TMI Blog2014 (10) TMI 825X X X X Extracts X X X X X X X X Extracts X X X X ..... n the non-specified companies is only 1.68 per cent. of the total asset. It is a very miniscule investment, if looked into the overall proportion of the activities of the trust. This should not be considered by the Assessing Officer as a substantial change which can goad him to depart from his stand right from 1975. Agricultural lands are held in the name of the trust and no corresponding books of account have been maintained - held that:- On a perusal of the findings of the Assessing Officer extracted (supra) it reveals that the Assessing Officer has assumed that the assessee has not carried out any agricultural activities and it is trying to introduce money collected by way of donations by giving admission in engineering colleges by way of net agricultural activities. We fail to understand what is the evidence possessed by the Assessing Officer for arriving at this conclusions. Even if the accounts are not maintained in a proper way of the agricultural activities, then also he could have called for the record of the Revenue authorities of the State Government. It could be ascertained whether 1,000 coconut, 7,500 mango and 13,000 beetlenut and banana plants, etc., planted in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owhere recorded, therefore, in our view, the Assessing Officer failed to collect any evidence with regard to justifying the violation of section 13(1)(c) and 13(3) of the Income-tax Act. Dominant part of the trust is to make profit - Held that:- The hon'ble Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association reported in [1979 (11) TMI 1 - SUPREME Court] has observed that in order to determine whether the activity of a trust is the activities of profit, one has to assess that whether the activities carried on with the objective of earning profit and not whether the activity results in profit, meaning thereby, if a trust is running educational institutions, it has to maintain its status and it has to create infrastructure in order to achieve the object. The income or profit is an incidental to such an activity. If the object is only based for making profit, then one can understand that the trust has deviated from its object of charity, but except making narrations, the Assessing Officer has not brought any substance on the record. Also see Pinegrove International Charitable Trust v. Union of India [2010 (1) TMI 49 - HIGH COURT OF PUNJAB AND ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and inter-connected. Therefore, we heard them together and deem it fit to dispose of them by this common order. 2. Before adverting to the facts and disputes raised by the parties in these appeals, it is pertinent to give brief background of the litigation in these appeals including I. T. A. No. 607 of 2009. The brief background is that the assessee is a trust settled by Shri Rama Nagappa Shetty on May 2, 1975, with other trustee Smt. Sudha Rama Shetty and Shri Diwakar Todurkar, having the main object like charity by offering social, educational, medical facilities and facilities to poor and needy citizens of Hubly and surrounding areas. Right from inception, the assessee has been enjoying the charity status and exemption under sections 11 to 13 of the Income-tax Act, 1961. In the assessment years 2003-04 and 2004-05, assessments were made on March 15, 2006 and March 26, 2006 under section 143(3) of the Income-tax Act respectively. The learned Commissioner took cognizance under section 263 of the Income-tax Act and set aside those assessment orders. Dissatisfied with the order of the learned Commissioner under section 263, the assessee filed appeal before the Tribunal in I. T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the present appeals also to be allowed and the matter has to be remanded to the Income-tax Appellate Tribunal. 3. Accordingly, the appeals are allowed and matters are remanded to the Income-tax Appellate Tribunal without answering the substantial questions of law, for fresh consideration without influenced by its earlier orders. All contentions are kept open. 3. In the assessment year 2001-02 the assessee has challenged the reopening of the assessment before the Tribunal. This ground appears to have been rejected and the assessee took the matter in appeal before the hon'ble High Court vide I. T. A. No. 5041 of 2009. The hon'ble High Court has dismissed this appeal of the assessee on April 22, 2010 and upheld the reopening of the assessment. Against this order, the assessee went in appeal before the hon'ble Supreme Court and the hon'ble Supreme Court has reversed the orders of the High Court as well as of the Tribunal and quashed the assessment order on the ground that proper sanction was not taken by the Assessing Officer before reopening the assessment. The hon'ble Supreme Court has decided the civil appeal No. 10469 of 2010 on December 10, 2010. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cember 7, 2007, under section 143(3) and outcome of that has been considered in the other two years, where assessments have been framed under section 143(3) read with section 147 on December 30, 2008. The brief facts in this year are that the assessee has filed its return of income on October 31, 2005, declaring an income at nil. The source of income to the assessee are from different streams which are as under : (Rs.) (a) Donations 17,62,888 (b) Interest received 30,69,354 (c) Profit on sale of shares 68,96,831 (d) Rent received 43,00,000 (e) Dividend received 2,81,173 (f) Fees received 7,47,96,946 (g) Other receipts 11,66,706 (h) Receipts towards corpus 2,69,84,491 (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders of the Revenue authorities contended that right from inception the assessee has been enjoying exemption either under section 10(23C) or under sections 11, 12 and 13 of the Income-tax Act on the ground that gross receipts of the assessee were from educational activities and they were applied for educational purposes. According to him, there is no specific change either in the activities nor was the Assessing Officer able to bring any evidence on the record to demonstrate the change in the activities of the assessee. On the strength of the hon'ble Supreme Court decision in the case of CIT v. Excel Industries Ltd. reported in [2013] 358 ITR 295 (SC) and in the case of Radhasoami Satsang v. CIT reported in [1992] 193 ITR 321 (SC), he contended that unless there is fresh development in the year indicating that either the assessee has deviated itself from its object of charity, the Assessing Officer cannot deny the exemption admissible to the assessee under sections 11 and 12 of the Income-tax Act, 1961. On the other hand the learned Departmental representative pointed out that the Assessing Officer has narrated the circumstances whose accumulative setting would indicate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , fundamental to the decision, taken or assumed by the plaintiff and traversable by the defendant, has not been traversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.' 30. Reference was also made to Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) and then it was held (page 329 of 193 ITR) : 'We are aware of the fact that strictly speaking res judicata does not apply to Income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter-and if there was no change it was in support of the assessee-we do not think the question shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 of the Income-tax Act. 13. The first circumstance noticed by the Assessing Officer in the assessment order is that the assessee had made investment in violation to section 11(5) of the Income-tax Act. The brief facts with regard to this issue are that on perusal of balance-sheet, it revealed to the Assessing Officer that the assessee had invested certain funds in the private investments, the following investments are noticed by the Assessing Officer : (Rs.) Murudeshwar Ceramics Ltd. (1,84,606 equity shares) 71,14,766.71 ICDS Ltd. Bangalore (250 shares) 20,000.00 Sriram Finance Mines Ltd. (100 shares) 1,20,000.00 L T Ltd. (896 shares) 2,68,800.00 Auma India Ltd. (500 shares) 5,000.00 Maruti Udyog 1,68,750.00 ICICI Bank Ltd. (3,400 shares) 9,52,000.00 14. The Assessing Officer has confronted the assessee with regard to this investment. In response to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. 16. Before us learned counsel for the assessee contended that dividend receipts from non-public sector company shares, vis-a-vis total receipts of the trust consists a very small portion. He brought to our notice the following details : Assessment year Total receipts of the trust Dividend received Dividend as percentage of total receipts 2005-06 12,27,34,601 2,81,173 0.23% Assessment year Total assets of the trust Book value of shares Shares of a percentage of total assets 2005-06 56,00,35,458 94,20,066 1.68% 17. Learned counsel for the assessee raised multi-fold submissions on this issue. He drew our attention towards the judgments of the hon'ble Karnataka High Court rendered in I. T. A. No. 105 of 2004 dated July 21, 2009, in the case of Society of Bridgettine Sisters Bangalore v. Asst. CIT, wherein the Assessing Officer had denied exemption under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an investment would lose its exemption. In other words, whatever the income comes to the assessee from such investment will be charged to tax at maximum marginal rate. It would not be considered for denying exemption to the assessee. 20. The learned Departmental representative on the other hand relied upon the orders of the Revenue authorities below. She contended that investment of ₹ 94,20,066 has been made in the companies which are not specified under section 11(5) or rule 17C of the Income-tax Rules, 1962. 21. We have duly considered the rival contentions and gone through the record carefully. There is no dispute that the objects of the assessee-trust are of charitable in nature. It is registered under section 12A of the Income- tax Act. It has been enjoying exemption under section 11, 12 or 10(23C). The Assessing Officer has harboured a belief that since the assessee has made investment of accumulated funds in non-specified companies in violation to rule 11(5). This aspect has not been disputed by the assessee that investment was made in non-public companies as far as Murudeshwar Ceramic Ltd. is concerned. Whether this investment per se would denude the assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of an association of persons. Therefore, a proviso was inserted by the Finance Act, 1984 with effect from April 1, 1985, under which in cases where the whole or any part of the relevant income is not exempt under section 11 or section 12 because of the contravention of section 13(1)(d), the tax shall be charged on such income or part thereof, as the case may be, at the maximum marginal rate. In other words, only the non-exempt income portion would fall in the net of tax as if it was the income of an association of persons. The phrase 'relevant income or part of the relevant income' in the proviso is required to be read in contradistinction to the phrase 'whole income' under section 161(1A). This is only by way of comparison. Under section 161(1A), which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat even as per section 13, sub-section (4), the investment of the assessee is only 0.77 per cent. of the total paid-up capital of the investee companies. This submission of the assessee was not rebutted by the Revenue authorities. The hon'ble Rajasthan High Court in the case of Deputy CIT v. Cosmopolitan Education Society reported in [2000] 244 ITR 494 (Raj) has held that if misapplication of the funds for the institution is noticed, then that does not mean that the institution would lose its charity status. The income from such misapplication can be brought to tax and exemption cannot be denied as observed by the hon'ble jurisdictional High Court. 23. In view of the above discussion we are of the view that this one factor cannot be considered as a corroborative factor to say that the assessee is not carrying out its activities in consonance with its object. The investment in the non-specified companies is only 1.68 per cent. of the total asset. It is a very miniscule investment, if looked into the overall proportion of the activities of the trust. This should not be considered by the Assessing Officer as a substantial change which can goad him to depart from his stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income-tax Act, 1961. 25. On appeal to the Commissioner of Income-tax (Appeals) a direction was issued to grant exemption of agricultural income and it be considered for rate purpose. The Revenue is in appeal on this issue. 26. Before us it was contended by the assessee that as per section 79B of the Karnataka Land Reforms Act, 1961, the trust or institutions are prohibited for holding land in their names, therefore, the lands have been purchased in the names of the trustee. For all practical purposes, the land has been owned and possessed by the trust. The assessee has placed on record a certificate from Village Assistant maintained in the ordinary course of his duties assigned under the Land Reforms Act. It exhibits the survey number of the land, area, dimension and plantations. It is pointed out that at village Kadanakoppa the assessee had eight properties in different survey numbers having an area of 54.19 acres. At village Chalamati it had again eight properties and 54.19 acres of land. There are 1,000 coconut trees, 7,500 mango trees and 13,000 beetlenut trees are standing on these lands. It is an agricultural land. In other words, 108 acres of land is being pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. The assessee has contended that since it has recognised the gross donations as its income, therefore, whatever has been returned has nothing to do with its corpus donations. The amount which alleged to have been returned cannot be added again. With regard to corpus donations the assessee has submitted a list of donors for a sum of ₹ 1,79,20,000. With regard to ₹ 90,64,491 it has filed the receipt with number without the names and addresses of the donors. The assessee had contended that no letters have been issued by the donors specifying in the said letters that donations is made towards corpus of the trust, but they had indicated at the time of donations that they should be used towards corpus. The receipts issued by the assessee represents oral directions by the donors made at the time of making the donations. It was also contended that nowhere in the Income-tax Act, it is expected that the assessee should receive specific letters from the donors. The Assessing Officer has observed that since the donations have come from third parties, therefore, it is the duty of the assessee to maintain and prove full identity of so called donors and their creditworthiness, oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt has held that the Assessing Officer has mis-directed himself in applying section 68 to an income receipt. The income has already been shown by the assessee, now it is to be seen whether it has been applied for charitable purpose or not. 31. With regard to capitation fees, alleged to have been received by the assessee from the students at the time of admission to engineering colleges is concerned, he pointed out that the assessee has collected the fees as prescribed by the Government of Karnataka. It has not collected capitation fees as such, but if there is some voluntary donations, then that is not prohibited either under the Income-tax Act or under the rules and regulations formulated by the Government of Karnataka. As far as the allegations, that the trust has returned corpus donations is concerned, learned counsel for the assessee submitted that the trust has not returned any corpus donations. There is no material available with the Assessing Officer. What was refunded was that some of the students sought admission in RNS Institute of Technology on the basis of their merit in the CET Exam. They paid the fees and other dues. However, later on either they got admission in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dmission near to their hometown. The Assessing Officer in the assessment years 2006-07 and 2002-03 made a mention of capitation fee, but except making discussion of the law, he has not referred to any instance which indicate that it was a capitation fee received by the assessee. We could appreciate the efforts of the Assessing Officer had he collected the details of a student or confirmation from any parent indicating that the assessee has taken fees or capitation fee in the form of donations over and above the one determined by the Government such an amount was taken forcibly. Merely by mentioning, it is not sufficient to deny exemption under section 11 to an institution which is enjoying such an exemption for more than 25 years ? 34. The next factor considered by the Assessing Officer is that the assessee has diverted its income towards the trustees, their relatives and directors. In order to buttress this factor, he has observed that the assessee has constructed building and let out to sister concerns at a nominal rent which is in violation of section 13(1)(c). It has entrusted construction activities to the sister concerns in order to benefit the trustees directly or indirec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded huge works and advanced substantial amounts to its sister concerns at a higher rate to carry out construction activities to benefit the trustees directly or indirectly. This amounts to diversion of income which is a violations under the provisions of section 13(1)(c) of the Income-tax Act 1961. Reliance is placed on the decision of the Tribunal in Action for Welfare and Awakening in Rural Environment (AWARE) v. Deputy CIT [2003] 263 ITR 13 (AP). (b) As seen from the records that the trust has constructed various buildings and let out to its sister concerns at Murudeswara on nominal rentals and thereby diverting its income to the trustees which is also in contravention of the provisions of section 13(1)(c) of the Income-tax Act, 1961. In this connection, a show-cause notice was issued as to why this should not be treated as direct or indirect benefits to the trustees. In response to this, the assessee in its letter dated October 11, 2007, stated as under : 'Some of the house properties of the trust which were not immediately required were let out to our sister concern by us acting as prudent persons so as to fetch adequate return by way of rent/ compensatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e person in receipt thereof. In section 13(1)(c) and (3) is as under : (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof- (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3) : Provided that in the case of a trust or institution created or estab lished before the commencement of this Act ; the provisions of subclause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub- section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution : Provided further that in the case of a tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carry out construction activities to benefit the trust. He has not mentioned the amount advanced by the assessee, how it is higher, what information he has collected indicating that these advances were not in commensurate with the services, those sister concerns had rendered to the assessee. For ascertaining these facts, we have reproduced the findings of the learned Assessing Officer. It is nowhere recorded, therefore, in our view, the Assessing Officer failed to collect any evidence with regard to justifying the violation of section 13(1)(c) and 13(3) of the Income-tax Act. 40. The next objection of the Assessing Officer is that dominant part of the trust is to make profit. The Assessing Officer has observed that the assessee is carrying on business and its existence is solely for making profits. On an analysis of the record, we find that the Assessing Officer nowhere demonstrated with the supporting information of his view point. The hon'ble Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association reported in [1980] 121 ITR 1 (SC) has observed that in order to determine whether the activity of a trust is the activities of profit, one has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer. Therefore, he cannot remit any issue for further investigation to the Assessing Officer. The learned Commissioner of Income-tax (Appeals) ought to have called for a remand report on this issue, if it requires reconsideration. Therefore, to this extent order of the Commissioner of Income-tax (Appeals) is not sustainable. The assessee in its appeal has demonstrated that earning of agricultural income and holding of land in the name of the trustees has been considered as one of the factor by the Assessing Officer to deny exemption. To our mind 108 acres of agricultural land could generate incomes shown by the assessee. When the assessee has produced the revenue record exhibiting the standing of mango, beetlenut and coconut trees than no doubt remained. The certificate is from a revenue official of the State Government. It per say admissible. 43. On an analysis of the record and the findings of the Assessing Officer on all the reasons assigned by him, we are of the view that the Assessing Officer has judged the issues peripherally, he has not collected any specific information about any particular issue except the investments made by the assessee in violation to section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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