Nimmagadda Foundation, Hyderabad V. DIT (Exemptions), Hyderabad

ITA 787/HYD/2014

• Counselvise Citation: 78722514 RSA 2014
• Duration Of Justice: 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-09-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: misc
• Appeal Filed On: 01-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Charitable institution; Source of fund; Cancellation of registration
• Section: 80G; 12A; 12AA; 12; 154; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 787/HYD/2014 ASSESSMENT YEAR : NIL M/S. NIMMAGADDA FOUNDATION, SECUNDERABAD PAN: AAGTS1157C VS. THE DIRECTOR OF INCOME - TAX (EXEMPTIONS) HYDERABAD APPELLANT RESPONDENT APPELLANT BY: SRI K.A. SAI PRASAD RESPONDENT BY: SRI D. SUDHAKAR RAO DATE OF HEARING: 01.09.2014 DATE OF PRONOUNCEMENT: 10 .09.2014 ORDER PER SAKTIJIT DEY, J.M.: ASSESSEE HAS PREFERRED THIS APPEAL BEING AGGRIEVED BY ORDER DATED 28.03.2014 PASSED BY DIRECTOR OF INC OME TAX (EXEMPTIONS) [DIT(E)], HYDERABAD CANCELLING REGISTRATION GRANTED U/S. 12AA OF INCOME-TAX ACT, 1 961. 2. BRIEFLY FACTS ARE, ASSESSEE EARLIER KNOWN AS M/S. SPANDANA FOUNDATION IS A CHARITABLE TRUST REGISTERE D U/S. 12AA OF THE ACT VIDE ORDER DATED 11.09.2007 OF THE DIT(E), HYDERABAD. IT IS A FACT ON RECORD THAT AFTER GRANT OF REGISTRATION, ASSESSEE HAS BEEN FILING ITS RETURN O F INCOME CLAIMING EXEMPTION U/S. 11 OF THE ACT WHICH HAS ALS O BEEN ACCEPTED BY AO AS WOULD BE EVIDENT FROM ASSESSMENT ORDER PASSED FOR A.Y. 2008-09 AND 2009-1 0. ON 6.09.2013 THE DIT(E) ISSUED A NOTICE PROPOSING T O 2 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== CANCEL THE REGISTRATION GRANTED U/S. 12AA OF THE AC T FOR THE FOLLOWING REASONS: (A) THE TRUST HAS CARRIED ON TRANSACTION OF BUYING AND SELLING OF SHARES WHICH IS NOT IN ACCORDANCE WITH OBJECTS OF THE TRUST. (B) ASSESSEE HAS OBTAINED UNSECURED LOANS OF RS. 1.21 CRORES FROM TWO DIFFERENT ENTITIES I.E., M/S. VANPIC PROJECTS (P) LTD. AND M/S. VANPIC PORTS (P) LTD. (C) AS BOTH THE COMPANIES WERE PROMOTED BY SRI NIMMAGADDA PRASAD AND HIS FAMILY MEMBERS HOLDING SUBSTANTIAL CAPITAL, RECEIVING OF LOANS FROM SUCH PRIVATE COMPANIES NOT BEING IN ACCORDANCE WITH THE OBJECTS OF THE TRUST, REGISTRATION GRANTED HAD TO BE CANCELLED. 3. IN REPLY TO THE SAID SHOW-CAUSE NOTICE IT WAS SUBMITTED BY THE ASSESSEE TRUST THAT AS PER CLAUSE 5(IV), THE TRUST HAS BEEN AUTHORISED TO INVEST TRUST FUNDS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 11(5) R.W .S. 13(1)(D) AND CLAUSE (IIA) OF PROVISO THERETO WOULD SHOW THAT THE TRUST CAN INVEST THE FUNDS IN SHARES. FUR THER, IT WAS SUBMITTED BY THE ASSESSEE THAT AT THE TIME OF GRANTING REGISTRATION U/S. 12AA OF THE ACT VIDE ORD ER DATED 11.09.2007 THE DIT(E) HAS ALREADY GONE INTO THE ISS UE OF INVESTMENT MADE BY THE ASSESSEE IN SHARES AND AFTER EXAMINING ALL FACTS AND MATERIALS RELATING TO THE S AID INVESTMENT IN SHARES HAD GRANTED REGISTRATION U/S. 12AA OF THE ACT. 4. SO FAR AS THE SECOND ISSUE OF OBTAINING UNSECURED LOANS FROM TWO PRIVATE COMPANIES, IT WAS SUBMITTED BY THE ASSESSEE TRUST THAT THE LOANS WERE NOT INTEREST BEARING HENCE NOT PREJUDICIAL TO THE INTERESTS OF THE TRUST . IT WAS SUBMITTED THAT CLAUSE 5(IIA) OF THE TRUST DEED PERM ITS 3 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== BORROWAL OF FUNDS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS FOR THE PURPOSE OF THE TRUST WITH OR W ITHOUT SECURITY OF TRUST PROPERTIES. THOUGH THE TRUSTEES ARE EMPOWERED TO BORROW FROM BANKS, THEY DID NOT DO SO SINCE BORROWING FROM BANKS WOULD LEAD TO PAYMENT OF HUGE INTEREST AND ALSO GIVING PROPERTIES OF THE TRU ST AS COLLATERAL SURETY. INSTEAD, THE TRUSTEES BORROWED THE INTEREST FREE FUNDS THEREBY SAVING VALUABLE FUNDS T O THE TRUST. FURTHER IT WAS BROUGHT TO THE NOTICE OF THE DIT(E) THAT THE UNSECURED LOANS WERE CLOSED BY TRANSFERRIN G THE SAID AMOUNT TO DONATION IN FINANCIAL YEAR 2010-11. IT WAS SUBMITTED THAT AS THE TRUST IN NO WAY WAS PREVENTED FROM PROMOTING ITS OBJECTS OR WAS PUT TO ANY FINANCIAL L OSS BY TAKING OF SUCH LOANS, IT CANNOT BE SAID THAT THEY W ERE NOT IN ACCORDANCE WITH THE OBJECTS OF THE TRUST. IT WA S SUBMITTED THAT AS THE ASSESSEE HAD BEEN CARRYING ON ACTIVITIES IN ACCORDANCE WITH OBJECTS OF THE TRUST AND THERE IS NO ALLEGATION WITH REGARD TO GENUINENESS OF ITS ACTIVITIES, THE REGISTRATION GRANTED U/S. 12AA OF T HE ACT SHOULD NOT BE CANCELLED. 5. THE DIT(E), HOWEVER, DID NOT ACCEPT SUBMISSIONS OF THE ASSESSEE. HE NOTED THAT THE TRUST HAS TAKEN LO AN OF RS. 40 CRORES FROM M/S. G2 CORPORATE SERVICES LTD., ON 26.8.2006 AND PURCHASED 20 LAKHS EQUITY SHARES OF M /S. MATRIZ LABORATORIES LTD., AT RS. 200 PER SHARE. SUBSEQUENTLY, ON 7.1.2007 THE TRUST HAS SOLD ALL 20 LAKH SHARES TO MYLAM INC., USA AT THE RATE OF RS. 306 PE R SHARE FOR A TOTAL SALE CONSIDERATION OF RS. 61.20 C RORES. THUS IT WAS CONCLUDED BY THE LEARNED DIT(E) THAT AS THE ASSESSEE HAS INDULGED IN THE ACTIVITY OF TRANSACTIO N OF PURCHASE AND SALE OF SHARES, WITH THE MOTIVE OF EAR NING 4 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== SUBSTANTIAL PROFIT FROM SUCH TRANSACTIONS, IT IS NO T AS PER THE OBJECTS OF THE TRUST. EVEN SO FAR AS OBTAINING OF UNSECURED LOANS FROM PRIVATE COMPANIES IS CONCERNED , LEARNED DIT(E) HELD THAT SAME IS IN VIOLATION OF TH E PROVISIONS CONTAINED IN CLAUSES 4 AND 5 OF THE TRUS T DEED. HENCE THE TRUST HAS NOT CARRIED ON ACTIVITIES IN ACCORDANCE WITH ITS OBJECTS AS MENTIONED IN THE TRU ST DEED. ACCORDINGLY, THE DIT(E) PASSED THE IMPUGNED ORDER CANCELLING THE REGISTRATION GRANTED U/S. 12AA OF TH E ACT. 6. THE LEARNED AR REITERATING THE STAND TAKEN BEFORE THE DIT(E), SUBMITTED THAT SO FAR AS THE ISSUE OF INVESTMENT IN SHARES, THE ENTIRE FACTS AND MATERIAL S RELATING TO THE INVESTMENT IN SHARES WAS EXAMINED B Y THE DIT(E) WHILE CONSIDERING ASSESSEE'S APPLICATION FOR REGISTRATION DATED 5.1.2007. THE LEARNED AR REFERR ING TO THE ORDER DATED 2.7.2007 PASSED BY THE DIT(E), A CO PY OF WHICH IS AT PAGE 53 OF PAPER BOOK, SUBMITTED THAT D URING THE ORIGINAL PROCEEDINGS FOR GRANT OF REGISTRATION U/S. 12AA. THE ISSUE OF INVESTMENT IN PURCHASE OF 20 LA KHS EQUITY SHARES OF M/S. MATRIX LABORATORIES LTD. WAS SPECIFICALLY EXAMINED BY THE DIT(E) IN THE CONTEXT OF VIOLATION OF SECTION 11(5) R.W.S. 13(1)(D) OF THE ACT. THE DIT(E) ULTIMATELY REJECTED ASSESSEE'S APPLICATION F OR GRANT OF REGISTRATION U/S. 12AA OF THE ACT. HOWEVER, ON APPLICATION FILED BY THE ASSESSEE U/S. 154 OF THE A CT, THE DIT(E) RE-EXAMINED THE ENTIRE ISSUE AGAIN AND HELD THAT ASSESSEE HAS NOT VIOLATED THE PROVISIONS OF SECTION 11(5) R.W.S. 13(1)(D) OF THE ACT WHILE MAKING INVESTMENT IN SHARES OF M/S. MATRIX LABORATORIES LTD. AND ULTIMAT ELY PASSED AN ORDER ON 11.9.2007 GRANTING REGISTRATION U/S. 12AA OF THE ACT TO THE ASSESSEE. FURTHER, IT WAS 5 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== SUBMITTED, WHEN THE AO DENIED EXEMPTION TO THE ASSE SSEE U/S. 11 OF THE ACT BY REFERRING TO THE VERY SAME IS SUE OF INVESTMENT IN SHARES OF M/S. MATRIX LABORATORIES LT D. AND CONSEQUENT VIOLATION OF SECTION 11(5) R.W.S. 13(1)( D) OF THE ACT IN THE ASSESSMENT ORDER PASSED FOR THE A.Y. 200 7-08, THE ISSUE CAME UP FOR CONSIDERATION BEFORE THE ITAT . THE ITAT AFTER CONSIDERING SUBMISSIONS OF THE PARTIES A ND EXAMINING THE FACTS AND MATERIALS ON RECORD IN ORDE R DATED 28.06.2013, PASSED IN ITA NO. 670/HYD/2012 HE LD THAT THERE IS NO VIOLATION OF SECTION 11(5) R.W.S. 13(1)(D) OF THE ACT BY THE ASSESSEE WHILE INVESTING IN 20 LAKH EQUITY SHARES OF M/S. MATRIX LABORATORIES LTD. 7. THUS, IT WAS SUBMITTED BY THE LEARNED AR THAT THE ISSUE RELATING TO INVESTMENT IN SHARES HAVING ALREA DY BEEN EXAMINED BY THE DIT(E) AT THE TIME OF GRANTING REGISTRATION U/S. 12AA OF THE ACT AND BY THE ITAT W HILE CONSIDERING THE CLAIM OF EXEMPTION U/S. 11 OF THE A CT FOR A.Y. 2007-08, THE DIT(E) CANNOT CANCEL REGISTRATION OF THE ASSESSEE BY AGAIN RAISING THE SAME ISSUE AS IT WOUL D AMOUNT TO REVIEW OF THE ORDER PASSED BY THE DIT(E) EARLIER AS WELL AS THE ORDER PASSED BY THE ITAT. 8. THE LEARNED AR SUBMITTED, IN RESPECT OF OBTAINING OF UNSECURED LOANS FROM TWO PRIVATE COMPANIES ALSO THERE IS NO VIOLATION OF OBJECTS OF THE TRUST. IT WAS SU BMITTED, AUTHORISATION TO BORROW BY THE TRUSTEES IS NOT PROV IDED UNDER THE OBJECTS OF THE TRUST BUT IT IS A PURELY ADMINISTRATIVE FUNCTION. IT WAS SUBMITTED THAT THE RE IS CLEAR DISTINCTION BETWEEN THE SOURCE OF FUNDS AND APPLICATION OF FUNDS. FOR EXAMINING WHETHER THE TR UST IS ENTITLED FOR REGISTRATION U/S. 12AA, THE REQUIREMEN T IS TO 6 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== LOOK INTO WHETHER THE FUNDS WERE APPLIED FOR ACHIEV ING THE OBJECTS OF THE TRUST. THE LEARNED AR SUBMITTED THA T THE PROVISIONS OF CLAUSE 12AA(3) EMPOWER THE DIT(E) TO CANCEL REGISTRATION ALREADY GRANTED ON SATISFACTION OF TWO CONDITIONS. THE CONDITIONS ARE, THE ACTIVITIES OF THE TRUST OR INSTITUTION ARE NOT GENUINE OR SUCH ACTIVITIES A RE NOT BEING CARRIED OUT IN ACCORDANCE WITH THE OBJECTS OF THE TRUST OR INSTITUTION. IT WAS SUBMITTED THAT IN THE PRESENT CASE, NEITHER OF THE CONDITIONS ARE FULFILLED. NEI THER THERE IS ANY ALLEGATION BY THE DIT(E) THAT THE ACTIVITIES OF THE TRUST ARE NOT GENUINE NOR THERE ARE ANY FACTS AND MATERIALS BROUGHT ON RECORD WHICH COULD SHOW THAT T HE ASSESSEE HAS NOT ACTED IN ACCORDANCE WITH THE OBJEC TS OF THE TRUST. IN THIS CONTEXT, THE LEARNED AR SUBMITT ED A LIST OF CHARITABLE ACTIVITIES CARRIED ON BY THE TRUST. IT WAS, THEREFORE, SUBMITTED, THE BASIC CONDITIONS OF SECTI ON 12AA(3) HAVING NOT BEEN SATISFIED, THE DIT(E) IS NO T JUSTIFIED IN CANCELLING THE REGISTRATION U/S. 12AA OF THE ACT. 9. THE LEARNED DR, ON THE OTHER HAND, SUPPORTING THE ORDER OF THE DIT(E) SUBMITTED THAT SECTION 12AA(3) OF THE ACT EMPOWERS THE DIT(E) TO EXAMINE VALIDITY OF REGISTRATION GRANTED U/S. 12AA OF THE ACT. THEREFO RE, IF THE DIT(E) SUBSEQUENTLY FINDS THAT ACTIVITIES OF TH E TRUST ARE NOT GENUINE OR ARE NOT IN ACCORDANCE WITH THE O BJECTS OF THE TRUST, HE CAN CANCEL THE REGISTRATION GRANTE D EARLIER. THE LEARNED DR SUBMITTED THAT WHEN THE TRANSACTIONS IN PURCHASE AND SALE OF SHARES AS WELL AS OBTAINING OF LOANS FROM PRIVATE COMPANIES ARE IN VIOLATION OF THE TRUS T DEED, THE DIT(E) WAS JUSTIFIED IN CANCELLING THE REGISTRA TION GRANTED. 7 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== 10. WE HAVE CONSIDERED SUBMISSIONS OF THE PARTIES AND PERUSED MATERIALS ON RECORD. AS IS VERY MUCH CLEAR FROM THE ORDER OF THE DIT(E), HE HAS CANCELLED THE REGIS TRATION FOR THE FOLLOWING TWO REASONS: (A) THE ASSESSEE HAS INVESTED IN PURCHASE OF EQUITY SHARES OF M/S. MATRIX LABORATORIES LTD. WHICH IS IN VIOLATION OF OBJECTS OF TRUST DEED. (B) ASSESSEE HAS OBTAINED LOANS FROM TWO PRIVATE COMPANIES WHICH IS IN CONTRAVENTION OF THE TRUST DEED. 11. SO FAR AS THE INVESTMENT IN SHARES OF M/S. MATRIX LABORATORIES LTD. IS CONCERNED, AS CAN BE SEEN FROM THE FACTS AND MATERIALS ON RECORD, THE ISSUE WAS CONSID ERED AT LENGTH BY THE DIT(E) WHILE EXAMINING ASSESSEE'S APPLICATION FOR GRANT OF REGISTRATION U/S. 12AA OF THE ACT. INITIALLY THE DIT(E) HAD REJECTED THE APPLICATION F OR REGISTRATION BY HOLDING AS UNDER: 'I. THE APPLICANT HAS NOT FURNISHED THE EVIDENCE REGARDING THE EXPENDITURE INCURRED OF RS. 1 CRORE WHICH EVEN AS PER THE CLAIM OF APPLICANT IS MERELY A COMMITMENT. II. THE LETTER DT. 4/4/2007 OF THE APPLICANT MERELY INDICATES ITS PLANS AND PROPOSALS IN SO FAR AS ITS CERTAINTY OF OBJECTS IS CONCERNED. III. THE APPLICANT TRUST HAS NOT COMMENCED ITS CHARITABLE ACTIVITIES SO FAR. IV. THE APPLICANT HAS MENTIONED NIL REMARK AT COL. 13 OF FORM 10G BUT IN THE NOTE FILED DURING THE COURSE OF PROCESSING OF APPLICATION, IT IS MENTIONED THAT THE TRUST HAS PURCHASED 20,00,000 EQUITY SHARES OF MATRIX LABORATORIES FROM G2 CORPORATE SERVICES LTD., SECUNDERABAD IN WHICH THE AUTHOR AND THE MAIN TRUSTEE SHRI N. PRASAD HAS 80% SHARE 8 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== HOLDING WHICH IS COVERED BY THE PROVISION OF SEC. 13(3) OF THE INCOME-TAX ACT, 1961. V. THE APPLICANT STATED THAT IT DOES NOT CARRY ANY BUSINESS BUT THE FACT OF PURCHASE OF 20 LAKHS SHARES OF MATRIX LTD., BY IT INDICATES INVESTMENT IN SHARES IN CLEAR VIOLATION OF SEC. 11(5) WHICH SPECIFIES VARIOUS KINDS OF INVESTMENTS TO BE MADE BY A SOCIETY OR TRUST. VI. THE FACTS OF THE APPLICANT'S CASE REVEAL THAT IT IS COVERED BY SEC. 13(L)(D) OF THE ACT. VII. THE SOURCES OF INVESTMENT FOR PURCHASE OF THE ABOVE SHARES FOR AN AMOUNT OF RS. 40 CRORES ARE NOT KNOWN ESPECIALLY SINCE THE APPLICANT TRUST WAS CONSTITUTED WITH A PALTRY SUM OF RS. 1116/- ONLY AS CORPUS ON 3/8/2006 I.E., ONLY A DAY BEFORE THE DATE OF PURCHASE OF THE ABOVE SHARES. IN VIEW OF THE ABOVE AND AFTER TAKING INTO ACCOUNT THE ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE, I AM SATISFIED THAT THE APPLICANT'S REQUEST FOR REGISTRATION U/S, 12A & FOR EXEMPTION U/S. 80G(5)(VI) OF THE ACT CANNOT BE ACCEDED TO. HENCE THE APPLICATIONS FILED BY THE APPLICANT FOR REGISTRATION U/S, 12A AND FOR GRANT OF EXEMPTION U/S. 80G ARE HEREBY REJECTED CHIEFLY ON THE GROUND OF NON- COMMENCEMENT OF CHARITABLE ACTIVITIES IN VIEW OF THE DECISION OF THE KERALA HIGH COURT REPORTED IN 241 ITR 18; AND PROVISIONS OF SEC. 11(5); SEC. 13(3) & SEC. 13(1)(D) OF THE INCOME- TAX ACT, 1961.' 12. SUBSEQUENTLY, ON AN APPLICATION FILED U/S. 154 OF THE ACT BY THE ASSESSEE, THE DIT(E) RECONSIDERED TH E ENTIRE ISSUE AND HELD THAT ASSESSEE HAS NOT VIOLATED THE PROVISIONS OF SECTION 11(5) R.W.S. 13(1)(D) OF THE ACT WHILE INVESTING IN SHARES OF M/S. MATRIX LABORATORIES LTD . THE RELEVANT PORTION FROM THE ORDER DATED 11.9.2007 PAS SED BY THE DIT(E), HYDERABAD IS EXTRACTED HEREUNDER: 9 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== 'AS REGARDS THE POINTS (IV), [V}, (VI) AND (VII) REFERRED TO IN THE ORDER SOUGHT TO BE RECTIFIED, THE APPLICANT TRUST HAS VEHEMENTLY CONTENDED THAT NEITHER THERE IS ANY VIOLATION OF SECTION 11(5) OF ACT NOR THE PROVISIONS OF SECTION 13(3) AND 13(1)(D) OF ACT ARE APPLICABLE TO THE FACTS OF ITS CASE. I AGREE THAT PROVISO (IIA) TO SEC. 13 (1)(D) DOES PROVIDE CLEAR CUT EXCEPTION TO THE INVESTMENTS NOT COMPLYING WITH PROVISIONS OF SEC, 11(5)) OF ACT, IF SUCH INVESTMENT IN SHARES IS DISPOSED OFF BEFORE THE EXPIRY OF ONE YEAR. SINCE THE APPLICANT TRUST HAS ACQUIRED SHARES IN AUGUST, 2006 AND DISPOSED THEM OFF IN JANUARY , 2007, THE APPLICANT TRUST IS ENTITLED TO BENEFIT OF PROVISO (IIA) TO SEC. 13(L)(D) OF ACT . THE APPLICANT TRUST HAS ALSO FURNISHED CLARIFICATION REGARDING SOURCES OF INVESTMENT FOR PURCHASE OF SHARES. ACCORDINGLY, THE APPLICANT TRUST HAS SUCCEEDED IN REBUTTING THE OTHER POINTS ALSO VIZ., (IV), (V), (VI) AND (VII) MENTIONED IN THE ORDER SOUGHT TO BE RECTIFIED. IN VIEW OF THE AFORESAID DISCUSSION, I FIND MERIT IN THE CONTENTIONS PRESSED BY THE APPLICANT TRUST AND I PROCEED TO RECTIFY MY ORDER DT. 02- 07-2007. THE NECESSARY ORDER GRANTING REGISTRATION U/S. 12AA OF ACT AND ALSO THE ORDER OF EXEMPTION U/S. 80G(5)(VI) OF ACT ARE PASSED SEPARATELY FOR THE SAKE OF CONVENIENCE.' 13. IN CONSEQUENCE TO THE AFORESAID ORDER, THE DIT(E) ALSO PASSED AN ORDER ON 11.09.2007 GRANTING REGISTR ATION TO THE ASSESSEE US. 12AA OF THE ACT. FURTHER, THE ISSUE OF INVESTMENT IN SHARES WAS AGAIN A MATTER OF DISPUTE BETWEEN THE ASSESSEE AND THE DEPARTMENT IN COURSE O F ASSESSMENT PROCEEDINGS FOR THE A.Y. 2007-08. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT H ELD THAT ASSESSEE WHILE MAKING INVESTMENT IN SHARES OF M/S. MATRIX LABORATORIES LTD. HAS VIOLATED THE PROVISION S OF SECTION 11(5) R.W.S. 13(1)(D) OF THE ACT AND ACCOR DINGLY 10 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== DENIED THE CLAIM OF EXEMPTION U/S. 11 OF THE ACT. AFTER THE ASSESSMENT WAS CONFIRMED BY THE CIT(A), THE ASS ESSEE PREFERRED AN APPEAL BEFORE THE TRIBUNAL. THE TRIBU NAL IN ITA NO. 670/HYD/2012 DATED 28.6.2013 AFTER CONSIDER ING THE CONTENTIONS OF THE PARTIES AND EXAMINING THE FA CTS AND MATERIALS ON RECORD VIS-A-VIS THE RELEVANT STAT UTORY PROVISIONS HELD AS UNDER: '11. EVEN, SO FAR AS THE VALIDITY OF THE GROUNDS FOR REJECTION OF THE ASSESSEE'S CLAIM UNDER SECTION 11 IS CONCERNED, WE FIND FORCE IN THE CONTENTION OF THE LEARNED A.R. THAT THE PROVISIONS INVOKED BY THE CIT(A) FOR DENYING EXEMPTION UNDER SECTION 11, ARE ALSO NOT APPLICABLE TO THE FACTS OF THE CASE. SECTION 13(2)(H) OF THE ACT PROVIDES THAT THE INCOME OR THE PROPERTY OF THE TRUST BE DEEMED TO HAVE BEEN USED OR APPLIED FOR THE BENEFIT OF A PERSON REFERRED TO IN SUB-SECTION (3), IF ANY FUNDS OF THE TRUST OR INSTITUTION ARE CONTINUE TO REMAIN INVESTED DURING THE PREVIOUS YEAR IN ANY CONCERN IN WHICH SUCH PERSON AS REFERRED TO IN SUB-SECTION (3) HAS A SUBSTANTIAL INTEREST. THE PERSON REFERRED TO IN SUB-SECTION (3) ARE THE AUTHOR OF THE TRUST OR FOUNDER OF THE INSTITUTION, ANY PERSON WHO HAS MADE A SUBSTANTIAL CONTRIBUTION TO THE TRUST OR INSTITUTION WHERE HIS CONTRIBUTION UP TO THE END OF THE RELEVANT PREVIOUS YEAR EXCEEDS RS. 50,000/-, ANY TRUSTEE OF THE TRUST OR MANAGER OF THE INSTITUTION ANY RELIEF OF SUCH OTHER FOUNDER PERSON, MEMBER, TRUSTEE OR MANAGER ANY CONCERN IN WHICH ANY OF THE PERSONS REFERRED TO HEREINABOVE HAS A SUBSTANTIAL INTEREST. THOUGH SHRI N. PRASAD IS A PERSON COVERED UNDER SUB-SECTION (3) HOWEVER, AS PER THE SHARE HOLDING DISCLOSED FROM THE CERTIFICATE SUBMITTED BY SHRI N. PRASAD SHAREHOLDING IN MATRIX LABORATORIES IS ONLY 17.09% WHICH CANNOT BE CONSIDERED AS SUBSTANTIAL FOR THE PURPOSE OF SECTION 13(2)(H) OF THE ACT IN VIEW OF EXPLANATION 3 TO SECTION 13 OF THE ACT. SIMILARLY, SECTION 13(1)(D) WOULD ALSO NOT BE APPLICABLE TO THE ASSESSEE IN VIEW OF CLAUSE 11 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== (IIA) OF PROVISO TO SECTION 13(1)(D) SINCE THE ASSESSEE HAS DEPOSITED IN THE SPECIFIED MODES UNDER SUB-SECTIONS (5) OF SECTION 11 OF THE ACT WITHIN THE PRESCRIBED PERIOD. THE AFORESAID FACTUAL POSITION ALSO HAS NOT BEEN CONTROVERTED BY THE DEPARTMENT. THE DECISION OF THE ITAT, DELHI BENCH IN THE CASE OF SERA FOUNDATION VS. ITO (SUPRA) ALSO SUPPORTS THIS VIEW. (EMPHASIS BY US.) 14. THEREFORE, THE ISSUE OF INVESTMENT IN SHARES HAVING BEEN CRYSTALLISED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE DIT(E) PASSED U/S. 154 (SUPRA) OF THE ACT AS WE LL AS BY THE TRIBUNAL IN ITA NO. 670/HYD/2012 (SUPRA), THE PRESENT DIT(E) CANNOT REOPEN THE ISSUE AGAIN FOR TH E PURPOSE OF CANCELLATION OF REGISTRATION, MORE SO, A FTER THE ORDER OF THE ITAT. THOUGH, IT APPEARS FROM THE REP LY TO SHOW-CAUSE NOTICE, ASSESSEE HAS NOT REFERRED TO THE AFORESAID ORDER OF THE TRIBUNAL, HOWEVER, ON A REFE RENCE TO THE SAID ORDER OF ITAT IT IS CLEAR A COPY OF THE SA ID ORDER WAS ALSO MARKED TO THE LEARNED DIT(E). THEREFORE, IN SPITE OF SUCH ORDER OF THE ITAT HOLDING THAT THERE IS NO VIOLATION BY THE ASSESSEE OF THE PROVISIONS CONTAINED IN SECT ION 11(5) R.W.S. 13(1)(D) OF THE ACT, THE ACTION OF T HE DIT(E) IN CANCELLING REGISTRATION ON THE ISSUE OF INVESTMENT IN SHARES CANNOT BE APPRECIATED. 15. SO FAR AS THE ISSUE OF RECEIVING UNSECURED LOANS FROM M/S. VANPIC PROJECTS (P) LTD. AND M/S. VANPIC PORTS (P) LTD. IS CONCERNED, WE ARE OF THE FIRM VIEW THAT IN RESPECT OF THESE LOANS ALSO THERE IS NO VIOLATION O F THE PROVISIONS CONTAINED UNDER THE TRUST DEED. THOUGH CLAUSE 5 OF THE TRUST DEED EMPOWERS THE TRUSTEES TO OBTAIN LOAN FROM BANKS AND FINANCIAL INSTITUTIONS, IT CANN OT BE CONSTRUED IN A MANNER TO SUGGEST THAT THE SAID CLAU SE 12 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== RESTRICTS THE TRUST/ TRUSTEES FROM OBTAINING LOANS FROM PRIVATE PARTIES. EVEN RAISING OF LOANS IS NOT COMI NG UNDER THE OBJECT CLAUSES OF THE TRUST DEED. THE LEARNED AR HAS RIGHTLY CONTENDED THAT THERE IS A DISTINCTION BETWE EN THE SOURCE OF FUNDS AND THEIR APPLICATION. SO FAR AS T HE OBJECTS OF THE TRUST ARE CONCERNED IT RELATES TO TH E APPLICATION OF THE FUNDS. THERE IS NOTHING BROUGHT ON RECORD BY THE DIT(E) TO SHOW THAT FUNDS HAVE NOT BE EN APPLIED FOR ACHIEVING THE OBJECTS OF THE TRUST. AT THIS STAGE, IT WOULD BE RELEVANT TO LOOK INTO THE PROVISIONS CO NTAINED U/S. 12AA(3) OF THE ACT. A READING OF THE SAID PRO VISIONS MAKES IT CLEAR THAT THE CIT (IN THE PRESENT CASE DI T(E)) CAN CANCEL THE REGISTRATION OF A TRUST OR INSTITUTI ON IF HE IS SATISFIED THAT THE ACTIVITIES OF THE TRUST ARE NOT GENUINE OR NOT IN ACCORDANCE WITH THE OBJECTS OF THE TRUST. 16. CONSIDERED IN THE CONTEXT OF AFORESAID STATUTORY PROVISION, AS CAN BE SEEN, NEITHER IN THE ORDER OF THE DIT(E) NOR FROM ANY OTHER FACTS AND MATERIALS ON RE CORD, IT IS ESTABLISHED THAT THE ACTIVITIES OF THE TRUST ARE NOT GENUINE OR ARE NOT IN ACCORDANCE WITH THE OBJECTS O F THE TRUST. THE GROUNDS ON WHICH THE DIT(E) HAS CANCELL ED THE REGISTRATION ARE NEITHER GERMANE NOR RELEVANT FOR T HE PURPOSE OF SECTION 12AA(3) OF THE ACT. NOTHING HAS BEEN BROUGHT ON RECORD TO SHOW THAT OBTAINING OF LOANS F ROM THE TWO PRIVATE COMPANIES IS IN DETRIMENT TO THE OB JECTS OF THE TRUST OR THEY ARE FOR THE BENEFIT OF THE TRUSTE ES OR THEIR RELATIVES. 17. IN THE AFORESAID VIEW OF THE MATTER, WE HAVE NO RESERVATION IN HOLDING THAT CANCELLATION OF REGISTR ATION BY THE LEARNED DIT(E) U/S. 12AA(3) OF THE ACT IS LEGAL LY 13 ITA NO. 787/HYD/2014 M/S. NIMMAGADDA FOUNDATION ======================== UNSUSTAINABLE. ACCORDINGLY, WE QUASH THE IMPUGNED ORDER OF THE DIT(E). 18. IN THE RESULT, ASSESSEE'S APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 10 TH SEPTEMBER, 2014 SD/ - (B. RAMAKOTAIAH) ACCOUNTANT MEMBER SD/ - (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 10 TH SEPTEMBER, 2014 TPRAO COPY TO: 1. M/S. NIMMAGADDA FOUNDATION, C/O. CH. PARTHA - SARATHY & CO., 1-1-298/2/B/3, 1 ST FLOOR, SOWBHAGYA AVENUE, ST. NO. 1, ASHOKNAGAR, HYDERABAD-20. 2. THE DIRECTOR OF INCOME - TAX (EXEMPTIONS), HYDERABAD. 3. THE ADIT(E) - II, HYDERABAD. 4. THE DR, B - BENCH, ITAT, HYDERABAD.