TMI Blog2015 (3) TMI 888X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be rejected merely on the basis of order of the DGIT(E) which rejected application for registration u/s 10(23C)(vi) of the Act. At the same time, we also conclude that the exemption u/s 11 and 12 of the Act cannot be denied only on the basis of rejection of application of the assessee filed u/s 10(23C) of the Act. Before we part, we may point out that the CIT(A) in the impugned order has clearly held that action of the AO in allowing exemption u/s 11 and 12 of the Act is beyond jurisdiction exercised by him during the assessment proceedings and at the same time, the CIT(A) has upheld the action of the AO which rejected the claim of the assessee for exemption u/s 11 of the Act, this contradictory observation and conclusion of first appellate authority is not permissible and sustainable. Therefore, action of the authorities below is not sustainable. - Decided in favour of assessee. Bogus “corpus donations” and “miscellaneous donations” - AO making addition u/s 68 - Held that:- The assessee trust submitted all the required details before the authorities below but the AO objected to the claim of assessee only on this premise that the assessee could not produce in person the do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee society and the payment made by the assessee society was in accordance with the prevailing fair market price of the vehicle hiring charges. Although the revenue authorities can also verify the fact of personal use of the vehicle owner but this is a secondary issue which cannot be a basis for rejecting the entire claim of the assessee society. Therefore, we are of the considered view that the revenue authorities had not adjudicated this issue as per section 37 and other relevant provisions of the Act and, therefore, their findings are set aside and the issue is restored to the file of the AO to adjudicate the same in accordance with the provisions of the law - Decided in favour of assessee for statistical purposes. Construction of College and Hospital building and hostel expenses disallowed - Held that:- CIT(A) has confirmed the observations and additions made by the AO on account of construction and hostel expenses without addressing, evaluating and adjudicating the contentions of the AO in the light of submissions and explanation of the assessee. In this situation, it can safely be presumed that the AO did not afford opportunity to the assessee to explain discrepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.No.3317/Del/2013 - - - Dated:- 23-3-2015 - Shri Pramod Kumar And Shri Chandra Mohan Garg,JJ. For the Appellant : Shri P.K. Jain,CA For the Respondent : Shri P. Dankanungna, DR ORDER Per Chandra Mohan Garg, Judicial Member The above appeal has been preferred by the assessee against the order of CIT(A)-XII, New Delhi dated 25.03.2013 pertaining to AY 2006-07 in Appeal No.194/08-09 for AY 2006-07. 2. The grounds raised by the assessee read as under:- 1. That having regard to the facts and circumstances of the case, Ld. CIT -A has erred in law and on facts by upholding the orders of the Deputy Director of Income Tax -E, Inv Cir-I, New Delhi passed u/s 143(3) resulting in huge demand. 2. That the authorities below has relied upon the findings of the Learned DGIT (E) for rejecting the application of the appellant filed u/s 10(23)(c) of the IT Act, 1962; whereas in the appellant's case Hon'ble Apex Court vide their order dated 2-4-2012, has held that the findings of the order of DGIT(E) are restricted to AY 2007-08 as the Hon'ble Bench comprising Chief Justice has elaborated in their order that; We uphold the order of rejection on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances of the case, Ld. CIT-A erred while upholding the contention of the DDIT(E) regarding excess salaries being charged with the intent of siphoning off funds of the appellant. Whereas the appellant contended that subsequent to the scrutiny of salary registers of society by the DGIT(E), the appellant got the information about the embezzlement and fraud of ₹ 1,59,9421-, which might have taken place and it is not an act with the intent of siphoning off funds. The finding of DGIT(E) were also not conclusive being decided without the expert advice. The embezzlement and fraud so stated does not in any way establish the intent of siphoning of funds by the appellant and accordingly the said findings are to be quashed. 6. That having regards to the facts and circumstances of the case, Ld CIT -A has erred in law and on facts by upholding the contention of Ld. DDIT(E) by not allowing the Vehicle hiring charges of ₹ 230001- per month, which were paid on the rates lower than the market value of the services and to avoid the huge capital cost in the Vehicles. The DDIT (E) without verifying the factual details disallowed the expense. 7. That having regard to the facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Fixed Assets and rejected the Books of Accounts. The AO framed the assessment of income, by applying rate of depreciation and assessed the income on estimate basis by applying rate of 50% of the gross receipts of ₹ 1,19,20,725/-, by estimating net taxable income at ₹ 59,60,363/- and also disallowed the claim of depreciation. The AO completed the assessment at the taxable income of ₹ 1,38,70,363/- as against nil income returned by the assssee. 5. Being aggrieved with the above assessment order, the assessee filed an appeal before the CIT(A) which was also dismissed by passing the impugned order. Now, the empty handed assessee is before this Tribunal with the grounds as reproduced hereinabove. Ground No. 1, 2 and 3 6. Apropos these grounds, ld. AR submitted that the Ld. CIT-A has erred in law and on facts by upholding the orders of the DGIT(E), dated 31.12.2008 passed u/s 143(3) resulting in unsustainable huge demand. Ld. AR further contended that the authorities below have relied upon the findings of the Learned DGIT (E) for rejecting the application of the appellant filed u/s 10(23C) of the Act, ignoring the directions of Hon'ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of DIT vs Bharat Kalyan Pratishthan (2002) 257 ITR 0609 (Del), DIT(E) vs Keshav Social and Charitable Foundation (2005) 278 ITR 152 (Del), decision of Hon ble Bombay High Court in the case of CIT vs Institute of Banking (2003) 264 ITR 110 (Bombay) and decision of ITAT Delhi in the case of Aryan Educational Society vs CIT 281 ITR AT 0072 (ITAT Delhi). 9. Apropos ground no. 1, 2 and 3, ld. DR, supporting the assessment order, submitted that the AO was quite justified in taking cognizance of the order of the DGIT(E) and holding that the activities of the assessee society are not genuine and are not being carried out in accordance with the objects of the Trust. Ld. DR further contended that the AO also noted that the assessee society was found to have violated the provisions of section 12AA(3) of the Act and that the proposal for withdrawal of registration u/s 12A of the Act has already been sent to DIT(E) on 2.12.2008 and therefore the proceeding for cancellation of registration was started by DIT(E) by issuing notice dated 4.12.2008. Ld. DR further contended that, under these facts and circumstances the AO rightly proceeded to assess the income of the assessee without allowing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elled or withdrawn during the second round of proceedings before the DIT(E). In this situation, we can safely presume that the registration u/s 12A r/w 12AA(1) of the Act dated 3.9.2004 w.e.f. 1.4.2003 is still in force and the DIT(E) has not taken any action in pursuance to the order of the Tribunal dated 17.6.2011 (supra). 12. From the first and second para at page 6 of the impugned order, we note that the CIT(A) has held that the action of the AO in not allowing the exemption u/s 11 and 12 of the Act is beyond the jurisdiction exercised by him during the assessment proceedings. The relevant observations and conclusion of the CIT(A) in these operative paragraphs read as under:- The appellant submitted that the order of the A.O was prima facie, influenced by the order of DGIT(E) as stated in the submission. Further, it is also submitted that Order of DGIT u/s 10(23C)(vi) cannot be the basis of cancellation of Certificate Reg. u/s-12A as decided by the Hon'ble Allahabad HC in the case of Sunbeam English School Society Vs CIT,129 ITD 299(All) wherein it was held that the learned CCIT, Allahabad had rejected the application for grant of exemption under section 10(23C)(vi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the registration u/s 12A is in force, the AO is directed to compute the income by granting exemption u/s 11 to the assessee. 14. We further take note of the order of the Supreme Court available at pages 41 and 42 of the Paper Book of the assessee wherein the order of the DGIT(E) rejecting the application of the assessee filed u/s 10(23C)(vi) of the Act has been upheld for AY 2007-08 but their lordships have also made it clear that the order passed by Hon ble Apex Court in that case will not preclude the assessee from making an application for approval u/s 10(23C)(vi) or section 11 of the Act in future and if such an application is made, then the competent authority will decide the matter without being influenced by this order of Hon ble Apex Court. In this situation, we respectfully note that even the Hon ble Supreme Court has allowed the assessee to file application u/s 10(23C)(vi) or section 11 of the Act and the revenue authorities have been directed to decide the same without being influenced by the order of Supreme Court for AY 2007-08. 15. Under the above noted facts and circumstances of the present case, we are of the considered view that the CIT(A) erred in upholdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s objecting to the genuineness of the corpus donations as well as petty donations on wrong premise that the assessee could not produce in person the donor parties during the assessment proceedings, therefore, entire amount of donation was wrongly treated as unexplained cash credit without any sound footing. Ld. AR further contended that the AO has not raised any doubt or has not brought out any adverse material or fact to support his contention that the donors are either not available at the given address or do not have the capacity to make such donations and the veracity of the corpus donation remained unverified. 17. Ld. AR further pointed out that despite remand report of the AO dated 4.3.2013 (supra), the CIT(A) did not pay any attention towards paragraph 4 of the remand report and simply after reproducing the observations of the AO has held that the activities of the assessee society are not genuine and the registration granted to the assessee u/s 12A of the Act shall be cancelled in due course of time and, therefore, decision taken by the AO is correct. Ld. AR vehemently contended that the approach of the CIT(A) was not judicious and the CIT(A) simply upheld the conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition made u/s 68 of the Act is sustainable. 20. On careful consideration of above submissions, at the very outset, we note that in the recent decision of the Tribunal in appellant society s case for AY 2009-10 dated 18.7.2014 (supra), it has been held that as the registration of the assessee u/s 12A of the Act is in force, therefore, the AO was directed to compute the income by granting exemption u/s 11 of the Act to the assessee. We may also point out that during the arguments, ld. DR could not satisfy us that the registration granted to the assessee on 3.9.2004 w.e.f. 1.4.2003 either stands cancelled or is not in force. In this situation, we can safely presume that the registration granted to the assessee u/s 12A of the Act is in force and, therefore, it is not open to the revenue authorities to discard or dismiss the claim of the assessee merely because the department is in the process of cancelling registration granted to the assessee u/s 12A of the Act since last 3-4 years i.e. after order of the Tribunal dated 17.6.2011 (supra). 21. We further take cognizance of the remand report dated 4.3.13 submitted by the AO to the CIT(A) during first appellate proceedings w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due course of time, therefore, conclusion of the AO is correct and the CIT(A) upheld the addition. Since while dealing with ground no. 1, 2 and 3 of the assessee in the earlier part of this order, we have held that the CIT(A) at page 6 noted that the action of the AO not allowing exemption u/s 11 and 12 of the Act is beyond jurisdiction, then on the same fact, it was not open to the CIT(A) to uphold the action of the AO which denied the benefit of exemption u/s 11 and 12 of the Act to the assessee. Therefore, the conclusion of the CIT(A) was not only self-contradictory but also perverse as per factual matrix of the case, hence, we set aside and dismiss the same. 23. Turning to the issue of genuineness and allowability of corpus and petty donations, at the very outset, we note that there was a confusion about the quantum of the corpus and petty donations, it was clarified by the AO himself in its remand report para 4, as reproduced hereinabove, wherein the AO explained that the corpus donation was of ₹ 71 lakh and amount of petty donation was ₹ 4,05,000 during the year under consideration. At this juncture, we respectfully take guidance from the decision of Hon ble J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djudicate all the issues and grounds raised by the assessee. The AO and the CIT(A) are not adjudicators but they are also investigators and examiners. 25. In view of above, we reach to a conclusion that ground no. 4 of the assessee is squarely covered in favour of the assessee by the decision of Hon ble Jurisdictional High Court of Delhi in the case of DIT vs Bharat Kalyan Pratisthan (supra) and DIT(E) vs Keshav Social and Charitable Foundation (supra) and therefore, we set aside the orders of the authorities below and directed the AO to delete the impugned addition made u/s 68 of the Act. Ground No. 5 26. Apropos ground no. 5, ld. AR submitted that the CIT-A erred while upholding the contention of the DDIT(E) regarding excess salaries being allegedly charged with the intent of siphoning off funds of the appellant. The ld. AR further contended that subsequent to the scrutiny of salary registers of society by the DGIT(E), the appellant got the information about the embezzlement and fraud of ₹ 1,59,9421-, which might have taken place and it is not an act of either management or trustees with the intent of siphoning off funds. Ld. AR further submitted that the finding o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d elaborating the explanation and submissions made before the AO and it was also submitted that the above alleged salary payments were made by the person-in-charge, which came to the knowledge of the management only during the proceedings u/s 10(23C)(vi) of the Act. It was also submitted, on behalf of the assessee, that the management has initiated inquiry against the employees responsible for embezzlement done by them during the relevant period, amounting to ₹ 2,35,942. In preliminary investigation he was found guilty, therefore, management has terminated the services of the said employees with immediate effect with forceful and sincere efforts to recover the same amount from the actual culprits. Ld. AR further submitted that had the intention of the management of the society been fraudulent, it would have certainly neither provided the affidavits of the employees nor these persons would have been produced for cross examination before the DGIT(E). Ld. AR further submitted that the DGIT impounded the salary register and sent it to Central Forensic Science Laboratory (CFSL), New Delhi and despite the fact that the CFSL experts expressed their inability to give report by 30.11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for misappropriation of funds, therefore, it can not be concluded that the money has been siphoned off by the trustees/members, specially when the embezzlement or fraud does not establish intention of siphoning of funds by the trustees or the management. 33. On careful consideration of above submissions, we note that in operative para 2 at page 7 of assessment order, the AO has taken cognizance of the conclusion of the DGIT(E) and has held that the salary payments have been made in cash and have been found bogus which indicates that siphoning of the trust fund has taken place. From the impugned order at page 17-18, we note that prior to recording the findings, the CIT(A) reproduced the observations and conclusion of the AO on this issue and at the last upheld the same by simply holding that the AO is correct and the addition made by the AO for siphoning of funds is hereby confirmed but the CIT(A) has also not concluded that there was a siphoning off of funds by the members and trustees of the assessee society. At this point, we also find that the conclusion of the DGIT(E), which was noticed by the AO, was based on his conclusion without waiting for the report of the CFSL and wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case, we are inclined to hold that there was no siphoning of funds by the management or trustees of the assessee society, therefore, the management or trustees of the assessee society cannot be held liable for the act of siphoning of funds. Accordingly, conclusion of the authorities below is quashed up to this extent only and hence ground no. 5 of the appellant is allowed as indicated above. Ground No. 6 36. Apropos ground no. 6, ld AR submitted that the AO wrongly held that in absence of maintenance of log book, it is not possible to verify the use of hired vehicles by the assessee society and the assessee failed to submit any evidence to prove that vehicles were not being used by Dr. Sunil Mittal for his personal purpose. Ld. AR vehemently contended that merely on the basis of baseless allegation of siphoning of funds of the trust, the claim of expenditure of vehicle hiring charges cannot be held as not genuine. Ld. AR also submitted that the revenue authorities ought to have considered that if the assessee society had hired vehicles from the market, it would have cost higher than the actual expenses which has been incurred by the assessee society. Ld. AR submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed for statistical purposes with the aforesaid directions to the AO. Ground No. 7 40. Apropos ground no.7, we have heard arguments of both the sides and carefully perused the relevant material placed on record. Ld. AR contended that the CIT-A erred in upholding the order of AO that the expenditure shown on account of construction of College and Hospital building and hostel expenses are inflated and the that trust funds have been siphoned off. Ld. AR further contended that whereas all the expenditures are properly vouched and find place in the books of accounts of the assessee society which were duly produced for verification during the remand proceedings before the Assessing officer, then the conclusion of the AO is not sustainable. 41. Replying to the above ld. DR supported the action of the authorities below and submitted that the AO rightly held that the Trust had passed bogus entries of ₹ 85,25,300 out of ₹ 2,62,79,888 on account of construction expenses and ₹ 9,51,664 on account of hostel expenses because to support these claims, relevant cash memos, bills or vouchers had not been provided by the assessee trust. The DR further pointed out that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O has noted that the cash payments in respect of construction are not found supported with cash memos and bills and the assessee even does not follow system of preparing internal cash payment vouchers, therefore, trust funds have siphoned off and the cash payments are either bogus or grossly inflated. On the issue of inflated hostel expenses, the AO has held that the assessee does not have any supporting cash memo or even internal cash vouchers in respect of these payments, therefore, genuineness of these payments could not be verified. We also note that the AO also noticed that no explanation was submitted by the assessee with regard to this erratic behaviour of hostel expenditure as there was a variation in the expenditure reported in month wise details of expenditure. 44. During the first appellate proceedings, the CIT(A) simply upheld the conclusion of the AO without addressing and adjudicating the contention of the AO as well as explanation of the assessee and the first appellate authority jumped to a conclusion that the addition made by the AO for siphoning off trust fund of ₹ 85,25,300 out of claimed expenditure of ₹ 2,62,79,888 on account of construction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the issues afresh, after considering submissions and explanation of the assessee along with remand report of the AO (supra), after affording due opportunity of hearing for the assessee and without being prejudiced and influenced by the earlier orders on this issue. Accordingly, ground no. 7 of the assessee is deemed to be allowed for statistical purposes for limited inquiry up to the extent as indicated above. Ground No.8 47. Apropos ground no. 8, ld. AR submitted that the ld. CIT-A erred in upholding the order of AO that the income of the assessee trust cannot be computed on the basis of such incomplete, unverifiable and unreliable books of accounts, therefore, claim of depreciation is not allowable. Ld. AR contended that the claim of depreciation is allowable on the assets, the cost of which has been fully allowed as application of income u/s 11 of the Act in the earlier or past years. 48. Placing reliance on the decision of Hon ble Bombay High Court in the case of CIT vs Institute of Banking (2003) 264 ITR 110 (Bombay), ld. AR submitted that the assessee society is entitled for depreciation on assets, the cost of which had been fully allowed as application of income u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation. It was held that income of a Charitable Trust derived from building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust. In view of the aforestated Judgment of the Bombay High Court, we answer question No. 1 in the affirmative i.e., in favour of the assessee and against the department. 50. On careful consideration of above, we note that the AO has denied the claim of depreciation by holding that the whole expenditure on account of addition to fixed assets has ready been allowed as application of income for charitable purposes in the earlier years in effect the written down value of the assets would be zero. The AO further held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the observation of fundamental axiom spelt out in the above judgement of Supreme Court applicable in the instant case. The provisions relating to compulsory application of income is altogether a different concept, and would come into play only after the income is determined. Application of income is not computation of income of charitable institution, therefore, the question whether the depreciation is allowed or not has nothing to do with the application of income. The income is always to be computed on commercial principles as per the system of accounting followed by the assessee subjected of course, as always to the statutory provision. Application of income is a condition for allowing benefit of exemption to a charitable institution. It has nothing to do with computation of income and is not a deduction. Therefore, the argument proffered by the AO's that the appellant is claiming double deduction has no substance and is to be rejected. In coming to this conclusion, reliance is placed on the judgment of Hon'ble ITAT, Delhi Bench, 'H', New Delhi in the case of ACIT Vs. Tiny Tots Education Society, in ITA No.3182/Del/2008, assessment year 2006-07 dated 2.6.2009 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption us/ 11 and 12 of the Act is beyond jurisdiction exercised by him during the assessment proceedings because registration u/s 12A of the Act granted to the assessee on 3.9.2004 w.e.f. 1.4.2003 is still in force. We may also point out that the department has not concluded the proceedings in pursuance to the order of the ITAT A Bench dated 17.6.2011 (supra) and in this situation, at the cost of repetition, we are inclined to hold that the registration granted for the assessee u/s 12A of the Act on 3.9.2004 is in force and, therefore, exemption us/ 11 of the Act cannot be disallowed merely on the premise that the department has initiated proceedings u/s 12AA(3) of the Act for cancellation of registration u/s 12A of the Act which are still pending without any outcome. We also hold that in this situation, the AO was not correct in denying claim of exemption u/s 11 of the Act estimating the income of the assessee society at ₹ 59,60,363 calculated at 50% of the gross receipts of the society during the year under consideration. 55. However, before we part with the order, we make it clear that the AO is empowered to examine and verify the claim of the assessee u/s 11 of t ..... 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