Case Law Details
ITO Vs Laxminarayan Mandir Trust (ITAT Mumbai)
ITAT Mumbai held that provisions of section 13(2)(a) of the Income Tax Act does not authorise the Revenue to compute the notional interest. Accordingly, addition of notional interest deleted.
Facts- The assessee is a religious and charity trust and maintains Laxminarayan Mandir at Vile Parle, Mumbai. The assessee is registered u/s. 12A of the Income Tax Act. The return filed by the assessee was selected for scrutiny and statutory notices u/s. 143(2) as well as Section 142(1) of the Act were issued and served on the assessee.
During the assessment proceedings, it was observed that the assessee has undertaken the redevelopment of the property of the trust, i.e. Mandir and adjustment chawls. The assessee has given Rs. 15,88,36,661 to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. On verification, it was found that the trustees of the assessee are directors of M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. having shareholding of 12.92% and 12.97% (conjointly more than 20%) in the said company. in which the trustees of the assessee were directors.
Accordingly, AO passed u/s. 143(3) of the Act came to the conclusion that the assessee has given loan to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. in the year 2011, which is related party u/s. 13(3) of the Act and the assessee has also violated section 11(5) of the Act. AO came to the conclusion that the trustees have taken benefit of the trust property and it is a clear-cut violation of the provisions of section 13(3) read with section 13(1)(c) and section 13(2)(a) of the Act and hence, the assessee is not eligible for exemption under section 11 of the Act.
Conclusion- Held that since no interest was charged by the assessee on the amount advanced to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd., the AO proceeded to compute the interest @10.5% by applying the rate at which interest was paid in A.Y. 2011-12 and made an addition of Rs. 1,66,77,849. It is pertinent to note that the only consequence of the case which falls within the four corners of section 13 is the denial of exemption u/s. 11 of the Act. Section 13(2)(a) of the Act also does not authorise the Revenue to compute the notional interest, in case no such interest is charged by the trust. Thus, in a case when no real interest was accrued or received nor the same was recorded by the assessee in its books of accounts, we find no merits in the findings of the learned CIT(A) in upholding the addition made by the AO by computing the notional interest and adding the same to the total income of the assessee. Accordingly, AO is directed to delete the addition of Rs. 1,66,77,849 on account of notional interest income. As a result, the grounds raised by the assessee are allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present cross–appeals have been filed challenging the impugned order dated 02/11/2022, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2013–14.
2. In its appeal, the Revenue has raised the following grounds:–
“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that there was no contravention of provision of Section 13 ignoring the fact that funds of the trust were diverted and used for the benefit of specified person as covered within the provision of section 13(1)(c)(ii) & section 13(2)(a) r. w.s. 13(3) (cc) of the Act.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in by deleting the addition of Rs.21,85,00,000/- which has been received by the assessee from M/s. Trinity Infratech Pvt. Ltd against the business project undertaken for re-development without permission of the Joint Charity Commissioner?
3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition on the technical ground that the amount of income received as proceeds against the redevelopment project had not crystallised only on the basis of the date of approval received from the Joint Charity Commissioner which has not been not received during the year but received subsequently?
4. Whether on the facts of the case and in law the Ld. CIT(A) was justified in deleting the addition made by the AO, ignoring the fact that the object of the trust is not money lending business. Further, these proceeds from the redevelopment project were the income of the trust received during the year and there was absence valid explanations and requisite permission from the charity commissioner, in view of which, the same had to be taxed in the hands of the assessee in the year of receipt?
5. Whether on the facts of the case and in law the Ld. CIT(A) was justified in ignoring the fact that the objects of the trust to carry out religious and charitable activities and in this background, the activity of the trust by being involved in re-development work comes under the activities within purview of a GPU which has been carried out on commercial lines and the same tantamount to a form of trade, commerce or business. Accordingly, such activities are covered by (para 253) interpretation of section 2(15) of the Act in the judgement of the Hon ‘ble Supreme Court dt. 19.10.2022 in A UDA Civil Appeal No. 21762 of 2017?
6. Whether on the facts of the case and in law the Ld. CIT(A) was erred in ignoring the fact that the objects of the trust to carry out religious and charitable activities. Accordingly, the receipts form the venture of redevelopment are commercial receipts and the same being diverted to the benefits of persons are covered within the provision of section 13(1)(c)) & section 13(2)(a) r. w.s. 13(3) (cc) under the Income-tax Act and not merely on the basis of the receipt of sanction and/or the date of approval given by the Joint Charity Commissioner in respect of the activity for re-development?”
3. While, the assessee has raised the following grounds in its appeal:–
“On facts an in the circumstances of the case, the learned CIT(Appeals):
(i) The learned CITA erred in holding that the appellant was chargeable to tax on notional income held as chargeable income by the Assessing Officer.
(ii) The learned CITA ought to have appreciated that it was not the claim of the AO that the Trust had received any such income or was due under any contract and therefore such interest could not have brought to charge:
(iii) The learned CITA ought to have appreciated that it was not under the Scheme of Income tax law that any income which is not received nor accrued could be charged to tax:
(iv) The learned CITA ought to have appreciated for violation of Section 13 of the IT Act, there could be any punishment meted out to the Trustees under various laws, including recovery of such loss to the Trust from Trustees, but the IT Act has no provision to punished the Trust except that the Trust loses exemption of income to tax u/s 11 of the Act. The provisions do not stipulate that the loss to the Trust as could be estimated by the AO should be brought to tax.
(v) The learned CITA erred in not giving an opportunity of hearing to the appellant before dismissing the appeal in regard to assessment of notional interest.
The appellant craves leave to add, alter, vary, abridge or delete any of the above grounds of appeal.”
4. The brief facts of the case, as emanating from the record, are that the assessee is a religious and charity trust and maintains Laxminarayan Mandir at Vile Parle, Mumbai. The assessee is registered under section 12A of the Act. For the year under consideration, the assessee filed its return of income on 17/10/2013 declaring total income at Rs. Nil. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee has undertaken the redevelopment of the property of the trust, i.e. Mandir and adjustment chawls. It was further observed that in this connection, the assessee trust has taken advances from certain persons amounting to Rs. 14.30 crore. It was further observed from the balance sheet that the assessee has given Rs. 15,88,36,661 to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. On verification, it was found that the trustees of the assessee are directors of M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. having shareholding of 12.92% and 12.97% (conjointly more than 20%) in the said company. Accordingly, notice was issued to the assessee to show cause as to why the act of giving advances by the assessee trust should not be treated as a violation of the provisions of section 13(3) and exemption under section 11 of the Act be not denied, since the advances have been given to the specified person as per the provisions of section 13(3) of the Act. In response thereto, the assessee submitted the copy of the MOU on the basis of which the assessee has stated to have advanced the money to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. To verify the submission of the assessee, notice under section 133(6) of the Act was also issued to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. In response thereto, M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. submitted that on 30/03/2011 the said amount was received from the assessee as a loan from them and interest has been paid to the assessee. It was further submitted that for the financial year ending 31/03/2011, interest of Rs. 66,62,810 has been paid to the assessee. From the perusal of aforesaid submissions, the Assessing Officer (“AO”) vide order dated 31/03/2016 passed under section 143(3) of the Act came to the conclusion that the assessee has given loan to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. in the year 2011, which is related party under section 13(3) of the Act and the assessee has also violated section 11(5) of the Act. The AO further found that the amount taken from the assessee as a loan was converted into advance on the basis of the MOU and the said fund has been further advanced to other companies wherein the trustees and the relative are directors. The AO also found that till date no registered agreement has been entered between the assessee and M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. Further, the AO disagreed with the submission of the assessee that the amount of Rs. 15,88,36,661 was given to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. as advance and accordingly treated the same as loan to the company. It was also held that M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. has not till date executed any project of property development/redevelopment and therefore it cannot be said that the assessee has given any advance to the company for the redevelopment of the property. The AO also held that the assessee does not fall under the exceptions provided in the proviso to section 13(1)(c) of the Act. Accordingly, the AO came to the conclusion that the trustees have taken benefit of the trust property and it is a clear-cut violation of the provisions of section 13(3) read with section 13(1)(c) and section 13(2)(a) of the Act and hence, the assessee is not eligible for exemption under section 11 of the Act.
5. During the assessment proceedings, the AO also observed that the assessee has obtained permission from the learned Charity Commissioner whereby the assessee was allowed to enter into a development agreement with M/s Trinity Infratech Private Limited, and as per the agreement, the developer was to construct the temple costing around Rs. 1 crore and hall admeasuring 400 sq.mt. in addition to the temple costing around Rs. 50 lakh. Further, upon redevelopment the developer shall construct 11 storied building out of which 50% of the constructed area, i.e. 1st to 5th floor and part of the 6th floor, a total admeasuring 1669.45 sq. mt., was to be given to the assessee and the balance constructed area of equivalent measurement from 6th floor to 11th floor was to be kept by the developer. It was further observed from the balance sheet and other details filed by the assessee that the assessee was in receipt of an amount of Rs. 14.30 crore and a deposit of Rs. 50 lakh from the said developer. In view of the above, the assessee was asked to explain the nature of the said receipts. The AO also issued a notice under section 133(6) of the Act to M/s Trinity Infratech Private Ltd. In response to the said notice, M/s Trinity Infratech Private Ltd submitted that as per the development agreement, it completed the construction in the year 2013. Further, as per the development agreement, the trust was entitled to receive 10 flats in the building, which it agreed to purchase from the trust subject to the approval of the learned Charity Commissioner for a total consideration of Rs. 16.50 crore. The AO, vide assessment order passed under section 143(3) of the Act, came to the conclusion that the assessee decided to sell its share of the flats for a total consideration of Rs 16.50 crore, and accordingly, the receipt of Rs. 14.30 crore is a part of the consideration to be paid to the assessee for purchase of the property. The AO further held that the transaction with M/s Trinity Infratech Private Ltd is complete as the assessee has received the entire consideration from the sale of property except a small amount of around Rs. 1.70 crore. Accordingly, the AO held that the assessee should have offered the income from the said transaction in the year under consideration, which was merely shown as advance by the assessee in its balance sheet. By considering the cost of construction of the temple of Rs. 1 crore and hall of Rs. 50 lakh, the AO came to the conclusion that the total consideration received from the sale of the property to M/s Trinity Infratech Private Ltd is Rs. 18 crore. Further, on the basis that the assessee could not explain the nature of the amount of Rs. 3.85 crore shown in the balance sheet as advance, the said amount was also treated as being related to the sale of the property at Vile Parle. Accordingly, an amount of Rs. 21.85 crore was considered as income from the sale of the property and added to the total income of the assessee.
6. As the assessee’s submission that the loan to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. is in the nature of advance for joint development of the property was rejected, the AO proceeded to compute the interest at the rate of 10.5% on the basis of interest income of Rs. 66,62,810 declared in the assessment year 2011-12. Since the advance till 3 1/03/2013 was at Rs. 15,88,36,661, the AO computed the notional interest income of the assessee at Rs. 1,66,77,849 being 10.50% of the aforesaid advance and added the same to the total income of the assessee.
7. The learned CIT(A), vide impugned order, granted partial relief to the assessee and deleted the addition of Rs. 21.85 crore on the basis that the learned Charity Commissioner has granted the sanction for the sale of 10 flats vide its order dated 31/03/2021 and therefore the transfer/sale of flats constructed by M/s Trinity Infratech Pvt. Ltd. has not taken place in the relevant assessment year. However, the learned CIT(A) upheld the addition of Rs. 1,66,77,849 being the notional interest not charged on the loan given by the assessee to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. in the year under consideration. Being aggrieved, both assessee and Revenue are in appeal before us.
8. We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee trust was formed under the Bombay Public Trusts Act, 1950, and is also registered under section 12A of the Act. The trust owns a property admeasuring 1920.29 sq.mt. in Vile Parle (West), Mumbai, which included a Mandir and three chawls rented out to three tenants. The said property was settled vide trust deed dated 29/10/1954 along with certain jewelry, ornaments, and items for worship. The object of the trust was to run Laxmi Narayan Mandir erected on the aforesaid land. Subsequently, the scheme was framed by the Assistant Charity Commissioner vide order dated 09/10/1998, whereby the objects of the trust were expanded to include medical relief and education. The trust had its revenue source from rent and meagre donations it was getting. As per the assessee, around 2006, it was thought to develop the land to its optimum potential available by way of FSI under Development Control Regulations at Mumbai and enhance the revenue source. Therefore, it was decided to allow acceptable developers to develop the land on a sharing-of-space basis. Since M/s Trinity Infratech Pvt. Ltd. showed interest in developing the property at its cost and gave the proposal to the trust, the assessee made an application to the Charity Commissioner for appointing M/s Trinity Infratech Pvt. Ltd. as developer and to grant approval for development of the property of the trust as per the provisions of Bombay Public Trust Act, 1950. The learned Charity Commissioner vide its order dated 15/11/2008 permitted the trustees of the assessee to transfer development rights of the trust property in favour of M/s Trinity Infratech Pvt. Ltd. on the condition that M/s Trinity Infratech Pvt. Ltd. shall re-develop/renovate the Mandir and hall at its own cost up to the tune of Rs. 1 crore. Further, upon redevelopment of the chawl structure, M/s Trinity Infratech Pvt. Ltd. shall give 50% of the constructed area from the newly constructed building, i.e. from the 1st to 5th floor and part of 6th floor to the assessee. It was also directed that M/s Trinity Securities Pvt. Ltd. shall bear all the costs of construction/redevelopment. Further, the security deposit amount shall be deposited in the government securities on a Nationalised/Scheduled Bank.
9. As per the assessee, it paid compensation aggregating to Rs. 2,43,00,000 to the three tenants to vacate the chawls occupied by them. In order to raise the required finance, the assessee intended to sell its share of flats to the developers and others against advances and adjust the same against the final consideration upon the actual sale of the said flats after the development was complete. Accordingly, in March 2009, one Mrs. Arundhati Shelgikar chose to buy one flat upon construction and advanced a sum of Rs. 1.61 crore to the assessee. Further, M/s Trinity Securities Pvt. Ltd. agreed to buy eight flats in the new building to be constructed for a total consideration of Rs. 16.50 crore. Similarly, one Mogra family agreed to buy two flats for Rs. 2.75 crore each and they paid the said amount to the trust as an advance on or about 04/12/2013. The development was complete and an occupation certificate was obtained from the municipal authorities on 24/01/2013.
10. As is evident from the record, the AO considered an aggregate amount of Rs. 21.85 crore (comprising Rs. 14.30 crore from the developer, Rs. 1.50 crore as the cost for renovation of the temple and hall, and Rs. 3.85 crore shown as advance against sale of space) as income of the assessee from sale of property during the year under consideration and added the same to the total income of the assessee. On the other hand, as per the assessee Rs. 14.30 crore received from the developer was advanced in respect of the sale of flats and the transaction of sale concluded only after the grant of approval by the learned Charity Commissioner vide order dated 31/03/2021. Similarly, Rs. 3.85 crore was in respect of the two flats agreed to be sold to the Mogra family.
11. Before proceeding further, it is relevant to note that under section 36 of the Bombay Public Trust Act, 1950, no sale, exchange, or gift of any immovable property, inter-alia, shall be valid without the previous sanction of the learned Charity Commissioner and the sanction may be accorded subject to such conditions as the Charity Commissioner may think fit to impose, regard being had to the interest, benefit of protection of the trust. From the perusal of the order dated 31/03/2021 passed by the learned Charity Commissioner, Greater Mumbai Region, Mumbai, we find that the assessee filed an application seeking permission to sell out the trust property which was rejected vide order dated 27/01/2021. Thereafter, the assessee filed a review application before the learned Charity Commissioner, which was disposed off vide aforesaid order dated 31/03/2021. We find that the learned Charity Commissioner, vide aforesaid order, granted sanction to sell two flats of the trust to Mogra family for an enhanced consideration of Rs. 3,57,63,200 each. Further, the learned Charity Commissioner granted sanction to sell the eight flats to the developer for a total enhanced consideration of Rs. 28,61,05,600. The learned Charity Commissioner noted that the sale of the flat to Mrs. Arundhati Shelgikar was already approved by its predecessor vide order dated 20/06/2019 for a total enhanced consideration of Rs. 2,61,00,000. It is pertinent to note that the learned Charity Commissioner directed the purchasers to pay enhanced consideration considering the rates of the property as per the Ready Reckoner published for the year 2021 by the Government of Maharashtra. Thus, from the above, it is evident that the sale of flats to Mrs. Arundhati Shelgikar, Mogra family, and the developer were approved by the learned Charity Commissioner in the financial years 2019-20 and 2020-21 at a higher consideration than initially agreed amongst the parties. Therefore, in view of the provisions of the Bombay Public Trust Act, 1950, we do not find any merits in the findings of the AO that even prior to the aforesaid orders passed by the learned Charity Commissioner the flats were sold by the assessee in the year under consideration and the advance received can be added in the hands of the assessee as income from the sale of property.
12. Further, the agreed cost of renovation of the Mandir and hall of Rs. 1 crore and Rs. 50 lakhs was also treated as the sale consideration by the AO without any basis. In view of the order passed by the learned Charity Commissioner, wherein after taking into consideration the fact that the developer has paid Rs. 16.50 crore, the learned Charity Commissioner directed the developer to pay a total enhanced consideration of Rs. 28,61,05,600, we find no merits in the conclusion reached by the AO in treating Rs. 18 crore as the sale consideration of the eight flats sold by the assessee. Further, as noted above, the amount of Rs. 3.85 crore, which was also considered as the income from the sale of property, was advanced by the Mogra family towards the sale of two flats by the assessee, which were ultimately sold after the aforesaid order dated 31/03/2021 passed by the learned Charity Commissioner for an enhanced consideration of Rs. 3,57,63,200 for each flat. Therefore, we are of the considered view that the AO not only considered the incorrect amount of sale consideration in respect of the flats sold by the assessee but also erred in taxing the advance in the year under consideration, particularly when the sale can only be considered to be valid after the sanction by the learned Charity Commissioner in view of the provisions of Bombay Public Trust Act, 1950, which in the present case was granted in the financial years 2019-20 and 2020-21. Since the flats were not sold by the assessee in the year under consideration, therefore, no addition can be made in this year. Accordingly, we find no infirmity in the impugned order passed by the learned CIT(A) in deleting the addition of Rs. 21.85 crore made by the AO. However, it will be open to the AO to consider the issue of taxability of the sale consideration, as per law, in the year in which the sale transaction was concluded pursuant to the order passed by the learned Charity Commissioner. Accordingly, the impugned order passed by the learned CIT(A) on this issue is upheld and the appeal by the Revenue is dismissed.
13. As regards the loan of Rs. 15,88,36,661 given by the assessee to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd., we find that no information has been brought on record to dispute the findings of the AO that the trustees of the assessee were having shareholding of 12.92% and 12.97% (conjointly more than 20%) in the said company. As per the AO, since the trustees of the assessee had more than 20% shareholding in M/s Ramgopal Ganpatrai & Co. Pvt. Ltd., the grant of loan to the said company has violated the provisions of section 13(1)(c) of the Act. Further, as per the AO, the loan of Rs. 15,88,36,661 given by the assessee to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. was subsequently moved in the accounts to advance and the assessee did not charge any interest thereon, despite the fact that in the assessment year 2011-12 the assessee received an interest at 10.5% on the same. Therefore, it was alleged that the assessee has violated the provisions of section 13(2)(a) of the Act since adequate security has not taken for the advance given to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd., in which its trustees are directors. Accordingly, the AO held that the assessee is not eligible for exemption under section 11 of the Act. On the other hand, it is the plea of the assessee that M/s Ramgopal Ganpatrai & Co. Pvt. Ltd. proposed to redevelop the property known as “Samudra Gaurav” in Mumbai and the assessee took interest in intending to invest the said amount advanced to the company in redeveloping the property and the said company intended to use the funds on such redevelopment. Accordingly, as per the assessee, its case is not covered under the provisions of section 13 of the Act. We find that the learned CIT(A) has not recorded any specific finding on the conclusion of the AO regarding assessee’s eligibility under section 11 of the Act. Since in its appeal, the assessee has not raised any ground challenging the findings of the AO regarding the eligibility under section 11 of the Act, therefore, we are keeping this issue open.
14. During the hearing, the learned Departmental Representative (“learned DR”) vehemently argued that exemption under section 11 is applicable to a trust that is wholly charitable or wholly religious. However, since the assessee is partially charitable and partially religious trust, the benefit of section 11 of the Act is not available to the assessee. It is evident from the record that the submission now made by the learned DR before us was not the basis of the AO for the denial of exemption under section 11 of the Act to the assessee in the present case. In this regard, the following observations of the Special Bench of the Tribunal in Mahindra and Mahindra Ltd vs DCIT, [2009] 30 SOT 374 (Mumbai) (SB), become relevant:-
“In our considered opinion the learned Departmental Representative has no jurisdiction to go beyond the order passed by the Assessing Officer. He cannot raise any point different from that considered by the Assessing Officer or CIT(A). His scope of arguments is confined to supporting or defending the impugned order. He cannot set up an altogether different case. If the learned D.R. is allowed to take up a new contention de hors the view taken by the Assessing Officer that would mean the learned A.R. stepping into the shoes of the CIT exercising jurisdiction under section 263. We, therefore, do not permit the learned D.R. to transgress the boundaries of his arguments.”
15. Therefore, on this preliminary basis only, as noted by the Special Bench of the Tribunal in the aforesaid decision, the contention of the learned DR is rejected.
16. Since no interest was charged by the assessee on the amount advanced to M/s Ramgopal Ganpatrai & Co. Pvt. Ltd., the AO proceeded to compute the interest @10.5% by applying the rate at which interest was paid in the assessment year 2011-12 and made an addition of Rs. 1,66,77,849. It is pertinent to note that the only consequence of the case which falls within the four corners of section 13 is the denial of exemption under section 11 of the Act. Section 13(2)(a) of the Act also does not authorise the Revenue to compute the notional interest, in case no such interest is charged by the trust. Thus, in a case when no real interest was accrued or received nor the same was recorded by the assessee in its books of accounts, we find no merits in the findings of the learned CIT(A) in upholding the addition made by the AO by computing the notional interest and adding the same to the total income of the assessee. Accordingly, AO is directed to delete the addition of Rs. 1,66,77,849 on account of notional interest income. As a result, the grounds raised by the assessee are allowed.
17. In the result, the appeal by the Revenue is dismissed, while the appeal by the assessee is allowed.
Order pronounced in the open Court on 18/09/2023
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