Case Law Details
ORDER M.V.R. Prasad, A.M.
1. These’ are cross-appeals filed by the assessee-society and the Department against the order of the CIT(A) dt. 30th Nov., 1999, for the asst. yr. 1996-97, wherein ‘he held, inter alia, that the income of the assessee-society is not entitled for exemption under Section 11, because it is hit by the provisions of Section 13(1)(c) ‘6f the IT Act. This is the main grievance of the assessee in its appeal. The Department is aggrieved by the order of the CIT(A) insofar as he held that certain expenditure disallowed by the AO was allowable.
2. YTA No. 31/Coch/2000 : The assessee-society was founded by Mr. C. George, an NRI businessman, belonging to Mavelikara, Kerala, and was registered as a non-profit body under Travancore-Cochin Literary Scientific and Charitable Societies Act, 1955, on 21st Dec., 1997. It appears that the assessee-society has also been registered under a similar enactment in the State of Tamil Nadu, but we are not concerned with this aspect of the matter in the present appeals. The assessee-society was granted registration under Section 12A of the IT Act by the CIT’s order dt. 22nd Sept., 1978. The objects of the assessee-society-included establishing and conducting educational institutions in the State of Kerala and elsewhere in India, to establish hospitals and nursing homes in Kerala and elsewhere in India, to establish and maintain industrial establishments for helping the poor, guest-houses for Indian and international tourists for international understandings, to help the economically weaker sections by distribution of cloth and providing low-cost houses, to run hostels for the benefits of deserving students, working men and women, etc. There is no dispute that the objects of the assessee-society are charitable within the definition of Section 2(15) of the IT Act. In the printed booklet of the assessee-society filed with us, the chairman’s appeal reads as under:
“You are perhaps aware that 220 million of our population live in cities. Of these, 75 million constitute slum and pavement dwellers. The appalling conditions under which these people eke out an existence is shocking to say the least. They have neither a roof over their heads, nor the basic needs for survival such as safe drinking water, nutritious food, medical facilities or regular employment. It is no wonder then that they remain illiterate and have little or no awareness of hygiene. The open defecation on our cities’ thoroughfares is a matter of shame for all, besides being a cause for spreading disease. Governmental and non-Governmental agencies have been making steady efforts to lift these ‘have-nots’ out of their misery. I am sure you will agree with me that it should be the prime concern of all right thinking people to lend their support where possible. We must spare no effort to bring to our fellow human beings the basic necessities of life-food, shelter and clothing.”
The above extract is only to give a sample of the concerns that seem to have gone into the foundation of the assessee-society. In pursuit of its objects, the assessee-society set up, (1) a 100 bed hospital at Mavelikara, Kerala, (2) a family counselling centre at Mavelikara, and (3) a pavement-dwellers Rehabilitation Centre at Velacherry Chennai under the auspices of the World Bank and Tamil Nadu Slum Clearance Board, providing shelter and multifaceted community development services to over 6,000 erstwhile street and slum dwellers. It is riot necessary for us to recount the other activities undertaken by the assessee-society in pursuit of its objects.
3. The assessee has filed separate receipts and payment accounts in respect of the above three activities before the AO. However, before us, such separate accounts in respect of each activity have not been filed. Only consolidated final accounts for the whole organisation were filed before us.
4. The AO observed that the income from running a hospital at Mavelikara has been granted exemption by the Department for the past several years. He also observed that family counselling centre has been receiving a grant from the State of Kerala and expenses are met out of this grant. In the light of these observations, he found it fit a exempt the income from these activities under Section 11, but did not deem it fit to grant exemption for the activity carried on by the assessee in Tamil Nadu, mentioned at No. 3 above. He held that the income in respect of the activity carried on by the assessee in Tamil Nadu is not eligible for exemption under Section 11 mainly on the ground that the assessee has violated the provisions of Section 13(1)(c) while carrying on this activity in Tamil Nadu. He noticed that the assessee-society has taken on lease a building at No. 4, D’Silva Road, Mylapore, Chennai, which belonged to the chairman Shri C. George, and his wife Smt. Omana George as co-owners, and used it as a guest-house of the society. Further, he observed that the assessee-society incurred an expenditure of Rs. 4,36,785 on the renovation of the said guest-house. He also mentioned that the assesses had purchased the following items of furniture and equipments and installed them in the said guest-house :
Rs.
1. Furniture & fittings 1,15,000
2. Air-conditioners 1,05,050
3. BPL washing machine 13,000
4. BPL micro-oven 11,540
5. Fridge 8,120
6. Generator 36,100
Total 2,88,810
The AO also observed that some expenditure by way of telephone charges, electricity charges, travelling and conveyance, payments to gardner, maid servant, driver, etc. were incurred by the assessee-society which were the personal expenses of the chairman, and for all these reasons there is violation of the provisions of Section 13(1)(c) of the IT Act, and so the assessee is not entitled for exemption under Section 11 in respect of the income of the assessee from the activity carried on in Tamil Nadu. As already mentioned, he disallowed various expenses under different heads. He held that out of certain expenditure aggregating to Rs. 22,23,224, only an amount of Rs. 8,34,020 was allowable.
5. Coming to the expenditure claimed to have been applied for charitable purposes, the AO invoked the provisions of Section 40A(3) in respect of the expenditure incurred on the cost of construction of a community hall and held that the cost that has actually been incurred was only Rs. 3,15,000, as against the claim by the assessee of Rs. 3,70,000, By some logic, which is difficult to follow, he reduced the assets installed at No. 4, D’Silva Road, i.e., the guesthouse of the assessee of Rs. 2,88,810 from the cost of construction of the community hall worked out by him at Rs. 3,15,000 and held that only an amount of Rs. 26,190 could be regarded as income applied by the assessee for charitable purposes. After giving deduction for the allowable depreciation of Rs. 5,93,011, he worked out the income of the assessee at Rs. 12,81,432 as per the following summarised computation :
Rs.
Total receipts of the activity at Tamil Nadu 27,34,653
Less : Allowable expenditure therefrom 8,34,020
19,00,633
Less : Income applied for charitable purposes as per AO 26,190 18,74,443
Less : Allowable depreciation worked out by the AO 5,93,011
12,81,432
The AO held that the above income of Rs. 12,81,432 is to be taxed at the maximum marginal rate, presumably under the provisions of Section 164(2) of the IT Act. On this basis, he levied income-tax of Rs. 5,12,572 and interest under Section 234B of Rs. 2,25,500, and thus raised an aggregate demand of Rs. 7,38,072.
6. When the matter reached the CIT(A), the AO sought an enhancement of the total income of the assessee to Rs. 17,75,003 on the ground that certain expenditure of a capital nature incurred by the assessee-society admittedly in pursuit of the purposes of the society admittedly in pursuit-.of the purposes of the society were, however, not eligible for being so considered, as the assessee-society is denied exemption under Section 11 because of its violation of the provisions of Section 13(1)(c). The CIT(A) upheld the order of the AO insofar as the finding regarding the violation of the provisions of Section 13(1)(c) is concerned. He accordingly upheld the finding of the AO that the assessee is not entitled for exemption of its income under the provisions of Section 11 of the IT Act. He also agreed with the AO that in view of the violation of the provisions of Section 13(1)(c), the assessee is not eligible for deduction of certain capital expenditure incurred by it in the context of the pursuit of its purposes, and hence such capital expenditure should not count as an application of income in terms of Section 11(2) of the IT Act. He, however, considered the various disallowances made by the AO, like the expenses on gardener, driver, security personnel, etc., and held that there was no basis for the disallowance of a substantial portion of such expenses. He, however, upheld the disallowance of a few items only, to which we shall advert hereinafter. Relying on the deeming provisions of Section 13(2}(b), the CIT{A) upheld the denial of exemption by the AO under Section 11 and also agreed to the enhancement of income proposed by the AO before the CIT(A). He rejected the contention of the assessee that the chairman of the society did not receive any benefit by his occasional occupation of the guest-house, because he had given his building on lease free of charge and he would otherwise have received a rent had he let it out to outsiders of about Rs. 25,000 per month. The CIT(A) held that the provisions of Section 13(2)(b) make no exception when the transaction involves the specified persons and held towards the close of para 4(f) and (g) at p 10 of his order as under:
“This deeming provision is without exception. In the circumstances of the case even if there is no established benefit under Section 13(1)(c)(ii}, such benefit is to be deemed in the facts of this case. The fact that the premises which would have fetched Rs. 25,000 p.m. for a family member or the chairman is given free of rent to the trust cannot be considered ‘other compensation’ for this property. The letting out of the building was not on condition of such free accommodation. Moreover, the compensation has not come from the persons who enjoyed the stay. In this connection the strict view taken by the Kerala High Court in the case referred to in para 4(c) is to be kept in view. I, therefore, hold that the trust has been rightly denied the benefit of exemption under Sections 11 and 12 in view of Section 13(1)(c)(ii) r/w Section 13(2).
4(g). This brings me to the question of what will be assessed. Section 13(1)(c) denies exemption of trusts of their ‘income’ and not their total income. The Kerala High Court in the case of CIT v. Programme for Community Organisation (1997) 228 ITR 620 (Ker) had held that even the Central Board of Revenue understood the term ‘income’ in the commercial sense in this context as distinguished from ‘total income’ as defined in Section 2(45) of the Act. Therefore, tax will be levied on the income as arrived at in commercial principles. This means that income will be decided after allowing all legitimate expenses for earning the income including depreciation on assets used. But, expenses incurred for the purpose of the trust cannot allowed since such allowance can be granted only under Section 11(1). Therefore, income will be computed at the difference between gross (of assessment order), as adjusted as per direction regarding allowability in the following paragraphs and further reduced by the depreciation on assets used claimed as expenditure in para 8 of the assessment order.”
The decision of the Hon’ble Kerala High Court relied upon by the CIT(A) in the above context of his order is the decision in the case of Agappa Child Centre v. CIT (1997) 226 ITR 211 (Kei).
7. Before us, the learned counsel for the assessee invited our attention to a letter dt. 15th March, 1995, addressed by the chairman of the assessee-society to his wife Smt. Omana George, the co-owner of the property, which reads as under:
“Mrs. Omana George Christopher, 39-12. International Plaza, Singapore-9019.
Dear Madam,
With reference to your offer of house and premises at No. 4, D’Silva Road, Mylapore, Chennai-600 004 for the use of GEMS Foundation as a guest house, we are willing to accept the same on following conditions ;
1. The house and premises would be made available for our use without any rent or deposit for at least 2 years from April, 1995, onwards.
2. Whatever repair, renovation or maintenance needed to be done on the courtyard, exterior or interior of the building, landscaping, electrical installation, plumbing, purchase of house-hold equipments, electrical appliances of any nature, furniture, etc. will be at our expense at total cost not more than Rs. 12 lakhs for the period of 2 years.
3. Whatever equipments and furniture bought for the use at the premises would be our property.
4. The premises will be vacated with one month notice on either side after completion of the initial 2 years period.
Thanking you,
Yours faithfully
Sd/-
C. George
Chairman.”
Mrs. Omana George accepted the proposal contained in the above letter of the assessee-society, vide her letter dt. 26th March, 1995, addressed to her husband, which reads as under :
“Dear Sir, With reference to your letter dt. 15th March, 1995, I hereby confirm the terms therein.
Thanking you,
Yours faithfully,
Sd/-
Omana George.”
“The learned counsel for the assessee also invited our attention to the list of guests and foreign dignitories who stayed in the said guest-house during. 1995 to 1998, and it is explained that the said list was furnished to the AO vide the assessee’s letter dt. 30th March, 1999. A copy of the list of the guests can be seen in the paper book filed before us as Annexure-I to the letter dt. 30th March, 1999, addressed to the AO. In the light of the above list of guests, it is claimed that the said guest-house was never used exclusively for the residence of the chairman or the trustees. It was only used as a guest-house for the benefit of the chairman and trustees and other visitors. It was explained that it was entirely because of the difficulty of accommodating the visitors who came to supervise or assist in the activities of the assessee-society, the society hit upon the idea of taking on lease the said property at D’Silva Road, as per the letter of the assessee-society addressed to Mrs. Omana George, referred to hereinabove. It is also explained that before the property was taken to lease by the assessee-society it was let out to outsiders on a rent of about Rs. 25,000 per month, and the family of the chairman had foregone the said rent and the substantial security deposit that would have been received by them had they let out the property to outsiders. It is also pleaded that the chairman was a man of means and was doing quite well in this business in Singapore and had no other business interests in Chennai, and had another house in Madras which was used as his residence whenever he visited Chennai on the work of the society. It is also claimed that these arguments were made out before the AO, and the AO also mentioned towards close of para 8 of his order that the arguments of the assessee would be considered later, but did not actually consider them at all and came to an abrupt conclusion towards the end of his order that the assessee-society violated the provisions of Section 13(1)(c). The learned counsel for the assessee has also in his written submission advanced certain additional arguments. The first part of the arguments reads as under :
“If the exemption is to be withdrawn under Section 13, then the income of the trust as computed on commercial principles should enure or to be used or applied. In this case the income as computed has not been used for any such purpose. In these provisions of Section 11 to 13 income means as computed. What is exempt is income as computed. It is that income so computed that should enure or be used or applied. Here in this case what is alleged by the Department is that some portion of the gross receipts has been expended for repairs of the house of the trustee and for his air travel from Singapore and certain telephone calls. That is not sufficient to deprive as the income as computed of exemption. At worst it is only a case for disallowance in the computation and taxing of such amount so disallowed as income under Section 11(3) of the Act. .That disallowance or taxation cannot be taken as a ground for withdrawal of exemption. [See All India Flat Tape Mfrs. v. ITO (1990) 33 ITD 372 (Bang) and Circular of 1968 at p 1237 of Sampath Iyengar].”
The next argument of the learned counsel for the assessee reads as under : “Property of the trust used : This allegation is not correct. The guest house is not the property of the trust. It is the property of the trustee. It is only a case where the trust is permitted to use it for their guests see pp 1 and 2 of the paper book. It is not a lease also because no rent is charged. The exclusive possession also is not given. What is stated in the letter is the house is given for the use of trust. So the entire reasoning of the AO and CIT(A) for withdrawal of the full exemption fails. Further, this guest-house is not used for any period. The trustee has his own house as a separate residence.”
The learned counsel for the assessee also claimed that the income of the assessee has to be computed on commercial principles in the light of the decision of the Hon’ble Kerala High Court in the case of CIT v. Programme for Community Organisation (1997) 228 ITR 620 (Ker), and so the various disallowances made by the AO are unwarranted. Regarding the equipment installed in the guest-house, it is claimed that they continued to be the property of the trust, despite their installation in the guest-house and so the assessee derived no benefit from such installation, and so the provisions of Section 13(1)(c) are not attracted.
7(a). The learned counsel has also mentioned that the main income of the assessee is only by way of rent of a building which was acquired by funds to the tune of a crore of rupees provided by the chairman. The other receipts of the society are only from patients treated in the hospital and some grants from the Government. There are no outside donations, either locally or from abroad worth mentioning. In other words, the plea is that the society has been funded almost solely by the chairman, except for some Government grants.
8. The learned Departmental Representative, on the other hand, invited our attention to the decision of the Hon’ble Kerala High Court in the case of Agappa Child Centre v. CTT (supra), in which the assessee-trust was held not eligible for exemption under Section 13(1)(c). In that case, a refrigerator purchased by the assessee-trust was placed at the residence of the managing-trustee and was used by him and so it was held by the Hon’ble Kerala High Court that the assessee was not entitled for exemption under Section 11. The learned Departmental Representative stressed that the case of the assessee before us is of a far worse hue than that of the assessee considered by the Hon’ble Kerala High Court. In that case it was a mere refrigerator that was used by the managing trustee. In the case before us, the learned Departmental Representative argued, it is not a simple case of the refrigerator, but many other electrical equipments that were used for the benefit of the chairman. Apart from that, funds of the society to the tune of about Rs. 4.36 lakhs were expended on the renovation of the said guest-house, and as the period of lease is only for about two years, the benefit of the renovation went to the trustee-owners. He also pointed out that there were other expenses like payments to gardener, driver, electricity charges, etc., which were incurred by the assessee-trust only to benefit the chairman of the assessee-society. So, it is pleaded that the sins of the assessee-society are for darker than those of the trust considered by the Hon’ble Kerala High Court in the decision mentioned above. The learned Departmental Representative also pleaded that all the other cases relied upon by the learned counsel for the assessee are distinguishable on facts.
9. Having regard to the rival submissions, we are of the view that the assessee deserves to succeed. Before we advert to the crux of the matter, we may make one or two initial remarks. Firstly, there is no material that can throw any doubt on the genuineness of the assessee-society. The assessee-society has one of the former Presidents of India as its patron. The AO acknowledged the good work done by the assessee-society at p 12 of his order as under :
“A perusal of the materials submitted shows that the society has done good work in the two re-settlement colonies at Adampakkam. However, the question regarding exemption is required to be considered in accordance with the provisions of the IT Act.”
The CIT(A) also acknowledges the good work done by the assessee-society in the following terms in para 4(a) at p 4 of his order as under:
“It is pointed out that the various activities of the society in the previous year included running a free clinic which attends to about 1,500 new cases free of charge every week, a creche of 50 children who are provided with free meals, running of a primary school with 260 students, arranging for sanitation in the adopted colony by appointment of 10 scavengers, various awareness programmes for women and children, adult literacy camps conducted, eye camps, TB detection camps, running of Anganvadies, tree planting works, embroidery training, etc. are being effectively done. The fact of such activity is not denied by the AO. Evidence in this connection has also been produced.”
Actually the CIT(A) has a word of praise for the activities of the trust and the chairman in para 4(f) at p 7 of his order as under:
“I have considered the arguments and gone through the records. Even the AO has no dispute about the valuable charity works done by the assessee. From the available facts the charitable disposition of the chairman and family members are worthy of appreciation. However, these are aspects of the issue which cannot be considered to supersede the provisions of the Act.”
10. Having acknowledged the good work done by the assessee-society, the CIT(A), however, felt compelled to hold that the assessee-society was hit by the provisions of Section 13(1)(c) because of the provisions of Section 13(2) of the IT Act. The relevant provisions of Section 13(1)(c) and 13(2) read as under:
“13.(1) Nothing contained in Section 11 or Section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof–
… … … …
(c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof–
… … … …
(ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in Sub-section (3) : … … … … Sec. 13(2), so far as it is relevant for our purposes, reads as under:
“(2) Without prejudice to the generality of the provisions of Clause (c) and Clause (d) of Sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in Sub-section (3),–(a) … … … …
(b) if any land, building or other property of the trust or institution is, or continues to be made available for the use of any person referred to in Sub-section (3), for any period during the previous year without charging adequate rent or other compensation;
… … … …”
It is not denied that the chairman of the assessee-society and certain other members of the governing council fall in the category of the persons specified in Section 13(3) of the IT Act. So, if the property of the assessee-society is made available for the use of the chairman or the members of the governing council, under the provisions of Section 13(2) of the IT Act the said property shall be deemed to have been used or applied for the benefit of a person referred to in Sub-section (3) of Section 13, and so the assessee-society must be held to be hit by the provisions of Section 13(1)(c), So, the Revenue authorities have held that the building at No. 4, D’Silva Road, which has been taken on lease by the assessee-society has been made available for the use of the chairman and the members of the governing council of the society, and therefore, it is hit by the provisions of Section 13(1)(c). It is the correctness of this conclusion that has to be examined by us.
11. It appears that the AO proceeded on the assumption that the building at D’Silva Road, has been used as the residence of the chairman. It is not clear how the AO arrived at this assumption. Vide his letter dt. 31st Oct., 1997, a copy of which has been filed before us by the Departmental Representative, the AO enquired of the assessee-society as follows :
“Building repairing and maintenance Rs. 5,11,343. A perusal of the bills in connection with these expenses shows that an amount of over Rs. 3,60,000 has been spent for renovation and maintenance of the residence of the managing trustee. You are, therefore, requested to furnish the break up of the expenses incurred for the repairs and maintenance of assets used for charitable purposes and in respect of residential premises of the managing trustee.
As per the details furnished air-conditioners of the value of Rs. 1,05,050, electrical appliances of Rs. 32,680, furnitures of Rs. 1,15,000 and generator of Rs. 36,000 have been installed at the residence/premises of the managing trustee. Further, an amount of Rs. 3,70,000 has been shown under the head ‘Fixed assets’ against building construction. You are requested to give the description of the building constructed during this period.”
The assessee-society replied vide its letter dt. 19th Nov., 1997, as under:
“C. Guest House of GEMS Foundation No. 4, D’Silva Road, Madras-4.
This house is owned by Mr. C. George, chairman of GEMS Foundation and was given to outside tenants on rent from 1991 to 1995. Since the chairman wants to supervise the activities of GEMS whenever he visits India, although he normally lives in Singapore, he has not renewed the rental agreement of his house and made available it as a guest-house for the use of GEMS Foundation at free of rent. GEMS decided to furnish and maintain the guest-house at their cost as it is being used for the services of GEMS Foundation chairman, governing council members, whenever, they visit Madras. The said building is entirely used as a guest-house of GEMS only on non-profit basis. All equipments and furniture belong to GEMS Foundation Assets.”
While giving details of the expenses on repairs and maintenance of various buildings, the assessee-society mentioned that it had incurred Rs. 3,90,785 on, what it called D’Silva Road residence (chairman’s). On the basis of these replies, it has been argued by the learned Departmental Representative before us that the guest-house was used only as the residence of the chairman and not as a guest-house.
12. We find it difficult to agree with this contention. In its reply dt. 19th Nov.. 1997, which we have quoted hereinabove, the assessee-society has clearly mentioned that the building at 4, D’Silva Road, is a guest-house of GEMS Foundation. It was used for accommodating the chairman and governing council members whenever they visited Madras, but that does not mean that it was used as the exclusive residence of the chairman. The mention of “D’Silva residence (chairman’s)” while giving details of the expenditure seems to be only a clerical error, and in popular usage the building could have been known as chairman’s residence, because before it was taken on lease, it happened to be the residence of the chairman. Further, even before the AO, the assesses had furnished the list of guests who were accommodated in the said building during the years 1995 to 1998. They are 17 in number and they were all visitors and some of them from abroad, like Kuwait, Canada and Singapore. The assessee also furnished the purpose of their visit, though the duration of their stay is not mentioned.
13. In its letter dt. 24th May, 1999, the assessee submitted before the AO as under:
“Points raised in your letter dt. 7th May, 1999.
1. With reference to the list of guests and foreign dignitaries who have stayed at the house at No. 4 D’Silva Road, Mylapore, Chennai, which was being used as a guest-house by the society, furnished by us in our letter dt. 30th March, 1999 referred by your goodself, we wish to inform your goodself that the visits were made by the above-mentioned persons mentioned in the list to personally see and understand the activities carried on by the GEMS Foundation at Madras.
The visits were expected to involve foreign organisations also in the activities of GEMS and where possible to obtain aid and support from overseas organisations. In this regard we also wish to inform you goodself that the society has obtained permission from the Government of India to obtain foreign contributions for its charitable activities.
The society has already furnished to your goodself the full details of persons who visited GEMS including their address and in this regard no further documentary evidence is available in the possession of the society. In view of the random visits made by visitors, no register was maintained by the society in the said guest house to keep track of the persons who visited. Further, no compulsory registration was required by the Madras Metropolitan Authority in respect of using the building as guest-house by the society.”
From the above, it is evident that it has been the case of the assessee-society even before the AO that the house at No. 4, D’Silva Road was used as a guesthouse of the assessee-society and not as the personal residence of the chairman. Even if it was called the residence of the chairman at any stage, that was possibly because the building happened to be the residence of the chairman and his wife, who were the co-owners of the building. That is the situation that prevailed before the building was taken over as the guest-house of the assessee in terms of its letter dt. 15th March, 1995, addressed to Mrs. Omana George, which we have reproduced hereinabove. Even in this letter it was proposed to be taken only as a guest-house of the assessee-society and not as the residence of a chairman. So if the AO had any doubts that it was not used as a guest-house, he could have made enquiries in that regard and brought material on record to prove that point. There is no such material brought on record to prove that the building in question was not used as a guest-house of the society. As already mentioned, the AO himself referred to the argument of the assessee in para 8, p 4, of his order that the former residential house of the chairman was converted as a guest-house for the members of the governing council of the society and mentioned that this argument would be considered later. He, however, abruptly concluded towards the end of his order at p 12 as under:
“The argument made by Shri George that his residential house was converted as a guest-house is devoid of any merit as all the governing council members are his family members. As per the provisions of Section 13(1)(c)(ii) ‘if any part of such income or property of the trust is used or applied directly or indirectly to any persons referred to in Sub-section (3), such trust/institution does not qualify for exemption. The society, in the circumstances, is not eligible for exemption as per the provisions of Sections 11 to 13 of the IT Act, 1961.”
From the above, we have to infer that even the AO did not dispute the fact that the building at No. 4, D’Silva Road, was actually used as a guest-house of the assessee-society and not as the residence of the chairman. However, the AO was of the view that even its user as a guest-house for the governing council members attracted the provisions of Section 13(1)(c), because of governing council members were all the family members of the chairman, which seems to be factually wrong. The AO mentioned in p 2 of his order that the trust was managed by seven trustees and he has not given their relationship with the chairman. All of them do not seem to be the members of the family of the chairman. Even the CIT(A) did not dispute the fact that the said building was used as a guest-house of the assessee-society. He, however, was of the view that even if the building had been used only as a guest-house and not as the residence of the chairman, it was hit by the provisions of Section 13(2), which is a deeming provision. The question to be considered is whether the inference of the Revenue authorities in this context, i.e., the provisions of Section 13(1)(c) r/w Section 13(2) are attracted in the present case because the said building was used as the guest-house where the governing council members were accommodated along with other guests, is correct. We are of the opinion that the provisions of Section 13(1)(c) are not attracted in the present case. We have already quoted the provisions of Section 13(1)(c) and also the deeming provision of Section 13(2). As we have already mentioned the crucial question to be considered is whether the building or the property of the assessee-society is made available for the use of any person referred to in Sub-section (3) within the meaning of Section 13(1)(b) of the IT Act. What is the significance of the expression used in Section 13(2)(b), i.e., “made available for the use of any person referred to in Sub-section (3) for any period during the previous year without charging adequate rent or other compensation”? We are of the view that this provision is attracted only in a situation where the property of a charitable society is made available exclusively for the use of any specified person for any period during the year without charging adequate rent or compensation. Where the property of the society is not so made exclusively available for the use of a specified person, we see no reason for inferring that the provisions of Section 13(1)(c) are attracted. In the present case, the building the at No. 4, D’Silva Road is taken on lease as a guest-house. A guest-house, by definition, is used for the accommodation of guests. It is not for the exclusive use of any particular person. The governing council members have utilised the building along with other outside guests for their temporary stay when they visited India from abroad. To give an extreme example, it is like the chairman using the furniture of the society. Can it be said in that case, that the property of the society is made available for the use of the specified person so as to attract the provisions of Section 13(1)(c)? Such an extreme interpretation would, to our mind, render the functioning of any charitable trust impossible. In the light of the facts established in this case, i.e., that the building at 4, D’Silva Road, has been utilised only as the guest-house and not as the residence of any category of persons specified in Section 13(3), we are of the view that the property of the assessee is not made available for the use of any person referred to in Sub- Section (3) of Section 13, within the meaning of Section 13(2} of the IT Act, even if no rent or compensation is charged. It is not the case of the Revenue that the governing council members have been extended any extra concession over and above the other guests who were accommodated in the guest-house. It is not the case of the AO that while the assessee-society charged rent from the other guests, it made available the guest-house to the governing council members without charging any rent. Where a common facility belonging to the assessee1 society is made available to the governing council members on the same terms as it is made available to other guests, we are of the view that the provisions of Section 13(2) are not attracted. The Revenue authorities have relied upon the decision of the Hon’ble Kerala High Court in the case of Agappa Child Centre v. CFP (supra) for their inference against the assessee-society. We are of the view that this case is distinguishable on facts. In this case, the jurisdictional High Court was considering a situation where a refrigerator purchased by the trust was placed in the residence of the managing trustee till the trust building was ready. Further, in that case the Tribunal gave a finding mentioned at p 214 of the report (of 226 ITR) that they failed to understand as to why when the building itself was not ready, the refrigerator had to be purchased at all. So, in that case a refrigerator was purchased when it was not required by the trust only to benefit the managing trustee, and was made available for his use. We do not see any such situation in the present case before us. The number of equipments purchased is definitely more, but they were installed in the guesthouse. They remained the property of the assessee-society and were not made available for the exclusive use of the chairman or the governing council members. A guest-house requires certain furniture and equipments and when the former residence of the chairman was converted into a guest-house, it Was suitably equipped. The guest-house itself was taken on lease because there was a felt need for such a guest-house. It is not the case of the Revenue that the visitors mentioned in the lists did not actually visit or that the claim of their being accommodated in the guest-house was bogus. It is not even the case of the Revenue that the guest-house was made available to the governing council members when they were not on official visits to India on the work of the assessee-society. Simply because the governing council members availed of a facility in the normal course of the discharge of their trustee functions, we do not see how the provisions of Section 13(2)(b) are attracted.
14. The matter may be viewed from a different angle also. It was pleaded before the Revenue authorities that the chairman would have received a substantial security deposit, plus a monthly rent of Rs. 25,000 if the said building at 4, D’Silva Road, had been let out to outside parties, instead of being leased out to the assessee-society. In other words, the plea made out was that the chairman did not actually receive any benefit from the said transaction of letting out the building on lease to the assessee-society. Of course, an amount of Rs. 4,36,785 was spent on the renovation of the house for a period of two years. As per the terms of the lease, as is evident from the letter dt. 15th March, 1995, addressed by the assessee to Mrs. Omana George, which we have extracted above, the maximum of Rs. 12 lakhs could have been spent over a period of 2 years. Actually, what was spent was only Rs. 4,36,785 only. This amount is much less than the rent that the chairman and his wife would have received, had it been let out to outsiders. We may also mention that the installation of various equipments in the guest-house has also not benefitted the chairman or the governing council members, directly or indirectly. As we have already mentioned, they remained the property of the assessee-society. Simply because they were installed in the guest-house, it does not mean that they were made available for the use of the chairman and the governing council members within the meaning of Section 13(2)(b). It is not as though they were installed in the personal residence of the specified persons.
15. The AO mentioned that there were some overwritings in the minutes book of the assessee-society when the building at 4, D’Silva Road, was taken on lease. It was explained before the Revenue authorities that the overwritings were by way of correction of clerical errors and they were authenticated by the chairman. We have no material to reject this plea of the assessee. In the circumstances, we see no justification for the conclusion of the CIT(A) that the provisions of Section 13(1)(c) r/w Section 13(2)(b) are attracted.
16. In the view we have taken of the matter, we need not go into the legal issues raised by the learned counsel for the assessee, which we have extracted hereinabove.
17. In the circumstances we agree with the assessee-society that the provisions of Section 13(1)(c) are not attracted and so we hold that the assessee is entitled for the exemption of its income under the provisions of Section 11 of the IT Act.
18. The CIT(A) has confirmed certain disallowances, like the following :
Rs.
1. Travelling expenses 47,048
2. Telephone expenses 13,475 The assessee is aggrieved by these disallowances. Regarding travelling expenses, the CIT(A) discussed the issue as under:
“14(a). The next issue is the addition of Rs. 95,738 out of the claim of travelling and conveyance of Rs. 1,03,080. On an examination of the details, the AO found that the disallowed amount related to 9 trips by the trustees and the chairman. Most of the journeys were between Madras and Trivandrum touching Mavelikkara, one of them charges for the air ticket of two trustees from Singapore to Madras of Rs. 41;744. The trip from Singapore to Madras was claimed as relating to the Annual General Body Meeting of the society at Madras. The other were stated to be for supervising the charitable activities at Mavelikkara and to attend the office at Trivandrum. The AO found that the visit of the two trustees permanently residing at Singapore could be for meeting their own relatives and is not. meant for furthering the interests of the society. Regarding the trips to Trivandrum he felt that the chairman’s mother is staying alone at Trivandrum and is being looked after by ‘aayas’ and, therefore, has to be visited by him frequently. Therefore all these expenses were held to be unrelated to the purpose of the trust and was disallowed.
14(b). The assessee, on the other hand, argues that it is essential that the trustees attend the meetings of the trust to supervise the work. The charitable work at Mavelikkara is accepted even by the AO. At Trivandrum the society has an office, and also is assessed here to income-tax. Personal supervision by the trustees is essential for the efficient running of the activities. The chairman has drawn for personal expenses from his NRE account an amount of Rs. 15.5 lakhs during the period 1992 to 1996. Details of individual stay at various places for personal purposes met from personal funds have also. been filed. The chairman’s mother is being looked after by his brothers and his visit frequently is not required. It is, therefore, claimed that the entire expenses as claimed is allowable, especially in view of the fact that none of the trustees have any individual business interests in India.
14(c) I have considered the rival contentions. There is evidence for the trustees meeting their own expenses from individual funds. It is also shown that they have sufficient individual resources. However, meeting the expenses of the journey of two trustees from Singapore to Madras: cannot be said to be for charitable purposes. The dire necessity of incurring such expenditure is not explained. Moreover, charitable activities abroad is not the objective of the trust. Similarly, the expenditure of Rs. 2,304 for the journey from Madras to Palghat also appears unrelated to the activity of the trust as it has not projects in that area. Therefore, the disallowance of the two sums of Rs. 41,744 and Rs. 2,304 are upheld. The other addition on this account are deleted.”
It may be observed that the genuineness of the expenditure is not doubted. It is not as though the expenditure is not doubted. It is not as though the expenditure is unvouched.. The claim of the assessee is that the governing council members, inclusive of the chairman, were normally residing outside India. The work of the trust took them to different places like Palghat, Trivandrum, Mavelikara, etc. There are also sufficient withdrawals from the NRE account of the chairman to explain his personal visits. We see no reason for the above disallowances. The disallowances aggregating to Rs. 44,048 is deleted. In this context we may mention that in the computation of business income, normally certain disallowances are made for probable personal use of assets/expenditure on the ground that there is no sufficient evidence by way of log book, etc. However, in the case of a charitable trust, such disallowances for personal use if made have serious consequences by way of attracting the provisions of Section 13(1)(c) or higher rate of tax under Section 164(2) of the IT Act. For invoking these sections, we are of the view that the onus is on the Department to prove personal use in the context of use of assets or incurring of expenditure. Such onus has not been discharged in respect of the disallowance of the travelling expenses.
19. Similar is the position with regard to the disallowance of Rs. 13,475 out of telephone expenses. The AO discussed the issue at p 8 of his order as under :
“Telephone charges Rs. 69,823 : The society has claimed telephone charges of Rs. 69,823 in respect of telephones installed at GEMS office, D’Silva Road, residences and at community halls. As per the bills telephone charges in respect of community halls is Rs. 11,496.85. The same is fully allowed. The telephone charges at the guest house as per the bill is Rs. 4,460. The same is disallowed. As regards the telephone bills in respect of GEMS office, the assessee has not furnished the computer print out of all the telephone bills. It is, therefore, not possible to ascertain the nature of calls made and the destination. It is, however, noticed from the computer printout of some of the telephone bills that there was frequent calls to Singapore and Trivandrum. The family members of the chairman of the society Shri C. George are permanently residing at Singapore, All the expenses in respect of the telephone installed at the office premises can not be fully allowed. Accordingly, 50 per cent of such expenses which comes to Rs. 26,950 is disallowed.”
The CIT(A) discussed the issue as under:
“16(a). The next addition is of the entire telephone charges of Rs, 4,460 relating to the guest-house and 50 per cent of such expenses relating to the society’s office. The former is disallowed as the AO felt it to be merely the residence of the chairman. Regarding the expenses at office, he found that the computer printout of telephone bills indicated frequent calls to Singapore and Trivandrum, where the family members of the chairman are residing. These were not for the purpose of the society and therefore 50 per cent was disallowed.
16(b). The assessee, on the other hand, argues that the family members are also trustees and discussion on administrative matters with them is necessary. The guest-house is used for both the chairman and others and there are no personal calls noticed by the AO.
16(c). I have considered the submissions. The maintenance of the guesthouse cannot be completely held to be unnecessary. Therefore the small amount of telephone charges incurred therein cannot be disallowed without any basis. This addition to deleted. Corning to the disallowance from the office expenditure, a certain percentage appears to be relatable to personal calls by the chairman. There is no evidence that chairman had incurred such expenses from personal account. However, it would be reasonable to restrict the disallowance to 25 per cent rather than 50 per cent which appears excessive.”
Again, it is not the case of the Revenue that the expenditure is not vouched. They have made the impugned disallowance only on surmises or estimate for the possible personal use of telephone by the chairman. Simply because the calls are frequent between Singapore and Trivandrum, it cannot be assumed that they are not relatable to the work of the trust. As the assessee admittedly has a centre in Trivandrum and the governing council members are staying in Singapore, it is quite possible that the directions of the governing council members were sought or that they gave instructions to their office at Trivandrum. In respect of the disallowance of telephone expenses at the office, the CIT(A) reduced the disallowance, but confirmed a portion, again only on surmises. Considering the serious consequences that could flow, like the denial of exemption under Section 11, disallowance for personal user by trustees cannot be countenanced, unless proved. There is no such, proof in respect of the disallowances in the present case. We accordingly delete the disallowance of Rs- 13,475 out of telephone expenses.
20. The next ground is that the CIT(A) erred in confirming the action of the AO in reducing the investment in the construction of the community hall by Rs. 55,000. The AO found that an expenditure to the extent of Rs. 55,000 out of the construction expenses of community hall was incurred in cash in violation of the provisions of Section 40A(3) and accordingly he reduced the construction cost by the said amount of Rs. 55,000. The CIT(A) discussed and decided this issue in paras 22(a) to 22(c) of his order, as under ;
“22(a). The next dispute is on account of expenditure in connection with the construction of a community hall at Adambakkam. This is not claimed in the income-expenditure account; but separately claimed in the income-tax adjustment statement as an application for charitable purpose. Since I have held in para 4(g) above that such claims are not to be allowed in this year, it is not essential to give a finding on this issue. But, for the sake of completeness it is also taken up. While examining the details of expenditure the AO found that two cheques were issued to one Shri Iyer in violation of the provisions of Section 40A(3). On a perusal of the vouchers submitted in this connection, they are seem to be classified as repair and renovation. The AO, therefore, reduced the total investment in the construction as reduced by this amount of Rs. 55,000 as he doubted the genuineness of the transaction.
22(b). The assessee on the other hand, explained that the renovation of the hall was necessary as it was damaged in fire. In view of the need for urgent repair, bearer cheques were issued to Shri Iyer for payment to labour immediately.
22(c), I have considered the submissions. The assessee has not properly explained as to how the provisions of Section 40A(3) should not apply in the assessee’s case with reference to the relevant rules. However, since the expenditure has been capitalised, there is no disallowance in the calculation of income required under Section 40A(3). The AO has therefore reduced the total investment by the relative sum. This action of the AO appears to be in order in that the assessee has not produced exact details of the type of renovation conducted by Shri Iyer. Only vouchers of Shri Iyer has been produced. The nature of work done by him has not been established in detail. Renovations hardly ever result in bills of round sums. The cost of the building for depreciation will be taken without considering this expenditure.”
We find no justification for the above rejection of the construction cost. The provisions of Section 40A(3) are to be invoked only in the computation of the income under the head ‘business’. The assessee-trust has not carried on any business activity. We see no reason for invoking the said section in the computation of the income of the society. The computation of the income of a trust is to be done on commercial lines, as held by the Hon’ble Kerala High Court in the case of Programme for Community Organisation (supra). The learned Departmental Representative in his written submissions mentioned that this decision is applicable only in the context of arriving at the amount applied on the purposes of the trust. Under the provisions of Section 11(4) relating to a business undertaking held under trust, there is a special provision for the computation of the income of the business undertaking “in accordance with the provisions of this Act relating to assessment”, and so this Sub-section provides for computation of the income of the business undertaking in terms of SS.-28 to 44D of the IT Act. We do not find any such provision in respect of the income of the trust and so we, do not see how the provisions of Section 40A(3) can be invoked in the context of the construction expenses of the community hall, which is basically a capital expenditure. Even if the computation had been made under the head “business”, the provisions of Section 40(3) are not attracted in the context of capital expenditure. At any rate in the present case the AO has not made any head-wise computation of income of the society. In the circumstances, we see no reason for reducing the construction cost by the amount of Rs. 55,000.
21. In the light of the above, we hold that the provisions of Section 13(1)(c) are not attracted in this case and the assessee is eligible for the exemption of its income under the provisions of Section 11 of the IT Act. The AO took a segmented approach and exempted the income, from the activities in Kerala and denied the exemption for the activities in Tamil Nadu. Such an approach, to our mind, is not permissible. We, however, need not go into this aspect of the matter because we have held that even in respect of the activities in Tamil Nadu, the provisions of Section 13(1)(c) are not attracted and the various disallowances made by the AO for the personal user by the trustees are not called for. We are also upholding hereunder the order of the CIT(A) in respect of the disallowances deleted by him and which are agitated by the Department in the appeal filed by them. The AO has also not considered separately the expenses of the trust and the expenses on the purposes of the trust. As per the computation of income filed by the assessee along with the return, the percentage of income spent oh the purposes of the trust in the light of Section 11(2) of the IT Act is as under :
Rs.
1. Income, inclusive of voluntary contributions 59,79,120
2. Income applied for charitable purposes, inclusive of depreciation 50,55,043
3. Assets purchased during the year 16,36,773
66,91.816
4. Amount of income accumulated to the extent it does not exceed 25 per cent of the income derived from the property of the trust Nil
In the light of the above working, it appears to us that the assessee has spent the statutory percentage of income on charitable purposes. This issue, however, is not before us and we have mentioned it only to give a complete picture.
22. In the result, the assessee’s appeal is allowed.
23. ITA No. 42/Coch/2000: The first ground in this appeal reads as under:
“The learned CIT(A) after having found that the trust has been rightly denied the benefits of exemption under Sections 11 and 12 in view of Section 13(1)(c)(ii) r/w Section 13(2) ought not to have decided on merits the disallowances made by the AO out of the expenses under Section 11 as not applied for charitable purposes.”
We have held hereinabove in the context of the assessee’s appeal that the provisions of Section 13(1)(c) r/w Section 13(2) are not attracted in the present case. We see no infirmity in the deletion by the CIT(A) of the various disallowances out of expenses made by the AO. The ground is rejected.
24. The next ground reads as under:
The learned CIT(A) ought to have found that the assessee’s income consists mainly of income under the heads ‘property’ and ‘other sources’ and that in the circumstances only the deductions permissible for computing the income under those heads were allowable as held by the Delhi High Court in CIT v. J.V. Gupta & Sons (HUF).”
In the case of J.V. Gupta & Sons (HUF) cited by the Revenue, the Hon’ble Delhi High Court held that once an appropriate head as mentioned in Section 14 of the IT Act is determined for chargeability of income, the total income has to be computed as per the procedure prescribed under the specific head. We have already referred hereinabove to the decision of the jurisdictional High Court in the case of Programme for Community Organisation (supra) wherein it has been held that for ascertaining the percentage of income applied for charitable purposes what is relevant is the amount disclosed in the accounts of the assessee and not of total income computed under the provisions of the Act. The Hon’ble High Court has also referred to a CBDT Circular dt. 19th June, 1968, in which the last para reads as under:
“Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word ‘income’ should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise ……… The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under Section 11(1)”
So, in the light of the above judgment of the Kerala High Court and the circular of the Board, at least for considering the percentage of income applied for charitable purposes, what is relevant is income as understood in the commercial sense, i.e., book income after adding back expenditure on the purposes of the trust and not the income computed under the provisions of the IT Act. It is the stand of the Department that the income has to be computed not on commercial lines, but under different heads specified in the IT Act and for this proposition they are relying on the above-mentioned decision of the Delhi High Court. It needs to be mentioned that the Hon’ble Delhi High Court was not dealing with the case of a charitable trust, and so it appears that the legal principles laid down by the Hon’ble Delhi High Court cannot extend to a charitable trust. If we accept the contention of the Department, it means that there have to be two computations, one on commercial lines for ascertaining the applicability of the provisions of Section 11(2) of the IT Act and another under different heads of the IT Act for ascertaining the total income. We do not find any authority for such two fold computation. Further, we are of the view that the decision of the Delhi High Court is not applicable because the AO has not specified the heads under which the income of the assessee-society is chargeable. When the particular head(s) of the income itself is not specified, there is no way of deciding the permissible deductions. At any rate, the disallowances made by the AO are basically on the ground of personal user of the assets or on the ground of expenditure incurred for the personal benefit of the governing council members and the chairman. The CIT(A) has not found any such personal element and so he held that there was no ground for disallowances of the expenses. We agree with his reasoning. The ground is rejected.
25. The next ground reads as under:
“Without prejudice to the above it is submitted that the learned CIT(A) erred in holding that the expenditure incurred by the assessee on the maintenance of a guest-house Rs. 4,36,785 and the amounts paid by way of salary to gardner and maid servant amounting to Rs. 25,000 and Rs. 12,000, respectively, and payment to security guard were allowable as a deduction on the ground that the ..expenditure cannot be disallowed unless it is held that the guest-house itself is not in pursuit of the purpose of the society.”
We have already held in the context of the assessee’s appeal that the building at 4, D’Silva Road, was used as guest-house of the assessee-society for accommodating its governing council members on visit to India and also outside guests, and also it has to be held that the guest-house was used in the pursuit of the purposes of the society. We see no reason for disallowing the expenditure mentioned in the above ground. We agree with the reasoning of the CIT(A) on this issue. The ground is rejected.
26. The next ground reads as under:
“The learned CIT(A) ought to have found that the guest-house was also the residence of the chairman of the assessee so early that the expenditure was not in pursuit of the purposes of the society, that Section 37(3) of the IT Act provides for the disallowance of expenditure incurred on the maintenance of a guest-house and that in view of the decision of the Bombay High Court in CIT v. Ocean Camers (P) Ltd. (1995) 211 ITR 357 (Bom), the expenditure incurred was to be disallowed.”
We already given a finding that the building at No. 4, D’Silva Road, was not used as an exclusive residence of the chairman, but was used as a guest-house of the assessee-society. We have also referred elsewhere the decision of the jurisdictional High Court in the case of Programme for Community Organisation (supra) as per which the income of the society has to be computed on commercial lines and not in terms of the provisions of the IT Act relating to the determination of the total income. At any rate, in the present case the AO himself has not specified the head under which he computed the income of the assessee-society. As the income is not computed specifically under the head ‘business’, we do not see as to how the provisions of Section 37{3) relating to expenditure on guest-house are attracted. In this view of the matter, we reject the ground.
27. The next two grounds read as under:
“1. The learned CIT(A) erred in deleting the disallowance of Rs. 1,90,031 being the proportionate interest on money borrowed and diverted for personal purposes. The learned CIT(A) ought to have found that the assessee had spent Rs. 12,66,897 for purchase of vehicles, washing machines, renovation of guest house and air ticket of chairman and family members out of interest-bearing funds and since the expenditure was incurred for the benefit of the chairman there was diversion for personal purposes warranting disallowance of proportionate interest.
2. The learned CIT(A) after having found that the AO had not examined how much of own resources and borrowed funds were available during the year for investment ought to have remitted the matter to the AO for verification instead of deleting the addition in the light of the Supreme Court decision in the case of Kapurchand Srimal v. CIT (1981) 131 ITR 451 (SC).”
In the context of the assessee’s appeal, we have given a finding that the various equipments installed in D’Silva Road residence ‘remained the property of the assessee-society and so we see no reason for disallowing the expenditure on their purchase. We do not see any diversion of funds for the personal purposes of the chairman, as he has nothing to do with the equipments installed in the guest-house. As the funds were used only for the purposes of the trust, we see no merits in the above grounds. They are rejected.
28. We uphold the order of the CIT(A). The Revenue’s appeal is dismissed.
