TaxTMI 
TaxTMI 
2017 (5) TMI 1839
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....ed in law in holding :- (a) That the advance of Rs.26,57,000/- 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 the....
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....round of appeal as raised violate Rule 8 of ITAT Rules. 2. (a) That the ground of appeal NO. 2(a) as raised by the revenue is wholly misconceived because of the findings of the ld CIT(A) with regard advances of Rs. 2657000/- to 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 abs....
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....ngs the ld Assessing Officer was directed to submit remand report and assessee was asked to file rejoinder. Consequent to that the ld CIT(A) deleted the addition on account of unsecured loan of Rs. 28.60 lakhs and also the disallowance of Rs. 2050491/- on account of interest 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 Ac....
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....unjab National Bank which is from12.03. 2009 not From 1.04.200 8 as required and this loan is unverifiable Smt Abha Jain 85000/- Copy of Bank Rs.1,47,050/- A/c, Copy of Computation of Income and copy of intimation u/s 143(1) of I.T.Act i) A sum of Rs.35000/-06.06.2008 was advanced to assessee trust .On perusal of Bank A/c it is noticed that 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 th....
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....ecured 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 not clear. Actually they all are name lender and trust is diverting the trust fund for the benefit of persons specified under section 13(3) of the income tax 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 ac....
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....present interest credited and paid by the Appellant Trust and the last entry of Rs.50,000/- on 31/03/2009 represented adjustment entry from the account of Smt. Abha Jain with closing balance of Rs. 11,50,000/- as on 31/03/2009. The AO has made addition of Rs.4,00,000/-being the difference of closing balance at Rs. 11,50,000/- and opening balance of Rs.7,50,000/- thereby ignoring the fact that confirmed copy of A/c had been filed by the Appellant giving therein PAN No. of Sh. Anubhav Jain as ACGPJ-1222M 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. ....
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....Jain (HUF) - Rs. 4,95,000/ -. The AO has made this addition by making the following observations: "(i) Income of Sh. Sharad Kr. HUF is very low to give this big amount of loan of Rs.4,95,000/ -. (ii) On perusal of entries in his Bank A/c it was found that there almost entries which only routed from here and there ". In support of the above loan, the Appellant has relied on the following evidence: i. Copy of confirmatory letter at page 436. ii. Copy of bank account at page 437- 442. iii. Copy of computation of income and intimation u/s 143(1) to prove that it was assessed 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 ....
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....rom the copy of A/c filed by the Appellant Trust placed at page 448 of the paper book, I find that it was duly confirmed by the depositor and he had also given his PAN No. AASPJ6280B. It is also an old A/c with opening balance of Rs.4,00,000/ -. In this case also, the AO has added the difference between closing balance of Rs.5,00,000/- and opening balance of Rs.4,00,000/ -. Copy of bank statement with Punjab National Bank is placed at page 449 - 451 of the paper book. Keeping in view the above documentary evidence, I hold that there was no justification on the part of the AO to have made addition of Rs. 1,00,0007- which has been explained satisfactorily. The addition of Rs 1,00,0007- is therefore deleted E. Smt. 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 tha....
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....e the bank had not issued the same within short time allowed by the AO. It is pertinent to point out here that the AO himself had not made any addition in the case of Smt. Megha Jain on the basis of her copy of bank account and computation of income filed by her alongwith her return regarding her loan of Rs. 50,000/ -. 2. Copy of account of citi Bank of Sh. Anubhav Jain at page 425A. 3. Copy of letter dated 20/05/2008 received from Times Group of Sh. Anubhav Jain showing remittance of Rs. 5,49,6111- through draft placed at pages 425B. 4. Certificate dated 25/09/2009 issued by United Airlines in which Sh. Anubhav Jain is employed drawing salary of approximately USD 78,600 page 425C. 5. Certificate dated M/s Golden Strand Pvt. Ltd. New Delhi with whom Sh. 'Pooja Jain is employed placed at pages 431B. 6. 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. ' ....
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....ted under Rule 46A of I.T. Rules, it has been submitted in the rejoinder that the Appellant had given reasons due to which it was prevented by sufficient cause in not producing such evidence before the AO and that the same having not been controverted or disproved coupled with the fact that the AO had not objected to the admittance of such evidence, the same deserve to be entertained and taken into consideration while deciding the appeal. 10.1.15 On this issue, I agree with the ARs that the Appellant was prevented by sufficient cause in producing the evidence now filed before me as additional evidence with regard to deposits in the account of Smt. Beenu Gupta, Sharad Kumar Jain (Individual) and Smt. Sarita Agarwal and therefore the same is admitted under Rule 46A of I.T. Rules. In the application u/s 46A placed at pages 533-34 of the paper book, the appellant has given valid reasons which prevented it to file the additional evidence, with which 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 f....
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....hey all are name lender and trust is diverting the trust fund for the benefit of persons "specified under section 13(3) of the Income tax Act, 1961." 10.1.19. The AO had not demonstrated as to how the Assessee is trying to befool the Revenue by filing contradictory replies or that the replies filed by the Assessee were contradictory. His further observations as to how the creditors were maintaining themselves were also not at all relevant particularly when all of them were regular Income Tax payers & had declared interest income earned from Appellant on such loans in their respective Income Tax returns and had been assessed to tax on such interest income. 10.1.20. I need not discuss various case laws relied upon by the Appellant with regard to the additions on account of deposits or credits in the accounts of various persons as discussed above because I have deleted them on merits though the same fully support the appellant's case. 10.1.21.In view of my findings given above, the additions on account of deposits aggregating at Rs.28,60,000/- being wholly unjustified are deleted" 10. Before us the ld DR vehemently supported the orders of the ld Asses....
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....tail filed by the assessee it is seen that surplus of Rs 853958827- was generated during the year and there was no requirement to raise the further unsecured loans it is also worthwhile to mention here that interest on secured loan was paid Rs 950595 l/-average cost of secured loan comes 11.4% on opening balance while on unsecured loan interest is paid @ 18%. In view of the facts unsecured loans creditors are the founders7office bearer and their relatives u7s 13(3) of I.T. Act It is clear if any Income or property of the Trust or Institution is diverted during the previous year in favour of any person referred to in sub section (3) or if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources or the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services; It is clear that assessee trust is in adequate surplus of the fund there was no need to take unsecured loans on higher rate i.e @ 18% while bank OD limit of Rs.4.5 crore under utilized which was available on very l....
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.... quantum coming since number of earlier years, which are also well assessed under scrutiny assessments for immediate earlier years. Under the facts and circumstances stated herein above the same deserves to be allowed. Reply of the assessee considered. Assesses tried to demonstrate the reason for higher of interest paid to persons specified under section 13(3) by commendatory, 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 are filing their income tax return by showing interest income and no other regular of income is earned/ shown by all unsecured loan creditors. No cash accruals is with the unsecured loan creditors and how they are maintaining themselves is also Taken care Actually they all are name lender and trust is diverting the trust fund for the benefit of persons specified under section 13(3) of the Income tax Act, 1961." 14. The ld CIT(A) has dealt with this issue at page No. 10.2 of his order from page No. 18 to 22 as u....
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....opy of sanction letter dated 10/08/2005 of PNB Meerut from whom loan was raised is at page 480 - 481. Clause 4 at page 481 of this letter reads as under: "Borrower shall undertake not to allow the withdrawal of unsecured loans from friends/relatives of promoters without prior permission of the bank in writing". . Clause 8 of Punjab National Bank's letter dated 10/08/2005 at page 487 reads as under: "Escalations: The borrower shall meet such costs, if any, from its own sources and shall not ask for any additional term loan from the bank. The promoters will also increase their margin contribution from Rs. 189.99 lakhs to Rs. 199.99 lakh". Further the AO overlooked to appreciate that raising of loans from the banks besides interest rate also costs the appellant processing fee of 1.25% and other charges coupled with the fact that the Appellant had to give personal securities of its Trustees also. In other words, raising of loan from the bank was not easy but also because of personal guarantees of the Trustees. Thereafter, the AO has reproduced Assessee's reply dated 29/12/2011 filed before AO, copy placed at pages 411 - 415 justifyin....
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....dition. 10.2.3. I have gone through the audit report filed by the Appellant along with the return copy placed at pages 499-516 of the paper book and I do not find any infirmity in the same. The Auditors had prepared their report correctly. 10.2.4. As regards the observations of the AO that keeping in view the surplus generated during the year, there was no requirement to raise further unsecured loan, the same were not at all justified firstly because it was the Appellant Trust which had to decide about the same keeping in view its requirements and secondly because I find from the sanction letter dated 10/08/2005 of PNB, Meerut from whom loan was raised, copy of which has been placed at page 480-481 that the Bank had imposed certain restrictions. It is appropriate to reproduce clause 4 of the said letter: "Borrower shall undertake not to allow the withdrawal of unsecured loans from friends/relatives of promoters without prior permission of the bank in writing". Further clause 8 of the said letter at page 487 reads as under: "Escalations: The borrower shall meet such costs, if any, from its own sources and shall not ask for any additional ....
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....lied upon the order of ld CIT(A). He further referred that 2010-11 this issue was examined during the scrutiny assessment u/s 143(3) of the Act and has not taken any adverse view despite noting that assessee has paid interest on above unsecured loans from 12 to 18 %. He therefore stated that in earlier and subsequent year the claim of the assessee is accepted, therefore, this issue cannot be agitated now. 17. We have carefully considered the rival contentions. The ld Assessing Officer has stated that interest has been paid @18% to various parties and therefore, he presumed that these are the parties specified u/s 13(3) of the Act and hence, held that provisions of section 13 are violated. The ld CIT(A) has considered the relevant banking rates and has held that the rate of interest are reasonable and AO has not given any valid and sustainable reasons with respect to the applicability of section 13(3) of the Act he emphatically stated that there is no contravention of provision of section 13(3) of the Act. 18. The provisions of section 13 provides that in certain circumstances section 11 which given beneficial treatment to income from property held for charitable or religious ....
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....e benefit of any person referred to in sub-section (3), in so far as such use or application relates to any period before the 1st day of June, 1970 ; 1(d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year- (i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 ; or (ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983, otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983 ; or (iii) any shares in a company, other than- (A) shares in a public sector company ; (B) shares prescribed as a form or mode of investment under clause (xii) of sub- section (5) of section 11, are held by the trust or institution after the 30th day of November, 1983 : Provided that nothing in this clause shall apply in re....
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....erred to in sub-section (3), for any period during the previous year without either adequate security or adequate interest or both ; (b) if any land, building or other property of the trust or institution is, or continues to be, made available for the use of any person referred to in sub- section (3) for any period during the previous year without charging adequate rent or other compensation ; (c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services ; (d) if the services of the trust or institution are made available to any person referred to in sub-section (3) during the previous year without adequate remuneration or other compensation ; (e) if any share, security or other property is purchased by or on behalf of the trust or institution from any person referred to in sub-section (3) during the previous year for consideration which is more than adequate ; (f) if....
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....ase as on 01.04.2008 the assessee was having opening unsecured loans of Rs. 12840243/- and during the year further loan was taken of Rs. 29.10 lakhs and out of which Rs. 28.36 lakhs were repaid. Interest amounting to Rs. 2002054/- was also paid along with TDS of Rs. 183383/- at the end of the year unsecured loan of Rs. 14732279/ -. The trust was having a corpus Rs. 15.20 crores and specific funds of Rs. 1 crore. Further, secured loan of Rs. 10 crores is also taken from Punjab National Bank. On looking at the loan statement which is placed at Pg No. 400 of paper book shows that the assessee has borrowed from 27 persons who are from Jain, Mittal, Goel, Aggarwal and Gupta Family. Further, the loan taken from them was also in the range of Rs. 30000/- to Rs. 25 lakhs. Further during the year the assessee has borrowed from these persons in the range of Rs. 50000/- to Rs. 10 lakhs. The loans taken during the year are also discussed while deciding ground No. 4 and 5 of this appeal. Though relevant facts mentioned therein do not warrant justification for addition u/s 68 of the Act, but tells a story which is evident that spare funds of the family are being parked in this trust and it carrie....
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....tioned letter of the bank mentioning that borrower shall not undertaken withdrawal of unsecured loan cannot be said that payment of interest @18% to them is at market rate. All those assertions and submissions of assessee would have sum semblance of acceptance if it could have demonstrated that such rate of interest is at lesser than competitive rates on similar terms and conditions and for such smaller quantum also. In absence of plausible explanation from the assessee we are of the opinion that ld CIT(A) has wrongly deleted the above additions. Further it has been submitted before that in the past and in the subsequent years the assessee is paying interest to the above persons which have not been disputed by the revenue. the assessee has produced the assessment orders as under :- Preceding years a. Assessment Year 2003-04 b. Assessment Year 2004-05 C. Assessment Year 2005-06 d. Assessment Year 2006-07 e. Assessment Year 2007-08 f Assessment Year 2008-09 Subsequent Years a. Assessment Year 2010-11 b. Assessment Year 2011-12 c. Assessment Year 2012-13 We have carefully examined these orders and except for AY 2010-11 we note that this issue has no....
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....total estimate value of construction was given this information shows that total area of construction under taken is 2,29,214 Square Ft. average construction cost is shown at Rs. 476/- per Square Feet excluding steel, cement and sanitary items. Other than steel, cement and sanitary items cost of Rs. 476/- per square feet is unreasonably high and not justified. Summary of expenditure as filed by assessee on building construction is given below :- S. No. Particular Amount 1 Contractor 17965662.00 2 Cement 5242384.00 3 Steel 15029974.00 4 Other Material 951992.00 5 Misc. Building repair & Maint. 1136944.00 Total 24126956.00 Apart from it assessee also submit the award of contract to various contractors for construction of institute building as per following details :- ' Contractor Name Blockwise Area Rate excluding steel, cement and sanitary items estimated value Total Advance payment during F.Y. 2008-09 Shubham Constructions 33029.02 Sq. Ft Rs. 476 per Sq. Ft. 1,57,21, 814 Shubham Constructions 33029.02 Sq. Ft Rs. 476 per Sq. Ft. 1,57,21, 814....
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....nbsp; 2. Payment to Petty Contractors: These are for carrying out miscellaneous - allied construction activities in respect of which a chart showing their complete names, addresses, PANos., quantum of payment has already been furnished - a copy of which is furnished afresh herewith. All said payments are also subject to due IDS. They are not the regular - main contractors to whom during the year only advances are given on their running bills - work carried out subject to TDS and shown as such as advances. 1765662 3. Cement: In respect of the same its detailed copy of account with copies of all bills have already been furnished during the proceedings, which may be taken on record. 5242384 4. Steel: In respect of the same its detailed copy of account with copies of all bills have already been furnished during the proceedings, which may be taken on record. 15029974/- 5. Other Material: In respect of the same its detailed copy of account with copies of all bills have already been furnished during the proceedings, which may be taken on record. 951992/- 6. Miscellaneous building repair and maintenance In respect of the same detaile....
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....e allowed as application. Since all surplus is added in the hands of assessee in view of provision of section 11 read with section 13(2) so this addition is not taken while calculating the taxable income. it is further to point out that the society has claimed for payment of advances against construction to M/s Shubham Constructions, M/s Design Cell, Shri Shanni Constructions and M/s Verma Constructions. In order to inquiry about genuinely the summon u/s 131was issued for calling details to M/s Design Cell, 7- 2nd Floor, Tirupati Plaza, Begum Bridge Road, Meerut & to M/s Shubham Constructions, 18- First Floor, K.N. Modi Complex, Modinagar, Ghaziabad. The finding of the same of reported as under :- M/s Design Cell: In compliance of notice issued u/s 131 of the T. Act, 1961, the partner of the Firm Shri Ved Prakash not appeared. He sent his son Shri Rajesh Agrawal on 29.12.2011 for compliance .. On goring through the P & L Account of the firm submitted for A. Y. 2009-10 & 2010-11, it is found that in A. Y. 2009-10, the assessee has purchased cement for Rs. 66,000/-and labour charges claimed Rs. 6,00,000// -. Simultaneously, in A. Y. 2010-11, the assessee ha....
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....der that such advances given to the construction contractor do not violate the provisions of section 11(5) of the Act. the ld DR relied on the order of the ld Assessing Officer and the ld AR relied on the order of CIT(A). 23. We have carefully considered the rival contentions. It is apparent that all these parties have been given contract work of 229216 sq ft and the estimated contract value of Rs. 11.06 crores. The main reason given by the ld Assessing Officer is that above advance is not a permissible investment. For the reasons given by the ld CIT(A) in para No. 11.5 are exhaustive and same were not contraverted by the ld DR. before us it could not be pointed out by the revenue that assessee has not got contraction none from these contracts and further these contractors are any way persons covered u/s 13(3) of the Act. Section 11(5) applies only in case of investment and deposit and revenue could not bring any thing on record to say that the above sum given as an advance to the contractor are not part of regular terms of the contract of the construction activity or contractors have not done any work on behalf of the trust but merely enjoyed the advances. Therefore, we are of ....