Subscription to chit funds cannot be regarded as investment U/s. 13(1)(d) RW 11(5)

Sri Sivani Educational Society Vs. ITO (ITAT Visakhapatnam)

Chit fund business is governed by the principles of mutuality and contribution to a chit fund is contribution to oneself on the principle of mutuality and hence, it is not an investment as contemplated by section 13(1)(d) read with section 11(5) of Income Tax Act, 1961. As it was held that contribution to chit fund in this case, was not an investment, and much less an investment with someone else, and further that the provisions of section 11(1)(a) had been complied with by investing the entire income of the year towards charitable purposes, there was no violation of section 13(1)(d) read with section 11(5) of Income Tax Act, 1961.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-Appeal of the assessee in ITA No. 175/V/2012 is directed against the order of the Commissioner (Appeals), Visakhapatnam dated 28-3-2012 and appeals of the assessee in ITA Nos. 479 to 481/V/2012 are directed against the order of Commissioner (Appeals), Visakhapatnam dated 27-9-2012. Since, all the issues arising in these appeals are common, for the sake of convenience they are heard together and disposed of by this common order.

Facts in brief: (ITA No. 175/V/2012):

2. The assessee Sri Sivani Educational Society, Srikakulam, is a society registered under the Societies Act. It has been granted registration under section 12A of the Income Tax Act, 1961 by the CIT-II, Visakhapatnam vide proceeding no. CIT-2/trusts/62/2005-06 dated 29-9-2006. The assessee is an educational institution, running Engineering and Pharmacy colleges. During the assessment year, the assessee filed its return of income on 30-9-2009 declaring nil income, after claiming excess of income over expenditure, amounting to Rs. 84,32,548. It claimed exemption under section 11 read with section 12A of the Act. The return of income was scrutinized under section 143(3) of the Act.

Assessing Officer’s findings:

3. During the course of scrutiny assessment proceedings, the assessing officer noticed that the assessee has been contributing to M/s. Margadarshi Chit Funds. The chit value is Rs. 15 lakhs and each installment is Rs. 30,000 and the total installments are 50. During the year under consideration, the assessee society has contributed Rs. 2,65,300 and received Rs. 1,24,700 as dividend from the said chit fund company. The assessing officer on the ground that the assessee has not invested or deposited its funds in the mode of form specified under section 11(5) of the Act held that the provisions of section 13(1)(d) of the Act are attracted and thus came to a conclusion that the assessee is not eligible for exemption under section 11 of the Act. A show cause notice was issued to the assessee society. In reply, the assessee submitted that (a) the purpose of subscribing to the chits was for obtaining funds for acquiring fixed assets and hence was not an investment. (b) CBDT Instruction No. 1175 states that in the case of the business entity, the loss incurred by the assessee in the chit transaction is to be treated as business loss and hence the subscription to chit funds cannot be regarded as investment or deposit.

4. The assessing officer rejected the contentions of the assessee. He held that the dividend received is not interest under the Act and hence the contribution made by the assessee society do not take the colour of finance, On the contention of the assessee that it has made contribution for the purpose of obtaining funds for acquiring fixed assets, A.O. at para 5 of his order stated that the assessee is having excess of income over expenditure of Rs. 38,74,707, Rs. 84,32,548, Rs. 1,02,74,514/- and Rs. 1,13,93,673/- for the financial years 2007-08, 2008-09, 2009-10 & 2010-11 respectively. He held that every year there is a surplus of income and this surplus left at the end of the financial year is increasing year by year. Hence, he held that there is no need of financing from the bidding of chits. He distinguished the case laws relied upon by the assessee. He referred to the decision of M/s. Priyadarshini Educational Society Vs. CIT 23 DTR 331 (Visakhapatnam) and held that contribution to chit funds is violative of the provisions of section 11(5) and therefore the exemption u/s 11 of the Act cannot be granted. He brought to tax the total income of the assessee.

5. Aggrieved, the assessee carried the matter in appeal.

CIT(A)’s findings:

6. The first appellate authority, in a very detailed order has upheld the order of the assessing officer. He held that (a) the assessee started contribution to Margadarshi Chit Fund in June, 2007 and got dividend on such contribution during the years 2007, 2008 & 2009. The assessee has excess of income over expenditure as on March, 2009, as in earlier years. As on 31-3-2009, the assessee is holding deposits of more than Rs. 1.1 crores in Vijaya Bank FDR. Hence, the assessee is not in dire and immediate need of funds. (b) it is not disputed that the assessee would need more money for his expansion plan. (c) however, for assessment year 2007-08, 2008-09 & 2009- 10, the assessee is having excess funds even after investing the funds in the fixed assets. (d) it is clear from the balance sheet that the assessee has taken secured loans from the banks and hence it cannot be said that the assessee is not having recourse to approved methods of funding and thus had to go in for chit borrowals. (e) assessee at the time of investing in the chits is not expecting that it would require funds in May, 2009 and hence would use this as a method of borrowal. (f) when the assessee started contributing to chits, it is with an intention to park its extra funds and earn dividend on the same. (g) it is only investing of money in chits and got categorized as investment. (h) on the reliance placed by the assessee on the decision of the Visakhapatnam bench of the ITAT in the case of Gurajada Educational Society v. CIT [IT Appeal No. 471 (Vizag.) of 2004], the learned Commissioner (Appeals) held that the facts are different as in that case, the assessee has bid the chit first and repaid the money so borrowed. He referred to decision of the Visakhapatnam ITAT in the case of Priyadarshini Educational Academy 123 TTJ 195 and pointed out that the Tribunal therein has explained the earlier decision in the case of Gurajada Educational Society (supra).

7. He relied on the decision of the Hon’ble A.P. High Court in the case of M/s. Priyadarshini Educational Academy 333 ITR 347 (AP) for the proposition that investment in the chit funds is not one of the modes approved or specified u/s 11(5) of the Act and hence the provisions of section 13(1)(d) of the Act are attracted. On the argument of the assessee that violation of section 13(1)(d) of the Act, will not attract total denial of exemption and the tax ability of income should be restricted only to the amount of investment, the Ld. CIT(A) discussed section 13 of the Act and at para 3.11 referred to the term “ any funds” and came to a conclusion that entire exemption u/s  11 was to be denied. He placed reliance on the following case laws:

1. Teleprolu Bapanaiah Vidyadharma Nidhi Trust v. CIT (1987) 167 ITR 482 (AP)

2. Sardarni Uttam Kaur Educational Society v. CIT (2008) 173 Taxman 229 (Punj. & Har.)

3. CIT v. Shree P. Subramoniam Religions Trust (2010) 326 ITR 393 (Ker.)

4. Kanahya Lal Punj Charitable Trust v. DIT (Exemption) (2008) 297 ITR 66 (Delhi)

5. CIT v. V.G.P. Foundation (2003) 262 ITR 187 (Mad.)

8. He also referred to the decision of the Hyderabad Bench of the ITAT in the case of “National Academy for Construction” and came to a conclusion that once the assessee society violated the provisions of section 13(1)(d) of the Act, it loses exemption to the whole of its income and not only for that part, which is earned from such investment. He referred for this proposition on the judgement of the Kerala High Court in the case of Mundakapadam Mandhirams Society Vs. CIT 258 ITR 395 (Ker). Thus, he dismissed the case of the assessee.

Facts in brief: (ITA Nos. 479 to 481/V/2012 and 447/V/2012):

9. The assessee is a society registered under section 12A of the Income Tax Act. It filed its return of income for all the above assessment years. There was a survey conducted under section 133A on 18-3-2010. During the course of survey, it was found that the assessee society has contributed to chit funds by name M/s. Nitchala Chit Funds Pvt. Ltd. having a branch office at Parvathipuram, Vizianagaram Dist. The contribution was in respect of two chits of Rs. 5 lakhs each and the monthly subscription amount was Rs. 10,000 each. Further, on verification of the balance sheet of the assessee under the head schedule-E “details of investments and deposits” Rs.60,000 has been shown towards investment in chits as at 31-3-2003. Subsequently, contributions were made to another chit by name M/s. Srinivasa Chit Funds Private Limited and the total amount mentioned in the balance sheet at the end of 31st March of 2004, 2005 and 2006 respectively was Rs. 4,00,000; Rs. 7,80,000 and Rs.6,91,540. The assessee had declared chit dividend income and also debited chit loss. The assessing officer reopened assessments for the all the four years and in the reassessment he held that the assessee has violated section 13(1)(d) of the Act by not making investments in the mode specified under section 11(5) of the Act and denied exemption under section 11 and brought to tax the entire surplus for all the four years.

10. Aggrieved, the assessee carried the matter in appeal. Before the first appellate authority, the assessee challenged reopening as well as on merits. The learned Commissioner (Appeals) in his exhaustive order upheld the findings of the assessing officer. We are not referring to the observations of the CIT in detail, for the reason that the observations of the CIT are identical to those narrated above in ITA No. 175/V/2012.

11. Aggrieved, the assessees filed these appeals on the following grounds :–

Grounds of appeal : ITA No. 175/V/2012:

1.a Appellant submits that Commissioner (Appeals) is not justified in holding that subscription to the Chit Fund made by the appellant for the purpose of raising financial resources, being a society registered under section 12A of the Income Tax Act, 1961 engaged only in imparting Education, attracts denial of exemption of its entire income under the provisions of section 11 read with those of section 13(1)(d), on the ground that subscription to the Chit Fund is only an investment, whereas the appellant had made such subscription only as a source for raising finances required to meet its financial requirements but not as an investment out of its surplus income.

1.b Appellant further respectfully submits that the reliance placed by the Commissioner (Appeals) on the judgment of the Hon’ble jurisdictional High Court of Andhra Pradesh in the case of Priyadarshini Educational Academy v. Director General of Income Tax (Investigation) 333 ITR 347 (AP) is not justified, as the facts in the said case are that the contribution to chit fund has been held to have been made as an investment out of income, whereas in the appellant’s case such contribution has been made only as a source for raising finances and further such contribution not having been made out of surplus funds of the appellant society.

1.c Appellant further respectfully submits that the decision of the hon’ble Income Tax Appellate Tribunal, Visakhapatnam bench, in the case of Gurajada Educational Society (ITA No. 471/Visakha/2004) is squarely applicable to the facts in the appellant’s case and that the reliance placed by the Commissioner (Appeals) on the decision of the hon’ble Income Tax Appellate Tribunal, Visakhapatnam bench, in the case of Priyadarshini Educational Academy v. Assistant Commissioner of Income Tax 125 ITD 141 (Visakha), is not applicable to the facts in appellant’s case.

Ground No. 2

2.a Without prejudice to Ground no.1, appellant submits that Commissioner (Appeals) is not justified in upholding the action of assessing officer that the entire income of the appellant, being a society registered under section 12A of the Income Tax Act 1961 engaged only in imparting Education, is liable to levy of income tax at the maximum marginal rate under the provisions of section 164(2) of the Income Tax Act, 1961, only on account of subscription to a Chit Fund made by the appellant for the purpose of raising financial resources, whereas appellant most respectfully prays that at the most, it is only the amount of income derived from such contribution to Chit Fund which ought to have been held as income liable to levy of income tax at the maximum marginal rate under the provisions of section 164 of the Income Tax Act but not the entire income of appellant.

2.b Appellant most respectfully submits that the reliance placed by the Commissioner (Appeals) on the decision of the hon’ble Hyderabad bench of Income Tax Appellate Tribunal in the case of National Academy of Construction is not correct and justified, when particularly the said judgment is contrary to the judicial principle laid down by the hon’ble High Court of Bombay in the case of DIT (Exemptions) v. S.M.F.B.B. Foundation Trust 259 ITR 533 (Bom.).

Ground No. 3:

Without prejudice to Ground nos. 1 and 2, appellant prays that Commissioner (Appeals) is not justified in confirming the action of assessing officer in subjecting to levy of income tax at the maximum marginal rate of tax of 33.66% on the entire income under the provisions of section 164(2) with particular reference to the proviso thereof, as against the normal rates of income tax applicable to an Association of Persons, particularly when the proviso to section 164(1) is clearly and beyond doubt applicable only to the income considered as not exempt but not in respect of the entire total income.

Grounds of appeal : ITA Nos. 479 to 481/V/2012:

Ground No. 1: The order of the learned Commissioner (Appeals), Visakhapatnam is contrary to the facts and law applicable to the case of the appellant.

Ground No. 2: The learned Commissioner (Appeals), Visakhapatnam ought to have held that the notice issued under the provisions of section 148 of the Income Tax Act, 1961 is invalid and consequently the entire reassessment proceedings are void-ab-intio.

Ground No. 3: The learned Commissioner (Appeals), Visakhapatnam is not justified in upholding the action of the assessing officer in denying exemption under the provisions of section 11 of the Income Tax Act, 1961 and in bringing to tax the surplus of Rs. 73,32,589.

Ground No. 4: The learned Commissioner (Appeals), Visakhapatnam is not justified in holding that the appellant has violated the provisions of section 13(1)(d) read with section 11(5) of the Income Tax Act, 1961.

Ground No. 5: The learned Commissioner (Appeals), Visakhapatnam is not justified in holding that the contribution to chit fund is in the nature of investment.

Ground No. 6: Without prejudice to the above, the learned Commissioner (Appeals) ought to have held that the appellant is under a bona fide belief that contribution to chit fund does not result in violation of the provisions of section 11(5) of the Income Tax Act, 1961 and hence condoned the alleged violation of provisions of section 13(1)(d) of the Income Tax Act, 1961.”

Assessee’s submissions:

12. The learned Counsel for the assessee Mr. G.V.N. Hari submitted that :–

(a) Both the assessees had net deficit during the relevant previous years, as demonstrated in the chart filed during the course of hearing. He submitted that in the case of Lokabandu Educational Society the chart is prepared by following the law laid down by various high courts that the deficit which is carried forward from the previous year, is also to be considered for the current year while arriving at the net deficit. For this proposition he relied on the following case laws :–

DIT v. Raghuvanshi Charitable Trust (2011) 197 Taxman 170 (Delhi)

Govindu Naicker Estate v. Asst. DIT (2001) 248 ITR 368 (Mad.)

CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal (1995) 211 ITR 293 (Guj.)

CIT v. Shri Gujrati Samaj (2012) 204 Taxman 151 (MP)

(b) The assessee has complied with the conditions prescribed under section 11(1) of the Act which confers exemption from the income derived from property held under the trust in two ways (i) amount actually applied for such purposes during the year (ii) amount not exceeding 15% of the income though not actually spent during the year. He submitted that the restriction contained in section 13(1)(d) of the Act is relatable only to the second limb of section 11(1)(a) of the Act i.e. amount not exceeding 15% of the total income, not actually spent during the year. He submitted that if the consequences of violation of section 13(1)(d) of the Act are applied to the first limb i.e. amount actually applied for charitable purposes during the previous year, then it would lead to an absurd result, as what is actually spent cannot be invested.

(c) When the entire income is actually spent by the assessee, then there is no amount which could be invested in the forms and mode specified under section 11(5) and consequently section 13(1)(d) of the Act is not attracted.

(d) He relied on the CBDT Circular No. 335, date 13-4-1982 in support of his above argument. He pointed out that section 13(5) of the Act was deleted and section 11(5) of the Act was brought in, but the interpretation placed by the board on the above requirement has been demonstrated by way of example in that circular and the beneficial circular issued by the CBDT is binding on the assessing officer.

(e) That the amendment brought out, with regard to the provisions governing the taxation of charitable trust are duly explained in the respective departmental circulars. He relied on (i) Circular No. 4P, date 21.7.1966 explaining the provisions of the Finance Act, 1966. (ii) Circular No. 12P (LXX-7), date 26-11-1968 and Circular No. 29, date 23-8-1969. (iii) Circular No. 45 date 2-9-1970 explaining the provisions of Finance Act, 1970. (iv) Circular No. 108, date 20-3-1973 explaining the provisions of the Finance Act, 1972. (v) Circular No. 204, date 24-7-1976 explaining the provisions of the taxation laws (Amendment Act, 1975). (vi) Circular No. 372, date 8-12-1983 explaining the provisions of the Finance Act, 1983. Referring to the above circulars, he submitted that, the underlying principle behind all these amendments, was that the provisions of section 13 was introduced only to restrict the exemption with regard to the amounts accumulated under section 11(1) of the Act. He pointed out that, but for the provisions of the Act, a Charitable trust was able to misuse the fund accumulated under section 11(1) of the Act and also the voluntary contributions under section 12 of the Act, as initially the provisions of section 11(5) were made applicable, to only accumulations under section 11(2) of the Act. At the same time, the Government did not want to completely restrict the freedom of the institution, with regard to the amounts accumulated under section 11(1) of the Act. Hence, initially the legislature has put only a negative condition that these funds accumulated under section 11(1) of the Act shall not be used for the benefit of the specified persons and it was later that voluntary contributions were brought into the purview of the restrictive conditions. A little later, a positive condition was imposed even with regard to, utilization of funds accumulated under section 11(1) of the Act. However, the choice of investment available to a charitable institution in respect of accumulation under section 11(1) was a little wider than the choice available with regard to the accumulation under section 11(2) of the Act and that ultimately the additional leverage available to funds accumulated under section 11(1) of the Act was withdrawn and that both the accumulations under section 11(1) and 11(2) of the Act have been brought at par.

(f) That the Hon’ble High Court of Andhra Pradesh in the case of Priyadarshini Educational Academy (supra), has held that what is required to be invested is only the income of the educational institutions.

(g) For the meaning of the term “fund”, he relied on the decision of the Hon’ble Delhi High Court in the case of CIT v. Sir Shri Ram Foundation (2001) 250 ITR 55 and submitted that “fund” means what is available for being spent. He argued that, as the entire income of the assessee was applied for charitable purposes, there was no fund available and hence the question of relating the fund to contributions made to chit does not arise.

(h) The learned Counsel for the assessee claimed that, the case of the assessee falls within the exception of section 13(1)(d) i.e. within the ambit of the proviso to section 13(1)(d). He submitted that when the income of the trust is from any other source, then separate books of accounts are to be maintained in respect of such business activity and in such situation, in view of the proviso to section 13(1)(d), it falls within the exception. He relied on the decision of the Delhi Bench of the ITAT in the case of Dy. CIT v. Beer Shiva Educational welfare Society (2007) 107 ITD 403, wherein, it is held that running schools in a systematic manner and generating profits from year to year also constitute a business activity and that only because of section 11(4A) and the provisions of section 2(15) which permit commercial activity in respect of charitable objects of education, that the income from running educational institutions is exempt from tax. He submits that the assessee’s activity is akin to business activity and the income would have, in the normal course be assessed under the head “Profits & Gains of business”. He submits that the assessee has only one source of income i.e. running of educational institution and hence maintenance of separate books of accounts is not required. Alternatively, he relied on the decision of the Hon’ble Delhi High Court in the case of GSI India v. DIT (Exemption) (2014) 360 ITR 138 (Del) and submitted that when the objects pursued and the activities generating the income are integral, it is sufficient if all the receipts and expenses of that activity are separately identified, though, not by way of maintenance of separate books of accounts. Thus he submitted that the assessee is covered by the proviso to section 13(1)(d).

(i) The learned Counsel submitted that the contribution to chit, in the case of the assessee is not an investment. He argued that investment connotes parting with money with a view to earn some income/return on or before the money parted with is returned to the person parting with the money. However, the case of contribution to a chit fund, there is no relationship of debtor and creditor between the person managing the chit funds and the person who contribute to the chit fund that there is no legal right, to claim refund of the amount, contributed by the person joining the scheme. For this proposition, he relied on the following case laws :–

(1) Shriram Chits & Investment (P.) Ltd. v. Union of India AIR 1993 SC 2063

(2) Dhoosa Narasimloo v. Yelala Rajanna (1958) ILR AP 409

(j) It was submitted that certain decisions were not brought to the notice of Hon’ble AP High Court in the case of Priyadarshini Educational Academy (supra) and that the issue whether contribution to a chit fund, constitutes investment or not, was not a question before the Hon’ble High Court and hence it cannot be said that it is a binding precedent. He relied on the decision of Hon’ble Andhra Pradesh High court in the case of CIT v. Suman Chit Funds in ITTA No. 120 of 2013, date 27-6-2013, wherein it is held that in respect of dividend paid by the foreman, to the subscriber of the chit, provisions of section 194A are not applicable.

(k) The learned Counsel relied upon the decision of the apex court in the case of Shriram Chits & Investment (P.) Ltd. (supra) and the judgment of the Hon’ble Madras High Court in the case of Raghavan v. Armugham (1934) 38 MLI 283 for the proposition that contribution to chit continues to be owned by the assessee and the foreman act only as a trustee and hence there is no parting of funds and principles of mutuality apply and the question of violation of section 11(5) does not arise.

(l) The learned Counsel further argued that the assessee never intended to make an investment as during the relevant period, the assessee has applied more money towards the charitable objects of the trust than the income of the trust and the assessee had to resort to borrowing and in such situation, the question of assessee intending to invest does not arise. Referring to the findings that the assessee has fixed deposits, the learned Counsel submitted that the assessee had to compulsorily make deposits in FDR’s, for getting the necessary permission to run the educational institution. He furnished copies of the fixed deposits to demonstrate the point that all these fixed deposits were held jointly with the Government authority. He argued that the assessee intended to bid for the chit in the auction, so that it could receive money in advance, but it could only bid one chit and with regard to the other chits, the assessee could not manage to bid the other chits till maturity, as the bidder was chosen by lottery system. He submitted that as the dominant motto of the assessee in contributing to the chits was only to augment its resources and not to invest in the chit funds, the provisions of section 11(5) are not applicable as it was so held by the Hon’ble ITAT in the case of Gurajada Educational Academy (supra). Further, he referred to the decisions of DIT v. Alarippu (2000) 244 ITR 358 (Delhi) and Kumudam Endowments v. ITO (1990) 32 ITD 210 (Mad.).

(m) The learned Counsel submitted that the contribution to chit fund in question was done in a bona fide manner and the assessee never knew that a question would arise that such contribution to chits would be considered as a possible violation of section 13(1)(d) read with section 11(5) of the Act. It was submitted that (in the case of Lokabandu Educational Society) only in the year 2005-06, when 143(3) order was passed, the assessee came to know of this possible interpretation and thereafter, he did not contribute to any chit funds. He further submits that the contribution made by the assessee to the chit funds is very marginal and negligible, when compared to the scale of operation of the assessee. Thus he contends that taking away the entire exemption under section 11 of the Act would be highly disproportionate consequence to the marginal error on the part of the assessee while acting in a bona fide manner. He relied on the decision of Hon’ble Delhi High court in the case of DIT v. Agrim Charan Foundation (2002) 253 ITR 593.

(n) Alternatively he submitted that the entire surplus cannot be brought to tax even if it is treated as a violation of section 13(1)(d) read with section 11(5) of the Act and for this proposition he relied on the following case laws :–

1. Gurdayal Berlia Charitable Trust v. Fifth ITO (1990) 34 ITD 489 (Bom.)

2. DIT (Exemption) v. Sheth Mafatlal Gagalbhai Foundation Trust (2001) 249 ITR 533 (Mum).

(o) He submitted that income cannot be taxed at maximum marginal rate as the assessee is a non-profit organization and its bye laws prohibited explicitly distribution of surplus and hence the society’s income has to be taxed as in the case of an ordinary AOP at progressive rate of taxation. Reliance was placed on the decision in the case of Samakar Nastik Kendram v. ITO (1993) 44 ITD 145 (Hyd.).

(p) He submitted that the issue is covered in favour of the assessee by the judgment of the Chennai bench of the Tribunal in the case of Sethu Valliammal Educational Trust v. ITO (Exemptions) (2013) 141 ITD 712 and the decision of the Hon’ble Bombay High Court in the case of CIT v. Dr. Vikhe Patil Foundation (2014) 222 Taxman 104 (Bom.).

Revenue’s submissions:

13. The learned D.R. Shri K.V.N. Charya, CIT(DR), ITAT Visakhapatnam on the other hand strongly controverted the arguments of the assessee. He submitted that :–

(a) The argument of the assessee that contribution to chits is a mode of borrowal and not an investment is dealt with by the Commissioner (Appeals) at para 3.6 and 3.7 of his order date 28.03.2012 and he relied on these findings. He took this bench to these paragraphs and submitted that, the assessee in this case has deliberately selected chit contribution as an investment and that this fact remains undisputed as the assessee from 2007 to the year under consideration has only contributed money and earned dividend year after year.

(b) On the second argument of the assessee that only, that part of the income which is relatable to the violation is to be taxed at the maximum marginal rate, but not the entire income of the trust, he referred to the order of the learned Commissioner (Appeals) at para 3.9 to 3.11 and relied on the same.

(c) He relied on the language of section 13(1)(d) of the Act and submitted that violation of this section would result in denial of the exemption under section 11 of the Act for the entire income. For this proposition he relied on the decision of the Hyderabad bench of the Tribunal in the case of National Academy of Construction (supra).

(d) On the argument of the assessee that, as the assessee has fulfilled the conditions laid down under section 11(1) of the Act and that section 13(1)(d) of the Act operates only in respect of the second limb of section 11(1) to the exclusion of the first limb, he submitted that the language of the section 13 of the Act is clear and unambiguous and that the provision states that nothing contained in section 11 or section 12 shall operate in case of any income thereof if any funds are invested or deposited otherwise then the forms/mode prescribed in section 11(5) of the Act. He referred to the section and submitted that a plain reading would lead to conclusion that the intention of the legislature was to remove the benefit of section 11, if any funds out of any income of the assessee, is invested other than the mode specified in section 11(5) of the Act. He submitted that any other interpretation would defeat the purpose of legislation itself and hence it should be avoided. He relied on the Circular No. 229, date 9-8-1977 brought in by the Finance Act (no. 2 of 1977) as well as the CBDT Circular No. 335 date 13-4-1982 and submitted that it has clearly stated that both the requirements of applying 85% of the income to charitable purposes and investing the remaining income in the mode specified under section 11(5) of the Act is mandatory for claiming exemption under section 11 of the Act.

(e) On the argument of the assessee that the entire income has been spent, he submitted that there is a basic flaw in the argument as the assessee is taking only revenue receipts as income for the purpose of calculations. He gave an example and submitted that word “any fund” used in the Act applies to both capital receipts and revenue receipts and the unspent capital receipt has to be invested in the mode specified under section 11(5) of the Act.

(f) From the facts in the case of Sri Sivani Educational Society, he submitted that, the assessee has excess of income over expenditure of Rs. 84,32,548 and that out of the receipt of Rs. 6.9 crores, only an amount of Rs. 6.05 crores was spent on revenue account and that the assessee spent Rs. 7.61 crores on capital account and while taking this figure into consideration, the assessee is claiming that it has a deficit of Rs.6.76 crores. He pointed out that the assessee is not taking into consideration capital receipt like loans, dedicated funds, accumulated funds, etc., which is wrong. While reiterating that even these funds cannot be invested in chits, he submitted that the assessee has not stated from where the money contributed to chits has come from, if it claimed that the entire income was utilized towards its objectives. He submitted that the amount contributed by the assessee towards chits has not come out of thin air. He submitted that if the argument of the assessee is accepted that once 85% or 100% of the revenue’s receipts are applied for the objectives of the trust, then any trust can invest the remaining funds in the manner it wants, after meeting both revenue and capital expenditure out of revenue receipts. Such an interpretation would defeat the purpose of the section in the Act. Hence, he argued that section and circular no.335 should be understood/interpreted to mean that minimum 85% of the income should be spent towards the objectives of the trust and all the remaining funds irrespective of the source and nature, be invested in the prescribed modes or otherwise section 13(1)(d) of the Act would be attracted.

(g) On the argument that the assessee falls within the exceptions laid down under section 13(1)(d), he submitted that even if this proposition is accepted, without conceding, it would not make a difference as the books have to be prepared on commercial line and in such a situation only revenue expenses are allowed and capital expenditure cannot be allowed.

(h) On the argument that contribution to chits is not an investment and the principles of mutuality would be attracted, he relied on the decision of the jurisdictional High Court in the case of Priyadarshini Educational Academy (supra) and submitted that the argument is devoid of merit. He submits that the case laws relied upon by the learned A.R. are entirely in a different context and are distinguishable.

(i) On the argument that the assessee had no intention of making an investment and that it acted in a bona fide manner, he relied again on the decision of the High Court in the case of Priyadarshini Educational Academy (supra).

(j) On the assessee’s argument that the entire surplus cannot be brought to tax, he submitted that there are catena of decisions in favour of the revenue and that these are brought out by the assessing officer as well as the CIT in their order. He pointed out that the decisions in the case of Gurdayal Charitable Trust (supra) and Sheth Mafatlal Gagalbhai Foundation Trust (supra) have been rightly distinguished by the assessing officer.

Learned CIT(DR) in view of the above factual and legal position argued that, the orders of the lower authorities have to be sustained and the assessee’s appeal be dismissed.

Our Findings:

14. Rival contentions were heard. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record and the orders of the authorities below, as well as the case laws cited, we hold as follows :–

The relevant sections that come up for our consideration i.e. 11(1), section 11(5) and 13(1)(d) are extracted for ready reference.

Section 11(1): Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income —

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of [fifteen] percent of the income from such property;

(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of [fifteen] per cent of the income from such property;

(c) income [derived] from property held under trust —

(i) created on or after the 1-4-1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and

(ii) for charitable or religious purposes, created before the 1-4-1952, to the extent to which such income is applied to such purposes outside India:

Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income;

(d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.

Explanation.–For the purposes of clauses (a) and (b), —

(1) in computing the fifteen percent of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income;

(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of eight-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount —

(i) for the reason that the whole or any part of the income has not been received during that year, or

(ii) for any other reason,

then —

(a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and

(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount,

may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.

Section 11(5): The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely :–

(i) investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government;

(ii) deposit in any account with the Post Office Savings Bank;

(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).

Explanation.–In this clause, “Scheduled bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);

(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);

(v) investment in any security for money created and issued by the Central Government or a State Government;

(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government;

(vii) investment or deposit in any public sector company:

Provided that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company, —

(A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company;

(B) such other investment or deposit shall be deemed to be an investment or deposit made under this clause for the period upto the date on which such investment or deposit becomes repayable by such company;

(viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long term finance for industrial development in India and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;

(ix) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;

(ixa) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long term finance for urban infrastructure in India.

Explanation.–For the purposes of this clause, —

(a) “long term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;

(b) “public company” shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);

(c) “urban infrastructure” means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport;

(x) investment in immovable property,

Explanation.– “Immovable property” does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth;

(xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964);

(xii) any other form or mode of investment or deposit as may be prescribed.

Section 13(1)(d): 

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 thereof —

……………………….

(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 28-2-1983 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 1-3-1983 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 30-11-1983; or

(iii) any shares in a company, not being a Government Company as defined in section 617 of the Companies Act, 1956 ( 1 of 1956) or a corporation established by or under a Central, State or Provincial Act are held by the trust or institution after the 30-11-1983:

Provided that nothing in this clause shall apply in relation to —

(i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1-6-1973;

(ia) any accretion to the shares, forming part of the corpus mentioned in clause (i), by way of bonus shares allotted to the trust 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 1-3-1983;

(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 31-3-1993 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 1-4-1984 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 income or any property of any trust or institution is during the previous year used or applied, directly or indirectly, for the benefit of any person referred to in sub-section (3), in so far as such use or application relates to any period before the 1-7-1972, no regard shall be had to the amendments made to this section by section 7 other than sub-clause (ii) of clause (a) thereof of the Finance Act, 1972.

15. The first issue that arises for adjudication, is whether the provisions of section 13(1)(d) of the Act are applicable to the case of the assessees. Before we consider this aspect, we discuss the nature of chit business. There are a catena of decisions of various courts including Hon’ble Supreme Court on this issue. The Hon’ble Delhi High court in the case of Delhi chit Funds Association Vs. UOI and another W.P.(C) 4512/2012 at para 6 & 7 of page 6 of judgement dated 23.4.2013 stated as follows:

“6. It is necessary to give a brief account of the operations of a chit fund business. Supposing 50 persons come together to organize a chit. Let us further suppose that each of them undertake to contribute Rs. 1,000. The total chit amount would be Rs. 50,000. Let us further suppose that the fund would operate for a period of 50 months. Thus the member subscribers and the number of months for which the chit would operate would be the same. In this example at the end of each month, an amount of Rs. 50,000 (Rs. 1,000 x 50) would be available in the kitty of the chit fund. The said amount would be put to auction and those subscribers who are interested in drawing the money early because of their needs may participate in the auction. The successful bidder who is normally the person who offers the highest discount is given the chit amount. For example if there are three bidders offering to take the chit of Rs. 50,000 for Rs. 40,000, Rs. 37,500 and Rs. 35,000 respectively, the chit would be given to that subscriber who is willing to take it for Rs. 35,000 since he has offered a discount of Rs. 15,000. This leave a balance of Rs. 15,000 (Rs. 15,000 – Rs. 50,000) in the kitty. The amount of Rs. 15,000 which represents the discount which the successful bidder has foregone becomes the dividend which is to be distributed to all the subscribers after deducting a fixed amount representing the commission payable to the “foreman”. A foreman is normally a person who organizes the auction and conducts the proceedings. If in the example given above, the commission payable to the foreman is fixed at 5%, then after deducting Rs. 2,500 (5% of Rs. 50,000, the chit amount) the balance of Rs. 12,500 would be distributed among all the 50 subscribers so that each would get Rs. 250. This amount of Rs. 250 can be set off by the subscribers against the second month’s installment of Rs. 1,000 payable by him and he can give only Rs. 750. The auction would be repeated in the subsequent months and the same procedure is followed. Any subscriber who delays the bidding or does not bid at all stands to gain the maximum discount. The chit is thus somewhat like a recurring deposit with the bank. There is no bar on the foreman of the chit fund also participating as a subscriber.

7. The business of chit funds is strictly regulated by the Chit Funds Act, 1982. It contains detailed provisions relating to registration of chits, commencement and conduct of chit business. Rights and duties of foreman, rights and duties of the subscribers, termination of chits, meetings of general body of subscribers, provisions relating to winding up, disputes and arbitration and other miscellaneous provisions. Suffice to note that section 11 recognizes that a chit business can be known by several names such as chit, chit fund, chitty, kuri, etc. Dealing with the Chit Funds Act, the Supreme Court in Sriram Chits & Investment (P) Ltd. v. Union of India : AIR 1993 SC 2063 has laid down the following propositions: —

(a) The Act, in pith and substance, deals with special contract and consequently falls within entry 7 of list III of the 7 the Schedule to the constitution of India;

(b) A chit fund transaction is not a case of borrowing, nor is it a loan transaction. If a subscriber advances any amount, he does so only to one of the members;

(c) The funds of the chit fund belong to the entire lot of subscribers;

(d) The amounts are in deposit which the stake holder only holds in trust for the benefit of the members of the fund;

(e) The foreman acts only as a person to bring together the subscribers and he is subject to certain obligations with a view to protecting the subscribers from any mischief or fraud committed by him by using the position;

(f) Commission is payable to the foreman for the service rendered by him as he does not lend money belonging to him.”

16. The Hon’ble Supreme court in the case of CIT Vs. Bilahari Investments Pvt. Ltd. 299 ITR 1 stated as follows:

“The Supreme Court noted that Chit funds are basically saving schemes in which a certain number of subscribers join together and each contributes a certain fixed sum each month, the total number of months being equal to the total number of subscribers. The subscriptions are paid to the manager of the fund by a certain prescribed date each month and the total subscriptions to the fund are auctioned each month among st the subscribers. At each auction, the lowest bidder is paid the amount of his bid and the balance received from out of the total subscriptions received is distributed equally among st other subscribers, as premium. The manager is paid a certain percentage of the collections each month on account of expenses and charges for conducting the auction. In the auction, a maximum amount, which the highest bidder agrees to forgo, is the amount, which is distributed to the other members, subject to deduction of the manager’s commission.”

17. The Hon’ble Delhi High court in the case of CIT Vs. Saheb Chits (Delhi) Pvt. Ltd. ITA No. 44 of 2008 judgement dated 24.7.2009 has observed as follows:

“Further, it was observed by the Hon’ble Supreme court in Sriram Chits and Investments (P) Ltd. (supra) that it would not be correct to state that each subscriber lent money to the person who gets chits earlier. It cannot also be construed that the person who gets chit later should be treated as a money lender. The agreement between the parties those entered as per section 6 of the Act only provides for distribution of the chit amount. The Supreme court however relied on the judgment of the Kerala High court in Janardhana Mallan & Ors. v. Gangadharan & Ors. AIR 1983 Kerala 178, wherein it was observed that on entering into a chit agreement, a debt is not incurred by the subscriber for the amount of all the future instalments and in respect of such amount there is no debtors-creditors relationship.”

The Hon’ble Delhi High Court further observed as follows :–

“This approach is fallacious on the face of it and particularly in view of the principle laid down in the aforesaid judgement of the Supreme court in Sriram Chits and Investment Pvt. Ltd. (supra), wherein the apex court observed that the subscription received from the members of the chit fund company in terms of contract are not treated as deposits for the purpose of Reserve Bank of India direction. The amount contributed by the members every month is given back to them in the following manner. The successful bidder takes the entire amount (minus) the bid amount and the bid amount is distributed equally among the members. Therefore, by no stretch of imagination, the aforesaid amount contributed by the members can be treated as a deposit with the company much less money borrowed by the assessee.”

18. The Hon’ble Supreme Court in the case of Shriram Chits & Investments (supra) at para 14 held as follows :–

“14. The question as to the nature of chit agreement came up for consideration before a Full Bench of five Judges of the Kerala High Court in Janardhana Mallan & Ors. v. Gangadharan & Ors.. The Full Bench there was concerned with the chit agreement under the Kerala Chitties Act (Act 23 of 1975) where the Kerala High Court speaking through Poti, Acting Chief Justice, took the view that on entering into the chitty agreement a debt is not incurred by the subscriber for the amount of all the future installments and in respect of such amount there is no debtor-creditor relationship. The chitty variola only embodies a promise to pay on future dates. That is not a promise to repay an existing debt, but to pay in discharge of a contractual obligation. For similar reasons neither the prizing of the chitty nor the execution of the security bond would give rise to a debt, for, the prize amount is not received as a loan, but as of right by virtue of the terms of the contract between the parties. Therefore, no debt due to the foreman arises by reason of the receipt of the prize amount or of the execution of the security bond for securing future subscriptions. The Full Bench in this decision over-ruled its earlier decision in the case of P.K Achutan v. State Bank of Travancore, Calicut. While rendering the decision in Janardhana Mallan & Ors. (supra) the Full Bench of the Kerala High Court considered a catena of decisions starting from 1937 in the matter of Ramanatha lyyar v. Narayanaswami. The Andhra Pradesh High Court also, while dealing with the transaction of a chit fund organisation, in the matter of Dhoosa Narsimloo v. Yelala Rajanna & Anr. I.L.R. (1958) Andhra Pradesh 409, where the petitioner had filed a suit in the Court of the District Judge against the respondents on a promissory note executed by them for the amount they drew in a pool from a chit fund organization and where the District Judge had dismissed the suit for want of a license under section 9(2) of the Hyderabad Money Lenders Act (Act V of 1349 F.) and on revision, the question that came for consideration was whether the chit fund organisation could be regarded as a money lender within the meaning of the said Act and whether its transaction partake the nature of a loan. Srinivasachari, J. speaking for the Court held that the amount drawn by a member of a chit fund who bid at the periodical auction giving the largest discount could not come within the definition of a loan within the meaning of the Money Lenders Act nor could such a transaction be regarded as a money lending transaction be and in the circumstances section 9 of the Hyderabad Money Lenders Act (V of 1349 F.) could have no application to such a case. At page 415 of the aforesaid report it has been observed “in our opinion there is nothing in the chit fund transaction which could be called the business of money lending. It is in essence an organization for mutual benefit.

It approved the decision of the Madras High Court in Raghavan v. Armugham: (1934) 38M.L.I. 283. That was also a case of chit fund transaction and the question for decision was whether a provision in the bond for payment of the whole amount in default of any one installment was in the nature of a penalty coming within section 74, Illustration (g) of the Contract Act. The learned Judges ruled that a chit fund transaction was not a case of borrowing at all and it was entirely different from a loan transaction. The learned Judges further held that “a loan envisages the relationship of a creditor and debtor in so far as the lender and the borrower are concerned. There cannot be the relationship of a creditor and debtor between the stake holder and a subscriber, in a chit fund transaction. If the stake-holder advances any amount he advances only to one of the members, the funds of the whole body of the chit fund, as the funds belong to the whole lot of subscribers, the members, borrower is as much a creditor as a debtor. The amounts are in deposit with the stake-holder only as a trustee for the benefit of the members of the fund. “Srinivasachari, J. noticed the observations of Srinivasa lyengar, J. in Tim-marsa Pai v. Subba Rao : AIR (1928) Madras 256 where Srinivasa lyengar, J. regarded the position of the Manager of a kuri chit as a trustee for all the subscribers of the chit fund.”

19. On a conspectus of the above judgement, it is clear that the Hon’ble Supreme Court has approved the opinion of Hon’ble Andhra Pradesh High Court in the case of Dhoosa Narasimloo (supra) that “it is in essence an organization for mutual benefit”. It is further made clear that chit transaction is not a money lending transaction and that there is no relationship of debtor and creditor. The role of the foreman is that of a trustee. He charges commission for his service. The money contributed by the subscribers to the chit does not belong to the foreman. It belongs to all the stake holders. Under these circumstances, it has to be concluded that the contribution to chit fund is a mutual activity and the fund belongs to all the participants. There is no money lent or kept by one party with another party as an investment or deposit.

20. Hon’ble Haryana High Court in the case of Soda Silicate & Chemical Works Vs. CIT 179 ITR 588 (P&H) held as follows:

“In order to answer the question posed, regard must be had to the nature and working of the chit fund, in the context of the assessee, with particular reference to the fact that running a chit fund or being a member of such fund, was not the business of the assessee. The transactions concerned here are contributions made to the fund by the assessee and the lump sum received by it, though at a discount and the subsequent distribution and receipt of amounts among st the participants as premia or dividend. There is clearly mutuality among st the contributors and the participants of the chit fund with their identity being known and established. When such is the case, contributions made to the chit fund cannot be treated as revenue expenditure nor indeed could the payment and receipt of any amount to and from the chit fund be treated to be the business activity of the assessee. The test of mutuality in this behalf, as laid down in CIT v. Nataraj Finance Corporation (1988) 69 CTR (AP) 15 : (1988) 169 ITR 732 (AP) is that the entity would be a mutual benefit association if all the participators to the common fund are also contributors and their identity is established. The contributors to the common fund and the participators in the surplus must be an identical body. The court went on to observe that this does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. What is required is that the member as a class should contribute to the common fund and participators as a class must be able to participate in the surplus”.

21. The same judgment relied on another decision of the Madras High Court in the case of Board of Revenue vs. North Madras Mutual Benefit Co. Limited 1922 I ITC 172 (Madras) wherein it was held that the operations of chit fund cannot be said to bring any profit to its subscribers as a body and the income represented by premia was thus not asses sable to income tax.

22. The hon’ble High Court of Andhra Pradesh in the case of CIT (TDS) Vs. Suman Chit Funds Private Limited held that the discount paid by the Foreman to the subscribers to a chit fund transaction does not partake the character of interest within the meaning of Section 2(28A) of the Income Tax Act. This decision was rendered following the principles laid down by the hon’ble Delhi High Court in Sahib Chits (Delhi) (P) Limited in ITA No. 44 of 2008 and also the hon’ble Supreme Court in the case of CIT Vs. Bilahari Investment Private Limited. Reference was made to a decision of Bangalore Bench of ITAT in the case of Marga Soochi Private Limited in ITA No. 995/Bangalore/2008.

23. Thus from the above it is clear that the contribution to a chit is a mutual activity and cannot be held as an investment, as there is no question of a individual subscriber being entitled to receive profit or income under a scheme of chit funds. No money is laid out with a second party that too with an intention to earn profit. The foreman holds the money received from the chit subscribers only as a trustee. Section 11(5) of the Act only refers money that is to be invested or deposited with a person or entity or organization or Government which is other than the assessee itself. Investment held by self i.e. where no second party is involved is obviously not covered to these sections. Thus, we can conclude that chit fund business is governed by the principles of mutuality and contributing to a chit fund is contribution to oneself on the principle of mutuality and hence, it is not an investment as contemplated by section 13(1)(d) read with section 11(5) of the Act.

24. Now, we proceed to examine to what extent a charitable institution is required to invest the funds for purposes of section 13(1)(d). For this purpose, we analyse the following terms used in section 13(1)(d) :–

(i) Any funds

(ii) Investment or deposit

25. The term “any funds” when read with the phrase ‘any income thereof’, in our opinion signifies income defined under section 2(24) of the Act. Thus any receipt, which falls within the definition of income under section 2(24) of the Act is to be considered. As rightly contended by the learned counsel for the assessee, the restriction on utilization of funds belonging to a charitable institution have been brought in to curb the misuse of tax exempt funds by these charitable institutions. Therefore, on a harmonious construction of the provisions of section 13(1)(d) we are of the considered view that the term ‘any funds’ refers to only the income of a charitable institution.

26. The term “any funds” has been explained by the Hon’ble Delhi High court in the case of CIT Vs. Shree Sri Ram Foundation 250 ITR 55 wherein it is held as follows:

“A similar issue had come up before various High Courts and there is unanimity in the view, as that taken by the Tribunal. In construing the provisions of section 13(2)(h), the expression “funds” has to be understood in the context of the provision and not only with reference to dictionaries or to commercial parlance or to the principles of accountancy. It is to be noted that the expression used is “funds” and not “fund”. “Funds” means money in hand or cash according to some dictionaries. This, according to us, would be the proper meaning to be attributed to the expression “funds” as appearing in the provision. The fundamental requirement of section 13(2)(h) is that there must be investment of funds of a trust. If any expanded meaning is given to include assets other than money in hand or cash or credit balance in a bank account, it is evident that they are not capable of being invested as such. Other assets of the trust apart from money in hand or cash or balance in bank will have to be converted into money or cash before the same can be invested, as was observed by the Calcutta High Court in CIT v. Birla Charity Trust (1988) 170 ITR 150. The expression “invest” connotes a positive act on the part of the trust where-by the funds of the trust are laid out or committed in any particular property or business or transaction with the object of earning a profit or financial advantage or return. What is contemplated is that the trust having assets in the form of money or cash or balance in a bank or any other form capable of being invested or by a positive act and pursuant to a decision of the trust was laid out or committed in a concern of a nature specified before it can be held that such an investment comes within the mischief of section 13(2)(h).

The meaning of the expression “funds” given in the standard dictionaries are as follows :–

“Black’s Law dictionary, fifth edition : ‘Fund’… An asset or group of assets set aside for a specific purpose ……….,

A generic term and all-embracing as compared with term ‘money’, etc., which is specific. A sum of money or other liquid assets set apart for a specific purpose or available for the payment of debts or claims. In the plural, this word has a variety of slightly different meanings, as follows : ‘moneys’ and much more, such as notes, bills, cheques, drafts, stocks and bonds, and in broader meaning may include property of every kind ………… Money in hand, assets, cash, money available for the payment of a debt, legacy, etc. Corporate stocks or government securities ; in this sense usually spoken of as the ‘funds’. Assets, securities, bonds or revenue of a State or Government appropriated for the discharge of its debts. Generally, working capital ; sometimes used to refer to cash or to cash and marketable securities.”

“(b) Dictionary for Accountants, fourth edition, by Eric L. Kohler : 1. An asset or group of assets within any organisation, separated physically or in the accounts or both from other assets and limited to specific uses. Examples : a petty cash or working fund ; a replacement and renewal fund ; an accident fund ; a contingent fund ; a pension fund. Example : a trust fund created by a will ; an endowment fund ; a sinking fund.

4. pl. : Current assets less current liabilities (on an accrual basis) ; working capital ; a term used in cash flow statements.

5. pl. : cash (pp. 204-208).” “Chambers’ Twentieth Century Dictionary, new edition :

Fund : n. a sum of money on which some enterprise is founded or expense supported : a supply or source of money : “The Concise Oxford Dictionary, fifth edition :

Fund n. 1. Permanent stock of something ready to be drawn upon–stock of money–pecuniary resources.”

“Webster’s Seventh New Collegiate Dictionary-based on Webster’s Third New International Dictionary (p. 538) :

Fund. 1. an available quantity or material or intangible resources ;

supply ; 2. a sum of money or other resources the principal or interest of which is set apart for a specific objective.”

The expression, “invest” in the said section 13(2)(h) is used as a verb and the meaning of the said expression in the standard dictionaries is as follows : “Chamber’s Twentieth Century Dictionary, new edition : … to lay out for profit as by buying property, shares, etc.” “The Concise Oxford Dictionary, fifth edition:

… lay out money on, as (invest) in a car.” “Webster’s Seventh New Collegiate Dictionary :

vb. vt 1: to commit (money) in order to earn a financial return ; 2 to make use of for future benefits or advantages–vt. to make an investment.” “Corpus Juris Secundum, Volume XXXVII:

In General.–The word has a variety of meanings, but the sense in which it is employed must be gathered from the context. It is not a legal term with a settled meaning, but it is a term in common use, suggesting money, in common speech, although technically it may be employed to cover other articles of value, for the term ‘fund’ or ‘funds’ is generic and all-embracing as compared with the term ‘money’, etc. which is specific . . , in the plural, ‘capital : cash, money, or moneys ; money and negotiable paper immediately or readily convertible into cash, available pecuniary resources ; money in hand or available for the payment of a debt, legacy, etc., specie, or a stock of convertible wealth; and ‘funds’ may mean or include not only money, as the term is generally understood, but other circulating medium or instrument or tokens in general use in the commercial world as the representatives of value, such as bank notes, bills, cheques, drafts, notes, stocks and bonds, deposits or certificates of deposit, evidences of money lent to the Government, constituting a national debt, for which interest is paid at prescribed intervals. … .”

In R.K. Dalmia v. Delhi Administration (1962) 32 Comp Cas 699 ; AIR 1962 SC 1821, it was observed that the word “fund” may mean actual cash resources of a particular kind (e.g., money in a drawer or in a bank or it may be a mere accountancy expression used to describe a particular category which a person uses in making up his accounts). A similar view was expressed in AHchm v. Coullkard (1942) 2 KB 228. The expression “fund” or “funds” has a variety of meanings but the sense in which it is employed must be gathered from the context. It would not be correct to adopt a strictly literal or technical meaning of this expression while construing section 13(2)(h). In other words we must not construe that provision mechanically. We must construe it having regard to the object which the Legislature had in view in enacting it and in the context of the setting in which it occurs. That, provision came to be inserted in the Act by the Finance Act, 1970. On a plain reading of that provision, it is clear that clause (h) of sub-section (2) of section 15 covers investment of the trust funds in any concern in which any of the persons specified in sub-section (3) has substantial interest (“specified persons” in short) and if such investment of the trust funds is made after 31-12-1970, it would result in forfeiture of exemption from tax. However, if the trust funds have already been invested in any concern as aforesaid before 1-1-1971, the exemption would be forfeited if the funds continued to remain so invested even after 31-12-1970. The object of the above provision is to discourage investment of trust funds in the concerns in which specified persons have substantial interest and if an investment is already made in such concerns, to discourage continuance thereof after 31-12-1970. In order to attract the provisions of section 13(2)(h), what is essential is that the funds of the trust are invested in a concern covered by section 13(2)(c) and if such investment is made prior to 1-1-1971, funds are continued to be not invested after 31-12-1970. It is only if the funds of the trust itself are under section 11, the funds have to be such as are capable of investment. Therefore, in order to attract section 13(2)(h), it has to be established that the funds of the trust which are capable of being invested have been utilised for making investment as provided therein. When the funds of the trust are so invested and such investment is continued after 31-12-1970, the trust whose funds are so invested will not be entitled to claim exemption under section 11. The above position has been elaborately dealt with by the Gujarat High Court in CIT v. Insaniyat Trust (1988) 173 ITR 248.

“The word “investment” means to lay out money in business with a view to obtain income or profit. In order to constitute an investment the amount laid down should be capable of resulting in an income or return or profit to the investor and in every case of investment, the intention and positive act on the part of the investor should be to earn such income, return or profit to the investor. In order to constitute an investment, the money shall be laid out in such manner, as to acquire some species of property which brings in an income to the investor. An investment popularly means every application of money which is intended to fetch return by way of interest income or profit. Thus only employed as capital in a business is money invested in business. (Vide Edwards J., in Tax Commissioner v. Australian Mutual Provident Fund Society (1902) 22 NZLR 445). In ArnaJld v. Grinstead (21 WR Eng 155), it was observed that in its most comprehensive sense it is generally understood to signify the laying out of money in such a manner that it produces a revenue. An illuminating observation was made in IRC v. Desoutter Bros. Ltd. (1946) 1 All ER 58 (CA) about what “investment” means. It was observed that the word “investment” is not a word of art, but has to be interpreted in a popular sense. It is not capable of legal definition, but a word of current vernacular. The words “invest” and “investment” are to be taken in the business sense of laying out of money for interest or profit.

A plea similar to the one taken by learned counsel for the Revenue was raised before the Kerala High Court in CIT v. Chandrika Educational Trust (1994) 207 ITR 108. There also it was pleaded that the expression “continued to remain” qualifies the expression “in any concern” whether it was an investment or not. The plea was rejected by the Kerala High Court. It was observed that it would be doing violence to the plain language of the provision. Section 13(2)(h) requires that the funds of the trust are, or continue to remain invested in any concern of the nature mentioned therein..’

27. In the case of DIT (Exemption) Vs. Alarippu 244 ITR 358 it is held as follows:

‘The expressions used in both the provisions quoted above, are “investment” and “deposit”. The former expression means to lay out money in business with a view to obtain an income or profit. Deposit, on the other hand, means that which is placed anywhere, as in any one’s hands for safe-keeping, something entrusted to the care of another. These two expressions have been used in a cognate sense and have to be understood as such. In order to constitute an investment the amount laid down should be capable of and result in any income return or profit to the investor and in every case of investment, the intention and positive act on the part of the investor should be to earn such income, returns, profit in order to constitute an investment, the monies shall be laid out in such a manner as to acquire some species of property which would bring in an income to the investor. A loan, on the other hand, is granting temporary “deposit” and “loan” are certainly different. Section 11(5) refers to pattern of investment by the assessee. Section 11(5) was introduced by the Finance Act, 1983, with effect from 1-4-1983, i.e., for and from assessment year 1983-84. It prescribes the forms and modes of investing and depositing money referred t in section 11(2)(b). Subsequently, new forms and modes have been added. Section 13(1)(d) as amended by the Finance Act, 1983, provides that the income of any charitable or religious trust or institution will not be entitled to exemption under section 11 and 12, if certain conditions stipulated therein are not complied with. The word deposit does not cover transaction of loan which can be more appropriately described as direct bailment. The essence of deposit is that there must be a liability to return it to the party by whom or on whose behalf has been made on fulfillment of certain conditions. In the commercial sense, the term is used to indicate the aforesaid transaction as deposit of money for employment, in business, deposits for value to initiate security for deposit of title deeds, similar documents as security for loan, deposit of money bills in a bank in the ordinary course of business of current account and deposits of a sum at interest at a fixed deposit in a bank. The amount given to Mahila Haat was neither for the purpose of investment nor for deposit, more particularly in the factual background as highlighted above. The transaction with which the present dispute is linked cannot be treated as an investment or deposit as has been factually found by the Tribunal. The conclusion being essentially factual, no question of law arises out of the order of the Tribunal. Accordingly, the petition is dismissed.’

28. The Hon’ble Bombay High court in the case of Income Tax Officer vs. Dr. Vikhe Patel Foundation (supra) held as follows:

“It is well settled that the depiction in books of accounts is not a determinative test but the factual nature of the transaction which has to be considered for the purpose of taxation.”

In this case, the investment in the shares of Cooperative Bank was a pre condition for raising loans and it was therefore not an investment as normally understood. The Tribunal has recorded a finding of fact that the shares was subscribed only for purposes of obtaining the loan and the amounts so obtained were used for furtherance of the objects of the trust. There is no dispute about the facts that loans taken from the said two cooperative banks were not completely repaid in the assessment year 2008-09 and, therefore, the assessee would be required to hold shares to continue as member of the cooperative society running the banking business.

29. The `C’ bench of the ITAT Delhi in the case of ADIT (Exemption) Vs. India Fringe Centre for the promotion of advanced research ITA No. 3065 and 6164 Delhi 2012 assessment years 2008-09 and 2009-10 held as follows:

‘The expression “investment” implies to lay out money in business with a view to obtain income on profit. The term “deposit” indicates the transaction as deposit of money for employment in business, deposit of title deeds similar document as security for loan, deposit of money in a bank in the ordinary course of business of current account and to deposit a sum of interest at a fixed deposit in a bank. Thus, both “investment” and “deposit” require a positive act on the part of the assessee with an intention to earn income/interest.’

30. The Madras `C’ Bench of the Tribunal in ITA No. 1445/Madras/2012 in the case of M/s. Sethu Valliammal Educational Trust (supra) order dated 10.1.2013 at para 8 and 9 held as follows:

“8. We have perused the orders and heard the rival submissions. There is no dispute that assessee had, during the relevant previous year, subscribed to two chits, one conducted by M/s. Tern Credits & Chits Private Limited and the other by M/s. K.R. Palaniappan (Chit). Learned D.R. has also not disputed the averment that both these were registered chit funds, running chits. Assessee had placed money with these chit companies by way of subscriptions. The amounts were paid on a monthly basis to the two chit companies. This is clear from paper-book pages 14 to 17, which are copies of relevant ledger folios in the books of the assessee. The total amount placed by the assessee, during the relevant previous year, with M/s. Tern Credits & Chits Private Limited was Rs. 2,08,456 and with M/s. K.R. Palaniappan (Chit) was Rs. 96,230. The annual income of the Trust came to Rs. 7,35,19,954 against which, utilization for charitable purpose came to Rs. 6,98,07,198, which was well above the limit of 85% prescribed under section 11(1)(a) of the Act. As per the assessee, subscriptions paid to chit funds were not deposits nor investments and it could not have been a reason for denying it the exemption claimed under Section 11 of the Act. Subscription paid by a subscriber of a chit to a chit company acting as the foreman of the chit, in our opinion, cannot be considered as an investment. Subscribing to a chit fund is not with an intention to earn interest or dividend. The only intention is to prize the chits either by competitive bidding or when lots are drawn. If there was no bidding done in a given month, there will be no income whatsoever derived. The income that can be derived was only the amount forgone by the bidders in an auction. Thus a chit fund is primarily intended to operate as a scheme for advancing loans from a common fund created by the subscribers, and their turn for getting such loan is decided either by auction or by drawing lots. The nature of chit as aforesaid has been vividly described in the judgment of Kerala High Court in the case of Kottayam Co-operative Bank Ltd. (supra).

9. Amritsar Bench of this Tribunal in the case of Onkar Capital Growth (P) Ltd. (supra) has clearly held that the subscribers to a chit fund were entitled only for prizing the chits and the money placed by a subscriber to a chit fund could not be equated with deposits. The foreman of a chit fund is only acting as a conduit for the subscribers to pool their money every month for the benefit of one of them. Chit Funds Act, 1982 requires the concern running a chit to a subscriber of the chit also. We cannot say that persons, who are subscribers to a chit, are making any investment in the concern running the chit fund. We cannot say that subscriber to a chit fund is placing any deposit in the concern running the chit fund. Pooling of money by a group of persons for the benefit of one of them, through chits, cannot be equated with investments or deposits.”

Thereafter it held as follows :–

“It is clear from the above consequence that the intention of legislature is to regulate the manner of investment of the money left with the assessee trust after utilization for charitable purpose.

11. Therefore, in our opinion, the lower authorities fell in error in concluding that such subscriptions were investments which violated the modes specified under section 11(5) of the Act. The question of denial of exemption under section 11 would arise only if investments were there. We are, therefore, of the opinion that assessee could not have been denied exemption claimed by it under section 11 of the Act, for a reason that it had subscribed to the chit funds. There is no case for the Revenue that any of the Trustees, Managers, contributors of relatives of such persons were having interest in the two chit companies. We are, therefore, of the opinion that assessee was eligible for exemption under section 11 of the Act and its claim was denied unjustly. We, therefore, set aside the orders of the authorities below and direct the assessing officer to grant the assessee its claim of exemption under section 11 of the Act for the impugned assessment year.”

31. The Calcutta High Court in the case of CIT v. Birla Charity Trust (1988) 170 ITR 150, Gujarat High Court in CIT v. Insaniyat Trust (1988) 173 ITR 248 and the Bombay High Court in Trustees of Mangaldas N. Verma Charitable Trust v. CIT (1995) 80 Taxman 1 have taken a view that the term “funds” means money or cash and the term invest connotes a positive act on the part of the trust whereby the funds of the trust are laid out or committed in any particular property or business or transaction with a view of earning a profit or financial addition or return. The courts therefore held that section 13(2)(h) did not apply to assets received as a donation since no “funds” were “invested”. In our view this proposition, though given in a context of section 13(2)(h) would equally apply to section 13(1)(d) of the Act as the language and purpose of the sections are the same.

32. We now consider the facts of this case. A perusal of the order of the first appellate authority reveals that there is no dispute on the legal principle that, if the chit fund contribution in question is not made as an investment, then the provisions of section 13(1)(d) are not attracted. In other words, it is an accepted position that section 13(1)(d) is attracted only if, on the facts and circumstances of the case, the contribution to chit is held to be an investment. The learned CIT(DR) placed reliance in the case of Priyadarshini Educational Academy (supra). Hon’ble A.P. High Court in that case was considering, in a writ petition, a case where exemption was denied under section 10(23c)(vi) of the Act. The argument of the learned Counsel in this case are at para 4. These are extracted for ready reference :–

“The surplus income, if any, and all their funds stood invested in acquisition of assets, and in the modes and forms specified in section 11(5), for the assessment year 2008-09, i.e., the year for which approval was sought; the legal infirmity, on the basis of which exemption was denied to the society in the past assessment years, was because of its contribution to a chit fund scheme which was considered by the assessing officer as a contravention of section 13(1)(d) of the Act; the said infirmity did not exist in the assessment year 2008-09 inasmuch as the installment had been fully paid in the earlier year itself; in the financial year, relevant to the assessment year 2008-09, all the petitioner’s funds stood invested in the forms approved under section 11(5) of the Act.”

33. The Hon’ble High Court at para 8 & 9 held as follows :–

“8. The third proviso to section 10(23C) of the Act requires the educational institution, referred to in sub-clause (vi), not to invest or deposit its funds, for any period during the previous year, otherwise than in any one or more of the forms or modes specified in section 11(5) of the Act. Section 11(5) prescribes the forms and modes of investing or depositing money as those specified in clauses (i) to (xii) thereunder. Investment/deposit in a chit fund is not one of the modes of investment or deposit of money referred to in clauses (i) to (ii) of section 11(5) of the Act. As section 10(23C)(vi) of the Act requires the income received by any person, on behalf of the educational institution existing solely for educational purposes and not for profit, to be excluded while computing the total income of the previous year of such a person, the third proviso thereto stipulates that the investment or deposit of funds of the educational institution, otherwise than in any one of the forms or modes specified in section 11(5), for any period during the previous year, would result in denial of the benefit of exclusion of such income from the total income of the previous year of the said person. Even in cases where approval was granted earlier under section 10(23C)(vi) of the Act, failure of the society (educational agency) to invest in the modes and forms specified in section 11(5) of the Act would disentitle them from claiming the benefit of exclusion of the income, received on behalf of an educational institution, from their total income for the previous year. In cases where initial approval, or extension of the approval granted earlier, is sought, the prescribed authority would be entitled to examine the annual accounts of the applicant-society for the previous three years to ascertain whether investment/deposits made in any of the previous three years are in the forms and modes other than those specified in section 1.1(5) of the Act. It is only if the prescribed authority is satisfied that the applicant has applied its income exclusively for the purpose of education, and has adhered to the modes specified in section 11(5) of the Act, that he would grant approval, or renew the approval granted earlier, under section 10(23C)(vi) of the Act.

9. Accepting the submission of the learned counsel for the petitioner that, since the petitioner’s investment in a chit fund, (which is not one of the modes and forms specified in section 11(5) of the Act), was in the assessment year 2007-08, prior to the assessment year 2008-09 for which approval was sought, such investment or deposit cannot result in denial of grant of exemption, would render the requirement of furnishing the audited annual accounts for the previous three years, as stipulated in Form 56D, wholly unnecessary. A logical corollary of the aforesaid submission would be that only the income of the previous financial year, relevant to the assessment year in question, would be required to be examined by the prescribed authority, and not the two previous years prior thereto.”

34. On perusal of the above judgment, it is clear that, the issue whether the contribution made by the assessee to a chit fund as an individual subscriber, either on the facts of the case, or under the scheme of the chit fund act, can be considered as an investment or not, or whether such contribution was a deposit or not, was not the issue before the Hon’ble High Court. The issue as to whether the contribution to the chit fund is an investment/deposit was not contested by the parties. Hence, this judgment of the jurisdictional High Court cannot be applied to the case on hand where the issue is whether a contribution to a chit by an individual subscriber can be considered an investment or a deposit as contemplated under section 13(1)(d) read with section 11(5) of the Act. The various judgments of the Hon’ble Supreme Court and the high courts as well as the Tribunal clearly lay down that contribution to a chit fund by an individual subscriber is governed by the principal of mutuality and hence it is neither an investment nor a deposit.

35. Even otherwise, in the case of the assessee, the undisputed fact is that assessee requires money for its expansion. This fact is not disputed by the learned CIT(DR). It is also clear that the assessee societies have taken huge loans from various banks, for undertaking expansion and to create infrastructure. These loans were taken by the societies as they did not have surplus funds to undertake expansion and create infrastructure. On the basis of these facts, we come to the conclusion that the contribution made by the assessees to a chit, is not a positive act to lay out money for business, with a view to obtain an income or profit. It is not an investment, as the amount laid out is not a positive act on the part of the assessees to earn any returns, profit or income. The money has not been laid out in such a manner as to acquire some species of property which would yield income for the assessee.

36. In this case, contribution to the chit fund was made to enable the assessee society to raise funds for expansion. This is clear from funds flow statement and the projected investment required by the assessee. When the assessee is paying huge amount of interest to various banks, it is wrong to conclude that assessee has with an intention to earn profit or income made a contribution to the chit fund.

37. The allegation of revenue that the assessee has not withdrawn the chit amount has been answered by the assessee, by pointing out that, every month the winner of the chit is determined by draw of lots and assessee society was not lucky to win the draw on each of the occasion. The allegation that the assessee has surplus fund, kept as deposits, is also wrong, for the reason that these fixed deposits were jointly held in the name of the assessee and the Governmental authority, as is was compulsory as per rules, for grant of permission to run educational institution. Thus, for all these reasons, we uphold the contention of the assessee that the contribution to chit, in the cases on hand, is not an investment nor a deposit and hence section 13(1)(d) of the Act is not attracted.

38. The term “fund” used in section 13(1)(d) of the Act, in our opinion, has to be read with section 11(5) of the Act. Under section 11(5), the wording is “forms and modes of investing and depositing the money referred to in clause (b) of sub-section (2) is as follows:

Section 11(2)(b) reads as follows :–

“the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5).”

39. Thus the requirement of investing or depositing, under section 11(5) of the Act is confined to money in hand or cash. When the entire income of the year has already been spent towards the objects of the society, there cannot be said to be any funds remaining out of the funds received by way of income. A person can invest only the money which is in his hands. If the entire money in hand is already spent for a particular purpose then the question of spending the same amount for another purpose as well does not arise. Thus the interpretation of the term “any funds” by the Hon’ble Delhi High Court in the case of Sri Shri Ram Foundation (supra), though made in the context of section 13(2)(h), is on all fours applicable, while interpreting section 13(1)(d) of the Act. Even the CBDT Circular No. 335, dt.13-4-1982 explains the same position. The example given therein clearly explains that in a case where the trust derives income of Rs. 40,000 in a year, as per section 11(1)(a) it has to spend at least Rs. 30,000 on charitable purpose and the balance of Rs. 10,000 will have to be invested in the forms or modes prescribed under section 13(5) (now section 11(5)). Therefore, in a case where the entire income of Rs. 40,000 is spent for charitable purposes exemption under section 11(1)(a) has to be granted and there is no need to further examine whether any investments were made in violation of section 11(5) of the Act in as much as the trust is left with no more funds out of the income of Rs. 40,000 received. In the case of both the assessees, as per the charts submitted by the assessees it is evident that they have incurred deficit in every year and thus entire income of each assessment year was fully spent towards the charitable objects.

40. As we have held that contribution to chit fund in this case, is not an investment, and much less an investment with someone else, and further that the provisions of section 11(1)(a) have been complied by investing the entire income of the year towards charitable purposes, we conclude that there is no violation of section 13(1)(d) read with section 11(5) of the Act.

41. As we have upheld the contention of the assessee, in this aspect, we do not express any opinion on the other arguments raised by both parties, as it would be an academic exercise.

42. In the result, all the appeals of the assessees are allowed.

Revenue Appeal: (ITA No. 447/V/2012):

43. This appeal of the revenue is directed against the order of the Commissioner (Appeals) date 29-9-2012 in the case of Lokabandu Educational Society. Grounds raised in the appeal are as under :–

“1. The learned Commissioner (Appeals) has erred in holding that the re-assessment proceedings for the assessment year 2005-06 as invalid.

2. The learned Commissioner (Appeals) has erred in holding that the assessment is reopened merely on change of opinion.

3. The Commissioner (Appeals) ought to have considered the fact that the assessment is reopened within four years from the end of the relevant assessment year and the requirement of full and true disclosure of material facts are not applicable to this case.

4. In view of the explanation 2(c)(i) of section 147, where assessment has been made but, such income has been made the subject of excessive relief under this act, the principle of change of opinion is not applicable to this case.”

44. While all the other facts are identical to the assessment years involved in the appeals of the assessee, the only peculiar fact for this assessment year is that the assessment was originally completed under section 143(3) of the Act. In the assessment completed vide order date 18-9-2006 the assessing officer made addition for the amount contributed to the chit fund instead of bringing the surplus to tax. In the reassessment proceedings, the assessing officer took a different view and brought to tax the surplus earned by the assessee for the assessment year.

45. The Commissioner (Appeals) held that the reassessment proceedings for the impugned assessment year are not valid and his findings in this regard as contained in para 6.1.3. are as under :–

“When the facts of the present case are examined in the light of above contextual back-ground, there can be no two opinions that assessing officer being in possession of tangible information has validly arrived at a reasonable belief that income chargeable to tax escaped assessment. Though assessing officer had reasons to believe, he is required to meet more stringent standards as far as assessment year 2005-06 is concerned because the assessment was originally made under section 143(3). As far as other assessment years are concerned the reasons recorded are sufficient to reopen the assessment as the concept of change of opinion does not apply because they were originally completed under section 143(1). As held by the Hon’ble Delhi High Court in the case of Sun Investments Private Limited 344 ITR 001 when the original assessment is made by way of processing the return there is no occasion for the assessing officer to examine the issues. Therefore, it could not be said that assessing officer formed an opinion which can be alleged to be changed. Similar opinion was held by various courts in a catena of decisions. Therefore, I hold that there is no change of opinion by assessing officer in case of assessment years 2003-04, 2004-05 and 2006-07 because no regular assessment was made in those years. Therefore, I uphold the action of issue of notice under section 148 for those three assessment years. As far as assessment year 2005-06 is concerned assessing officer assessed the income originally under section 143(3). The issue of violation of provisions of section 11(5) was duly considered in the original assessment and it was held by assessing officer that the income which would attract denial of exemption is only the cumulative contribution of Rs. 7,80,000 made in chit funds. Assessing officer having examined this issue and formed an opinion though erroneous is not entitled to revise his opinion and reopen the assessment on the same issue and take a different stand in the reassessment. Thus, as far as A.Y.2005-06 is concerned, assessee’s reliance on the decisions of Kelvinator India Limited 320 ITR 561 and Eicher Limited 294 ITR 310 is well founded. Therefore, I hold that the assessment for assessment year 2005-06 is reopened merely on change of opinion and hence I have no hesitation in holding that reassessment proceedings as far as assessment year 2005-06 are concerned are not valid and therefore the assessment made for assessment year 2005-06 is quashed. As already stated reopening of assessments for assessment years 2003-04, 2004-05 and 2006-07 is held to be valid.”

46. Learned DR Smt. Komali Krishna submits that the Commissioner (Appeals) is not justified in quashing the assessment for the assessment year 2005-06. She argued that the view taken by the assessing officer at the time of completing the assessment originally under section 143(3) of the Act is an erroneous view and therefore the reopening was in accordance with law.

47. Learned counsel for the assessee placed strong reliance in the order of the Commissioner (Appeals) and brought our attention to para 6.1.3. of the order of Commissioner (Appeals). Further, he placed reliance in the decisions of hon’ble Delhi High Court in the cases of CIT v. Orient Craft Ltd. (2013) 354 ITR 536, Mohan Gupta (HUF) v. CIT (2014) 366 ITR 115 (Delhi) and decision of hon’ble Gujarat High Court in the case of Inductotherm (India) (P.) Ltd. v. M. Gopalan, Dy. CIT (2013) 356 ITR 481. It is the submission of the A.R. that in all the above cases it was categorically held that in the absence of new material the assessing officer is precluded from reopening an assessment completed under section 143(3) of the Act merely on account of change of opinion. He further submitted that the view taken by the assessing officer in the assessment under section 143(3) of the Act is not erroneous as such a view is supported by various decisions. Further, he supported the order of Commissioner (Appeals) on the ground that contribution to a chit fund is not violative of the provisions of section 11(5) read with section section 13(1)(d) and hence the relief given by the Commissioner (Appeals) is sustainable even on this score.

48. We have heard the rival contentions. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record and the orders of the authorities below, as well as the case laws cited, we hold as follows:

49. It is an undisputed fact that at the time the assessment was originally completed under section 143(3) the assessing officer was aware of the contribution made by the assessee to chit funds. However, the assessing officer was of the view that in such circumstances the denial of exemption under section 11 would be restricted to the amount invested in violation of section 11(5). As rightly argued by the learned counsel for the assessee, this view taken by the assessing officer is supported by a few decisions. We do not wish to express any views on the correctness of these decisions. Suffice to say that on these facts and circumstances of the case, the view taken by the assessing officer cannot be termed as patently erroneous. It is the consistent view of various high courts that in the absence of any fresh material an assessment concluded under section 143(3) cannot be reopened on mere change of opinion. In the decisions cited by the counsel for assessee this was the view taken by the hon’ble Delhi High Court and Gujarat High Court. Respectfully following these decisions, we hold that the Commissioner (Appeals) was justified in quashing the assessment for assessment year 2005-06 on the ground that the reopening of the assessment was invalid.

50. Even otherwise, in the appeals of the assessee we have taken a view that in the facts and circumstances of the case, contribution to chit funds would not disentitle the assessee from claiming exemption under section 11(1) of the Act. Therefore, the relief granted by Commissioner (Appeals) is sustainable even on merits.

51. In the result, appeal of the revenue is dismissed.