TMI Blog2002 (12) TMI 205X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer had taxed all the receipts of the year. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer that there is violation of provisions of section 13(1)(c) read with section 13(2)(b). On the claim of the assessee that the entire receipts cannot be taxed as income, the learned Commissioner (Appeals) held that under section 2(24)(iia) income includes voluntary contributions and that the entire receipts were income taxable under the Income-tax Act. Aggrieved by the above, the assessee is in appeal before us. 3. Before coming to the arguments of both sides, we deem it appropriate to extract the assessment order wherein the Assessing Officer has given the reasons for his decision. The assessment order reads as follows :- "1. On 27-1-1997 Mr. Vardhan, Executive Secretary, raised a loan of Rs.3,40,000 by pledging SIDUR's FDs 130/96 133/96 with South India Bank and withdrew the money from the loan a/c. in cash for personal use by way of payment to Kathmandu Medical College. He thus availed a loan of Rs.3.40 lakhs from SIDUR. He claims to have repaid to the bank, the principal amount as well as the interest on the loan from his own sources, thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is seen that while in most cases the loan was applied for by Mrs. Vardhan on behalf of SIDUR and utilized by her and her husband for their personal needs, in two cases the loans were applied in the individual names of Nanda Vardhan and Sharma Kunda but all loans were sanctioned against SIDUR's FDs. These two persons Mr. Mrs. Vardhan being interested persons as defined in section 11(3) of the Act, have been raising loans for their personal needs, pledging the assets of the Society, with or without the knowledge and permission of the executive body and no tangible security was offered to SIDUR apart from an omnibus personal undertaking from Vardhan as referred above. The Executive Committee did not even bother to find out why Mr. Vardhan, whose wife was in full charge of the day-to-day affairs including transacting in all bank and money matters and custody of securities of the society, was raising such huge personal loans which they had no capacity to repay. 4. The memorandum of association of the Society provides that all bank transactions should be signed by two joint signatories either the Secretary and President or Secretary and Treasurer but never singly or jointly by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uditor Sampalh Ramesh pleaded that the original receipts were not shown to him and it was a lapse on their part not to insist on production of original FD receipts. 6. Some of the other Committee Members Sri Paul Diwakar, Smt. Stuthi Kumari, Treasurer Sri Siva Reddy have been examined and questioned about the above personal transactions of Mr. Vardhan. They all replied that they were aware of the loans being availed by Mr. Mrs. Vardhan but that they had full faith in him not to act against the interests of the Society. 7. Mr. Vardhan applied to Charminar Bank for a loan in SIDUR's name in September 1998. The application is signed by Mr. Vardhan showing SIDUR as the applicant/borrower and giving SIDUR's particulars against columns for nature of business, turn-over, profit loss in the past three years etc. In order to service the debt, the bank made him open a current account which again had to be in the name of SIDUR because the borrower was SIDUR. He signed the application for opening the c/a. using the stamp of Executive Director, SIDUR and issued post dated cheques against it towards instalment of the loan repayment as required by the bank. He also signed these cheques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he original loan as well as the second loan raised to liquidate the first were for personal use by Mr. Vardhan. When asked as to why he applied for term loan 8/99 with Trinity Bank in the name of SIDUR when he was mortgaging his wife's property as collateral security he replied that the bank did not favour giving him a personal loan but was agreeable to giving in the name of the Society. 10. Mr. Vardhan misusing his position as executive secretary, availed another loan of Rs. 9.90 lakhs from Trinity Bank on 16-2-1999 against the security of FDs 446 447 belonging to SIDUR for Rs. 11 lakhs in the aggregate with the same bank. He signed the application as Executive Secretary, SIDUR, though he was not among the authorized signatories and every banking operation had to be signed by joint signatories. This loan was drawn in the name of SIDUR but utilized by him personally to repay loans taken earlier or sent to Kathmandu Medical College. This loan was finally adjusted against SIDUR's FDs 446 447 with Trinity Bank even though the loan was utilized by Mr. Vardhan personally. He has submitted to the bank a resolution purportedly signed by the President of the Society Sri B. Franklin. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wife, who is the Secretary and signatory Member. As for his being authorized for bank transactions, he himself admitted in his deposition that under the F.C.R. (A) Act, husband and wife cannot be joint signatories and anyhow the Bye-laws relied upon in the reply do not empower him to apply singly for purposes of loans on behalf of SIDUR. As per the resolution dated 31-12-1996, Mr. Vardhan was authorized to operate the FCR-A account along with the treasurer Mr. Siva Reddy, in the absence of Secretary but not singly. The other plea taken was that all impugned transactions were entered into on the advice of Mr. Raghavan, C.A. of M/s. Charles Prabhakar Associates. Mr. Raghavan has been examined by the Addl. CIT, Range-4 in this context and he clarified that his advice was taken only as to whether loans raised on deposits from foreign contributions could be credited in other than designated account under the F.C.R. (A) Act and that he had advised Mr. Vardhan that the loan proceeds also should be credited in the F.C.R.(A) Account. Further, even if Mr. Raghavan gave him wrong advice it does not absolve him of responsibility as he was in full knowledge of the fact that he was raising l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. DCIT did not apply her mind or cared to examine the books of account." The Commissioner (Appeals) at para 14 on page 12 of his order has dealt with this ground as follows:- "The appellant Society has raised one more ground stating that even if exemption under section 11 is denied the entire receipt cannot be taxed as income has to be computed under the provisions of the Act. The receipts of the Society are in the nature of grants and donations and also funds from foreign funding agencies through banking channels. The expenditure incurred in carrying out the objectives of the Society must be allowed and only the resultant income should be taxed and not the gross receipts. The argument of the Society cannot be accepted. As per section 2(24)(iia) income includes voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes. In the light of this definition, the grants received by the Society either from donor in India or abroad has to be treated as income and is liable to be taxed in once exemption is denied under section 11. Hence I do not find any merit in this g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the assessee and the Executive Secretary, by any stretch of imagination. The learned counsel submitted that the matter was further confused at the appellate stage on the very foundation of assessment itself on the basis of which it was framed. As the Commissioner (Appeals) was of the view that the provisions that were invoked by the Assessing Officer, i.e. section 13(1)(c) read with section 13(2)(a) are not exactly applicable to the facts of the assessee's case, but the provisions of section 13(1)(c) read with sub-sections (2)(b) and (2)(c) are only applicable, even for which he was under the inspiration of the judgment of IT AT, Hyderabad Bench 'A', dated 23-5-2001, in the assessee's case for assessment year 1998-99. In this context, the learned counsel submitted, with restraint and due respect, that perpetuating an error is no heroism as was held by the Honourable Supreme Court of India in Distributors (Baroda) of India Ltd., 155 ITR 120. This perpetuation resulted in utter chaos to the detriment of the assessee for the reasons that neither the Assessing Officer nor the Addl. Commissioner of Income-tax nor the first appellate authority, was clear as to exactly which provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee stood as a mere guarantor. The guarantor's obligation can in no case be understood to have parted with any compensation unless the borrower is declared an NPA (non-performing asset) and till such time as the Executive Secretary's account is declared as NPA, the guarantor's obligation could not have been put in motion. As such, the question of losing a compensation by the assessee during the previous year did not arise, as the Executive Secretary fulfilled all his obligations and the relationship of the assessee as guarantor was only a contingent one which had neither crystallised nor accrued. In that case, there was no case of parting with any compensation, let alone a rent, for the purpose of invocation of section 13(2)(b). In view of the above, the learned counsel submitted that the application of the provisions of section 13 to deny exemption to the assessee-society is highly arbitrary, unilateral, abusive and without any application of mind in a proper and perspective manner. The provisions of section 13 are couched in an independent manner without attracting or effecting one clause with another, and the provisions cannot be used in a manner of straightjacket formula to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dy. CIT v. Cosmopolitan For any misutilisation or mismanagement Education Society [2000] 244 action is to be taken against the member of ITR 494 (Raj.) the society. SC dismissed the SLP filed by the department as reported in 241 ITR 132 (Statutes). Director of I. T. (Exemptions) Where the monies were taken and returned, v. Bharat Diamond Bourse [2000] there will be no violation of 245 ITR 437 (Mum.) section 11 of the Act. CIT v. Sir Shri Ram Foundation Even under section 13(2)(h), the word /CIT v. Sir Sobha Singh Public "invest" connotes that there must be a Charitable Trust [2001] 250 ITR positive act on the part of the trust 55/475 (Delhi) whereby the funds of the trust are laid out in any particular property or business. Since this sub-clause is in the same section, the ratio also applies for section 13(2)(a)/13(2)(b). CIT v.Rai Bahadur Bissweswarlal "Trust" and "instituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity by the Assessing Officer to the assessee while following the directions issued under section 144A by the Addl. CIT. It is also relevant to mention that the directions issued under section 144A are binding on the Assessing Officer. 11. As regards the contention of the assessee that the Assessing Officer/ Addl. CIT did not specify as to which clause of section 13(3) applies to the persons causing violation in this case, Sri Srivastava argued that this is only a technical kind of objection because there has never been any doubt that Mr. and Mrs. Vardhan, being Executive Secretary and Secretary of SIDUR respectively, were interested persons as mentioned in section 13(3). He submitted that during the arguments on 14-10-2002, the Bench requested the assessee's authorised representative to explain whether these persons are not covered by section 13(3)(cc) and 13(3)(d) of the I.T. Act and there was no specific denial on this. He also drew our attention to the finding of ITAT, Hyderabad Bench 'B', at page 15 of its order dated 23-5-2001 in I.T.A. No. 787/Hyd./2000 for assessment year 1998-1999 in the assessee's appeal against order under section 263 (Revenue's paper book page 275 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that this is also the view taken by the IT AT in its order dated 23-5-2001 in I.T.A. No. 787/Hyd./2000 in the assessee's case referred to above. Thus, while section 13(1)(c) read with section 13(2)(a) constructively applies in this case, section 13(1)(c) read with section 13(2)(b) strictly applies as held by the Commissioner (Appeals). The learned Commissioner (Appeals) has held additionally that the provisions of section 13(2)(c) would also be applicable in this case. From all angles, Sri Srivastava submitted, it is clear that the violation prescribed under section 13(1)(c) has definitely taken place. 13. Adverting to the argument of the learned counsel for the assessee that the financial securities of SIDUR were intact and even if the relationship is assumed for invoking section 13(2)(b), the relationship is trilateral in which the assessee stood as a mere guarantor and the question of losing the compensation by the assessee did not arise as the Executive Secretary fulfilled his obligations, Sri Srivastava submitted that firstly it has to be noted that the utilisation of the property of the society by its Executive Secretary, within the meaning of section 13(2)(b), is primari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 12 is to be withdrawn. In such a situation, the provisions of section 2(24)(iia) will be squarely applicable as per which the voluntary contributions received by an institution will be deemed as its income. He argued that as rightly held by the learned Commissioner (Appeals), there is no scope for allowing expenditure in such a case and the entire grants received by the society are to be treated as income. In this connection, he also drew our attention to the order of the Tribunal, Hyderabad Bench "A", for assessment year 1993-94 dated 17-5-2002 in the case of AWARE v. Dy. CIT [IT Appeal No. 743 Hyd. of 2000, dated 17-5-2002], where the total receipts of the assessee-society aggregating to Rs. 9,99,644 were taxed as income after withdrawal of exemption under similar circumstances and such action was confirmed in appeals. In that case, the Chairman of AWARE took a loan in his capacity as Chairman and gave it to an outsider without any adequate security or compensation. The offence of the assessee in the present case is somewhat more serious in the sense that the loan has been taken by the Executive Secretary against the FDs of the society for his own personal purposes. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us by the learned Departmental Representative, conclusively proves that the fixed deposits were used and pledged by the Secretary Smt. Nanda Vardhan for raising loans. The resolutions of the society highlighted by Sri Srivastava, learned Departmental Representative, prove that the Executive Secretary has been authorised by the society to obtain loans against F.D.Rs. The money so raised was used by Sri Vardhan, not for the society, but for some other purposes. The objects for which it was used, however, laudable, were not the objects of the society. The FDRs were used without compensation to the society. On a query from the Bench, the learned counsel for the assessee admitted that these loans are not reflected in the books of the assessee-society. Without the use of the FDRs of the society, it would not have been possible for Smt. Vardhan to help her husband Sri Vardhan to raise these loans, for whatever purposes. Thus for other than for the society's requirements or purposes, the asset has been used without security or compensation whatsoever. 19. In the case of A WARE consisting of the same Members, held as follows in para 30 of the said order :- "We have perused the sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey support the contention of the learned Departmental Representative." This Bench of the Tribunal in the assessee's own case in I.T.A. No. 787/ Hyd./2000 for assessment year 1998-99, by order dated 23-5-2001, to which one of us was a party, had followed the judgment of the Honourable Kerala High Court in the case of Agappa Child Centre and in para 19 at page 19 it was held as follows :- "We are of the view that the issue raised in this appeal is covered against the assessee by the decision of the Hon'ble Kerala High Court in the case of Agappa Child Centre v. CIT 226 ITR 211 (Ker.), wherein it was held that because a refrigerator belonging to the charitable society in question was installed in the residential premises of the founder, the provisions of section 13(1)(c) were attracted and the assessee-society was not entitled to the exemption under section 11 of the Act. The violation considered by the Hon'ble Kerala High Court is relatively minor compared to the utilisation of the fixed deposits of the assessee-society before us by its Executive Secretary. It has been argued before us that in the process of the pledge of the fixed deposits by the Executive Secretary, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vardhan is covered by section 13(3)(cc) and section 13(3)(d). The learned counsel for the assessee could not reply to this query of the Bench. Sri Vardhan and Smt. Vardhan are not only founder members of the assessee-society [Ref. Page 22 of green paper book] but also are the executive committee members as per page 23 of green paper book. 22. Coming to the case laws cited by the assessee, the judgment of Honourable Madras High Court in Nachimuthu Industrial Association's case, is not applicable to the facts of this case as the exemption was not denied for use of an asset by the society and the judgment of Honourable Kerala High Court in the case of Agappa Child Centre applies to this case. The judgment of Honourable Rajasthan High Court in Shree Poongalia Jain Swetamber Mandir's case, is also not applicable in this case, as that was a case of immovable property and was with reference to section 13(2)(a). Similar is the judgment of Honourable Andhra Pradesh High Court in Polisetty Somasundaram Charities's case. By the own admission of the assessee in the stay petitions, the borrower cannot be said to be financially sound. Our finding is that security and compensation are totally a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second limb of the argument of the learned counsel for the assessee that the entire receipts cannot be taxed, we find that the issue is covered by the judgment of this Bench in Nirmal Agricultural Society's case. In that case, it has been held (as per head note) as under :- "The assessee had not been granted registration under section 12A, as the Commissioner thought it fit to refuse to condone the long delay caused by the assessee in applying for the registration. Therefore, the Assessing Officer had no other option but to complete the assessments in the status of AOP also closing his eyes towards section 11 and section 13. To that extent, the Assessing Officer was right as he had acted only according to will of law. But as far as the contents of the assessments were concerned, even when the assessee had been assessed as AOP and deprived of section 11 benefits, the Assessing Officer could assess only net income of the assessee and not gross receipts. As far as the assessee was concerned, construction of houses, reclamation of land, etc., were part of its regular activities. Houses were built on the land of poor agriculturists. The assessee-society had no legal title or right o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, if any, available to the credit of the donor, could be treated as income of the assessee, if the donor did not insist [or the repayment of the balance amount. Therefore, the Assessing Officer was to be directed to re-do the assessment on the following lines : (1) The tied-up grants received from the donor, Bread for the World, will be taken out of the computation of income from the income-side. (2) All the money spent under the tied-up programmes directed by the donor also will be taken out of the computation of income from the expenses-side. (3) Any non-refundable credit balance in the personal account of Bread for the World will be treated as income in the year in which such non-refundable balance was ascertained. (4) The expenses incurred by the assessee for house construction, reclamation of land, non-formal education programme (other than covered by the tied-up grants) will be deducted as revenue expenses." 25. Honourable Rajasthan High Court in the case of Sukhdeo Charity Estate, held as follows (as per head note):- "It was for the specific purpose of implementation of the water supply scheme that the request for contribution had been made by the assessee-tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fund as per head note, held as follows:- "(i) That the finding of the Tribunal, that the assessee could not be regarded as a branch or as a part of the parent body, was a finding of fact and no question of law arose for reference. (ii) That the mere fact that the rice millers paid contributions with an oblique motive would not affect the character of the contributions, as voluntary contributions. (iii) That the finding of the Tribunal, that the assessee was not entitled to exemption as a trust under section 12 because some of the funds were being utilised for purposes other than charitable and religious was a finding of fact and no question of law arose for reference." This judgment was relied upon by the Revenue. A careful reading of this judgment does not indicate that the question raised by the assessee before us was posed to the Court. We do not feel that this is a precedent for laying down a proposition of allowability of expenditure for computation of income of a charitable institution which is denied benefit under section 11. Honourable Supreme Court in the case of Goodyear India Ltd, v. Stale of Haryana [1991] 188 ITR 402 as per head note, held as follows : " Pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t can be retained as the corpus of the recipient trust without attracting any tax liability. Although the italicized words have now been omitted from section 2(2A)(iia), the exclusion of such capital donations from the definition of "income" implicit in that section. The correct legal position is as under : (a) All contributions made with a specific direction that they shall form part of the corpus of the trust are capital receipts in the hands of the trust. They are not income either under the general law or under section 2(24)(iia) rightly construed. (See under section 2(24)(iia), "Voluntary contributions received by charity") (b) Section 2(24)(iia) deems revenue contributions to be income of the trust. It thereby prevents the trust from claiming exemption under general law on the ground that such contributions stand on the same footing as gifts and are therefore not taxable. (See under section 10(3), "Voluntary payments...." (p. 320) (c) Section 12 goes one step further and deems such revenue contributions to be income derived from property held under trust. It thereby makes applicable to such contributions all the conditions and restrictions under sections 11 and 13 for c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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