TMI Blog2012 (3) TMI 484X X X X Extracts X X X X X X X X Extracts X X X X ..... ted:- 30-3-2012 - SHRI D K TYAGI JUDICIAL MEMBER And SHRI A L GEHLOT ACCOUNTANT MEMBER Appellant by :- Shri Ashwin Shah, AR Respondent by:- Shri Abhijeetkumar, Sr. DR ORDER PER D K TYAGI (JM):- This is assessee s appeal against an order dated 07-12-2007 passed by the Learned Commissioner of Income-tax (Appeals)-V, Baroda [hereinafter referred to as the learned CIT(A) ] for Assessment Year 2004-05. [1] The learned CIT(A) has erred in holding that provision of Sec. 13(1)(c) is applicable since the misuse of funds by Shri Jignashu Patwa son of a trustee at the relevant time amounts to benefit to the relative of the a trustee and thereby has erred in holding that the expenditure incurred for the objects of the Trust is not eligible for deduction under Sec. 11 in as much as the provision of Sec. 13(1)(c) are not violated. The appellant says and submits that any income of the Trust is not used or applied during the previous year for the benefit of a relative of a trustee. The appellant further says and submits that use or application of income involves voluntary act on the part of trustee. In the present case, it is involuntary act whereby Shri Jignas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. These facts were mentioned in the Auditor's Report for the relevant year. The Auditors concluded that Shri Patwa defalcated ₹ 77,82,366/- being fixed deposit amount ₹ 19,77,634/-being the interest amount from the date of maturity of the deposits to the date of re-payment. They also mentioned that the Trust has started recovering this amount. The Assessing Officer has issued a show-cause on this issue. 2.2 The Authorized Representative have replied before the Assessing Officer that the Trust had a total deposits of ₹ 1,65,00,000/- with Gruh Finance Limited. They were maturing on 01.06.2006. Out of this Shri Patwa took deposits worth ₹ 80 lacs to obtain a personal loan from H.D.F.C. Bank. This was found out by Auditors while conducting the audit for the financial year 2003-04 in the month of August, 2004. They determined the principle loan amount misused amounting to ₹ 77,82,366/- and interest of ₹ 19,77,634/-. The Trust treated this amount as not an investment but as a loan to Shri Patwa for the financial year 2003-04 and treated it in the same nature till its recovery. 2.3 The Assessing Officer found out that Shri Jignashu Patwa is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a son of the Trustee, misappropriation is by a person closely connected with the Trustees. The Board of Trustees are supposed to know what is happening in the Trust. He has stated that exemption u/s. 11 or 12 [should be denied. He has also relied on order of CIT (Appeals)-V, in order No. CAB/V/135/2005-06 dated 02.12.2005 in the case of Parisar Trust where exemption was denied, artd confirmed by the CIT (Appeals) in similar circumstances. 3.1 The main thrust of the argument of the learned Authorized Representative is that Shri Piyushbhai Patwa was not aware of the transaction carried out by the son. In submission dated 24.04.2007 the appellant mentioned that although Shri Piyushbhai Patwa was a Trustee between 02nd March, 2000 to 09th Sept., 2004 he was not associated with raising a loan from H.D.F.C. Bank The appellant submitted that though Shri Piyush Patel was present in the meeting the authority to raise loan was given to President and Secretary namely, Late Anuben Thakkar and Chinubhai Parmar. The appellant submitted that Shri Jignashu Patwa had taken un-due advantage and his father did not play any role, since the act was un-authorized Section 13(1)(c) cannot be invoked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the invoking of Section 13(1)(c) and denial of exemption u/s. 11 of the I.T. Act, as the Trust made certain payment to interested persons even though its laws permitted by the Rules of the Trust. Hon'ble Madras High Court in this case followed the principles laid down by Supreme Court in the case of CIT. V/s. Rattan Trust 227 ITR 356 (S.C). 4.4 In several cases under similar circumstances the courts of Law have held upheld the denial of exemption by the assessing officer applying the provisions of section 13(1)(c). 4.3 The argument of the learned Authorized Representatives that the relevant events occurred long back is not acceptable. The Assessing Officer has discovered the diversion of the fund from notes on account for financial year 2003-04. Hence, for this year also the funds of the Trust still remain utilized for the purpose of an interested persons . 4.4 Considering all the aspects of the case the action of the Assessing Officer in denying the exemption u/s. 11 of the Act is upheld and the appeal on this ground is dismissed. 4 Aggrieved by the order of the learned CIT(A), the assessee is now in appeal before us. The learned counsel of the assessee reiterat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce on Resolution nos.2, 4 and 5 of the Trust according to which the President and the Secretary of the Trust were authorized signatories to the relevant transactions and father Shri Piyushbhai Patwa was not at all authorized signatory. We deem it proper to refer to the relevant Resolutions which are at pages 38 and 39 of the paper book and read as under:- Resolution No.2: It was decided by Resolution No.4 of the meeting held on 17-02-2000 to purchase Lenier Excelator Machine from Varian Medical System Co., USA as recommended by doctor s coordination committee, cancer hospital. It was also resolved to make the advance payment. The cot price of the machine was ₹ 12.00 crore. For the purpose of making payment, it was necessary to raise loan from HDFC against the FDs of the trust. President Secretary were unanimously authorize to complete the formalities for the purpose of raising the loan. Resolution No.4: For the purpose of purchase of Lenier Excelator Machine from Varian Medical System Co., USA ₹ 1.20 crore has been paid in advance. For the balance payment, it was necessary to raise 90% loan from HDFC Bank against the FDs of Muni Seva Ashram. For this purpose C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinguishable on facts. In the case of Bharat Diamond Bourse (supra), the income of the charitable institution was utilized for the benefit of founder of the institution and therefore, the exemption was denied to the assessee. In the instant case, it is not so. Similarly, in the case of Muthoottu Charitable Trust (supra), there was close connection between the partners of firm and founders of Trust. The sums shown as income of the trust in Trust Account for AYs 19980-81 and 1981-82 were actually given to Trust in 1984 by the family firm and therefore, not used for charitable purpose by the trust during those years and under these circumstances the trust was held not entitled to the exemption. Therefore, the facts of this case also being different from the facts of the present case, are not applicable. In view of the above, Ground nos.1 and 2 of the assessee s appeal are allowed. 7 Ground No.3 relates to confirmat ion of an addition of ₹ 19,77,634/- made by the AO being interest recoverable from Mr. Jignashu Patwal on the amount of ₹ 80 lacs misappropriated by him. The facts as noted by the learned CIT(A) in his order are that the AO made an addition of ₹ 1,03 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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