All India J.D. Educational Society, New ... vs Assessee

M/s All India J.D. Educational Society, vs Dy.Director of Income Tax, NU-23A, Pitampura, Inv. Cirle-1, Delhi. New Delhi-110034 (Appellant) (Respondent) Appellant by: Shri P.K. Jain,CA Respondent by : Shri P. Dankanungna, DR

Date of Hearing: 22.1.2015

Date of pronouncement: 23.3.2015

ORDER

PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

The above appeal has been preferred by the assessee against the order of

CIT(A)-XII, New Delhi dated 25.03.2013 pertaining to AY 2006-07 in Appeal

No.194/08-09 for AY 2006-07.

2. The grounds raised by the assessee read as under:-

"1. That having regard to the facts and circumstances of the case, Ld. CIT -A has erred in law and on facts by upholding the orders of the Deputy Director of Income Tax -E,

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Inv Cir-I, New Delhi passed u/s 143(3) resulting in huge demand.

2. That the authorities below has relied upon the findings of the Learned DGIT (E) for rejecting the application of the appellant filed u/s 10(23)(c) of the IT Act, 1962; whereas in the appellant's case Hon'ble Apex Court vide their order dated 2-4-2012, has held that the findings of the order of DGIT(E) are restricted to AY 2007-08 as the Hon'ble Bench comprising Chief Justice has elaborated in their order that;

"We uphold the order of rejection on the grounds of limitation as also on merits for assessment year 2007-08. However we make it clear that the Order passed by us today in this case will not preclude the assessee from making application for approval under Section 10(23C)(vi) or Section 11 of the Act in future and if such an application is made, the competent Authority will decide the matter uninfluenced by this Order. "

In view of the said order of the Hon'ble Supreme Court, CIT -A's order upholding the contention of the AO under the influence of the order of DGIT -(E) is beyond the jurisdiction and against the directions of Hon'ble Supreme Court, therefore, the impugned order in appeal is liable to be quashed as bad in law and also contrary to the directions of Hon'ble Apex Court.

3. Ld. CIT -A erred in upholding the contention of Ld. DDIT(E) that the activities of the assessee society are found to be for profit and not for charitable purposes and is not justified in declining the exemptions Vis 11 & 12 of the Income Tax Act whereas the exemption Vis 11 & 12 is still available and not cancelled as on the date of the assessment. That the Ld CIT -A on the one hand admitted at para 1 on page 6 that;

"the action of AO not allowing exemption u/s 11 & 12 is beyond the jurisdiction exercised by him during the assessment proceedings" whereas on the other hand the CIT -A upheld the order of AO, therefore, the order of CIT -(A) is liable to be quashed as not legal and contrary to her own finding as well.

4. That having the regard to the facts and circumstances of the case, Ld. CIT -(A) erred in upholding the addition of Rs. 75,05,000/- as Unexplained Cash Credit' in the hands of the

2 ITA No.3317/Del/2013 AY: 2006-07

assessee Society u/s 68 of the Income Tax Act, 1961. Further a sum of Rs. 4,05,000/- was also upheld to be added as Other Donation to the income of the Society which is already included in total Donation figure of Rs. 75,05,000/- whereas the appellant has submitted all the documents with regards to each donor. The assessee has already discharged its onus by providing the details regarding Identity of the Donor indicating name, address, PAN and Income Tax Particulars of the person making such donation. Therefore, the disallowance of the donation and charging the same to tax u/s 68 is also not sustainable in law and liable to be deleted.

5. That having the regard to the facts and circumstances of the case, Ld. CIT-A erred while upholding the contention of the DDIT(E) regarding excess salaries being charged with the intent of siphoning off funds of the appellant. Whereas the appellant contended that subsequent to the scrutiny of salary registers of society by the DGIT(E), the appellant got the information about the embezzlement and fraud of Rs.

1,59,9421-, which might have taken place and it is not an act with the intent of siphoning off funds. The finding of DGIT(E) were also not conclusive being decided without the expert advice. The embezzlement and fraud so stated does not in any way establish the intent of siphoning of funds by the appellant and accordingly the said findings are to be quashed.

6. That having regards to the facts and circumstances of the case, Ld CIT -A has erred in law and on facts by upholding the contention of Ld. DDIT(E) by not allowing the Vehicle hiring charges of Rs.230001- per month, which were paid on the rates lower than the market value of the services and to avoid the huge capital cost in the Vehicles. The DDIT (E) without verifying the factual details disallowed the expense.

7. That having regard to the facts and circumstances o f the case, the ld. CIT -A erred while upholding the order of DDIT(E) alleging that the expenditure shown on account of construction of College and Hospital building and hostel expenses are inflated and the allegation that trust funds have been siphoned off. Whereas all the expenditures are properly vouched and find place in the books of accounts of the appellant and duly produced for verification during the remand report before the Assessing officer as well. Therefore,

3 ITA No.3317/Del/2013 AY: 2006-07

the contention of the AO is out of proportion and to be quashed.

8. That having regard to the facts and circumstances of the case, Ld. CIT -A has erred in law and on facts by upholding the contention of Ld. DDIT(E) in passing the order by not allowing the depreciation claim.

9. That having regards to the facts and circumstances of the case, Ld CIT-A has erred in law and on facts in upholding the order of the DDIT(E) estimating the income of the appellant society at Rs.59,60,363/- calculated at 50% of the gross receipts of the society for Rs.l,19,20,725/-, which is wholly unjustified and bad in law."

3. Briefly stated the facts giving rise to this appeal, as noted by the first

appellate authority viz. CIT(A), are that the assessee was society registered on

14.8.2002 with the main object of setting up and running Hospitals and to set up

educational institution, which was granted registration under Section 12-A of

the Income Tax Act, 1961 (for short the Act) as a Charitable organization vide

approval letter dated 03.09.2004 w.e.f. 1.4.2003 and was also granted

registration as Charitable Organization u/s 80-G of the Act vide order dated

26-11- 2007 valid upto 31-03-2010. For the year under consideration, the

assessee filed its return of income and the case was selected for scrutiny and a

notice u/s 143(2) of the Act on 24.09.2007 and 9.7.2008 were issued to the

assessee. The assessee society had also applied for exemption u/s 10(23C) (vi)

before the Director General of Income Tax(Exemption), Delhi on 05-11-2007,

which was rejected on 28-11-2008 by the Learned DGIT(E) for alleged

siphoning of the funds of the Society.

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4. During the assessment proceedings for the year under consideration, the

AO made certain adverse remarks in respect of the Corpus donations, Salary,

and Cash Expenses for Construction & Hostel Expenses, Vehicle Hiring

Charges and the Depreciation on Fixed Assets and rejected the Books of

Accounts. The AO framed the assessment of income, by applying rate of

depreciation and assessed the income on estimate basis by applying rate of 50%

of the gross receipts of Rs.1,19,20,725/-, by estimating net taxable income at

Rs. 59,60,363/- and also disallowed the claim of depreciation. The AO

completed the assessment at the taxable income of Rs.1,38,70,363/- as against

nil income returned by the assssee.

5. Being aggrieved with the above assessment order, the assessee filed an

appeal before the CIT(A) which was also dismissed by passing the impugned

order. Now, the empty handed assessee is before this Tribunal with the grounds

as reproduced hereinabove.

Ground No. 1, 2 and 3

6. Apropos these grounds, ld. AR submitted that the Ld. CIT-A has erred in

law and on facts by upholding the orders of the DGIT(E), dated 31.12.2008

passed u/s 143(3) resulting in unsustainable huge demand. Ld. AR further

contended that the authorities below have relied upon the findings of the

Learned DGIT (E) for rejecting the application of the appellant filed u/s

10(23C) of the Act, ignoring the directions of Hon'ble Supreme Court in the 5 ITA No.3317/Del/2013 AY: 2006-07

order dated 2-4-2012, wherein it was held that the findings of the order of

DGIT(E) are restricted only to AY 2007-08. Ld. AR has drawn our attention

towards Paper Book page no. 41 and 42 of the assessee and submitted that

Hon'ble Supreme Court, while upholding the order of rejection on the ground of

limitation and merits for AY 2007-08 made it clear that the order passed by

their lordships in that case will not preclude the assessee from making an

application for approval u/s 10(23C)(vi) or section 11 of the Act in future and if

such an application is made, then the competent authority will decide the matter

without being influenced by the order of the Hon'ble Apex Court. Ld. AR

further contended that the CIT(A) was not justified in upholding the contention

of the AO which was purely influenced by the order of the DGIT(E) and was

against the directions of the Hon'ble Supreme Court and, therefore, the

impugned order is contrary to the directions of the Hon'ble Supreme Court

liable to be quashed.

7. Ld. AR further submitted that the Ld. CIT(A) has erred in upholding the

contention of Ld. DGIT(E) that the activities of the assessee society are found to

be for earning profit and not for charitable purposes and is not justified in

declining the exemptions u/s 11 & 12 of the Income Tax Act, specially when

registration u/s 12A of the Act is still in force and available for the assessee and

which has not cancelled as on the date of the assessment. Ld. AR has also

drawn our attention towards first paragraph at page 6 of the impugned order and

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submitted that while the CIT(A) has held that action of the AO in allowing

exemption u/s 11 and 12 of the Act is beyond the jurisdiction exercised by him

during the assessment proceeding, then the first appellate authority was not

correct in upholding the order of the AO which was liable to be quashed as not

legal and contrary to the findings of the CIT(A).

8. To support above contentions, ld. AR has placed reliance on the decision

of ITAT Allahabad Bench in the case of Sunbeam English School Society vs

129 ITD 299 (Allahabad Tribunal), decision of ITAT Jaipur Bench in the

case of Arya Sanstha vs CIT (2012) 013 ITR 0491 (Tribunal Jaipur) and

decision of Hon'ble Jurisdictional High Court of Delhi in the case of

DIT(E) v Moti Bagh Mutual Aid Education 298 ITR 0190 (Del), decision of

Hon'ble Delhi High Court in the case of DIT vs Bharat Kalyan Pratishthan

(2002) 257 ITR 0609 (Del), DIT(E) vs Keshav Social and Charitable

Foundation (2005) 278 ITR 152 (Del), decision of Hon'ble Bombay High

Court in the case of CIT vs Institute of Banking (2003) 264 ITR 110

(Bombay) and decision of ITAT Delhi in the case of Aryan Educational

Society vs CIT 281 ITR AT 0072 (ITAT Delhi).

9. Apropos ground no. 1, 2 and 3, ld. DR, supporting the assessment order,

submitted that the AO was quite justified in taking cognizance of the order of

the DGIT(E) and holding that the activities of the assessee society are not

genuine and are not being carried out in accordance with the objects of the

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Trust. Ld. DR further contended that the AO also noted that the assessee

society was found to have violated the provisions of section 12AA(3) of the Act

and that the proposal for withdrawal of registration u/s 12A of the Act has

already been sent to DIT(E) on 2.12.2008 and therefore the proceeding for

cancellation of registration was started by DIT(E) by issuing notice dated

4.12.2008. Ld. DR further contended that, under these facts and circumstances

the AO rightly proceeded to assess the income of the assessee without allowing

the benefit of exemption as provided in section 11 and 12 of the Act and the

assessee society was rightly assessed in the status of Association of Persons

(AOP).

10. Ld. AR also placed rejoinder to above submissions of the department and

submitted copies of the decision of ITAT 'A' Bench in ITA No. 1647/Del/2009

dated 17.6.2011 and in ITA No. 1607/Del/2013 for AY 2009-10 dated

18.7.2014 and submitted that the registration us/ 12AA of the Act was granted

to the assessee society vide order dated 3.9.2004 which was cancelled by the

DIT(E) and the same was set aside by the Tribunal with a further direction to

decide the matter afresh. Ld. AR vehemently contended that the department has

not passed any order in the second round of proceedings as per directions of the

Tribunal order dated 17.06.2011 (supra) and the order granting registration u/s

12AA r/w section 12AA(1)(v) of the Act dated 3.9.2004 w.e.f. 1.4.2003 is in

force till date. Ld. AR has further drawn our attention towards order of the

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ITAT "A" Bench Delhi for AY 2009-10 dated 18.7.2014 (supra) and submitted

that the Tribunal has held that as the registration of assessee u/s 12A of the Act

is in force, therefore, the order of the AO, as confirmed by the CIT(A) for that

assessment year viz. 2009-10, is not sustainable and the matter has been

restored to the file of AO for fresh adjudication in accordance with law and the

AO has been directed to compute the income to the assessee society by granting

exemption u/s 11 of the Act.

11. On careful consideration of above rival submissions of both the sides and

perusal of the relevant material placed before us, inter alia assessment order,

impugned order of the CIT(A), order of the Tribunal dated 17.6.2011 (supra)

and recent order of the Tribunal for AY 2009-10 dated 18.7.2014 (supra), at the

very outset, we note that the order of cancellation of registration u/s 12A of the

Act has been set aside by the Tribunal and the issue was restored to the file of

DIT(E) for a fresh adjudication but we are unable to see or note any fact that

registration dated 4.9.2003 granted for the assessee w.e.f. 1.4.2003 has been

cancelled or withdrawn by the department by following procedure u/s 12AA(3)

of the Act. On a specific query from the Bench, ld. DR fairly accepted that to

the best of his knowledge, registration granted to the assesssee u/s 12AA of the

Act has not been cancelled or withdrawn during the second round of

proceedings before the DIT(E). In this situation, we can safely presume that the

registration u/s 12A r/w 12AA(1) of the Act dated 3.9.2004 w.e.f. 1.4.2003 is

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still in force and the DIT(E) has not taken any action in pursuance to the order

of the Tribunal dated 17.6.2011 (supra).

12. From the first and second para at page 6 of the impugned order, we note

that the CIT(A) has held that the action of the AO in not allowing the exemption

u/s 11 and 12 of the Act is beyond the jurisdiction exercised by him during the

assessment proceedings. The relevant observations and conclusion of the

CIT(A) in these operative paragraphs read as under:-

"The appellant submitted that the order of the A.O was prima facie, influenced by the order of DGIT(E) as stated in the submission. Further, it is also submitted that Order of DGIT u/s 10(23C)(vi) cannot be the basis of cancellation of Certificate Reg. u/s-12A as decided by the Hon'ble Allahabad HC in the case of Sunbeam English School Society Vs CIT,129 ITD 299(All) wherein it was held "that the learned CCIT, Allahabad had rejected the application for grant of exemption under section 10(23C)(vi) of the Act. In the present case, as we have already pointed out that the assessee was engaged in the activities of providing the education since its inception and the said activity comes under the purview of charitable activities as per the provisions contained in section 2( 15) of the Act. Secondly the rejection of application under section 10(23C)(vi) of the Act cannot be a reason to cancel the registration under section 12AA(3) of the Act.

On going through the detailed submission, I considered that the findings of the DGIT(E) were followed by the AO during the assessment proceedings without further examining the same. The assessing officer is duty bound to make proper examination and inquiry in such matters. The conclusions drawn by the DGIT were in the nature of creation of doubts which also could not be properly established and the AO just followed those remarks. The salary registers were also impounded for further verification and examination by forensic department, whereas the said action was also incomplete and without the report from expert, the appellant 10 ITA No.3317/Del/2013 AY: 2006-07

was held as guilty. The assessment proceedings are independent proceedings where the findings are to be of the assessing officer. Therefore I consider the allegations of the DGIT should be excluded from the assessment order and the effect of withdrawal of exemption u/s 11 & 12 was premature, as the AR place before me that the order of cancellation of registration dated 16-03-2009 (after the date of Asstt Order 31.12.2008) has also been set aside by the Hon'ble ITAT, New Delhi vide their order dated 17-06-2011. Therefore the action of the AO not allowing the exemption u/s 11 & 12 is beyond the jurisdiction exercised by him during the assessment proceedings. "

13. At this stage, we also respectfully take cognizance of the decision of

ITAT "A" Bench Delhi for AY 2009-10 dated 18.7.2014 (supra) wherein it has

been held thus:-

"5. The order granting registration u/s 12A read with section 12AA(1)(v) of the Act on 3rd September,2004 w.e.f. 01/04/2003 is in force. The DIT(E)'s has not taken any action after the order of the Tribunal ITAT in ITA No. 1647(Del) of 2009 dated 17/06/2011. As the registration of the assessee u/s 12A is in force, we set aside the order of the AO as confirmed by the ld. CIT(A) and restore the matter to then file of the AO for fresh adjudication in accordance with law. As the registration u/s 12A is in force, the AO is directed to compute the income by granting exemption u/s 11 to the assessee."

14. We further take note of the order of the Supreme Court available at pages

41 and 42 of the Paper Book of the assessee wherein the order of the DGIT(E)

rejecting the application of the assessee filed u/s 10(23C)(vi) of the Act has

been upheld for AY 2007-08 but their lordships have also made it clear that the

order passed by Hon'ble Apex Court in that case will not preclude the assessee

from making an application for approval u/s 10(23C)(vi) or section 11 of the

Act in future and if such an application is made, then the competent authority 11 ITA No.3317/Del/2013 AY: 2006-07

will decide the matter without being influenced by this order of Hon'ble Apex

Court. In this situation, we respectfully note that even the Hon'ble Supreme

Court has allowed the assessee to file application u/s 10(23C)(vi) or section 11

of the Act and the revenue authorities have been directed to decide the same

without being influenced by the order of Supreme Court for AY 2007-08.

15. Under the above noted facts and circumstances of the present case, we are

of the considered view that the CIT(A) erred in upholding the contention of the

AO in the assessment order which were influenced by the order of DGIT(E). At

the cost of repetition, we are inclined to hold that since the registration granted

for the assessee on 3.9.2004 w.e.f. 1.4.2003 is still in force and the DIT(E) has

not taken any action in pursuance to the order of the Tribunal dated 17.6.2011

(supra), then it is an obvious fact that the registration of the assessee society u/s

12A of the Act is in force, therefore, the claim of the assessee for grant of

exemption u/s 11 of the Act cannot be rejected merely on the basis of order of

the DGIT(E) which rejected application for registration u/s 10(23C)(vi) of the

Act. At the same time, we also conclude that the exemption u/s 11 and 12 of

the Act cannot be denied only on the basis of rejection of application of the

assessee filed u/s 10(23C) of the Act. Before we part, we may point out that the

CIT(A) in the impugned order has clearly held that action of the AO in allowing

exemption u/s 11 and 12 of the Act is beyond jurisdiction exercised by him

during the assessment proceedings and at the same time, the CIT(A) has upheld

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the action of the AO which rejected the claim of the assessee for exemption u/s

11 of the Act, this contradictory observation and conclusion of first appellate

authority is not permissible and sustainable. Therefore, action of the authorities

below is not sustainable. Accordingly, grounds no.1, 2 and 3 of the assessee are

hereby allowed.

Ground No.4

16. Apropos ground no.4, ld. AR submitted that the AO wrongly held that the

"corpus donations" and "miscellaneous donations" are bogus and the AO was

not justified in making addition u/s 68 of the Act on the assumption that either

the said donors are not existent or their addresses are not available. Ld. AR has

further drawn our attention towards remand report of the AO dated 4.3.2013

available at paper book page 89-90 and submitted that the AO in the remand

report, submitted to the CIT(A), has accepted that the assessee received corpus

donations of Rs.71 lakh and petty donation of Rs.4,05,000 and the assessee had

furnished the income tax return acknowledgment, copy of annual accounts and

bank statement with Memorandum of Association of all the donors companies

and obtained confirmations of all the petty donations with their identifications.

The AR vehemently contended that the AO is objecting to the genuineness of

the corpus donations as well as petty donations on wrong premise that the

assessee could not produce in person the donor parties during the assessment

proceedings, therefore, entire amount of donation was wrongly treated as

13 ITA No.3317/Del/2013 AY: 2006-07

unexplained cash credit without any sound footing. Ld. AR further contended

that the AO has not raised any doubt or has not brought out any adverse

material or fact to support his contention that the donors are either not available

at the given address or do not have the capacity to make such donations and the

veracity of the corpus donation remained unverified.

17. Ld. AR further pointed out that despite remand report of the AO dated

4.3.2013 (supra), the CIT(A) did not pay any attention towards paragraph 4 of

the remand report and simply after reproducing the observations of the AO has

held that the activities of the assessee society are not genuine and the

registration granted to the assessee u/s 12A of the Act shall be cancelled in due

course of time and, therefore, decision taken by the AO is correct. Ld. AR

vehemently contended that the approach of the CIT(A) was not judicious and

the CIT(A) simply upheld the conclusion of the AO without addressing to the

contention of the AO and submissions of the assessee and even the comments of

the AO in the remand report which also support the case of the assessee.

18. Placing reliance on the decision of Hon'ble Jurisdictional High Court

of Delhi in the case of DIT(E) vs Bharat Kalyan Pratisthan (supra) and

decision in the case of DIT(E) vs Keshav Social and Charitable Foundation

(supra) and decision of the ITAT, Jaipur in the case of Arya Sanstha vs

CIT (supra) and submitted that when the assessee had furnished list of donors,

their income tax return acknowledgement, copies of their annual account and

14 ITA No.3317/Del/2013 AY: 2006-07

bank statement along with memorandum of association of all the donor

companies and also obtained confirmation of all the petty donation with their

identification, then the AO cannot make addition u/s 68 of the Act, treating the

amount of corpus donations and petty donation as cash credits. The AR further

pointed out that the AO or the CIT(A) has not brought out any adverse material

or fact that either the corpus donations or petty donations were introduced by

the assessee society to rotate its unexplained income and the same was not spent

for charitable purposes, then the addition u/s 68 of the Act is not sustainable.

19. Replying to the above, ld. DR submitted that when the AO had drawn a

conclusion that the activities of the assessee are found to be for profit and not

for charitable purpose, then the assessee cannot be allowed benefit of exemption

u/s 11 and 12 of the Act and therefore, the AO was quite justified in treating the

corpus donations as unexplained cash credit. The DR relying on the decision of

Hon'ble Jurisdictional High Court of Delhi in the case of Kanhaya Lal

Punj Charitable Trust vs DIT(E) (2008) 297 ITR 6 (Del) submitted that once

exemption u/s 11 and 12 of the Act is withdrawn, all receipts of the Trust or

society either by way of voluntary contribution or income derived from it

would be in the normal course and is chargeable to tax. Ld. DR further

submitted that when the department was in the process of cancelling registration

granted to the assessee u/s 12A of the Act, then the exemption u/s 11 and 12 of

the Act was rightly denied and, therefore, corpus and petty donations which

15 ITA No.3317/Del/2013 AY: 2006-07

could into be substantiated by the assessee are rightly held to be the income of

the assessee for the year under consideration and the addition made u/s 68 of the

Act is sustainable.

20. On careful consideration of above submissions, at the very outset, we

note that in the recent decision of the Tribunal in appellant society's case for

AY 2009-10 dated 18.7.2014 (supra), it has been held that as the registration of

the assessee u/s 12A of the Act is in force, therefore, the AO was directed to

compute the income by granting exemption u/s 11 of the Act to the assessee.

We may also point out that during the arguments, ld. DR could not satisfy us

that the registration granted to the assessee on 3.9.2004 w.e.f. 1.4.2003 either

stands cancelled or is not in force. In this situation, we can safely presume that

the registration granted to the assessee u/s 12A of the Act is in force and,

therefore, it is not open to the revenue authorities to discard or dismiss the

claim of the assessee merely because the department is in the process of

cancelling registration granted to the assessee u/s 12A of the Act since last 3-4

years i.e. after order of the Tribunal dated 17.6.2011 (supra).

21. We further take cognizance of the remand report dated 4.3.13 submitted

by the AO to the CIT(A) during first appellate proceedings wherein on the issue

of corpus and petty donations, the AO has accepted some vital facts supporting

the claim of the assessee which read as under:-

16 ITA No.3317/Del/2013

AY: 2006-07

"Corpus Donations: The assesses objection regarding contents quoted from the letter dated 04.08.2008; it is correct that the assessee had stated that it had also received corpus donations along with the income from operations of Ayurvedic College by way of fees, hospital development fees. Hostel fees, and receipts from the patients in the hospital. Further the assessee has stated that corpus donation of Rs . 71,00,000/- and Rs 4,05.000/- (petty donations) were received and assessee had furnished the income tax return acknowledgment, copy of annual accounts and bank statements with Memorandum of Association of all the donor companies and obtained confirmations of all the petty donations with their identifications But the assessee could not produce in person the donor parties during the assessment proceedings therefore the AO made the additions considering the amount as unexplained cash credit which is based on sound footing. The assessee relied on the judicial pronouncements in support of its contention that the assessee society need not produce the persona whereas assessee has filed the necessary papers as stated above in the paper book also. The assessee's submission is not tenable."

22. In view of above facts submitted by the AO to the CIT(A), we note that

the assessee society had furnished income tax return, acknowledgement, copies of

the annual account and bank statements of the donors along with Memorandum of

Association of all the corpus donor companies and obtained confirmations of all

petty donations with their identification before the AO. The AO also noted that

the assessee could not produce corpus donors during the assessment proceedings

and then AO made the additions considering the amount as unexplained cash

credit u/s 68 of the Act. Further, from the impugned order, we note that the

CIT(A) after reproducing the relevant part of the assessment order merely noted

that it is established that the activities of the assessee society are not genuine and 17 ITA No.3317/Del/2013 AY: 2006-07

are not being carried out in accordance with the objects of the Trust and the

assessee is found to have violated the provisions of section 12AA(3) of the Act

and the registration granted to the assessee u/s 12A of the Act shall be cancelled

in due course of time, therefore, conclusion of the AO is correct and the CIT(A)

upheld the addition. Since while dealing with ground no. 1, 2 and 3 of the

assessee in the earlier part of this order, we have held that the CIT(A) at page 6

noted that the action of the AO not allowing exemption u/s 11 and 12 of the Act

is beyond jurisdiction, then on the same fact, it was not open to the CIT(A) to

uphold the action of the AO which denied the benefit of exemption u/s 11 and 12

of the Act to the assessee. Therefore, the conclusion of the CIT(A) was not only

self-contradictory but also perverse as per factual matrix of the case, hence, we

set aside and dismiss the same.

23. Turning to the issue of genuineness and allowability of corpus and petty

donations, at the very outset, we note that there was a confusion about the

quantum of the corpus and petty donations, it was clarified by the AO himself in

its remand report para 4, as reproduced hereinabove, wherein the AO explained

that the corpus donation was of Rs. 71 lakh and amount of petty donation was

Rs.4,05,000 during the year under consideration. At this juncture, we

respectfully take guidance from the decision of Hon'ble Jurisdictional High

Court of Delhi in the case of DIT vs Bharat Kalyan Pratisthan (supra) wherein it

has been held that where the CIT(A) recorded a categorical finding that the

18 ITA No.3317/Del/2013 AY: 2006-07

Trust had furnished all details required by the AO and having done so, it was

not for the Trust to produce the donors before the AO as desired by him. On

this issue, we further take cognizance of the decision of Hon'ble Jurisdictional

High Court of Delhi in the case of DIT(E) vs Keshav Social and Charitable

Foundation (supra) wherein their lordships held that when the assessee had

furnished the list of donors and the AO disallowed the claim stating that the

assessee could not furnish details regarding the donors and that it was just a way

of introducing unaccounted money into the books of the assessee trust and thus,

the AO treated the same amount as cash credit making addition u/s 68 of the

Act. In this case, dismissing the appeal of the revenue, Hon'ble High Court held

that to obtain the benefit of exemption us/ 11 of the Act, the assessee was

required to show that the donations were voluntary and the assessee had not

only disclosed its donations but had also submitted a list of donors. In this case,

speaking for the Hon'ble Jurisdictional High Court, their lordships also held that

even a complete list of donors had not been filed or the donors had not been

produced did not necessarily lead to the inference that the assessee had tried to

introduce its unaccounted money by way of donation receipts.

24. As per facts and circumstances of the present case and the observations of

the AO in the assessment order as well as in the remand report submitted to the

CIT(A), it is clear that the assessee trust submitted all the required details before

the authorities below but the AO objected to the claim of assessee only on this

19 ITA No.3317/Del/2013 AY: 2006-07

premise that the assessee could not produce in person the donor parties during

the assessment proceedings. On similar liens, the CIT(A) upheld the action of

the AO without addressing to the explanation and contentions of the assessee

and remand report of the AO dated 4.3.2013, merely observing that the

activities of the assessee society are not genuine and registration granted to the

assessee u/s 12A of the Act shall be cancelled in future in due course of time.

This is not judicious and proper approach for a quasi-judicial authority who are

duty bound to address and adjudicate all the issues and grounds raised by the

assessee. The AO and the CIT(A) are not adjudicators but they are also

investigators and examiners.

25. In view of above, we reach to a conclusion that ground no. 4 of the

assessee is squarely covered in favour of the assessee by the decision of

Hon'ble Jurisdictional High Court of Delhi in the case of DIT vs Bharat Kalyan

Pratisthan (supra) and DIT(E) vs Keshav Social and Charitable Foundation

(supra) and therefore, we set aside the orders of the authorities below and

directed the AO to delete the impugned addition made u/s 68 of the Act.

Ground No. 5

26. Apropos ground no. 5, ld. AR submitted that the CIT-A erred while

upholding the contention of the DDIT(E) regarding excess salaries being

allegedly charged with the intent of siphoning off funds of the appellant. The ld.

AR further contended that subsequent to the scrutiny of salary registers of 20 ITA No.3317/Del/2013 AY: 2006-07

society by the DGIT(E), the appellant got the information about the

embezzlement and fraud of Rs. 1,59,9421-, which might have taken place and it

is not an act of either management or trustees with the intent of siphoning off

funds. Ld. AR further submitted that the finding of DGIT(E) were also not

conclusive being decided without the expert advice and the embezzlement and

fraud so stated does not in any way establish the intent of siphoning of funds by

the assessee society or its office bearers or its management officers. Therefore,

the conclusion of the AO deserves to be quashed. The AR further pointed that

the revenue authorities have not brought out any evidence to show that the

embezzlement or fraud have taken place by the officers or managers of the

assessee society or with their help and therefore, the conclusion of the AO on

this issue is not sustainable.

27. Ld. AR further pointed out that the management of the Trust has taken a

serious action against the culprit employees for their act of fraud, therefore it

was wrongly concluded that the money has been siphoned off by the

trustees/members of the appellant society.

28. Ld. DR replied that when the AO observed that there was excess salary

claim of Rs.1,59,942 which was debited to the expenditure account, then there

was a serious infirmity in the details of salary payment submitted by the

asssesse trust before the AO and it was found by the assessing officer in certain

cases that the salary was charged and paid even after the resignation date of the

21 ITA No.3317/Del/2013 AY: 2006-07

respective alleged employee, therefore, the AO was correct in holding that there

was siphoning of funds by the trustees/members of the assessee society and,

therefore, observations and conclusion of the AO on this point are sustainable.

29. On careful consideration of above submissions, we note that the assessee

society submitted before the AO that the embezzlement was planned on the

employees who had left the organisation and the salaries were pocketed by the

person in charge of the day-today affairs of the society. The AO did not accept

the explanation and submission of the assessee trust by holding that the assessee

society in its return of income has not made any claim of loss on account of

embezzlement, therefore, the embezzlement theory submitted by the assessee

was an afterthought explanation which cannot be accepted. The AO concluded

that the salary payments have been made in cash and found to be bogus which

indicate that the siphoning off of the trust fund have taken place.

30. During the first appellate proceedings before the CIT(A), the assessee

society submitted detailed submissions reiterating and elaborating the

explanation and submissions made before the AO and it was also submitted that

the above alleged salary payments were made by the person-in-charge, which

came to the knowledge of the management only during the proceedings u/s

10(23C)(vi) of the Act. It was also submitted, on behalf of the assessee, that

the management has initiated inquiry against the employees responsible for

embezzlement done by them during the relevant period, amounting to

22 ITA No.3317/Del/2013 AY: 2006-07

Rs.2,35,942. In preliminary investigation he was found guilty, therefore,

management has terminated the services of the said employees with immediate

effect with forceful and sincere efforts to recover the same amount from the

actual culprits. Ld. AR further submitted that had the intention of the

management of the society been fraudulent, it would have certainly neither

provided the affidavits of the employees nor these persons would have been

produced for cross examination before the DGIT(E). Ld. AR further submitted

that the DGIT impounded the salary register and sent it to Central Forensic

Science Laboratory (CFSL), New Delhi and despite the fact that the CFSL

experts expressed their inability to give report by 30.11.08, the DGIT(E)

proceeded to adjudicate the application of the assessee for grant of registration

u/s 10(23C) of the Act without assistance of expert report and hence serious

criminal allegation of embezzlement against Members and trustees cannot be

labelled merely on the surmises and conjectures. The ld. AR strenuously

contended that it was not open for the AO to borrow and apply above baseless

conclusion of the DGIT(E) for making impugned disallowance about a part of

the salary payment claim of the assessee.

31. Ld. DR replied that the cash payment of salary to the employees have left

the organisation much earlier is a serious act which resulted into embezzlement

and siphoning of the funds by the members/officers and trustees of the society

as the salary payments have been made in cash for the period after resignation

23 ITA No.3317/Del/2013 AY: 2006-07

of respective employees and have been found to be bogus by DGIT(E) and there

was no action by the assessee society then it may be inferred that the assessee

society is responsible for siphoning of funds.

32. Ld. AR placed rejoinder to the above submissions of the department and

submitted that even the AO in the operative para at page 7 has held that the

salary payment has been made in cash and have been found to be bogus which

indicated that siphoning of the trust fund has taken place but there is no finding

that the siphoning of funds was done by the trust or trustees or management of

the society. Ld. AR, placing reliance on the decision of Jurisdictional High

Court of Delhi in the case of DIT(E) vs Moti Bagh Mutual Aid Education

(supra), submitted that even if there were minor contradictions or deviations in

the accounts of the assessee that, by itself, did not substantiate the allegation

that the assessee did not exist solely for educational purposes or that it existed

mainly for a profit motive. Ld. AR further contended that the when the assessee

society submitted complete details with regard to payment of salary including

salary registers, copy of appointment and affidavits of the employees with their

personal presence before the DGIT(E), then the management or trustees of the

assessee society cannot be held liable for excess payment of salary which came

to the knowledge of the management during proceedings before the DGIT(E).

The AR further pointed out that the management of the trust has taken serious

action against the employees for misappropriation of funds, therefore, it can not

24 ITA No.3317/Del/2013 AY: 2006-07

be concluded that the money has been siphoned off by the trustees/members,

specially when the embezzlement or fraud does not establish intention of

siphoning of funds by the trustees or the management.

33. On careful consideration of above submissions, we note that in operative

para 2 at page 7 of assessment order, the AO has taken cognizance of the

conclusion of the DGIT(E) and has held that the salary payments have been

made in cash and have been found bogus which indicates that siphoning of the

trust fund has taken place. From the impugned order at page 17-18, we note

that prior to recording the findings, the CIT(A) reproduced the observations and

conclusion of the AO on this issue and at the last upheld the same by simply

holding that the AO is correct and the addition made by the AO for siphoning of

funds is hereby confirmed but the CIT(A) has also not concluded that there was

a siphoning off of funds by the members and trustees of the assessee society.

At this point, we also find that the conclusion of the DGIT(E), which was

noticed by the AO, was based on his conclusion without waiting for the report

of the CFSL and without expert's advice. Hence, we are inclined to hold that

although the authorities below have held that there was siphoning of funds from

the funds of the society but there is no finding or conclusion that the siphoning

of funds was made by the members and trustees of the society. We may also

point out that when the act of embezzlement was noticed by the management

during the proceedings before the DGIT(E), then the management proceeded to

25 ITA No.3317/Del/2013 AY: 2006-07

take action against the responsible employee and the management also

submitted documents pertaining to appointment, resignation and affidavits of

the alleged employees and also some of them were also produced before the

DGIT(E), therefore, act of siphoning of funds cannot be attributed to the

management or trustees of the society.

34. At this juncture, we respectfully take cognizance of Hon'ble

Jurisdictional High Court of Delhi in the case of DIT(E) vs Moti Bagh Mutual

Aid Education (supra) wherein their lordships have held thus:-

"We view that even if there are minor contradictions or deviations in the accounts of the assessee, that by itself cannot substantiate the allegation that the assessee does not exist solely for educational purposes or that it exists partly for a profit motive. The fact that the assessee had been granted exemption under section 10(22) of the Act since 1960 and even subsequent to the assessment year in question is a factor that cannot be easily overlooked. It is not possible to accept the view, in the absence of any cogent reason, that for one particular year merely on the basis of some discrepancy in the accounts of the assessee, its objects changed from educational purposes to making a profit.

We may also note a decision of this court reported in CIT v. Lagan Kala Upvan (2003) 259 ITR 489 wherein-a Division Bench accepted the view of the statutory authorities under the Act to the effect that a claim of depreciation in respect of certain assets of the assessee does not per se show the business/profit motive of the assessee or disentitle it from exemption under section 10(22) of the Act. Similarly, in this case, even if it is assumed that there are some discrepancies in the accounts of the assessee, that would not per se lead to any conclusion regarding a change in the object of the assessee."

26 ITA No.3317/Del/2013 AY: 2006-07

35. On the basis of foregoing discussion and in the light of facts and

circumstances of the present case, we are inclined to hold that there was no

siphoning of funds by the management or trustees of the assessee society,

therefore, the management or trustees of the assessee society cannot be held

liable for the act of siphoning of funds. Accordingly, conclusion of the

authorities below is quashed up to this extent only and hence ground no. 5 of the

appellant is allowed as indicated above.

Ground No. 6

36. Apropos ground no. 6, ld AR submitted that the AO wrongly held that in

absence of maintenance of log book, it is not possible to verify the use of hired

vehicles by the assessee society and the assessee failed to submit any evidence

to prove that vehicles were not being used by Dr. Sunil Mittal for his personal

purpose. Ld. AR vehemently contended that merely on the basis of baseless

allegation of siphoning of funds of the trust, the claim of expenditure of vehicle

hiring charges cannot be held as not genuine. Ld. AR also submitted that the

revenue authorities ought to have considered that if the assessee society had

hired vehicles from the market, it would have cost higher than the actual

expenses which has been incurred by the assessee society. Ld. AR submitted

that the expenses claimed by the assessee society are genuine as the vehicles

were used only for the purpose of the day to day work of the society and Dr.

Sunil Mittal did not use the vehicle for his personal purpose. Ld. AR further

27 ITA No.3317/Del/2013 AY: 2006-07

submitted that the revenue authorities should have verified whether the vehicle

was used for the purpose of activities of the assessee society or not.

37. Ld. DR supported the orders of the authorities below and submitted that

the onus was on the assessee to show that the claim of vehicle hiring expenses is

genuine and on failure to substantiate this fact, the AO was right in rejecting the

claim of the assessee and the CIT(A) was also justified in upholding the

conclusion of the AO.

38. On careful consideration of above submissions, we are of the considered

view that for verification and allowability of claim of expense of vehicle

charges, the prime issue to be adjudicated is that whether the vehicle was used

for the purpose and activities of the assessee society and the payment made by

the assessee society was in accordance with the prevailing fair market price of

the vehicle hiring charges. Although the revenue authorities can also verify the

fact of personal use of the vehicle owner but this is a secondary issue which

cannot be a basis for rejecting the entire claim of the assessee society.

39. Therefore, we are of the considered view that the revenue authorities had

not adjudicated this issue as per section 37 and other relevant provisions of the

Act and, therefore, their findings are set aside and the issue is restored to the file

of the AO to adjudicate the same in accordance with the provisions of the law

and keeping in view our aforesaid observations and after affording due

opportunity of hearing for the assessee and without being prejudiced or 28 ITA No.3317/Del/2013 AY: 2006-07

influenced by the earlier orders on this issue. Before we part with the issue, we

may also make it clear that the expenses claimed in regard to vehicle hiring

charges are allowable if it is found that the hired vehicle was used for the

purpose of activities of the society and incurred expenses is in accordance with

prevailing fair market price of the service and no part of claim can be rejected

without bring out any fact that any part of service was used otherwise beyond

the activities of the appellant trust. Accordingly, ground no. 6 of the assessee

trust is deemed to be allowed for statistical purposes with the aforesaid

directions to the AO.

Ground No. 7

40. Apropos ground no.7, we have heard arguments of both the sides and

carefully perused the relevant material placed on record. Ld. AR contended that

the CIT-A erred in upholding the order of AO that the expenditure shown on

account of construction of College and Hospital building and hostel expenses

are inflated and the that trust funds have been siphoned off. Ld. AR further

contended that whereas all the expenditures are properly vouched and find place

in the books of accounts of the assessee society which were duly produced for

verification during the remand proceedings before the Assessing officer, then

the conclusion of the AO is not sustainable.

41. Replying to the above ld. DR supported the action of the authorities

below and submitted that the AO rightly held that the Trust had passed bogus 29 ITA No.3317/Del/2013 AY: 2006-07

entries of Rs.85,25,300 out of Rs.2,62,79,888 on account of construction

expenses and Rs.9,51,664 on account of hostel expenses because to support

these claims, relevant cash memos, bills or vouchers had not been provided by

the assessee trust. The DR further pointed out that the assessee trust could not

demolish the allegations of the AO that the purchase of timber, tiles and iron as

shown in a very shabby manner and were not having correct units as per items

appearing in sl. No. 139, 140 and 141 and labor payment appearing at sl. No. 38

& 145. Ld. DR further submitted that the AO was quite justified in holding that

all the hostel expenses are being paid in cash and the same have varied from

month to month and found to be erratic in nature and therefore, the same are not

allowable.

42. Ld. AR also submitted rejoinder to the above allegation of the department

and submitted that cash memos and vouchers of construction expenses and

hostel expenses were very well available before the AO and assessee trust had

not been given any opportunity to explain the alleged vague and incorrect

narrations as pointed out by the AO and the AO completed the assessment

proceedings in a hasty manner keeping his office open on a holiday in the name

of shortage of time. The AR strenuously contended that in this situation, how

the AO can justify proper consideration of all vouchers and records with details

of construction and hostel expenses which was very well verifiable from the

vouchers placed before him. Ld. AR vehemently contended that the AO as well

30 ITA No.3317/Del/2013 AY: 2006-07

as the CIT(A) ignored this material fact that the hospital, college and the hostel

of the society is situated in rural area which is 10 to 11 km away from district

headquarter Aligarh and all the needs of students are to be fulfilled by nearby or

other adjacent villages, therefore, it was not practically possible to get printed

bills for the supply of milk, vegetables etc. with vouchers for satisfaction of the

AO. The AR also contended that in spite of this practical problem, the assessee

trust maintained details of all the expenses along with internal vouchers and

cash memos. Ld. DR further pointed out that the variation in month to month

hostel expenses was caused due to get together and functions of the students

which were organised in the month of October and January, thus, the variation

in month to month hostel expenses occurred due to genuine reasons which

cannot be doubted on the basis of surmises and conjectures.

43. On careful consideration of above rival submissions and careful perusal

of the relevant material placed before us, at the outset, from the assessment

order, we note that the AO has noted that the cash payments in respect of

construction are not found supported with cash memos and bills and the

assessee even does not follow system of preparing internal cash payment

vouchers, therefore, trust funds have siphoned off and the cash payments are

either bogus or grossly inflated. On the issue of inflated hostel expenses, the

AO has held that the assessee does not have any supporting cash memo or even

internal cash vouchers in respect of these payments, therefore, genuineness of

31 ITA No.3317/Del/2013 AY: 2006-07

these payments could not be verified. We also note that the AO also noticed

that no explanation was submitted by the assessee with regard to this erratic

behaviour of hostel expenditure as there was a variation in the expenditure

reported in month wise details of expenditure.

44. During the first appellate proceedings, the CIT(A) simply upheld the

conclusion of the AO without addressing and adjudicating the contention of the

AO as well as explanation of the assessee and the first appellate authority

jumped to a conclusion that the addition made by the AO for siphoning off trust

fund of Rs. 85,25,300 out of claimed expenditure of Rs.2,62,79,888 on account

of construction and Rs.9,51,664/- on account of hostel expenses is sustainable

and the same was confirmed by the CIT(A).

45. First of all, we may pointed out that the AO does not raise any doubt

about the entire expenditure incurred on construction of college and hospital

building and the AO raised doubt only about unsupported payment of

Rs.85,25,300 out of total expenditure of Rs.2,62,79,888. Meaning thereby the

AO was satisfied about the correctness of the remaining payment which was not

objected neither during the assessment proceedings nor during the first appellate

proceedings. From the narration of the assessment order, we note that the AO

has pointed out certain defects in Annexure A submitted by the assessee and

after that the AO noted that no explanation was filed by the assessee when

confronted with the details of unsupported cash payments but this noting does

32 ITA No.3317/Del/2013 AY: 2006-07

not show that the AO provided due opportunity of hearing to the assessee to

explain discrepancies and inconsistencies noted and objected by the AO.

46. During the first appellate proceedings, the CIT(A) has simply reproduced

the detailed contentions of the AO running into 3-4 pages and after reproducing

conclusion of the AO, the CIT(A) has confirmed the observations and additions

made by the AO on account of construction and hostel expenses without

addressing, evaluating and adjudicating the contentions of the AO in the light of

submissions and explanation of the assessee. In this situation, it can safely be

presumed that the AO did not afford opportunity to the assessee to explain

discrepancies and inconsistencies noted by him during the assessment

proceedings. We may also note that during first appellate proceedings, the

CIT(A) has reproduced and mentioned detailed submission of the assessee on

this issue but confirmed the allegation and upheld both the additions made by

the AO, without addressing and adjudicating the explanation and submissions of

the assessee in the light of para 6 at page 2 of remand report of the AO dated

04.03.2013. Hence, we find it appropriate to restore both the issues to the file

of the AO for proper verification and examination. Therefore the issues of

allowability of expenses on construction of hospital and hostel building of Rs.

85,25,300 and hostel expenses of Rs. 9,51,664 are restored to the file of AO

with a direction that the AO shall adjudicate both the issues afresh, after

considering submissions and explanation of the assessee along with remand

33 ITA No.3317/Del/2013 AY: 2006-07

report of the AO (supra), after affording due opportunity of hearing for the

assessee and without being prejudiced and influenced by the earlier orders on

this issue. Accordingly, ground no. 7 of the assessee is deemed to be allowed

for statistical purposes for limited inquiry up to the extent as indicated above.

Ground No.8

47. Apropos ground no. 8, ld. AR submitted that the ld. CIT-A erred in

upholding the order of AO that the income of the assessee trust cannot be

computed on the basis of such incomplete, unverifiable and unreliable books of

accounts, therefore, claim of depreciation is not allowable. Ld. AR contended

that the claim of depreciation is allowable on the assets, the cost of which has

been fully allowed as application of income u/s 11 of the Act in the earlier or

past years.

48. Placing reliance on the decision of Hon'ble Bombay High Court in the

case of CIT vs Institute of Banking (2003) 264 ITR 110 (Bombay), ld. AR

submitted that the assessee society is entitled for depreciation on assets, the cost

of which had been fully allowed as application of income u/s 11 of the Act

during the earlier assessment proceedings held for the past years. Ld. DR

supported the orders of the authorities below and submitted that the assessee has

been allowed the benefit of application of funds in the year in which assets were

procured and written down value of these assets has been reduced to nil,

therefore, claim of depreciation of the assessee society is not allowable specially 34 ITA No.3317/Del/2013 AY: 2006-07

when there was huge inflation shown in expenditure on account of construction

of college and hospital building and also for hostel expenses.

49. At the very outset, we respectfully take cognizance of decision of

Hon'ble Bombay High Court in the case of CIT vs Institute of Banking (supra)

wherein it has been held that the Tribunal was right in law in directing the AO

to allow depreciation on the assets, the cost of which had been fully allowed as

application of income u/s 11 in the past year. The operative part of this order is

being reproduced for the sake of clarity in our conclusions which reads as

under:-

"It was held by the Bombay High Court that section 11 of the Income Tax Act makes provision in respect of computation of income of the Trust from the properly held for charitable or religious purposes and it also provides for application and accumulation of income. On the other hand, section 28 of the Income Tax Act deals with chargeability of income from profits and gains of business and section 29 provides that income from profits and gains of business shall be computed in accordance with section 30 to section 43C, That, section 32(1) of the Act provides for depreciation in respect of building, plant and machinery owned by the assessee and used for the business purposes. It further provides for deduction subject to section 34. In that matter also, a similar argument, as in the present case, was advanced on behalf of the revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income Tax Act and not under general principles. The court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income Tax Act. The court rejected the argument on behalf of the revenue that section 32 of the Income Tax Act was the only section granting benefit of

35 ITA No.3317/Del/2013 AY: 2006-07

deduction on account of depreciation. It was held that income of a Charitable Trust derived from building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust. In view of the aforestated Judgment of the Bombay High Court, we answer question No. 1 in the affirmative i.e., in favour of the assessee and against the department."

50. On careful consideration of above, we note that the AO has denied the

claim of depreciation by holding that the whole expenditure on account of

addition to fixed assets has ready been allowed as application of income for

charitable purposes in the earlier years in effect the written down value of the

assets would be zero. The AO further held that the claim of depreciation is not

allowable even when the income of the assessee is to be computed as provided

under Chapter 4 as the benefit of section 11 and 12 has been denied to the

assessee. The first appellate authority i.e. CIT(A) upheld the conclusion of the

AO without any detailed adjudication and ignoring the ratio of the decision of

Hon'ble Mumbai High Court in the case of CIT vs Institute of Banking (supra).

51. During the first appellate proceedings, ld. AR of the assessee society also

sought attention and consideration of the CIT(A) to the decision of ITAT Bench

"H" Delhi in the case of DIT vs Vishwa Jagriti Mission dated 13.5.2011 in

36 ITA No.3317/Del/2013 AY: 2006-07

ITA No. 3877/Del/2010 for AY 2006-07, we note that the claim of charitable

institution for depreciation was allowed by the Tribunal by holding as under:-

"4. After hearing both the sides, we find that the CIT (A) has granted the relief to the assessee by holding as under :-

"7. In ground No.6 the appellant has raised issue regarding not allowing deduction of Rs.36,53,818/- on account of depreciation on fixed assets utilized for charitable objects of the trust, in as much as, depreciation is a legitimate deduction in computing the income of the trust. I am also of the opinion that the appellant is entitled to the claim of depreciation. The judgment of the Hon'ble Supreme Court in the case of Escorts Ltd Vs. Union of India 199 ITR 43, often relied upon by the AOs, is in respect of claim of deduction made u/s.35(2)(iv) as well as u/s.32 of the IT Act. Section 35(2)(iv) specifically lays 3 ITA No.3877/Del/2010 down that where the deduction is allowed for any previous year u/s.35 in respect of an expenditure represented wholly or partly by an asset, no deduction shall be allowed under clause (2) of sub-section (1) of section 32 for the same previous year in respect of that asset. Thus, the ratio laid down in the above case is not applicable in the case of assessments of income derived from property held under trust wholly for charitable or religious purpose. The sections dealing with such assessments do not specifically debar deduction on account of depreciation as provided for u/s.35(2)(iv). There has never been a dispute that in case of charitable trust, the income should be computed on commercial principles. Furthermore, in my view the appellant has not claimed any double deduction so as to make the observation of "fundamental axiom" spelt out in the above judgement of Supreme Court applicable in the instant case. The provisions relating to compulsory application of income is altogether a different concept, and would come into play only after the income is determined. Application of income is not computation of income of charitable institution, therefore, the question whether the depreciation is allowed or not has nothing to do with the application of income. The income is always to be computed on commercial principles as per the system of accounting followed by the assessee subjected of course, as always to the statutory provision. Application of

37 ITA No.3317/Del/2013 AY: 2006-07

income is a condition for allowing benefit of exemption to a charitable institution. It has nothing to do with computation of income and is not a deduction. Therefore, the argument proffered by the AO's that the appellant is claiming double deduction has no substance and is to be rejected. In coming to this conclusion, reliance is placed on the judgment of Hon'ble ITAT, Delhi Bench, 'H', New Delhi in the case of ACIT Vs. Tiny Tots Education Society, in ITA No.3182/Del/2008, assessment year 2006-07 dated 2.6.2009, as also the following cases:- (i) ITO Vs.Trustees of Marathi Mission and Vice Versa (1982) 1 ITD (BOM) 539 (ii) Director of Income Tax (Exemption) Vs.Framjee Cawasjee Institute (1993) 109 CTR (BOM) 464 (iii) CIT Vs. Institute of Banking Personnel Selection (2003)264 ITR (Bom.) 110 4 ITA No.3877/Del/2010 7.1 Thus, in light of the above discussion, the claim of the appellant in respect of depreciation amounting to Rs.36,53,818/- is allowed."

Since the relief has been granted on the basis of various judgments of ITAT, Delhi Bench, respectfully following the same, we sustain the order of the CIT (A) and dismiss the appeal of the revenue."

52. In view of above, we are of the considered view that the claim of

depreciation of the assessee society is legally allowable in the manner as held

by Hon'ble Bombay High Court in the case of CIT vs Institute of Banking

(supra) and the AO is directed to examine, verify and to allow the same,

keeping in view the legal propositions as reproduced hereinabove. Accordingly,

ground no. 8 of the assessee is allowed.

Ground No. 9

53. Apropos ground no. 9, the ld. AR contended that the Ld CIT-A has erred

in law and on facts in upholding the order of the AO, wherein the AO denied

exemption u/s 11 and 12 of the Act to the assessee and estimated the income of 38 ITA No.3317/Del/2013 AY: 2006-07

the assessee society at Rs.59,60,363/- calculated at 50% of the gross receipts of

the society for Rs.l,19,20,725/-, treating the assessee in the status of Association

of Persons (AOP). The ld. AR placing reliance on the decision of ITAT Delhi

A Bench in assessee's own case for AY 2009-10 dated 18.7.2014 (supra)

submitted that as the registration granted u/s 12A of the Act to the assessee on

3.9.2004 w.e.f. 1.4.2003 is in force, therefore, the AO may kindly be directed to

compute the income by granting exemption u/s 11 of the Act. Replying to the

above submissions of the assessee, the ld. DR supported the action of the AO

and submitted that when huge siphoning of funds and inflated claim has been

noticed by the AO, then the AO was right in denying exemption us/ 11 of the

Act for the assessee and consequently estimating the income of the assessee at

50% of gross receipts of the society for the year under consideration.

54. Since, while adjudicating ground no. 1, 2 and 3 of the assessee in this

appeal, we have held that the action of the AO in disallowing exemption us/ 11

and 12 of the Act is beyond jurisdiction exercised by him during the assessment

proceedings because registration u/s 12A of the Act granted to the assessee on

3.9.2004 w.e.f. 1.4.2003 is still in force. We may also point out that the

department has not concluded the proceedings in pursuance to the order of the

ITAT "A" Bench dated 17.6.2011 (supra) and in this situation, at the cost of

repetition, we are inclined to hold that the registration granted for the assessee

u/s 12A of the Act on 3.9.2004 is in force and, therefore, exemption us/ 11 of

39 ITA No.3317/Del/2013 AY: 2006-07

the Act cannot be disallowed merely on the premise that the department has

initiated proceedings u/s 12AA(3) of the Act for cancellation of registration u/s

12A of the Act which are still pending without any outcome. We also hold

that in this situation, the AO was not correct in denying claim of exemption u/s

11 of the Act estimating the income of the assessee society at Rs.59,60,363

calculated at 50% of the gross receipts of the society during the year under

consideration.

55. However, before we part with the order, we make it clear that the AO is

empowered to examine and verify the claim of the assessee u/s 11 of the Act

within the ambit of relevant provisions of the Act including section 11 of the

Act. Therefore, disallowance of exemption u/s 11 of the Act as well as

estimation of income of the appellant society in the status of AOP as made by

the AO is not sustainable and we set aside the same. Accordingly, ground no. 9

of the assessee is allowed with this direction to the AO that the assessment of

the assessee trust for the year under consideration i.e. 2006-07 be reframed by

granting exemption u/s 11 of the Act to the assesse society.

56. In the result, the appeal of the assessee is partly allowed on ground no. 1

to 5 and 9 of the assessee and partly allowed for statistical purposes on ground

no. 6 to 8 of the assessee as per our discussion and conclusion recorded

hereinabove.

40 ITA No.3317/Del/2013 AY: 2006-07

Order pronounced in the open court on 23.3.2015.

Sd/- Sd/-

(PRAMOD KUMAR) (CHANDRAMOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER

DT. 23rd March, 2015 'GS'

Copy forwarded to:-

1. Appellant 2. Respondent 3. C.I.T.(A) 4. C.I.T. 5. DR By Order

Asstt. Registrar

41