Case Law Details
Gurudwara Godri Sahib Baba Farid Society Vs DCIT (ITAT Chandigarh)
ITAT Chandigarh held that loss incurred on account of embezzlement during the course of day to day carrying out of charitable activities by the trust is revenue loss and duly allowable.
Facts- The Assessee is a Society registered under the Societies Registration Act, 1860. The Society is also registered u/s. 12AA of the Income Tax Act, 1961. As per the Memorandum of the Society, the main object of the society is to spread and propagate the religious and spiritual teachings of ‘Sant Baba Farid’.
The Assessee, herein, challenges the sustenance of addition of Rs. 49,09,290/- by the First Appellate Authority on account of embezzlement of funds by the employees of the assessee-society, out of the addition of Rs.1,05,30,712/- made by the Assessing Officer.
Conclusion- We have also gone through the various judicial precedents cited by the ld. AR on this ground and though the various judgments cited are in the context of the loss incurred on account of embezzlement by the employees in the course of carrying on of business activities, we are of the considered view that the principle as laid down in above said various judgments along with Board Circular No.35D would be squarely applicable to the facts and circumstances of the case inasmuch as even in the present appeal, the embezzlement has occurred during the course of day to day carrying out of charitable activities by the assessee trust.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
ITA No.340/Chd/2019 is the assessee’s appeal, which has been filed before this Tribunal (ITAT) against the order dated 04.01.2019 passed by the ld. Commissioner of Income Tax (Appeals), Bhatinda (hereinafter called ‘the CIT(A)’) for Assessment Year (AY) 2015-16.
1.1 The following revised grounds have been raised by the assessee:
“1. That the Ld. CIT(A) having accepted the fact that there has been embezzlement by the employees and still has erred in confirming the addition of Rs. 49,09,290/-, which is against the facts and circumstances of the case.
2. That the CIT(A) has erred in confirming the addition of Rs. 65,94,957/-on account of alleged difference in the “interest Income” as per Form No.26AS and as per books of accounts as he failed to consider that higher interest income, has been disclosed in the earlier years and later years while filing the return of income.
3. Notwithstanding the above said grounds of appeals,, the CIT(A) have failed to appreciate the fact that even after the confirmation of above addition on account of embezzlement and difference of interest income as per 26AS, there is much more application of income as per the chart submitted to him during the course of appellate proceedings and, thus, the action of the Assessing in not allowing the exemption u/s 11 and taxing the income ‘A OP’ is not justified.
4. That the CIT(A) has failed to appreciate the fact that the assessee society is registered u/s 12A of the Income Tax Act by the CIT, Bathinda vide order, dated 30.05.2006 w.e.f. 1.4.2003.
5. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.”
1.2 ITA No. 534/Chd/2019 is the Cross Appeal of the Department for the same year.
1.3 The following grounds have been raised by the Department:
“i. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the claim of Rs.2 Cr which remained unutilized within 5 years of accumulating the funds (i.e. from A.Y. 2010-11 to A.Y. 2015-16) by holding that the assessee had utilized the funds for purchase of land when the purpose of accumulation viz “educational Religious and charitable” was general and not specific and purchase of land did not fall within the purpose of accumulation mentioned in Form 10 and not considering the decision of the Hon’ble Calcutta High Court in the case of Director of Income Tax (Exemption) Vs. Trustee of Singhania Charitable Trust reports in 199 ITR 819 (1993).
ii. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the claim of Rs. 2 Cr. which remained unutilized within 5 year of accumulating the funds (ie. from 2010-11 to A.Y. 2015- 16 by holding that the assessee had utilized this funds for purchase of land when the assessee had failed to show that it had purchased land out of the income which was accumulated in A.Y. 2010-11.
iii. That on the facts and in the circumstance of the case, the Ld. CIT(A) had erred in allowing the claim of Rs. 2 cr which remained unutilized within 5 year of accumulating the funds (i.e. from A.Y. 2010-11 to A.Y. 2015-16 when the assessee had failed to show that funds accumulated u/s 11(2) of the Act were separate from the other funds of the assessee because only then the assessee can fulfill the condition that the amount accumulated u/s 11(2) has been used for specific purpose within the specific time stated Form 10.
iv. That the appellant craves to leave, add or amend any grounds of appeal on or before the appeal is heard or disposed of.”
Additional Ground of Appeal
“1. Whether on the material and applicable facts and circumstances of the case, the Ld. CIT has failed to appreciate the decision of the Hon’ble Calcutta High Court in the case of DIT(E) Vs. Trustees of Singhania Charitable Trust reported in 199 ITR 819 (1993) wherein it was held that specific objects of the future employments of the accumulated funds need to be mentioned in the Form No. 10 which is contrary to the factual position in this case and which also needs to be considered against the backdrop that the Apex Court has only dismissed in 2019 the SLP filed by Revenue against a contrary judgement by the Hon’ble Gujarat High Court in the case of CIT(E) Vs. Bochasanwasi Shri Akshar Purushottam Public Charitable Trust reported in 102 taxmann.com 122(2019) which dismissal cannot be applied as res judicata in the instant case of the assessee.”
2.0 The brief facts of the case are that the assessee is a Society registered under the Societies Registration Act (XXI of 1860), vide registration No.328 of 1982-83, dated 19.08.1982. The Society is also registered u/s. 12AA of the Income Tax Act, 1961 (hereinafter called ‘the Act’), vide order dated 30.05.2006.
2.1 As per the Memorandum of the Society, the main object of the society is to spread and propagate religious and spiritual teachings of ‘Sant Baba Farid’. The Society is running a College under the name and style of ‘Baba Farid Law College’ at Faridkot and a school named ‘Baba Farid Public School’, Faridkot. The Society is also managing a Gurudwara in the name of ‘Gurudwara Godri Sahib’ at Faridkot.
2.2 The return for the captioned year was filed, declaring income at Rs.NIL. The case was picked up for scrutiny under the CASS guidelines. The assessment was completed at an income of Rs.4,73,40,679/- after making the following additions/disallowances:
1. Addition on account of difference in interest income as declared by the assessee and as reflected in Form-26AS – Rs.65,94,957/-.
2. Amount alleged as remaining unutilized out of accumulated funds as per provision of Section 11 of the Act – Rs.2,00,00,000/-.
3. Amount claimed as embezzlement expenses – Rs.1,05,30,712/-.
4. Additions treated as anonymous – Rs.1,02,15,010/-.
2.3 Aggrieved, the assessee approached the ld. First Appellate Authority, challenging the above mentioned additions/disallowances. The appeal of the assessee was partly allowed by the ld. First Appellate Authority as under:
1. Addition pertaining to anonymous donations of Rs.1,02,15,010/- was deleted by the ld. First Appellate Authority.
2. The addition of Rs.2.00 crores pertaining to unutilized accumulated funds u/s. 11 of the Act was also deleted.
3. The addition pertaining to claim of expenses on account of embezzlement, amounting to Rs.1,05,30,712/- was partly allowed by the ld. CIT(A) on the ground that the assessee had recovered and subsequently offered to tax income of Rs.52,73,229/- in Financial Year (FY) 2014-15 and Rs.56,21,422/- in F.Y. 2015-16. The addition was restricted to Rs.49,09,290/-. The Assessing Officer was also directed to verify the contention of the assessee that the assessee had offered to tax the embezzlement income recovered.
4. As far as the addition of Rs.65,94,957/- on account of difference in interest income as reported in Form-26AS and as declared in the return of income was concerned, the addition was confirmed.
3.0 The ld. Authorized Representative submitted that as far as the assessee’s Ground No.1 is concerned, the same challenges the sustenance of addition of Rs.49,09,290/- by the ld. First Appellate Authority on account of embezzlement of funds by the employees of the assessee-society, out of the addition of Rs.1,05,30,712/- made by the Assessing Officer. It was submitted by the ld. Authorized Representative of the assessee that the background pertaining to this addition is that the affairs of the assessee’s society are mainly looked after by the President of Society, namely, Shri Inderjeet Singh Sekhon, who at present is of 94 years of age. It was further submitted that at the time of the embezzlement, he was of 87 years of age. It was further submitted that, although, he is still actively engaged in looking after the affairs of the society, two employees of the society manipulated certain bills of expenditure by manipulating the amounts payable to the various vendors by increasing them and got the cheques against those manipulated bills signed by the President of Society and managed to embezzle those funds during two Financial Years i.e. 2014-15 and 2015-16.
3.1 It was further submitted that this embezzlement was discovered only at a later stage when the two employees left their employment with the assessee-society and went on to settle abroad and new staff was appointed. The ld. AR of the assessee submitted that the assessee-society, thereafter, lodged an FIR and on the basis of such FIR, the two ex-employees were brought back by the Police from outside India and the recovery of funds were made from them during the captioned assessment year to the tune of Rs.52,73,232/-, which was credited to the consolidated Income and Expenditure Account. Our attention was also drawn to Page 5 of the Paper Book in this regard. The ld. AR also drew our attention to copies of the bills, which had been manipulated by the employees and which were placed at Pages 106 to 112 of the Paper Book filed by the assessee.
3.2 The ld. Authorized Representative submitted that the fact of embezzlement had been accepted by the Assessing Officer and this embezzlement had resulted in the expenses being reported at an inflated figure, because the same had been debited to the Income and Expenditure Account to the tune of Rs.1,58,03,941/- and that out of this amount, the amount of Rs.52,73,232/-recovered from those ex-employees had already been credited to the consolidated Income and Expenditure Account and, therefore, the remaining embezzled amount of Rs.1,05,30,712/- was added by the Assessing Officer. The ld. Authorized Representative of the assessee further argued that, thus, the Assessing Officer had accepted the fact of embezzlement and even the ld. First Appellate Authority has not disputed the same. It was submitted that this claim of embezzlement is duly supported by documents and it was argued that this expense is incidental to the charitable activity of the assessee-society and the loss was essentially revenue in nature. The ld. AR further submitted that there were numerous judicial precedents in support of his proposition that if any loss occurs on account of any embezzlement during the course of carrying out of regular activities, the same is an allowable loss and deduction.
3.3 The ld. Authorized Representative of the assessee specifically referred to the judgment of the Hon’ble Supreme Court in the cases of Badridas Daga Vs. CIT (1958) 34 ITR 10 (SC) and Nainital Bank Ltd. Vs. CIT (1965) 55 ITR 707 (SC) on this issue.
3.4 Apart from this, the ld. AR also relied on certain other case laws, copies of which were filed and they have been taken on record and will be duly considered at the time of adjudication of this appeal. The ld. AR also drew our attention to the CBDT Circular No.35D(X1, VII-20) [F.No.10148/65-IT (AL) and it was submitted that as per this Circular, the legal position now is that loss by embezzlement by employees should be treated as incidental to business and should be allowed as a deduction in the year in which it is discovered.
3.5 The ld. AR of the assessee also placed reliance on the order of the Jaipur Bench of ITAT in the case of M/s Pawan Specialties (P) Ltd. in ITA No.809/JP/2016 and it was submitted that the aforesaid Circular of the Board has been relied upon by the Jaipur Bench in this case and the loss from embezzlement has been allowed as a deduction. Our attention was also drawn to the judgment of the Hon’ble Allahabad High Court in the case of Sheetla Prasad Ramlal vs. CIT reported in 188 ITR 514, wherein, in view of above mentioned Circular issued by the Board, the loss on account of embezzlement made by the employees was held to be as incidental to carrying out of business.
3.6 Drawing our attention to the order of the ld. First Appellate Authority on the issue, it was submitted that after considering the written submissions of the assessee, the ld. First Appellate Authority had called for a remand report and, thereafter, had also sought some clarifications from the Assessing Officer. In the remand report, the Assessing Officer has admitted that the assessee has submitted copies of embezzled bills.
3.7 The ld. Authorized Representative of the assessee submitted that as argued earlier, admittedly, the ld. First Appellate Authority has given a finding in Para 6.2 of the impugned order that the embezzlement had taken place and had also given a direction that the addition was to be restricted to the tune of Rs.49,09,290/-. Since there was a recovery of embezzled funds, amounting to Rs.52,72,229/- in F.Y. 2014-15 and of Rs.56,21,422/- in F.Y. 2016-17, the ld. AR submitted that the additions sustained by the ld. First Appellate Authority was also not legally correct, because once the fact of embezzlement has been accepted, the entire claim by the assessee should have been allowed as a deduction in view of various judicial precedents relied upon and cited by him and also in view of Board Circular No.3 5D (Supra) as above.
4.0 Coming to the second ground taken by the assessee in its appeal, it was submitted that this ground relates to confirmation of addition of 65,94,957/- on account of alleged difference in the interest income, as per Form-26AS and as declared by the assessee in its return of income. The ld. AR submitted that the difference as per the return of income and as per Form-26AS has not been disputed. He, however, submitted that in the consolidated Income and Expenditure Account, a much higher interest income had been disclosed, which was even more than the amount reflected in Form-26AS. Referring to Para 7.1 of the impugned order, our attention was drawn to a chart reproduced therein and it was submitted that the excess interest income in Assessment Years 2013-14 and 2014-15 was to the tune of Rs.79,23,533/-. The ld. AR submitted that since the assessee had offered a higher income in earlier years and the assessee has already moved an application u/s. 154 of the Act on this issue, consequently, relief may be allowed in earlier assessment years or excess interest offered in earlier years may be allowed to be set off in the captioned assessment year.
5.0 Arguing on Ground Nos. 3 and 4, the ld. AR submitted that both these grounds relate to the two additions i.e. of Rs.49,02,290/- on account of embezzlement and of Rs.65,94,257/- on account of difference in interest income and submitted that even if these additions are to be confirmed, there is much more application of income by the assessee and further the assessee is to be allowed benefit of exemption u/s. 11 of the Act, because the assessee society continues to enjoy the benefit of registration granted u/s.12A of the Act and as such the assessment of income as AOP was not justified.
6.0 In response to the arguments advanced by the ld. AR, the ld. CIT (DR), who supported the orders of the Assessing Officer as well as of the ld. First Appellate Authority, argued that the assessee was not carrying out any business. It was engaged in charitable activities and, therefore, the loss on account of embezzlement cannot be allowed.
6.1 Regarding the arguments of the ld. AR with regard to interest income, the ld. CIT(DR) argued that each assessment year is an independent assessment year and the income earned or accrued is to be taxed in that particular assessment year only. It was submitted that even if the assessee had disclosed higher interest income in earlier assessment years on its own, the benefit of set off against interest income accrued during the captioned assessment year cannot be given. It was submitted that whatever income had accrued to the assessee as per Form-26AS, has to be assessed and taxed in that year only and that the ld. First Appellate Authority had rightly sustained the addition.
7.0 Arguing for the Departmental Appeal, the ld. CIT(DR) submitted that although the Department has raised as many as three grounds of appeal, but as per the revised grounds and the additional ground raised by the Department, the main issue in Departmental Appeal is that the ld. CIT(A) has erred in deleting the addition of Rs.2.00 crores made by the Assessing Officer on account of such amount remaining unutilized even after five years of accumulation of fund. The ld.CIT(DR) argued that the accumulation of funds was not for specific purpose and it was only general purposes, such as educational, religious and charitable as mentioned in Form-10. The ld. CIT(DR) submitted that since the amount of Rs.2.00 crores accumulated in the year 201011 remained unutilized, the same had become taxable in terms of Section 11(2) of the Act r.w.s.11(3) of the Act. It was prayed that the order of the ld. CIT(A) deserves to be reversed on this issue.
8.0 In response to the arguments advanced by the ld. CIT(DR) on the Departmental Appeal, the ld. AR submitted that the amount of Rs.2.00 crores was accumulated for education, religious and charitable purposes in AY 2010-11 and during the year under consideration, with an aim to extend the scope of education, land adjoining the college building had been purchased by the assessee society, which was in furtherance to education purposes. Our attention was drawn to the Purchase Deed in this regard and it was submitted that Form-10 had also been submitted in time.
8.1 The ld. AR further submitted that an identical issue had arisen before the Hon’ble Apex Court in the case of CIT(Exemption) vs. Bochasanwasi Shri Akshar Purushottam Public Charitable Trust cited in (2019) 105 Taxmann.com 1997 (SC), wherein, the Hon’ble Apex Court had dismissed the Special Leave Petition against the order of the Hon’ble High Court, wherein, the Hon’ble High Court had held that lack of declaration in Form-10 regarding specific purposes for which the funds were being accumulated by the assessee trust is not be fatal to exemption claimed u/s.11(2) of the Act.
8.2 Further, reliance was also placed on the judgment of the Hon’ble Punjab and Haryana High Court in the case of CIT vs. Market Committee, Tohana reported in 201 Taxman 235 (P&H) wherein, the order of the Tribunal was upheld and it was held that merely because the assessee had mentioned development work in general, it cannot be said that the primary condition to Section 11 has not been fulfilled.
8.3 The ld. AR also placed reliance on certain other judicial precedents, the copies of which have been filed in Paper Book. The same have been taken on record and the same will be duly considered while adjudicating the issue. The ld.AR submitted that in view of the various judicial precedents, the ld. CIT(A) had rightly deleted the addition.
9.0 We have heard the rival contentions and have also perused the records as well as the paper book and the judicial precedents filed by the assessee in support of the various contentions. We have also perused the orders of the lower authorities. We now take up the various grounds raised one by one.
9.1 As far as the assessee’s appeal is concerned, Ground No. 1 of the revised grounds of appeal challenges the confirmation of addition of Rs.49,09,290/- on account of embezzlement of funds by the employees. As is evident from the orders of both the lower authorities, the fact of embezzlement has been accepted by the Assessing Officer as well as the ld. CIT(A). It is also a fact on record that the ld. CIT(A) has allowed relief in part on account of the recovery made against such embezzlement. It is seen that the ld. First Appellate Authority had called for two remand reports from the Assessing Officer and in the second remand report, the Assessing Officer has admitted that the payments of inflated expenses had been made on the basis of manipulated bills, but since they were not signed, they could not be considered as genuine. We have also gone though the copies of the manipulated bills placed at Pages 106 to 112 of the Paper Book against which the cheques have been issued and we note that these bills have been signed by different parties and these bills were also signed by officials of the society while passing the bills. Undisputedly, the funds were embezzled on account of manipulation made by the employees of the society. The fact that the Police was able to recover some of the amount also leaves no doubt that the funds were embezzled. It is also a fact on record that although inflated expenditure had been claimed in the Income and Expenditure Account on account of these inflated bills, in the consolidated Income and Expenditure Account, whatever amount had been recovered has been disclosed as income, which in this case comes to Rs.1,08,94,651/-out of the total embezzled funds of Rs. 1,58,03,11/-.
9.2 We have also gone through the various judicial precedents cited by the ld. AR on this ground and though the various judgments cited are in the context of the loss incurred on account of embezzlement by the employees in the course of carrying on of business activities, we are of the considered view that the principle as laid down in above said various judgments along with Board Circular No.35D (Supra) would be squarely applicable to the facts and circumstances of the case inasmuch as even in the present appeal, the embezzlement has occurred during the course of day to day carrying out of charitable activities by the assessee trust.
9.3 Reference may be made, at this juncture, to the judgment of Hon’ble Apex Court in the case of Nainital Bank Ltd. (Supra). Per this judgment, the Bank had incurred loss of cash due to dacoity and had claimed the same as deductible business expenditure. The Hon’ble Apex Court held that the retention of money in the bank premises carries with it the ordinary risk of it being subjected to embezzlement, theft, dacoity or destruction by fire and such risk of loss is incidental to the carrying on of the operation of the business of banking and, therefore, the loss of cash by dacoity was an admissible deduction. Undisputedly, no doubt has been cast on the embezzlement of funds and we are of the considered view that loss of Rs.49,09,290/- is a revenue loss and the same deserves to be allowed. Therefore, this ground of the assessee’s appeal stands allowed.
9.4 As far as assessee’s ground no.2 is concerned, this ground challenges the confirmation of addition of Rs.65,94,957/- on account of difference in interest income as per Form-26AS and the income disclosed in the return of income. The difference, as pointed out by the Assessing Officer, has not been disputed by the ld. AR. The argument of the ld. AR that the assessee has declared higher interest income in earlier years, and, therefore, the same should be set off in this year does not find favour with us. All the same, as has been stated by the Authorized Representative that the assessee has moved application u/s. 154 of the Act for AYs. 2013-14 and 2014-15 before the Assessing Officer to assess the correct income/interest in accordance with Form-26AS, we direct the same may be considered sympathetically after due examination of the various evidences. However, for the captioned assessment year, we decline to interfere and we dismiss Ground No.2 raised by the assessee.
9.5 As far as Ground Nos. 3 and 4 of the assessee’s appeal are concerned, it is the contention of the ld. AR that since the assessee Society continues to enjoy the benefit of registration u/s. 12A of the Act, i.e., the registration has not been cancelled, the assessee could not have been assessed to tax as an AOP. We further note that we have already deleted the addition of Rs.40,90,290/- on account of embezzled funds claimed as deduction and although we have confirmed the addition of Rs.65,94,957/- on account of difference in interest income, all the same, there is much more application of income by the assessee society and, therefore, the Assessing Officer was not justified in not allowing the benefit of exemption to the assessee u/s.11 of the Act and taxing the assessee under the status of AOP. Accordingly, Ground Nos. 3 and 4 stand allowed.
10. Coming to the appeal of the Department, the Department has also filed revised Grounds of Appeal along with the additional grounds and all the grounds relate to the non utilization of Rs.2.00 crores, which allegedly remained unutilized even after five years of accumulation of funds. The main thrust of argument by the ld. CIT(DR) is that objects as mentioned in Form-10 are general in nature. It is seen that it is an undisputed fact that the adjoining land was purchased for the purpose of extending the college building and, thus, it can be safely concluded that the purchase of land was in furtherance of object of education. This purchase of land was for a total consideration of Rs.3.78 crores. It is also not in dispute that the assessee society has been imparting education and it runs a law college as well as a school and, therefore, purchase of land adjoining the college for the purpose of extending the scope of activities of the college is definitely in furtherance of the objects of imparting of education. No doubt, Form-10 filed by the assessee did not specifically mention the object for which the funds were being accumulated. All the same, the Hon’ble Punjab and Haryana High Court in the case of CIT vs. Market Committee, Tohana (Supra) has laid down that merely because the assessee had mentioned development work in a general manner in Form-10, it cannot be said that the condition of Section 11(2) of the Act has not been fulfilled. While coming on this conclusion, the Hon’ble Punjab and Haryana High Court also referred to the judgment of the Hon’ble Delhi High Court in the case of Director of Income Tax vs. Mitsui & Co. (2008) 167 Taxman 43.
10.1 We have also drawn support from the order of the Chandigarh Bench of ITAT in the case of Rogi Kalyan Samiti vs. ACIT, Palampur reported in 174 TTJ 34, wherein the Coordinate Bench had held as under:
“The undisputed facts of the assessee are that the assessee society is registered under section 12A of the Act, hence is eligible to get exemption under section 11 of the Act. However, during the year, the assessee could not utilize funds to the extent of 85% and to comply with the requirements of section 11(2) of the Act, it filed Form No. 10 before the Assessing Officer, stating the object for accumulation of funds as “salary and welfare of patients”. On perusal of the bye laws of the assessee society, we see that hiring of staff and utilization of funds for welfare of patients are two objects of the society. Therefore, it cannot be said that the objects which are stated for the purpose of accumulation of funds under Form No. 10 are outside the objects as provided in the bye laws of the society. The contention of the Assessing Officer is that these objects are too vague and are not specific. We do not see any reason for not granting assessee the benefit of such accumulation given the fact that the accumulation is sought for the purpose of its objects on the basis of which it was granted registration under section 12A of the Act. We do not even find the objects stated in the Form No. 10 too vague either, as these are the objects as per the bye laws. Admittedly, the objects stated in Form No. 10 are not elaborately stated, but that cannot be the reason to deny the said benefit.”
10.2 Accordingly, in view of the above cited judgment, we uphold the order of the ld. CIT(A) and dismiss the grounds raised by the Department.
11. In the final result, the appeal of the asses see stands partly allowed, whereas the appeal of the Department stands dismissed.
(Order pronounced in the open Court on 06/06/2023)
Author Bio
