Whole Sale Cloth Merchant Association Vs DCIT (ITAT Jaipur)
Diversion of Trust Funds Fatal- ITAT Jaipur Upholds Denial of Exemption to Cloth Merchant Trust – Misuse of Rs.2.52 Cr Trust Funds Bars Charitable Exemption
Assessee, a charitable trust registered u/s 12A since 1994, filed appeals against orders of CIT(A) upholding reassessments u/s 147/143(3) for three years. AO had denied exemption u/s 11/12 citing various violations & assessed income at Rs.3.92 crore for AY 2014-15, along with substantial additions on account of bogus creditors, unverifiable expenses, construction cost disallowances & TDS defaults.
AO noted that the trust had not filed returns u/s 139(1). Return was filed only after reopening u/s 148 based on information regarding cash deposits of Rs.32.30 lakh, service tax receipts exceeding Rs.8.37 crore & interest income. Audit report Form 10B revealed discrepancies, including allotment of 22 plots to non-members & personal withdrawals of Rs.2.52 crore by the then president. AO held that provisions of s.13(1)(c) were violated & taxed income at Maximum Marginal Rate u/s 164(2).
CIT(A) upheld reopening as valid, relying on Explanation 3 to s.147 & judicial precedents (Rajesh Jhaveri SC, Best Wood Kerala FB, Majinder Singh Kang P&H HC), holding that AO can assess “any other income” once valid notice is issued. It was observed that exemption u/s 11 cannot be granted due to non-filing of returns, audit lapses, diversion of funds & violation of s.13. Misuse of trust funds by the president justified denial of exemption.
