If assessee trust had not defaulted in any of the limb of section 13, the exemption under section 11 could not be denied.

Short Overview : Treating the loan as unexplained had no link with the denial of the exemption under section 11/12. Further, as the assessee had not defaulted in any of the limbs of section 13, the exemption under section 11 could not be denied. Moreover, as the discrepancy referred to by the AO in the loan was only an accounting error duly explained by the assessee, the denial of the exemption under section 11/12 by AO was not justified.

Assessee-trust was registered under section 12AA. It had shown unsecured loans. AO treated the discrepancies found in the amount of loan as unexplained and denied the exemption under sections 11 and 12. Assessee contended that as the discrepancy mentioned by the AO did not fall in any of the limbs of section 13, denial of exemption under section 11 was not justified. Assessee further contended that said discrepancy in the loan was only an accounting error.

It is held that  Registration granted to the assessee under section 12AA had not been cancelled or withdrawn by the CIT. Further, treating the loan as unexplained had no link with the denial of the exemption under section 11/12. And, as the assessee had not defaulted in any of the limb of section 13, the exemption under section 11 could not be denied. Moreover, as the discrepancy referred to by the AO in the loan was only an accounting error duly explained by the assessee, the denial of the exemption by AO was not justified. Hence, the AO was directed to compute the income after allowing exemption under section 11/12.

Decision: In assessee’s favour

IN THE ITAT, JAIPUR BENCH

VIJAY PAL RAO, J.M. & VIKRAM SINGH YADAV, A.M.

Dy. CIT (E) v. Lotus Education Society

ITA No. 360/JP/2019

16 October, 2019

Assessee by: P. C. Parwal (CA)

Revenue by: Ashok Khanna (Joint Commissioner)

Vikram Singh Yadav, A.M.

This is an appeal filed by the Revenue against the order of learned Commissioner (Appeals), Kota, dated 20-12-2018 wherein the assessee has taken the following grounds of appeal :–

“1. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in allowing exemption under section 11 of the Income Tax Act, 1961 to the assessee without appreciating the fact that various discrepancies were found by the assessing officer on verification of unsecured loans?

2. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in allowing exemption under section 11 of the Income Tax Act, 1961 to the assessee without appreciating the fact that various discrepancies were found by the assessing officer in the submission filed by the assessee trust during assessment proceedings and thereby defeating the very purpose of the assessment proceedings and integrity of the written submissions of the assessee?

3. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the addition of Rs. 25,625 on account of non-deduction of TDS by holding that assessee trust was allowed the benefit of section 11 & 12 of the Income Tax Act, 1961?

4. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the addition of Rs. 5,00,000 made under section 68 of the Act?

5. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the addition of Rs. 2,28,24,920 on account of expenses claimed for investment in acquisition of fixed assets by holding that assessee trust was allowed the benefit of section 11 & 12 of the Income Tax Act, 1961?

6. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in allowing accumulation or set-apart to the extent of 15% by holding that assessee trust was allowed the benefit of section 11 & 12 of the Income Tax Act, 1961?

7. Any other question of law as deemed fit in the facts and circumstances of the case may also be framed before the Hon’ble Tribunal in the interest of justice.”

2. Briefly stated, the facts of the case are that the assessee society is engaged in imparting education and is running an engineering college in the name of Jaipur Institute of Technology, Jaipur. It is registered under the Registration Society Regulation Act, 1958 with effect from 12-9-2007 and is also registered under section 12AA of Income Tax Act, 1961 vide letter no.627, dated 20-7-2010 with effect from 1-4-2010. It filed its return of income on 5-2-2015 declaring Nil income. In course of assessment proceedings, the assessing officer observed that assessee has shown unsecured loans of Rs. 8,85,32,180. To verify the genuineness of these unsecured loans, information was called for under section 133(6) in the Income Tax Act. In nine cases, reply was not received, in case of Ramesh Kumar Sarogi, letter was returned back by the postal authorities with the remark incomplete address and in case of Anil Kumar Nuhal, there was difference in the amount of loan to the extent of Rs. 5,00,000. In view of these discrepancies, assessing officer denied the exemption under section 11 & 12 of Income Tax Act, 1961 and completed the assessment by treating the assessee as an Association of Persons and taxed the surplus amount of Rs. 1,32,02,345 in its hands at the maximum marginal rate.

3. Being aggrieved, the assessee society carried the matter in appeal. The learned Commissioner (Appeals) held that it is not the case of the assessing officer that certain unsecured loans were bogus or unproved as seen from the explanation given by the appellant in assessment proceedings and also no separate addition has been made under section 68 in respect of these loans. The only real discrepancy noted was of Rs. 5 lacs in respect of loan from Sh. Anil Kumar Nuhal. Treating the loan to the extent of Rs. 5 lacs as unexplained has no link with the denial of exemption under section 11/12.

The exemption under section 11 can be denied only when the assessee’s case falls in any of the limb of section 13. In the present case, assessee has not defaulted any of the limb of section 13. As regards the discrepancy referred by the assessing officer in the loan taken from Anil Kumar Nuhal is concerned, the same is clarified by the appellant. Hence, denial of exemption by the assessing officer is not justified and assessing officer was directed to compute the income after allowing exemption under section 11/12 of the Act.

4. Against the aforesaid findings of the learned Commissioner (Appeals), the Revenue is in appeal before us. The learned Departmental Representative took us through the findings of the assessing officer and submitted that given the discrepancies noticed by the assessing officer in respect of unsecured loans, the assessing officer was right in denying the exemption claimed by the assessee under section 11 and 12 of the Act.

5. Per contra, the learned Authorised Representative submitted that from the provisions of the Act, it can be noted that exemption under section 11/12 can be denied by the assessing officer only if the conditions referred to in section 13 are not complied with. The discrepancy mentioned by the assessing officer does not fall in any of the limb of section 13. The exemption granted under section 12A has not been withdrawn till date. Therefore, denial of exemption under section 11 is uncalled for.

6. It was further submitted by the learned Authorised Representative that the discrepancy referred by the assessing officer in the loan taken from Anil Kumar Nuhal is only an accounting error.

The assessee has received loan of Rs. 10 lacs from Anil Kumar Nuhal and Rs. 5 lacs from his sister concern M/s. Krishna Developer. However, the entire loan has been accounted for in the books in the name of Anil Kumar Nuhal. This fact is evident from the copy of bank account of assessee from which it is clearly evident that Rs. 10,00,000 was received from Anil Kumar Nuhal and Rs. 5,00,000 was received from M/s. Krishna Developers. This fact was also stated vide Letter, dated 28-12-2016 along with copy of confirmation from M/s. Krishna Developers and its bank account. Thus, loan received is fully explained.

Simply on accounting error which neither resulted in wrong claim nor any benefit to the specified person, exemption denied by the assessing officer is uncalled for. In view of above, order of learned Commissioner (Appeals) be upheld by dismissing the ground of department.

7. We have heard the rival contentions and pursued the material available on record. The assessee society is registered under section 12AA of the Act.

We also note that there is no finding recorded by the assessing officer in terms of non-fulfillment of conditions specified in section 11, 12, 12A and 13 of the Act by the assessee society. Regarding non-verification of certain unsecured loan accounts and discrepancy in loan amount of Rs. 5 lacs, the learned Commissioner (Appeals) has returned following findings that the same cannot be a basis for denial of exemption under section 11 and 12 and we hereby confirm the same :–

“The assessing officer has denied the exemption under section 11/12 as there was a discrepancy in the verification of the loan to the extent of Rs. 5,00,000. It is not the assessing officer’s case that certain unsecured loans were bogus or unproved as seen from the explanation given by the appellant in the assessment proceedings and also no separate addition has been made under section 68 in respect of these loans. Clearly, the finding to make the addition has arisen from the assessing officer’s decision to deny the Exemption under section 11 & 12 in the case. The only real discrepancy noted was of Rs. 5, 00,000 in respect of Loan from sh. Anil Kumar Nuhal.

It is seen that the assessee is an educational institutions and running an Engineering college in the name of Jaipur Institute of Technology, Jaipur.

The society is registered under the Registration of Societies Act with effect from 12-9-2007.The assessee is also registered under section 12AA of Income Tax Act, 1961 vide letter No. 627, dated 20-7-2010. This registration has not been cancelled or withdrawn by the Commissioner. The treating of the loan to the extent of Rs. 5, 00,000 as unexplained has no link with the denial of the exemption under section 11/12. The exemption under section 11 can be denied only when assessee’s case falls in any of the limb of section 13. In the present case the assessee has not defaulted any of the limb of section 13.

As regards the discrepancy referred by the assessing officer in the loan taken from Anil Kumar Nuhal is concerned, I find that the same was clarified by the appellant by filing the confirmation from M/s. Krishna Developers along with their bank account vide letter dt.28-12-2016 where the balance amount of loan of Rs. 5 lakhs was;: effected as this concern is also a family concern of Sh. And Kumar Nuhal and the Trust entered the entire amount of Rs. 15 lakhs under his name, which explanation given in the statements of Sh. Anil Kumar Nuhal also the assessing officer has not found to be false.

Considering all the above facts and circumstances, the denial of the exemption made by the assessing officer is not found to be justified and the assessing officer is directed to compute the income after allowing exemption under section 11/12.

This ground of appeal is treated as allowed.”

In the result, the ground no. 1 and 2 of the Revenue’s appeal is dismissed.

8. In the Ground No. 3, the Revenue is aggrieved by the action of learned Commissioner (Appeals) in deleting the addition of Rs. 25,625 on account of non deduction of TDS by holding that assessee trust was allowed the benefit of section 11 & 12 of the Income Tax Act, 1961. Briefly stated, the facts of the case are that the assessing officer observed that assessee has not deducted TDS on the interest of Rs. 25,625 credited to the account of Sita Devi Kabra. Accordingly, he disallowed Rs. 25,625 under section 40(a)(ia) of the Income Tax Act because assessee’s claim of exemption under section 11 was rejected. The learned Commissioner (Appeals) after relying on the decision of ITAT, Jaipur Bench in case of Shri Digamber Jain Bees Panthi Ajmeri Amnay Panchayat Bada Dhada v. ITO(E), deleted the disallowance made by the assessing officer.

9. In this regard, the learned Authorised Representative submitted that provisions of section 40(a)(ia) are not applicable on trust. Explanation 3 to section 11 inserted by FA, 2018 which provides that provisions of section 40(a)(ia) is applicable in case of charitable or religious trust or institution is applicable from 1-4-2019. For this purpose reliance is placed on the decision of ITAT, Jaipur Bench in case of Shri Digamber Jain Bees Panthi Ajmeri Amnay Panchayat Bada Dhada v. ITO(E) 2018 ITL 3413 (JP): 2018 TaxPub(DT) 6527 (Jp-Trib). Hence, disallowance made by the assessing officer is uncalled for.

10. We have heard both the parties and purused the material available on record. We find that the assessing officer has invoked the provisions of section 40(a)(ia) where the assessee society was held not eligible for exemption under section 11 and 12 of the Act. However, while disposing off the aforesaid grounds of appeal, we have already held that the assessee society is eligible for exemption under section 11 and 12. Hence, the said ground of appeal becomes academic and is hereby dismissed as infructous.

11. In Ground No. 4, the Revenue is aggrieved with the action of the learned Commissioner (Appeals) in deleting the addition of Rs. 5,00,000 made under section 68 of the Act.

12. Briefly stated, the facts of the case are that the assessing officer observed that assessee has shown loan of Rs. 15,00,000 from Sh. Anil Kumar Nuhal whereas in response to information called under section 133(6) of Income Tax Act, Sh. Anil Kumar Nuhal has informed that he has given loan of Rs. 10 lacs and also furnished his bank statement. The same was also confirmed by Sh. Anil Kumar Nuhal in the statement recorded under section 131 of the Income Tax Act, 1961. Accordingly, the assessing officer treated the difference in unsecured loan of Rs. 5 lacs as anonymous receipt & unexplained cash credit/undisclosed investment of the assessee and added the same under section 68 of the Income Tax Act, 1961.

13. On appeal, the learned Commissioner (Appeals) held that amount of Rs. 5 lacs is not a donation but loan from Krishna Developers for which confirmation and bank account was filed. The lender is assessed to tax. The assessing officer has not found any discrepancies in the same. Accordingly, he deleted the addition of Rs. 5 lacs made by the assessing officer.

14. In this regard, the learned Authorised Representative submitted that the assessee has received loan of Rs. 10 lacs from Anil Kumar Nuhal and Rs. 5 lacs from his sister concern M/s. Krishna Developer. However, by mistake the entire loan has been accounted for in the books in the name of Anil Kumar Nuhal. In support of the same, copy of bank account of assessee and confirmation from Krishna Developers and its bank account was filed. Hence, addition made by the assessing officer is uncalled for.

15. We have heard the rival contentions and pursued the material on record.

We find that the assessee has duly explained the transaction with Anil Nuhal and Krishna Developers which has been rightly appreciated by the learned Commissioner (Appeals) and no infirmity therein has been observed by the learned Commissioner (Appeals). We accordingly confirm the findings of the learned Commissioner (Appeals) and the ground of the Revenue is dismissed.

16. In Ground No. 5, the Revenue is aggrieved with the action of the learned Commissioner (Appeals) in deleting the addition of Rs. 2,28,24,920 on account of expenses claimed for investment in acquisition of fixed assets by holding that assessee trust was allowed benefit of section 11 & 12 of the Income Tax Act, 1961.

17. Briefly stated, the facts of the case are that in computation of total income, assessee claimed expenses for investment in acquisition of fixed assets at Rs. 2,28,24,920. The assessing officer disallowed the same on the ground that assessee’s claim of exemption under section 11 is rejected and its assessment is done as an assessing officerP.

The learned Commissioner (Appeals) held that as the claim of exemption under section 11/12 is allowed, the assessing officer was directed to compute the income as per provisions of section 11 and 12 of the Act.

18. We find that the assessing officer has denied the claim of application of income by way of capital expenditure towards acquisition of fixed assets for the reason that the assessee society was held not eligible for exemption under section 11 and 12 of the Act. However, while disposing off the aforesaid grounds of appeal, we have already held that the assessee society is eligible for exemption under section 11 and 12. Hence, the said ground of appeal becomes academic and is hereby dismissed as infructous.

19. In Ground No. 6, the Revenue is aggrieved with the action of the learned Commissioner (Appeals) in allowing accumulation or set apart to the extent of 15% by holding that assessee trust was allowed the benefit of section 11 & 12 of the Income Tax Act, 1961.

20. The assessing officer did not allow the accumulation or set apart to the extent of 15% of total receipts to the assessee as the assessee’s claim of exemption under section 11 is rejected,. The learned Commissioner (Appeals) held that as the claim of exemption under section 11/12 is allowed, assessing officer was directed to compute the income as per provisions of section 11 of the Act. The learned Authorised Representative further submitted that from the computation of total income, it can also be noted that assessee has not claimed any accumulation or set apart of total receipts.

21. We have heard the rival contentions and perused the material available on record. Undisputedly, the assessee being eligible for exemption under 11 and 12 is eligible for accumulation of its receipts within the prescribed threshold as provided in the Act. In this regard, we find that the assessee society has shown fees from students amounting to Rs. 7,89,58,305 and other income of Rs. 12,22,222 totalling to Rs. 8,01,80,527. Further, as regards application of income, it has claimed expenditure of Rs. 6,15,09,279 and capital expenditure of Rs. 2,28,24,920 totalling to Rs. 8,43,34,199 and thus has reported excess of expenditure over receipts by Rs. 41,53,672. Given that besides the fees receipts and other income, the assessee has shown unsecured loans of Rs. 8,85,32,180, prima facie the excess of expenditure has been met out of unsecured loans and not out of total fee and other income receipts during the year. Therefore, it needs to be examined in detail to what extent the unsecured loans have been utilised for meeting the expenditure and to what extent, fee receipts and other income have been utilised for meeting the expenditure and then determine the amount of accumulation out of total fee and other income receipts accordingly. In the result, the matter is set-aside to the file of the assessing officer for the limited purposes of determination the accumulation of receipts, if any and take action as per law. The ground is thus allowed for statistical purposes.

In the result, appeal of the Revenue is partly allowed for statistical purposes.