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2016 (10) TMI 311 - ITAT DELHI

2016 (10) TMI 311 - ITAT DELHI - TMI - Validity of reopening u/s 147/148 - denial of exemption u/s 11 - violation of provisions of Section 13(3) - non charitable activities - Held that:- The present case, it is an admitted fact that the relatives of the trustees were appointed as Principal, Vice- Principal and Administrative Director. However, their appointments were not illegal as the same were done by following the proper procedure, an advertisement was published in the National Newspaper for .....

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le fixed by the Directorate of Education for the similar post. It is not the case of the AO that the remuneration paid was in excess of what may be reasonably paid for such services. It is also not the case that the expenses relating to telephone etc. were not incurred for furtherance of the objectives of the assessee society. In the present case, the AO has observed that the development charges were not shown in the income and expenditure account and reopen the assessment on the said basis. Thi .....

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o 314 of the assessee’s paper book. In the present case, the AO has not brought anything on record to substantiate that the expenditure on salary or facilities provided to the relatives of the trustees of the assessee society were excessive having regard to fair market value of the services provided by them. Therefore, the AO wrongly invoked the provisions of Section 13(3) of the Act and the ld. CIT(A) was not justified in confirming the action of the AO. We, therefore, set aside the impugned or .....

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K. Jaiswal, DR ORDER Per N. K. Saini, AM These cross appeals by the assessee and the department are directed against the order dated 30.11.2012 of ld. CIT(A)-XXI, New Delhi. 2. First we will deal with the appeal of the assessee in ITA No. 761/Del/2013. Following grounds have been raised in this appeal: 1. Because the impugned order passed by the Ld. C1T(A) is bad in law, contrary to the facts and circumstances of the case, material/evidence on the record as well as passed without application of .....

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ngs were null and void. 4. Without prejudice to the above, and in addition thereto, the Ld. CIT(A) has failed to appreciate that there were "no reasons for reopening" recorded by the assessing officer, which is a condition precedent tor invoking the provisions of section 147/148 of the I.T. Act, which rendered the entire proceedings null and void. 5. Without prejudice to the above and in addition thereto, the Ld. CIT(A) in the impugned order has erred in upholding the reopening of asse .....

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ase. 7. Because the Ld. CIT(A) has erred in facts and law in upholding the action of the AO holding the assessee to have violated the provisions of section 13(3) of the Act, when there was no undue benefit to specified persons as alleged, nor any huge financial losses were caused to the society there was nor any in transparency in the functioning of society. 8. Because the Id. CIT(A) has erred in facts and law in upholding the action of the assessing officer holding the assessee to have violated .....

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re pretense and apprehension without any support from the material on the record. 11. Because the Ld. CIT(A) has erred in facts and law in failing to appreciate / ignore the assessment status of the appellant society as a society registered under section 12A(a) of the IT Act, as such the entitled to claim exempt income. 3. The department has raised the following grounds in its appeal in ITA No. 1005/Del/2013: 1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has err .....

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Vide Ground Nos. 1 to 5, the grievance of the assessee relates to the validity of reopening u/s 147/148 of the Income Tax Act, 1961 (hereinafter referred to as the Act) and Ground Nos. 6 to 11 relate to the upholding of the action of the AO in invoking the provisions of Section 13(3) of the Act and denying the exemption u/s 11 of the Act. 5. From the aforesaid grounds raised by the department it would be clear that the main grievance of the department in this appeal relates to action of the ld. .....

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income in the income and expenditure statement for the year ending on 31.03.2009. The AO was of the view that there was an escapement of income of ₹ 1,16,57,941/- and that the assessee had employed specified persons as per Section 13(3) of the Act in the School run by the Society on various capacities. On the basis of aforesaid reasons, the AO recorded the reasons to believe for issuing the notice u/s 148 of the Act on 08.02.2011. In the mean time, the assessee approached the Hon ble Delh .....

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y caused huge financial losses to the assessee s society. He also disallowed the depreciation on the assets which were purchased in the preceding years by observing that capital expenditure for earlier years had already been allowed as application of income. Accordingly, the AO allowed the depreciation of ₹ 52,25,727/- in respect of the assets purchased during the year under consideration instead of the depreciation claimed at ₹ 93,82,255/-. The AO also added a sum of ₹ 36,14,5 .....

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Rs. Excess of Expenditure over income -97,20,538 Add: Development Fund 1,16,57,941 Add: Depreciation disallowed (Computer, dep., vehicle) 93,82,255 Add: Deletion in assets during the year (para 8.1 above) 36,14,584 Add: Provisions of Gratuity & Leave Encashment disallowed as their expenses allowed only on actual payment basis (As given by assessee in revised computation sheet, actual PF Contribution ₹ 28,98,229/- only and no actual leave encashment) 55,36,794 Add: Excessive Mobile exp .....

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le income and the AO determined the income at ₹ 1,86,68,234/- by rectifying the mistake in calculation i.e. totaling. 8. The assessee challenged the validity of the reopening before the ld. CIT(A) who observed that the case was reopened u/s 148 of the Act on the basis of certain informations and that the Hon ble High Court had directed the AO to proceed in accordance with law vide order dated 02.02.2012. The ld. CIT(A) accordingly dismissed the grounds raised by the assessee against the re .....

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ceedings itself, but the assessing officer has not even considered the same and passed the order against the law. Hence we are submitting herewith following details and documents for your consideration. 1. The school has sold four buses, some old broken furniture, one almarah and one old scooter. In respect of sale of old furniture, it is explained that a list of unserviceable furniture and fixture is being prepared and advertisement for the same is being' given. In addition to that a notice .....

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s of their running and the school could not run the bus as per the direction of honorable Delhi High Court, hence there were no option other than the sale of old bus. A detailed chart showing book value, buyer name, relation, amount received, mode of payment and copy of advertisement for the same is enclosed herewith for your kind consideration. Copy of confirmation of the buyer of the buses is also enclosed herewith for your kind consideration. 2. Detailed notes on repairs and maintenance of ve .....

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school to provide school transport for safety of their wards. Today, parents even don't tolerate any trip missing for picking of their wards. They agitate and come to the school in grounds and even break the window pan to express their grievances for missing trip of the bus. In the circumstances explained above the school is compelled to employ vehicle mechanic and vehicle electrician on contract basis to ensure that buses are kept road worthy at all times of the year, copy of proof for pay .....

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the submission dated 10.05.2012. 3. Appointment of Principal, Vice Principal and Director (Administration) has properly been made as per norms and procedures prescribed by the Directorate of Education, NCT of Delhi in this behalf. Copy of documents, statement in this regard has already been submitted with submission dated 10.05.2012. 4. The assessing officer has invoked the provision of Sec. 13(3) of the IT Act, 1961 for the use of word Lancer, here we would like to say that the word Lancer neit .....

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ith the above mentioned Lancer name organization. Further, Lancer Convent School is affiliated to CBSE whereas Lancer International School, Gurgaon is running under the strength of Private Limited Company and Affiliated to International Board and as on today students from 17 countries are studying in Lancer International School. Further, only 300 students are enrolled on the roll of this school. Therefore, no benefit of any kind has derived from the Lancer Convent School to anyone. Hence, there .....

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and do the needful in this regard. Further, we shall be glad to furnish any other statement or document required to dispose off this appeal in the next hearing. 9. The assessee again vide letter dated 28.08.2012 submitted to the ld. CIT(A) as under: 1. In the above case the Assessing Officer has illegally and arbitrary initiated the proceeding u/s. 148 of the IT Act. 1961 on account of concealment of Development fund, whereas the amount of development fund has properly disclosed by the assessee .....

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ealment of income on account of development fund at all. Therefore the order passed by the assessing authority u/s.147/143(3) of the IT Act, 1961 is totally wrong, illegal and arbitrary as per the Law prescribed and the same should be quashed. 2. The assessee is a society properly registered under the society registration Act, 1860 vide regn.No.13042/1982 w.e.f. 04.11.1982 and the same has been registered u/s.12A(a) of the IT Act 1961 by the Commissioner of Income Tax (E), New Delhi-VI vide orde .....

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e Memorandum of Association of any type, copy of Memorandum of Association and registration u/s.12A(a) of the IT Act, 1961 is enclosed herewith for your kind consideration. 3. The Assessing Officer in its assessment order dated 02.03.2012 has alleged the activities of the society arc non-charitable and no longer be regarded as a charitable organization without any base and legal back, here it is well settled law that once registration u/s.l2A(a) of the IT Act, 1961 stands granted, the charitable .....

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aritable Society Vs. CIT, 278 ITR 262 (P&H), it was held that the registration of an institution u/s.12A of the IT Act, 1961 is sufficient proof of the fact that the trust or institution concerned is created or established for charitable or religious purpose, here we are citing another case namely stock Exchange, Ahmadabad vs. ACIT, 74 ITD I (Ahd) it has been held that once an institution has been registered u/s.12A, it is for the AO to find out whether the income of the institution has been .....

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s per section 2(15) of the IT Act, 1961. Hence there was no room for the Assessing Officer to treat the activities of the society as non-charitable and not as per the object in the explained circumstances. Therefore the allegation of the Assessing Officer may strictly be quashed. The following are the other decisions to the same effect: A. DCIT Vs Rajnees Foundation, 280 ITR 533 (Bom) B. N.N. Desai Charitable Trust Vs CIT, 246 ITR 452 (Guj) C. Orpat Charitable Trust Vs. CIT 256 ITR 690 (Guj) D. .....

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f the IT Act, 1961 in any manner. The provisions of section 13(3) does not impose any bar and restriction to remunerate the specified persons and the Trust and charitable Society can made payments of salary to specified persons commensurate to their service provided. Here we would like to say that the Assessing Officer was not fully aware about the provisions of section 13(3) of the IT Act, 1961 and has made his own interpretation in this regard which is not in any way permitted by the law. Henc .....

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which was not in any way excess, undue and unreasonable. Further they have been appointed and receiving salary since many years and the same has been accepted by the department and assessed the case u/s. 143(3) of the IT Act, 1961, copy of Assessment order u/s. 143(3) of the IT Act, 1961 for last four Assessment Year has already been submitted with submission dated 10.05.2012. Further copy of appointment procedure, minutes books, scale of their pay and copy of their ITR return for the financial .....

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herein it was held that where the payment made is commensurate with the nature of services rendered by the specified person, the charitable nature of the trust cannot be doubted, which proposition also find support from ADIT vs. MANAV BHARTI CHILD AND PSYCHOLOGY 20 SOT 517 (Del.), wherein it has been held that, in the context of section 11 and 12 of the Act, that in the act there no prohibition to remunerate the interested person, that such remuneration should be commensurate with the service re .....

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ent & Management Trust (ASBM Trust) ITA No. 14/CTK/20I1 C) Career Launcher Vs DGIT (E) ITA No. 2849/Del/2011. 10. The ld. CIT(A) after considering the submissions of the assessee pointed out that the AO in the assessment order observed that there was violation of Section 13(3) of the Act for the following reasons: 1. Sh. A.S. Mann is the President of the society and his son Sh. Joginder Singh Mann is the Secretary of the society. In Lancers Convent School, Rohini, Principal is Mrs. Sudesh Si .....

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Mrs. Anita Mann is occupying the seat of Director (Admn.) and is being paid a hefty amount in the name of salary. Sh. A.S. Mann was stated to be looking after the transportation, sale purchase, school activity etc. No remuneration was stated to be taken by him but the society had provided car and phone facility to him. Looking to age of Sh. A.S. Mann who is at 79 years old, the possibility of his active involvement in the affairs of the schools is remote. There is a clear-cut violation of Secti .....

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naging Committee of Lancers Convent met on 22nd October 2009. The case for ex-post facto approval of selection of Mrs. Anita Mann was put up to committee who had already been selected for the post of Director- Administration w.e.f. 1.1.2008. Thus it is clear that advertisement in the newspaper was a futile exercise just to lend credibility to the selection of Mrs. Anita as Director Administration. The assessee has not established any credible evidence that Society has followed due process for th .....

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talented persons than him for these posts. Therefore, the violation of Sec. 13(3) of IT Act is clear from the conduct of the Society in these appointments as benefit has accrued to family members of the specified persons. 11. The ld. CIT(A) also pointed out that the expenses of the Mobile Number 9810010833 used by Secretary Sh. Joginder Singh Mann, were being claimed under Mobile expenses amounting to ₹ 63,083/- for the year under consideration and that high value mobile phone worth ͅ .....

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d violated the provisions of Section 13(3) of the Act by giving undue benefit to the family members which had cost a huge financial loss to the assessee Society and the explanation given by the assessee was not convincing. He further observed that Mrs. Anita Mann was occupying the seat of Director Administration and was being paid hefty salary and that Sh. A.S. Mann who was 79 years old was provided phone facilities and car, however, it was not known that what kind of activities were performed b .....

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ecision of the ITAT Hyderabad Bench in the case of ADIT(E) Vs Chirec Education Society reported at 58 DTR 453 and the judgment of the Hon ble Allahabad High Court in the case of CIT Vs Vijeta Educational Society (2011)-TIOL-592. Accordingly, the ld. CIT(A) held that the AO was justified in denying the exemption u/s 11 of the Act as the assessee had violated provisions of Section 13(3) of the Act. 12. As regards to the additions relating to sale/purchase of assets, vehicle maintenance and furnitu .....

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665/- in the assessment years 2006-07, 2007-08 and 2008-09 respectively but no adverse view had been taken for those years. The ld. CIT(A) was of the view that it is a common practice that such old buses are sold on depreciated value, so, there will be loss on old buses and had it been a manipulation it should have been committed for other years also, which issue had not been touched by the AO. The ld. CIT(A) deleted the addition made by the AO by following the ratio laid down by the Hon ble Sup .....

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Act but the AO did not provide the same. Therefore, the proceeding in pursuant to the notice u/s 148 of the Act is liable to be quashed. The reliance was placed on the following case laws: GKN Driveshafts (India) Ltd. Vs ITO and Others (2013) 259 ITR 19 (SC) Haryana Acrylic Manufacturing Company Vs CIT and Anr. (2009) 308 ITR 38 (Del) CIT Vs Videsh Sanchar Nigam Ltd. (2012) 340 ITR 66 (Bom) M/s Jagat Talkies Distributors Vs DCIT in ITA No. 1068 to 1073/Del/2008 order dated 10.06.2015 14.1 It wa .....

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148 of the Act was that, the assessee had employed specified persons in violation of the Section 13(3) of the Act. The said reason could not be a valid reason for reopening, as there was no prohibition in employing specified persons u/s 13(3) of the Act unless the amount is in excess then what may be reasonably paid for such services. It was further submitted that as per the provisions of Section 13(2)(c) of the Act, there are two conditions firstly the salary, allowances has to be paid to the .....

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to page nos. 154 to 155 & 196 of the assessee s paper book). It was further that a proper selection procedure had been followed by the Selection Committee which included two members nominated by the Directorate of Education (a reference was made to page no. 197 of the assessee s paper book). Accordingly, it was submitted that the AO as well as the ld. CIT(A) were not justified in denying the exemption u/s 11 of the Act by invoking the provisions of Section 13(3) r.w.s. 13(2)(c) of the Act. .....

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anagement in ITA No.127/CTK/2011 order dated 29.07.2011 (ITAT Cuttack) 16. The ld. Counsel for the assessee contended that the assessee society was registered u/s 12A of the Act since its inception and was earlier approved/notified for exemption u/s 10(23C)(vi) of the Act and the approval was also granted for exemption u/s 80G(5)(vi) of the Act vide order dated 15.07.2009 till the assessment year 2012-13. It was further submitted that the earlier assessment of the assessee had been finalized and .....

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as further submitted that the AO repeated the order of the DG(Exemption) passed u/s 10(23C) of the Act in the assessment order. It was pointed out that para 2.1 of the order of the DG (Exemption) was repeated in para 1 of the assessment order and similarly para 2.3 of the order of the DG(Exemption) was repeated in para 3 of the assessment order. It was submitted that the Principal of the School was appointed in 1996 after following the proper procedure (a reference was made to page nos. 111 & .....

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ht on record to substantiate that excessive salary was paid to the Principal Mrs. Sudesh Singh, Mrs. Latesh Chaudhary and Mrs. Anita Mann and that in the subsequent year the salary paid had been accepted, so there was no application of mind by the AO while alleging that the excessive payment was made to the relative and there was violation of the provisions of Section 13(3) of the Act. 18. In his rival submissions the ld. DR supported the orders of the authorities below and further submitted tha .....

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nagement Committee of the assessee society were getting the benefits, therefore, the AO rightly invoked the provisions of Section 13(3) of the Act and denied the exemption u/s 11 of the Act. It was accordingly submitted that the ld. CIT(A) was justified in upholding the action of the AO for issuing the notice u/s 148 r.w.s. 147 of the Act. 19. We have considered the submissions of both the parties and carefully gone through the material available on the record. As regards to the issue agitated b .....

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are not inclined to admit the appeal and frame any substantial question of law since none arises from the order of the Tribunal. There is no dispute that the assessee has been granted registration under Section 12AA vide order dated 11th September, 2009 and, therefore, it was entitled to exemption of its income under Section 11. The only question is whether the income of the assessee should be computed on commercial principles and in doing so whether depreciation on fixed assets utilised for th .....

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ious purposes should be computed. JagannathaSetty, J. speaking for the Division Bench of the Court held that income derived from property held under trust cannot be the "total income" as defined in Section 2(45) of the Act and that the word "income" is a wider term than the expression "profits and gains of business or profession". Reference was made to the nature of depreciation and it was pointed out that depreciation was nothing but decrease in the value of proper .....

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e trust derives income from house property, interest on securities, capital gains, or other sources, the word 'income1 should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purpose of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become c .....

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ment Trust (1981) 127 ITR 378 and by the Madras High Court in Commissioner of Income-Tax vs Rao Bahadur Calavala Cunnan Chetty Chanties (1982) 135 ITR 485. The Madhya Pradesh High Court in CIT vs. Raipur Pallottine Society (supra) has held, following the judgment of the Karnataka High court cited above, that in computing the income of a charitable institution/trust, depreciation of assets owned by the trust/institution is a necessary deduction on commercial principles. The Gujarat High Court, af .....

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easons as to why the judgment cannot be applied to the present case Firstly, the Supreme Court was not concerned with the case of a charitable trust/institution involving the question as to whether its income should be computed on commercial principles in order to determine the amount of income available for application to charitable purposes- It was a case where the assessee was carrying on business and the statutory computation provisions of Chapter IV-D of the Act were applicable. In the pres .....

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ch allowed deduction for capital expenditure incurred on scientific research The question was whether after claiming deduction in respect of the cost of the asset under Section 35(1), can the assessee again claim deduction on account of depreciation in respect of the same asset. The Supreme Court ruled that, under general principles of taxation, double deduction in regard to the same business outgoing is not intended unless clearly expressed. The present case is not one of this type, as rightly .....

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der as to costs." 20. So, respectfully following the ratio laid down by the Hon ble Jurisdictional High Court in the aforesaid referred to case, we do not see any merit in the appeal of the department and are of the considered view that the AO was not justified in making the addition on account of depreciation. 21. As regards to the issue agitated by the assessee in its appeal against the denial of exemption u/s 11 of the Act on the ground that the assessee violated the provisions of Sectio .....

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e Society and that the Director(Administration) Mrs. Anita Mann is wife of Sh. Joginder Singh Mann. Therefore, there was a clear-cut violation of Section 13(3) as the assessee was paying unreasonable salary to the aforesaid ladies. However, nothing was brought on record as to how much salary was excessive in comparison to the salary paid to another persons working in the same capacity and in the similar circumstances, in another institutions. 22. On a similar issue the Hon ble Jurisdictional Hig .....

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r was excessive having regard to fair market value of services provided by her. 23. In the present case also the AO simply stated that there was violation of the provisions of Section 13(3) of the Act and unreasonable salary was paid to Mrs. Sudesh Singh, Mrs. Latesh Chaudhary and Mrs. Anita Mann. However, nothing is brought on record as to how much salary paid to these ladies was excessive. On the contrary, the assessee adopted the proper procedure for appointment of the Principal and Vice-Prin .....

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ut of the 14 persons who were called for interview which is evident from page no. 140 of the assessee s paper book. The Selection Board was having two nominees of the Education Department. Similarly, Mrs. Latesh Chaudhary applied for the post of Vice-Principal in lieu of the advertisement dated 08.03.1995 (copy of which is placed at page no. 139 of the assessee s paper book). The salary was given to both of them in accordance with the recommendation by the Directorate of Education, Old Secretari .....

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tion) for proper running of the institutions established by the assessee Society and was provided with car and phone facility. The AO did not bring any material on record to substantiate that the facilities provided to Mrs. Anita Mann were not used to achieve the objects of the assessee Society or it was misused for personal benefits. In the present case, the remuneration received by the aforesaid ladies was disclosed in their respective returns of income and accepted by the department. 24. On a .....

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f Section 13(3) of the Act. In the present case, it seems that the AO alleged that it was a family affairs of the assessee without appreciating the functioning of the Society and the requirement of law and also did not bring any material on record to substantiate that the facilities provided by the assessee to the aforesaid persons or the remuneration paid was not for the services rendered by the relatives of the trustees to achieve the objectives of the assessee society. In the instant case, it .....

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or denying the said exemption, the AO invoked the provisions of Section 13(3) r.w.s. 13(2)(c) of the Act. The provisions contained in Section 13(2)(c) of the Act reads as under: 13(2)(c) Without prejudice to the generality of the provisions of clause (c) and clause (d) of sub section (1), the income or the property of the trust or institution or any part of such income or property shall for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred t .....

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an admitted fact that the relatives of the trustees were appointed as Principal, Vice- Principal and Administrative Director. However, their appointments were not illegal as the same were done by following the proper procedure, an advertisement was published in the National Newspaper for the post of Principal and Vice-Principal. In response to the said advertisement, the applications were received from the eligible person and after a proper scrutiny, those persons who fulfilled the requisite qua .....

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