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From the Courts »
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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

DIRECTOR OF INCOME TAX (EXEMPTION) Vs. CHARANJIV CHARITABLE TRUST
March, 31st 2014
*            IN THE HIGH COURT OF DELHI AT NEW DELHI

                                           Reserved on: 3rd February, 2014
%                                       Date of Decision: 18th March, 2014

+      ITA No.321/2013
+      ITA No.322/2013
+      ITA No.323/2013

       DIRECTOR OF INCOME TAX (EXEMPTION) ..... Appellant
                     Through: Mr. N.P. Sahni, Sr. Standing
                              Counsel.
           versus

       CHARANJIV CHARITABLE TRUST          ..... Respondent
                    Through: Ms. Shashi M. Kapila with Mr.
                             R.R. Maurya and Mr. Pravesh
                             Sharma, Advocates.

CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR


R.V. EASWAR, J.

1.     All the three appeals have been filed by the revenue under Section

260A of the Income Tax Act, 1961. They challenge the impugned order

of the Tribunal passed on 30.04.2012 in three appeals filed before it, two

by the assessee relating to the assessment years 2006-07 and 2007-08 and

one by the revenue relating to the assessment year 2006-07. In other

words, in respect of the assessment year 2006-07, there were cross-

ITA Nos.321/2013, 322/2013 & 323/2013                         Page 1 of 40
appeals before the Tribunal and in respect of the assessment year 2007-08,

it was the assessee which was in appeal. All the appeals were disposed of

by a common.


2.     The brief facts giving rise to the present appeals are as follows.

The assessee is a Charitable Trust which was granted registration under

section 12A of the Act on 28.05.1976. In respect of the assessment year

2006-07, it filed a return of income declaring Rs.Nil as its income. On

31.10.2006 this return was processed under Section 143(1). Subsequently

a scrutiny of the return was initiated and notices under Sections 142(1)

and 143(2) were issued. A sum of Rs.8,60,1600/- was shown by the

assessee as the proceeds of the sale of assets, being land. It appears that

M/s. Ansal Properties and Industries Ltd. (APIL) owned certain plots of

land earmarked for schools, dispensaries, etc. The assessee in furtherance

of its objects to open a school, entered into agreements with APIL on

18.03.2004 and 14.03.2004 for purchase of the land situated at Palam

Vihar, New Delhi. In these agreements the assessee paid 95% of the price

of the land to APIL and simultaneously obtained possession of the plots.

It would appear that one of the conditions of the agreement was that in

case the allotment of plots is cancelled later, the assessee will be liable for


ITA Nos.321/2013, 322/2013 & 323/2013                            Page 2 of 40
cancellation charges of 10% of the cost of plots. The advance paid by the

assessee was recorded in books of accounts for the financial year 2004-05

and the amount so advanced was added to the list of fixed assets. In the

assessee's books and as advances received in the books of APIL.


3.     In April, 2005 the assessee cancelled the sale agreement and the

monies paid to APIL were returned to the assessee in instalments. No

cancellation charges were however levied by APIL. The entire amount of

Rs.8,60,1600/- which was earlier paid was returned by APIL. In the

course of the assessment proceedings, the AO doubted the genuineness of

the transaction of projects of the plots. He noted the following features: -


       (i)     Even after the lapse of more than one year from the date of

               the agreement to sell, the sale was not completed and no

               registered document was executed and in respect of the

               delay, there was no explanation;


       (ii)    There was no evidence for taking possession of the land;


       (iii)   APIL did not declare any income by way of the transaction

               (i.e. sale of the land to the assessee) in the relevant year when




ITA Nos.321/2013, 322/2013 & 323/2013                             Page 3 of 40
               the agreement to sell were executed which shows that even

               possession of the land was not parted with; and


       (iv)    Though the agreements were cancelled on 21.04.2005 the

               assessee-Trust made entries in its books for the cancellation

               only on 31.03.2006 i.e. the last date of the accounting year.


4.     The assessee's explanation was that the transactions were genuine,

were duly entered into the books, that the payments were made through

banking channels, that the plots were sought to be acquired in furtherance

of the objects of the trust and there was nothing to suspect the motives of

the assessee in entering into those transactions. This was, however, not

accepted by the assessing officer who took the view that the real motive

of the assessee was to advance its surplus monies to APIL without

charging any interest and since APIL was a prohibited person within the

meaning of Section 13(3), the provisions of Section 13(1)(c)(ii) were

attracted with the result that the assessee could not be allowed the

exemption under Section 11.


5.     In the course of the assessment proceedings, the assessing officer

also noted that the assessee claimed to have received corpus donation of

Rs.1.5 crores from one S. Jagjit Singh, S/o. S. Bachan Singh through a

ITA Nos.321/2013, 322/2013 & 323/2013                            Page 4 of 40
pay order. Under Section 12(1) of the Act, all voluntary contributions

received by a trust will be deemed to be income derived from property

held under trust wholly for charitable purposes, except those contributions

which are made with a specific direction that they shall form part of the

corpus of the trust.         The effect of Section 12(1) is that non-corpus

donations which are treated as income derived from property held under

trust will have to be subjected to the provisions of Section 13. Corpus

donations, however, will not be treated as income derived from property

held under trust and, therefore, the provisions of Section 13 will not be

attracted. Having regard to the relevance of the corpus donations in the

assessment of a trust, the assessing officer issued notice under Section 131

and got the statement of Jagjit Singh recorded by the Additional Director

of Income Tax (Exemptions). It would appear that Jagjit Singh stated that

he had some disputes with regard to the clearance of title to the land with

DLF and in order to resolve the dispute, DLF was directed to pay Rs.1.5

crores to the assessee. He would, however, appear to have stated that

there was no specific direction given by him that the donation would be a

corpus donation. The assessing officer, on the basis of the statement of

Jagjit Singh, invoked the provisions of Section 68 of the Act and added



ITA Nos.321/2013, 322/2013 & 323/2013                          Page 5 of 40
the amount of Rs.1.5 crores as the assessee's income. A similar addition

was made in respect of another corpus donation of Rs.25 lakhs claimed to

have been received from one Piyush Jain through an account payee

cheque; the said donor failed to appear before the AO in response to the

notice issued under Section 131.


6.     In the course of the assessment proceedings the assessing officer

found a debit balance of Rs.16,55,448/- in the name of Charanjiv

Charitable Educational Society. It was explained that the said society was

a charitable institution established in the State of Chhattisgarh by the

trustees of the assessee. It was formed as a separate institution as the

assessee desired to establish a private university in the State of

Chhattisgarh whose laws did not permit any institution outside the State to

establish any university in the State. According to the assessee, the said

society was formed only with the object of establishing a university in

Chhattisgarh, which was in conformity with the objects of the trust. It

was thus explained that the advancing of the money to the said society

without charging any interest did not in any manner violate the provisions

of Section 13(1)(c)(ii) of the Act. Detailed written submissions were also

filed before the assessing officer together with the correspondence with


ITA Nos.321/2013, 322/2013 & 323/2013                        Page 6 of 40
the government of Chhattisgarh in order to show that the debit balance in

the account of the society was not any interest free advance and therefore

there was no question of any application of the income or property of the

trust directly or indirectly for the benefit of any prohibited person. The

assessing officer did not accept the explanation and held that the Trust

was not entitled to the exemption.





7.     In respect of the assessment year 2007-08, the assessing officer

took the same stand as he took in the assessment year 2006-07 on the

question of exemption under Section 11 and for the same reasons. He

also added an amount of Rs.25 lakhs claimed to have been received by the

assessee from M/s. Kuber Swamy Ashutosh Consultancy Pvt. Ltd. and

Rs.9,06,000/- from M/s. Sun System Institute of Information Technology

as corpus donations, disbelieving the assessee's version and invoking

Section 68 of the Act. He also took steps to verify both the donations.

M/s. Kuber Swamy Ashutosh Consultancy Pvt. Ltd. furnished the copy of

the bank statement to show the payment made to the assessee and also

furnished the copy of the receipt issued by the assessee, the PAN number

and copy of the bank certificate confirming the payment made to the

assessee. The assessing officer rejected the evidence on the ground that


ITA Nos.321/2013, 322/2013 & 323/2013                       Page 7 of 40
the donor never filed any return of income and did not submit its audited

balance sheet as on 31.03.2006. Moreover, the assessee did not produce

the Director of the donor company despite specific direction in this Court

by the assessing officer. As regards the corpus donation from Sun System

Institute of Information Technology the assessing officer took steps to

verify the same and issued a letter under Section 133(6) calling for

information but there was no compliance. He, therefore, added both the

corpus donations under Section 68. The assessing officer also disallowed

depreciation on certain assets on the ground that the cost of those assets

was allowed as application of the income of the trust for charitable

purposes and allowance of depreciation of those assets would amount to

double allowance which is not permissible.


8.     There was an appeal to the CIT (Appeals) in which the assessee

challenged the findings recorded by the assessing officer. As regards the

violation of the provisions of Section 13(1)(c)(ii) on the ground that the

assessee advanced sums to APIL without charging any interest, the CIT

(Appeals) examined the relevant agreements under which the amount was

advanced and held that there were written agreements which were backed

by bank transactions and other documentary evidence to show that the


ITA Nos.321/2013, 322/2013 & 323/2013                        Page 8 of 40
amount was advanced to APIL for purchase of land for setting up a

school, that the giving of possession is evidenced by the agreements and

the possession letters, that the payments were recorded in the books of

accounts as for purchase of land and in these circumstances the assessing

officer was not justified in holding that the provisions of Section

13(1)(c)(ii) read with Section 13(3) were attracted. As to the finding of

the assessing officer that an adjustment entry was passed in the accounts

of the assessee only on the last day of the financial year, he held that

considering the totality of the circumstances and the evidence available,

the accounting entry did not affect the genuineness of the transaction.

There were other findings recorded by the CIT (Appeals) based on the

accounts that the amount advanced by the assessee to the APIL did not

represent any loan or advance but represented payments made towards

purchase of plots reserved for school/ dispensary and, therefore, there was

no question of charging any interest or security. He, therefore, held that

there was no violation of provision of Section 13(1)(c)(ii) read with

Section 13(3).


9.     As regards the objection of the assessing officer based on the debit

balance of Rs.16,55,448/- appearing in the assessee's balance sheet in the


ITA Nos.321/2013, 322/2013 & 323/2013                        Page 9 of 40
name of Charanjiv Educational Society on the basis of which he came to

the conclusion that there was a violation of Section 13(1)(c)(ii) read with

Section 13(2)(a)/ 13(3), the CIT (Appeals) held that the debit balance

arose on account of the desire of the assessee to establish an educational

institution (private university) in the State of Chhattisgarh. According to

the law prevailing in Chhattisgarh, no society established outside that

State could open a private university. In order to overcome this legal

hurdle the assessee formed and registered a trust by name "Chirajiv

Educational Society" as an independent unit in Chhattisgarh.             The

signatories to the trust deed were the trustees of the assessee. The object

of the society was charitable and similar to the objects of the assessee

trust. The assessee provided the funds to the aforesaid society for the

purpose of meeting the expenditure required for establishing the private

university. These funds were utilised by Charanjiv Educational Society

for purchase of land, contribution to the endowment fund, etc.           The

society received permission from the Chhattisgarh government and also

made the required payments in order to establish the private university.

However, in the year 2005 the Supreme Court struck down Sections 5 and

6 of Chhattisgarh Niji Khsetra Vishwavidalaya Regulatory Commission



ITA Nos.321/2013, 322/2013 & 323/2013                        Page 10 of 40
(Sthapana Aur Viniyaman) Adhiniyam, 2002 as a result of which the

Chhattisgarh government by letter dated June, 2006 informed the society

that the project could not be fulfilled and returned the deposit of Rs.2

crores by account payee cheque which in turn was returned by the society

to the assessee trust. The other amounts advanced by the assessee to the

society were also returned as and when they were received back by the

society. The establishment, legal and other expenses incurred by the

society were to be made good by the assessee on closure of operations by

the society in 2008 pursuant to the letter of the government. On these

findings, the CIT (Appeals) held that there was no violation of the

provisions of Sections 13(1)(d) read with Section 11(5) as this was not a

case of deposit of funds of the trust in unauthorised modes. On the

contrary, the amount was utilised for the purpose the educational object

and no benefit was derived by the society or their trustees or any other

interested party. In this view of the matter, the CIT (Appeals) held that

the assessing officer was not justified in denying the exemption under

Section 11 to the assessee on the ground that the funds of the assessee

were utilised for the benefit of a prohibited person.




ITA Nos.321/2013, 322/2013 & 323/2013                       Page 11 of 40
10.    So far as the ground relating to depreciation is concerned, the CIT

(Appeals) took note of the judgment of the Supreme Court in Escorts Ltd.

vs. UOI, (1993) 199 ITR 43 and held that in arriving at the real income of

the trust, deduction for depreciation cannot be allowed if the capital

expenditure incurred in acquiring the asset has been allowed as

application of income, since allowance of depreciation in such a case

would amount to double deduction. On the basis of this judgment the CIT

(Appeals) upheld the disallowance of the depreciation.


11.    As regards the addition made under Section 68 in respect of the

donation received from Jagjit Singh, the CIT (Appeals) held after

examining the relevant facts that the assessee had filed a confirmation

letter from the donor which was found untrue on later inquiry. The CIT

(Appeals) noted that the donor had denied the making of any donation and

had made a statement to that effect before the ADIT (Investigation). On

the basis of the denial, the CIT (Appeals) held that the source of the

receipt of the amount of Rs.1.50 crores was not approved. He accordingly

upheld the addition.


12.    As regards the addition of Rs.25 lakhs under Section 68, stated to

be received as corpus donation from Piyush Jain, the CIT (Appeals) after


ITA Nos.321/2013, 322/2013 & 323/2013                        Page 12 of 40
examining the evidence held that since the assessee failed to produce the

donor or any proof of donation towards the corpus of the trust and even

failed to demonstrate that the amount was received for a purpose other

than the corpus, the amount was rightly added by the assessing officer.


13.    In the appeal for the assessment year 2007-08 a different incumbent

in the office of the first appellate authority, found himself unable to

follow the decision taken by his predecessor in respect of the

disallowance of the exemption under Section 11 on the ground of

violation of Section 13(1)(c)(ii) read with Section 13(3). According to

him, both in respect of the advances made to APIL and the debit balances

in the account of Charanjiv Educational Society, there was a violation of

the above statutory provisions disentitling the assessee from the benefit of

exemption under Section 11. The addition made under Section 68 of the

Act on account of corpus donations received from M/s. Kuber Swamy

Ashutosh Consultancy Pvt. Ltd. and Sun System Institute of Information

Technology were also confirmed.


14.    The matter reached the Income Tax Appellate Tribunal in cross

appeals for the assessment year 2006-07. In the assessee's appeal the

challenge was to the addition of Rs.1.50 crores and Rs.25 lakhs made


ITA Nos.321/2013, 322/2013 & 323/2013                         Page 13 of 40
under Section 68 and the addition of the development fund charges of

Rs.59,58,384/- which represented the corpus of the trust which was

obliged to be spent on the objects of the trust. In the appeal by the

revenue, the decision of the CIT (Appeals) that there was no violation of

the provisions of Section 13(1)(c)(ii) read with Section 13(3) of the Act

was challenged. There was also a ground relating to certain amounts

which were held by the CIT (Appeals) to be eligible for the benefit of

Section 11(1)(d). The Tribunal in its consolidated order held that there

was no violation of the provisions of Section 13(1)(c)(ii) read with

Section 13(3) either on account of the monies belonging to the assessee

having been advanced to APIL without any interest or security or on

account of the existence of debit balances in the account of Charanjiv

Educational Society. So far as the advances made to APIL are concerned

the Tribunal accepted that they were made for acquisition of plots for the

objects of the trust and were not advances made without any interest or

security so as to attract the provisions of Section 13(1)(c)(ii)/ 13(3) of the

Act. The findings of the Tribunal, summarised in paragraph 19.3 of its

order, are as below: -


               "(a) Assessee is a charitable institution, there is no
               change in it's objects. It carried on educational

ITA Nos.321/2013, 322/2013 & 323/2013                           Page 14 of 40
               institutions and intended to further its objects by
               opening new schools and a university.
               (b) APIL owned reserved educational plots and it's
               agreements to sale of such reserved plots with group
               educational trust do not carry any element of primary
               suspicion.
               (c) The agreements are being held as colorable
               devise as they are not registered and therefore, cannot
               be considered evidence.          Assuming even that
               agreements cannot be produced as evidence; the
               contemporaneous records for AY 2004-05; 2005-
               2006; bank accounts and other relevant evidence does
               support the explanation of the assessee. Besides its
               trite law that an evidence which may not be
               admissible in court of law can be admissible for
               income tax purposes. This is so as in income-tax
               proceedings there is no lis or adversarial proceedings
               between assessee and department.           Income tax
               proceedings are not fettered by technical rules of
               evidence and evidence which has bearing on the
               subject matter and is primarily relied can be
               considered in income tax proceedings.               The
               agreements and other record is complimentary to
               each other, corroborative to each other. In our
               considered view on the basis of contemporaneous
               evidence like account books, bank accounts and
               returns of income it cannot be held that assesses
               explanation in this behalf is unbelievable. Some
               minor issues here and there about posting a journal
               entry at the end of the year or difference in
               nomenclature cannot make a transaction colourable,
               which otherwise has corroborative evidence.
               (d) From APIL copy of account in the assesses
               books it clearly emerges that more often than not
               APIL had credit balance, thus it has been providing
               monetary support to trust now and then. Therefore, a


ITA Nos.321/2013, 322/2013 & 323/2013                          Page 15 of 40
               presumption cannot be drawn that APIL diverted the
               funds without proper justification for its use.
               (e) Assessee debited 95% advance to asset
               acquisition a/c itself indicate that because of
               substantial advance and possession it treated the plots
               as its assets. Treatment of these amounts as advances
               in APIL books, does not militate against assessee's
               method of accounting. Both maintain independent
               accounts; assessee under Trust regulations and APIL
               under normal Company Law and commercial
               principles, method of accounting and revenue
               recognition principles.       Therefore, the alleged
               variation in categorization of accounting in two
               different set of books will not convert valid
               transactions into colourable transactions.
               (f)    So far we have been unable to find any
               motivation on the part of APIL to clandestinely divert
               Trust Funds for its personal use.         Before the
               agreements and after the termination of agreements
               APIL had interest free credit balance with assessee.
               On cancellation of plots their amount has been duly
               returned within reasonable time on running account
               basis.
               (g) Revenue has an objection that possession of
               plots and valuable rights to insist for specific
               performance were vested in assessee, they have been
               relinquished.     Apropos assessee contends that
               cancellation of plots was in the interest of trust as by
               that time it had moved on to better projects including
               a university. Since no cancellation charges were to
               be levied, it terminated the agreements. In our view
               every entity has a right to carry on its objectives in the
               manner it best considers. Revenue cannot step in the
               shoes of the trustee in these matters.             If the
               explanation is prima facie convincing and reasonably
               corroborated by record, evidence and explanation;
               the same should not be rejected on ipse-dixit.

ITA Nos.321/2013, 322/2013 & 323/2013                             Page 16 of 40
               (h) In view of the foregoings we see no reason to
               interfere with the finding of ld. CIT (A) which have
               been arrived at after due consideration of evidence,
               record, explanations and case laws mentioned above.
               Revenues reliance on the case of Kanhaya Lal Punj
               Trust (supra) has been rightly distinguished and held
               to be not applicable to the assesses case in view of the
               contemporaneous evidence."


15.    So far as the debit balances in the account of Charanjiv Educational

Society is concerned, which was one of the grounds of the assessing

officer to deny the exemption under Section 11 is concerned, the finding

of the Tribunal is as under: -


               "21. Apropos revenue ground about debit balances
               against CES also we see no infirmity in the order of
               CIT(A). It has been held that assessee in furtherance
               of its objects intended to open a university at
               Chhatisgarh, proper formalities were completed, due
               to Supreme Court order the object could not be
               achieved in the hands of the assessee. Therefore, it
               formed this charitable society with same objects and
               trustees and incurred the expenses which are shown
               as advance to CEC. In our view, even if the same
               amount was donated to CEC in place of advance, in
               that eventuality also it would have been allowed as
               application to objects. CIT (A) rightly dismissed this
               ground which had no merit."


16.    We are leaving out the finding of the Tribunal relating to the corpus

donations treated by the assessing officer as not being eligible for the



ITA Nos.321/2013, 322/2013 & 323/2013                           Page 17 of 40
benefit of Section 11(1)(d) since no question has been raised before us by

the revenue on this point.


17.    The Tribunal's finding in the assessee's appeal with respect to the

addition made under Section 68 is that the assessee has successfully

demonstrated the identity of the donors, the source of the payment, the

PAN numbers, original confirmation, etc. and in the light of the

documentary evidence, which were not pursued by the assessing officer

by making further inquiries, and, therefore, the assessee has discharged

the onus of establishing the identity and creditworthiness of the donors as

also the genuineness of the donations. The additions of Rs.1.50 crores

and Rs.25 lakhs were accordingly deleted. As regards the assessee's

ground claiming allowance of depreciation in computing the real income

for the purpose of determining the application of income despite the

investment in the assets having been allowed as application of income, the

Tribunal, purporting to follow a judgment of this Court in DIT vs. Vishwa

Jagrati Mission in ITA No.140/2012 dated 29.03.2012 [since reported in

(2013) 262 CTR (Del) 558], held that in the light of this judgment the

assessee was entitled to claim depreciation on the cost of the assets, the

investment in which was already allowed as application of income.


ITA Nos.321/2013, 322/2013 & 323/2013                        Page 18 of 40
18.    We are leaving out the finding of the Tribunal in relation to the

treatment accorded to the development fund charges of Rs.59,58,384/-

recovered during the year and directly credited to the corpus of the trust

because no question of law has been raised on this aspect before us.


19.    In the appeal by the assessee for the assessment year 2007-08, the

Tribunal took the same view so far as the claim for exemption under

Section 11 is concerned. It also deleted the additions made under Section.


20.    The following substantial questions of law are framed: -


       ITA Nos.321/2013 & 323/2013 (assessment year 2006-07)

       (i)     (a) Whether on the facts and in the circumstances of the case

       the Tribunal was right in law in holding that there was no violation

       of Section 13(1)(c)(ii) read with Section 13(3) of the Income Tax

       Act, 1961 in respect of the transactions which the assessee had

       with M/s. APIL and Charanjiv Educational Society and

       consequently in holding that the assessee was entitled to the

       exemption under Section 11?


       (b)     Was such decision perverse?




ITA Nos.321/2013, 322/2013 & 323/2013                          Page 19 of 40
       (ii)    Whether the Tribunal was right in law in holding that the

       assessee was entitled to depreciation on the assets, the cost of

       which has been allowed as deduction as application of income?


       (iii)   Whether on the facts and in the circumstances of the case the

       Tribunal was justified in deleting the addition of Rs.1.50 crores and

       Rs.25 lakhs received from Jagjit Singh and Piyush Jain

       respectively, by invoking Section 68 of the Act?


       ITA No.322/2013 (assessment year 2007-08)

       (i)     (a) Whether on the facts and in the circumstances of the case

       the Tribunal was right in law in holding that there was no violation

       of Section 13(1)(c)(ii) read with Section 13(3) of the Income Tax

       Act, 1961 in respect of the transactions which the assessee had

       with M/s. APIL and Charanjiv Educational Society and

       consequently in holding that the assessee was entitled to the

       exemption under Section 11?


       (b)     Was such decision perverse?


       (ii)    Whether on the facts and in the circumstances of the case the

       Tribunal was justified in deleting the addition of Rs.25 lakhs and

ITA Nos.321/2013, 322/2013 & 323/2013                          Page 20 of 40
       Rs.9.06 lakhs being amounts claimed to have been received by the

       assessee as corpus donations from M/s. Kuber Swamy Ashutosh

       Consultancy Pvt. Ltd. and Sun System Institute of Information

       Technology respectively by invoking Section 68 of the Act?


21.    We may first take up the fundamental question as to whether the

assessee was ineligible for the exemption under Section 11 on the ground

that there was contravention of the provisions of Section 13(1)(c)(ii) read

with Section 13(3) of the Act.          It is necessary to briefly notice the

statutory provisions in this regard.       Section 11 exempts any income

derived from property held under trust wholly for charitable or religious

purposes to the extent to which it is applied to such purposes in India, to

the extent of 85% of such income. Charitable purposes are defined in

Section 2(15). There is no dispute that the objects pursued by the assessee

fall within the said definition. Even if the objects of a trust satisfies the

definition of "charitable purpose" as per Section 2(15), it does not

automatically confer exemption to the trust; it has to further get itself

registered under Section 12A. This condition is also satisfied in the

present case since the assessee was registered under Section 12A on

28.05.1976.       There are further conditions for being eligible to the


ITA Nos.321/2013, 322/2013 & 323/2013                           Page 21 of 40
exemption.        Section 13(1) enumerates instances under which the

provisions of Section 11 granting exemption will not operate. One such

instance is furnished by clause (c)(ii) which says that if any part of the

income or any property of the trust is, during the relevant previous year,

used or applied directly or indirectly for the benefit of any person referred

to any sub-section (3), the exemption will not be allowed. Sub-section (3)

enumerates the prohibited persons and there is no dispute that the

assessee's case falls within clause (e) of sub-section (3). There is another

provision which we have to notice and that is Section 13(2) which in

clauses (a) to (h) thereof sets out illustrative instances where the income

or property of the trust may be deemed to have been used or applied for

the benefit of a prohibited person.


22.    It is also to be noted that even if there is one instance of application

or use of the income or property of the trust directly or indirectly for the

benefit of any prohibited person, the trust will lose the exemption in

respect of its entire income. Therefore, if in respect of the monies paid

either to APIL or to Charanjiv Educational Society, it is found that the

provisions of Section 13(1)(c)(ii) read with Section 13(3) of the Act are

not followed, the trust would lose its exemption entirely, with the result


ITA Nos.321/2013, 322/2013 & 323/2013                            Page 22 of 40
that the assessment of its income will be made according to the provisions

of the Act.


23.    With the above prefatory observations we may examine the facts of

the case relating to the monies advanced to APIL. Before the assessing

officer the assessee submitted that the agreements were entered into with

APIL in the financial year 2003-04 for purchase of land in Palam Vihar

and advance of Rs.86,01,600/- was made. In its letter dated 26.11.2008

written to the assessing officer, the assessee admitted that though payment

was made possession was not taken by the trust. The payment was,

however, treated as application of income (towards charitable purposes) in

the said financial year. In the same letter it was further averred that due to

various reason the assessee changed its mind and the agreements were

cancelled; the amount was refunded to the assessee in the financial year

relevant to the assessment year 2006-07.        The refunded amount was

reduced from the fixed assets to which they had been debited. Having

said this, in its subsequent letter dated 18.12.2008 the assessee appears to

have changed its stand. In this letter it was admitted that though no

registered deeds were executed but possession of the plots were given to

the assessee in the financial year 2003-04. The attention of the assessing


ITA Nos.321/2013, 322/2013 & 323/2013                           Page 23 of 40
officer was drawn to the clauses 16 and 20 of the agreements dated

18.03.2004 and 24.03.2004 which stipulated that on receipt of 95% of the

amount, physical possession of the plots was handed over to the assessee

by APIL.        It was explained that these clauses were unfortunately

overlooked by the assessee and the attention of the assessing officer was

not drawn to that in the earlier letter. The assessee also enclosed copies of

its letter dated 31.3.2005 to APIL and the reply of APIL dated

21.04.2005. It is significant that these letters had not been filed with the

assessing officer along with the assessee's earlier letter. The assessing

officer dealt with the assessee's submissions in both the letters and n oted

that there was a significant change in the assessee's stand vis-a-vis taking

over possession of the land. He issued summons to APIL under Section

131 of the Act in response to which APIL submitted that no income from

the transaction was shown in its return for the assessment year 2004-05.

Apparently the assessing officer was of the view that in case possession of

the land had been handed over to the assessee in the financial year 2003-

04 by APIL, as claimed by the assessee in the subsequent letter dated

18.12.2008, the provisions of Section 2 (47)(v) of the Act which defines

"transfer" inclusively for the purpose of levying capital gains, would be






ITA Nos.321/2013, 322/2013 & 323/2013                          Page 24 of 40
applicable and capital gains would have been declared by the APIL but in

view of APIL's reply, the assessing officer concluded that possession of

the land was not given to the assessee. He further noted that the amount

of Rs.8,60,16,000/- continued to remain with APIL for the whole of the

next financial year i.e. 2004-05 without any progress in the transaction.

No sale deed was signed for more than one year even assuming that there

were agreement to sell entered into in the month of March, 2004. He

found it unusual that the assessee would part with 95% of the price of the

land without even taking possession of the same and would wait for such

a long period without getting the sale registered in its name. He also

found it unusual that it was on the last day of the financial year 2004-05

that the assessee claimed to have written to APIL cancelling the deal

which was accepted by the letter dated 21.04.2005. The assessing officer

also noticed that even though APIL agreed on 21.04.2005 to cancel the

agreements, the copy of the ledger account of APIL in the books of the

assessee did not reveal any corresponding entry made on the said date; the

entry reflecting the cancellation of the agreement to sell was passed in the

accounts only on 31.03.2006. He further noted from the account that even

after cancellation of the deal two cheques for Rs.80 lakhs and Rs.75 lakhs



ITA Nos.321/2013, 322/2013 & 323/2013                         Page 25 of 40
were given to APIL on 29.11.2005 and 13.12.2005 for which there was no

explanation. On these facts and relying upon certain authorities including

the judgment of this Court in Kanahya Lal Punj Charitable Trust Vs.

Director of Income Tax (Exemptions) (Delhi), (2008) 297 ITR 66, the

assessing officer took the view that there was a violation of Section

13(1)(c)(ii) read with Section 13(2) read with Section 13(3)(e). These

findings were not accepted either by the CIT (Appeals) who decided the

appeal for the assessment year 2006-07 or by the Tribunal.


24.    Counsel for the revenue submitted that the findings of the Tribunal

are perverse and have been recorded by taking into account irrelevant

considerations and by ignoring relevant material. We are inclined to

agree. The statutory provisions which we have referred to have to be

applied stringently by having regard to their object, viz., to prevent misuse

of the exemption provision. It is difficult to see how the assessee-trust

can advance about 95% of the price of the land allegedly purchased by it

for its objects and not insist on the lands being conveyed to it within

reasonable time or within the time which it normally takes. If the trust is

quite serious about pursuing its objects of running schools/ dispensaries, it

should have insisted on conveyance of the lands within a reasonable


ITA Nos.321/2013, 322/2013 & 323/2013                          Page 26 of 40
period of time or at least stipulated for interest or adequate compensation

or damages in case of failure to honour the alleged agreements. Counsel

for the assessee pointed out that no advances were given in the previous

year relevant to the assessment year 2006-07 and that they were all given

in the earlier years and were only refunded in the accounting year ended

on 31.03.2006. This argument is bereft of any merit and in fact reinforces

the contention of the revenue that the monies were lying with APIL for a

longer period without any interest or security, even taking into account the

amounts refunded by APIL in the relevant previous year. Moreover, the

Tribunal failed to take note of the fact that the assessee had taken

contradictory stands before the assessing officer on a crucial aspect i.e.

possession of the land.           In its letter dated 26.11.2008 the assessee

admitted that though payment of Rs.8,60,16,000/- had been made to

APIL, possession of the land was not taken.            But in its letter dated

18.12.2008 the assessee filed copies of the agreement dated 18 th and 24th

March, 2004 to show that they contained clauses to the effect that

physical possession of the plots had been handed over by APIL and

explained that these clauses were overlooked by it while making

submissions vide letter dated 26.11.2008. It is difficult to believe how the



ITA Nos.321/2013, 322/2013 & 323/2013                            Page 27 of 40
assessee could forget or could have overlooked that it had taken

possession of the land and admit to the contrary in its letter dated

26.11.2008, if in fact and truth it had taken possession of the land

pursuant to the relevant clauses in the agreements. Even if it is accepted

for the sake of argument that the assessee had taken physical possession

of the lands, there is no explanation as to why the agreements were

cancelled, except a vague statement in the letter dated 26.11.2008 that it

changed its mind due to "various factors". The assessee is a trust; surely,

such decisions are expected to be taken formally in meetings of the

trustees with reasons for the decisions being discussed and minuted. No

minutes were produced; a vague statement is made that the trust changed

its mind due to various factors, without being specific. The amount

advanced is quite substantial and particularly when it is admitted that the

amount was advanced to a prohibited person within the meaning of

Section 13(3), it was the burden of assessee to establish beyond any doubt

or suspicion that the advance was made bona fide and with the genuine

object of acquiring land for the pursuit of the objects of the trust. Further,

even though APIL accepted the request for cancellation of the agreements

by letter dated 21.04.2005, the entry reflecting the cancellation of the



ITA Nos.321/2013, 322/2013 & 323/2013                           Page 28 of 40
agreement was passed in the assessee's account only after almost a year

i.e. on 31.03.2006 which is the last day of the relevant accounting year.

This fact will have to be noted and appreciated keeping in view the whole

perspective and not in isolation. Even if the agreements were cancelled

on 21.04.2005, there is no explanation why further amounts of Rs.80

lakhs and Rs.75 lakhs were advanced to APIL on 29.11.2005 and

13.12.2005 respectively. These amounts also did not bear any interest nor

was any security taken.


25.    Counsel for the assessee would, however, contend that the chart set

out in the order of the Tribunal would show that the account between the

assessee and the APIL is a running account and if the entries are taken as

a whole it would be seen that it is APIL which is funding the assessee and

not the other way round. It was again submitted that in the 12 month

period ended on 31.03.2006, no monies flowed out from the assessee to

any prohibited person. This latter submission has already been dealt with

by us supra. As to the contention that it is only a running account

between the assessee and the APIL, we are unable to give effect to the

submission since Section 13(1)(c)(ii) read with Section 13(2) does not

appear to make any distinction between a running account where there is


ITA Nos.321/2013, 322/2013 & 323/2013                        Page 29 of 40
inter-flow of funds and a case of pure advance. Section 13(2) makes it

clear that the instances listed in its clauses (a) to (h) are only illustrative

and without prejudice to the generality of the provisions of Section

13(1)(c). The prohibition is on the use or application of any part of the

income or property of the trust, during the relevant previous year, for the

direct or indirect benefit of any prohibited person.         When funds of

assessee trust are lying with APIL ­ even though they were not advanced

in the relevant accounting year ­ and no interest or security is taken, it is a

case of direct use of the funds for the benefit of a prohibited person.

Clause (a) of Section 13(2) says that even if the income or property of the

trust continues to remain lent to any prohibited person for any period

during the relevant previous year without security or interest, it would be

a case of deemed misapplication. This shows that it is not necessary that

there should be any advance payment to the prohibited person in the

relevant accounting year. At this juncture it is relevant to point out a

crucial aspect. The provision makes reference to income or property of

the trust being "lent" or continued to be "lent" to any prohibited person.

If the funds of the assessee had been given to APIL without any

agreement to sell being entered into there would have been no defence to



ITA Nos.321/2013, 322/2013 & 323/2013                            Page 30 of 40
the assessee as that would have been a clear case of monies lent or

continue to be lent without interest or security. It is only in order to get

out of the clutches of the said clause that the assessee appears to have

conceived of a device and entered into documentation with APIL to make

it appear as if the monies were not "lent" to APIL, but were given for the

purpose of acquiring lands under agreements to sell, for the objects of the

trust. This explains why the assessee admitted before the assessing officer

in its first letter that it had not taken possession of the lands, but resiled

from that position in its second letter, realising its faux par, citing some

clauses in the agreements. Taking possession of the lands has not been

established as a fact by adducing evidence.


26.    The argument of the counsel for the assessee that the CIT (Appeals)

and the Tribunal have entered concurrent findings of fact which should

not normally be disturbed unless they are perverse is technically correct;

however, we are in agreement with the submission of the counsel for the

revenue that the findings of the CIT (Appeals) (for the assessment year

2006-07) and the Tribunal are superficial and have not taken note of the

normal course of human conduct and probabilities. A little probing or

scratching of the surface was all that was required on the part of the


ITA Nos.321/2013, 322/2013 & 323/2013                           Page 31 of 40
Tribunal to find out the truth about the claim of the assessee.             The

Tribunal has chosen, erroneously ­ this we say with respect ­ to ignore

the normal course of human conduct and probabilities of the case and has

preferred to be led simply by the documentation presented by the

assessee. Each and every objection taken by the assessing officer has

been attempted to be explained away by the assessee and the Tribunal

overlooked that the facts have to be looked at cumulatively and as a

whole; it failed to realise that and the real transaction between the

assessee and APIL is not just an aggregate of the several component parts

thereof; the authenticity of the transaction has to be examined by keeping

in view the conspectus of the facts without missing the woods for the

trees.


27.      In the aforesaid view of the matter, we hold that the findings of the

Tribunal on this aspect cannot be upheld. We uphold the findings of the

assessing officer and hold that in advancing the amount of

Rs.8,60,16,000/- to APIL the assessee committed a violation of the

provisions of Section 13(1)(c)(ii) read with Section 13(2) and Section

13(3) of the Act. The trust was accordingly not eligible for the exemption

under Section 11 of the Act for both the years.


ITA Nos.321/2013, 322/2013 & 323/2013                           Page 32 of 40
28.    It is further necessary to examine whether the advance made to

Charanjiv Educational Society can be said to be in violation of the

aforesaid provisions. On this aspect we are unable to find fault with the

approach of the Tribunal. The relevant facts have already been noticed by

us. The amounts were advanced by the assessee to the society which in

turn deposited them with the Chhattisgarh government for the purpose of

establishing a private University. The relevant documentary evidence is

on record and has been noticed and relied upon by the Tribunal. It is only

after the judgment of the Supreme Court that the position became certain

that entities established outside the State of Chhattisgarh cannot be

permitted to open private universities in the State. The monies were

thereafter returned to the assessee. On these facts it is not possible to

question the correctness of the view taken by the Tribunal.         We are

accordingly of the view that the assessing officer was not right, as held by

the Tribunal, in denying the exemption under Section 11 on the ground

that by advancing monies to Charanjiv Educational Society the assessee

committed a violation of Section 13(1)(c)(ii) read with Section 13(2) and

Section 13(3) of the Act.




ITA Nos.321/2013, 322/2013 & 323/2013                         Page 33 of 40
29.    It is now necessary to examine the other two questions of law. We

may take up the applicability of Section 68 in respect of the donations

received from Jagjit Singh and Piyush Jain in the previous year relevant to

the assessment year 2006-07. So far as the Jagjit Singh is concerned, the

Tribunal has deleted the addition on the ground that the assessee has

successfully demonstrated the identity of the donors, the source of the

payment, the PAN number and by filing the confirmation letters. These

were not pursued by the assessing officer by making further inquiries.

The Tribunal, however, has overlooked that Jagjit Singh, in some other

proceedings made a statement on oath denying the fact that he made any

corpus donations to the assessee trust. What he stated was that an amount

of Rs.1.5 crores was payable to him by DLF in a tripartite dispute

between him, APIL and DLF out of which a sum of Rs.1.5 crores was

paid by DLF directly to the assessee as corpus donation of Jagjit Singh.

The Tribunal has held that it is not possible to view the transaction with

suspicion merely because some other entity, which owes money to Jagjit

Singh, had made the donation on behalf of Jagjit Singh in discharge of the

debt to Jagjit Singh. It has also observed that Jagjit Singh was not cross-

examined by the assessee on the statement said to have been made by him



ITA Nos.321/2013, 322/2013 & 323/2013                        Page 34 of 40
before another income tax authority in some other proceedings denying

the making of the donation. The Tribunal has also found that the money

has actually been given to the trust which has also used it. In these

circumstances the Tribunal deleted the condition. The findings recorded

by the Tribunal cannot be said to be perverse. Similarly in respect of the

donation received from Piyush Jain, the Tribunal has noticed that the

assessee was able to establish the identity of the donor and the source of

the payment which was through account payee cheque, and give the PAN

number and bank details. These details were not inquired into by the

assessing officer and nothing adverse was found.             It is in these

circumstances that the Tribunal has deleted the addition. The findings of

the Tribunal which are based on relevant material cannot be called

perverse.

30.    So far as the claim of depreciation is concerned the decision of the

Tribunal cannot be countenanced. The Tribunal has overlooked that the

cost of the assets has already been allowed as a deduction as application

of income, as held by the CIT (Appeals) as well as the assessing officer.

It was their view that allowing depreciation in respect of assets, the cost of

which was earlier allowed as deduction as application of income of the


ITA Nos.321/2013, 322/2013 & 323/2013                           Page 35 of 40
trust, would actually amount to double deduction on the basis of the ruling

of the Supreme Court in Escorts Ltd. vs. UOI (supra). In respect of the

additions to the fixed assets made during the previous year relevant to the

assessment year 2006-07, the CIT (Appeals) held that since the cost of the

assets was not allowed as a deduction by way of application of income,

depreciation should be allow.           The CIT (Appeals) has thus made a

distinction between assets the cost of which was allowed as deduction as

application of income and assets, the cost of which was not so allowed.

The Tribunal has not kept this distinction in view, but has proceeded to

rely upon a judgment of this Court in DIT vs. Vishwa Jagrati Mission

(supra). In the judgment of this Court the question was whether the

income of the assessee, which was a charitable trust, should be computed

on commercial principles and if so, whether depreciation on fixed assets

used for charitable purposes should be allowed as a deduction. This Court

noticed that there was a consensus of judicial opinion on this aspect and

held, after referring to those authorities as well as a circular of the CBDT

issued on 19.07.1968, that while computing the income of the trust

available for application for charitable purposes, depreciation on assets

used for charitable purposes should be allowed. The point to be noticed is



ITA Nos.321/2013, 322/2013 & 323/2013                         Page 36 of 40
that in this judgment, this Court referred to and distinguished the

judgment of the Supreme Court in Escorts Ltd. (supra) on the ground that

in Escorts (supra), the Supreme Court was concerned with a case where

the deduction of the cost of the asset was allowed under Section 35(1) as

capital expenditure incurred on scientific research and, therefore, no

deduction for depreciation on the very same assets was held allowable

under general principles of taxation, as it would amount to double

deduction. The judgment of this Court in DIT vs. Vishwajagrati Mission

reinforces the principle that if the cost of the asset has been allowed as

deduction by way of application of income then depreciation on the same

asset cannot be allowed in the computation of the income of the trust.

The distinction has not been kept in view by the Tribunal which seems to

have erroneously relied on the judgment of this Court to direct allowance

of depreciation even in respect of assets, the cost of which has already

been allowed as application of income. We accordingly hold that the

Tribunal was not justified in directing the allowance of depreciation in

respect of such assets.


31.    In ITA No.322/2013, which relate to the assessment year 2007-08

the issues are consequential. In that year the assessing officer denied


ITA Nos.321/2013, 322/2013 & 323/2013                        Page 37 of 40
exemption to the trust under Section 11 on the ground that there was a

violation of Section 13(1)(c)(ii) read with Section 13(3) arising out of the

advances given to APIL and Charanjiv Educational Society. His attention

would appear to have been drawn to the order of the CIT (Appeals) in

respect of the assessment year 2006-07 in which both the issues were

decided in favour of the assessee and it was held that the exemption under

Section 11 cannot be denied on the aforesaid grounds. The assessing

officer, however, proceeded to complete the assessment by denying the

exemption under Section 11 since the department had filed an appeal

before the Tribunal against the order of the CIT (Appeals) for the

assessment year 2006-07. While computing the income of the assessee,

the assessing officer made several additions and disallowances and

determined taxable income Rs.3,64,64,753/-. By virtue of the order of the

Tribunal for the assessment year 2007-08, the trust has been given the

exemption under Section 11 of the Act. The Tribunal further held that

since the trust is eligible for exemption under Section 11, the additions

made under Section 68 of the Act have to be examined on the yardstick

applicable to donations received by a charitable trust. It then proceeded to

examine those additions and deleted the same. Since we have reversed



ITA Nos.321/2013, 322/2013 & 323/2013                         Page 38 of 40
the order of the Tribunal on the question of exemption under Section 11

for the assessment year 2006-07.


32.    In line therewith, we hold that the Tribunal was not right in law in

holding that the assessee was entitled to the exemption under Section 11

in respect the assessment year 2007-08. So far as the decision of the

Tribunal in respect of the corpus donations are concerned, which have

been added under Section 68, the Tribunal has deleted the addition of

Rs.25 lakhs in respect of the corpus donation received from M/s. Kuber

Swamy Ashutosh Consultants Pvt. Ltd. and Rs.9.06 lakhs received from

M/s. Sun System Institute of Information Technology Pvt. Ltd. (total

Rs.34.06 lakhs). The Tribunal has examined the evidence and deleted

them. No perversity has been pointed out in its decision to do so.

33.    In the result both aspects of the first substantial question of law

which is common to both the assessment years 2006-07 and 2007-08 are

answered in the negative, in favour of the revenue and against the

assessee. The second question of law relating to the assessment year

2006-07 is also answered in the negative, in favour of the revenue and

against the assessee. The third question of law for the assessment year

2006-07 and the second question of law for the assessment year 2007-08


ITA Nos.321/2013, 322/2013 & 323/2013                        Page 39 of 40
are decided in the affirmative, in favour of the assessee and against the

revenue. The appeals of the revenue are accordingly partly allowed.




                                                 (R.V. EASWAR)
                                                     JUDGE



                                             (S. RAVINDRA BHAT)
                                                    JUDGE
MARCH 18, 2014
hs




ITA Nos.321/2013, 322/2013 & 323/2013                       Page 40 of 40

 
 
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