Sankshema, Hyderabad vs Assessee

SANKSHEMA Dy. Director of Income Karimnagar - 505 001 vs. Tax (Exemptions)-I, PAN AADTS0244H Hyderabad. (Appellant) (Respondent)

For Assesseee : Mr. S. Rama Rao For Revenue : Mr. Rajat Mitra

Date of Hearing : 24.07.2015 Date of Pronouncement : 31.07.2015

ORDER

This appeal filed by the assessee is directed against the order of the learned Commissioner of Income-tax (Appeals)-III, dated 6-9-2013 for the assessment year 2007-08.

2. The assessee has raised the following grounds.

i) "The order of the learned CIT(A) is erroneous to the extent it is prejudicial to the appellant herein.

ii) The learned CIT(A) erred in holding that the transactions with Kapil Chit Funds are in violation of the provisions u/s 11(5) of the I.T.Act. The CIT(A) ought to have seen that the provisions u/s 11(5) do not apply to the transactions entered into with Kapil Chits Funds.

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iii) Any other grounds that may be urged at the time of hearing."

3. The main issue evolves from the grounds of appeal is whether the AO is right in holding that the chit contributions violates the provisions of section 11(5), consequently makes the assessee ineligible to claim exemption u/s 11 of the I.T. Act.

4. The assessee also raised additional ground by filing a petition for admission of additional ground of appeal on 01.09.2014 which reads as follows.

"The Assessing Officer and the learned CIT(A) ought to have held that the appellant is entitled for depreciation on the assets used in the process of deriving income when exemption u/s 11 of the I.T.Act is denied."

5. The assessee has made an alternate ground by filing additional ground on the issue of allowability of depreciation when the income is computed under normal provisions of the Act, the same is admitted, being legal in nature.

6. The facts of the case, briefly are that the assessee is a Society registered u/s 12AA of the I.T.Act and running a cancer hospital. The assessee has filed its return of income for the assessment year 2007-08 on 14.05.2007 admitting NIL income after availing exemption u/s.11 of the I.T. Act. The Assessing Officer, during the course of assessment u/s 143(3) is of the view that the 3 ITA.No.1560/Hyd/2013 Sankshema, Hyderabad.

total receipts from the property held under trust is more than 1 crore and, therefore, it ought have obtained the approval u/s 10(23) of the I.T.Act. The Assessing Officer also found that the assessee made investment in Chit Fund Company, thereby, violated the provisions of section 11(5). Therefore, the Assessing Officer rejected the claim of exemption u/s 11 and completed the assessment under normal provisions of the Act. Aggrieved, the assessee preferred an appeal before Commissioner of Income- Tax(Appeals)-IV, Hyderabad. On appeal, the learned CIT(A), held that the assessee is eligible for exemption u/s 11, even though it has not obtained notification u/s 10(23C) of the I.T.Act, but, observed that as there is violation of section 11(5), such exemption cannot be allowed for the year under consideration. Aggrieved, the assessee is in appeal.

7. The authorized representative submitted that, the assessee is registered u/s 12AA of the I.T. Act and also obtained approval u/s.10(23C) belatedly from the assessment year 2007-08 onwards. He further, submits that, the assessee is running a cancer hospital with the aid of Donations from State Government. He also submitted that, the Chit Fund contributions are made for the better management of funds, which is neither deposit nor investments as contemplated u/s 11(5) of the Act. He further argued that, there was no need of investing the funds in the investments or deposits as specified u/s 11(5), as there was no amount accumulated or set apart, 4 ITA.No.1560/Hyd/2013 Sankshema, Hyderabad.

in fact, there was deficit. In other words, he submitted that, the assessee has not set apart or accumulated any income, instead, there was excess application of income for the year under consideration. To this effect he has filed a statement of income indicating the excess application of income which is at page No. 1 of his paper book. During the course of argument,the AR, relied on the Co-ordinate Bench of Vishakhapatnam in the case of Sri Sivani Educational Society vs. Income Tax Officer, reported in (2015) 153 ITD 121(Visakhapatnam) (Tribu.) for the proposition that the contributions in a chit fund does not attract provisions of section 11(5).

8. The Departmental Representative, on the other hand submitted that, the assessee violated provisions of section 11(5), by contributing to Chit Fund. He further, submitted that the facts of case law relied upon by the authorized representative in 153 ITD 121 (2015), Vishakhapatnam Tribunal is different from that of present case. In the case before Vishakhapatnam Bench, there were no surplus funds and the deposit was made in joint name of Society and the Government. Therefore, urged to confirm the order of CIT(A) order.

9. We have heard the rival contentions and perused the materials on record and also considered the case laws cited by the parties. The factual matrix of the case is that, the assessee is Society registered u/s 12AA of the I.T. Act, have made contributions to Kapil Chit 5 ITA.No.1560/Hyd/2013 Sankshema, Hyderabad.

Fund Company. The Assessing Officer denied the benefit of exemption u/s 11, by holding that there was violation of section 11(5), as the Chit Fund subscription is not investment or deposit as specified u/s 11(5) of the Act. The CIT(A), however, held that the assessee is eligible for exemption u/s.11, even though it has not obtained registration u/s 10(23C), but observed that there was violation of section 11(5), such exemption cannot be given for the year under consideration. The authorized representative submitted that, there was no violation of section 11(5), because Chit Fund contributions are not made as investment u/s 11(1), but, it is a normal deposit for better management of the funds.

10. Now we have to look into the provisions of section 11(2) and 11(5). For the sake of convenience, the relevant portion is reproduced, which reads as follows.

(2)[Where[eighty-five per cent] of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely :--

(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-

section (5).

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(5) the forms and mode of investing or depositing the money referred to clause (b) of sub -section (2) shall be the following.

11. The plain reading of clause (b) of sub section (2) together with sub section (5), makes it clear that sub section (5) will come into operation only, when there is accumulation or set part of amount u/s 11(2). When the assessee sets apart 15% of income or accumulates over and above 15% of income from property held under trust then, it needs to invest the amount in the forms and modes specified under section 11(5). I have gone through the financial statements and statement of total income filed by the assessee, where, the application of income is in excess of income earned from property held under trust. In other words, there was no surplus funds which needs to be invested u/s.11(5). The requirement of investing or depositing under section 11(5) is confined to the amount which is set apart or accumulated u/s.11(2). When the entire income of the year is applied for the objects of the Society, there cannot be said to be any funds remaining out of the funds received by way of income. In the case of the assessee, as per the statement of total income and financial statement submitted by the assessee it is evident that it has spent excess amount for the objects of the Society. The allegation of the Revenue is that the assessee has surplus funds which it has invested in Chit Fund is not correct. The annual accounts submitted by the assessee clearly show that it has spent excess amount for the year under consideration. If one 7 ITA.No.1560/Hyd/2013 Sankshema, Hyderabad.

see's the statement of income, the gross receipts from the trust for the year was at Rs.1,40,56,424.22 and the amount applied for the objects was at Rs.1,63,58,553.88. Thus, there was excess application of income of Rs.23,02,129.66 which is 16.38% of the gross income of the assessee. Under the circumstances, it is not correct on the part of the Revenue to argue that there was surplus.

12. It is clear that Chit fund contribution works under mutuality concept. In the chit fund subscription there is no question of any individual subscriber entitled to receive any profit or income. The money is not laid out with a second party that too with an intention to earn profit. The foreman holds the money received from the chit subscribers only as a trustee. Section 11(5) refers to only money that needs to be invested as stipulated in section 11(2) in investments or deposits. Thus, it could be concluded that Chit Fund contribution is governed by the principles of mutuality and contributing to a Chit Fund is contribution to oneself on the principles of mutuality and hence, it is not an investment as contemplated by section 11(5). The Coordinate Bench at Vishakhapatnam in the case of Sri Sivani Educational Society vs. ITO, (2015) 153 ITD 121, elaborately discussed the issue. The Tribunal held that contribution to chit fund is works on principles of mutuality and hence, it is not a investment or deposits as contemplated u/s.11(5). The relevant portion of the judgment is reproduced below.

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"It is clear that the contribution to a chit is a mutual activity and cannot be held as an investment, as there is no question of a individual subscriber being entitled to receive profit or income under a scheme of chit funds. No money is laid out with a second party that too with an intention to earn profit. The foreman holds the money received from the chit subscribers only as a trustee. Section 11(5) only refers money that is to be invested or deposited with a person or entity or organization or Government which is other than the assessee itself. Investment held by self i.e., where no second party is involved is obviously not covered to these sections. Thus, it could be concluded that chit fund business is governed by the principles of mutuality and contributing to a chit fund is contribution to oneself on the principle of mutuality and hence, it is not an investment as contemplated by section 13(1) (d) read with section 11(5).

The issue whether the contribution made by the assessee to a chit fund as an individual subscriber, either on the facts of the case, or under the scheme of the Chit Fund Act, can be considered as an investment or not, or whether such contribution was a deposit or not, was not the issue before the High Court. The issue as to whether the contribution to the chit fund is an investment/deposit was not contested by the parties. Hence, this judgment of the jurisdictional High Court cannot be applied to the case on hand where the issue is whether a contribution to a chit by an individual subscriber can be considered an investment or a deposit as contemplated under section 13(1)(d) read with section 11(5). The various judgments of the Supreme Court and the High Courts as well as the Tribunal clearly lay down that contribution to a chit fund by an individual subscriber is governed by the principal of mutuality and hence it is neither an investment nor a deposit. [Para 34]

Even otherwise, in the case of the assessee, the undisputed fact is that assessee requires money for 9 ITA.No.1560/Hyd/2013 Sankshema, Hyderabad.

its expansion. This fact is not disputed by the Commissioner (Appeals). It is also clear that the assessee societies have taken huge loans from various banks, for undertaking expansion and to create infrastructure. These loans were taken by the societies as they did not have surplus funds to undertake expansion and create infrastructure. On the basis of these facts, we come to the conclusion that the contribution made by the assessees to a chit, is not a positive act to layout money for business, with a view to obtain an income or profit. It is not an investment, as the amount laid out is not a positive act on the part of the asses sees to earn any returns, profit or income. The money has not been laid out in such a manner as to acquire some species of property which would yield income for the assessee. [Para 35]

In this case, contribution to the chit fund was made to enable the assessee society to raise funds for expansion. This is clear from funds flow statement and the projected investment required by the assessee. When the assessee is paying huge amount of interest to various banks, it is wrong to conclude that assessee has with an intention to earn profit or income made a contribution to the chit fund. [Para 36]

The allegation of revenue that the assessee has not withdrawn the chit amount has been answered by the assessee, by pointing out that, every month the winner of the chit is determined by draw of lots and assessee society was not lucky to win the draw on each of the occasion. The allegation that the assessee has surplus fund, kept as deposits, is also wrong for the reason that these fixed deposits were jointly held in the name of the assessee and the Governmental authority, as is was compulsory as per rules, for grant of permission to run educational institution. Thus, for all these reasons, the contribution to chit, in the cases on hand, is not an investment nor a deposit and hence section 13(1)(d) is not attracted. [Para 37] The requirement of investing or depositing, under section 11(5) is confined to money in hand or cash.

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When the entire income of the year has already been spent towards the objects of the society, there cannot be said to be any funds remaining out of the funds received by way of income. A person can invest only the money which is in his hands. If the entire money in hand is already spent for a particular purpose then the question of spending the same amount for another purpose as well does not arise. In the case of assessees, as per the charts submitted by the assessee it is evident that it has incurred deficit in every year and thus entire income of each assessment year was fully spent towards the charitable objects. [Para 39]

Contribution to chit fund in this case, is not an investment, and much less an investment with someone else, and further that the provisions of section 11(1)(a) have been complied by investing the entire income ofthe year towards charitable purposes, it is concluded that there is no violation of section 13(1)(d) read with section 11(5)."

13. The assessee has spent the entire income earned in the year for the objects of the trust. As has incurred excess amount, there is no surplus amount which needs to be invested u/s 11(5). Section 11(5) comes in to operation only when Trust has accumulated or set part the amount u/s 11(2). In the case of the assessee, there is a no surplus fund and hence, the question of investment or deposit as specified u/s 11(5) does not arise. Contribution to chit fund in this case is not an investments or deposit as specified u/s 11(5), it is, as submitted, only an arrangement for better management of funds of the assessee. The assessee has been complied with the provisions of section 11(1)(a) by applying entire amount for the objects of the trust. Therefore, respectfully 11 ITA.No.1560/Hyd/2013 Sankshema, Hyderabad.

following the Co-ordinate Bench decision of Vishakhapatnam reported in (2015) 153 ITD 121, it is concluded that there is no violation of section 11(5) and the assesse is eligible to claim exemption u/s 11. Hence, the grounds of the assessee are allowed.

14. Since, the assessee is succeeds in main ground, the additional ground raised is academic and hence, not adjudicated.

15. In the result, appeal of the assessee is partly allowed.

Order pronounced in the open Court on 31.07.2015.

Sd/-

B. RAMAKOTAIAH ACCOUNTANT MEMBER Dated 31st July, 2015.

VBP/-

Copy to

1. SANKSHEMA, Karimnagar.

C/o. Mr. S. Rama Rao, Advocate, Flat No.102, Shriya's Elegance, Door No.3-6-643, Street No.9, Himayatnagar, Hyderabad - 500 029.

2. Dy. Director of Income Tax (Exemptions)-I, Hyderabad.

3. CIT(A)-IV, Hyderabad.

4. DIT (Exemptions), Hyderabad.

5. D.R. ITAT, SMC (B) Bench, Hyderabad.

6. Guard File