TaxTMI 
TaxTMI 
TaxTMI 
2017 (5) TMI 1839
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....7,000/- to the contractor for construction of the institute building may be taken into consideration as application of the funds u/s 115 of the I.T. Act, 1961. (b) That the funds at Rs 3,23,47,187/- borrowed for construction of the institute building may be taken as application of the funds and there was no violation of the provisions of the section 13(2) of the I.T Act 1961. (3) Whether in the facts and circumstances of the case the Ld. CIT (A) has erred in law in deleting the disallowance of Rs 20,50,491/- being exorbitantly high rate of interest paid to the persons specified in section 13(3) of the I.T. Act which was diversion of the trust funds to specified persons u/s 13(3) of the I.T Act 1961. (4) Whether in the facts and circumstances of the case the Ld. CIT (A) has erred in law in deleting the addition of Rs.28,60,000/-on account of cash credits ignoring the vital fact that all the alleged cash creditors had no regular source of income except the interest income as allegedly received from the assessee trust. There was no cash accruals and was not apparent how they were maintaining themselves. Thus the creditworthiness of the creditors was not proved. The assessee fail....
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....o the construction contractors for the construction of the institute's building are fully justified. (b) This ground as raised is also misconceived because the assessee had not borrowed funds amounting to Rs. 32347687/ -. This figure of Rs. 32347687/- represented additions made by the assessee to the fixed assets as was also evidence from the details given by the AO himself at page 2 of the assessment order at page 3 of CIT(A) order. 3. That there was no diversion of trust funds to specified persons u/s 13(3) of the IT Act as alleged in Ground No. 3 and therefore the ld CIT(A) was justified in deleting the disallowance of Rs. 2050491/- on account of interest of loans. 4. Ground No. 4 as raised by the revenue also deserves to be dismissed because the ld CIT(A) had deleted the additions aggregating to Rs. 2860000/- after considering the documentary evidences filed by the assessee. The case laws cited by the revenue had absolutely no relevance to the facts of assessee's case. 5. Ground No. 5 as raised by the revenue is again misconceived and misleading because the ld CIT(A) had admitted additional evidence as filed by the assessee u/s 46A after giving proper opportunit....
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....terest holding that there is no contravention of section 13(3) of the Act. It was further held that there is no violation of section 11 and 12 of the Act in giving advances to the contractors and therefore, the action of the ld Assessing Officer to bring to tax the entire surplus of Rs. 65458599/- was quashed. Therefore, the revenue aggrieved with the order of ld CIT(A) has preferred appeal before us. 6. On reading of the grounds of appeal it is apparent that two issues have been raised to hold that there is a violation of provisions of section 11 and 13 of the Income Tax Act and therefore, the assessee losses the exemption granted therein. a. Payment of interest of Rs. 2050491/- to the related party @ 18% b. Amount of Rs. 2657000/- given to the contractor in violation of section 11(5) of the Act 7. Further, a sum of Rs. 28.60 lakhs has been added into the hands of the assessee u/s 68 of the Act. 8. Firstly we deal with the issue of addition of Rs. 28.60 lakhs in the hands of the assessee. During the year assessee has taken a loan of Rs. 29.10 lakhs from 8 persons which are discussed at page No. 4 to 8 of the order of the ld Assessing Officer as under :- "In view of above ....
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.... Rs 35000/- is cash withdraw! and another entry of Rs. 50000/- is also cash withdraw! Smt Beenu Gupta 1000000A No copy of bank a/c is filed. Only copy of ITR acknowledgement filed. Rs. 2,44,9307- Genuineness and credit worthiness of loan is unproved. Smt Megha Jain 50000/- Copy of Bank A/c, Copy of Computation of Income Rs. 1,48,53 7/- Smt Sarita Agarwal 700000/- No document filed in support of loan . Total 2910000/- On this issue assessee filed the following reply :- 1) Unsecured Loans; In the captioned matter it is pointed out that the assessee trust has raised fresh Unsecured Loans to the tune of Rs. 29.10 lacs whereupon interest at the rate of 18% p.a. has been given. It is also pointed out that the said lenders are the relatives of the founders - trustees of the Assessee Trust. In the matter this is to submit the following facts : (i) that the said fresh unsecured loans of Rs. 29.10 Lacs are from eight lenders who are the old depositors with the trust and during the year they have introduced small- small amounts in the trust against which the trust has made repayments of Unsecured Loans to the extent of Rs. 28,36,635....
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....x Act 1961. In view of the above it is clear that loan taken from the aforesaid parties accept Smt. Megha Jain are nothing but only name lending. Assessee trust failed to discharge initial onus u/s 68 of I.T. Act. The addition of Rs. 28,60,0007- is being made. 9. The ld CIT(A) has delete the above addition vide para No. 10.1 of his order at page No. 8 to 18 of his order as under :- "10.1. As regards the addition of Rs.28,60,000/-, the AO has given the relevant details of such unsecured loans at pages 4-6 of the impugned assessment order having been raised from the following parties: A. Mr. Anubhav Jain - Rs. 4,00,000/- on account of fresh loan. The AO has stated the fact that the Appellant Trust had filed copy of bank account and computation of income along with intimation u/s 143(1) in the case of Shri Anubhav Jain but he was of the view that the income of Shri Anubhav Jain was very low to give this big amount of loan of Rs.4,00,000/- and that before giving this loan, there was a credit entry of Rs.5,49,617/- in his SB A/c showing its narration as USA from which the nature of receipt was not clear. 10.1.1. The ARs have made the following submissions before me: i. Copy o....
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....2M alongwith copy of bank statement with State Bank of Patiala placed at pages 420-422 of the paper book and with Punjab National Bank (PNB) copy placed at pages 423 - 425 of the paper book. The Appellant had also filed a certificate dated 25/09/2009 issued by United Airlines in which Sh. Anubhav Jain was an employee drawing salary of approx. USD 78,600A placed at page 425C of the paper book. 10.1.3. The documentary evidence filed by the Appellant had neither been controverted/disproved by the AO in the assessment order nor in his remand report and therefore, I have no hesitation in holding that the appellant had proved the genuineness of loan and also credit worthiness of Sh. Anubhav Jain. It is an old account with an opening balance of Rs.7,50,000/- which stands accepted as genuine in the preceding year. Therefore, this addition of Rs.4,00,000/- is deleted. B. Ms. Pooja Jain - Rs. 80,000/ -. The AO has made this addition by saying that the evidence filed by the Appellant created a suspicion and that she had deposited cash of Rs.20,000/- on 04/07/2008 and Rs.40,000/- on 09/07/2008 in her SB A/c which seems to be generation of entry only. 10.1.4. The ARs have drawn my attenti....
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....ssessed to tax at page 432 - 435. iv. Copy of its account as standing in the books of the Trust at page 436. v. The mere fact that that the income of this HUF creditor was low was no ground to treat the same as undisclosed income of the Appellant Trust when it had the resources to give loan of Rs.4,95,000/ -. The following observations of the AO in the remark column are factually and legally incorrect: "On perusal of entries in his Bank A/c it was found that there almost entries which only routed from here and there ". From the above observations, it is not clear as to what actually the AO wants to convey. At any rate, his observations are incorrect and untenable 10.1.6. The Appellant had filed confirmed copy of account of Sharad Kr. Jain HUF in the books of the Appellant Trust, copy of which is placed at page 436 of the paper book which shows that there was an opening credit balance of Rs.2,50,000/- while closing balance was Rs.7,45,000/ -. Here again the AO has added the difference between the closing balance and the opening balance amounting to Rs.4,95,000/- without giving any valid and sustainable reasons. PAN No. of the creditor is duly given in the confirmatory lett....
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....mt. Beenu Gupta - Rs. 10,00,000/ -. The' AO has made the addition by saying that copy of bank A/c had not been filed and the Assessee had filed only copy of her income-tax return acknowledgment and therefore, genuineness and creditworthiness of loan was unproved. 10.1.9. Copy of confirmatory letter of Smt. Beenu Gupta is placed at pages 455 of the paper book along with statement of her bank A/c with Punjab National Bank at page 456 which shows that she is assessed to tax with PAN No. AEQPG2755L. The AO has himself mentioned that in the Income-tax return, she had declared net income of Rs.2,44,930/ -. From her copy of A/c with the appellant Trust, I find that there are other credit entries also which have been accepted by the AO. Against the deposit of Rs. 10,00,000/- on 01/05/2008, it is specifically mentioned that PNB OD A/c No. 501561 was debited which stands proved from her bank statement placed at page 456 of the paper book. She is also assessed to tax. Therefore, the AO was not justified in holding that genuineness of loan and creditworthiness were unproved. Consequently, the addition of Rs. 10,00,000/- is deleted. F. Smt. Sarita Agarwal - Rs.7,00,000/- added by the AO....
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..... Copy of her statement of affairs for F.Y. 2008-09 as filed by her with her Income tax returns placed at page 431'A The documentary evidence mentioned at Sr. No. 2 to 6 above, could' not be filed before the AO because the AO had not given reasonable opportunity in the course of assessment proceedings. ' 7. Copy of bank account of Sh. Sharad Kumar Jain (individual) placed w.e.f. 01/04/2008 at page 450 which could not be filed before the AO because the AO did not ask for the same though copy of his bank account admittedly was filed from 12/03/2009 onwards. 8. In the case of loan of Smt. Sarita Aggarwal amounting to Rs. 7 Lacs, following documentary evidence may kindly be entertained under Rule 46A: (i) Confirmatory letter which mentions her PAN No. ADDPA2824N at page 460. (ii) ' Copy of her bank account at page 461-463. (iii) Copy of computation of income, with acknowledgment and intimation u/s 143(1) to show that she was assessed to tax at page 457-458. (iv) Copy of her account as standing in the books of the Trust at page 460. The Ld. AO had issued show cause notice of 6 pages on 28/12/2011 copy at pages 405-410 in which she had mentioned at page 40....
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.... I agree. Further, the AO had been given an opportunity for submitting his remand report in which he could not give any valid reasons for non-admittance of such documentary evidence and therefore, I admit the additional evidence as filed by the Appellant 10.1.16. I may also mention here that deposit of Rs.50,000/- made by Smt. Megha Jain was accepted by the AO himself on the basis of copy of Bank A/c and computation of her income. It is also pertinent to point out that in para (iii) at page 7, the AO himself has observed as under: "As regards to the genuineness of the said fresh unsecured loans, to support their identity, credit worthiness and nature of transactions, the assessee has already furnished ((a) copies of their respective accounts duly confirmed by the lenders with their complete addresses; (b) copies of their income tax returns with computation of income (c) copies of their respective bank accounts etc.). Further this is to mention that all these transactions are through banks only. " In view of the above observations of the AO himself, no justification subsisted to make the impugned additions. 10.1.17, I find from the assessment record that the Appellant had ex....
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....aggregating at Rs.28,60,000/- being wholly unjustified are deleted" 10. Before us the ld DR vehemently supported the orders of the ld Assessing Officer. 11. The ld AR submitted that the assessee has produced the complete details of the loan and the confirmation which were not controverted and hence, the order of the ld CIT(A) deleting the above addition is in order. 12. We have carefully considered the rival contentions and perused the orders of lower authorities. Before the ld Assessing Officer, assessee has submitted with respect to creditors, the copies of bank account, computation of total income and copy of intimation u/s 143(1) of the Act. The ld Assessing Officer did not confront any of the evidences submitted by the assessee and merely rejected the details furnished. The ld CIT(A) has examined each of the loan in detail after obtaining the remand report as well as admitted the additional evidence with respect to the other creditors and hence deleted the addition. The ld DR could not show us any infirmity in the order of the ld CIT(A) in deleting the above addition. We are also of the view that the assessee has submitted the complete details of unsecured loan proving iden....
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....her rate i.e @ 18% while bank OD limit of Rs.4.5 crore under utilized which was available on very lower rate as compared to interest paid on unsecured loans. On specifically asked for about the payment of higher rate of interest to unsecured loan creditors and in spite of availability of cash flow why unsecured loan was further raised assessee submitted the following reply :- As regards to interest payer: 3r. the rate of interest of 12% ch Loans extended to the assessee trust, this is to submit that it is fact the assessee is enjoying Secured O/D Limits from banks, which at times are fully utilized during the year but at times it is lesser utilized as per the day to day and time to time cash flow with the assessee. When the limits are fully utilized these Unsecured Loans are regularly available to the assessee. As against the total operations of the assessee these are a small quantum of Unsecured Loans as on 01.04.08 Rs. 1,28,40,243 which has grown to Rs. 1,47,32,279 as on 31.03.09 basically due to application of interest of Rs. 20,02,054 which is well subject to TDS and all such lenders are regularly assessed to Income Tax and paying taxes as per the Laws of the Land. Furtherm....
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.... page No. 10.2 of his order from page No. 18 to 22 as under :- "10.2. Ground No. 2(b) is against the addition of Rs.20,50,491/- on account of disallowance of interest on unsecured loans. 10.2.1. The Appellant has reproduced the relevant observations of the AO and then has made its submissions with regard to this addition as under: "The AO has discussed this issue at page 2-4 of the impugned assessment order. The AO has at page 2 of the assessment order observed as under: "Assessee filed the detail of unsecured loans vide reply dt. 23.12.2011. Audit report filed in Form JOB do not contain list of persons specified u/s 13(3) of IT. Act, 1961 in part 11 of Form 10B no comment for details is offered and against each clause Nil is -written ". Copy of audited report in the case of the Appellant as filed before AO is placed at pages 499 - 516 of the paper book. The auditors had correctly prepared their report. Section 13(3) of I.T. Act had no application to the facts of-Appellant's case. The AO has further observed as under: . "As per detail filed by the assessee, it is seen that surplus of Rs.8,53,95,882/-was generated during the year and there was no requirement to rai....
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....ors. However, the same has been rejected by the AO by making the following observations at page 3-4 of the impugned order: "Reply of the assessee considered. Assessee tried to demonstrate the reason for higher rate of interest paid to persons specified under section 13(3) by commentary, but in support no documentary proof is filed. It is obvious that bank may asked for increase the capital/General fund for debt equity ratio, but in this case no general fund is increased. Secondly term loan and working capital loan was under utilized. Thirdly almost unsecured loan creditors are filing their income tax return by showing interest income and no other regular source of income is earned/shown by all unsecured loan creditors. No cash accruals is available with the unsecured loan creditors and how they are maintaining themselves is also net clear. Actually they all are name lender and trust is diverting the trust found for the benefit of persons specified under section 13(3) of the Income tax Act, 1961". From the above observations of the AO, it is evident that without disproving the documentary evidence filed by the Assessee in support of the unsecured creditors/loan, the AO has disal....
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.... overlooked to appreciate that for raising of loans from the Banks, the Appellant was to pay processing fee of Rs. 1.25% and other charges besides interest coupled with the fact that the Trustees have to give personal securities, which goes to show that raising of loans from the Bank was not easy and was fraught with dire consequences. Moreover, if such term loan as sanctioned by PNB was underutilized, the same could not entitle the AO to draw any adverse inference against the Appellant. The AO has disallowed the interest without giving any valid and sustainable reasons. 10.2.5. I also find that the Appellant had paid interest on almost similar rates in the preceding year which stands allowed by the AO. If at a particular time, term loan and working capital loan were underutilized, it could not entitle the AO to draw any adverse inference. I have already held that the onus to prove that such creditors/depositors were name lenders and the Trust was diverting the Trust fund for the benefit of persons specified u/s 13(3) of the I.T. Act was on the AO which had not at all been discharged. The AO could not without disproving the documentary evidence filed by the Assessee in support of....
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.... "13(1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt there of- (a) any part of the income from the property held under a trust for private religious purposes which does not enure for the benefit of the public ; (b) in the case of a trust for charitable purposes or a charitable institution created or established after the commencement of this Act, any income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste ; (bb) Omitted by the Finance Act, 1983, w.e.f. 1-4-1984. (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 institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person ref....
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....ust or institution ;(ii) any assets (being debentures issued by, or on behalf of, any company or corporation) acquired by the trust or institution before the 1st day of March, 1983 ;(iia) any asset, not being an investment or deposit in any of the forms or modes specified in sub-section (5) of section 11, where such asset is not held by the trust or institution, otherwise than in any of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 19932, whichever is later ;(iii) any funds representing the profits and gains of business, being profits and gains of any previous year relevant to the assessment year commencing on the 1st day of April, 1984, or any subsequent assessment year : Explanation Where the trust or institution has any other income in addition to profits and gains of business, the provisions of clause (iii) of this proviso shall not apply unless the trust or institution maintains separate books of account in respect of such business. Explanation For the purposes of sub-clause (ii) of clause (c), in determining whether any part of the inco....
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....tion (3) : Provided that this clause shall not apply where the income, or the value of the property or, as the case may be, the aggregate of the income and the value of the property so diverted does not exceed one thousand rupees ; (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971) in any concern in which any person referred to in sub- section (3) has a substantial interest. (3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely :- (a) the author of the trust or the founder of the institution ; (b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees ; (c) where such author, founder or person is a Hindu undivided family, a member of the family ; (cc) any trustee of the trust or manager (by whatever name called) of the institution ; (d) any relative of any such author, founder, person, member, trustee or manager as aforesaid ; (e) any con....
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....refore, now it is required to be examined whether interest paid to these parties @18% directly or indirectly results in benefit to these persons in terms of section 13(1)(c) or 13(2) of the Act. The ld Assessing Officer has stated that in view of the huge surplus generated by the assessee of Rs. 8.53 crores during the year there was no requirement to raise the further unsecured loans. Admittedly, during the year assessee has raised loan of sum of Rs. 50000/- also. Further, loans raised by the assessee are of the small amount except in case of Binu Gupta of Rs. 10 lakhs. Looking to the nature of transaction and the schedule of the repayment it is apparent that all these parties have used this trust for parking of the funds and earned interest @18% per annum. The ld Assessing Officer has further stated that term loan and working capital loans remains under utlised. It is further stated by the AO that on looking to the income tax return of these persons it is apparent that they are only earning interest income from these trusts and there is no other regular source of income available with the depositors. The ld CIT(A) has stated that AO is not entitled to draw any adverse inference of....
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....er in that year rate of interest is also varying. In view of this we are of the opinion that provisions of section 13(1)(c) read with section 13(2) has triggered in the case of the assessee. In the result the ground No. 3 of the appeal of the revenue is allowed. 20. Coming to ground No. 2(a) and 2(b) which is against granting of advance to the contractor for the construction of the institute building was considered by the Assessing Officer as application of the funds in violation of section 11(5) of the Act. 21. The ld Assessing Officer has dealt with this issue vide page No. 8 to 13 as under:- "Construction of Building Assessee is running education institute and shown expenditure on land and building as per detail follows :- Head of Account Opening Balance as on 01.04.2008 the year Addition during Closing Balance as on 31.03.2009 Land 21457424/- 4542350/- 25999774/- Building 120209897/- 32347 187/- 152557084/- Roads and Site development, Furniture & Fixture shown separately from which it is clear that building and civil work is only on account of building structure. For establishing construction cost, assessee furnishes copy of approved map, name of contr....
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....arlier years to justify how much area was constructed. Assessee has also not filed detail of total land, permissible construction in square feet. Advance given of Rs. 2,60,51,0007 is also not included. In the figure of addition made during the year but it is shown under the head loans and advance (etc), copy of contract with contractor confirmed copy of account, detail of area constructed during the year under assessment is also filed by the assessee. It is apparent that advances to contractor is given to divert the secured loan taken from banks to utilize the bank loan advances are given to various contractors and in the absence of any detail actual utilization of funds cannot be judged. Assessee further submits amount the construction of building as follows :- Construction of Building: This head consists of two sub - heads viz Land and Building -Civil Construction. As regards to Land, the assessee has acquired some Land adjacent to the existing campus for extension, in respect of which copies of registered purchase deeds of / and in the name of Assessee Trust - copies of which have been filed during the assessment proceedings and also filed afresh herewith for ready ....
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....send that opening construction value in books is Rs. 12,02,09,897/- ( after claiming the depreciation) Addition during the year is shown Rs. 32347187/- Total value as on 31.3.2009 shown by assessee is Rs. 15,25,57,0847 -. The above advance given for Rs. 2,60,51,0007- is not included in the cost of construction. The above advance is not allowable under section 11(5) of the Act in view of the fact that this is not an permissible investment. Further no complete details are filed. It is seen that during the year one of the trustee retired and in her place new trustee joined the trust. Retired trustee obviously without taking handsome amount will not retuned from the trust. It is apparent that fresh term loan raised in the garb of construction of building and same amount is transferred to some contractors by cheque. Amount shown under the head advances. Their details is not filed. It appears that amount transferred to contractor has taken back in cash and which could not be verified in absence of complete details of the contractors. They not turned up in summon proceedings. It is apparent that total contract was given for further construction of 229216.16 Sq. Ft. No details about how mu....
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....actors in his books of account. It is clearly shows that the management of M/s Space Age Research & Charitable Trust, Meerut is siphoning the found of the society by misappropriation of accounts by way of making advance payment under the head of construction of buildings. Here also there is clear-cut of violation the provision of section 13(2) of IT. Further it is also clear that construction of building can not be allowed as application because construction is taken out of the cannot be allowed. Addition to the fixed asset amounting to Rs. 32347187/- cannot be allowed as application. Since assessee has violated the provision of section 13(2) of I.T, Act, 1961 so benefit under section 11 shall not be allowed to assessee. Hence surplus of Rs. 6,54,58,589.00 shown under income expenditure account shall be added to the income of assessee. Incomes of the assessee is computed a follows: -Income shown by assessee Nil Add :- Intt. On unsecured loan disallowed: Rs. 20,50,491/ -Add :- Unsecured loan added- Rs. 28,60,000/- Add :- Surplus treated as income Taxable Income Rs. 6,54,58,599/ (Addition of Rs. 6,54,58,589.00) -Rs. 7,03,69,090/- Assessed on an i....