Appeal Details
Counselvise Citation
[2022] 105 COUNSELVISE.COM (IT) 1359 (ITAT-CHANDIGARH)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 year(s) 11 month(s) 24 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
24-05-2022
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
B
Assessment Year
2016-2017
Appeal Filed On
30-05-2019
Judgement Text
आयकर अपील य अ धकरण,च डीगढ़ यायपीठ “B” , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “B”, CHANDIGARH ी एन.के.सैनी, उपा य एवं ी स ु धांश ु ीवा%तव, या'यक सद%य BEFORE: SHRI. N.K.SAINI, VP & SHRI. SUDHANSHU SRIVASTAVA, JM आयकर अपील सं./ ITA No. 1578/Chd/18 नधा रण वष / Assessment Year : 2014-15 DCIT, Circle-1 (Exemptions), Chandigarh, 5 th Floor, Sector 17-E, C.R Building, Chandigarh बनाम M/s. Ram Asra Goyal Education & Research Society, Adjoining Geeta Bhawan Sunam, Dist. Sangur थायी लेखा सं./PAN No: AAAAR6411R अपीलाथ /Appellant यथ /Respondent आयकर अपील सं./ ITA No. 869/Chd/19 नधा रण वष / Assessment Year : 2016-17 DCIT, Circle-1 (Exemptions), Chandigarh, 5 th Floor, Sector 17-E, C.R Building, Chandigarh बनाम M/s. Ram Asra Goyal Education & Research Society, Adjoining Geeta Bhawan Sunam, Dist. Sangur थायी लेखा सं./PAN No: AAAAR6411R अपीलाथ /Appellant यथ /Respondent राज व क ओर से/ Revenue by : Dr. Ranjeet Kaur, Sr. DR नधा "रती क ओर से/Assessee by : Shri Tejmohan Singh, Advocate स ु नवाई क तार&ख/Date of Hearing : 19/04/2022 उदघोषणा क तार&ख/Date of Pronouncement : 25/05/2022 आदेश/Order PER N.K. SAINI, VICE PRESIDENT These two appeals by the department are directed against the separate orders dt. 04/09/2018 and 14/03/2019 of the CIT(Appeal), Patiala for the assessment years 2014-15 and 2016-17 respectively. 2. Since the issues involved are common in these appeals which were heard together, therefore, these are being disposed off by this common order for the sake of convenience and brevity 3. At the first instance we will deal with appeal for the A.Y 2014-15 in ITA No. 1578/Chd/2018. 2 4. Following grounds have been raised in this appeal: i. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law and facts in deleting the addition of Rs. 9,50,000/- on account of payment made by the assessee to M/s. Ashoka Educational Trust by relying upon the additional evidence under Rule 46A of the Income Tax Rules filed by the assessee during the appellate proceedings. ii. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law and facts in allowing the repayment of loan as application of income. This was rightly disallowed by the assessing officer by holding that since the assessee has not shown loans taken as income hence they cannot be allowed as application of income at time of repayment. iii. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law and facts in deleting the addition of Rs. 2,31,30,585/- under section 68 r.w.s 115BBE of the Act on account of unsecured loans by relying upon the additional evidence under Rule 46A of the Income Tax Rules filed by the assessee during the appellate proceedings. The addition was rightly done as the assessee had failed to file relevant evidences during the assessment proceedings. iv. That the appellate craved to add, delete or and any grounds of appeal on or before the date it is heard and disposed off. 5. Vide ground no. (i) the grievance of the department relates to the deletion of addition of Rs. 9,50,000/- made by the Assessing Officer ( in short, the AO) on account of payment made by the assessee society to M/s. Ashoka Educational Trust. 6. Facts related to this issue in brief are that the assessee society was registered under the Societies Registration Act (XXI of 1860) vide registration No.46 of 2008-09 dt. 14-05-2008 and also registered u/s. 12AA of the Income-tax Act, 1961 (hereinafter referred to as ‘ the Act’ ) with the Ld. CIT, Patiala vide Order No.CIT/PTA/TECH/12- A/11/2008-09/7608 dt. 02/01/2009. The assessee filed its return of income on 03-09-2014 declaring Nil income. Later on the case was selected for scrutiny. During the course of assessment proceedings the AO issued the notice to the assessee to show cause as to why the donation paid to M/s. Ashoka Educational Trust may not be disallowed by observing as under:- “On perusal of the income and expenditure account and details filed by you, it is seen that you have paid amount of Rs.9,50,000/- to M/s. Ashoka Educational Trust as donation. On perusal of your reply it is seen that M/s. Ashoka Educational Trust is not registered u/s. 12AA for AY 2014-15. During the inquiry u/s. 133(6) of I.T Act it is also found that M/s. Ashoka Educational Trust has filed in its reply that no amount has been received by M/s. Ashoka Educational Trust and it is also 3 verified from the balance sheet and income & expenditure account of M/s. Ashoka Educational Trust that you have not paid any amount to M/s. Ashoka Educational Trust. In these facts when M/s. Ashoka Educational Trust has not received any donation from you and not registered u/s. 12AA and not spent on educational purpose, then this amount of Rs.9,50,000/- is not allowable as application of income. This expense is disallowed and will be added into surplus. “ 6.1. In response, the assessee vide reply dt. 26-12-2016 submitted as under; 1. A sum of Rs.9,50,000/- was donated by the Society to Ashoka Education Trust for educational purpose. Copy of confirmation from Ashoka Educational Trust and utilization certificate issued by Ashoka Educational Trust regarding usage of funds are enclosed vide annexure no. 1. The payment was made to the trust vide Cheque No.006049 dated 07.03.2014 and duly recorded in our bank statement. The name of trust is also reflected in Bank statement enclosed vide annexure no.1. 6.2. The AO after considering the above submissions of the assessee observed that the assessee failed to justify the payments made to M/s. Ashoka Educational Trust, which is registered u/s. 12AA of the Income Tax Act (hereinafter referred to as the Act)for the AY 2015-16 and not for the A.Y 2014-15. He also observed that during the enquiry u/s. 133(6) of the Act, it was found that in its reply M/s. Ashoka Educational Trust stated that no amount had been received by it. The AO also observed that for the AY 2014-15 there was no activity seen related with the charity or education by M/s. Ashoka Educational Trust for the A.Y 2014-15 and the investments was made in the fixed assets. He, therefore, disallowed a sum of Rs. 9,50,000/-. 7. Being aggrieved, the assessee carried the matter to the Ld. CIT(A), Patiala and submitted as under:- “ To Ashoka Educational Trust a sum of Rs.9,50,000/- was donated vide cheque No. 006049 dated 07.03.2014 by our Society. They have failed to acknowledge the fact during assessment due to non-availability of their Chairman. They have now admitted the receipt through a letter confirming their mistake along with Balance sheet for the year 2013-14. We hereby request you to allow us to produce additional evidence on this account as per Petition under rule 46A of Income Tax Act, being attached herewith.” 7.1. The aforesaid submissions of the assessee was forwarded to the AO who replied as under:- “(Appellant cannot be allowed to change statements so frequently. It is an afterthought. During the assessment proceedings, the assessee was given sufficient opportunities to file its explanation. But the assessee failed to 4 file/produce requisite documents so as to justify its claim. Hence, documents submitted by the assessee now should not be considered as additional evidences under Rule 46A of the Income tax Rules. 7.2. In its counter comments the assessee submitted to the ld. CIT(A) as under:- “The objection that the appellant has changed its statements is uncalled for. The appellant has right from the beginning been clear that the donation was given and has shown in the Audited Balance sheet also. It was the donee who has changed the statement and has accepted their mistake also as per letter dated 31.10.2017. The donation was shown in the Audited Balance Sheet as such the AO contention that it was afterthough is incorrect. The appellant was never given an opportunity to cross examination the party. The bank statement of appellant clearly shown name of Ashoka Educational Trust in the statement along with Cheque Noo.006049 dated 07.03.2014.” 7.3. The Ld. CIT(A) after considering the above submissions of the assessee and comments of the AO observed that as regards to the admission of additional evidence the AO suggested that assessee was given enough time and the submission was an after though. He observed that the bank records revealed the date of cheque issued to the Ashoka Educational Trust was within the previous year relevant to the AY under consideration and confirmation was to be obtained from a third party which, at times could be difficult, moreover, the additional evidence goes to the root of the matter, which falls within the exceptions as envisaged by Rule 46A of the Income Tax Rules, 1962. He, therefore, admitted the additional evidence. The Ld. CIT(A) observed that the assessee had furnished confirmation duly signed by the donee, Ashoka Educational Trust dt. 31-10-2017 along with an approval u/s. 12AA of the Act. He further observed that the audited balance sheet, income and expenditure account dt. 14-08-2014 revealed that amount of Rs. 9,50,000/- was received as corpus donation from the assessee. He further observed that the date of audited balance sheet was prior to the enquiries made by the AO, where amount was indicated as not reflected in the receipt and expenditure account as well as balance sheet filed with the AO by M/s. Ashoka Educational Trusts and further as to why with a letter dt. 31-10-2017 an un-audited provisional balance sheet (signed by a Chartered Accountant duly acknowledging the provisional nature in the balance sheet). The assessee on being questioned on the 5 same vide letter dt. 16-08-2018 filed a copy of the return of income filed by M/s. Ashoka Educational Trust for the AY 2014-15 along with computation of income, audited balance sheet and P & L account duly signed by the auditor on 18-09-2014. The Ld. CIT(A) stated that he had examined the aforesaid facts, which revealed that the assessee had duly reflected the said amount of Rs.9,50,000/- as a loan from the assesse. The Ld. CIT(A) observed that there was considerable casualness and lack of discipline both by the assessee and loanee in making submissions. He opined that facts were crystal clear, from the bank records, it was clear that the amount in question was paid by cheque to Ashoka Educational Trust and date of cheque issued by the assessee as well as the debit in the accounts was within the previous year relevant to the AY under consideration. As per return of income and audited accounts of the Ashoka Educational Trust the amount had been shown as a loan. He also observed that non- furnishing of the confirmation by Ashoka Educational Trust during assessment proceedings had been contradicted by the trust in its confirmation filed during appellate proceedings, which was predicated on audited accounts. He, therefore, held that the assessee was not at fault in this matter. Accordingly, he deleted the addition of Rs. 9,50,000/- made by the AO. 8. Now, the department is in appeal. 9. The Ld. Sr.DR strongly supported the assessment order passed by the AO and further submitted that before the AO the assessee claimed the amount paid to M/s. Ashoka Educational Trust as donation, but the Ld. CIT(A) considered that it was a loan. Therefore, the amount was rightly disallowed and the addition was made by the AO, as M/s. Ashoka Educational Trust was not having registration u/s. 12AA of the Act at the relevant time. 10. In his rival submissions, the Ld. Counsel for the assessee submitted that the amount of Rs. 9,50,000/- paid by the assessee to M/s. Ashoka Educational Trust was a donation and not a loan. A reference was made to page-25 of assessee’s compilation, which is the copy of letter dt. 06-12-2016 written by the assessee to the AO, wherein vide para 3, it was stated that a sum of Rs.9,50,000/- was donated by the assessee society to M/s. Ashoka Educational Trust for the purpose of construction of building and 6 till now that building was used by M/s. Ashoka Educational Trust. It was further stated that the date of order u/s. 12AA of the Act an application of educational trust was on 13-04-2015, which was applicable for the AY 2015-16, but the amount of Rs.9,50,000/- donated to M/s. Ashoka Educational Trust have been utilised for the construction of building. Reliance was placed on the following decisions/case laws: 1 CBDT Instruction No. 1132/CBDT dt.05-01-1978 2 CIT Vs. J.K Charitable Trust (1992)196 ITR 31(All.) 3 CIT Vs. Sarladevi Sarabhai Trust (1998) 172 ITR 698(Guj.) 4 CIT Vs. Thanthi Trust (1999) 239 ITR 502 5 CIT Vs. Karnataka Lingayat Society (Kar) Hon’ble Karnataka High court and in ITA No. 5004/2012, ITAT Karnataka 6 ACIT Vs. Thanthi Trust 247 ITR 785(SC) 10.1. The Ld. Counsel for the assessee also referred to page-27 of assessee’s paper book, which is the copy of letter dt. 16-12-2016 written to the assessee society by the AO/DCIT(Exemptions), Chandigarh, wherein the AO asked the assessee that the amount of Rs.9,50,000/- paid to M/s. Ashoka Educational Trust as donation was not reflected in the balance sheet, income and expenditure account of M/s. Ashoka Educational Trust and that when M/s. Ashoka Educational Trust had not received any donation and was not registered u/s. 12AA of the Act, then the amount of Rs.9,50,000/- was not allowable as application of income. It was stated that the AO disallowed the donation paid by the assesee. He also referred to page-39 of assessee’s compilation, which is the copy of reply dt. 26-12-2016 of the assessee society written to the AO/DCIT,C-1-Exemptions, Chandigarh, wherein it was stated that a sum of Rs.9,50,000/- was donated by the assessee society to M/s. Ashoka Educational Trust for educational purposes only. Copy of confirmation from M/s. Ashoka Educational Trust along with utilisation certificate issued by the said trust were enclosed vide annexure no. 1. It was also stated that the payment was made to the trust vide cheque no. 006049 dt. 07-03- 2014, which was duly recorded/mentioned in the bank statement furnished vide annexure no.1. The Ld. Counsel for the assessee also referred to page-44 of assessee’s compilation, which is the copy of letter dt. 21-10-2016 written by Ashoka Educational Trust to the AO/DCIT,C-1-Exemptions, Chandigarh, in response to notice issued u/s. 133(6) of the Act calling for information relating to assessee society vide said letter, copies of accounts for AY’s 2014-15 to 2016-17 showing the utilisation of donation 7 received from M/s. Ram Asra Educational & Research Society, Sangur, Punjab(the assessee) alongwith audit report, receipt & expenditure and balance sheet from AY 2014-15 to 2016-17 had been furnished. The Ld. Counsel for the assessee also referred to page-76 of assessee’s compilation, which is the copy of letter dt. 21-01-2017 written to the Ld. CIT (Appeals), Patiala which read as under:- “1. We are submitting herewith an undertaking from Ashoka Educational Trust wherein they have confirmed the receipt of donation along with cheque no. & date. They have also stated the mistake on their part of not acknowledging the receipt earlier. A copy of their registration u/s. 12AA is also enclosed. They have also submitted their balance sheet for the year 2013-14. A detailed account statement as per their books duly authenticated by them is also enclosed. The party may be produced for evidence purpose if required. 10.2. The Ld. Counsel for the assessee also referred to page-87 of assessee’s compilation, which is the copy of letter dt. 31-10-2017 written to CIT(Appeals), Patiala by Ashoka Educational Trust, wherein it has been admitted that the donation of Rs.9,50,000/- was received from the assessee society vide cheque no. 006049 dt. 07-03- 2014 drawn on Oriental Bank of Commerce, which was transferred to their bank account no. 05902191018350 maintained with Oriental Bank of Commerce, Bhupindera Road, Patiala and earlier it was inadvertently replied that no money was received, the said incorrect version happened because their regular accountant was not attending the institute at the time of reply to the AO. The Ld. Counsel for the assessee also referred to page nos. 88-89 of assessee’s compilation, which are the copies of approval given by the CIT(Exemptions), Chandigarh, wherein it has been mentioned that application was filed in FY 2014-15 and as such the approval u/s. 12AA will be applicable for AY 2015-16 and onwards. He also referred to page no.95 of assessee’s compilation, which is the copy of provisional balance sheet of Ashoka Educational Trust, Patiala for the year ending 31-03-2014, wherein amount of Rs.9,50,000/- had been shown under the head Corpus Fund. It was accordingly submitted that assessee society paid the donation of Rs. 9,50,000/- to M/s. Ashoka Educational Trust having registration u/s. 12AA of the Act and the said donation was received as corpus fund, which was utilised for the purpose of charitable activities. He accordingly submitted that the Ld. CIT(A) rightly deleted the addition made by the AO. 8 11. We have considered the rival submissions of both the parties and perused the material available on record. In the present case it appears that the assessee had paid a sum of Rs.9,50,000/- to M/s. Ashoka Educational Trust as corpus fund, which is evident from page-95 of Assessee’s compilation. The assessee society paid the said amount through banking channel and at every step claimed the said amount was paid as donation. Even the recipient, M/s. Ashoka Educational Trust also confirmed the same before the AO as well as before the Ld. CIT(A) that the amount in question was received by them as a donation to be utilised for the purpose of charitable activities of M/s. Ashoka Educational Trust. We, therefore, considering the totality of the facts are of the view that the Ld. CIT(A) was fully justified in deleting the addition made by the AO. Ground no. (i) raised by the department is dismissed. 12. Vide ground no. ii the grievance of the department relate to allowing the repayment of loan as application of income. 13. Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had claimed repayment of loan as application of income in the computation. He asked the assessee to explain as to how the repayment of loan was allowable as application of income. In response, the assesse referred to Circular No. 100 of CBDT and computation of income from FYs 2008- 09 to 2013-14. The assessee furnished its reply on 26-12-2016, which reads as under:- “ We have submitted to you the computation of Income and its utilization right since the incorporation of society. The term loan was obtained from bank in order to construct the building and creation of infrastructure for Educational Institutes. The institution is being run on self financing basis and no Government funds were used to create the infrastructure. Hence, it was necessary to raise loan from Banks to partly fund the initial cost. The loans taken were shown as receipts in Receipt and payment account and fixed assets were taken as outgo. No depreciation has been claimed under 85% utilization. The repayment of loan has been taken as utilization of funds in the year of repayment thereof since it resulted in reduction of liability of the Soociety. The interest on term loan has been charged to expenses. Ratio of unsecured loan to promoter’s fund in FY 2011-12 is 1.998, which is reduced to 0.736 and 0.2068 in FY 2012-13 and 2013-14 respectively. Hence it is clear that we have not claimed depreciation as application of income. We have claimed fixed assets as application of income in the year of purchase. The loan, when taken was shown as receipt and when repaid shown as application of income. In the year of receipt we have applied 85% of income 9 plus loan receipt. Similarly in the year of repayment of loan the repayment has been claimed in 85% utilization. The repayment of loan has reduced the liability of the trust and hence to be construed as payment in receipt & payment A/c.” 13.1. The AO did not find merit in the above submissions of the assessee by observing in para 7.1 and 7.2 of the assessment order which read as under:- “7.1 The reply of assessee duly considered but not accepted under the following findings. Assessee has never claim loan amounts as receipts in its computation in earlier years. In response of the query raised during the assessment, assessee has submitted revised compuitation of income after including the loan amounts as receipts and not claimed the depreciation in these computations. Reply of assessee is not accepted because assessee has never claimed loan amounts as receipts in earlier years computation. The original computation of income for AY 2014-15 and AY 2013-14 is reproduced here:- Schedule-Vii: Security as on 31.03.2013 Particulars Amount (Rs.) Security A/c ACE 800000.00 Security A/c AICTE B.Tech 3500000.00 Security A/c AICTE MBA A/c 1500000.00 Security A/c AICTE MCA A/c 1500000.00 Security A/c Dean College Punjabi University Ptla 1000000.00 Security A/c NCERT Jaipur 419985.00 Security A/c Punjabi University Patiala A/c 1000000.00 Security A/c R A Society A/c 800000.00 Security A/c R A Society A/c New B.Ed 800000.00 Security Electricity 449210.00 Total 11769195.00 As on 31.03.2014 Particulars Amount Total Income of the Society Gross Income As per income & Expenditure Account 152997833.00 INCOME FOR THE YEAR 2013-14 Total-A 152997833.00 Minimum amount Required to be spent{ i.e 85% of Total (A)} Total-B 130048158.05 Maximum amount of income can be sent apart Total-C 22949674.95 APPLICATION OF INCOME Total expenditure Total-D 70306331.00 Addition to Fixed Assets Total-E 23129013.00 10 Total Application of Income (D+E) 93435344.00 Amount of Income Set Apart A-(D+E) 59562489.00 Amount over spent (In excess of minimum requirement (D+E)-B (36612814.05) Amount over Spent (previous Year) 170160921.15 Total amount over spent till 31.03.2014 1133548107.10 Income set apart in excess of 15% of income - 7.2. On perusal of the above it is clear that the assessee has not claimed loan amount as receipts but claimed the capital investments as application of income in earlier years as well as in this year. This fact shows that assessee is claiming double deduction as application of income, 1 st investments in capital assets and then repayment of the same, which is not accepted. Assessee is not claiming repayment of loan as application of income in the original computation dated 01- 09-2014. 7.3 Assessee’ s reply that these payments are application of income and covered u/s. 11(1) as aplication of income is not accepted. Case laws and circular of CBDT vide no. 1132 dated 5.1.1981 [F. No. 176/89/77-IT(AI)] duly considered but not accepted because the facts of the case laws are differ from the present case.” 13.2. The AO also observed that the assessee paid the amount to the bank as repayment of loans, but those have not been shown as receipt. The AO also referred to the CBDT Instruction No.1582 dt. 19-10-1984 issued by the CBDT, which modified the earlier instruction no. 1132 dt. 5-1-1981. The A.O. was of the view that the assessee had not applied the amount for charitable purposes and was not eligible for exemption u/s. 11(1) of the Act by observing as under:- “ 7.5 Perusal of the above instruction no. 1582, it is clear that in this case instruction no. 1132 will not apply and CBDT has given the power to the AO to verify the utilization of the amounts paid by the assessee under instruction no. 1582. In the present case assessee has utilized these amounts on capital expenditure, which cannot be considered application of income as charitable. So, in the above facts it is clear that assessee has not applied the amount for charitable purposes and not eligible for the exemption u/s. 11(1) of I.T Act, 1961. 14. Being aggrieved, the assessee carried the matter to the ld. CIT(A) and submitted as under:- “1. During the year we have spent above 85% on the objects of the society as per calculation given below: Particulars Amount Total Income of the Society 15,29,97,833.00 11 Gross Income (As per income & Expenditure Account) INCOME FOR THE YEAR 2013-14 Total-A 15,29,97,833.00 Minimum amount Required to be spent{ i.e 85% of Total (A)} Total-B 13,00,48,158.05 Maximum amount of income can be sent apart Total-C 2,29,49,674.95 APPLICATION OF INCOME TotalExpenditure 70,03,06,331 Add: Depreciation 1,48,60,262 Add: Expenses Written off 10,70,993 Total-D 8,62,37,586 Addition to Fixed Assets Total-E 2,31,29,013.00 Total Application of Income(D+E) Total-F 10,93,66,599 Amount of Income Set Apart A-F 4,36,31,234 Amount over/(under) spent (In excess of minimum requirement F-B (2,06,81,559) Amount over Spent (previous Years) 17,01,60,921.15 Total amount over spent till 31.03.2014 14,94,79,362.1 Income set apart in excess of 15% of income - Due to purchase of Fixed assets in initial years of formation there was an overspent of Rs.17,01,60,921.15/- i.e the amount spent in excess of 85% of income, which was carried forward from previous year. The calculation of same is shown in the above table. 2.” Attention is also drawn to the fact that the amendment” The deduction of depreciation in case of a charitable/religious trust, amount to double benefit/deduction has been affected with effect from 01 April 2015 in section 11(6) wherein the legal position has been changed”. Earlier depreciation was allowed as deduction. Relevant Case Law on the point is as follows: CIT Vs. Tiny Tots Education Society [2011] 230 ITR 21 (P&H) In this case the assessee was a charitable institution registered under section 12AA of the Income-tax Act, 1961. In its accounts, the assessee calculated depreciation on the ground showing the amount utilized. The Assessing Officer disallowed the depreciation on the ground that the income of the assessee being exempt, claim for depreciation would amount to taking of double benefit. The Commissioner (Appeals) held that deduction for computing income to preserve the corpus of the trust was permissible and did not amount to double benefit. This view was upheld by the Tribunal observing that application of income was not computation of income of the charitable institution. Therefore, the question whether depreciation was to be allowed or not, had nothing to do with the application of income. The income was always to be computed on commercial principles and as per the system of accounting followed by the assessee, subject always to the statutory provisions. On further appeal by the Revenue before the High Court, dismissing the appeal, it was held that the assessee was not claiming double deduction on account of depreciation. The income of the assessee being exempt, the assessee was only claiming that depreciation should be reduced from the income for determining the percentage of funds which had to be applied for the purposes of the trust. It could not be held that double benefit was given in allowing the claim for depreciation for computing income for purposes of section 11. 12 “ Attention is also drawn to the fact that the amendment has been affected with effect from 01 April 2015 in section 11(6) wherein the legal position has been changed.” In view of the aforesaid reasons, it is clearly established that a charitable/religious trust is entitled to deduction of depreciation allowance and such a deduction does not amount to double benefit or double deduction. 3. If the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are carried forward and adjusted against the income of a subsequent year, the income of that year can be said to be applied for charitable and religious purpose. Relevant Case Law on the point is as follows: In CIT v. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj.), Lordships of the Rajasthan High Court held that if the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are adjusted against the income of a subsequent year, the income of that year can be said to be applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes had been adjusted. Adjustment of excess expenditure against income of following year would amount to application of income for charitable purpose. This view was reiterated by the Gujarat High Court in CIT v. Shri PlotSwetambarMurtiPujak Jain Mandal (1995) 211 ITR 293 (Guj) and by the Madras High Court in CIT v. Matriseva Trust (2000) 242 ITR 20 (Mad.). In these cases it was held and observed that where an amount on charitable and religious purposes had been incurred in an earlier year, such expenditure if adjusted against the income of the subsequent year, the income of that subsequent year can be said to have been applied for charitable or religious purposes in the year in which the expenditure was incurred. It was also held that income derived from trust property has to be determined on commercial principles and the application of such commercial principles also warrants the conclusion that the expenditure incurred in an earlier year can be set off against the income of the subsequent year. In Trustees of Balkan-Ji Bari (1979) 10 CTR (Trib.) 22, the Bombay Bench of the Tribunal upheld the assessee’ s contention that it should be allowed the adjustment of excess amount spent towards charitable purposes in the earlier years against current income to determine the funds available with the assessee for the purposes of section 11(1) of the Act. In the case of CIT vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom), the AO disallowed the claim for carry forward of deficit of the earlier years for adjustment against the surplus of the subsequent years on the ground that such carry forward loss was applicable only to income under the head “ Profits & Gains of Business” and was not permissible in case of income under section 11 to 13 of the Income-tax Act. The Bombay High Court held that income derived from the trust is to be computed on commercial principles. Accordingly, adjustment of expenses incurred by the trust for charitable purposes in the earlier years against the income earned by the trust in the subsequent year will have to regard as application of income of the trust in the subsequent year. 13 4. However, the carried forward of excess application is not allowed by AO during assessment. Thereafter we had also prepared a cash flow statement showing all receipts/payments form FY 2008-09 (formation year) till Fy 2013-14 as follows: Particulars FY 2008-0 FY 2009-10 FY 2010-11 FY 2011-12 FY 2012-13 FY 2013-14 Income of the Society (As per Income & Exp a/c) - 1,70,47,036 5,01,72,758 12,54,43,895 16,60,56,037 15,29,97,833 Loan Taken 3,11,65,459 7,59,66,313 6,26,11,085 6,21,87,634 2,44,10,445 1,96,32,738 Total 3,11,65,459 9,30,13,349 11,27,83,843 18,76,31,529 19,04,66,482 17,26,30,571 85% of Income(a) 2,64,90,640 7,90,61,347 9,58,66,267 15,94,86,799 16,18,96,510 14,67,35,985 Application of Income Total expenditure 53,54,969 95,14,858 3,67,48433 7,31,55,106 7,73,89,384 7,03,06,331 Expense w/off - 10,70,994 10,70,994 10,70,994 10,70,994 10,70,994 Loan Repayment - - 1,99,77,208 3,80,64,320 6,73,32,499 9,29,72,587 Addition of Fixed asset 4,49,34,155 9,21,12,175 5,20,40,856 6,74,23,976 6,66,87,899 2,31,29,013 Total Application of Income(b) 5,02,89,124 10,26,98,027 10,98,37,491 17,97,14,396 21,24,80,776 18,74,78,924 Amount Overspent(a- b) (2,37,98,484) (2,36,36,680) (1,39,71,224) (2,02,27,597) (5,05,84,266) (4,07,42,939) It is clear from the above table that we have added loan taken to receipts in respective years and loan repayment to the payment. Then also in FY 2013-14 we have found no deficit in application of income. The following cases show that repayment of loan is to be considered as application of income: a. The Madras High Court in Kannika Parameswari Devasthanam & Charities 2011 held that if the expenditure is on capital account on objects(s) contained in the object clause, the expenditure will amount to application of income. Where the assessee had constructed a building out of accumulated and borrowed funds and the building was later rented out and a part of the rent was used for repayment of loan, the Karnataka High Court held 21 that such repayment of loan was application of income. b. Repayment of a debt incurred for charitable purposes by a charitable trust and loans advanced by educational trusts are application of income: Repayment of loan taken for construction of a building by the assessee for the purpose of augmenting its funds shall qualify as income applied for charitable purposes [Janamabhoomi Press Trust (Kar)] 14 c. CIT vs. Maharana Mewar Charitable Foundation reported in 164 ITR page 439 (Raj) wherein Their Lordships have held that the anomaly which has arisen that if the Trust takes a loan for the purposes of incurring expenditure for charitable and religious purposes in a particular year and the said loan is repaid out of the income of the subsequent year, the said repayment would be entitled to the exemption from tax u/s. 11(1). d. Relevant Case Laws_Director Income-tax (Exemption) v. Govindu Naicker Estate (2009) 315 ITR 237 (Mad). Relevant Section-11 During the assessment under section 143(3) of the Act, the Assessing Oficer noted that the trust had made part repayment of a lonan taken from the bank for constructing a multi-storied building. The Assessing Officer opined that the multi-storied commercial complex was not one of the objects of the trust and the expenditure incurred for the construction of the building could not be treated as charitable in nature, that the repayment of loan could not be regarded as application of income towards the charitable objects of the trust and rejected the claim of the assessee. The Commissioner (Appeals) allowed the appeal on the ground that the property of the trust was in a dilapidated condition and fresh construction had to be undertaken by obtaining a loan. The subsequent letting out of the property was connected with the carrying out of the object of the trust and hence, the repayment of loan ought to have been treated as eligible application. The finding of the Commissioner (Appeals) was confirmed by the Tribunal. The High Court held that the Tribunal was right in holding that the repayment of loan taken from the bank for construction of commercial complex was application of income for charitable purposes and the assessee trust was eligible for exemption under section 11 of the Act. Even though the expenditure incurred is capital in nature, if the expenditure is incurred for the purpose of promoting the object of the trust, it could be considered as application of the income for the purpose of the trust. If the application of the income resulted in the maintenance of the property held under trust for charitable purposes, is for the purpose of augmenting income in order to pursue the objects of the trust that would amount to application of income for the purpose of the trust. Hence repayment of loan taken for construction of college building amounted to augmentation of income of society in future years and to puruse the objects of the society. 14.1. The ld. CIT(A) after considering the submissions of the assessee held that the addition made by the AO could not be sustained and the assessee trust was eligible for exemption u/s. 11 of the Act by observing as under:- 15 “In the first instanced as pointed out supra the circular 1132 of 1978 and NO. 1582 of 1984 relied upon by the appellant and the Ld. AO relate to loans given by one Charitable Society to another while the instant case to repayment of loans simpliciter. The settled judicial view in this connection is that repayment of loans is to be generally treated as application. In CIT v.Janamabhumi Press Trust (200) 242 ITR 457 and 703 the Karnatka High Court held that the repayment of a debt incurred by the trust for construction of the building, which in turn would augment its income, should be treated as application the income of the trust for charitable purposes. In this respect, the Court followed the view earlier taken by the Madras High Court in CIT v. Kannika Parmeswari Devasthana & Charities (1982) 133 ITR 779 and the Kerala High Court in CIT v. St. George Forana Church (1988) 170 ITR 62. 7.2 Further vide Circular No. 100 dated 24 th January, 1973 (1973) 88 ITR (st.) 66 the following question is answered. Quest: Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust? Ans : The loan was taken by the trust to fulfil the objects of the trust. In the case of CIT v. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439, the Rajasthan High Court has considered the Circular and held as follows: “ In the Circular dated 24 th January, 1973 the Central Board of Direct Taxes has considered the question to whether where a trust incurs a debt for the purposes of the trust, the repayment of the debt would amount to an application of income for the purposes of the trust. In the said circular, the Central Board of Direct Taxes has expressed the view that the repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. In other words, according to the said circular, if the trust wants to spend more money on charitable and religious purposes, then, in a particular year, it can take a loan and the said loan can be repaid out of the income of the subsequent year and the repayment of the said loan out of the income of the subsequent year would amount to application of income for charitable and religious purposes under section 11(1) of the Act. 7.3 This is reiterated in the decision of the Madras High Court in the case of DDIT (E) v. Govindu Naicker Estate (Mad) 227 CTR 283, it was held that repayment of loan is to be treated as application under section 11. In this case the question of law before the Hon’ble Court was as under: Whether repayment of borrowed funds utilised for construction of commercial complex augmenting income of trust and amounts to application of income for charitable purpose eligible for exemption under section 11of the Act ? The Hon’ble High Court held that the Tribunal was right in holding that the repayment of loan taken from the bank for construction of commercial complex was application of income for charitable purposes and the assessee trust was eligible for exemption under section 11 of the Act. The High Court further emphasized that even though the expenditure incurred is capital in nature, if the expenditure is incurred for the purpose of promoting the object of the trust, it could be considered as application of the income for the purpose of the trust. 16 However, in the instant case the Ld. AO has also raised the issue of double relief as the appellant is first treating the creation of Capital asset as the application of income and thereafter treating the repayment of loans taken for the purposes of these assets as the application of income a second time. The issue with regards to whether the loans are to be treated as receipts in the receipt and expenditure account, the Ld.AO has pointed out that in earlier computations the Ld. AO has not treated the loans as receipt but has given a re-working. Prima facie from the reworking as placed on record it appears that the utilisation in earlier years, if the reworking is done, is within the norms. In the remand report the Ld. AO has not commented on this ground of appeal. In addition the Jurisdictional High Court in the case of CIT Vs. Tiny Tots Education Society [2011] 330 ITR 21 ( P & H) cited supra on identical facts has held that claim of depreciation does not tantamount to double deduction. Moreover, if the alternate submissions of appellant that expenses for charitable and earlier years carried forward and adjusted against the oncome of a subsequent year to be treated as application and also has considerable judicial support. The Ld. AO has neither allowed the repayment of loan nor allowed the carried forward excess application in earlier years. Further the appellant has in earlier utilized 85% of the receipts including the loans received, towards Charitable activities while 15% have been set aside as per norms. It is my considered view that the addition on this ground cannot be sustained. The appeal on this ground is allowed.” 15. Now the department is in appeal. 16. The Ld. Sr.DR reiterated the observations made by the Ld.AO and strongly supported the assessment order particularly para 7.2 of the assessment order. 17. In his rival submissions, the Ld. Counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order passed by the Ld. CIT(A). 18. We have considered the rival submissions and perused the material available on the record. In the present case the assessee utilised the loans to construct the building and creation of infrastructure for educational institutes. The assessee society was being run on self financing basis. Since no government funds were available to create the infrastructure, the assessee raised loans from the banks, which were shown as receipt in the Receipts and Payment account on the receipt side and the fixed assets were created out of the loan. The assessee considered the repayment of loan as utilization of funds in the year of the repayment and interest on the term loan had been charged 17 to expenses. The assessee utilized 85% of receipts including the loan received towards charitable activities. The assessee claimed the repayment loan as utilization. 18.1 On a similar issue the Hon’ble Karnataka High Court in the case of CIT Vs. Janmabhumi Press Trust reported in (200) 242 ITR 457(Kar.) held as under:- “When the assessee is a trust entitled to benefit under section 11 of the Income- tax Act, 1961, the only question that arises for consideration is whether that income or the accumulated income thereof is applied for charitable purpose. If investments have been made in the construction of a building which in turn would augment its income, it should also be held that the application of the funds is for the purpose of the trust. The repayment of the debt incurred by the trust for construction of the building should be treated as application of the income of the trust for charitable purposes. 18.2 In the aforesaid referred case the Hon’ble Karnataka High Court followed the judgments of the Hon’ble Kerala High Court in the case of CIT vs. St. George Forana Church reported in (1988) 170 ITR 62 and the Hon’ble Madras High Court in the case of Kannika Parameswari Devasthanam & Charities reported in (1982) 133 ITR 779 (Mad.). In the present case also the assessee utilized the loans to create the fixed assets and the loan was taken and shown as receipt while on repayment, it was considered as application of income. Therefore, following the ratio laid down by the Hon’ble Karnataka High Court the Ld. CIT(A) was fully justified in allowing the claim of the assessee. It is relevant to point out that the Ld. CIT(A) also followed the judgment of the Hon’ble Rajasthan High Court in the case of CIT vs. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj.), wherein it has been held as under:- “ In the Circular dated 24 th January, 1973, the Central Board of Direct Taxes has considered the question to whether where a trust incurs a debt for the purpose of the trust, the repayment of the debt would amount to an application of income for the purposes of the trust. In the said circular, the Central Board of Direct Taxes has expressed the view that the repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. In other words, according to the said circular, if the trust wants to spend more money on charitable and religious purposes, then, in a particular year, it can take a loan and the said loan can be repaid out of the income of the subsequent year and the repayment of the said loan out of the income of the subsequent year would amount to application of income for charitable and religious purposes under section 11(1)(a) of the Act. 18.3 The Ld. CIT(A) also followed the judgment of the Hon’ble Madras High Court in the case of DDIT (E) v. Govindu Naicker Estate (Mad) 227 CTR 282, wherein it was held 18 that repayment of loan was to be treated as application under section 11 of the Act. We, therefore, considering the totality of the facts do not see any valid ground to interfere with the findings given by the Ld. CIT(A). In that view of the matter, we uphold the impugned finding of the Ld. CIT(A) in allowing the same. This ground of departmental appeal is dismissed. 19. Next issue vide ground no. (iii) relates to deletion of addition of Rs. 2,31,30,835/- made by the AO u/s. 68 r.w.s 115BBE of the Act. 20. The facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that there were additions of donation in trust fund as well as addition on account of unsecured loans. The AO asked the assessee to furnish full name and addresses along with other details. In response, the assessee furnished the name and addresses along PAN Nos. of the donees and unsecured loan providers, which were also verified u/s. 133(6) of the Act. Name of such thirty seven (37) persons had been mentioned at pages 4-6 of AO’s order. For the cost repetition these are not reproduced herein. 20.1 The AO also observed that there were certain transactions, which were not genuine and their sources of payments were not verifiable satisfactorily. The details of those persons were as under:- S. No. Name Address PAN Amounts Nature of Transaction Remarks 1 Smt.Saklochna Devi W/o Sh.Sat Patel Garg, Sunaam ALCPD5758P 3150000 Unsecured Loan Notices u/s 133(6) issued and reply received, but sources of payments are not satisfactory in commensurate with the Income shown in ITR. 2 Makhal Singh S/o Santa Singh, Agit Nagar Sangrur ADXPS5283M 45000/- Donation Notices u/s 133(6) issued and reply not received till date, sources of payments are not genuine. 3 Narinder Pal Kaushal Sangrur AETPK9728A 91000/- Donation Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. 4 Anju Bala Sunam AKLPB7099M 100000 Donation Notices u/s. 133(6) issued and reply not received till date, 19 sources of payments are not genuine. 5 Ram Kishore Goyal HUF,Hanjra Marg,Sunam AAIHR7367H 33000 Donation Notices u/s 133(6) issued and reply received, but sources of payments are not satisfactory in commensurate with the Income shown in ITR. 6 Lalita Hanjra Marg, Sunam AADPL0896L 100000 Donation Notices u/s. 133(6) issued and reply received, but sources of payments are not satisfactory in commensurate with the income shown in ITR 7 Smt. Priyanka Nh-64, Vill.Rajpura, Near Chowk, Patial AIDPP8354P 61000 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. 8 Kasturi Lal & Sons Main Bazar, Sunam BLWPS7176R 314400 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. 9 Chamkau Singh Sunam CJHPS2064L 4000000 Unsecured loan Notices u/s. 133(6) issued and reply received, but sources of payments are not satisfactory in commensurate with the income shown in ITR 10 Anil Gupta Chandigarh ACFPG9050R 700000 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. 11 Ram Kishore Goyal Nh64, Vill- Rajpura,Near Chowk, Patial AAOPG6391A 5351185 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. 12 Keshav Goyal NH64,Vill-Rajpura, Near Chowk,Patial ADWPG9801G 6494000 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. 13 Sushma NH 64,Vill-Rajpura, Near, Near Chowk, Patial AAOPG6392D 229000 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. 14 Smt. Anju Bala W/o Sh.Keshav Goyal, NH 64, Vill- Rajpura, Near Chowk, Patial AKLPD7099M 64000 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. 15 Data Asra Trading Co. NH 64,Vill-Rajpura, Near Chowk, Patial AAKPD1716C 6892000 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments 20 are not genuine. 16 Archana Nagpal Sunam AGQPN2196J 20000 Donation Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. 17 Sumit Aneja Sunam ADQPA6963P 35000 Donation Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. 18 Praveen Kumari B-10,1844, Near Grain Market Road, Barnala ADRPK8615M 40000 Donation Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. Total Rs.27719585 (Rs.2,72,55,585 as unsecured loan + Rs.464000 as donation) 20.2. The AO considered the aforesaid amount as income of the assessee by observing at page No. 8 of Assessment order dated 30.12.2016as under:- “ On perusal of the above, it is found that there are some donations which are not verified during the verification u/s. 133(6) of I.T Act as per remarks. On perusal of the above, it is found that there are some unsecured loans, which are not verified during the verification u/s. 133(6) of I.T Act as per remarks. And some unsecured loan sources are not found genuine. Their creditworthiness and sources are not satisfactory. In the above facts why not amount of Rs.2,77,19,585/- related with these transactions treated as income u/s. 68 of I.T Act and tax the same u/s.115BBE of I.T Act.” 20.3. The AO made the addition of Rs.2,31,30,585/- u/s. 68 of the Act by observing in para 8.0 to 8.3 of assessment order, which is reproduced verbatim as under: “8. Addition u/s. 68 r.w.s 115BBE of I.T Act “8.0 During the assessment proceedings on perusal of Balance shhet, income and expenditure and replies of assessee, it is seen there are additions of donations of Rs.15,93,000/- and addition of Rs.5,33,90585/- as unsecured loan. During the assessment proceedings full name and address and other details have been asked, in response of the same counsel of assessee has filed reply along with the name and address and PAN nos. of donors and debtors, which have been also verified u/s. 133(6) of I.T Act. After perusal of assessee’s reply and confirmation received u/s. 133(6) of I.T Act, it is found that some transactions are not genuine and not verified from the return of income and bank statement. So show cause has issued on the above ground. In response of the same assessee has filed its reply, which is on record. 8.1 On perusal of the above reply and facts of the case, it is seen that there are some transactions, which are not genuine and their sources of payments are not verified or satisfactory. The details of the same are as under:- 21 S. No. Name Address PAN Amounts Nature of Transaction Remarks 1 Smt. Salochna Devi W/o Sh.Sat Patel Garg, Sunaam ALCPD5758P 3150000 Unsecured Loan Notices u/s 133(6) issued and reply received, but sources of payments are not satisfactory in commensurate with the Income shown in ITR. 2 Kasturi Lal & Sons Main Bazar, Sunam BLWPS7176R 314400 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR filed and no bank statements filed by the assessee as well as from the debtor 3 Anil Gupta Chandigarh ACFPG9050R 700000 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR filed and no bank statements filed by the assessee as well as from the debtor 4 Ram Kishore Goyal Nh 64,Vill-Rajpura, Near Chowk, Patial AAOPG6391A 5351185 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR filed and no bank statements filed by the assessee as well as from the debtor 5 Keshav Goyal NH64,Vill-Rajpura, Near Chowk,Patial ADWPG9801G 6494000 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR and no bank statements filed by the assessee as well as from the debtor 6 Sushma NH64, Vill-Rajpura, Near Chowk, Patial AAOPG6392D 229000 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR and no bank statements filed by the assessee as well as from the debtor 7 Data Asra Trading Co. NH 64,Vill-Rajpura, Near Chowk, Patial AAKPD1716C 6892000 Unsecured loan Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR and no bank statements filed by the assessee as well as from the debtor Total Rs. 2,31,30,585 On perusal of the above, it is found that there are some unsecured loans, which are not verified during the verification u/s. 133(6) of IT Act as per remarks and 22 some unsecured loan sources are not found genuine. Their creditworthiness and sources are not satisrfactory. 8.2 It is also mentioned here that provisions of section 68 is applicable to these unanimous donation as donors are not having valid identity and genuineness and credit worthiness of the deposits. This shows that assessee has failed to fulfil the basic conditions of section 68 of IT Act, which are as under:- “ Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the the sum so credited may be charged to income-tax as the income of the assessee of that previous year: [Provided that where the assessee is a company ( not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever named called, any explanation offered by such assessee company shall be deemed to be not satisfactory, unless:- (a) The person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) Such explanation in the opinion of the Assessing Officer afroessaid has been found to be satisfactory: (c) Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section10] 8.3 The above mentioned provisions clearly mentioned nature of the transaction, it should be cash credits in the books of the assessee and assessee is not explained the valid sources of the credits and failed to explain the genuineness, creditworthiness and identity of the sources then the provision of section 68 will apply. The reply of assessee duly considered but not accepted because assessee has failed to explain the identity, sources of unsecured loans and creditworthiness of the same, which are basic conditions of the section 68 of IT Act. Regarding that these donations are cash credits or not it is clear that these amounts are credited in the bank of assessee, so covered under the purview of section 68 of I.T Act. 8.4 The case of assessee clearly fall under the provision of section 68 because assessee has failed to establish valid sources of unsecured loans receipts and also not explained the genuineness, credit worthiness and identity of the debtors. 8.5 In view of the totalling of facts and in the circumstances of the case, the unsecured loans to the tune of Rs. 2,31,30,585/- are taxable under the provisions of section 68 r.w.s115BBE of I.T Act.” 21. Being aggrieved, the assessee carried the matter to the Ld. CIT(A) and furnished the written submission on 02-11-2017, which reads as under:- 23 1.The AO has added a sum of Rs. 2,31,30,585/- the name of parties are as per as per annexure given. All the parties are related to society/promoters and at the time of its establishment provide funds to the society for acquiring fixed assets and running its affairs. A table showing the opening and closing balances of all these 7 parties is as follows:- UNSECURED LOAN ON 31-03-2013 & 31-03-2014 Sr. No. Particulars Balance on 31- 03-2013 Balance on 31- 03-2014 Addition/Deletion 1. Salochana Devi w/o Satpal Garg 15,00,00,000 31,50,000 16,50,000 2 Kasturi Lal & Sons (Jagdish Chand Singla) 3,18,000 3,14,400 (3600 3 Anil Gupta - 7,00,000 7,00,000 4 Ram Kishore Goyal 1,71,73,285 53,51,185 (1,18,22,100) 5 Keshav Goyal 1,09,35,000 64,94,000 (44,41,000) 6 Sushma 18,50,000 2,29,000 (16,21,000) 7 Data Asra Trading Co. (Prop. Satya Devi) 23,23,000 68,92,000 45,69,000 TOTAL 3,40,99,285 2,31,30,585 (1,09,68,700) It may be observed that the balance of unsecured loan of these parties as on 31.03.2013 was Rs.3,40,99,285 and that as on 31.03.2014 was Rs. 2,31,30,585 showing a net reduction of Rs.1,09,68,700/- Further as required by you we are submitting the confirmation Documents of the parties as per following details: a. Salochana Dev:- Copy of her ITR, computation, ledger A/c, PAN, Aadhar, bank statement and confirmation letter are enclosed. It is pertinent to mention that the society also had a loan of Rs.15,00,000/- from Mrs. Salochana Devi as on 04-04- 2013. This was an interest bearing loan and a sum of Rs.2,57,997/- was paid to her after deduction of TDS. Hence the AO is totally unjustified in making the addition. b. Kasturi Lal: A sum of Rs. 3,14,400/- was outstanding as unsecured loan as on 31-3-2014 where as the balance as on 31-03-2013 was Rs. 3,18,000/-. We are enclosing herewith a confirmation letter, PAN Aadhar, copy of ITR of last 3 years and bank statement & ledger account of the party. c. Anil Gupta:A sum of Rs.7,00.000/- was advanced by Mr. Anil Gupta & his confirmation letter, ITR, Ledger account, PAN, Aadhar bank statement showing 2 cheques of Rs. 3,00,000/- & Rs. 4,00,000/- respectively is enclosed. d. Ram Kishore Goyal: Mr. Ram Kishore Goyal (Rs.53,51,185/-) is the chairman of the society and has been attending the proceedings before your good office and copy of his confirmation letter, ITR, computation of last three years his ledger account & bank statement, balance sheet, PAN & Aadhar are enclosed. It may be noted that unsecured loan as on 31-03-2013 was Rs.1.17,73,285/-, which was duly reflected in balance sheet was assessed. In fact during the year under consideration the balance came down by approx Rs.120 Lacs. 24 e. Keshav Goyal:Keshav Goyal is General Secretary of the society a sum of Rs.65,94,000/- was outstanding as on 31-03-2014 wehreas the balance as on 31-3- 2013 was Rs.1,09,35,000/-. Hence there was a reduction of approx Rs. 45 Lacs. We have enclosed his confirmation letter, ITR, computation for last three years, bank statement, ledger account, balance sheet, PAN and Aadhar. f. Sushma Goyal: She advanced a sum of Rs.2,29,000/- from her saving, the balance as on 31-03-2013 was Rs.18,50,000/- out of this a net payment of Rs.16,00.000/- approx are returned & copy of ledger account, bank statement, ITR computation, bank statement, confirmation letter, PAN & Aadhar showing all transactions. g. Data Asra Trading: Prop Satya Devi is the pattern of the society, she has been advancing the funds & also received back the funds regularly during the year. The total sum advanced by her was Rs. 2,75,80,000/- and out of this a sum of Rs. 2,06,88,000/- was returned by the society. Her ledger account, ITR, computation, bank statement, confirmation letter, PAN & Aadhar showing all transaction are enclosed 21.1. The assessee again furnished a rejoinder on 15-12-2017, which reads as under:- The evidence submitted in case of unsecured loans were not considered by AO and we are enclosing under rule 46A of Income Tax Act 1961 with all the supporting documents. In case of Salochana Devi the AO has deemed the source of income to be not satisfactory and chosen to check the source of source in case of a non corporate loanee and assessee also. 21.2. The Ld. CIT(A) asked for remand report from the AO and comments of assessee thereon, which has been tabulated as under:- “ 8.3 The Ld. AO’s remarks in his remand report and the Appellant’s comments thereto on each party where the loans are disallowed are as under:- Particulars Remand Report of AO Appellant Rebuttal submission Evidence submitted by the Appellant Salochana Devi Notices u/s 133(6) issued and reply received, but sources of payments was not satisfactory in commensurate with the Income shown in ITR. The AO has not considered the evidence submitted by us (a) Copy of Confirmation letter, PAN & Aadhar (b) Copy of ITR, Computation, Ledger A/c & Bank statement Kasturi Lal & Sons Notices u/s. 133(6) issued and reply not received, source of payments was not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors The AO has refused to consider the documents of unsecured loans submitted by society members itself and proceeded with addition (a)Copy of Confirmation letter, PAN & Aadhar (b)Copy of ITR & Computation of 3 years & ledger account (c )Copy of bank statement Anil Gupta Notices u/s. 133(6) issued and reply not received, source of payments was not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors The AO has refused to consider the documents of unsecured loans submitted by society members itself and proceeded with addition (a)Copy of Confirmation letter, PAN & Aadhar (b)Copy of ITR & Computation & Bank statement Ram Kishore Goyal Notices u/s. 133(6) issued and reply not received, source of payments was The AO has refused to consider the documents of unsecured loans submitted (a)Copy of Confirmation letter, PAN & Aadhar (b)Copy of ITR & 25 not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors by society members itself and proceeded with addition Computation of 3 years & Balance sheet ( c ) Bank statement & ledger account Keshav Goyal Notices u/s. 133(6) issued and reply not received, source of payments was not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors The AO has refused to consider the documents of unsecured loans submitted by society members itself and proceeded with addition (a) Copy of Confirmation letter, PAN & Aadhar (b) Copy of ITR, computation & bank statement Sushma Notices u/s. 133(6) issued and reply not received, source of payments was not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors The AO has refused to consider the documents of unsecured loans submitted by society members itself and proceeded with addition (a) Copy of Confirmation letter, ITR, Computation & Ledger Account (b) Copy of bank statement Data Asra Trading Company Notices u/s. 133(6) issued and reply not received, source of payments was not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors The AO has refused to consider the documents of unsecured loans submitted by society members itself and proceeded with addition (a) Copy of Confirmation letter, PAN & Aadhar. (b) Copy of ITR, computation, ledger account & balance sheet (c ) copy of bank statement 21.3. The assessee further submitted to the Ld. CIT-A that in the remand report submitted by the AO no material was brought to substantiate its claim and the AO merely repeated the reasons recorded in the assessment order and that the submissions made by the assessee were not negative by the AO by brining any substantiating evidence on record for further enquiry. Reliance was placed on the decision of the ITAT Mumbai Bench in the case of Shahrukh Khan Vs. DCIT, Spl.Rg. 21Order Dt. 20 July,2006 21.4. The Ld. CIT(A) after considering the submissions of assessee deleted the impugned addition by observing as under:- “I have considered the written submissions/counter comments of the Ld. AR, the findings and the comments of the Ld. AO and the case laws cited and contextualized these to the facts of the case and also to the documents filed. The Appellant has in all these 7 cases furnished Copy of Confirmation letter, PAN & Aadhar, Copy of ITR, Computation of Income, Ledger A/c & Bank statement where the loans to the appellant are clearly figuring. In addition, except for one Anil Gupta, all the other are old creditors and there have been accretions or repayments during the year; the Ld. AO has sought to tax the total credit balance rather than the amount introduced during the previous year relevant to the assessment. The Ld. AO has neither during assessment proceedings not thereafter during remand not addressed/countered the evidence produced by the Ld.AR. It is my considered view that qua the 7 parties ( the six individuals and one firm) the appellant has prima-facie discharged his burden on establishing 26 their identity, credit worthiness as well as the genuineness of the transactions as they find reference in their returns of income. It was open to the Ld. AO to refer the matter to the assessing Officers of the parties in case there were any doubts in their sources of income. Further, the 6 individuals and the partners of the firm are all either the members of the society or their immediately family members. The addition u/s. 68 thus has no legs to stand on and is directed to be deleted.” 22. Now, the department is in appeal. 23. The Ld. DR strongly supported the assessment order passed by the AO and reiterated the observations made in paras 8.0 to8.5 of the assessment order, which we have already reproduced hereinabove in the former part of this order. She further submitted that the assessee did not produce the details before the AO inspite of various opportunities given and since the loans were not verifiable as no reply was received when the notices were issued u/s. 133(6) of the Act by the AO to the creditors. Therefore, the impugned addition was rightly made by the AO by invoking provision of section 68 of the Act. The Ld. CIT(A) was not justified iin deleting the same. 24. In his rival submission, the ld. Counsel for the assessee reiterated the submission made before the authorities below and further submitted that the assessee had furnished all the details before the AO and the creditors were verifiable. The Ld. CIT(A) after considering all the relevant documents furnished by the assessee, which are placed at page-288-457 in the form of copies of confirmations, ledger accounts, ITR’S, computation of total incomes and bank account statements from various persons in respect of unsecured loans given to assessee and the AO furnished the remand report after considering all those documents, copies of which are placed at page-458-461 of assessee’s compilation. Against the said remand report, the asessee furnished rejoinder on 15-12-2017, copy of which is placed at pages-462 – 466 of assessee’s compilation. It was stated that the Ld. CIT(Appeal) after appreciating the submissions of assessee and remand report of the AO deleted the impugned addition made by the AO. He strongly supported the impugned order passed by the Ld. CIT(A). 25. We have considered the rival submissions of both the parties and perused the material available on record. In the present case, it is noticed that the AO issued 27 notices u/s. 133(6) of the Act to the said six(6) persons from whom the assessee had received loans amounting to Rs.2,31,30,585. Since the AO was not satisfied from the replies furnished by the creditors, Smt. Salochana Devi, from whom Rs. 3150,000/- was received as unsecured loan and reply was not received from another six creditors, namely Kasturi Lal & Sons, Sh. Anil Gupta, Sh. Ram Kishore Goyal, Sh. Keshav Goyal and Data Asra Trading Co. from whom Rs.3,14,400/-, Rs.7,00,000/-,Rs.53,51,185/- ,Rs.64,94,000/- and Rs.68,92,000/- respectively were received. He, therefore, made the additions u/s. 68 of the Act. However, vide application dt. 15-12-2017 the assessee furnished additional evidences under Rule 46A of the IT Rules, 1962 in the form of copies of confirmation letters, PAN, Aadhar, copies of ITR’s, computation of incomes, ledger accounts and bank statements in respect of aforesaid persons and stated that the AO refused to consider the documents of unsecured loans. The Ld. CIT(A) admitted the additional evidence and deleted the additions. In the present case, the identity of the persons from whom the assessee received the loans was not doubted and nothing was brought on record to substantiate that they were not the persons of means. The AO in his remand report placed at page nos. 458-461 of the paper book, simply stated that the details were asked from the persons and their sources were not genuine. However, he did not comment on his bank statements explaining the source and computation of income furnished along with IT returns as well as confirmations given by the persons from whom the assessee has taken the loans. In our opinion the Ld. CIT(A) was fully justified in deleting the impugned additions when the assessee proved the identity of the persons, their credit worthiness and genuineness of the transaction. In that view of the matter, we do not see any merit in the departmental appeal in ground no.(iii), the same is dismissed. 26. The appeal of the department in ITA No. 1578/Chand/18 for the AY 2014-15 is dismissed. 27. Now we will deal with the appeal of the department in ITA No.869/Chand/19 for the AY 2016-17. 28. Following grounds have been raised in this appeal: 28 i. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in allowing exemption u/s 11 and 12 to the assessee on the surplus without appreciating that the assessee had been earning substantial profits year after year which instead of redeploying for education were used for amassing more and more capital assets including luxury cars and thereby not correctly applying the decision in the case of Islamic Academy of Education & another vs. State of Karnataka and others (2003) 6 SSC 697 and Viswesvaraya Technological University Vs. ACIT (SC) in civil appeal Nos. 4361-4366 of 2016?. ii. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in allowing exemption u/s 11 and 12 to the assessee when despite having sufficient receipts in the form of fees and excessive surplus, the assessee had paid extremely poor salaries which adversely affects quality of education as it will not attract quality faculty, which shows the misplaced focus of the assessee on maximization of profits by minimization of employee cost at the cost of quality of education. iii. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in allowing exemption u/s 11 and 12 to the assessee when the funds of the assessee were misused for purchasing luxury cars like Audi and Land Rover for the benefit of specified persons u/s 13(3) who did not own any motor vehicle and were running their parallel business resulting in application of section 13(l)(c). iv. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in restricting the disallowance of the estimated expenses on luxury vehicles to Rs. 9,23,281/- for personal use despite the assessee not submitting any documentary proof before the AO or before the Id. CIT(A). v. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in restricting the disallowance of exemption u/s 11 and 12 to the amount of Rs. 9,23,281/- being the amount calculated by CIT(A) as expenses on personal use of vehicles by the specified persons instead of disallowing exemption u/s 11 and 12 on the entire income in view of application of section 13(l)(c) without appreciating that the latter proposition finds support from many judicial precedents including the decision in the case of Director of Income Tax vs Bharat Diamond Bourse (2003) 179 CTR SC 225 (SC). vi. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in allowing repayment of loan as application of income when the assessee had not shown the same as income in the years in which these loans were taken. vii. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in allowing exemption u/s 11 and 12 to the assessee stating that the assessee had registration u/s 12AA when in view of sub-section (4) of section 12AA, application of section 13(l)(c) may result in cancellaption of registration and application of 13(l)(c) is independent of availability/non-availability of registration u/s 12AA. viii. That the appellant craves to leave, add or amend any grounds of appeal on or before the appeal is heard or disposed of. 29 29. Vide Ground Nos. (i), (ii) and (iii) the grievance of the Department relates to the exemption under section 11 & 12 allowed to the assessee and vide (iv) & (v) the grievance of the Department relates to the deletion of disallowance of Rs. 9,23,281/- made by the AO for personal use of vehicle. These two issues had been dealt by the AO and the Ld. CIT(A) together so these are discussed simultaneously. 30. The facts related to the above said issues in brief are that the AO during the course of assessment proceedings made certain observations, questioning the assessee’s activity and was of the view that the assessee’s activities were not in the nature of charitable and were being run on commercial line. The AO issued show cause notice to the assessee on 26/11/2018 which read as under: "..lt is observed that the assessee has given undue benefit to specified persons u/s 13(3) of the I.T. Act. The assessee has used the funds of the assessee for the purchase of luxury vehicles like Audi and Land Rover and has given these for use of the specified persons. It is important to note that these specified persons are also engaged in their individual businesses besides being members of the assessee society. It is further pertinent to mention that these specified persons do not possess any personal vehicle of their own. Smt. Satya Devi, Ram Kishore Goyal, Keshav Goyal, Priyanka, Anju Bala who are the members of the society are also members of a family and all the above facts when read together make it amply clear that the specified persons have misused the funds of the assessee for buying high end luxury vehicles like Audi and Land Rover for their personal use. The assessee is required to show cause as to why provisions of section 13(1)(c) r.w.s. 13(3) should not be invoked and why entire exemption u/s 11 and 12 should not be disallowed. It is also observed that the assessee has been running its institutions on commercial principles. The assessee has been charging huge fees but has been paying comparatively paltry salaries to the employees. It is noted from the salary chart submitted that Principals of different institutions have been paid between Rs. 2 lakhs to Rs. 5.5 lakhs per annum i.e. Rs. 16000- Rs. 45000 per month. Most of the other Assistant Professors have been paid merely Rs. 1 lakh to 2 lakh per annum i.e. Rs. 8000 to Rs. 16000 per month. These salaries are much below the salaries fixed for State Govt, teachers. Paying low salaries checks an institute from attracting quality faculty and hampers advancement of education. The only reason for charging huge fees and not paying adequate salaries can be to maximize profits. It is observed from the Income & Expenditure account that the net profit for the year under consideration is Rs. 9,34,50,359/- which is approx. 56% of the total receipts. Even from the earlier years Income & Expenditure account, it is seen that the profit is between 40%-55%. Permissible reasonableness has been defined in the order of the Apex Court in the case of Islamic Academy of Education & another vs. State of Karnataka and others (2003) 6 SSC 697 and further reiterated in the case of Viswesvaraya Technological University Vs. AC IT in civil appeal Nos. 4361-4366 of 2016. Reasonable surplus has been pegged at 30 anything between 6% to 15% of the receipts. It is clear from the above mentioned discussion that the assessee is not doing any charitable activity under education and that the main focus is earning profit by running the institutions on commercial principles. Moreover, as also noted earlier, the assessee has preferred to divert the funds for purchasing luxury vehicles to be used by the specified persons instead of spending these funds for betterment of education. Therefore, the assessee is required to show cause as to why the entire exemption claimed u/s 11 and 12 of the Act should not be disallowed and the assessee be assessed as an AOP. It is also proposed to disallow 20% of the vehicle charges as the members of the society have been using the vehicles for their personal use..." 30.1 In response the assessee vide letter dt. 30/11/2018 submitted to the AO as under: ".... It is submitted that the Institution is being run on charitable basis and our reply to your observations are as follows: A. Fee: We have not charged any donation or any excess fee from any student and fee for all the Institutions is charged as per Govt, norms. We have already submitted fee structure issued by various Govt, authorities as applicable to our colleges. As per norms we are not supposed to charge excess/short fee for any course. B. Salary: It may be noted that sometimes retired persons from Govt, sector are reemployed as Principals in our Institute at a lower Salary. Many times the salary is based on Last Salary drawn-Pension basis. The main object of the Society is also a promotion of education and it can't be conclusively decided on the basis of quantum of salary being paid. Rather paying of reasonable salary and incurring appropriate expenditure proves that the expenditure is being made property. We have already submitted a list of employee wise salary and request you to raise specific question with name of employee, if any, so that the profile of concerned faculty and his employment history be submitted. If required we may produce the concerned employee for you examination. •€€€€€€ It may also be noted that the institution is located in Rural area where most of the students who joined us are from Punjabi medium background and passed their examination from state boards only. Hence providing education in this area itself is a charitable activity. The promoters have invested as sum of Rs. 1,19,54,400/- as corpus fund in 2008 while setting up the college and they have also obtained loans from banks by providing their personal guarantees. C. Vehicles: As far as use of college vehicles for personal use are concerned we again stress that the college is maintaining pool of vehicles and the college personnel including members have to visit various offices for work related to colleges for the purpose a proper system is in place and indent is issued (enclosed vide annexure 3) for use of college vehicles and it is approved by Principal. 31 As far as personal vehicles are concerned two wheelers are kept by both of the members for their personal work. •€€€€€€ PB44B7127 Motor Cycle is in the name of Mr. Keshav Goyal •€€€€€€ PB13AB9127 Motor Cycle is in the name of Mr. Ram Kishore Goyal Regarding vehicles expense being proposed to disallowed it is submitted that college have total 33 vehicles (list provided to you in our reply dated 09.11.2018 vide annexure 6.) and most of the expenses relate to college buses being used for students. Out of list appended we have bifurcated the expenses into other vehicles and 2 vehicles being used by members of the society while working for the society. Particulars Total Expenses Other Vehicles Vehicles used by member Petrol & Diesel expenses Rs. 74,54,249 70,03,132 Rs. 4,51,117 Repair & maintenance Expenses Rs. 7,57,553 6,65,258 Rs.92,295 Vehicle Insurance Rs. 10,95,271 10,22,003 Rs. 73,233 Vehicle Passing Tax Rs. 18,47,550 Rs. 18,47,550 Only applicable on College Buses. Not applicable on Cars Total (A) Rs. 1,11,54,623 Rs. 1,05,37,973 Rs. 6,16,650 20% ot (A) Rs. 1,23,330/- Cars are provided to Mr. Ram Kishore Goyal (Chairman) and Mr. Keshav Goyal (General Secretary). We hereby again submit that both of them are attending the office daily and managing the affairs of Society. Both are qualified Ph.d and MBA but they are not charging any salary for their services and also no other facility except cars is provided to them. So provision of vehicles provided to them for their services is justified. Copies of their degrees are already submitted in previous reply. Both are not working anywhere else on regular basis and their major income is from rental only as may be verified from their ITR's submitted earlier. Unsecured loan of Rs. 60,31,359/- is also given by them to society but no interest is being charges by them from society. An interest calculation chart is enclosed vide Annexure 4 on unsecured loan given by them. A detailed chart of unsecured loan given by Mr. Keshav Goyal and Mr. Ram Kishore Goyal from year ending 31.03.2009 till the year ending 31.03.2016 is as follows: Name 31.03.2009 31.03.2010 31.03.2011 31.03.2012 31.03.2013 31.03.2014 31.03.2015 31.03.2016 Ram Kishore Goyal 29,54,599 40,71,849 60,04,035 69,52,285 1,71,73,285 53,51,185 53,51,185 52,40,185 Keshav Goyal 18,67,426 34,08,626 28,89,400 61,65,000 1,09,35,000 64,94,000 1,02,99,174 7,91,174 Total 48,62,020 74,80,475 88,93,435 1,31,17,285 2,81,08,285 1,18,45,185 1,56,50,359 60,31,359 You may summon any Principal/employees/Staff member for examination. 32 D. A receipts & payment account is enclosed vide Annexure 5 which clearly shows that during the F.Y. 2015-16 surplus was amounting Rs. 46,16,584/-which is 2.71% of total receipts amounting Rs. 17,00,16,872/-. So it is clear that surplus is quite reasonable if we take into account the case law mentioned by you as it is below 6% of receipts and justify permissible reasonableness defined in the order of the Apex Court in the case of Islamic Academy of Education & another vs. State of Karnataka and others (2003) 6 SSC 697 and reiterated in the case of Viswesvaraya Technological University Vs. ACIT in civil appeal Nos. 4361-4366 of 2016. Reasonable surplus has been pegged at anything between 6% to 15% of the receipts. So it is clear that the case is based on surplus and not profit, hence the Society is Charitable Institution." 30.2 The AO however did not find merit in the submissions of the assessee and held that the focus of the assessee was on maximization of profit rather than on advancement of education and such activity did not fall with in the ambit of charitable purposes and that the assessee society was being run by members as another family business. He therefore invoked the provisions of Section 13(1)(c) r.w.s 13(3) of the Act and taxed the surplus as per Income & Expenditure Account in the hands of the AOP. The AO also disallowed Rs. 20,09,524/- out of the vehicle expenses for personal use of the members by observing in para 6 to 11 which read as under: 6. The submissions of the assessee have been considered, however, they are not acceptable. From the Income & Expenditure account, it is observed that the assessee has earned net profit of Rs. 9,34,50,359/- which is approx. 56% of the total receipts. On further analysis, it is observed that the reason for such high net profit is that the assessee is earning huge income from fees of Rs. 15,55,36,621/- but at the same time its expenditure on salaries, which is usually the biggest component of cost of running an educational institute, is very low totaling to Rs. 2,52,94,134/-. During the assessment proceedings, the salary details were called for and on perusal of the same it was observed that the Principals of different institutions were paid between Rs. 2 lakhs to Rs. 5.5 lakhs per annum i.e. Rs. 16000- Rs. 45000 per month. Most of the other Assistant Professors were paid merely Rs. 1 lakh to 2 lakh per annum i.e. Rs. 8000 to Rs. 16000 per month. The salaries paid are extremely low. Rather, most of the salaries paid are lower than salaries of class IV government employees. It is noted that the only reason for charging high fees and paying low salaries to teachers/employees would be to earn more and more profit at the cost of the quality of education as low salaries will not attract better quality faculty. Quality of education is directly proportional to the quality of its teachers. The assessee has tried to minimize its employee cost (which is normally the biggest running cost for any educational institute) by paying poor salaries to teachers at the cost of the quality of education. This clearly establishes the misplaced focus of the assessee on maximization of profit rather than on advancement of education and such activities do not fall within the ambit of "charitable purpose" as defined u/s 2(15) of the Act. 33 7. It is further observed from the Income & Expenditure account of the last few years that the net profit of the assessee has been between 40% and 55% of the total income. This shows that the assessee has been consistently earning huge profits. The assessee vide its submission dated 30.11.2018 has claimed that after accounting for application on capital account, the surplus left was very reasonable. In this regard, it is stated that the assessee has failed to prove for what purpose the fixed assets purchased were actually used. This becomes especially important because the assessee is being run by members of the same family and it is important to ensure that there is no diversion of funds and assets for the benefit of the members. Also, the assessee has claimed repayment of loan as application of income without including loans taken as income in the earlier years when these loans were raised. Therefore, the calculation of application of income of the assessee is faulty. It is further noted that the assessee has purchased luxury cars such as Audi and Land Rover out of the funds of the assessee in the earlier years and is incurring expenses on running and maintenance of these cars. During the assessment proceedings, the assessee was asked the purpose for purchasing these luxury cars and who uses these cars. The assessee was also asked to give details of the personal vehicles owned by the members of the assessee society. In response to this, vide letter dated 09.11.2018 and 14.11.2018, the assessee submitted that Audi (PB 13AC-0027) was being used by the Chairman, Sh. Ram Kishore Goyal and Landrover (CH01AT-0327) was being used by the M.D. cum General Secretary, Sh. Keshav Goyal. It is noted that both these persons are specified persons u/s 13(3) of the Act. Vide letter dated 30.11.2018, the assessee submitted that both these members attend the office daily and manage the affairs of the society and are not charging any fees but have been given cars. This justification of the assessee doesn't hold water because of the facts as discussed in the following paras. 9. It is pertinent to note that the society is being run by members of the same family viz. Smt. Satya Devi, Sh. Ram Kishore Goyal, Sh. Keshav Goyal, Ms. Priyanka and Ms. Anju Bala. From the ITRs of these specified persons and as also confirmed by the assessee vide reply dated 14.11.2018, it is observed that Smt. Satya Devi, Sh. Ram Kishore Goyal and Sh. Keshav Goyal are engaged in other proprietary business viz. M/s Data Asra Trading Co, M/s Asra Kishore Trading Co and M/s Asra Keshav & Co respectively. These specified persons are also acting as commission agents. Further, they have given godowns owned by them on rent and are earning rental income from the same. Business is a full-time job and requires undivided time and effort. This shows that the specified persons have not been giving enough of their time and effort to the assessee institutions but had been provided high-end luxury vehicles using the funds of the assessee. 10. Further, the assessee vide reply dated 09.11.2018 informed that no personal vehicles were owned by Sh. Ram Kishore Goyal and Sh. Keshav Goyal. Rather, it informed that the other members as specified above also did not own personal vehicles. But, vide reply dated 30.11.2018, the assessee submitted that two wheelers are kept by Sh. Keshav Goyal and Sh. Ram Kishore Goyal, one in each name. Evenif, two-wheeler is owned by two specified persons, even then the assessee has itself submitted that Audi car and Landrover car were provided to Sh. Ram Kishore Goyal, Sh. Keshav Goyal. It is beyond acceptance that the specified persons who had been provided Audi car and Land Rover were using motor cycle for their personal use. Moreover, there were several members in the family and it is not possible that all of them were using motor cycle for their 34 personal use as the assessee is trying to portray. It is very obvious that the specified persons were using luxury vehicles purchased from assessee's funds for their personal use and their proprietory business which is an utter misuse of the provisions of the Act. Therefore, without a doubt, the members of the society who are also members of the same family have diverted the resources of the assessee for their personal benefit. The assessee society was being run by the members as another family business and the provisions of section 13(1)(c) r.w.s. 13(3) of the Act are invoked. 11. It is concluded that the assessee was functioning on commercial lines and its activities were focused at earning profits and diverting these funds for the benefit of specified persons u/s 13(3) of the Act by using these funds for buying high-end luxury vehicles like Audi and Land Rover for the use by its members. The members of the assessee society had thoroughly misused and abused the exemption provisions under the Act behind the cloak of an educational society. The assessee was actually being run as a family-business venture but was window- dressed as "charity". Therefore, the provisions of section 11 r.w.s. 2(15), and sections 13(1)(c) r.w.s. 13(3) of the Act are applicable. The reliance was placed on the following case laws: • DIT Vs. Bharat Diamond Bourse (2003) 179 CTR 225 (SC) • Agappa Child Centre Vs. CIT [1997] 226 ITR 211 (Ker) • DIT(E) Vs. Charanjiv Charitable Trust [ 2014] 43 taxmann.com 300 (Del) • DDIT(E)-1, Chennai Vs. India Cements Educational Society [2016] 67 taxmann.com 236(Chennai-Trib) 30.3 The AO also observed that the case laws relied by the assessee were distinguishable on facts and that the assessee was ineligible for exemption under section 11 of the Act by observing in para 14 to 18 of the assessment order as under: 14, The case laws cited by the assessee do not give any strength to the assessee's argument because the facts are entirely different. In the cited case laws, although reasonable profits had been earned, the focus was on charitable activity. Also, some case laws cited pertain to section 13(1 )(d) which is not the matter of contention in the present case. In the present case, the assessee society was like a family, business of the members with the institutions run for profits and the surplus from the same utilized for buying high-end cars for the specified persons. By no stretch of imagination, such activities can be considered as charitable and the question of restricting the taxable income to the relevant income of misuse does not arise. The assessee's functioning when seen in its entirety shows that education has taken a backseat and the focus is on extracting maximum profits and diverting the same for the personal benefit of the specified persons. In view of the above, the surplus as per the Income & Expenditure account will be taxed as an AOP. 15. Further, a part of the vehicle expenses claimed relating to the two high-end luxury cars shall be disallowed. Total vehicle expenses are as under:- 35 Petrol & Diesel expenses Rs. 7454249 Repairs & maintenance vehicles Rs. 757553 Vehicle insurance Rs. 1095271 Vehicle passing tax Rs. 1847550 TOTAL- (A) RS. 1,11,54,623/- 16, While the assessee vide its submission dated 30.11.2018 has given bifurcation of these expenses between the two luxury cars used by specified persons and other vehicles, no supporting proof/bills have been produced. Accordingly, the bifurcation is not accepted. 20% of the aforementioned vehicle expenses are attributed to the luxury vehicles used by the specified persons. Also, depreciation on Audi car and Land Rover car is to be included in the expenses attributable to these luxury vehicles. Accordingly, expenses incurred on Audi and Land Rover are estimated to be as under:- 20% of Rs. 1,11,54,623/- Rs. 22,30,925/- Depreciation on Audi Rs.2,54,300/- Depreciation on Land Rover Rs. 3,85,523/- TOTAL RS. 28,70,748/- 17. Further, it is estimated that the members were incurring only about 30% of the expenses on these two luxury vehicles for the purpose of the assessee. Therefore, 70% of the expenses on these two vehicles i.e. 70% of Rs. 28,70,748/- amounting to Rs. 20,09,524/- are disallowed as expenses for personal use of the members and not for the purpose of the business of the assessee. 18 It is also seen that the assessee vide its submission dated 30.11.2018 has requested for benefit of deemed application as per Explanation to section 11. It is stated that once the assessee is found to be ineligible for exemption u/s 11 of the Act, the question of granting benefit of deemed application does not arise. Moreover, the assessee has not filed form 9A which was mandatory w.e.f. A.Y. 2016-17. 30.4 Accordingly the AO assessed the total income at Rs. 9,54,59,883/- by giving calculation in para 20 of the assessment order dt. 05/12/2018 which read as under: 20. Consequently, the total income of the assessee is calculated as under:- Returned income NIL Surplus as per Income & Expenditure account Rs. 9,34,50,359/- Add: Vehicle expenses disallowed Rs. 20,09,5247- Total Income Rs. 9,54,59,883/- 31. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under: 1. "Ground of Appeal 1 - Addition of Rs. 9,34,50,359/- on account of presumption that the society is not Charitable 36 The AO has presumed that the society is not charitable and is being run on profit basis and has considered total net profit as taxable and has asseseed the society as AOP and taxing entire profit as per Income and expenditure account amounting Rs. 9,34,50,359/- as AOP without considering the addition to Fixed Asset Rs. 6,93,95,688/-, repayment of loan and carry forward of excess application of previous year and withdrawing the benefit of claim u/s 11 of the Income Tax Act, 1961. The surplus of Rs. 9,34,50,359/- as per income & Exp. Account is being used for acquisition of Fixed assets amounting Rs. 6,93,95,688/- and repayment of Loan. Apart from this the institute has not charged any fee which is not in accordance with the Govt, of India fixed fee structure for all courses. Hence it is not correct to term the institution as running on commercial principles. A receipt & payment account is enclosed vide annexure 1 which clearly shows that during the FY 2015-16 surplus was amounting RS. 46,16,584/- which is 2.71% of total receipts amounting Rs. 17,00,16,872/-. So it is clear that surplus is quite reasonable if we take into account the case law mentioned by AO as it is below 6% of receipts and justify permissible reasonableness defined in the order of the Apex Court in the case of Islamic Academy of Education & another vs. State of Karnataka and others (2003) 6 SSC 697 and reiterated in the case of Viswesvaraya Technological University Vs. ACIT in civil appeal Nos. 4361-4366 of 2016. Reasonable surplus has been pegged at anything between 6% to 15% of the receipts. So it is clear that the case is based on surplus and not profit, hence the Society is a Charitable Institution. Relevant case law of Hon. Supreme court regarding this point is reproduced here: [2015]55 taxmann.com 255 (SC) SUPREME COURT OF INDIA Queens Educational Society v. Commissioner of Income-tax *In favour of assessee Where a surplus was made by educational institution which was ploughed back for educational purposes, said institution was to be held to be existed solely for educational purpose and not for purpose of profit. Also refer circular 14/2015 dated 17.08.2015 which recognizes generation of surplus. (2015] 55 taxmann.com 34 (Karnataka) HIGH COURT OF KARNATAKA Director of Income-tax (Exemption), Bangalore v. Karnataka Industrial Area Development Board* *In favour of assessee A registration granted earlier under section 12A can be cancelled under two circumstances: (a) If the activities of such trust or institution are not genuine, (b) the activities of trust or institution not being carried out in accordance with the object of the trust or institution. Therefore, registration already granted under section 12A could not be revoked for the reason that the charitable trust or institution pursuing of advancement of objects of general public utility carried on commercial activities Also refer to Circular 21/2016 dated 27.05.2016 [2016] 70 taxmann.com 181 (Bombay) HIGH COURT OF BOMBAY Director of Income-tax (Exemptions) v. Khar Gymkhana 37 In view ofCBDT's Circular No.21/2016 dated 27-5-2016, Registration of a trust can't be cancelled merely because receipts from commercial activities exceed Rs.25L lakhs unless there is change in the nature of its activities or its activities are not genuine. Salary to Employees It may be noted that sometimes retired persons from Govt, sector are employed as Principals in our Institute at a lower Salary. Many times the salary is based on Last Salary drawn- Pension basis. The main object of the Society is also a promotion of education and it can't be conclusively decided on the basis of quantum of salary being paid. Rather paying of reasonable salary and incurring appropriate expenditure proves that the expenditure is being made properly. A list of employee wise salary was submitted and the AO was requested to raise specific question with name of employee, if any, so that the profile of concerned faculty and his employment history be produced. It was also proposed to produce the concerned employee for personal examination by AO. However no such requirement was raised and the assessment was completed. Carry forward of Excess Application: If the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are carried forward and adjusted against the income of a subsequent year, the income of that year can be said to be applied for charitable and religious purpose. A total amount of Rs. 1,96,71,844/- was overspent in the FY 2014-15 as shown in the shown in the chart mentioned below in point no. 2 which should be carried forward in FY 2015-16 and to be allowed as application of income. Relevant Case Law on the point is as follows: The reliance was placed on the following case laws: • CIT Vs. Maharana of Mewar Charitable Foundation(1987) 164 ITR 439(Raj) • CIT Vs. Shri Plot Swetambar Murti Pujak Jain Mandal(1995) 211 ITR 293 (Guj) • CIT Vs. Matri Seva Trust (2000) 242 ITR 20 (Mad) • Trustees of Balkan-Ji Bari (1979) 10 CTR (Trib) 22 • CIT Vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom) 31.1 It was also submitted as under: > It may be noted that the exemption u/s 11 of Income tax act can be denied to Registered Trust/society only on following grounds: (i) Section 13(l)(c) - Benefit to interested persons Section 13(l)(c) of the Act has carved out an exception from exemption in cases where a part of income of a charitable or religious trust / institution ensures or is used or applied directly or indirectly for the benefit of the settler, founder or certain other specified persons under section 13(3) of the Act. This is obviously intended to ensure that the income of such a trust / institution is not diverted towards the benefit of persons who are closely connected with the creation, establishment and conduct of the affairs of the trust / institution. 38 (ii) Section 13(l)(d) - Investment of funds of the trust / institution in modes or forms other than those, specified. Section 13(l)(d) provides that exemption from tax to charitable or religious trust / institution will be forfeited if any funds of the trust / institution are invested or deposited after 28.2.1983, otherwise than in any one or more of the forms or modes specified therein. (iii) Section 13(2) - Bar due to deemed use / application of the income or property of the trust by interested persons. As per section 13(2) of the Act, without prejudice to the generality of the provisions of section 13(l)(c) and section 13(l)(d), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of persons referred to in section 13(3), in situations listed under clauses (a) to (h) thereof. Thus, the provisions of section 13(2) are nothing but extension of the provisions of section 13(l)(c) / 13(l)(d) of the Act. • College continued to be approved by relevant Govt. Authority during the A Y 2016-17. Proof is enclosed vide annexure 2. Hence there is no change in basic nature of educational activities. In the present context, the provisions of section 164(2) are also relevant, which are reproduced as follows: "164. Charge of tax where share of beneficiaries unknown. (2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, or which is of the nature referred to in sub-clause (Ha) of clause (24) of section 2 or which is of the nature referred to in sub-section (4A) of section 11 tax shall be charged on so much of the relevant income as is not exempt under section 11 or section 12, as if the relevant income not so exempt were the income of an association of persons: Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate." From the aforesaid provisions of section 164(2), it may be seen that in the case of relevant income referred to therein, tax shall be charged on so much of the relevant income, as is not exempt under section 11 or 12, as if the relevant income not so exempt were the income of an association of persons (AOP). It clearly implies that only that part of the relevant income which is not exempt under section 11 or section 12 is brought to tax, as the income of an AOP and the balance of income of the charitable trust / institution, will remain exempt. Further, as per the proviso to section 164(2), where the whole or any part of the relevant income is not exempt under section 11 or section 12, by virtue of the 39 provisions of section 13(l)(c) or section 13(l)(d), tax shall be charged on the relevant income or part of relevant income, at the maximum marginal rate. In view of the aforesaid proviso to section 164(2), the Courts have held that in case of violation of the conditions under section 13(l)(c) or 13(l)(d) of the Act, only the relevant income or part of such relevant income is liable to be taxed at maximum marginal rate. It is also held that the violation of section 13(l)(c) or 13(l)(d) does not result in denial of exemption under section 11, in respect of the total income of the assessee. In other words, only the non-exempt income, in view of the provisions of section 13(l)(c) / 13(l)(d) would fall in the tax-net and the other income of the charitable trust / institution would remain exempt under the provisions of section 11 of the Act. Relevant part of Circular No.387. dt.6.7.1984 [152ITR (St) 1]. In the present context, paragraph 28 of Circular No.387, dt.6.7.1984, issued by the CBDT, under the heading "Levy of income-tax at maximum marginal rate in the case of charitable and religious trusts which forfeit tax exemption" is very relevant. For our purpose, paragraph 28.6 of the aforesaid Circular is relevant, which is reproduced as follows: "28.6 It may be noted that new sub-section (1A) inserted in section 161 of the IT Act, which provides for taxation of the entire income received by trusts at the maximum marginal rates is applicable only in the case of private trusts having profits and gains of business. So far as public charitable and religious trusts are concerned, their business profits are not exempt from tax, except in the cases falling under clause (a) or clause (b) of section 11(4A) of the IT Act. As the maximum marginal rate of tax under the new proviso to section 164(2) applies to the whole or a part of the relevant income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the IT Act in regard to investment pattern or use of the |
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