIRECTOR FOR THE ADMINISTRATIVE AND OTHER ROUTI NE SERVICES RENDERED TO THE TRUST LIKE PREPARATION OF PROJECT R EPORTS, MONITORING THE PROGRESS OF THE SCHEMES ETC., AND TH E PAYMENT WAS NOT TO THE TRUSTEES. 7.1 TO DRIVE HOME THE POINT, THE LD. A R CAME UP W ITH A VOLUMINOUS PAPER BOOK CONTAINING 1 174 PAGES WHI CH CONSISTS OF, INTER ALIA, COPIES OF (I) APPLICATION FORM 10G, (II) STA TEMENT OF INVESTMENTS IN UTI UNIT SCHEME, REDEMPTION OF INVESTMENTS; (III) C ORRESPONDENCES WITH DIT (E) ETC., BESIDES A BUNCH OF CASE LAWS. 7.2 ON THE OTHER HAND, THE LD. D R WAS VERY VEH EMENT IN HIS RESOLVES THAT THE LD. DIT (E), AFTER ANALYZING THE ISSUE IN DEPTH AND POINTING OUT THE DISCREPANCIES IN THE DETAILS FURNI SHED, CAME TO THE CONCLUSION THAT THE ASSESSEE TRUSTS CASE WAS NOT Q UALIFIED FOR RENEWAL OF RECOGNITION U/S 80G OF THE ACT. IT WAS, THEREFORE, PLEADED THAT THE ORDER OF THE LD.DIT (E) UNDER DISPUTE REQUIRES TO BE SUST AINED. RELIANCE HAS BEEN PLACED IN THE CASE LAWS OF (I) HINDUSTAN WELF ARE TRUST VS DIT (E) REPORTED IN (1993) 201 ITR 564 (CAL) AND (II) BANG ALORE EDUCATION TRUST VS DIT (E) REPORTED IN (2004) 267 ITR 549 (KAR). ITA NO.618(B)/09 7 8. WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIONS , CAREFULLY PERUSED THE RELEVANT RECORDS AND THE EVIDENCES PROD UCED AND ALSO THE CASE LAWS BY EITHER PARTY IN SUPPORT OF THEIR RESPE CTIVE STAND. 9. WE SHALL DECIDE THE ISSUES IN A CHRONOLOGICAL ORDER AND GROUNDWISE. I ) (I) THE IMPUGNED ORDER OF THE LD. DIT (E) UNDER DISPUTE , ACCORDING TO THE ASSESSEE TRUST, WAS BARRED BY LIMITATION SIN CE THE DIT (E) HAD FAILED TO PASS AN ORDER WITHIN SIX MONTHS FROM THE DATE OF MAKING AN APPLICATION FOR RENEWAL OF RECOGNITION. (II) THE ASSESSEE TRUST HAD FURNISHED AN APPLIC ATION FOR RENEWAL OF RECOGNITION ON 16.9.2008. IN COMPLIANCE TO THE DIT (E)S QUERY (CALLING FOR CERTAIN DETAILS), THE ASSESSEE TRUST PURPORTED TO H AVE FURNISHED THE REQUIRED DETAILS ON 24.11.2008 AND AGAIN ON 24.12.2 008. THIS VERY FACT HAS BEEN VOUCHED BY THE LD. A R VIDE ITS LETTER DAT ED 26.3.2009 THAT SOME ADDITIONAL DETAILS WERE FURNISHED VIDE LETTER DATED: 24.12.2008 [SOURCE: PAGE 154 OF PB AR] (III) AS PER RULE 11AA (6) OF I.T. RULES , THE TIME LIMIT WITHIN WHICH THE COMMISSIONER SHALL PASS AN ORDER EITHER GRANTIN G THE APPROVAL OR REJECTING THE APPLICATION SHALL NOT EXCEED SIX MONT HS FROM THE DATE ON WHICH SUCH APPLICATION WAS MADE; PROVIDED THAT IN COMPUTING THE PERIOD OF SIX MONTHS , ANY TIME TAKEN BY THE APPLICANT IN NOT COMPLYING WITH THE DI RECTIONS OF THE COMMISSIONER UNDER SUB-RULE (3) SHALL BE EXCLUDED. (IV) IN THE CASE ON HAND, THE ASSESSEE TRUS T HAD FURNISHED CERTAIN DETAILS AS LATEST AS ON 24.12.08 WHICH WAS ACKNOWLEDGED BY THE LD. A R REFERRED SUPRA AND IN ACCORDANCE WITH RULE 11AA (6) CITED SUPRA, WE ARE OF THE FIRM VIEW THAT THE LD. DIT (E) WAS WI THIN THE REALM TO PASS ITA NO.618(B)/09 8 THE IMPUGNED ORDER ON 13.4.2009 WHICH WAS NOT AT AL L BARRED BY LIMITATION AS ALLEGED BY THE ASSESSEE TRUST. (V) LET US ALSO ANALYZE THE CASE LAWS ON WHICH THE ASSESSEE TRUST HAS PINNED ITS STRENGTH;- (A) BHAGWAD SWARUP SHRI SHRI DEV RAHA BABA MEMORIAL SHRI HARI PARMARTHDHAM TRUST V. CIT [ 111 ITD 175 (SB DE LHI)]: THE ISSUE IN BRIEF, WAS THAT THE ASSESSEE, A CHA RITABLE INSTITUTION APPLIED FOR REGISTRATION U/S 12A OF THE ACT ON 23.1 0.01 UNDER S.12AA(2), EVERY ORDER GRANTING OR REFUSING REGISTRATION SHALL BE PASSED BY THE AUTHORITY BEFORE THE EXPIRY OF SIX MONTHS FROM THE END OF THE MONTH IN WHICH THE APPLICATION WAS RECEIVED BY HIM. THE ORDE R WAS PASSED ON 26.5.03 REFUSING REGISTRATION. SINCE, THE ORDER WA S BEYOND THE TIME LIMIT PRESCRIBED, THE SPECIAL BENCH WAS PLEASED TO ALLOW THE APPEAL IN FAVOUR OF THE ASSESSEE. WITH RESPECTS, WE WOULD LIKE TO POINT OUT THAT IN T HE PRESENT CASE ON HAND, THE DIT (E) HAD PASSED THE ORDER WITHIN THE TIME LIMIT AS PROVIDED UNDER RULE 11 AA (6) REFERRED SUPRA, THE CASE LAW R ELIED ON BY THE ASSESSEE IS DISTINGUISHABLE AND IT CANNOT COME TO THE AID OF THE ASSESSEE. (B) REV FATHER TRUST OSCAR COLASCO MEMORIAL MEDICA L ASSOCIATION VS CIT [ (2009) TIOL 548 ITAT MUM] IN THIS CASE, THE ASSESSEE ORGANIZATION APPLIES FOR REGISTRATION U/S 12AA VIDE FORM 10A FILED BEFORE THE CIT WHO REFUSED REGISTRATION STATING THAT THE APPLICATION FILED AFTER THE EXPIRY OF ONE YEAR OF FORMATION OF THE TRUST AND VERY NOMINAL INCOME WAS EXPENDED TO FURTH ER THE OBJECTS OF THE ITA NO.618(B)/09 9 TRUST. IT WAS RULED BY THE HONBLE TRIBUNAL THAT T HE CIT HAD FAILED TO INITIATE THE ENQUIRY IN TIME TO COMPLETE THE PROCES S OF GRANT OF REGISTRATION WITHIN THE STIPULATED PERIOD OF SIX MONTHS AND AS T HE ORDER HAS NOT BEEN PASSED WITHIN THE TIME LIMIT PRESCRIBED, THE APPLIC ATION WAS DEEMED TO HAVE BEEN GRANTED. WITH REGARDS, THE ABOVE CITED CASE LAW HAS NO RELE VANCE TO THE ISSUE ON HAND. IN THE INSTANT CASE, THE LD. DIT (E ) HAD INITIATED INQUIRY AT THE EARNEST AND THE ASSESSEE TRUST HAD FURNISHED CERTAIN ADDITIONAL DETAILS ONLY ON 24.12.2008 [PAGE 154 OF PB AR] AND, ACCORDING TO RULE 11AA (6), IN COMPUTING THE PERIOD OF SIX MONTHS, TH E TIME TAKEN BY THE ASSESSEE TRUST IN COMPLYING WITH THE DIRECTIONS OF THE LD. DIT (E) WILL HAVE TO BE EXCLUDED. IN DOING SO, THE LD. DIT (E) HAD, IN FACT, PASSED THE IMPUGNED ORDER WHICH IS UNDER DISPUTE, WITHIN THE S TIPULATED TIME FRAME. (C) KARNATAKA GOLF ASSOCIATION V. DIT [91 ITD 1 B ANG]: THE ISSUE BEFORE THE HONBLE TRIBUNAL WAS ALMOST SIMILAR TO THE ISSUES DELIBERATED UPON IN THE FORE-GOING PARAGRAPHS AND, THUS, WITH D UE REGARDS, WE ARE OF THE FIRM VIEW THAT THE FINDING OF THE HONBLE TRIBU NAL WILL HAVE OF NO HELP TO THE CAUSE OF THE PRESENT ASSESSEE. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTAN CES OF THE ISSUE, THIS GROUND OF THE ASSESSEE TRUST IS DISMISSED. II (I) THE SECOND ISSUE RAISED WAS IN RESPECT OF THE DIT (E)S STAND IN HOLDING THAT THE TRUSTS INCOME RECEIVED IN LIEU OF THE COMMERCIAL TRANSACTION OF SALE OF PRODUCTS WAS IN VIOLATION OF THE PROVISIONS OF THE ACT REGARDLESS OF THE USE OR APPLICATION OF SUCH INCOME . ITA NO.618(B)/09 10 (II) THE ARGUMENT OF THE ASSESSEE TRUST W AS THAT THE ACTIVITY OF SALE OF PRODUCTS AND THE CONSIDERATION RECEIVED AS PART OF SWASTHA PROJECT WAS ONLY FALLING WITHIN THE AMBIT OF ADVANCEMENT OF ED UCATION AND NOT FALLING UNDER THE CATEGORY OF ADVANCEMENT OF ANY OTHER OBJ ECT OF GENERAL PUBLIC UTILITY AND, HENCE, DOES NOT TRIGGER ANY VIOLATION OF THE PROVISIONS OF THE ACT; THAT THE SALE OF PAPER WAS NOT AN ACTIVITY IN THE NATURE OF TRADE, COMMERCE OR BUSINESS. THE PAPER WHICH WAS SOLD WAS MADE BY THE INMATES OF SWASTHA AS PART OF THE ACTIVITY TO PROVI DE THEM WITH NECESSARY SKILLS; IT WAS IN THE FURTHERANCE OF THE OBJECT OF THE TRUST. (III) HOWEVER, THE LD. DIT (E) TOOK A ST AND THAT IN VIEW OF THE PROVISO TO THE AMENDED S. 2(15), THE ACTIVITIES CAR RIED OUT BY THE TRUST SHALL NOT BE A CHARITABLE PURPOSE. THE APPLICANTS INCOME RECEIVED IN LIEU OF THE COMMERCIAL TRANSACTION OF SALE OF PRODUCTS B Y IT IS THUS HIT BY THE CHANGE IN LAW, REGARDLESS OF THE USE OR APPLICATION OF SUCH INCOME. (IV) THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. SHRI RAM EDUCATION FOUNDATION REPORTED IN (2001) 250 ITR 504 (RELIED ON BY THE ASSESSEE) HAD DEALT WITH AN IDENTICAL ISSUE. THE ISSUE BEFORE THE HONBLE COURT WAS , IN BRIEF, THAT THE ASSESSEE, A REGISTERED SOCIETY, THE OBJECT FOR WHIC H THE FOUNDATION WAS ESTABLISHED WAS, INTER ALIA, TO FURNISH THEORETICAL AND PRACTICAL EDUCATION OF BUSINESS AND SCIENCE. IN FURTHERANCE OF THE SAI D OBJECTS, IT WAS PROVIDED THAT THE FOUNDATION MAY OPEN SCHOOLS, COLL EGES ETC., OPEN INDUSTRIAL AND COMMERCIAL UNDERTAKINGS AS MEANS OF TRAINING MEN OR IN SUPPORT OF THE INSTITUTION SOLELY OR IN PARTNERSHIP WITH OTHERS. IN 1950, ITA NO.618(B)/09 11 LALA MADAN MOHAN LALL MAHILA SHILP VIDYALAYA [LMML MSV] TRANSFERRED ALL ITS ASSETS AND LIABILITIES TO THE FOUNDATION ON THE CONDITION THAT IT SHALL APPLY THE ASSETS FOR THE OBJECT OF LMMLMSV SOCIETY. IN FURTHERANCE OF THE OBJECTS OF THAT SOCIETY, FOR THE PURPOSE OF WHICH A SSETS WERE PLACED ON TRUST WITH THE FOUNDATION, IT WAS RUNNING A VOCATIO NAL TRAINING CENTRE IN THE NAME OF JUGNU WHICH TRAINS WOMEN IN THE ART O F STITCHING AND EMBROIDERY. SALE OF THE PRODUCTS OF THE SAID JUGNU RESULTED IN SOME SURPLUS WHICH WAS CLAIMED AS EXEMPTION U/S 11 OF TH E ACT. THE AO WAS OF THE VIEW THAT THE ACTIVITY RUN BY THE FOUNDATION HAD RESULTED IN SURPLUS WHICH WAS TAXABLE WHICH WAS UPHELD BY THE AAC. ON APPEAL, THE TRIBUNAL, ACCEPTING THE CONTENTION THAT THE JUGNU A CTIVITY WAS CARRIED ON WAS PLAINLY AN OBJECT OF GENERAL PUBLIC UTILITY AND IT DID NOT INVOLVE THE CARRYING ON OF ANY ACTIVITY FOR PROFIT, WENT ON TO HOLD THAT ON THE MATERIALS PLACED BEFORE US, THERE IS NO SCOPE FOR C ONCLUDING THAT THE PRIMARY OBJECT NOR DOMINANT PURPOSE OF THE INSTITUTION IS T HE CARRYING ON OF AN ACTIVITY FOR PROFIT. THE REAL PURPOSE OF THE INSTI TUTION IS THE ADVANCEMENT OF THE OBJECT OF IMPARTING VOCATIONAL TRAINING AND TEA CHING TO NEEDY WOMEN. WE, THEREFORE, HOLD THAT THE BUSINESS OF THE JUGNU ACTIVITY IS PROPERLY HELD UNDER TRUST AND FOR CHARITABLE PURPOSES AND INCOME THERE FROM IS TO BE EXEMPTED IN ACCORDANCE WITH THE PROVISIONS OF S.11 . ON FURTHER APPEAL, THE HONBLE COURT HE LD THAT IN VIEW OF THE FACTUAL CONCLUSION ARRIVED AT, AS NOTED ABOVE IN TH E QUOTED PORTION, THE TRIBUNAL HAS RIGHTLY HELD THAT THE INCOME WAS EXEMP TED UNDER SECTION 11. GUIDELINES TO BE APPLIED IN SUCH CASES HAVE BEEN IN DICATED BY THE APEX ITA NO.618(B)/09 12 COURT IN ADDL. CIT V. SURAT ARI SILK CLOTH MFRS. AS SOCIATION (1980) 121 ITR 1. (V) FURTHER, ON A CLOSE PERUSAL OF THE AMENDMENT TO S. 2(15) OF THE ACT BY THE FINANCE ACT, 2008, WE FIND THAT THE FOLLOWING IMPLICATIONS ARISE FROM THIS AMENDME NT;- > THE NEWLY INSERTED PROVISO TO S. 2(15) WILL NOT A PPLY IN RESPECT OF THE FIRST THREE LIMBS OF S.2(15), I.E., RELIEF OF THE POOR, E DUCATION OR MEDICAL RELIEF. CONSEQUENTLY, WHERE THE PURPOSE OF A TRUST OR INSTI TUTION IS RELIEF OF THE POOR, EDUCATION OR MEDICAL RELIEF , IT WILL CONSTITUTE CHARITABLE PURPOSE EVEN IF IT INCIDENTALLY INVOLVES THE CARRYING ON OF COMMERCIAL ACTIVITIES. (VI) IN VIEW OF THE ABOVE, WE ARE OF THE FIRM VIEW THAT THIS VITAL ISSUE, IN CONSEQUENCE OF THE JUDICIAL PRONOUNCEMENT AND AL SO THE AMENDMENT TO S. 2(15) OF THE ACT, HAS NOT BEEN ADDRESSED TO IN A COMPREHENSIVE AND IN A PROPER PERSPECTIVE MANNER. III. (I) WITH REGARD TO THE REPAYMENT OF INTEREST FREE LOAN BY THE ASSESSEE TRUST TO TCL, WE FIND THAT THE JURISDICTIO NAL HONBLE HIGH COURT IN THE ASSESSEE-TRUSTS OWN CASE [WRIT PETITION NO. 2360/2004(T-IT) DATED 8.6.2006], AFTER DUE CONSIDERATION OF THE LETTER OF CONSOLIDATED COFFEE LIMITED DATED 29.12.1994 ADDRESSED TO THE CHAIRMAN OF THE ASSESSEE TRUST, HAD OBSERVED THAT - IN THE SAID LETTER, IT IS SPECIFICALLY MENTIONED B Y THE CONSOLIDATED COFFEE LTD., THAT A CHEQUE FOR RS.5.00 CRORES IS BEING SENT, BUT THE WHOLE OF THE AMOUNT IS NOT I N THE NATURE OF THE DONATION. IT IS FURTHER MENTIONED IN THE LETTER THAT, AS TO WHAT WILL BE CONTRIBUTION TOWARD S CORPUS OUT OF RS.5.00 CRORES AND WHAT WILL BE THE INTEREST FREE ITA NO.618(B)/09 13 LOAN WILL BE INTIMATED TO THE PETITIONER IN DUE COU RSE. THE CHEQUE OF RS.5.00 CRORES RECEIVED BY THE PETITIONER FROM THE CONSOLIDATED COFFEE LTD., WAS SUBJECT TO THE TE RMS OF THE LETTER ACCOMPANYING THE SAME. PETITIONER-TRUST HAD ACCEPTED THE TERMS OF THE LETTER-ANNEXURE B AND G AVE A RECEIPT. THEREFORE, THE PETITIONER WAS BOUND BY TH E TERMS OF THAT LETTER. SUBSEQUENTLY, A LETTER DATED 27 TH MARCH 1995 VIDE ANNEXURE-E WAS RECEIVED BY THE PETITION ER FROM CONSOLIDATED COFFEE LTD., WHEREIN IT IS MENTIO NED THAT ONLY RS.50 LAKHS OUT OF RS.5.00 CRORES WAS IN THE NATURE OF DONATION BY WAY OF CORPUS AND THE BALANCE WAS INTEREST FREE LOAN. ACCORDINGLY, A SUM OF RS.4 .50 CRORES WAS REPAYABLE TO THE COMPANY. SUBSEQUENTLY, ABOUT 90% OF RS.5 CRORES WAS INVESTED BY THE PETITI ONER IN UNIT TRUST OF INDIA. SUCH INVESTMENT WAS IN ACCORDANCE WITH SECTION 11 (5) OF THE INCOME-TAX AC T. THE LETTER ANNEXURE-E FURTHER MAKES IT CLEAR THAT SIX MONTHS NOTICE WILL BE GIVEN BY THE COMPANY TO THE PETITION ER-TRUST IN CASE IF THE COMPANY WANTS REFUND OF THE INTEREST FREE LOAN. THUS, THE PETITIONERS TRUST WILL HAVE SIX MO NTHS TIME TO REFUND THE INTEREST FREE LOAN TO THE COMPAN Y BY LIQUIDATING ITS INVESTMENT MADE IN THE UNIT TRUST O F INDIA. ACCORDING TO THE PETITIONER, IT HAS BEEN RETURNING THE LOAN BY INSTALLMENTS FROM OUT OF THE INCOME GENERATED BY TH E INVESTMENT. ACCORDING TO THE PETITIONER, AS ON TODAY, PETITIONER IS OWNIN G ONLY RS.160 LAKHS TO THE CONSOLIDATED COFFEE LTD., OUT OF THE TOTAL AMOUNT O F RS.4.50 CRORES TAKEN BY WAY OF INTEREST FREE LOAN. THUS, IT IS CLEAR THAT THE PETITIONER HAS TAKEN THE LOAN OF RS.4.50 CRORES FROM THE CONSOLIDATED COFFEE LTD., AS PER THE AGREEMENT BETWEEN THE COMPANY AND THE TRUST AND PET ITIONER HAS BEEN ITA NO.618(B)/09 14 PAYING BACK THE LOANS IN INSTALLMENTS. THUS, THIS CANNOT BE TREATED AS VIOLATION OF SECTION 23 R/W SECTION 11 OF THE INCOM E-TAX ACT. NO WHERE IN THE IMPUGNED ORDER, THE DIRECTOR OF INCOME-TAX (EXE MPTION), BANGALORE, HAS OBSERVED THAT THE PETITIONER IS NOT A CHARITABLE TR UST OR THAT IT HAS AGREED ONLY FOR THE PURPOSE OF SAVING INCOME-TAX OF TATA C OFFEE LIMITED. RESPECTFULLY FOLLOWING THE RULING OF THE HONBLE CO URT REFERRED SUPRA, WE ARE OF THE CONSIDERED VIEW THAT THE REPAY MENT OF INTEREST FREE LOAN BY THE ASSESSEE TRUST TO TCL WAS NOT IN VIOLAT ION OF S.13 OF THE ACT. IT IS ORDERED ACCORDINGLY. IV. THE FOURTH ISSUE WAS THE CLAIM OF CAPITAL LOSS ON R EDEMPTION OF INVESTMENTS AS APPLICATION OF INCOME OF THE TRUST. THE MAIN THRUST OF THE ASSESSEE-TRUSTS CONTENTION WAS THAT THE DIT(E) OUG HT TO HAVE FOLLOWED THE ORDER OF THE CIT(A) IN THE ASSESSEES OWN CASE FOR THE AY 05-06 WHEREIN HE HELD THAT THE INCOME TO BE APPLIED FOR CHARITABLE P URPOSES WOULD BE THE INCOME ARRIVED AT BY FOLLOWING THE GENERAL ACCOUNTI NG PRINCIPLES AND, THUS, THE LOSS ARISING FROM REDEMPTION OF INVESTMEN TS SHOULD BE REDUCED FROM THE INCOME AND THE BALANCE AMOUNT SHOULD BE CO NSIDERED FOR DETERMINING THE AMOUNT AVAILABLE FOR APPLICATION OF CHARITABLE PURPOSES. THE REASONING OF THE LD. DIT (E) WAS THAT THE LOSSE S INCURRED ON REDEMPTION OF UNITS WERE LARGELY FUNDS OF TATA COMP ANIES AND THESE TRANSACTIONS WILL BE MATTER OF INVESTIGATION IN THE PENDING ASSESSMENTS. THE OTHER POINT RAISED BY THE DIT (E) WAS THAT NO D ETAILS REGARDING THE COMPUTATION OF CAPITAL LOSS FORM PART OF THE AUDITE D ACCOUNTS FURNISHED ITA NO.618(B)/09 15 WITH THE APPLICATION. TAKING CUE FROM THE RULING O F THE HONBLE MADRAS HIGH COURT REPORTED IN 241 ITR 195, THE DIT (E) REA SONED THAT WITHOUT LOOKING INTO FORM AND SUBSTANCE WHETHER THE INVESTM ENTS WERE CONSIDERED FOR CHARITABLE PURPOSES OR OTHERWISE, GRANTING OF E XEMPTION WILL NOT ARISE. DURING THE COURSE OF HEARING, THE LD. DR DREW THE A TTENTION OF THIS BENCH WITH REGARD TO THE RULING OF THE HONBLE HIGH COURT OF CALCUTTA IN THE CASE OF HINDUSTAN WELFARE TRUST V. DIT (E) REPO RTED IN 201 ITR 564, WHEREIN THE HONBLE HIGH COURT IN ITS WISDOM HAD HE LD THAT LOSS ON SALE OF INVESTMENT IS NOT ALLOWABLE IN COMPUTING THE INC OME FOR PURPOSES OF S.11. (II) CONSIDERING THE DIVERGENT VIEWS EXPRESSED BY T HE EITHER PARTY AND ALSO THE FACT REVEALED BY THE DIT (E) IN THE IM PUGNED ORDER WHICH IS UNDER CHALLENGE THAT THE DETAILS WITH REGARD TO TH E COMPUTATION OF CAPITAL LOSS FORM PART OF THE AUDITED ACCOUNTS HAVE NOT BEE N FURNISHED, WE ARE OF THE UNANIMOUS VIEW THAT THIS ISSUE REQUIRES FRESH E XAMINATION BY THE DIT(E) TO ARRIVE AT A CONCLUSION IN ACCORDANCE WITH THE PROVISIONS OF THE ACT AND ALSO AFTER LOOKING INTO THE COMPUTATION OF CAPITAL LOSS WHICH WILL BE FURNISHED BY THE ASSESSEE TRUST. WHILE DOING SO , THE DIT (E) SHALL KEEP IN VIEW THE LEGAL PRONOUNCEMENTS OF VARIOUS COURTS ON THE ISSUE. V. (I) THE FIFTH GROUND WAS THAT THE DIT (E) ERRE D IN HOLDING THAT THE DONATIONS BY THE ASSESSEE TRUST TO OTHER ELIGIBLE T RUSTS WAS NOT AN APPLICATION OF INCOME UNDER THE ACT. THE CONTENTION OF THE ASSESSEE TRUST WAS THAT VARIO US COURTS HAVE HELD THAT WHEN A DONOR TRUST WHICH ITSELF A CHARITA BLE AND RELIGIOUS TRUST ITA NO.618(B)/09 16 DONATES ITS INCOME TO ANOTHER TRUST, THE DONOR TRUS T CAN BE SAID TO HAVE APPLIED ITS INCOME FOR RELIGIOUS AND CHARITABLE PUR POSES. IT WAS, FURTHER, CONTENDED THAT THE DIT (E) HAD FAILED TO APPRECIATE THE FACT THAT THE UTILIZATION BY THE DONEE TRUST IN ANY YEAR WOULD NO T BE RELEVANT FOR THE PURPOSE OF DECIDING WHETHER THE DONOR TRUST CAN GET EXEMPTION OR NOT. (II) ON A GLIMPSE OF THE IMPUGNED ORDER OF THE LD. DIT (E), WE FIND THAT THE DIT (E) HAD MADE A FAR-REACHING REMARK THA T (II) THE TRUST IS ALSO FOUND TO HAVE MADE INTER-TR UST DONATIONS YEAR AFTER YEAR AND SHOWN THE SAME AS APPLICATION TOWARD S CHARITABLE PURPOSE (REFER TABLE). AS PER CBDT INSTRUCTION NO.1 582 DT: 19.10.1984, THE AO HAS TO BE SATISFIED THAT THE FUNDS WHICH HAV E BEEN DONATED TO THE DONEE TRUST WILL BE UTILIZED ONLY FOR THE CHARI TABLE PURPOSE. THIS ISSUE ALSO REQUIRES EXAMINATION U/S 143(3) IN THE P ENDING ASSESSMENTS PERTAINING TO THE LAST THREE YEARS. (III) THUS, THIS ISSUE IS RATHER INCONCLU SIVE AT THE LEVEL OF DIT (E). THUS, THIS ISSUE HAS NECESSARILY TO BE ADDRESSED TO BY THE DIT(E) TO COME TO A CONCLUSION AFTER LOOKING INTO OTHER ASPECTS AS POINTED OUT IN THE IMPUGNED ORDER. VI . THE SIXTH AND LAST GROUND OF THE ASSESSEE TRUST WAS THAT THE LD. DIT (E) ERRED IN HOLDING THAT THE TRUST HAVING PAID CER TAIN SUMS TO THE TRUSTEES HAD VIOLATED THE PROVISIONS OF THE ACT. (II) THE CONTENTION OF THE ASSESSEE-TRUST WAS THAT THE TRUST HAD PAID HONORARIUM TO THE DIRECTOR OF THE TRUST FOR THE ADM INISTRATIVE AND OTHER ROUTINE SERVICES RENDERED TO THE TRUST LIKE PREPARA TION OF PROJECTS, MONITORING THE PROGRESS OF THE SCHEMES ETC. FURTHER , IT HAD VOUCHED THAT ITA NO.618(B)/09 17 THE DIRECTOR OF THE TRUST WAS NOT A TRUSTEE. WHILE CLARIFYING THE ISSUE WITH REGARD TO HONORARIUM PAID TO THE DIRECTOR, THE TRUS TS A R VIDE ITS COMMUNICA8TION DATED 24.12.2008 [SOURCE: PAGES 152 & 153 OF PB AR] IT WAS REVEALED THAT THERE WAS ONLY ONE DIRECTOR BY NA ME K.N.CHANGAPPA WHO WAS TO LOOK AFTER THE ROUTINE ACTIVITIES AND AD MINISTRATION OF THE OFFICE OF THE FOUNDATION AND THE NATURE OF SERVICES RENDER ED BY HIM WAS THAT IN-CHARGE OF ALL ASPECTS OF THE OPERATION OF THE F OUNDATION INCLUDING ACCOUNTS, ADMINISTRATION, IDENTIFICATION OF PROJECT S, PREPARATION OF PROJECT REPORTS, MONITORING PROGRESS OF THE SCHEMES ETC., HOWEVER, ON A PERUSAL OF THE IMPUGNED ORDER OF THE LD. DIT (E), WE FIND THA T THERE WAS NEITHER ANY DISCUSSION NOR REBUTTAL OF THE ASSESSEES CLAIM ON THIS SCORE, HOWEVER, THE LD. DIT (E) MADE A SWEEPING REMARK THAT IN ASST. YEAR 2004-05, 2006-07 AND 2007-08 ALSO THERE ARE SIMILAR ISSUES REGARDING RETURN OF LOANS AND PAYMENTS TO TRUSTEES ATTRACTING S.13 WHICH WILL IMPACT THE APPLICANTS CLAIM FOR EXEMPTION RESPECT OF RECEIPTS U/S 11. 9.1. IN AN OVERALL CONSIDERATION OF THE FACTS AND C IRCUMSTANCES OF THE ISSUES AS DELIBERATED UPON IN THE FORE-GOING PA RAGRAPHS, WE ARE OF THE UNANIMOUS VIEW THAT THE ENTIRE ISSUES REQUIRE COMPR EHENSIVE CONSIDERATION AT THE LEVEL OF THE DIT (E) AND TO TA KE APPROPRIATE ACTION IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, INSTEAD OF DEALT WITH IN A PIECE- MEAL MANNER. TO FACILITATE THE LD. DIT (E) TO CARR Y OUT THE DIRECTION OF THIS BENCH, THE ENTIRE ISSUE IS RESTORED ON THE FIL E OF THE DIT (E). IN THE MEANWHILE, THE ASSESSEE-TRUST THROUGH ITS A R, ADV ISED TO FURNISH ALL THE ITA NO.618(B)/09 18 RELEVANT PARTICULARS AND TO CO-OPERATE WITH THE DIT (E) TO CARRY OUT THE DIRECTIONS OF THIS BENCH CITED SUPRA. IT IS ORDERE D ACCORDINGLY. 10. IN THE RESULT, THE ASSESSEES TRUST APPEAL IS T REATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THE 3 RD MAY, 2010. (DR. O.K.NARAYANAN) (GE ORGE GEORGE K. ) VICE PRESIDENT JUDICIAL MEMBER PLACE: BANGALORE DATED: 03-05-2010. AM* COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. CIT(A) 4. CIT 5. DR 6. GF(BLORE) 7. GF(DELHI) BY ORDER AR, ITAT, BANGALORE