TaxTMI 
TaxTMI 
2002 (12) TMI 205
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....ing 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 causing....
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....4/97 14-10-97 85/97 10,00,000 G. Sharma Kunda " 40/97 19-11-97 179/96 1,80,000 Nanda Vardhan " 06/98 08-06-98 55/98 9,00,000 SIDUR " 11/98 22-06-98 154/98 7,20,000 SIDUR " It 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 p....
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.... Members did express anxiety at the frequency of borrowals by Mr. Vardhan. Further, the loan of Rs. 10 lakhs being given to Sharma Kunda was also not mentioned to the Committee, it was represented as a loan to Mr. Vardhan himself. But Mrs. Vardhan, as Secretary filed a resolution before South Indian Bank to the effect that the Committee approved giving a loan to Sharma Kunda. Obviously the resolution was fabricated by herself, at the instance of her husband Mr. Vardhan and submitted to the Bank. There is no resolution signed by all the members to this effect. This loan was outstanding as on 31-3-1998 but was not shown outstanding in the audited Balance Sheet. The auditor 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 Societ....
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....of SIDUR as the borrower. Mr. Vardhan signed on the loan application form using the stamp of Executive Secretary, SIDUR. The loan amount was disbursed through the S.B. Account of Shri T.J.P.S. Vardhan, No. 1427 with Trinity Bank. He withdrew the amount to repay his earlier loans taken from South Indian Bank. This loan is outstanding as of date except for an amount of Rs. 1,01,482 which was adjusted out of FDs 446 & 447 in the name of SIDUR on their maturity on 31-7-1999. It can be thus seen that what were originally loans taken from South Indian Bank were partly repaid by loan from Trinity Bank to which part of SIDUR's FDs were adjusted on maturity. All along the 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....
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....d that under the bye-laws, the Executive Secretary was authorized to conduct all affairs along with the Secretary including signing of bank papers but that he does not fall under the category of interested persons defined in section 13(3) which covers only the author of the trust and therefore, implying that any irregularity done by Mr. Vardhan cannot attract section 13(1)(c)(ii). This argument has to be rejected because section 13(3)(cc) & (d) clearly cover any Manager by whatever name called or a trustee or any relative of a Member or Manager or trustee. Mr. Vardhan as Executive Secretary becomes an 'interested person' both directly as well as through his 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 pl....
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....essing Officer, taken by the assessee as its second limb of argument is ground No. 16 which reads as follows :- "The ld. Addl. CIT and the ld. DCIT both failed to note that even if section 11 of the Income-tax Act is held to apply, all the receipts ipso facto become taxable. They ought to have seen that the entire receipts consist of grant received through regular banking channels from foreign funding agencies and thus do not form part of income at all. If section 11 is held applicable only the income arising from the investment of these grants should have been brought to tax after deducting there from the concerned expenditure. This amply shows that the 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 expendi....
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....ed the assessment. In other words, the assessment is based and is made in vacuum. The learned counsel argued that the Assessing Officer is vague and confused as to exactly which provision is applicable to the assessee's case, because the Assessing Officer applied section 13(1)(c) without comprehending sub-section (3) and further applied section 13(2)(a), so as to say that the society lent its income/property to the Executive Secretary thereby causing benefit to him. But, the Assessing Officer could not establish any relationship of borrower and lender between the Executive Secretary and the society, because there was no loan/financial transaction between 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) a....
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....se under which the assessee's case fell, section 13(1)(c) itself became inapplicable. (iii) Even assuming without accepting the department's contention, the assessee had not made available any property for the use of the assessee society. In other words, the financial securities of the society are intact and the same were pledged with the banker which did not mean that the same were used without charging adequate rent or other compensation. Even if the relationship for invoking the provisions of sub-section (2)(b) is assumed, the relationship among the assessee, the Executive Secretary and the banker was only a trilateral one whereby the assessee 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 con....
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....nbsp; and lender must come into existence. Shree Poongalialain Swetamber Material on record shows the documentary Mandir v. CIT [1987] 168 ITR evidence regarding immovable property 516 (Raj.) offered as security. No criteria fixed under the Act for adequacy or otherwise [section 13(2)(a)]. R.B. Shreeram Durga Prasad & Principles of natural justice having been Fatehchand Nursing Das v. violated, the Court is concerned with the Settlement Commission....
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....bsp; 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 "institution" are different Motilal Kalwasiya Trust [2001] from one another and section 13(cc) 252 ITR 84(Cal.) speaks of manager of institution and not manager of trust. With regard to section 2(24)(ii)(a), "Voluntary contribution....
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....herein have to be upheld as it is proved beyond doubt that the assessee-society had violated the provisions of section 13(1)(c) read with section 13(2)(b). He submitted a paper book consisting of pages 1 to 296 and took this Bench through various depositions, confirmation letters etc., to fortify his case that the Secretary of the assessee-society, Smt. Nanda Vardhan, has in fact obtained loans from South Indian Bank by pledging the fixed deposit receipts of the society and that this amount was given to her husband Sri T.J.P.S. Vardhan who is the Executive Secretary of the society. 10. Replying to the various arguments raised by the learned counsel for the assessee, Sri Srivastava submitted that it is clear from the provisions of section 144A that opportunity is to be provided to the assessee by the Addl. Commissioner of Income-tax during proceedings under section 144A and there is no provision in law requiring providing of opportunity 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 th....
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....of the said financial statements have also been furnished to the Bench. In his statement dated 8-7-1999 recorded during survey (pages 12 and 13 of Revenue's paper book) also, Sri Vardhan had admitted that he raised personal loans against SIDUR's FDs and utilised the properties of the trust (society) for availing the loan for his personal commitments. Thus, the society as well as Mr. Vardhan is clearly shown to have entered into a relationship of borrower or lender in this case and hence the provisions of section 13(2)(a) are constructively attracted. Still, keeping in view the fact that this relationship was indirect (through Bank), it was held by learned Commissioner (Appeals) that there was violation as mentioned in the provisions of section 13(1)(c) read with section 13(2)(b) inasmuch as the property of the society had been utilised for the benefit of prohibited category of persons without adequate compensation. He submitted 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) rea....
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....r own intents and purposes. The ultimate destination of the funds raised by way of loan is not very important in this connection. The KMC story brought in by the assessee has no relevance as the alleged payments to KMC are nowhere mentioned in the books of account of the assessee-society or in the minutes book of the society. The fact remains that loans were raised against the society's FDs by the Secretary/Executive Secretary, who are husband and wife, to meet personal expenses or commitments. 15. As for the contention of the assessee that since the assessee-society has rendered good number of public interest activities, at least actual disbursement incurred in meeting its purposes may be allowed, Sri Srivastava submitted that the provisions of section 13(1)(c) of the I.T. Act and related provisions are very strict and whenever there is a violation as mentioned in section 13, the exemption provided by section 11 or section 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 Commissi....
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....ent year 1998-99. In the case of A WARE's total withdrawal of exemption has been upheld in almost similar circumstances. Hence, he requested the Bench to dismiss the assessee's appeal in the present case, following the decision in the case of AWARE's and the observations in the case of the assessee in section 263 matter for assessment year 1998-99. 18. We have heard both sides and gone through all the papers on record and the orders of the authorities below. On a careful consideration of the facts of the case, we have come to the conclusion that Smt. Nanda Vardhan, Secretary of the assessee-society, wife of Sri T.J.P.S. Vardhan, the Executive Secretary of the assessee-society, had used the fixed deposit receipts belonging to the assessee-society for raising loans. The reply of the South Indian Bank Ltd. dated 15-7-1999 giving details asked by the Assessing Officer under section 133(6), a copy of which has been filed before 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 Representat....
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....re was a typographical error in the assessment order and that the impugned transaction attracted the provisions of section 13(3)(cc). We are of the opinion that mentioning of a wrong provision would not be fatal to the assessment proceeding when the Assessing Officer is justified in his action under some other provision. The Assessing Officer has not mentioned the word "relative" or held that the funds had been misused to give to a "relative" of Sri Madhavan or any other person. On the other hand, the Assessing Officer has specifically held that Sri Madhavan took the loan in the name of Chairman of AWARE. The income of the assessee is, therefore, assessable under the provisions of section 13(1)(c)(ii) r.w.s. 13(2)(b) and 13(3)(cc). We have gone through the case laws cited by the learned Departmental Representative in this regard, mentioned in para 23 at page 20 of this order and we are of the considered opinion that they 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 ....
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....onal Commissioner has given a number of opportunities. Even otherwise, the learned counsel for the assessee submitted that he is not pressing this ground. Thus, this argument is dismissed. 21. As regards the assessee's contention that the Executive Secretary Sri T.J.P.S. Vardhan does not fall under the class of persons specified under sub-section (3) of section 13 of the I.T. Act, we agree with the argument of Sri Srivastava that it was the Secretary herself, i.e. Smt. Vardhan, who signed and pledged the FDRs of the society and had used the assets of the society without any compensation whatsoever to the society and being a person covered under section 13(3), had violated the provisions of section 13(1)(c). Section 13(1)(c) applies only in cases of enumerated classes of people in section 13(3). We have no doubt that the Secretary Smt. Vardhan, who has pledged the FDRs falls under section 13(3) and also that Sri 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 t....
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....or security for the same. For the reasons mentioned in para 21 above, the judgment of Honourable Calcutta High Court in Rai Bahadur Bissweswarlal Motilal Kalwasiya Trust's case, is not applicable to this case as the Secretary as well as the founder and the Executive Secretary have used the assets of the society and they are managers of the trust. 23. In view of the above discussion and in view of the fact that Smt. Nanda Vardhan, Secretary of the society, and Sri Vardhan, the founder, Executive Secretary and a relative of the Secretary and also a Manager, had used the FDRs of the society for obtaining loans other than for the society itself without compensation, the provisions of section 13(1)(c) r.w.s. 13(2)(b) and 13(2)(cc) are attracted and the assessee-society is not entitled to the exemption under section 11 of the I.T. Act. We uphold the orders of the lower authorities on this issue. 24. Coming to the 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 :- "....
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....purpose would only mean that the assessee which was a voluntary organisation, had agreed to act as a trustee of a special fund granted by donor with the result that it need not be. pooled or integrated with the assessee's normal income or corpus. In the instant case, the assessee was acting as. an independent trustee for that grant, just as same trustee could act as a trustee of more than one trust. Tied-up amounts need not, therefore, be treated as amounts which were required to be considered for assessment for ascertaining the amount expended or the amount to be accumulated. The assessee should have actually credited the grant in the personal account of the donor and any amount spent against that grant should have been debited to that separate account of the donor. That incoming and outgoing need not be reflected in the income and expenditure account of the assessee. At the end of the project, the balance, 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....
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....the income should be computed on commercial principles, as we have held that the assessee-society is eligible for exemption under section 11 of the Act and we have also held that the objects of the society were of charitable nature within the meaning of section 2(15) of the Act, and as we have further held that there is no violation, whatsoever of the provisions of section 13(1)(c) and (d) of the Income-tax Act, 1961, the other grounds of the assessee need not be gone into, as it would be of academic interest only." The Revenue has not brought to our notice any judgment from any High Court which has dealt at length on this issue and which is in its favour. It is also not clear whether the Revenue has accepted or gone on appeal against the judgment of this Bench in the case of Nirmal Agricultural Society. 26. Honourable Andhra Pradesh High Court in the case of Chairman, Andhra Pradesh Welfare 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 contribut....
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.... Principles such as capital versus revenue, doctrines of overriding title, form versus substance, interpretation of "deeming" provisions etc., have to be applied wherever necessary. Only the surplus or profit can be brought to tax and the same has to be computed in the manner laid down in the Act applying the normal principles of accountancy and taxation laws. 29. The learned authors Kanga and Palkhivala in the book The Law and Practice of Income Tax, Eighth edition, Vol. I, at page 387, state the legal position as follows :- "Voluntary contributions towards corpus of recipient trust.- The present section 12 is expressly made applicable to voluntary contributions which arc made with a specific direction that they shall form part of the corpus of the trust [original in italics]. Therefore, such contributions on capital account do not have to be applied to charitable purposes but 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 :....