Repayment of debt, incurred by trust, for construction of building is application of income

DCIT Vs Ram Asra Goyal Education & Research Society (ITAT Chandigarh)

Facts- The assessee society was registered under the Societies Registration Act and also registered u/s. 12AA of the Income-tax Act, 1961. The assessee filed its ROI on 03-09-2014 declaring Nil income. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer (AO) issued the notice to the assessee to show cause as to why the donation was paid to M/s. Ashoka Educational Trust may not be disallowed. The AO after considering the above submissions of the assessee observed that the assessee failed to justify the payments made to M/s. Ashoka Educational Trust, which is registered u/s. 12AA of the Income Tax Act for the AY 2015-16. The AO observed that during the inquiry u/s. 133(6) of the Act, it was found that in its reply M/s. Ashoka Educational Trust stated that no amount had been received by it. The AO also observed that for the AY 2014-15 there was no activity seen related to the charity or education by M/s. Ashoka Educational Trust for the A.Y 2014-15 and the investments were made in the fixed assets and therefore, disallowed a sum of Rs. 9,50,000/-.

Being aggrieved the assessee carried the matter to the Ld. CIT(A). CIT(A) deleted the disallowance. Accordingly, the department preferred the present appeal. Another grievance of the department was allowing repayment of loan as application of income.

Conclusion- We have considered the rival submissions of both the parties and perused the material available on record. In the present case it appears that the assessee had paid a sum of Rs.9,50,000/- to M/s. Ashoka Educational Trust as corpus fund. The assessee society paid the said amount through banking channel and at every step claimed the said amount was paid as donation. Even the recipient, M/s. Ashoka Educational Trust also confirmed the same before the AO as well as before the Ld. CIT(A) that the amount in question was received by them as a donation to be utilised for the purpose of charitable activities of M/s. Ashoka Educational Trust. We, therefore, considering the totality of the facts are of the view that the Ld. CIT(A) was fully justified in deleting the addition made by the AO. Ground no. (i) raised by the department is dismissed.

With regard to repayment of loan it was held that in the case of CIT Vs. Janmabhumi Press Trust, Hon’ble Karnataka High Court has held that the repayment of debt incurred by the trust for construction of the building should be treated as application of the income of the trust for charitable purpose. In the present case also the assessee utilized the loans to create the fixed assets and the loan was taken and shown as receipt while on repayment, it was considered as application of income. Therefore, following the ratio laid down by the Hon’ble Karnataka High Court the Ld. CIT(A) was fully justified in allowing the claim of the assessee.

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH

These two appeals by the department are directed against the separate orders dt. 04/09/2018 and 14/03/2019 of the CIT(Appeal), Patiala for the assessment years 2014-15 and 2016-17 respectively.

2. Since the issues involved are common in these appeals which were heard together, therefore, these are being disposed off by this common order for the sake of convenience and brevity

3. At the first instance we will deal with appeal for the A.Y 2014-15 in ITA No. 1578/Chd/2018.

4. Following grounds have been raised in this appeal:

i. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law and facts in deleting the addition of Rs. 9,50,000/- on account of payment made by the assessee to M/s. Ashoka Educational Trust by relying upon the additional evidence under Rule 46A of the Income Tax Rules filed by the assessee during the appellate proceedings.

ii. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law and facts in allowing the repayment of loan as application of income. This was rightly disallowed by the assessing officer by holding that since the assessee has not shown loans taken as income hence they cannot be allowed as application of income at time of repayment.

iii. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law and facts in deleting the addition of Rs. 2,31,30,585/- under section 68 r.w.s 115BBE of the Act on account of unsecured loans by relying upon the additional evidence under Rule 46A of the Income Tax Rules filed by the assessee during the appellate proceedings. The addition was rightly done as the assessee had failed to file relevant evidences during the assessment proceedings.

iv. That the appellate craved to add, delete or and any grounds of appeal on or before the date it is heard and disposed off.

5. Vide ground no. (i) the grievance of the department relates to the deletion of addition of Rs. 9,50,000/- made by the Assessing Officer ( in short, the AO) on account of payment made by the assessee society to M/s. Ashoka Educational Trust.

6. Facts related to this issue in brief are that the assessee society was registered under the Societies Registration Act (XXI of 1860) vide registration No.46 of 2008-09 dt. 14-05-2008 and also registered u/s. 12AA of the Income-tax Act, 1961 (hereinafter referred to as ‘ the Act’ ) with the Ld. CIT, Patiala vide Order No.CIT/PTA/TECH/12-A/11/2008-09/7608 dt. 02/01/2009. The assessee filed its return of income on 03-09-2014 declaring Nil income. Later on the case was selected for scrutiny. During the course of assessment proceedings the AO issued the notice to the assessee to show cause as to why the donation paid to M/s. Ashoka Educational Trust may not be disallowed by observing as under:-

“On perusal of the income and expenditure account and details filed by you, it is seen that you have paid amount of Rs.9,50,000/- to M/s. Ashoka Educational Trust as donation. On perusal of your reply it is seen that M/s. Ashoka Educational Trust is not registered u/s. 12AA for AY 2014-15. During the inquiry u/s. 133(6) of I.T Act it is also found that M/s. Ashoka Educational Trust has filed in its reply that no amount has been received by M/s. Ashoka Educational Trust and it is also verified from the balance sheet and income & expenditure account of M/s. Ashoka Educational Trust that you have not paid any amount to M/s. Ashoka Educational Trust. In these facts when M/s. Ashoka Educational Trust has not received any donation from you and not registered u/s. 12AA and not spent on educational purpose, then this amount of Rs.9,50,000/- is not allowable as application of income. This expense is disallowed and will be added into surplus. “

6.1. In response, the assessee vide reply dt. 26-12-2016 submitted as under;

1. A sum of Rs.9,50,000/- was donated by the Society to Ashoka Education Trust for educational purpose. Copy of confirmation from Ashoka Educational Trust and utilization certificate issued by Ashoka Educational Trust regarding usage of funds are enclosed vide annexure no. 1. The payment was made to the trust vide Cheque No.006049 dated 07.03.2014 and duly recorded in our bank statement. The name of trust is also reflected in Bank statement enclosed vide annexure no.1.

6.2. The AO after considering the above submissions of the assessee observed that the assessee failed to justify the payments made to M/s. Ashoka Educational Trust, which is registered u/s. 12AA of the Income Tax Act (hereinafter referred to as the Act)for the AY 2015-16 and not for the A.Y 2014-15. He also observed that during the enquiry u/s. 133(6) of the Act, it was found that in its reply M/s. Ashoka Educational Trust stated that no amount had been received by it. The AO also observed that for the AY 2014-15 there was no activity seen related with the charity or education by M/s. Ashoka Educational Trust for the A.Y 2014-15 and the investments was made in the fixed assets. He, therefore, disallowed a sum of Rs. 9,50,000/-.

7. Being aggrieved, the assessee carried the matter to the Ld. CIT(A), Patiala and submitted as under:-

“ To Ashoka Educational Trust a sum of Rs.9,50,000/- was donated vide cheque No. 006049 dated 07.03.2014 by our Society. They have failed to acknowledge the fact during assessment due to non-availability of their Chairman. They have now admitted the receipt through a letter confirming their mistake along with Balance sheet for the year 2013-14. We hereby request you to allow us to produce additional evidence on this account as per Petition under rule 46A of Income Tax Act, being attached herewith.”

7.1. The aforesaid submissions of the assessee was forwarded to the AO who replied as under:-

“(Appellant cannot be allowed to change statements so frequently. It is an afterthought. During the assessment proceedings, the assessee was given sufficient opportunities to file its explanation. But the assessee failed to file/produce requisite documents so as to justify its claim. Hence, documents submitted by the assessee now should not be considered as additional evidences under Rule 46A of the Income tax Rules.

7.2. In its counter comments the assessee submitted to the ld. CIT(A) as under:–

“The objection that the appellant has changed its statements is uncalled for. The appellant has right from the beginning been clear that the donation was given and has shown in the Audited Balance sheet also. It was the donee who has changed the statement and has accepted their mistake also as per letter dated 31.10.2017.

The donation was shown in the Audited Balance Sheet as such the AO contention that it was afterthough is incorrect.

The appellant was never given an opportunity to cross examination the party.

The bank statement of appellant clearly shown name of Ashoka

Educational Trust in the statement along with Cheque Noo.006049 dated 07.03.2014.”

7.3. The Ld. CIT(A) after considering the above submissions of the assessee and comments of the AO observed that as regards to the admission of additional evidence the AO suggested that assessee was given enough time and the submission was an after though. He observed that the bank records revealed the date of cheque issued to the Ashoka Educational Trust was within the previous year relevant to the AY under consideration and confirmation was to be obtained from a third party which, at times could be difficult, moreover, the additional evidence goes to the root of the matter, which falls within the exceptions as envisaged by Rule 46A of the Income Tax Rules, 1962. He, therefore, admitted the additional evidence. The Ld. CIT(A) observed that the assessee had furnished confirmation duly signed by the donee, Ashoka Educational Trust dt. 31-10-2017 along with an approval u/s. 12AA of the Act. He further observed that the audited balance sheet, income and expenditure account dt. 14-08-2014 revealed that amount of Rs. 9,50,000/- was received as corpus donation from the assessee. He further observed that the date of audited balance sheet was prior to the enquiries made by the AO, where amount was indicated as not reflected in the receipt and expenditure account as well as balance sheet filed with the AO by M/s. Ashoka Educational Trusts and further as to why with a letter dt. 31-10-2017 an un-audited provisional balance sheet (signed by a Chartered Accountant duly acknowledging the provisional nature in the balance sheet). The assessee on being questioned on the same vide letter dt. 16-08-2018 filed a copy of the return of income filed by M/s. Ashoka Educational Trust for the AY 2014-15 along with computation of income, audited balance sheet and P & L account duly signed by the auditor on 18-09-2014. The Ld. CIT(A) stated that he had examined the aforesaid facts, which revealed that the assessee had duly reflected the said amount of Rs.9,50,000/- as a loan from the assesse. The Ld. CIT(A) observed that there was considerable casualness and lack of discipline both by the assessee and loanee in making submissions. He opined that facts were crystal clear, from the bank records, it was clear that the amount in question was paid by cheque to Ashoka Educational Trust and date of cheque issued by the assessee as well as the debit in the accounts was within the previous year relevant to the AY under consideration. As per return of income and audited accounts of the Ashoka Educational Trust the amount had been shown as a loan. He also observed that non-furnishing of the confirmation by Ashoka Educational Trust during assessment proceedings had been contradicted by the trust in its confirmation filed during appellate proceedings, which was predicated on audited accounts. He, therefore, held that the assessee was not at fault in this matter. Accordingly, he deleted the addition of Rs. 9,50,000/- made by the AO.

8. Now, the department is in appeal.

9. The Ld. Sr.DR strongly supported the assessment order passed by the AO and further submitted that before the AO the assessee claimed the amount paid to M/s. Ashoka Educational Trust as donation, but the Ld. CIT(A) considered that it was a loan. Therefore, the amount was rightly disallowed and the addition was made by the AO, as M/s. Ashoka Educational Trust was not having registration u/s. 12AA of the Act at the relevant time.

10. In his rival submissions, the Ld. Counsel for the assessee submitted that the amount of Rs. 9,50,000/- paid by the assessee to M/s. Ashoka Educational Trust was a donation and not a loan. A reference was made to page-25 of assessee’s compilation, which is the copy of letter dt. 06-12-2016 written by the assessee to the AO, wherein vide para 3, it was stated that a sum of Rs.9,50,000/- was donated by the assessee society to M/s. Ashoka Educational Trust for the purpose of construction of building and till now that building was used by M/s. Ashoka Educational Trust. It was further stated that the date of order u/s. 12AA of the Act an application of educational trust was on 13-04-2015, which was applicable for the AY 2015-16, but the amount of Rs.9,50,000/-donated to M/s. Ashoka Educational Trust have been utilised for the construction of building. Reliance was placed on the following decisions/case laws:

1	CBDT	Instruction No. 1132/CBDT dt.05-01-1978
2	CIT Vs. J.K Charitable Trust	(1992)196 ITR 31(All.)
3	CIT Vs. Sarladevi Sarabhai Trust	(1998) 172 ITR 698(Guj.)
4	CIT Vs. Thanthi Trust	(1999) 239 ITR 502
5	CIT Vs. Karnataka Lingayat Society (Kar)	Hon’ble Karnataka High court and in ITA No. 5004/2012, ITAT Karnataka
6	ACIT Vs. Thanthi Trust	247 ITR 785(SC)

10.1. The Ld. Counsel for the assessee also referred to page-27 of assessee’s paper book, which is the copy of letter dt. 16-12-2016 written to the assessee society by the AO/DCIT(Exemptions), Chandigarh, wherein the AO asked the assessee that the amount of Rs.9,50,000/- paid to M/s. Ashoka Educational Trust as donation was not reflected in the balance sheet, income and expenditure account of M/s. Ashoka Educational Trust and that when M/s. Ashoka Educational Trust had not received any donation and was not registered u/s. 12AA of the Act, then the amount of Rs.9,50,000/-was not allowable as application of income. It was stated that the AO disallowed the donation paid by the assesee. He also referred to page-39 of assessee’s compilation, which is the copy of reply dt. 26-12-2016 of the assessee society written to the AO/DCIT,C-1-Exemptions, Chandigarh, wherein it was stated that a sum of Rs.9,50,000/-was donated by the assessee society to M/s. Ashoka Educational Trust for educational purposes only. Copy of confirmation from M/s. Ashoka Educational Trust along with utilisation certificate issued by the said trust were enclosed vide annexure no. 1. It was also stated that the payment was made to the trust vide cheque no. 006049 dt. 07-03­2014, which was duly recorded/mentioned in the bank statement furnished vide annexure no.1. The Ld. Counsel for the assessee also referred to page-44 of assessee’s compilation, which is the copy of letter dt. 21-10-2016 written by Ashoka Educational Trust to the AO/DCIT,C-1-Exemptions, Chandigarh, in response to notice issued u/s. 133(6) of the Act calling for information relating to assessee society vide said letter, copies of accounts for AY’s 2014-15 to 2016-17 showing the utilisation of donation received from M/s. Ram Asra Educational & Research Society, Sangur, Punjab(the assessee) alongwith audit report, receipt & expenditure and balance sheet from AY 2014-15 to 2016-17 had been furnished. The Ld. Counsel for the assessee also referred to page-76 of assessee’s compilation, which is the copy of letter dt. 21-01-2017 written to the Ld. CIT (Appeals), Patiala which read as under:-

“1. We are submitting herewith an undertaking from Ashoka Educational Trust wherein they have confirmed the receipt of donation along with cheque no. & date. They have also stated the mistake on their part of not acknowledging the receipt earlier. A copy of their registration u/s. 12AA is also enclosed. They have also submitted their balance sheet for the year 2013-14. A detailed account statement as per their books duly authenticated by them is also enclosed. The party may be produced for evidence purpose if required.

10.2. The Ld. Counsel for the assessee also referred to page-87 of assessee’s compilation, which is the copy of letter dt. 31-10-2017 written to CIT(Appeals), Patiala by Ashoka Educational Trust, wherein it has been admitted that the donation of Rs.9,50,000/- was received from the assessee society vide cheque no. 006049 dt. 07-03­2014 drawn on Oriental Bank of Commerce, which was transferred to their bank account no. 05902191018350 maintained with Oriental Bank of Commerce, Bhupindera Road, Patiala and earlier it was inadvertently replied that no money was received, the said incorrect version happened because their regular accountant was not attending the institute at the time of reply to the AO. The Ld. Counsel for the assessee also referred to page nos. 88-89 of assessee’s compilation, which are the copies of approval given by the CIT(Exemptions), Chandigarh, wherein it has been mentioned that application was filed in FY 2014-15 and as such the approval u/s. 12AA will be applicable for AY 2015-16 and onwards. He also referred to page no.95 of assessee’s compilation, which is the copy of provisional balance sheet of Ashoka Educational Trust, Patiala for the year ending 31-03-2014, wherein amount of Rs.9,50,000/- had been shown under the head Corpus Fund. It was accordingly submitted that assessee society paid the donation of Rs. 9,50,000/- to M/s. Ashoka Educational Trust having registration u/s. 12AA of the Act and the said donation was received as corpus fund, which was utilised for the purpose of charitable activities. He accordingly submitted that the Ld. CIT(A) rightly deleted the addition made by the AO.

11. We have considered the rival submissions of both the parties and perused the material available on record. In the present case it appears that the assessee had paid a sum of Rs.9,50,000/- to M/s. Ashoka Educational Trust as corpus fund, which is evident from page-95 of Assessee’s compilation. The assessee society paid the said amount through banking channel and at every step claimed the said amount was paid as donation. Even the recipient, M/s. Ashoka Educational Trust also confirmed the same before the AO as well as before the Ld. CIT(A) that the amount in question was received by them as a donation to be utilised for the purpose of charitable activities of M/s. Ashoka Educational Trust. We, therefore, considering the totality of the facts are of the view that the Ld. CIT(A) was fully justified in deleting the addition made by the AO. Ground no. (i) raised by the department is dismissed.

12. Vide ground no. ii the grievance of the department relate to allowing the repayment of loan as application of income.

13. Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had claimed repayment of loan as application of income in the computation. He asked the assessee to explain as to how the repayment of loan was allowable as application of income. In response, the assesse referred to Circular No. 100 of CBDT and computation of income from FYs 2008­09 to 2013-14. The assessee furnished its reply on 26-12-2016, which reads as under:-

“We have submitted to you the computation of Income and its utilization right since the incorporation of society. The term loan was obtained from bank in order to construct the building and creation of infrastructure for Educational Institutes. The institution is being run on self financing basis and no Government funds were used to create the infrastructure. Hence, it was necessary to raise loan from Banks to partly fund the initial cost. The loans taken were shown as receipts in Receipt and payment account and fixed assets were taken as outgo. No depreciation has been claimed under 85% utilization. The repayment of loan has been taken as utilization of funds in the year of repayment thereof since it resulted in reduction of liability of the Soociety. The interest on term loan has been charged to expenses. Ratio of unsecured loan to promoter’s fund in FY 2011-12 is 1.998, which is reduced to 0.736 and 0.2068 in FY 2012-13 and 2013-14 respectively.

Hence it is clear that we have not claimed depreciation as application of income. We have claimed fixed assets as application of income in the year of purchase. The loan, when taken was shown as receipt and when repaid shown as application of income. In the year of receipt we have applied 85% of income plus loan receipt. Similarly in the year of repayment of loan the repayment has been claimed in 85% utilization.

The repayment of loan has reduced the liability of the trust and hence to be construed as payment in receipt & payment A/c.”

13.1. The AO did not find merit in the above submissions of the assessee by observing in para 7.1 and 7.2 of the assessment order which read as under:-

“7.1 The reply of assessee duly considered but not accepted under the following findings. Assessee has never claim loan amounts as receipts in its computation in earlier years. In response of the query raised during the assessment, assessee has submitted revised compuitation of income after including the loan amounts as receipts and not claimed the depreciation in these computations. Reply of assessee is not accepted because assessee has never claimed loan amounts as receipts in earlier years computation. The original computation of income for AY 2014-15 and AY 2013-14 is reproduced here:-

Schedule-Vii: Security as on 31.03.2013

Particulars	Amount (Rs.)
Security A/c ACE	800000.00
Security A/c AICTE B.Tech	3500000.00
Security A/c AICTE MBA A/c	1500000.00
Security A/c AICTE MCA A/c	1500000.00
Security A/c Dean College Punjabi University Ptla	1000000.00
Security A/c NCERT Jaipur	419985.00
Security   A/c Punjabi University Patiala A/c	1000000.00
Security A/c R A Society A/c	800000.00
Security A/c R A Society A/c New B. Ed	800000.00
Security Electricity	449210.00
Total	11769195.00

As on 31.03.2014

Particulars	Amount	Total
Income of the Society Gross Income As per income & Expenditure Account		152997833.00
INCOME FOR THE YEAR 2013-14	Total-A	152997833.00
Minimum amount Required to be spent{ i.e 85% of Total (A)}	Total-B	130048158.05
Maximum amount of income can be sent apart	Total-C	22949674.95
APPLICATION OF INCOME Total expenditure	Total-D	70306331.00
Addition to Fixed Assets	Total-E	23129013.00
Total Application of Income	(D+E)	93435344.00
Amount of Income Set Apart	A-(D+E)	59562489.00
Amount over spent (In excess of minimum requirement	(D+E)-B	(36612814.05)
Amount over Spent (previous Year)		170160921.15
Total amount over spent till 31.03.2014		1133548107.10
Income set apart in excess of 15% of income		–

7.2. On perusal of the above it is clear that the assessee has not claimed loan amount as receipts but claimed the capital investments as application of income in earlier years as well as in this year. This fact shows that assessee is claiming double deduction as application of income, 1^st investments in capital assets and then repayment of the same, which is not accepted. Assessee is not claiming repayment of loan as application of income in the original computation dated 01­09-2014.

7.3 Assessee’ s reply that these payments are application of income and covered u/s. 11(1) as aplication of income is not accepted. Case laws and circular of CBDT vide no. 1132 dated 5.1.1981 [F. No. 176/89/77-IT(AI)] duly considered but not accepted because the facts of the case laws are differ from the present case.”

13.2. The AO also observed that the assessee paid the amount to the bank as repayment of loans, but those have not been shown as receipt. The AO also referred to the CBDT Instruction No.1582 dt. 19-10-1984 issued by the CBDT, which modified the earlier instruction no. 1132 dt. 5-1-1981. The A.O. was of the view that the assessee had not applied the amount for charitable purposes and was not eligible for exemption u/s. 11(1) of the Act by observing as under:-

“7.5 Perusal of the above instruction no. 1582, it is clear that in this case instruction no. 1132 will not apply and CBDT has given the power to the AO to verify the utilization of the amounts paid by the assessee under instruction no. 1582. In the present case assessee has utilized these amounts on capital expenditure, which cannot be considered application of income as charitable. So, in the above facts it is clear that assessee has not applied the amount for charitable purposes and not eligible for the exemption u/s. 11(1) of I.T Act, 1961.

14. Being aggrieved, the assessee carried the matter to the ld. CIT(A) and submitted as under:-

“1. During the year we have spent above 85% on the objects of the society as per calculation given below:

Particulars	Amount	Total
Income of the Society		15,29,97,833.00
Gross Income (As per income & Expenditure Account)
INCOME FOR THE YEAR 2013-14	Total-A	15,29,97,833.00
Minimum amount Required to be spent{ i.e 85% of Total (A)}	Total-B	13,00,48,158.05
Maximum amount of income can be sent apart	Total-C	2,29,49,674.95
APPLICATION OF INCOME Total Expenditure 70,03,06,331 Add: Depreciation 1,48,60,262 Add: Expenses Written off 10,70,993	Total-D	8,62,37,586
Addition to Fixed Assets	Total-E	2,31,29,013.00
Total Application of Income(D+E)	Total-F	10,93,66,599
Amount of Income Set Apart	A-F	4,36,31,234
Amount over/(under) spent (In excess of minimum requirement	F-B	(2,06,81,559)
Amount over Spent (previous Years)		17,01,60,921.15
Total amount over spent till 31.03.2014		14,94,79,362.1
Income set apart in excess of 15% of income		–

Due to purchase of Fixed assets in initial years of formation there was an overspent of Rs.17,01,60,921.15/- i.e the amount spent in excess of 85% of income, which was carried forward from previous year. The calculation of same is shown in the above table.

2.” Attention is also drawn to the fact that the amendment” The deduction of depreciation in case of a charitable/religious trust, amount to double benefit/deduction has been affected with effect from 01 April 2015 in section 11(6) wherein the legal position has been changed”. Earlier depreciation was allowed as deduction.

Relevant Case Law on the point is as follows:

CIT Vs. Tiny Tots Education Society [2011] 230 ITR 21 (P&H)

In this case the assessee was a charitable institution registered under section 12AA of the Income-tax Act, 1961. In its accounts, the assessee calculated depreciation on the ground showing the amount utilized. The Assessing Officer disallowed the depreciation on the ground that the income of the assessee being exempt, claim for depreciation would amount to taking of double benefit. The Commissioner (Appeals) held that deduction for computing income to preserve the corpus of the trust was permissible and did not amount to double benefit. This view was upheld by the Tribunal observing that application of income was not computation of income of the charitable institution. Therefore, the question whether depreciation was to be allowed or not, had nothing to do with the application of income. The income was always to be computed on commercial principles and as per the system of accounting followed by the assessee, subject always to the statutory provisions.

On further appeal by the Revenue before the High Court, dismissing the appeal, it was held that the assessee was not claiming double deduction on account of depreciation. The income of the assessee being exempt, the assessee was only claiming that depreciation should be reduced from the income for determining the percentage of funds which had to be applied for the purposes of the trust. It could not be held that double benefit was given in allowing the claim for depreciation for computing income for purposes of section 11.

“ Attention is also drawn to the fact that the amendment has been affected with effect from 01 April 2015 in section 11(6) wherein the legal position has been changed.”

In view of the aforesaid reasons, it is clearly established that a charitable/religious trust is entitled to deduction of depreciation allowance and such a deduction does not amount to double benefit or double deduction.

3. If the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are carried forward and adjusted against the income of a subsequent year, the income of that year can be said to be applied for charitable and religious purpose.

Relevant Case Law on the point is as follows:

In CIT v. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj.), Lordships of the Rajasthan High Court held that if the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are adjusted against the income of a subsequent year, the income of that year can be said to be applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes had been adjusted. Adjustment of excess expenditure against income of following year would amount to application of income for charitable purpose.

This view was reiterated by the Gujarat High Court in CIT v. Shri Plot Swetambar Murti Pujak Jain Mandal (1995) 211 ITR 293 (Guj) and by the Madras High Court in CIT v. Matriseva Trust (2000) 242 ITR 20 (Mad.). In these cases it was held and observed that where an amount on charitable and religious purposes had been incurred in an earlier year, such expenditure if adjusted against the income of the subsequent year, the income of that subsequent year can be said to have been applied for charitable or religious purposes in the year in which the expenditure was incurred. It was also held that income derived from trust property has to be determined on commercial principles and the application of such commercial principles also warrants the conclusion that the expenditure incurred in an earlier year can be set off against the income of the subsequent year.

In Trustees of Balkan-Ji Bari (1979) 10 CTR (Trib.) 22, the Bombay Bench of the Tribunal upheld the assessee’ s contention that it should be allowed the adjustment of excess amount spent towards charitable purposes in the earlier years against current income to determine the funds available with the assessee for the purposes of section 11(1) of the Act.

In the case of CIT vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom), the AO disallowed the claim for carry forward of deficit of the earlier years for adjustment against the surplus of the subsequent years on the ground that such carry forward loss was applicable only to income under the head “ Profits & Gains of Business” and was not permissible in case of income under section 11 to 13 of the Income-tax Act. The Bombay High Court held that income derived from the trust is to be computed on commercial principles.

Accordingly, adjustment of expenses incurred by the trust for charitable purposes in the earlier years against the income earned by the trust in the subsequent year will have to regard as application of income of the trust in the subsequent year.

4. However, the carried forward of excess application is not allowed by AO during assessment. Thereafter we had also prepared a cash flow statement showing all receipts/payments form FY 2008-09 (formation year) till Fy 2013-14 as follows:

Particulars	FY 2008-0	FY 2009-10	FY 2010-11	FY 2011-12	FY 2012-13	FY 2013-14
Income of the Society (As per Income & Exp a/c)	–	1,70,47,036	5,01,72,758	12,54,43,895	16,60,56,037	15,29,97,833
Loan Taken	3,11,65,459	7,59,66,313	6,26,11,085	6,21,87,634	2,44,10,445	1,96,32,738
Total	3,11,65,459	9,30,13,349	11,27,83,843	18,76,31,529	19,04,66,482	17,26,30,571
85% of Income(a)	2,64,90,640	7,90,61,347	9,58,66,267	15,94,86,799	16,18,96,510	14,67,35,985
Application of Income Total expenditure	53,54,969	95,14,858	3,67,48433	7,31,55,106	7,73,89,384	7,03,06,331
Expense w/off	–	10,70,994	10,70,994	10,70,994	10,70,994	10,70,994
Loan Repayment	–	–	1,99,77,208	3,80,64,320	6,73,32,499	9,29,72,587
Addition of Fixed asset	4,49,34,155	9,21,12,175	5,20,40,856	6,74,23,976	6,66,87,899	2,31,29,013
Total Application of Income(b)	5,02,89,124	10,26,98,027	10,98,37,491	17,97,14,396	21,24,80,776	18,74,78,924
Amount Overspent(a-b)	(2,37,98,484)	(2,36,36,680)	(1,39,71,224)	(2,02,27,597)	(5,05,84,266)	(4,07,42,939)

It is clear from the above table that we have added loan taken to receipts in respective years and loan repayment to the payment. Then also in FY 2013-14 we have found no deficit in application of income.

The following cases show that repayment of loan is to be considered as application of income:

a. The Madras High Court in Kannika Parameswari Devasthanam & Charities 2011 held that if the expenditure is on capital account on objects(s) contained in the object clause, the expenditure will amount to application of income. Where the assessee had constructed a building out of accumulated and borrowed funds and the building was later rented out and a part of the rent was used for repayment of loan, the Karnataka High Court held 21 that such repayment of loan was application of income.

b. Repayment of a debt incurred for charitable purposes by a charitable trust and loans advanced by educational trusts are application of income: Repayment of loan taken for construction of a building by the assessee for the purpose of augmenting its funds shall qualify as income applied for charitable purposes

[Janamabhoomi Press Trust (Kar)]

c. CIT vs. Maharana Mewar Charitable Foundation reported in 164 ITR page 439 (Raj) wherein Their Lordships have held that the anomaly which has arisen that if the Trust takes a loan for the purposes of incurring expenditure for charitable and religious purposes in a particular year and the said loan is repaid out of the income of the subsequent year, the said repayment would be entitled to the exemption from tax u/s. 11(1).

d. Relevant Case Laws_Director Income-tax (Exemption) v. Govindu Naicker

Estate (2009) 315 ITR 237 (Mad).

Relevant Section-11

During the assessment under section 143(3) of the Act, the Assessing Oficer noted that the trust had made part repayment of a lonan taken from the bank for constructing a multi-storied building.

The Assessing Officer opined that the multi-storied commercial complex was not one of the objects of the trust and the expenditure incurred for the construction of the building could not be treated as charitable in nature, that the repayment of loan could not be regarded as application of income towards the charitable objects of the trust and rejected the claim of the assessee.

The Commissioner (Appeals) allowed the appeal on the ground that the property of the trust was in a dilapidated condition and fresh construction had to be undertaken by obtaining a loan. The subsequent letting out of the property was connected with the carrying out of the object of the trust and hence, the repayment of loan ought to have been treated as eligible application. The finding of the Commissioner (Appeals) was confirmed by the Tribunal.

The High Court held that the Tribunal was right in holding that the repayment of loan taken from the bank for construction of commercial complex was application of income for charitable purposes and the assessee trust was eligible for exemption under section 11 of the Act.

Even though the expenditure incurred is capital in nature, if the expenditure is incurred for the purpose of promoting the object of the trust, it could be considered as application of the income for the purpose of the trust.

If the application of the income resulted in the maintenance of the property held under trust for charitable purposes, is for the purpose of augmenting income in order to pursue the objects of the trust that would amount to application of income for the purpose of the trust.

Hence repayment of loan taken for construction of college building amounted to augmentation of income of society in future years and to puruse the objects of the society.

14.1. The ld. CIT(A) after considering the submissions of the assessee held that the addition made by the AO could not be sustained and the assessee trust was eligible for exemption u/s. 11 of the Act by observing as under:-

“In the first instanced as pointed out supra the circular 1132 of 1978 and NO. 1582 of 1984 relied upon by the appellant and the Ld. AO relate to loans given by one Charitable Society to another while the instant case to repayment of loans simpliciter. The settled judicial view in this connection is that repayment of loans is to be generally treated as application. In CIT v. Janamabhumi Press Trust (200) 242 ITR 457 and 703 the Karnatka High Court held that the repayment of a debt incurred by the trust for construction of the building, which in turn would augment its income, should be treated as application the income of the trust for charitable purposes. In this respect, the Court followed the view earlier taken by the Madras High Court in CIT v. Kannika Parmeswari Devasthana & Charities (1982) 133 ITR 779 and the Kerala High Court in CIT v. St. George Forana Church (1988) 170 ITR 62.

7.2 Further vide Circular No. 100 dated 24^th January, 1973 (1973) 88 ITR (st.) 66 the following question is answered.

Quest: Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust? Ans : The loan was taken by the trust to fulfil the objects of the trust.

In the case of CIT v. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439, the Rajasthan High Court has considered the Circular and held as follows:

“ In the Circular dated 24^th January, 1973 the Central Board of Direct Taxes has considered the question to whether where a trust incurs a debt for the purposes of the trust, the repayment of the debt would amount to an application of income for the purposes of the trust. In the said circular, the Central Board of Direct Taxes has expressed the view that the repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. In other words, according to the said circular, if the trust wants to spend more money on charitable and religious purposes, then, in a particular year, it can take a loan and the said loan can be repaid out of the income of the subsequent year and the repayment of the said loan out of the income of the subsequent year would amount to application of income for charitable and religious purposes under section 11(1) of the Act.

7.3 This is reiterated in the decision of the Madras High Court in the case of DDIT (E) v. Govindu Naicker Estate (Mad) 227 CTR 283, it was held that repayment of loan is to be treated as application under section 11. In this case the question of law before the Hon’ble Court was as under:

Whether repayment of borrowed funds utilised for construction of commercial complex augmenting income of trust and amounts to application of income for charitable purpose eligible for exemption under section 11of the Act ?

The Hon’ble High Court held that the Tribunal was right in holding that the repayment of loan taken from the bank for construction of commercial complex was application of income for charitable purposes and the assessee trust was eligible for exemption under section 11 of the Act. The High Court further emphasized that even though the expenditure incurred is capital in nature, if the expenditure is incurred for the purpose of promoting the object of the trust, it could be considered as application of the income for the purpose of the trust.

However, in the instant case the Ld. AO has also raised the issue of double relief as the appellant is first treating the creation of Capital asset as the application of income and thereafter treating the repayment of loans taken for the purposes of these assets as the application of income a second time. The issue with regards to whether the loans are to be treated as receipts in the receipt and expenditure account, the Ld.AO has pointed out that in earlier computations the Ld. AO has not treated the loans as receipt but has given a re-working. Prima facie from the reworking as placed on record it appears that the utilisation in earlier years, if the reworking is done, is within the norms. In the remand report the Ld. AO has not commented on this ground of appeal.

In addition the Jurisdictional High Court in the case of CIT Vs. Tiny Tots Education Society [2011] 330 ITR 21 ( P & H) cited supra on identical facts has held that claim of depreciation does not tantamount to double deduction.

Moreover, if the alternate submissions of appellant that expenses for charitable and earlier years carried forward and adjusted against the oncome of a subsequent year to be treated as application and also has considerable judicial support. The Ld. AO has neither allowed the repayment of loan nor allowed the carried forward excess application in earlier years. Further the appellant has in earlier utilized 85% of the receipts including the loans received, towards Charitable activities while 15% have been set aside as per norms.

It is my considered view that the addition on this ground cannot be sustained. The appeal on this ground is allowed.”

15. Now the department is in appeal.

16. The Ld. Sr.DR reiterated the observations made by the Ld.AO and strongly supported the assessment order particularly para 7.2 of the assessment order.

17. In his rival submissions, the Ld. Counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order passed by the Ld. CIT(A).

18. We have considered the rival submissions and perused the material available on the record. In the present case the assessee utilised the loans to construct the building and creation of infrastructure for educational institutes. The assessee society was being run on self financing basis. Since no government funds were available to create the infrastructure, the assessee raised loans from the banks, which were shown as receipt in the Receipts and Payment account on the receipt side and the fixed assets were created out of the loan. The assessee considered the repayment of loan as utilization of funds in the year of the repayment and interest on the term loan had been charged to expenses. The assessee utilized 85% of receipts including the loan received towards charitable activities. The assessee claimed the repayment loan as utilization.

18.1 On a similar issue the Hon’ble Karnataka High Court in the case of CIT Vs. Janmabhumi Press Trust reported in (200) 242 ITR 457(Kar.) held as under:-

“When the assessee is a trust entitled to benefit under section 11 of the Income-tax Act, 1961, the only question that arises for consideration is whether that income or the accumulated income thereof is applied for charitable purpose. If investments have been made in the construction of a building which in turn would augment its income, it should also be held that the application of the funds is for the purpose of the trust. The repayment of the debt incurred by the trust for construction of the building should be treated as application of the income of the trust for charitable purposes.

18.2 In the aforesaid referred case the Hon’ble Karnataka High Court followed the judgments of the Hon’ble Kerala High Court in the case of CIT vs. St. George Forana Church reported in (1988) 170 ITR 62 and the Hon’ble Madras High Court in the case of Kannika Parameswari Devasthanam & Charities reported in (1982) 133 ITR 779 (Mad.). In the present case also the assessee utilized the loans to create the fixed assets and the loan was taken and shown as receipt while on repayment, it was considered as application of income. Therefore, following the ratio laid down by the Hon’ble Karnataka High Court the Ld. CIT(A) was fully justified in allowing the claim of the assessee. It is relevant to point out that the Ld. CIT(A) also followed the judgment of the Hon’ble Rajasthan High Court in the case of CIT vs. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj.), wherein it has been held as under:-

“ In the Circular dated 24^th January, 1973, the Central Board of Direct Taxes has considered the question to whether where a trust incurs a debt for the purpose of the trust, the repayment of the debt would amount to an application of income for the purposes of the trust. In the said circular, the Central Board of Direct Taxes has expressed the view that the repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. In other words, according to the said circular, if the trust wants to spend more money on charitable and religious purposes, then, in a particular year, it can take a loan and the said loan can be repaid out of the income of the subsequent year and the repayment of the said loan out of the income of the subsequent year would amount to application of income for charitable and religious purposes under section 11(1)(a) of the Act.

18.3 The Ld. CIT(A) also followed the judgment of the Hon’ble Madras High Court in the case of DDIT (E) v. Govindu Naicker Estate (Mad) 227 CTR 282, wherein it was held that repayment of loan was to be treated as application under section 11 of the Act. We, therefore, considering the totality of the facts do not see any valid ground to interfere with the findings given by the Ld. CIT(A). In that view of the matter, we uphold the impugned finding of the Ld. CIT(A) in allowing the same. This ground of departmental appeal is dismissed.

19. Next issue vide ground no. (iii) relates to deletion of addition of Rs. 2,31,30,835/-made by the AO u/s. 68 r.w.s 115BBE of the Act.

20. The facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that there were additions of donation in trust fund as well as addition on account of unsecured loans. The AO asked the assessee to furnish full name and addresses along with other details. In response, the assessee furnished the name and addresses along PAN Nos. of the donees and unsecured loan providers, which were also verified u/s. 133(6) of the Act. Name of such thirty seven (37) persons had been mentioned at pages 4-6 of AO’s order. For the cost repetition these are not reproduced herein.

20.1 The AO also observed that there were certain transactions, which were not genuine and their sources of payments were not verifiable satisfactorily. The details of those persons were as under:-

S. No.	Name	Address	PAN	Amounts	Nature of Transaction	Remarks
1	Smt.Saklochna Devi	W/o Sh.Sat Patel Garg, Sunaam	ALCPD5758P	3150000	Unsecured Loan	Notices u/s 133(6) issued and reply received, but sources of payments are not satisfactory in commensurate with the Income shown in ITR.
2	Makhal Singh	S/o Santa Singh, Agit Nagar Sangrur	ADXPS5283M	45000/-	Donation	Notices u/s 133(6) issued and reply not received till date, sources of payments are not genuine.
3	Narinder Pal Kaushal	Sangrur	AETPK9728A	91000/-	Donation	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
4	Anju Bala	Sunam	AKLPB7099M	100000	Donation	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
5	Ram Kishore Goyal	HUF,Hanjra Marg,Sunam	AAIHR7367H	33000	Donation	Notices u/s 133(6) issued and reply received, but sources of payments are not satisfactory in commensurate with the Income shown in ITR.
6	Lalita	Hanjra Marg, Sunam	AADPL0896L	100000	Donation	Notices u/s. 133(6) issued and reply received, but sources of payments are not satisfactory in commensurate with the income shown in ITR
7	Smt. Priyanka	Nh-64, Vill.Rajpura, Near Chowk, Patial	AIDPP8354P	61000	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
8	Kasturi Lal & Sons	Main Bazar, Sunam	BLWPS7176R	314400	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
9	Chamkau Singh	Sunam	CJHPS2064L	4000000	Unsecured loan	Notices u/s. 133(6) issued and reply received, but sources of payments are not satisfactory in commensurate with the income shown in ITR
10	Anil Gupta	Chandigarh	ACFPG9050R	700000	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
11	Ram Kishore Goyal	Nh64, Vill- Rajpura,Near Chowk, Patial	AAOPG6391A	5351185	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
12	Keshav Goyal	NH64,Vill-Rajpura, Near Chowk,Patial	ADWPG9801G	6494000	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
13	Sushma	NH 64,Vill-Rajpura, Near, Near Chowk, Patial	AAOPG6392D	229000	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
14	Smt. Anju Bala	W/o Sh.Keshav Goyal, NH 64, Vill- Rajpura, Near Chowk, Patial	AKLPD7099M	64000	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
15	Data Asra Trading Co.	NH 64,Vill-Rajpura, Near Chowk, Patial	AAKPD1716C	6892000	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
16	Archana Nagpal	Sunam	AGQPN2196J	20000	Donation	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
17	Sumit Aneja	Sunam	ADQPA6963P	35000	Donation	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
18	Praveen Kumari	B-10,1844, Near Grain Market Road, Barnala	ADRPK8615M	40000	Donation	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine.
Total				Rs.27719585 (Rs.2,72,55,585 as unsecured loan + Rs.464000 as donation)

20.2. The AO considered the aforesaid amount as income of the assessee by observing at page No. 8 of Assessment order dated 30.12.2016as under:-

“ On perusal of the above, it is found that there are some donations which are not verified during the verification u/s. 133(6) of I.T Act as per remarks.

On perusal of the above, it is found that there are some unsecured loans, which are not verified during the verification u/s. 133(6) of I.T Act as per remarks. And some unsecured loan sources are not found genuine. Their creditworthiness and sources are not satisfactory.

In the above facts why not amount of Rs.2,77,19,585/- related with these transactions treated as income u/s. 68 of I.T Act and tax the same u/s.115BBE of I.T Act.”

20.3. The AO made the addition of Rs.2,31,30,585/- u/s. 68 of the Act by observing in para 8.0 to 8.3 of assessment order, which is reproduced verbatim as under:

“8. Addition u/s. 68 r.w.s 115BBE of I.T Act

“8.0 During the assessment proceedings on perusal of Balance shhet, income and expenditure and replies of assessee, it is seen there are additions of donations of Rs.15,93,000/- and addition of Rs.5,33,90585/- as unsecured loan. During the assessment proceedings full name and address and other details have been asked, in response of the same counsel of assessee has filed reply along with the name and address and PAN nos. of donors and debtors, which have been also verified u/s. 133(6) of I.T Act. After perusal of assessee’s reply and confirmation received u/s. 133(6) of I.T Act, it is found that some transactions are not genuine and not verified from the return of income and bank statement. So show cause has issued on the above ground. In response of the same assessee has filed its reply, which is on record.

8.1 On perusal of the above reply and facts of the case, it is seen that there are some transactions, which are not genuine and their sources of payments are not verified or satisfactory. The details of the same are as under:-

S. No.	Name	Address	PAN	Amounts	Nature of Transaction	Remarks
1	Smt. Salochna Devi	W/o Sh.Sat Patel Garg, Sunaam	ALCPD5758P	3150000	Unsecured Loan	Notices u/s 133(6) issued and reply received, but sources of payments are not satisfactory in commensurate with the Income shown in ITR.
2	Kasturi Lal & Sons	Main Bazar, Sunam	BLWPS7176R	314400	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR filed and no bank statements filed by the assessee as well as from the debtor
3	Anil Gupta	Chandigarh	ACFPG9050R	700000	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR filed and no bank statements filed by the assessee as well as from the debtor
4	Ram Kishore Goyal	Nh 64,Vill-Rajpura, Near Chowk, Patial	AAOPG6391A	5351185	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR filed and no bank statements filed by the assessee as well as from the debtor
5	Keshav Goyal	NH64,Vill-Rajpura, Near Chowk,Patial	ADWPG9801G	6494000	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR and no bank statements filed by the assessee as well as from the debtor
6	Sushma	NH64, Vill-Rajpura, Near Chowk, Patial	AAOPG6392D	229000	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR and no bank statements filed by the assessee as well as from the debtor
7	Data Asra Trading Co.	NH 64,Vill-Rajpura, Near Chowk, Patial	AAKPD1716C	6892000	Unsecured loan	Notices u/s. 133(6) issued and reply not received till date, sources of payments are not genuine. No ITR and no bank statements filed by the assessee as well as from the debtor
			Total	Rs. 2,31,30,585

On perusal of the above, it is found that there are some unsecured loans, which are not verified during the verification u/s. 133(6) of IT Act as per remarks and some unsecured loan sources are not found genuine. Their creditworthiness and sources are not satisrfactory.

8.2 It is also mentioned here that provisions of section 68 is applicable to these unanimous donation as donors are not having valid identity and genuineness and credit worthiness of the deposits. This shows that assessee has failed to fulfil the basic conditions of section 68 of IT Act, which are as under:-

“ Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the the sum so credited may be charged to income-tax as the income of the assessee of that previous year:

[Provided that where the assessee is a company ( not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever named called, any explanation offered by such assessee company shall be deemed to be not satisfactory, unless:-

(a) The person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b) Such explanation in the opinion of the Assessing Officer afroessaid has been found to be satisfactory:

(c) Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section10]

8.3 The above mentioned provisions clearly mentioned nature of the transaction, it should be cash credits in the books of the assessee and assessee is not explained the valid sources of the credits and failed to explain the genuineness, creditworthiness and identity of the sources then the provision of section 68 will apply. The reply of assessee duly considered but not accepted because assessee has failed to explain the identity, sources of unsecured loans and creditworthiness of the same, which are basic conditions of the section 68 of IT Act. Regarding that these donations are cash credits or not it is clear that these amounts are credited in the bank of assessee, so covered under the purview of section 68 of I.T Act.

8.4 The case of assessee clearly fall under the provision of section 68 because assessee has failed to establish valid sources of unsecured loans receipts and also not explained the genuineness, credit worthiness and identity of the debtors.

8.5 In view of the totalling of facts and in the circumstances of the case, the unsecured loans to the tune of Rs. 2,31,30,585/- are taxable under the provisions of section 68 r.w.s115BBE of I.T Act.”

21. Being aggrieved, the assessee carried the matter to the Ld. CIT(A) and furnished the written submission on 02-11-2017, which reads as under:-

1.The AO has added a sum of Rs. 2,31,30,585/- the name of parties are as per as per annexure given. All the parties are related to society/promoters and at the time of its establishment provide funds to the society for acquiring fixed assets and running its affairs. A table showing the opening and closing balances of all these 7 parties is as follows:-

UNSECURED LOAN ON 31-03-2013 & 31-03-2014

Sr. No.	Particulars	Balance on 31- 03-2013	Balance on 31- 03-2014	Addition/Deletion
1.	Salochana Devi w/o Satpal Garg	15,00,00,000	31,50,000	16,50,000
2	Kasturi Lal & Sons (Jagdish Chand Singla)	3,18,000	3,14,400	(3600
3	Anil Gupta	–	7,00,000	7,00,000
4	Ram Kishore Goyal	1,71,73,285	53,51,185	(1,18,22,100)
5	Keshav Goyal	1,09,35,000	64,94,000	(44,41,000)
6	Sushma	18,50,000	2,29,000	(16,21,000)
7	Data Asra Trading Co. (Prop. Satya Devi)	23,23,000	68,92,000	45,69,000
	TOTAL	3,40,99,285	2,31,30,585	(1,09,68,700)

It may be observed that the balance of unsecured loan of these parties as on 31.03.2013 was Rs.3,40,99,285 and that as on 31.03.2014 was Rs. 2,31,30,585 showing a net reduction of Rs.1,09,68,700/-

Further as required by you we are submitting the confirmation Documents of the parties as per following details:

a. Salochana Dev:- Copy of her ITR, computation, ledger A/c, PAN, Aadhar, bank statement and confirmation letter are enclosed. It is pertinent to mention that the society also had a loan of Rs.15,00,000/- from Mrs. Salochana Devi as on 04-04­2013. This was an interest bearing loan and a sum of Rs.2,57,997/- was paid to her after deduction of TDS. Hence the AO is totally unjustified in making the addition.

Kasturi Lal: A sum of Rs. 3,14,400/- was outstanding as unsecured loan as on 31-3-2014 where as the balance as on 31-03-2013 was Rs. 3,18,000/-. We are enclosing herewith a confirmation letter, PAN Aadhar, copy of ITR of last 3 years and bank statement & ledger account of the party.

Anil Gupta:A sum of Rs.7,00.000/- was advanced by Mr. Anil Gupta & his confirmation letter, ITR, Ledger account, PAN, Aadhar bank statement showing 2 cheques of Rs. 3,00,000/- & Rs. 4,00,000/- respectively is enclosed.

2013. Ram Kishore Goyal: Mr. Ram Kishore Goyal (Rs.53,51,185/-) is the chairman of the society and has been attending the proceedings before your good office and copy of his confirmation letter, ITR, computation of last three years his ledger account & bank statement, balance sheet, PAN & Aadhar are enclosed. It may be noted that unsecured loan as on 31-03-2013 was Rs.1.17,73,285/-, which was duly reflected in balance sheet was assessed. In fact during the year under consideration the balance came down by approx Rs.120 Lacs.

24

1. Keshav Goyal:Keshav Goyal is General Secretary of the society a sum of Rs.65,94,000/- was outstanding as on 31-03-2014 wehreas the balance as on 31-3­2013 was Rs.1,09,35,000/-. Hence there was a reduction of approx Rs. 45 Lacs. We have enclosed his confirmation letter, ITR, computation for last three years, bank statement, ledger account, balance sheet, PAN and Aadhar.

• . Sushma Goyal: She advanced a sum of Rs.2,29,000/- from her saving, the balance as on 31-03-2013 was Rs.18,50,000/- out of this a net payment of Rs.16,00.000/- approx are returned & copy of ledger account, bank statement, ITR computation, bank statement, confirmation letter, PAN & Aadhar showing all transactions.
• . Data Asra Trading: Prop Satya Devi is the pattern of the society, she has been advancing the funds & also received back the funds regularly during the year. The total sum advanced by her was Rs. 2,75,80,000/- and out of this a sum of Rs. 2,06,88,000/- was returned by the society. Her ledger account, ITR, computation, bank statement, confirmation letter, PAN & Aadhar showing all transaction are enclosed

21.1. The assessee again furnished a rejoinder on 15-12-2017, which reads as under:-

The evidence submitted in case of unsecured loans were not considered by AO and we are enclosing under rule 46A of Income Tax Act 1961 with all the supporting documents. In case of Salochana Devi the AO has deemed the source of income to be not satisfactory and chosen to check the source of source in case of a non corporate loanee and assessee also.

21.2. The Ld. CIT(A) asked for remand report from the AO and comments of assessee thereon, which has been tabulated as under:-

“ 8.3 The Ld. AO’s remarks in his remand report and the Appellant’s comments thereto on each party where the loans are disallowed are as under:-

Particulars	Remand Report of AO	Appellant Rebuttal submission	Evidence submitted by the Appellant
Salochana Devi	Notices u/s 133(6) issued and reply received, but sources of payments was not satisfactory in commensurate with the Income shown in ITR.	The AO has not considered the evidence submitted by us	(a) Copy of Confirmation letter, PAN & Aadhar (b) Copy of ITR, Computation, Ledger A/c & Bank statement
Kasturi Lal & Sons	Notices u/s. 133(6) issued and reply not received, source of payments was not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors	The AO has refused to consider the documents of unsecured loans submitted by society members itself and proceeded with addition	(a)Copy of Confirmation letter, PAN & Aadhar (b)Copy of ITR & Computation of 3 years & ledger account (c) Copy of bank statement
Anil Gupta	Notices u/s. 133(6) issued and reply not received, source of payments was not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors	The AO has refused to consider the documents of unsecured loans submitted by society members itself and proceeded with addition	(a)Copy of Confirmation letter, PAN & Aadhar (b)Copy of ITR & Computation & Bank statement
Ram Kishore Goyal	Notices u/s. 133(6) issued and reply not received, source of payments was not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors	The AO has refused to consider the documents of unsecured loans submitted by society members itself and proceeded with addition	(a)Copy of Confirmation letter, PAN & Aadhar (b)Copy of ITR &Computation of 3 years & Balance sheet (c) Bank statement & ledger account
Keshav Goyal	Notices u/s. 133(6) issued and reply not received, source of payments was not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors	The AO has refused to consider the documents of unsecured loans submitted by society members itself and proceeded with addition	(a) Copy of Confirmation letter, PAN & Aadhar (b) Copy of ITR, computation & bank statement
Sushma	Notices u/s. 133(6) issued and reply not received, source of payments was not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors	The AO has refused to consider the documents of unsecured loans submitted by society members itself and proceeded with addition	(a) Copy of Confirmation letter, ITR, Computation & Ledger Account (b) Copy of bank statement
Data Asra Trading Company	Notices u/s. 133(6) issued and reply not received, source of payments was not genuine. No ITR, bank statement was filed by the assessee as well as confirmation from debtors	The AO has refused to consider the documents of unsecured loans submitted by society members itself and proceeded with addition	(a) Copy of Confirmation letter, PAN & Aadhar. (b) Copy of ITR, computation, ledger account & balance sheet (c ) copy of bank statement

21.3. The assessee further submitted to the Ld. CIT-A that in the remand report submitted by the AO no material was brought to substantiate its claim and the AO merely repeated the reasons recorded in the assessment order and that the submissions made by the assessee were not negative by the AO by brining any substantiating evidence on record for further enquiry. Reliance was placed on the decision of the ITAT Mumbai Bench in the case of Shahrukh Khan Vs. DCIT, Spl.Rg. 21Order Dt. 20 July,2006

21.4. The Ld. CIT(A) after considering the submissions of assessee deleted the impugned addition by observing as under:-

“I have considered the written submissions/counter comments of the Ld. AR, the findings and the comments of the Ld. AO and the case laws cited and contextualized these to the facts of the case and also to the documents filed.

The Appellant has in all these 7 cases furnished Copy of Confirmation letter, PAN & Aadhar, Copy of ITR, Computation of Income, Ledger A/c & Bank statement where the loans to the appellant are clearly figuring. In addition, except for one Anil Gupta, all the other are old creditors and there have been accretions or repayments during the year; the Ld. AO has sought to tax the total credit balance rather than the amount introduced during the previous year relevant to the assessment. The Ld. AO has neither during assessment proceedings not thereafter during remand not addressed/countered the evidence produced by the Ld.AR. It is my considered view that qua the 7 parties ( the six individuals and one firm) the appellant has prima-facie discharged his burden on establishing their identity, credit worthiness as well as the genuineness of the transactions as they find reference in their returns of income. It was open to the Ld. AO to refer the matter to the assessing Officers of the parties in case there were any doubts in their sources of income. Further, the 6 individuals and the partners of the firm are all either the members of the society or their immediately family members. The addition u/s. 68 thus has no legs to stand on and is directed to be deleted.”

22. Now, the department is in appeal.

23. The Ld. DR strongly supported the assessment order passed by the AO and reiterated the observations made in paras 8.0 to8.5 of the assessment order, which we have already reproduced hereinabove in the former part of this order. She further submitted that the assessee did not produce the details before the AO inspite of various opportunities given and since the loans were not verifiable as no reply was received when the notices were issued u/s. 133(6) of the Act by the AO to the creditors. Therefore, the impugned addition was rightly made by the AO by invoking provision of section 68 of the Act. The Ld. CIT(A) was not justified iin deleting the same.

24. In his rival submission, the ld. Counsel for the assessee reiterated the submission made before the authorities below and further submitted that the assessee had furnished all the details before the AO and the creditors were verifiable. The Ld. CIT(A) after considering all the relevant documents furnished by the assessee, which are placed at page-288-457 in the form of copies of confirmations, ledger accounts, ITR’S, computation of total incomes and bank account statements from various persons in respect of unsecured loans given to assessee and the AO furnished the remand report after considering all those documents, copies of which are placed at page-458-461 of assessee’s compilation. Against the said remand report, the asessee furnished rejoinder on 15-12-2017, copy of which is placed at pages-462 – 466 of assessee’s compilation. It was stated that the Ld. CIT(Appeal) after appreciating the submissions of assessee and remand report of the AO deleted the impugned addition made by the AO. He strongly supported the impugned order passed by the Ld. CIT(A).

25. We have considered the rival submissions of both the parties and perused the material available on record. In the present case, it is noticed that the AO issued notices u/s. 133(6) of the Act to the said six(6) persons from whom the assessee had received loans amounting to Rs.2,31,30,585. Since the AO was not satisfied from the replies furnished by the creditors, Smt. Salochana Devi, from whom Rs. 3150,000/- was received as unsecured loan and reply was not received from another six creditors, namely Kasturi Lal & Sons, Sh. Anil Gupta, Sh. Ram Kishore Goyal, Sh. Keshav Goyal and Data Asra Trading Co. from whom Rs.3,14,400/-, Rs.7,00,000/-,Rs.53,51,185/-,Rs.64,94,000/- and Rs.68,92,000/- respectively were received. He, therefore, made the additions u/s. 68 of the Act. However, vide application dt. 15-12-2017 the assessee furnished additional evidences under Rule 46A of the IT Rules, 1962 in the form of copies of confirmation letters, PAN, Aadhar, copies of ITR’s, computation of incomes, ledger accounts and bank statements in respect of aforesaid persons and stated that the AO refused to consider the documents of unsecured loans. The Ld. CIT(A) admitted the additional evidence and deleted the additions. In the present case, the identity of the persons from whom the assessee received the loans was not doubted and nothing was brought on record to substantiate that they were not the persons of means. The AO in his remand report placed at page nos. 458-461 of the paper book, simply stated that the details were asked from the persons and their sources were not genuine. However, he did not comment on his bank statements explaining the source and computation of income furnished along with IT returns as well as confirmations given by the persons from whom the assessee has taken the loans. In our opinion the Ld. CIT(A) was fully justified in deleting the impugned additions when the assessee proved the identity of the persons, their credit worthiness and genuineness of the transaction. In that view of the matter, we do not see any merit in the departmental appeal in ground no.(iii), the same is dismissed.

26. The appeal of the department in ITA No. 1578/Chand/18 for the AY 2014-15 is dismissed.

27. Now we will deal with the appeal of the department in ITA No.869/Chand/19 for the AY 2016-17.

28. Following grounds have been raised in this appeal:

i. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in allowing exemption u/s 11 and 12 to the assessee on the surplus without appreciating that the assessee had been earning substantial profits year after year which instead of redeploying for education were used for amassing more and more capital assets including luxury cars and thereby not correctly applying the decision in the case of Islamic Academy of Education & another vs. State of Karnataka and others (2003) 6 SSC 697 and Viswesvaraya Technological University Vs. ACIT (SC) in civil appeal Nos. 4361-4366 of 2016?.

ii. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in allowing exemption u/s 11 and 12 to the assessee when despite having sufficient receipts in the form of fees and excessive surplus, the assessee had paid extremely poor salaries which adversely affects quality of education as it will not attract quality faculty, which shows the misplaced focus of the assessee on maximization of profits by minimization of employee cost at the cost of quality of education.

iii. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in allowing exemption u/s 11 and 12 to the assessee when the funds of the assessee were misused for purchasing luxury cars like Audi and Land Rover for the benefit of specified persons u/s 13(3) who did not own any motor vehicle and were running their parallel business resulting in application of section 13(l)(c).

iv. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in restricting the disallowance of the estimated expenses on luxury vehicles to Rs. 9,23,281/- for personal use despite the assessee not submitting any documentary proof before the AO or before the Id. CIT(A).

v. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in restricting the disallowance of exemption u/s 11 and 12 to the amount of Rs. 9,23,281/- being the amount calculated by CIT(A) as expenses on personal use of vehicles by the specified persons instead of disallowing exemption u/s 11 and 12 on the entire income in view of application of section 13(l)(c) without appreciating that the latter proposition finds support from many judicial precedents including the decision in the case of Director of Income Tax vs Bharat Diamond Bourse (2003) 179 CTR SC 225 (SC).

vi. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in allowing repayment of loan as application of income when the assessee had not shown the same as income in the years in which these loans were taken.

vii. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in allowing exemption u/s 11 and 12 to the assessee stating that the assessee had registration u/s 12AA when in view of sub-section (4) of section 12AA, application of section 13(l)(c) may result in cancellaption of registration and application of 13(l)(c) is independent of availability/non-availability of registration u/s 12AA.

viii. That the appellant craves to leave, add or amend any grounds of appeal on or before the appeal is heard or disposed of.

29. Vide Ground Nos. (i), (ii) and (iii) the grievance of the Department relates to the exemption under section 11 & 12 allowed to the assessee and vide (iv) & (v) the grievance of the Department relates to the deletion of disallowance of Rs. 9,23,281/-made by the AO for personal use of vehicle. These two issues had been dealt by the AO and the Ld. CIT(A) together so these are discussed simultaneously.

30. The facts related to the above said issues in brief are that the AO during the course of assessment proceedings made certain observations, questioning the assessee’s activity and was of the view that the assessee’s activities were not in the nature of charitable and were being run on commercial line. The AO issued show cause notice to the assessee on 26/11/2018 which read as under:

“..lt is observed that the assessee has given undue benefit to specified persons u/s 13(3) of the I.T. Act. The assessee has used the funds of the assessee for the purchase of luxury vehicles like Audi and Land Rover and has given these for use of the specified persons. It is important to note that these specified persons are also engaged in their individual businesses besides being members of the assessee society. It is further pertinent to mention that these specified persons do not possess any personal vehicle of their own. Smt. Satya Devi, Ram Kishore Goyal, Keshav Goyal, Priyanka, Anju Bala who are the members of the society are also members of a family and all the above facts when read together make it amply clear that the specified persons have misused the funds of the assessee for buying high end luxury vehicles like Audi and Land Rover for their personal use. The assessee is required to show cause as to why provisions of section 13(1)(c) r.w.s. 13(3) should not be invoked and why entire exemption u/s 11 and 12 should not be disalowed.

It is also observed that the assessee has been running its institutions on commercial principles. The assessee has been charging huge fees but has been paying comparatively paltry salaries to the employees. It is noted from the salary chart submitted that Principals of different institutions have been paid between Rs. 2 lakhs to Rs. 5.5 lakhs per annum i.e. Rs. 16000- Rs. 45000 per month. Most of the other Assistant Professors have been paid merely Rs. 1 lakh to 2 lakh per annum i.e. Rs. 8000 to Rs. 16000 per month. These salaries are much below the salaries fixed for State Govt, teachers. Paying low salaries checks an institute from attracting quality faculty and hampers advancement of education. The only reason for charging huge fees and not paying adequate salaries can be to maximize profits. It is observed from the Income & Expenditure account that the net profit for the year under consideration is Rs. 9,34,50,359/- which is approx. 56% of the total receipts. Even from the earlier years Income & Expenditure account, it is seen that the profit is between 40%-55%. Permissible reasonableness has been defined in the order of the Apex Court in the case of Islamic Academy of Education & another vs. State of Karnataka and others (2003) 6 SSC 697 and further reiterated in the case of Viswesvaraya Technological University Vs. AC IT in civil appeal Nos. 4361-4366 of 2016. Reasonable surplus has been pegged at anything between 6% to 15% of the receipts. It is clear from the above mentioned discussion that the assessee is not doing any charitable activity under education and that the main focus is earning profit by running the institutions on commercial principles. Moreover, as also noted earlier, the assessee has preferred to divert the funds for purchasing luxury vehicles to be used by the specified persons instead of spending these funds for betterment of education. Therefore, the assessee is required to show cause as to why the entire exemption claimed u/s 11 and 12 of the Act should not be disallowed and the assessee be assessed as an AOP.

It is also proposed to disallow 20% of the vehicle charges as the members of the society have been using the vehicles for their personal use…”

30.1 In response the assessee vide letter dt. 30/11/2018 submitted to the AO as under:

“…. It is submitted that the Institution is being run on charitable basis and our reply to your observations are as follows:

A. Fee:

We have not charged any donation or any excess fee from any student and fee for all the Institutions is charged as per Govt, norms. We have already submitted fee structure issued by various Govt, authorities as applicable to our colleges. As per norms we are not supposed to charge excess/short fee for any course.

B. Salary:

It may be noted that sometimes retired persons from Govt, sector are reemployed as Principals in our Institute at a lower Salary. Many times the salary is based on Last Salary drawn-Pension basis. The main object of the Society is also a promotion of education and it can’t be conclusively decided on the basis of quantum of salary being paid. Rather paying of reasonable salary and incurring appropriate expenditure proves that the expenditure is being made property. We have already submitted a list of employee wise salary and request you to raise specific question with name of employee, if any, so that the profile of concerned faculty and his employment history be submitted. If required we may produce the concerned employee for you examination.

• €€€€€€ It may also be noted that the institution is located in Rural area where most of the students who joined us are from Punjabi medium background and passed their examination from state boards only. Hence providing education in this area itself is a charitable activity. The promoters have invested as sum of Rs. 1,19,54,400/- as corpus fund in 2008 while setting up the college and they have also obtained loans from banks by providing their personal guarantees.

C. Vehicles:

As far as use of college vehicles for personal use are concerned we again stress that the college is maintaining pool of vehicles and the college personnel including members have to visit various offices for work related to colleges for the purpose a proper system is in place and indent is issued (enclosed vide annexure 3) for use of college vehicles and it is approved by Principal.

As far as personal vehicles are concerned two wheelers are kept by both of the members for their personal work.

• €€€€€€ PB44B7127 Motor Cycle is in the name of Mr. Keshav Goyal •€€€€€€ PB13AB9127 Motor Cycle is in the name of Mr. Ram Kishore Goyal

Regarding vehicles expense being proposed to disallowed it is submitted that college have total 33 vehicles (list provided to you in our reply dated 09.11.2018 vide annexure 6.) and most of the expenses relate to college buses being used for students.

Out of list appended we have bifurcated the expenses into other vehicles and 2 vehicles being used by members of the society while working for the society.

Particulars	Total Expenses	Other Vehicles	Vehicles used by member
Petrol & Diesel expenses	Rs. 74,54,249	70,03,132	Rs. 4,51,117
Repair & maintenance Expenses	Rs. 7,57,553	6,65,258	Rs.92,295
Vehicle Insurance	Rs. 10,95,271	10,22,003	Rs. 73,233
Vehicle Passing Tax	Rs. 18,47,550	Rs. 18,47,550	Only applicable on College Buses. Not applicable on Cars
Total (A)	Rs. 1,11,54,623	Rs. 1,05,37,973	Rs. 6,16,650
20% ot (A)			Rs. 1,23,330/-

Cars are provided to Mr. Ram Kishore Goyal (Chairman) and Mr. Keshav Goyal (General Secretary). We hereby again submit that both of them are attending the office daily and managing the affairs of Society. Both are qualified Ph.d and MBA but they are not charging any salary for their services and also no other facility except cars is provided to them. So provision of vehicles provided to them for their services is justified. Copies of their degrees are already submitted in previous reply. Both are not working anywhere else on regular basis and their major income is from rental only as may be verified from their ITR’s submitted earlier. Unsecured loan of Rs. 60,31,359/- is also given by them to society but no interest is being charges by them from society. An interest calculation chart is enclosed vide Annexure 4 on unsecured loan given by them.

A detailed chart of unsecured loan given by Mr. Keshav Goyal and Mr. Ram Kishore Goyal from year ending 31.03.2009 till the year ending 31.03.2016 is as follows:

Name	31.03.2009	37.03.2070	31.03.2011	31.03.2012	31.03.2013	31.03.2014	37.03.2075	37.03.2076
Ram	29,54,599	40,71,849	60,04,035	69,52,285	1,71,73,285	53,57,785	53,51,185	52,40,185
Kishore
Goyal
Keshav	18,67,426	34,08,626	28,89,400	61,65,000	1,09,35,000	64,94,000	7,02,99,774	7,91,174
Goyal
Total	48,62,020	74,80,475	88,93,435	7,37,77,285	2,81,08,285	7,78,45,785	7,56,50,359	60,31,359

You may summon any Principal/employees/Staff member for examination.

D. A receipts & payment account is enclosed vide Annexure 5 which clearly shows that during the F.Y. 2015-16 surplus was amounting Rs. 46,16,584/-which is 2.71% of total receipts amounting Rs. 17,00,16,872/-. So it is clear that surplus is quite reasonable if we take into account the case law mentioned by you as it is below 6% of receipts and justify permissible reasonableness defined in the order of the Apex Court in the case of Islamic Academy of Education & another vs. State of Karnataka and others (2003) 6 SSC 697 and reiterated in the case of Viswesvaraya Technological University Vs. ACIT in civil appeal Nos. 4361-4366 of 2016. Reasonable surplus has been pegged at anything between 6% to 15% of the receipts. So it is clear that the case is based on surplus and not profit, hence the Society is Charitable Institution.”

30.2 The AO however did not find merit in the submissions of the assessee and held that the focus of the assessee was on maximization of profit rather than on advancement of education and such activity did not fall with in the ambit of charitable purposes and that the assessee society was being run by members as another family business. He therefore invoked the provisions of Section 13(1)(c) r.w.s 13(3) of the Act and taxed the surplus as per Income & Expenditure Account in the hands of the AOP. The AO also disallowed Rs. 20,09,524/- out of the vehicle expenses for personal use of the members by observing in para 6 to 11 which read as under:

6. The submissions of the assessee have been considered, however, they are not acceptable.

From the Income & Expenditure account, it is observed that the assessee has earned net profit of Rs. 9,34,50,359/- which is approx. 56% of the total receipts. On further analysis, it is observed that the reason for such high net profit is that the assessee is earning huge income from fees of Rs. 15,55,36,621/- but at the same time its expenditure on salaries, which is usually the biggest component of cost of running an educational institute, is very low totaling to Rs. 2,52,94,134/-. During the assessment proceedings, the salary details were called for and on perusal of the same it was observed that the Principals of different institutions were paid between Rs. 2 lakhs to Rs. 5.5 lakhs per annum i.e. Rs. 16000- Rs. 45000 per month. Most of the other Assistant Professors were paid merely Rs. 1 lakh to 2 lakh per annum i.e. Rs. 8000 to Rs. 16000 per month. The salaries paid are extremely low. Rather, most of the salaries paid are lower than salaries of class IV government employees. It is noted that the only reason for charging high fees and paying low salaries to teachers/employees would be to earn more and more profit at the cost of the quality of education as low salaries will not attract better quality faculty. Quality of education is directly proportional to the quality of its teachers. The assessee has tried to minimize its employee cost (which is normally the biggest running cost for any educational institute) by paying poor salaries to teachers at the cost of the quality of education. This clearly establishes the misplaced focus of the assessee on maximization of profit rather than on advancement of education and such activities do not fall within the ambit of “charitable purpose” as defined u/s 2(15) of the Act.

7. It is further observed from the Income & Expenditure account of the last few years that the net profit of the assessee has been between 40% and 55% of the total income. This shows that the assessee has been consistently earning huge profits. The assessee vide its submission dated 30.11.2018 has claimed that after accounting for application on capital account, the surplus left was very reasonable. In this regard, it is stated that the assessee has failed to prove for what purpose the fixed assets purchased were actually used. This becomes especially important because the assessee is being run by members of the same family and it is important to ensure that there is no diversion of funds and assets for the benefit of the members. Also, the assessee has claimed repayment of loan as application of income without including loans taken as income in the earlier years when these loans were raised. Therefore, the calculation of application of income of the assessee is faulty.

It is further noted that the assessee has purchased luxury cars such as Audi and Land Rover out of the funds of the assessee in the earlier years and is incurring expenses on running and maintenance of these cars. During the assessment proceedings, the assessee was asked the purpose for purchasing these luxury cars and who uses these cars. The assessee was also asked to give details of the personal vehicles owned by the members of the assessee society. In response to this, vide letter dated 09.11.2018 and 14.11.2018, the assessee submitted that Audi (PB 13AC-0027) was being used by the Chairman, Sh. Ram Kishore Goyal and Landrover (CH01AT-0327) was being used by the M.D. cum General Secretary, Sh. Keshav Goyal. It is noted that both these persons are specified persons u/s 13(3) of the Act. Vide letter dated 30.11.2018, the assessee submitted that both these members attend the office daily and manage the affairs of the society and are not charging any fees but have been given cars. This justification of the assessee doesn’t hold water because of the facts as discussed in the following paras.

9. It is pertinent to note that the society is being run by members of the same family viz. Smt. Satya Devi, Sh. Ram Kishore Goyal, Sh. Keshav Goyal, Ms. Priyanka and Ms. Anju Bala. From the ITRs of these specified persons and as also confirmed by the assessee vide reply dated 14.11.2018, it is observed that Smt. Satya Devi, Sh. Ram Kishore Goyal and Sh. Keshav Goyal are engaged in other proprietary business viz. M/s Data Asra Trading Co, M/s Asra Kishore Trading Co and M/s Asra Keshav & Co respectively. These specified persons are also acting as commission agents. Further, they have given godowns owned by them on rent and are earning rental income from the same. Business is a full-time job and requires undivided time and effort. This shows that the specified persons have not been giving enough of their time and effort to the assessee institutions but had been provided high-end luxury vehicles using the funds of the assessee.

10. Further, the assessee vide reply dated 09.11.2018 informed that no personal vehicles were owned by Sh. Ram Kishore Goyal and Sh. Keshav Goyal. Rather, it informed that the other members as specified above also did not own personal vehicles. But, vide reply dated 30.11.2018, the assessee submitted that two wheelers are kept by Sh. Keshav Goyal and Sh. Ram Kishore Goyal, one in each name. Evenif, two-wheeler is owned by two specified persons, even then the assessee has itself submitted that Audi car and Landrover car were provided to Sh. Ram Kishore Goyal, Sh. Keshav Goyal. It is beyond acceptance that the specified persons who had been provided Audi car and Land Rover were using motor cycle for their personal use. Moreover, there were several members in the family and it is not possible that all of them were using motor cycle for their personal use as the assessee is trying to portray. It is very obvious that the specified persons were using luxury vehicles purchased from assessee’s funds for their personal use and their proprietory business which is an utter misuse of the provisions of the Act. Therefore, without a doubt, the members of the society who are also members of the same family have diverted the resources of the assessee for their personal benefit. The assessee society was being run by the members as another family business and the provisions of section 13(1)(c) r.w.s. 13(3) of the Act are invoked.

11. It is concluded that the assessee was functioning on commercial lines and its activities were focused at earning profits and diverting these funds for the benefit of specified persons u/s 13(3) of the Act by using these funds for buying high-end luxury vehicles like Audi and Land Rover for the use by its members. The members of the assessee society had thoroughly misused and abused the exemption provisions under the Act behind the cloak of an educational society. The assessee was actually being run as a family-business venture but was window-dressed as “charity”. Therefore, the provisions of section 11 r.w.s. 2(15), and sections 13(1)(c) r.w.s. 13(3) of the Act are applicable.

The reliance was placed on the following case laws:

• DIT Vs. Bharat Diamond Bourse (2003) 179 CTR 225 (SC)
• Agappa Child Centre Vs. CIT [1997] 226 ITR 211 (Ker)
• DIT(E) Vs. Charanjiv Charitable Trust [ 2014] 43 com 300 (Del)
• DDIT(E)-1, Chennai Vs. India Cements Educational Society [2016] 67 com 236(Chennai-Trib)

30.3 The AO also observed that the case laws relied by the assessee were distinguishable on facts and that the assessee was ineligible for exemption under section 11 of the Act by observing in para 14 to 18 of the assessment order as under:

14, The case laws cited by the assessee do not give any strength to the assessee’s argument because the facts are entirely different. In the cited case laws, although reasonable profits had been earned, the focus was on charitable activity. Also, some case laws cited pertain to section 13(1 )(d) which is not the matter of contention in the present case. In the present case, the assessee society was like a family, business of the members with the institutions run for profits and the surplus from the same utilized for buying high-end cars for the specified persons. By no stretch of imagination, such activities can be considered as charitable and the question of restricting the taxable income to the relevant income of misuse does not arise. The assessee’s functioning when seen in its entirety shows that education has taken a backseat and the focus is on extracting maximum profits and diverting the same for the personal benefit of the specified persons. In view of the above, the surplus as per the Income & Expenditure account will be taxed as an AOP.

15. Further, a part of the vehicle expenses claimed relating to the two high-end luxury cars shall be disallowed. Total vehicle expenses are as under:-

Petrol & Diesel expenses	Rs. 7454249
Repairs & maintenance vehicles	Rs. 757553
Vehicle insurance	Rs. 1095271
Vehicle passing tax	Rs. 1847550
TOTAL- (A)	RS. 1,11,54,623/-

16, While the assessee vide its submission dated 30.11.2018 has given bifurcation of these expenses between the two luxury cars used by specified persons and other vehicles, no supporting proof/bills have been produced. Accordingly, the bifurcation is not accepted. 20% of the aforementioned vehicle expenses are attributed to the luxury vehicles used by the specified persons. Also, depreciation on Audi car and Land Rover car is to be included in the expenses attributable to these luxury vehicles. Accordingly, expenses incurred on Audi and Land Rover are estimated to be as under:-

20% of Rs. 1,11,54,623/-	Rs. 22,30,925/-
Depreciation on Audi	Rs.2,54,300/-
Depreciation on Land Rover	Rs. 3,85,523/-
TOTAL	RS. 28,70,748/-

17. Further, it is estimated that the members were incurring only about 30% of the expenses on these two luxury vehicles for the purpose of the assessee. Therefore, 70% of the expenses on these two vehicles i.e. 70% of Rs. 28,70,748/- amounting to Rs. 20,09,524/- are disallowed as expenses for personal use of the members and not for the purpose of the business of the assessee.

18 It is also seen that the assessee vide its submission dated 30.11.2018 has requested for benefit of deemed application as per Explanation to section 11. It is stated that once the assessee is found to be ineligible for exemption u/s 11 of the Act, the question of granting benefit of deemed application does not arise. Moreover, the assessee has not filed form 9A which was mandatory w.e.f. A.Y. 2016-17.

30.4 Accordingly the AO assessed the total income at Rs. 9,54,59,883/- by giving calculation in para 20 of the assessment order dt. 05/12/2018 which read as under:

20. Consequently, the total income of the assessee is calculated as under:-

Returned income	NIL
Surplus as per Income & Expenditure account	Rs. 9,34,50,359/-
Add: Vehicle expenses disallowed	Rs. 20,09,5247-
Total Income	Rs. 9,54,59,883/-

31. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under:

1. “Ground of Appeal 1 – Addition of Rs. 9,34,50,359/- on account of presumption that the society is not Charitable

The AO has presumed that the society is not charitable and is being run on profit basis and has considered total net profit as taxable and has asseseed the society as AOP and taxing entire profit as per Income and expenditure account amounting Rs. 9,34,50,359/- as AOP without considering the addition to Fixed Asset Rs. 6,93,95,688/-, repayment of loan and carry forward of excess application of previous year and withdrawing the benefit of claim u/s 11 of the Income Tax Act, 1961. The surplus of Rs. 9,34,50,359/- as per income & Exp. Account is being used for acquisition of Fixed assets amounting Rs. 6,93,95,688/-and repayment of Loan. Apart from this the institute has not charged any fee which is not in accordance with the Govt, of India fixed fee structure for all courses. Hence it is not correct to term the institution as running on commercial principles.

A receipt & payment account is enclosed vide annexure 1 which clearly shows that during the FY 2015-16 surplus was amounting RS. 46,16,584/- which is 2.71% of total receipts amounting Rs. 17,00,16,872/-. So it is clear that surplus is quite reasonable if we take into account the case law mentioned by AO as it is below 6% of receipts and justify permissible reasonableness defined in the order of the Apex Court in the case of Islamic Academy of Education & another vs. State of Karnataka and others (2003) 6 SSC 697 and reiterated in the case of Viswesvaraya Technological University Vs. ACIT in civil appeal Nos. 4361-4366 of 2016. Reasonable surplus has been pegged at anything between 6% to 15% of the receipts. So it is clear that the case is based on surplus and not profit, hence the Society is a Charitable Institution.

Relevant case law of Hon. Supreme court regarding this point is reproduced here:

[2015155 taxmann.com 255 (SC) SUPREME COURT OF INDIA Queens Educational Society v. Commissioner of Income-tax *In favour of assessee Where a surplus was made by educational institution which was ploughed back for educational purposes, said institution was to be held to be existed solely for educational purpose and not for purpose of profit.

Also refer circular 14/2015 dated 17.08.2015 which recognizes generation of surplus.

(20151 55 taxmann.com 34 (Karnataka) HIGH COURT OF KARNATAKA Director of Income-tax (Exemption), Bangalore v. Karnataka Industrial Area Development Board*

*In favour of assessee

A registration granted earlier under section 12A can be cancelled under two circumstances: (a) If the activities of such trust or institution are not genuine, (b) the activities of trust or institution not being carried out in accordance with the object of the trust or institution. Therefore, registration already granted under section 12A could not be revoked for the reason that the charitable trust or institution pursuing of advancement of objects of general public utility carried on commercial activities

Also refer to Circular No.21/2016 dated 27-5-2016 [20161 70 taxmann.com 181 (Bombay) HIGH COURT OF BOMBAY Director of Income-tax (Exemptions) v. Khar Gymkhana

In view of CBDT’s Circular No.21/2016 dated 27-5-2016, Registration of a trust can’t be cancelled merely because receipts from commercial activities exceed Rs.25L lakhs unless there is change in the nature of its activities or its activities are not genuine.

Salary to Employees

It may be noted that sometimes retired persons from Govt, sector are employed as Principals in our Institute at a lower Salary. Many times the salary is based on Last Salary drawn- Pension basis. The main object of the Society is also a promotion of education and it can’t be conclusively decided on the basis of quantum of salary being paid. Rather paying of reasonable salary and incurring appropriate expenditure proves that the expenditure is being made properly. A list of employee wise salary was submitted and the AO was requested to raise specific question with name of employee, if any, so that the profile of concerned faculty and his employment history be produced. It was also proposed to produce the concerned employee for personal examination by AO. However no such requirement was raised and the assessment was completed.

Carry forward of Excess Application:

If the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are carried forward and adjusted against the income of a subsequent year, the income of that year can be said to be applied for charitable and religious purpose.

A total amount of Rs. 1,96,71,844/- was overspent in the FY 2014-15 as shown in the shown in the chart mentioned below in point no. 2 which should be carried forward in FY 2015-16 and to be allowed as application of income. Relevant Case Law on the point is as follows:

The reliance was placed on the following case laws:

• CIT Vs. Maharana of Mewar Charitable Foundation(1987) 164 ITR 439(Raj)
• CIT Vs. Shri Plot Swetambar Murti Pujak Jain Mandal(1995) 211 ITR 293 (Guj)
• CIT Vs. Matri Seva Trust (2000) 242 ITR 20 (Mad)
• Trustees of Balkan-Ji Bari (1979) 10 CTR (Trib) 22
• CIT Vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom)

31.1 It was also submitted as under:

> It may be noted that the exemption u/s 11 of Income tax act can be denied to Registered Trust/society only on following grounds:

(i) Section 13(l)(c) – Benefit to interested persons Section 13(l)(c) of the Act has carved out an exception from exemption in cases where a part of income of a charitable or religious trust / institution ensures or is used or applied directly or indirectly for the benefit of the settler, founder or certain other specified persons under section 13(3) of the Act. This is obviously intended to ensure that the income of such a trust / institution is not diverted towards the benefit of persons who are closely connected with the creation, establishment and conduct of the affairs of the trust / institution.

(ii) Section 13(l)(d) – Investment of funds of the trust / institution in modes or forms other than those, specified.

Section 13(l)(d) provides that exemption from tax to charitable or religious trust / institution will be forfeited if any funds of the trust / institution are invested or deposited after 28.2.1983, otherwise than in any one or more of the forms or modes specified therein.

(iii) Section 13(2) – Bar due to deemed use / application of the income or property of the trust by interested persons.

As per section 13(2) of the Act, without prejudice to the generality of the provisions of section 13(l)(c) and section 13(l)(d), 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 persons referred to in section 13(3), in situations listed under clauses (a) to (h) thereof.

Thus, the provisions of section 13(2) are nothing but extension of the provisions of section 13(l)(c) / 13(l)(d) of the Act.

• College continued to be approved by relevant Govt. Authority during the A Y 2016-17. Proof is enclosed vide annexure 2. Hence there is no change in basic nature of educational activities.

In the present context, the provisions of section 164(2) are also relevant, which are reproduced as follows:

“164. Charge of tax where share of beneficiaries unknown.

(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, or which is of the nature referred to in sub-clause (Ha) of clause (24) of section 2 or which is of the nature referred to in sub-section (4A) of section 11 tax shall be charged on so much of the relevant income as is not exempt under section 11 or section 12, as if the relevant income not so exempt were the income of an association of persons:

Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.”

From the aforesaid provisions of section 164(2), it may be seen that in the case of relevant income referred to therein, tax shall be charged on so much of the relevant income, as is not exempt under section 11 or 12, as if the relevant income not so exempt were the income of an association of persons (AOP). It clearly implies that only that part of the relevant income which is not exempt under section 11 or section 12 is brought to tax, as the income of an AOP and the balance of income of the charitable trust / institution, will remain exempt.

Further, as per the proviso to section 164(2), where the whole or any part of the relevant income is not exempt under section 11 or section 12, by virtue of the provisions of section 13(l)(c) or section 13(l)(d), tax shall be charged on the relevant income or part of relevant income, at the maximum marginal rate.

In view of the aforesaid proviso to section 164(2), the Courts have held that in case of violation of the conditions under section 13(l)(c) or 13(l)(d) of the Act, only the relevant income or part of such relevant income is liable to be taxed at maximum marginal rate. It is also held that the violation of section 13(l)(c) or 13(l)(d) does not result in denial of exemption under section 11, in respect of the total income of the assessee. In other words, only the non-exempt income, in view of the provisions of section 13(l)(c) / 13(l)(d) would fall in the tax-net and the other income of the charitable trust / institution would remain exempt under the provisions of section 11 of the Act.

Relevant part of Circular No.387. dt.6.7.1984[152ITR (St) 1].

In the present context, paragraph 28 of Circular No.387, dt.6.7.1984, issued by the CBDT, under the heading “Levy of income-tax at maximum marginal rate in the case of charitable and religious trusts which forfeit tax exemption” is very relevant. For our purpose, paragraph 28.6 of the aforesaid Circular is relevant, which is reproduced as follows:

“28.6 It may be noted that new sub-section (1A) inserted in section 161 of the IT Act, which provides for taxation of the entire income received by trusts at the maximum marginal rates is applicable only in the case of private trusts having profits and gains of business. So far as public charitable and religious trusts are concerned, their business profits are not exempt from tax, except in the cases falling under clause (a) or clause (b) of section 11(4A) of the IT Act. As the maximum marginal rate of tax under the new proviso to section 164(2) applies to the whole or a part of the relevant income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the IT Act in regard to investment pattern or use of the | <k trust property for the benefit of the settlor, etc., contained in section 13(l)(c) and (d) of that Act, the said rate will not apply to the business profits of such trusts which are otherwise chargeable to tax. In other words, where such a trust contravenes the provisions of section 13(l)(c) or (d) of the Act, the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provisions.”

As per the aforesaid paragraph 28.6 of the aforesaid Circular, where such a trust contravenes the provisions of section 13(l)(c) or 13(l)(d) of the Act, the maximum marginal rate of income-tax will apply only to that part of income, which has forfeited exemption under the said provisions.

From the aforesaid discussion, it is clearly established that a legal precedent which applies in relation to violation of the provisions of section 13(l)(d), will equally apply in relation to violation of the provisions of section 13(l)(c), also.

Reliance was placed on the following case laws:

• CIT Vs. Fr. Mullers Charitable Institutions (2014) 363 ITR 230 (Karn)
• DIT(E) Vs. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 (Bom)
• CIT Vs. Fr. Mullers Charitable Institutions [2014] 363 ITR 230 (Karn)
• DIT(E) Vs. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533(Bom)
• DIT(E) Vs. Agrim Charan Foundation [2002] 253 ITR 593 (Del)
• Jamsetji Tata Trust Vs. JDIT(E) [2014] 101 DTR(Trib) 305 (Mum)
• DIT(E) Vs. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 (Bom)
• CIT Vs. Red Rose School [2007] 163 Taxman 19(All)
• ITO Vs. Virendra Singh Memorial Shiksha Samiti[2009] 18 DTR(Trib) 502 (Lucknow)
• Arvind Bhartiya Vidhyalya Samiti Vs. ACIT [2018] 115 TTJ 351 (JP)
• CIT Vs. Cosmopolitan Education Society [2000] 244 ITR 494 (Raj)
• Surat City Gymkhana Vs. Dy. CIT[2002] 254 ITR 733 (Guj)
• CIT Vs. Kamala Town Trust [2005] 279 ITR 89 (All)

31.2 It was further submitted as under:

Conclusion

In the light of the discussion brought out in the preceding paragraphs, the following conclusions are clearly established:

1. As per provisions of section 13(l)(d), it is only the income from such investment or deposit which has been made in violation of section 11(5) of the Act, that is liable to be taxed and violation under section 13(l)(d) does not result in the denial of exemption under section 11 to the total income of the trust.

2. Similarly, as per the provisions of section 13(l)(c), it is only the income or value of the property misused by the trustee that is liable to be taxed and violation under section 13(l)(c) will not result in the denial of exemption under section 11 to the total income of the trust.

3. As regards the provisions of section 13(2), the same being an extension of the provisions of section 13(l)(c) / 13(l)(d), the violations there under will be dealt with on similar lines as the violations under section 13(l)(c) / 13(l)(d) of the Act.

4. The burden of proof lies on the Revenue to prove that the trust has committed any violation of the provisions of section 13 of the Act.

5. Besides, in the light of the legal precedents referred to in the preceding paragraph (V), the restriction placed by the provisions of section 13 on the benefit available under section 11 should be so interpreted, as to grant the benefit of section 11 to the trust and not to deprive the trust of the same.

In the light of the aforesaid reasons, it is only the relevant income falling within the section 13(l)(c)/ 13(l)(d), which is liable to be taxed and violation of the provisions of section 13(l)(c) / 13(l)(d) will not result in denial of exemption under section 11 to the total income of the trust. In other words, the balance of the total income of the trust, will remain eligible for the benefit of exemption under section 11 of the Act.

Hence the addition ofRs. 9,34,50,359/- should be dropped.

“Ground of Appeal II Repayment of Loan to be considered as application of income  During the year the assesee repaid a sum of Rs. 52,27,752/- towards repayment of Term Loan and Rs. 2,96,07,850/- for repayment of Unsecured Loan which should also be considered as application of income.

The following cases show that repayment of loan is to be considered as application of income:

In Circular No. 100 dated 24th January, 1973 (1973) 88 TTR (St.) 66 the following question is answered

Ques: Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust?

Ans: The loan was taken by the trust to fulfill the objects of the trust

• In the case of CIT v. Maharana of Me war Charitable Foundation (1987) 164 ITR 439, the Rajasthan High Court has considered the Circular and held as follows:

“In the Circular No 100 dated 24th January, 1973, the Central Board of Direct Taxes has considered the question to whether where a trust incurs a debt for the purpose of the trust, the repayment of the debt would amount to an application of income for the purposes of the trust. In the said circular, the Central Board of Direct Taxes has expressed the view that the repayment of the loan originally taken to fulfill one of the objects of the trust will amount to an application of the income for charitable and religious purposes. In other words, according to the said circular, if the trust wants to spend more money on charitable and religious purposes, then, in a particular year, it can take a loan and the said loan can be repaid out of the income of the subsequent year and the repayment of the said loan out of the income of the subsequent year would amount to application of income for charitable and religious purposes under Section 11(1)(a) of the Act..

• This is reiterated in the decision of the Madras High Court in the case of DDTT (E) v. Govindu Naicker Estate (Mad) 227 CTR 283 it was held that repayment of loan is to be treated as application under Section 11. In this case the question of law before the Hon ble Court was as under:

Whether repayment of borrowed funds utilized for construction of commercial complex augmenting income of trust and amounts to application of income for charitable purpose eligible for exemption under section 11?

The Hon ble High Court held that the Tribunal was right in holding that the repayment of loan taken from the bank for construction of commercial complex was application of income for charitable purposes and the assessee-trust was eligible for exemption under section 11 of the Act. The High Court further emphasized that even though the expenditure incurred is capital in nature, if the expenditure is incurred for the purpose of promoting the object of the trust, it could be considered as application of the income for the purpose of the trust.

The expenses for charitable and earlier years carried forward and adjusted against the income of a subsequent tear to be treated as application also has considerable judicial support. We may either be allowed the repayment if loan nor allowed, the carried forward excess application in earlier years should be allowed. Further the assessee have earlier utilized 85% of the receipts including the loans received, towards Charitable activities while 15% have been set aside as per norms.

• The Madras High Court in Kannika Parameswari Devasthanam & Charities 2011 held that if the expenditure is on capital account on object (s) contained in the object clause, the expenditure will amount to application of income. Where the assessee had constructed a building out of accumulated and borrowed funds and the building was later rented out and a part of the rent was used for repayment of loan, the Karnataka High Court held 21 that such repayment of loan was application of income.

b. Repayment of a debt incurred for charitable purposes by a charitable trust and loans advanced by educational trusts are application of income:: Repayment of loan taken for construction of a building by the assessee for the purpose of augmenting its funds shall qualify as income applied for charitable purpose. [Janmabhoomi Press Trust (Kar)].

The High Court held that the Tribunal was right in holding that the repayment of loan taken from the bank for construction of commercial complex was application of income for charitable purposes and the assessee-trust was eligible for exemption under section 11 of the Act.

Even though the expenditure incurred is capital in nature, if the expenditure is incurred for the purpose of promoting the object of the trust, it could be considered as application of the income for the purpose of the trust.

Computation chart showing all receipts /payments from FY2008-09 (formation year) till FY 2015-16 as follows:

It is clear from the above table that we have added loan taken to receipts in respective years and loan repayment to the payment. Then also in FY 2015-16 we have found no deficit in application of income.

If the application of the income resulted in the maintenance of the property held under trust for charitable purpose, is for the purpose of augmenting income in order to pursue the objects of the trust that would amount to application of income for the purpose of the trust.

• Hence repayment of loan amounting Rs. 3,48,35,602/- should be considered as application of income

2. Ground of Appeal III I – Cars Provided to Chairman & General Secretary

Cars are provided to Mr. Ram Kishore Goyal (Chairman) and Mr. Keshav Goyal (General Secretary). Both of them are attending the office daily (Copy Attendance record enclosed vide annexure 3) and managing the affairs of Society. Both are qualified Ph.d and MBA (Copy of degrees enclosed vide annexure 4) and are qualified to be appointed as Head of Institutions as per Govt of India norms, but they are not charging any salary for their services and also no other facility except Cars is provided to them. So provision of vehicles provided to them for their services is justified. Both are not working anywhere else on regular basis and their major income is from rental only (which does not require full time job) as may be verified from their TTRs enclosed vide annexure 5.

The AO has contended that they are doing business and having business income. It is submitted that they are commission agents of agricultural commodity which is purely a seasonal work and does not require much attendance and it is their ancestral business. Income Tax return is clearly showing that their income from business is just 1.27% of their total income.

They are full time sitting at college and managing affairs of the Institution. However while managing the affairs they are using office and other facilities of college campus. However the AO has selectively chosen the cars and proceeded with the addition.

It is submitted that the college is maintaining pool of vehicles and the college personnel including members have to visit various offices like AICTE office New Delhi, Punjabi University Patiala, PSBTE office Chandigarh, Maharaja Ranjit Singh University Bathinda, Dept. of SC Welfare, Income Tax Dept. Chandigarh etc. for work related to colleges. For the purpose a proper system is in place and indent is issued for use of college vehicles and it is approved by Principal. To manage such an organization both the office bearers are providing services to the society and its objects. They are not charging any salary what so ever. Their residence is approximately 44 K.M from college campus. The society has provided them vehicles out of car pool. Their residence proof are enclosed along with the distance as per Google map vide annexure no. 6.

These vehicles are being used for official purpose only and for their personal work both of the members are having two wheelers with following registration Nos PB44B7127 Motor Cycle is in the name of Mr. Keshav Goyal

PB13AD9127 Motor Cycle is in the name of Mr. Ram Kishore Goyal

Regarding vehicles expenses being proposed to disallow amounting Rs. 20,09,524/- it is submitted that college have total 33 vehicles and most of the expenses relate to college buses being used for students. Out of the total expenses related to all 33 vehicles amounting Rs. 1,11,54,623/- only Rs. 6,16,650/-and Rs. 6,39,823/- (Depreciation on two Cars) related to 2 vehicles being used by members.

We have bifurcated the expenses into other vehicles and 2 vehicles being used by members of the society while working for the society.

Particulars	Total Expenses	Other Vehicles	Vehicles used by member
Petrol & Diese l expenses	Rs. 74,54,249	70,03,132	Rs. 4,51,117
Repair & maintenance Expenses	Rs. 7,57,553	6,65,258	Rs. 92,295
Vehicle Insurance	Rs. 10,95,271	10,22,033	Rs. 73,238
Vehicle  Passing Tax	Rs. 18,47,550	Rs. 18,47,550	Only applicable on College Buses. Not

The Ld. AO has wrongly considered that undue benefit is being provided to members and resources are being diverted for personal benefit. The asssesee has not violated the provisions of Section 13(1) (c ) r.ws. 13(3) of the act.

The AO has also failed to consider the interest free Unsecured loans provided by promoters and their relatives to the Society amounting to Rs 60,31,359/-. A notional interest calculation chart is enclosed vide Annexure 7. On unsecured loan given by them where total interest on unsecured loans amount to Rs. 17,85,970/- which is more than vehicles expenses amounting Rs. 12,56,473/­(6,16,650+ 6,39,823) related to 2 vehicles being used by members.

A detailed chart of unsecured loan given by Mr. Keshav Goyal and Mr. Ram Kishore Goyal from year ending 31.03.2009 till the year ending 31.03.2016 is as follows:

Name	31.03.200 9	31.03.20 10	31.03.201 1	31.03.20 12	31.03.201 3	31.03.201 4	31.03.2015	31.03.2016
Ram Kishore Goya l	29,94,599	40,71,84 9	60,04,035	69,52,28 5	1,71,73,28 5	53,51,185	53,51,185	52,40,185
Keshav Goya l	18,67,426	34,08,62 6	28,89,400	61,65,00 0	1,09,35,00 0	64,94,000	1,02,99,174	7,91,174
Total	48,62,020	74,80,47 5	88,93,435	1,31,17,2 85	2,81,08,28 5	1,18,45,18 5	1,56,50,359	60,31,359

• Relevant case law to this point is as follows:

[Kashatriya Sabha v. UOI 194 Taxman 442 (2010) (Punj. & Har.)]

Advancement of loans by an educational institution to its employees, cannot be regarded as mis □ application of funds for purpose of section 10(23c)(vi) of !. T. Act. Facilities like housing, loan, car loan etc., given by an educational institution would be regarded as expenditure spent on the object of education and not to any other purpose.

• Hence the addition of Rs. 20,09,524/- should be dropped.

31.3 The Ld. CIT(A) after considering the submissions of the assessee observed that the assessee has exemption under section 12AA of the Act given by the Ld. CIT(Exemption) Chandigarh. He thereafter discussed the case laws relied by the AO in para 4.7 to 4.20, for the cost of repetition the observations of the Ld. CIT(A) are not reproduced herein.

31.4 The Ld. CIT(A) summarised the findings of the various judgments relied by the AO with reference to the findings of the present case as under:

1. Fees structure cannot be rigidly regulated (Islamic Society judgment citing TM Pai), however some state/ central government regulation is permissible and that the same should come within the rubric of reasonable restrictions

2. That service conditions, quality of teachers, their salary etc can be regulated by the state government considering local conditions and to an and to an extent that of regulatory agencies such as UGC/ AICTE.

3. That providing education is the responsibility of the state and that insisting on non-profit motive may be seen as reasonable regulation from the point of view of recognition / certification.

4. That high surplus simpliciter may not be sufficient grounds to. treat a society as being engaged in other than charitable activities if the same is ploughed back in the charitable purposes and for its expansion.

5. That the “taint of commerciality” has to be read within the overall rubric of the regulatory framework and the utilisation of the

6. That undue benefit /benefit without any consideration / service to a specified purpose would result in denial of exemption for a relevant assessment year even if otherwise the exemption persists.

31.5 The Ld. CIT(A)also issued show cause notice vide letter dt. 27/02/2019 to the assessee on the following points:

While exemption u/s 12AA is granted to your trust this authority cannot stand in judgement over the decision of co-ordinate authority and hence while the overall objectives of your trust may be charitable you are required to show cause as to why the taint of profit motive should not been attributed to your activities of the trust during the A. Y. 2014-15 .

1. You are charging high fees from students and fees is not in the nature of charity contribution/corpus donation but as per the AO in the nature of commercial enterprise. As per trite law that there is no “cost of charity”. Therefore please justify as to why high fees fits within meaning of Charity operation. .

2. It appears salary is being paid to the teachers and other employees are not as per Govt, guidelines/guidelines for institutions such as engineering colleges. Please explain as to why taint of profit objective cannot be attributed to this. .

3. It is on record that expensive cars have been used by the trustees who also work as administrators in your college. You are required to justify as to what activity is carried out by these persons that entitles them to these benefits .

4. You have claimed repayment of loans as application of surplus funds, you are required to establish the following :-

i) Whether the assets that these loans went into were claimed as application in the years loans were taken.

ii) Whether any depreciation was claimed on these assets is in the last three years.

iii) Whether the loans themselves were part of the sources of funds in the receipt of expenditure account.”

31.6 In response the assessee furnished the reply which has been reproduced by the Ld. CIT(A) in para 4.23 of the impugned order which read as under:

“Kindly refer to your Show cause notice no. CIT(A)/ PTA/18-19/2226 dated 27.02.2019 we hereby submit that society was given exemption u/s 12AA of The IT Act, 1961 by the CTT, Patiala, vide Order No. CU/PTA/TECH/12-A/11/2008-09/7608, dated 09/01/2009. The society was formed for carrying charitable activities. There was no profitable motive anywhere in the working of society. The AO has confused the judicial pronouncement based on surplus with profit in Income & Expenditure A/c. Point wise reply to show cause is as follows:

1. Fee Structure

Fee from students are charged as per approved fee structure of respective affiliating university and as per Punjab Govt, norms. Fee structure of Asra Group of Institutions along with fee structure of Affiliated universities are enclosed vide Annexure 1 which proves that no high/extra fee has been charged from the students.

The fee for all technical institutions in Punjab is fixed by affiliated universities/Boards. All the Govt approved fees are available in Public Domain also. So there is no high fee being charged by Society.

A detailed bifurcated fee structure of different courses along with number of students and fee structure of university/board to which colleges are affiliated for academic year 2015-16 was submitted to A. O in reply dated 14/11/2018. Thereupon no specific question was raised by A.O regarding the fees.

Hence where the fee is fixed by Govt. Authority and college is merely charging same or lower fee, the question of high fee doesn’t arise.

2, Salary to Employees

Salary paid to all employees of the institution was as per norms of affiliated university and Punjab Govt, norms. Also some employees who are employed as Principals in our institution are retired persons from Govt, sector. Salary paid to them is based on Last salary drawn less pension.

We submit that the main object of the Society is promotion of education and it cant be conclusively decided on the basis of quantum of salary being paid. Rather paying of reasonable salary and incurring appropriate expenditure proves that the expenditure is being made properly.

We have provided employee wise annual salary list to the AO and explained that a few of the employees were on rolls only for a part of year. Also vide reply dated 30.11.2018 we requested to AO to raise specific question with name of employee, so that the profile of concerned faculty and his employment history be submitted and to produce the concerned employee for examination. But no specific question was raised by AO.

3 Cars Provided to Chairman & Genera/ Secretary

Cars are provided to Mr. Ram Kishore Goya/ (Chairman) and Mr. Keshav Goyal (General Secretary). Both of them are attending the office daily and managing the affairs of Society. Both are qualified Ph.d and MBA and are qualified to be appointed as Head of Institutions as per Govt of India norms, but they are not charging any salary for their services and also no other facility except Cars is provided to them. So provision of vehicles provided to them for their services is justified.

Copy of their Attendance record and Degrees was submitted to AO and at your office which proves that they are attending the office daily and managing the day to day affairs of the Society.

• In the judicial proceeding of High court of Punjab & Haryana – Commissioner of income Tax vs M/s Idicula trust society decided on 11 April, 2014 for AY 2003-04 it was decided that if reasonable salary is paid to members of the society for services rendered by them then the same is allowed as application towards the objects of the society.
• Similarly in PNR Society for Relief & Rehabilitation of the Disabled Trust Vs DDTT (ITAT Ahmedabad) order dated 14/08/2014 it was decided that a reasonable salary is paid to trustees for services rendered by them is allowed as application of income. Brief of this case is as follows:

The assessee trust paid remuneration of Rs 4,80,000/- to Shri Anantbhai K. Shah who is a full time secretary and trustee of the assessee trust. The Assessing Officer disallowed the deduction claimed for above payment on the ground that the services rendered by Shri Anantbhai K. Shah were a duty of him as a trustee and the remuneration paid to him being violative of provisions of section 13(l)(c) and 13(3)(cc). The Assessing Officer also opined that remuneration ofRs 4,80,000/-paid to said Shri Anantbhai K. Shah cannot be treated as application towards objects of the trust and therefore he disallowed the entire amount of Rs 4,80,000/-and treated the same as taxable income in the hands of the assessee charitable trust.

Authorized Representative of the assessee contended that in view of the provisions of section 13(2)(c), no disallowance of remuneration paid to the trustee which is not more than the fair market value can be made, and therefore, the Revenue was not justified in making arbitrary disallowance. He also pointed out that similar remuneration was paid to the same trustee in earlier years also which was accepted and allowed by the Department.

The Authorized Representative of the assessee further submitted that Shri Anantbhai K. Shah was full time secretary in the assessee trust. He was engaged full time in the activities of the trust. Therefore, by no stretch of imagination it can be held that annual remuneration ofRs 4,80,000/- paid to said Shri Anantbhai K. Shah was more than the fair market value of his services rendered to the assessee trust.

ITAT concludes that the revenue could not bring any material before us to controvert the submissions of the Authorized Representative of the assessee. It was found that the total receipts of the assessee trust were to the tune of Rs 443.24 lakhs during the year under consideration and the activity undertaken by the assessee trust was to the tune of Rs 469.87 lakhs. Thus, the remuneration of Rs  4,80,000/- which is about 1% of the total value of activities of the trust for looking  after which the same was paid, cannot be said to be excessive or unreasonable.

Further, we find that the Departmental Representative could not controvert the submissions of the assessee that the remuneration of Rs 4,80,000/- per year was paid to the said trustee by the trust in earlier years also for rendering similar services which were allowed by the Department since Assessment Year 2003-04. In the above circumstances, in absence of any material brought before us to show that the remuneration of Rs 4,80,000/- paid to Shri Anantbhai K. Shah for actually rendering services as full time secretary of the trust was in excess of the amount which can be reasonably paid for such services, So the disallowance of Rs 4,80,000 was deleted by ITA T.

As per AOs calculation in our case, total vehicle expenses comes to Rs. 20,09,524/-which is merely 0.12% of total receipts of the society as supported in above mentioned case law.

Further,as far as calculation of expenses is concerned we submit that:

AO has disallowed vehicle expenses of total of Rs. 20,09,524/- which is 70% of 28,70,748/-( 22,30,925/- +2,54,300/- +3,85,523/-) and is incurred on 33 vehicles and most of expenses were related to college buses being used for students. AO has disallowed the vehicles expenses without taking into account bifurcation of expenses related to other 31 vehicles and 2 vehicles being used by the members while working for the society.

We have bifurcated the expenses into other 31 vehicles and 2 vehicles being used by the members. Bifurcation is as follows:

Particulars	Total Expenses of 33 Vehicles	Other 31 Vehicles	2 Vehicles used by member
Petrol & Diesel expenses	Rs. 74,54,249	70,03,132	Rs. 4,51,117
Repair & maintenance Expenses	Rs. 7,57,553	6,65,258	Rs. 92,295
Vehicle Insurance	Rs. 10,95,271	10,22,033	Rs. 73,238
Vehicle Passing	Rs. 18,47,550	Rs. 18,47,550	Only applicable on College Buses.  Not applicable on Cars
Total (A)	Rs. 1,11,54,623	Rs. 1,05,37,973	Rs. 6,16,650

It is clear from the above table that out of total vehicles expenses of Rs. 1,11,54,623/- only Rs. 6,16,650/- is related to 2 vehicles being used by the members. AO has wrongly disallowed the 70% of Rs. 28,70,748/- without taking into account the bifurcation of expenses related to 2 vehicles.

By another method also if out of total vehicles expenses of Rs. 1,11,54,623/- we reduce vehicle passing tax of Rs. 18,47,550/- which is only related to commercial vehicles i.e college buses net expenses related to 33 vehicles will be Rs. 93,07,073/-Hence the expenses related to 2 vehicles will be RS. 5,64,065/-(93,07,073*2/33) and Depreciation on 2 vehicles Rs. 6,39,823/- (2,54,300/­+3,85,523/-). So total expenses plus depreciation comes to RS. 12,03,888/- Out of this appropriate percentage of expenses related to presumed personal use may be disallowed.

4 Repayment of Loan as application:

i) & iii) A detailed computation chart showing all the receipts/payments from FY 2008-09 (formation year) till FY 2015-16 is enclosed vide annexure 2 which shows that Loan taken has been taken as receipt and repayment to the payments.

ii) It is also clear from above mentioned utilization chart that depreciation has not been claimed as application of income.

A detailed computation chart of assessable income for AY 2016-17and showing how the 85% is applied for the objects of the trust is as follows:

PARTICULARS	Amount Rs
Gross Income (As per Income & Expenditure Account)	16,64,11,424
Unsecured Loan Taken (Priyanka Rs. 30L & Shelly Gupta Rs. 8Lac)	38,00,000
INCOME FOR THE YEAR 2015-16	17,02,11,424
Minimum amount Required to be spent {i.e. 85% of Total	14,46,79,710
APPLICATION OF INCOME Total Expenditure without depreciation	6,12,26,286
Addition to Fixed Assets	6,93,95,688
Add: Loan repayment (Rs. 52,27,752/-secured8i Rs. 2,96,07,850 unsecured)	3,48,35,602
Total Application of Income	16,54,57,576
Amount over spent	2,07,77,866

It is clear from the above mentioned chart that depreciation has not been taken as utilization of income and loan taken has taken as receipt and repayment to the payments and there is over spend amount of Rs. 2,07,77,866/-. Hence the percentage utilization is 97.20 % of receipts which is well above the 85 % norm. Audited Balance Sheet as on 31.03.16 and 31.03.15 are enclosed vide annexure 3

31.7 The Ld. CIT(A) observed that the main object of the assessee was as under:

The main aim and object of the society is to start, establish, finance, manage, run, takeover and maintain schools, colleges, institutions, universities with an object to provide sound pre-primary, primary, middle, secondary, senior secondary and higher education to the students of disciplines of Humanities, Social Studies, Sports, Physical Education, Dance & Music, Engg. & Technology etc. by seeking recognition affiliations, certifications or under own autonomous certification at affordable rates or free of cost.

31.8 The Ld. CIT(A) further observed that the fees collected by the assessee, were well within the ceiling as per the State Government norms and in some cases below, was a matter of record which was also not disputed by the AO and that the salary paid to the Teachers / Faculty was as per norms of Affiliated University and Punjab Government norms including instances where last pay drawn less pension was paid to retired teachers re-employed, was also a matter of record and not in dispute. He also observed that there was nothing on record to suggest that underqualified teacher had been appointed by the assessee. According to the Ld. CIT(A) the salaries in the present case were being paid as per the State Government and Affiliating University norms. The Chairman / Managing Directors were person specified under section 13(3) of the Act and two expensive luxury cars were provided for the travel of the Chairman and Managing Directors and that non personal use of cars by the Chairman / Managing Directors was a matter of record. The Ld. CIT(A) observed that no salary was paid to Chairman / Managing Director who were full time engaged with the institution having degree and qualifications (PhD / MBA) which such heads of institutions were required to have. The Ld. CIT(A) pointed out that the AO had not countered the submissions that the Chairman and Director were not looking after the affairs of managing of trust which was running multiple institutes namely Asra College of Engg. & Tecyh., Asra Institute of Advanced Studies, Asra College of Education, Asra International School and Hostel in Sangrur, Punjab. Therefore the personal / non personal use of the cars could not be determined and may not be sufficient reason to hold that the consideration of use of those vehicles was not communserate with the services rendered by them given that the total Revenue of those institutions was in excess of Rs. 15 Crores. The Ld. CIT(A) held that even the funds were utilized for purchase of cars in the name of assessee then denial of exemption should be limited to the amount which was diverted and in the present case the cars were owned by the Trust and not in the name of Chairman / Director. The reliance was placed on the decision of the ITAT Pune Bench in case of Audyogik Shikshan Manda Vs. ITO (2016) 156 ITD 1 (TM).

31.9 The Ld. CIT(A) further observed that the Chairman and Director had rental income from godown and other business therefore the running institution was a full time vocation for them. And the facts of this case were distinguishable from the facts of the case of DIT Vs. Bharat Diamond Bourse (2003) 179 CTR 225(SC) relied by the AO wherein Mr. Bharat Shah was given the advance without any ostensible services. The Ld. CIT(A) was of the view that the reasonable amount attributable to the estimated personal use of the luxury vehicle was Rs. 9,23,281/-which could not be treated as excessive compensations for services rendered by the Director and Chairman on nearly full time basis. The said amount was liable to be taxed rather than the entire surplus.

31.10 With regard to the denial of exemption under section 13(1)(c) of the Act, the Ld. CIT(A) observed that the assessee was having the exemption under section 12AA of the Act and use of the luxury cars for the services may not be enough to deny exemption. He therefore restricted the income to Rs. 9,23,281/- which was not exempted.

32. Now the Department is in appeal.

33. The Ld. Sr. DR reiterated the observations made by the AO and strongly supported the impugned order dt. 05/12/2018.

34. In his rival submissions the Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and strongly supported the impugned order passed by the Ld. CIT(A).

35. We have considered the submissions of both the parties and perused the material available on the record. In the present case it is not in dispute that the assessee was having Registration under section 12AA of the Act and was not collecting any fee more than what was allowed to be collected by the State Government and salary was also paid to the teachers / faculty as per the norms of Affiliated University and the Punjab Stated Government.

35.1 In the instant case the AO pointed out that two cars were provided for the travel of the Chairman and Managing Director. The said persons were having their personal income and were providing the services on full time basis to the assessee society. The Ld. CIT(A) worked out the value of perquisites in the hands of the Chairman and Managing Director at Rs. 9,23,281/- which was considered to be disallowed instead of total surplus. In the instant case nothing is brought on record that the estimated value for personal use of vehicle was more than the amount which was worked out by the Ld. CIT(A) at Rs. 9,23,281/-. Since the Ld. CIT(A) disallowed 40% of the expenses incurred on vehicle for the personal use of the persons specified under section 13(3) of the Act. We therefore considering the totality of the fact do not see any valid ground to interfere with the findings of the Ld. CIT(A) on this issue.

36. Ground nos. (vi) and (vii) of this appeal relate to allowing of repayment of loan as application of income. Facts related to this issue are identical involved in ground no.(ii) of the departmental appeal for the AY 2014-15, which we have already disposed off in the former part of this order. Therefore our findings given therein shall apply mutatis mutandis for this issue in this case. These grounds of departmental appeal are dismissed.

37. Ground No. (viii) is general in nature so do not require any comment on our part.

38. In the result, appeals of the department for the A.Ys 2014-15 & 2016-17 are dismissed.

(Order pronounced in the open Court on 25/05/2022)