MUNI SEVA ASHRAM V. INCOME TAX OFFICER

TAXAP/1231/2008

AI Insights

The case involves Muni Seva Ashram, a trust, which appealed against the decision of the Income Tax Appellate Tribunal, Ahmedabad, concerning the denial of tax exemption under Sections 11 and 12 of the Income Tax Act, 1961. The Tribunal had upheld the Assessing Officer's decision, which was based on the misuse of the trust's funds by Shri Jignashu Patwa, an investment agent and son of a trustee, and Shri Pratap Rathwa, an accountant. The misuse involved obtaining personal loans using the trust's fixed deposits and misappropriating cash. The High Court examined whether these actions constituted a direct or indirect benefit to the individuals involved, which would justify the denial of tax exemptions under the cited sections.

• Counselvise Citation: [2020] 140 COUNSELVISE.COM (IT) 750440 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 03-03-2020
• Assessment Year: misc
• Other Referred Cases: Associated Banking Corporation of India Ltd. v. Commissioner of Income-Tax, Bombay, Commissioner of Income-tax v. Adaikappa Chettiar (A.R.), Commissioner of Income-tax v. Kulandaivedlu Konar (C.), Commissioner of Income-tax v. Venkataraman (G.), Mehta (M.M.) v. Commissioner of Income-tax, Commissioner of Income-tax v. Jawaharlal Nagpal (Late), Commissioner of Income-tax v. Orpat Charitable Trust
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Applicant
• Court: HIGH COURT
• Department Lawyers: VARUN PATEL
• Assessee Lawyers: MANISH SHAH
• Keywords: Exemption denial; FDRs; Fraud; Income Tax; Loan; Misappropriation; Tax appeal; Trust
• Section: 11; 12; 260A; 13(1)(c); 13(2)(b); 13(2)(a)

Judgement Text

"C/TAXAP/1231/2008 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 1231 of 2008 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? NO 2 To be referred to the Reporter or not ? NO 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? NO ================================================================ MUNI SEVA ASHRAM Versus INCOME TAX OFFICER ================================================================ Appearance: MR MANISH J SHAH(1320) for the Appellant(s) No. 1 MR.VARUN K.PATEL(3802) for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 03/03/2020 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. This Tax Appeal is filed by the assessee Page 1 of 37 C/TAXAP/1231/2008 JUDGMENT under Section 260A of the Income Tax Act, 1961 (for short ‘the Act, 1961’) against the order dated 11.07.2008 passed by the Income Tax Appellate Tribunal, Ahmedabad, ‘B’ Bench, Ahmedabad (for short ‘the Tribunal’) in I.T.A. No. 633/AHD/2008 for A.Y. 2004-05. 2.This Court vide an order dated 11.05.2009, admitted the Tax Appeal on the following substantial questions of law: “1. Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that FDRs belonging to the assessee trust were used or applied for the benefit of Jignashu Patwa as required by section 13(1)(c) of the Income Tax Act, 1961? 2. Whether on the facts and in circumstances of the case, the Tribunal was right in law in holding that FDRs belonging to assessee trust were lent during A.Y. 2004-05 as required by section 13(2)(c) of the Income Tax Act, 1961? 3. Whether on the facts and in circumstances of the case the Tribunal was right in law in holding that the unauthorized act of the son of a Trustee of making use of FDRs belonging to the assessee trust as security for borrowing money falls in section 13(2)(b) of the Income Tax Act, 1961?” 3.1. The appellant- assessee Trust filed return of income declaring loss of Rs.6,10,35,609/- on 31.10.2004 for A.Y. 2004-05. Page 2 of 37 C/TAXAP/1231/2008 JUDGMENT 3.2. The case of the appellant – assessee was selected for scrutiny. The Assessing Officer on the basis of the foot note to the audited account filed by the assessee noticed that one Shri Jignashu Patwa, an investment agent, banker and commission agent who was also managing the finance of the assessee Trust misappropriated the funds of the Trust. The assessee Trust in the note to the account under the heading ‘event occurring after the balance sheet date’ mentioned that Shri Jignashu Patwa had availed the loan against the fixed deposit of Rs.80,00,000/- pledged with Gruh Finance Limited by opening an unknown account with HDFC Bank. It was also mentioned in the note that, Shri Shri Jignashu Patwa had defalcated the fixed deposit to the tune of Rs.77,82,366/- and interest Rs.19,77,634/- being the interest from the date of maturity of the fixed deposit till the date of repayment of defalcated amount along with interest by him. It was also mentioned that one Mr. Pratap Rathwa, performing duties as an Accountant for the last more than 10 years had misappropriated cash to the tune of Rs.3,99,904/- by showing internal departmental cash transfer. Shri Rathwa admitted misappropriation and agreed for Page 3 of 37 C/TAXAP/1231/2008 JUDGMENT repayment of the said amount. 3.3. During the course of assessment proceedings, it was submitted by the appellant – assessee that Shri Jignashu Patwa, utilized the fund of the Trust to the tune of Rs.80,00,000/- for the purpose of obtaining personal loan which was found out during the annual audit account of the trust for A.Y. 2003-04 in August, 2004 and on detailed inquiry, Shri Jignashu Patwa confessed that he had obtained loan against such deposit. Accordingly, interest of Rs.19,77,634/- along with the outstanding amount of Rs.77,82,366/- was treated as loan to Shri Jignashu Patwa in the balance-sheet of the trust for financial year 2003-04. With regard to the defalcation made by Shri Pratap Rathwa, recovery proceedings were initiated by the Trust. 3.4. The Assessing Officer issued a show cause notice dated 23.11.2006 and in reply, Shri Jignashu Patwa stated that his father Shri Piyushbhai Patwa was a trustee of the assessee Trust. It was also submitted by him that his father was a signing authority and deposit of Rs.80,00,000/- with Gruh Finance Ltd. which was made in the year 2000, when Mrs. Anuben Thakkar and Secretary Chunibhai Page 4 of 37 C/TAXAP/1231/2008 JUDGMENT Parmar were signing authority, and a fraud was committed by him without the knowledge of the board of trustees due to financial difficulty. 3.5. Thus, Shri Jignashu Patwa made a confession before the Assessing Officer having committed fraud with the assessee –Trust. 3.6. However, the Assessing Officer concluded that the trustees and secretaries were well aware about this transaction and in order to safeguard the interest of someone, true and correct information / detail was not provided. The Assessing Officer therefore made addition of Rs.80,00,000/- of the fixed deposit amount and Rs.19,77,634/- of interest amount and Rs.3,99,904/- the amount defalcated by Shri Pratap Rathwa to total income and denied the claim for exemption under Sectio12312008ns 11 and 12 of the Act, 1961 invoking the provisions of Sections 13 (1)(c), 13 (2)(a) r/w. 13(2)(h) of the Act, 1961. 3.7. The assessee being aggrieved and dissatisfied with the assessment order preferred an appeal before the CIT (A). The CIT (A) considering the submissions made on behalf of the assessee deleted the addition Page 5 of 37 C/TAXAP/1231/2008 JUDGMENT of Rs.80,00,000/- since it was of a capital nature and not income but confirmed the addition of interest of Rs.19,77,634/-, and Rs.3,99,904/- misappropriated by Shri Rathwa. The CIT (A) also held that the exemption under Section 11 of the Act, 1961 is rightly withdrawn by applying Section 13(1)(c) of the Act, 1961. 3.8. The appellant – assessee, therefore, being aggrieved by the order of the CIT (A) filed an appeal before the Tribunal. The Tribunal after considering the material placed on record by the assessee and the submissions made by the assessee, confirmed the order passed by the CIT (A) by holding as under: “Though the learned AR vehemently argued before us that amount of loan taken by Shri Jignashu Patwa was withdrawn from the bank account of the trust by exercising undue influence on Mrs. Anuben Thakkar and was, thus unauthorized use of funds, there is nothing to support this plea of the Id. AR nor we are convinced by this plea. As is evident from the facts of the case both the President and Secretary opened and operated a second bank account, obtained loan against FDRs and sign the cheques of huge amount for Withdrawing the money for use of Shri Jignashu Pathwa, son of the trustee. How in this process undue influence has been exercised, is not understood. Not a whisper has been made before us regarding exercise of undue influence on Page 6 of 37 C/TAXAP/1231/2008 JUDGMENT the Secretary. There is nothing on record suggesting undue influence on the President and/or Secretary of the trust. Here we may recapitulate the facts again. Immediately after father of Shi Jignashu Patwa joins the trust, a resolution is passed to pledge the FDRs of the trust with the Gruh Finance Ltd. for obtaining loan from the HDFC bank, in a meeting wherein father of Shri Jignashu Patwa, a trustee, is also present. Thereafter, FDRs are stated to have been discharged by the President and Secretary of the trust for obtaining a loan from the HDFC bank. For this purpose applications must have been filed with HDFC bank. A second account is opened with HDFC bank by Mrs. Anuben Thakkar and Shri Chunilal Parmar, President and Secretary of the trust as is evident from the copy of letter dated 14.3. 2007 of the HDFC bank placed on page 37of the paper book. No reasons have been adduced as to the necessity of having a second account with the same bank, when the trust is stated to be already having a account. After loan amount is credited in the bank account of the trust with HDFC bank. Authorized signatories issue cheques for withdrawal of the amount from the bank account of the trust. The amount withdrawn through these cheques is utilized by Shri Jignashu Patwa, son of a trustee. For more than four years. Board of the trustees and auditors are silent and do not raise a finger about the money belonging to the trust with Shri Jignashu Patwa. The amount of Rs. 80 lacs is not that small amount that everyone in the trust, including President and Secretary put on blinkers towards this withdrawal and use of money. Even auditors were silent for all Page 7 of 37 C/TAXAP/1231/2008 JUDGMENT these years and no question has been raised on the use of money by Shri Jignashu Patwa. Now before us, it is being pleaded that whatever has been done is without the knowledge of trustees and is unauthorized and involuntary, especially when one of the trustees is father of Shri Jighnashu Patwa and is stated to be authorized signatory on behalf of the trust. We are not swayed by this theory of absence of knowledge of trustees or the act being unauthorized or involuntary nor any evidence is placed before us in support of this plea. Moreover, there is nothing in the relevant provisions of sec. 13(1) (c) and 13(2) of the Act that these provisions are not applicable to unauthorized or involuntary acts. The facts and circumstances in this case amply prove that this act of President /Secretary of the trust and Shri Jignashu Patwa is nothing but use of property of the trust directly or indirectly for the benefit of son of a trustee, a person referred to in Clause(d) of sub section 3 of section 13 of the Act. Though AO requested the taxpayer trust to produce resolutions and minute book before him, the trust never produced before the AO. Even when we requested Id. AR to submit copies of bank accounts maintained by the trust with HDFC bank where in these transactions of withdrawal of money raised through loan against FDRs of Rs.80 lacs was credited and later withdrawn, these were never submitted before us.” 3.9. Thereafter, the Tribunal after considering the provisions of Sections 11, 12 and 13 of Page 8 of 37 C/TAXAP/1231/2008 JUDGMENT the Act, 1961 has drawn an adverse inference against the appellant – assessee and presumed that it cannot be believed that Shri Jignashu Patwa acted unauthorizedly when at every step the President and the Secretary of the Trust and the authorized signatories were contributing directly or indirectly with discharging of FDRs, applying of loan, opening of another bank account and then issuing cheques for withdrawal of the amount. For more than four years, they did not even whisper about the funds withdrawn from the account of the trust by Shri Jignashu Patwa nor even when the auditors pointed out the facts in the note to the accounts. Accordingly, the Tribunal applied the provisions of Sections 13(1)(c)(ii), 13 (2)(a) and 13(2)(b) of the Act, 1961 to confirm the order passed by the CIT (A). The Tribunal brushed aside the various decisions cited at bar on behalf of the assessee, holding that the same were not applicable to the facts of the present case, so as to uphold the view of the CIT (A) that assessee continued to use and apply the FDRs of the trust for obtaining loans for purpose other than for the trust itself and for the use of Shri Jignashu Patwa, without security and compensation and thus the assessee is Page 9 of 37 C/TAXAP/1231/2008 JUDGMENT not entitled to the exemption under Sections 11 and 12 of the Act, 1961, in view of the provisions of Sections 13(1)(c)(ii), 13(2) (a), 13(2)(b) r/w. 13(3) of the Act, 1961. 4.1. Learned Advocate Mr. Manish J. Shah appearing for the appellant- assessee submitted that in order to deny the exemption under Sections 11 and 12 of the Act, 1961 by applying Sections 13(1)(c)(ii), 13(2)(a) and 13(2)(b) of the Act, 1961, first of all, there should be an application or use of the fund of the trust for benefit of anybody. It was submitted that in the facts of the present case, there is neither application nor use of any benefit granted by the assessee trust to anybody. It was further submitted that Shri Jignashu Patwa being son of one of the trustees of the trust was of no consequence as no benefit was granted to Shri Jignashu Patwa by the trust. 4.2. Mr. Shah further submitted that the misappropriation of funds has been fully recovered from Shri Jignashu Patwa and Shri Pratap Rathwa and this fact is not considered by either of the authorities. 4.3. It was submitted that, unauthorized use of the fixed deposit by Shri Jignashu Patwa Page 10 of 37 C/TAXAP/1231/2008 JUDGMENT cannot be termed as benefit granted since it was involuntarily or unauthorized act of misappropriation or fraud with the appellant – assessee. Attention of the Court was invited to the minutes of the meeting of the trustee held on 13.04.2000 in which sanction was given to take a loan against the FD and further pointed out that late Anuben Thakkar, President and Chunibhai Parmar, Secretary were authorized to operate the account. It was further pointed out that the Fixed Deposits with Gruh Finance Ltd. were discharged by Shri Jignashu Patwa under undue influence, since Anuben Thakkar was suffering from cancer during financial year 2000-01 and later on she passed away. It was therefore submitted that the act of Shri Jignashu Patwa was involuntary and without any authority. He also invited the attention upon the FIR filed by Shri Rahul Niranjanbhai Ankeshwaria on behalf of Gruh Finance Ltd. against Shri Jignashu Patwa for the fraud committed by him for the offence punishable under Sections 406, 420, 467, 468 and 471 of the Indian Penal Code for getting the loan on the four forged FDs, each of Rs.20,00,000/- using duplicate stamp, seal and signature of the assessee appellant and then not returning the loan amount, knowing that the receipts were Page 11 of 37 C/TAXAP/1231/2008 JUDGMENT forged and which were used as true receipts. 4.4. Mr. Shah also invited attention to the partnership deed of M/s. K.C. Parikh & Co. dated 01.04.1995, wherein, Shri Jignashu Patwa was one of the partners. It was pointed out that the business of the partnership firm was to act as a broker for shares and FDs. It was therefore submitted that, Shri Jignashu Patwa acted as a broker for the FD (Fixed Deposit) of the assessee. 4.5. Learned advocate Mr. Shah invited attention to the letter dated 14.05.2008 addressed to the Tribunal by the assessee to point out that the assessee trust has taken loan from HDFC of Rs.12,00,00,000/- against the FDs of the trust for the purchase of Linear accelerator machine. It was submitted that the purchase of machinery was sanctioned by resolution no. 2 in the meeting held on 13.04.2000 and decided in the meeting of the trustees held on 17.02.2000 by resolution no. 4, Shri Piyush Patwa, father of Shri Jignashu Patwa was not a trustee when the resolution no.4 was passed in the meeting held on 17.02.2000. Shri Piyush Patwa was appointed as a Trustee in the meeting held on 02.03.2000. It was submitted that the assessee trust is one of the leading Page 12 of 37 C/TAXAP/1231/2008 JUDGMENT institutions carrying out the activities in the name of ‘Muni Seva Ashram’ for medical relief and educational activities and also running Old Helpage Centre. 4.6. It was submitted that, late Anuben Thakkar who was source for the activity of the assessee trust relied upon Shri Jignashu Patwa but her trust was misused by him for obtaining personal loan against the FD reflecting the name of the appellant trust- assessee. It was submitted that the FDs were pledged by Shri Jignashu Patwa during the financial year 2000-01, whereas, the fraud was found during the assessment year 2004-05, and therefore, it cannot be said that the funds were either used or applied during the previous year for the benefit of relative of a trustee, so as to attract the provisions of the Act, 1961 to deny the exemption under Sections 11 and 12 of the Act, 1961 where such personal loans were obtained by Shri Jignashu Patwa was nothing but a criminal act of misappropriation by fraud and not a lending by the appellant trust, as the same was involuntary act without any authority of the appellant trust. In such circumstances, it was prayed that no ingredients of Section 13(1)(c) or 13(2)(c) of the Act, 1691 cannot be applied for the unauthorized act of the Page 13 of 37 C/TAXAP/1231/2008 JUDGMENT son of the trustee of making use of the FDRs belonging to the appellant trust as a security for borrowing money, so as to attract the provisions of Section 13(2)(b) of the Act 1961. 4.7. Learned advocate Mr. Shah relied upon the following decisions in support of his submissions: (i) Associated Banking Corporation of India Ltd. v. Commissioner of Income-Tax, Bombay reported in (1965) 56 ITR 1 (SC), wherein, the Supreme Court held as under: “In the case under discussion the embezzlements of funds of the bank took place in 1946. They were then unknown to the bank. Even after the embezzlements came to the knowledge of the liquidator, trading loss cannot be deemed to have resulted. We are unable to countenance the proposition that irrespective of other considerations, as soon as the embezzlement takes place of the employer's funds, whether the employer is aware or not of the embezzlement, there results a trading loss. So long as there was a reasonable prospect of recovering the amounts embezzled by the bank, trading loss in a commercial sense may not be deemed to have resulted. There is no evidence that in the year of account Javeri, the secretary, could not have met the obligations either wholly or partially if he was called upon to refund the amounts embezzled. The embezzled amounts did not come to the knowledge of the Page 14 of 37 C/TAXAP/1231/2008 JUDGMENT liquidator even from the report dated April 1, 1947, of Messrs. M.N. Raiji & Co. who were appointed auditors to investigate the affairs of the bank by the Registrar of Joint Stock Companies. The embezzlements came to the knowledge of the liquidator very much later, only when the liquidator made demands from the various persons in whose names the amounts were debited in the books of account of the bank, and the demands were made upon the liquidator for preferential payment by V.R. Ranade and Sons and by the Bank of Bhopal Ltd. for repayment of the amounts or in the alternative for delivery of the stock purchased by them through the bank.” (ii) Commissioner of Income-tax v. Adaikappa Chettiar (A.R.) (Madras High Court) reported in (1973) 91 ITR 90, wherein, the Madras High Court held that before a person could be said to have obtained a benefit or perquisite from a company there should be some legal or equitable claim even though it be contingent or contested in nature. A mere receipt of money or property which one is obliged to return or repay to the rightful owner as in the case of a loan or a credit cannot definitely be taken as a benefit or perquisite obtained from the company. The benefit or advantage which might have been taken by a director or other person from a company without any claim of right has to be repaid or returned to the company if the company discovers the unauthorized taking and Page 15 of 37 C/TAXAP/1231/2008 JUDGMENT seeks to enforce its restitution. The Court therefore analysed the words ‘benefit or perquisite’ occurring in Section 2 (6C)(iii) of the Indian Income-tax Act, 1922, to mean that only such benefit or perquisite can only take into those authorized by the company and it is not possible to treat both authorized and unauthorized benefits alike. (iii) Commissioner of Income-tax v. Kulandaivedlu Konar (C.) reported in (1975) 100 ITR 629 (Madras), wherein, the Madras High Court held that, in order to bring a benefit or advantage within the provisions of Section 17(2)(iii) of the Act, 1961, it must have a legal origin and since any unauthorized advantage taken by an employee without the authority of the employer would create a legal obligation to restore such advantage, it would not amount to a benefit or advantage within the meaning of section 17(2)(iii), so as to qualify as benefit or perquisite in the ends of the employee. (iv) Commissioner of Income-tax v. Venkataraman (G.) (Madras High Court) reported in (1978) 111 ITR 444 (Madras), wherein, the Madras High Court held that, even assuming that money can be considered to be benefit or perquisite as contemplated by the section, it Page 16 of 37 C/TAXAP/1231/2008 JUDGMENT should have been obtained from the company but, in view of the finding of the Appellate Assistant Commissioner and the Tribunal that the amount in question was embezzled by R which finding was agreed to by the High Court, it cannot be said that the amount was obtained by R from the company nor can it be said that the family availed an interest-free loan from the company, and ultimately, held that such embezzlement would not qualify to be considered as a benefit or perquisite. (v) Mehta (M.M.) v. Commissioner of Income-tax (Calcutta High Court) reported in (1979) 117 ITR 362 (Calcutta), wherein the Calcutta High Court in the facts of that case held that, it should be a legal claim and the trustees should authorize to grant the benefit to any person. It was submitted by the learned advocate that in the facts of the present case, no authority was given to use the FDs to Shri Jignashu Patwa, and therefore, there is no benefit which can be said to have been granted or authorized by the trustees. (vi) Commissioner of Income-tax v. Jawaharlal Nagpal (Late) reported in (1988) 171 ITR 136 (M.P.), wherein, the M.P. High Court has held Page 17 of 37 C/TAXAP/1231/2008 JUDGMENT that unauthorized use of company’s car not be termed as a benefit or perquisite obtained from the company under Section 2 (24) of the Act, 1961. (vii) Commissioner of Income-tax v. Orpat Charitable Trust reported in (2015) 55 taxman.com 211 (Guj.), wherein, this Court has held that, the perusal of Section 13(1) (d) of the Act, 1961 makes it clear that it is only the income from such investment or deposit which has been made in violation of Section 11(5) of the Act, 1961 that is liable to be taxed, and violation under Section 13(1)(d) of the Act, 1961 does not result in denial of exemption under Section 11 to the total income of the assessee, and that where the whole or part of the relevant income is not exempted under Section 11 by virtue of violation of Section 13(1)(d) of the Act, 1961, tax shall be levied on the relevant income or part of the relevant income at the maximum marginal rate. 4.8. Learned advocate for the appellant – assessee submitted that none of the above decisions were considered by either Assessing Officer or CIT (A) and the Tribunal had brushed aside the same, as not applicable, in spite of the fact that, it is a case of Page 18 of 37 C/TAXAP/1231/2008 JUDGMENT misappropriation and fraud by Shri Jignashu Patwa with the appellant – assessee trust. 4.9. In the alternative, it was submitted that, even if it is presumed that misappropriation is a benefit and as misappropriation took place in the financial year 2000-01, therefore, provision of Section 13(1)(c) of the Act, 1961 could have been applied for the financial year 2000-01 and not for the financial year 2003-04, relevant to A.Y. 2004-05. It was also pointed out that not a single condition of Section 13(1)(c) of the Act, 1961 is fulfilled in the facts of the present case and as such the Tribunal has committed an error in applying the provisions of Section 13 (1)(c), so as to deny the exemption to the appellant – assessee under Sections 11 and 12 of the Act, 1961. 5.1. On the other hand, learned senior standing counsel Mr. Varun K. Patel appearing for the revenue relied upon the concurrent findings arrived at by the CIT (A) and the Tribunal and submitted that, the Tribunal has arrived at a finding of fact that both the President and Secretary opened and operated the 2nd bank account for obtaining a loan against the FDR and signed the cheque of huge amount for withdrawing the money for use of Shri Page 19 of 37 C/TAXAP/1231/2008 JUDGMENT Jignashu Patwa, son of one of the trustees. The Tribunal has therefore rightly come to the conclusion that it is not possible to believe that as to how undue influence has been exercised, as there is no whisper made regarding exercise of undue influence on the Secretary. It was further pointed out that there is nothing on record suggesting undue influence either on the President and/ or Secretary of the Trust. 5.2. Mr. Patel further submitted that immediately after joining of Shri Piyushbhai Patwa, father of Shri Jignashu Patwa as a trustee of the appellant trust, a resolution was passed to pledge the FDR of the trust to Gruh Finance Ltd. for obtaining the loan from the HDFC Bank, where, Shri Piyushbhai Patwa was also present. Thereafter, the FDRs were stated to have been discharged by the President and Secretary of the Trust for obtaining loan from the HDFC Bank by opening a second bank account with the HDFC Bank by Mrs. Anuben Thakkar and Shri Chunilal Parmar, President and Secretary of the Trust respectively. It was therefore submitted that, in absence of any reasons, as to the necessity of having 2nd account with the same bank when the trust is stated to already have one account and after the loan was credited Page 20 of 37 C/TAXAP/1231/2008 JUDGMENT in the bank account of the trust with the HDFC bank, cheques were issued with the authority letter for withdrawal of the amount from the bank account of the trust which was utilized by Shri Jignashu Patwa, son of one of the trustees of the trust. 5.3. Learned advocate further submitted that, the Tribunal therefore rightly applied the provisions of Sections 13(1)(c) and 13(2) of the Act, 1961, because neither of the provisions provides that it is not applicable to unauthorized or involuntary act. It is not in dispute that the property of the trust was directly or indirectly used for the benefits of Shri Jignashu Patwa, son of the one of the trustees of the trust who is a person falling under clause (d) of sub-section 3 of Section 13 of the Act, 1961. 5.4. It was submitted that in such circumstances, the CIT (A) and the Tribunal has rightly come to the conclusion that there is a breach of provisions of Section 13(1)(c) and 13(2)(c) of the Act, 1961 for utilizing the funds of the trust for the benefit of relative of the trustees of the trust. 5.5. It was therefore submitted that, exemption granted under Sections 11 and 12 of the Act, Page 21 of 37 C/TAXAP/1231/2008 JUDGMENT 1961 were rightly denied to the appellant – assessee. It was prayed that as there are concurrent findings of facts arrived by the CIT(A) and the Tribunal, the appeal is required to be dismissed as there is no question of law arising from the impugned order passed by the Tribunal. 6. Having heard the learned advocates appearing for the respective parties and having gone through the materials on record and on perusal of the impugned orders passed by the CIT(A) and the Tribunal, the only question which arises for consideration is whether, in the facts of the case, when admittedly there is misappropriation and fraud committed by Shri Jignashu Patwa, who happens to be son of one of the trustees of the trust -appellant – assessee, the provisions of Sections 13(1)(c) r/w. 13(2)and 13(3)(d) of the Act, 1961 could be attracted or not. 7. For this purpose, it would be germane to refer to relevant provisions of Section 13 which reads thus: 13. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof— (a) any part of the income from the property held under a trust for private religious Page 22 of 37 C/TAXAP/1231/2008 JUDGMENT purposes which does not enure for the benefit of the public; (b) in the case of a trust for charitable purposes or a charitable institution created or established after the commencement of this Act, any income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste; (bb) [***] (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof— (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3) : Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution: Provided further that in the case of a trust Page 23 of 37 C/TAXAP/1231/2008 JUDGMENT for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub- section (3) in so far as such use or application relates to any period before the 1st day of June, 1970; (d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year— (i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11; or (ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983 otherwise than in any one or more of the forms or modes specified in sub- section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983; or (iii) any shares in a company, other than— (A) shares in a public sector company; (B) shares prescribed as a form or mode of investment under clause (xii) of sub-section (5) of section 11, are held by the trust or institution after the 30th day of November, 1983: Page 24 of 37 C/TAXAP/1231/2008 JUDGMENT Provided that nothing in this clause shall apply in relation to— (i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1st day of June, 1973; (ia) any accretion to the shares, forming part of the corpus mentioned in clause (i), by way of bonus shares allotted to the trust or institution; (ii) any assets (being debentures issued by, or on behalf of, any company or corporation) acquired by the trust or institution before the 1st day of March, 1983; (iia) any asset, not being an investment or deposit in any of the forms or modes specified in sub-section (5) of section 11, where such asset is not held by the trust or institution, otherwise than in any of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 1993, whichever is later; (iii) any funds representing the profits and gains of business, being profits and gains of any previous year relevant to the assessment year commencing on the 1st day of April, 1984 or any subsequent assessment year. Explanation.—Where the trust or institution has any other income in addition to profits and gains of business, the provisions of clause (iii) of this proviso shall not apply unless the trust or institution maintains separate books of account in respect of such business. Page 25 of 37 C/TAXAP/1231/2008 JUDGMENT Explanation.—For the purposes of sub-clause (ii) of clause (c), in determining whether any part of the income or any property of any trust or institution is during the previous year used or applied, directly or indirectly, for the benefit of any person referred to in sub-section (3), in so far as such use or application relates to any period before the 1st day of July, 1972, no regard shall be had to the amendments made to this section by section 7 [other than sub-clause (ii) of clause (a) thereof] of the Finance Act, 1972. (2) Without prejudice to the generality of the provisions of clause (c) and clause (d) of sub-section (1), 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 a person referred to in sub-section (3),— (a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub- section (3) for any period during the previous year without either adequate security or adequate interest or both; (b) if any land, building or other property of the trust or institution is, or continues to be, made available for the use of any person referred to in sub-section (3), for any period during the previous year without charging adequate rent or other compensation; (c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be Page 26 of 37 C/TAXAP/1231/2008 JUDGMENT reasonably paid for such services; (d) if the services of the trust or institution are made available to any person referred to in sub-section (3) during the previous year without adequate remuneration or other compensation; (e) if any share, security or other property is purchased by or on behalf of the trust or institution from any person referred to in sub-section (3) during the previous year for consideration which is more than adequate; (f) if any share, security or other property is sold by or on behalf of the trust or institution to any person referred to in sub- section (3) during the previous year for consideration which is less than adequate; (g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3): Provided that this clause shall not apply where the income, or the value of the property or, as the case may be, the aggregate of the income and the value of the property, so diverted does not exceed one thousand rupees; (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971), in any concern in which any person referred to in sub-section (3) has a substantial interest. (3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely :— Page 27 of 37 C/TAXAP/1231/2008 JUDGMENT (a) the author of the trust or the founder of the institution; (b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees; (c) where such author, founder or person is a Hindu undivided family, a member of the family; (cc) any trustee of the trust or manager (by whatever name called) of the institution; (cci) (d) any relative of any such author, founder, person, member, trustee or manager as aforesaid; (e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest. 8. On perusal of the above provisions, it is clear that nothing contained in Sections 11 or Section 12 of the Act, 1961 will be applicable, if the part of the income or any property of the trust during the previous year is directly or indirectly used or applied for the benefit of any person referred to in sub-section 3 of Section 13 and it shall deemed to have been applied for the benefit of such person, if inter alia the same is made available for any period during the previous year without charging any adequate rent or Page 28 of 37 C/TAXAP/1231/2008 JUDGMENT compensation or if any amount is paid by way of salary allowance out of the resource of trust or institution for the services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services. Sub-section (3) of Section 13 referred to in clause-c of sub- section 1 of Section 13 and sub-section 3 of Section 13 provides that a person would mean inter alia any relative of the author, founder, person, member, trustee or manager of the trust. Therefore, it is necessary to ascertain from the facts of the case, as to whether the. CIT (A) and the Tribunal have rightly applied the provisions of sections 13(1)(c), 13(2) and 13(3) (d) of the Act, 1961 correctly in the facts of the case or not. 8.1 From the facts emerging from the record, it is not in dispute that Mr. Jignashu Patwa, son of one of the trustee Shri Piyush Patwa without any authority misappropriated the funds of the appellant – assessee to the tune of Rs.80,00,000/- by obtaining personal loan without the knowledge of any trustee. 8.2 Mr. Pratap Rathwa who is not relative of the trustee, misappropriated Rs.3,99,904/- during A.Y. 2004-05. Page 29 of 37 C/TAXAP/1231/2008 JUDGMENT 8.3 Criminal complaint is filed against Mr. Jignashu Patwa by the Manager of Gruh Finance Ltd. for misappropriation and fraud. 11. In view of the above undisputed facts, it cannot be said that the appellant trust has granted any benefit to Mr. Jignashu Patwa, who is son of one of the trustees of appellant trust as referred by the CIT (A) and the Tribunal on the ground that, the President and Secretary of the appellant trust signed the relevant documents as directed by Mr. Jignashu Patwa, so as to pledge FD of Gruh Finance Ltd., and open second account with HDFC Bank. The CIT (A) and the Tribunal both have ignored the fact that the President of the appellant trust Ms. Anuben Thakkar was suffering from cancer and both the President, Secretary and other trustees had put faith upon Mr. Jignashu Patwa who misappropriated and committed fraud with the appellant assessee trust. The appellant assessee trust is thus victimized by the unauthorized action of Mr. Jignashu Patwa and Mr. Pratap Rathwa who committed fraud with the appellant assessee trust. 12. In such circumstances, both the CIT (A) and the Tribunal have committed an error by applying the provisions of Section 13(1)(c), 13(2) and 13(3)(d) of the Act, 1961 so as to deny the Page 30 of 37 C/TAXAP/1231/2008 JUDGMENT exemption to the appellant assessee trust under Sections 11 and 12 of the Act, 1961. 13. The Supreme Court in case of Associated Banking Corporation of India Ltd. (supra) has held that, it is wrong to say that irrespective of other considerations, as soon as embezzlement of the employer’s funds takes place, whether the employer is aware or not of the embezzlement, there results a trading loss. However, in the facts of the present case, the entire amount is recovered from Mr. Jignashu Patwa and Mr. Pratap Rathwa. There was embezzlement of funds, misappropriation and fraud committed by the by Mr. Jignashu Patwa and Mr. Pratap Rathwa without knowledge of the President and trustees of the appellant trust. Moreover, the fact that criminal complaint was filed against Mr. Jignashu Patwa is a material factor which is ignored by the Tribunal. The Tribunal has taken into consideration the irrelevant factors like opening of second bank account for obtaining loan from the HDFC Bank by the appellant trust ignoring the material facts that the misappropriation and fraud was committed in the year 2000-01 and opening of the bank account and obtaining loan from the HDFC bank were subsequent thereto. 14. Both the CIT (A) and the Tribunal have ignored the decisions cited by the appellant Page 31 of 37 C/TAXAP/1231/2008 JUDGMENT assessee to point out that there was no benefit or advantage which was given to Mr. Jignashu Patwa by the appellant assessee trust in any manner whatsoever, in view of the admitted fact that there was misappropriation and fraud committed by him. Similarly, defalcation of cash by Mr. Pratap Rathwa is also not in dispute. Therefore, the Assessing Officer was not right in making addition of the interest earned on the FD amounting to Rs.19,77,634/- as well as the amount of cash defalcated amounting to Rs. 3,99,904/- as income of the appellant assessee trust and further an error is committed by invoking the provisions of Section 13(1)(c) which cannot be applied in the facts of the case, because as per the provisions of clause (c) of sub-section 1 of Section 13, only if part of such income or any property of the trust or the institution is applied, directly or indirectly for the benefit of any person like Mr. Jignashu Patwa, it can come into play. In the facts of the case, it cannot be said that the appellant assessee trust directly or indirectly applied any part of income or property of the trust for the benefit of Mr. Jignashu Patwa, as there is evidence on record of misappropriation and fraud committed by Mr. Jignashu Patwa. The Tribunal, therefore, committed an error in drawing an adverse inference against the President and Secretary of Page 32 of 37 C/TAXAP/1231/2008 JUDGMENT the Trust ignoring this vital fact and aspect of the matter. 15. The Tribunal has further committed an error by holding that only because the President and the Trustees of the trust did not raise a finger / any voice for a considerable long time with regard to the fraud committed by Mr. Jignashu Patwa and the actions were taken only when it was found during the course of audit, the addition is liable to be made, whereas in the facts of the case, it is not in dispute that the Assessing Officer made addition only on the basis of the note to the accounts for the year under consideration. 16. Moreover, the CIT (A) as well as the Tribunal have lost sight of the remand report of the Assessing Officer dated 23.02.2007 submitted to the CIT (A), wherein, it is stated by the A.O. as under: “2. In this case, Shri Jignashu Piyush Patwa an Investment agent, Banker and commission agent acting on behalf of Muni Seva Ashram was doing the above jobs with the Ashram since long. He was indulged in misappropriation of deposits of Gruh Finance Ltd. by availing loan on fixed deposit of Rs.80,00,000/- Pledged with Gruh Finance Ltd. His father Shri Piyushbhal Patwa is happens to be a Trustee of Muni Seva Ashram. On the ground of that Shri Piyushbhal Patwa a trustee of Muni Seva Ashram who happened Page 33 of 37 C/TAXAP/1231/2008 JUDGMENT to be a father of the persons who has misappropriation the trust Fund. A copy of the confession letter of Shri Jignashu Patwa is enclosed herewith. 3. It is crystal clear case of defalcation and fraud by a party who is connected with the trustees. The Board of Trustee should know what is happening in the trust where the trust fund received from Government as well as private organization are misappropriated and hence section 13 applied in the assessee’s case and hence the trust for the year under consideration is eligible for exemption under section 11 or 12 the Act and trust income from the following sources is changeable to tax income of the AOP. 1. Income from the property held under the trust wholly for the Charitable or religious purposes. 2. Voluntary Contributions without any deduction that they shall form of corpus of the trust, and: 3. Income of trust being profit & gains of business which is Incidental attainment of the objectives of trust and separate books of account are maintained. Since the assessee’s claim of exemption under section 11 has been forfeited this income amounting to Rs.2,74,502/- are held to be assessee’s total income chargeable to maximum marginal rate. 4. The Ld. C.I.T.(A)-V, Baroda vide order No. CAB/V/135/05-06 dated 02.12.2005 in the case of Parisar Trust has rightly dismissed the assessee’s Page 34 of 37 C/TAXAP/1231/2008 JUDGMENT Appeal wherein the Relative of the Trustee has been granted an advance of the Trust money which were not returned by the son of the Trustee and thereby the trust fund was misused and where the Ld. C.I.T.(A) has confirmed the addition made by A.O. on account misuse of Trust Money which were advanced to the person specified u/s. 13 of the I.T. Act. 5. And hence from the above is seen that the I.T.O. has rightly made the additional and assessee’s appeal may be dismissed.” 17. From the above remand report, it is apparent that the A.O. has admitted that there was misappropriation and fraud by Mr. Jignashu Patwa. In spite of such admission in the remand report, it was opined that, Section 13 was applicable to the case on the ground that the board of trustee should know what is happening in the trust, where the trust fund received from government as well as from private organizations are misappropriated. Neither the provision of Section 13(1)(c) or (13)(2)(a) or 13(2)(b) of the Act, 1961 provides for such stipulation that board of trustees should know what is happening in the trust when the trust funds are misappropriated. In the facts of the case, misappropriation of funds cannot be said to be applied or used for the benefit of Mr. Jignashu Patwa. The remand report also referred to the confession letter of Mr. Jignashu Patwa. Page 35 of 37 C/TAXAP/1231/2008 JUDGMENT 18. The A.O. in the remand report has referred the case of the Parisar Trust but in the said case, as pointed out by him, the relatives of the trustees have granted an advance of the trust money, which were not returned by the son of the trustee and thereby the trust fund was misused and the exemption granted to the said trust was withdrawn. However, in the facts of the present case, in view of the misappropriation and fraud committed by Mr. Jignashu Patwa, and more particularly, when such funds which were misappropriated were returned by him, the provisions of sections 13(1)(c) or 13(2)(a) or 13(2)(b) of the Act, 1961 cannot be said to be applicable. 19. We are, therefore, of the view that the Tribunal was not right in holding that the FDRs belonging to the appellant-assessee trust were used or applied for the benefit of Mr. Jignashu Patwa in terms of Section 13(1)(c) of the Act, 1961 nor that the FDRs belonging to the assessee trust can be said to be lent during 2004-05, in terms of Section 13(2)(a) of the Act, 1961. The Tribunal was also not right in holding that, unauthorized act of the son of the trustee of making use of the FDRs belonging to the assessee trust as a security for borrowing money fall within Section 13(2)(b) of the Act, 1961. Page 36 of 37 C/TAXAP/1231/2008 JUDGMENT 20. Hence, we answer the question of law in favour of the assessee and against the revenue. The appeal accordingly stands allowed. No order as to costs. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) PRADHYUMAN Page 37 of 37 "