Commissioner Of Income Tax (Exemptions), 3 Rd Floor, Kailashheights, Lal Kothi, Tonk Road, Jaipur v. M/S Shri Ramdoot Prasad Sewa Samiti, Trust, V/P Ghatamehandipur Balaji, Tehsil Todhabhim, Distt. Karauli

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 62/2020 Commissioner of Income Tax (Exemptions), 3 Rd Floor, KailashHeights, Lal Kothi, Tonk Road, Jaipur. ----Appellant Versus M/s Shri Ramdoot Prasad Sewa Samiti, Trust, V/p GhataMehandipur Balaji, Tehsil Todhabhim, Distt. Karauli. ----Respondent For Appellant(s) : Mr. Anuroop Singhi through VCFor Respondent(s): Mr. Siddharth Ranka through VC HON'BLE THE CHIEF JUSTICE MR. AKIL KURESHI HON'BLE MR. JUSTICE SUDESH BANSAL 08/02/2022 Order 1.This appeal is filed by the revenue to challenge the order ofthe Income Tax Appellate Tribunal. Following questions arepresented for our consideration:- "(i) Whether on the facts and in the circumstances ofthe case and in law the Hon'ble ITAT was correct inallowing exemption u/s 11 of the I.T.Act, 1961 to theassessee without appreciating the fact that AO hasgiven detailed reason in assessment order to establishthat activities of the assessee are not charitable in viewof amended provisions of section 2(15) of the I.T.Act,1961? (ii) Whether the ITAT was justified in law in notconsidering that intent for carrying out activities is notrelevant if activities are commercial in nature despitethe fact that in this case assessee has beenselling/preparing ladoos/Prasad etc for which chargesare taken from devotees? (iii) Whether the ITAT was justified in law in allowingexemptions u/s 11 of the I.T.Act, 1961 to the assesseewithout appreciating the fact that the trust has madepurchase of Rs.9,00,46,104/- from M/s Pawansut Trading Company Pvt. Ltd., New Delhi which is aspecified person u/s 13(3) of the I.T.Act, 1961 and thusprovisions of section 13(1)(c)(ii) r.w.s. 13(2)(g) of theI.T.Act, 1961 are attracted in this issue? (iv) Whether the ITAT was justified in law in allowingexemption u/s 11 of the I.T.Act, 1961 to the assesseewithout appreciating the fact that the purchases fromspecified person i.e. M/s Pawansut Trading CompanyPvt. Ltd., New Delhi were not reported by the Auditor inthe audit report furnished u/s 12A(1)(b) in formNo.10B? (v) Whether the ITAT was justified in law in allowingexemption u/s 11 of the I.T.Act, 1961 to the assesseewithout appreciating the fact that the entities i.e. M/sPawansut Trading Company Pvt. Ltd. and M/s MarutiTraders from where maximum purchases were made,have shown a very meager income of Rs.9,71,880/-and Rs.19,357/- respectively which leads to doubtsabout the genuineness of these purchases from theseconcerns? (vi) Any other question of law as deemed fit in the factsand circumstances of the case may also be framed bythe Hon'ble Court in the interests of justice." 2.Though multiple questions are framed, the principal issue onwhich strenuous arguments were made by the counsel for therevenue was with respect to the decision of the Tribunal regardingthe purchases of Rs.9 crores (rounded off) made by the assesseefrom one Pawansut Trading Company Pvt. Ltd. which was aspecified person under Section 13(3) of the Income Tax Act, 1961('Act' for short). According to revenue this transaction would becovered within the mischief of Section 13(2)(g) of the Act.Remaining questions would not require elaborate reference orreasons for not accepting since essentially they are pure questionsof facts duly considered by the Tribunal. 3.Coming to the sole surviving issue of purchases made by theassessee from the related person, brief facts are that respondent-assessee is a trust registered under Section 12AA of the Act and 3.Coming to the sole surviving issue of purchases made by theassessee from the related person, brief facts are that respondent-assessee is a trust registered under Section 12AA of the Act and had claimed exemption under the Act for assessment year 2012-13. The return filed by the assessee-trust was taken underscrutiny by the assessing officer. During such assessment theassessing officer noticed that the assessee had made totalpurchases of raw materials worth Rs.12.24 crores (rounded off)out of which purchases of Rs.9 crores were made from M/sPawansut Trading Company Pvt. Ltd. Upon further scrutiny it wasfound that the one Kishorepuri Ji Maharaj was the main trustee ofthe assessee trust and also the director of the said company andfrom whom purchases worth 75% were made. The assessingofficer was of the opinion that such substantial purchases madefrom a related party had to be at arm's length. The assessingofficer thereupon referred to Section 13 of the Act and without anyfurther discussion concluded as under:- "6.4In view of aforementioned discussion andthe entire material available on record it isestablished that the assessee trust has madepurchases on unreasonable rates from M/s PawansutTrading Pvt. Ltd. New Delhi who is person specifiedu/s 13(3). As such, I hold that the management ofthe trust has used the property of the trust for theirpersonal benefits without justification which attractsprovisions of sec. 13(1)(c) (ii)r.w. 13(2)(g) of the Actas such the assessee is not eligible to claimexemption u/s 11 and 12 of the Act." 4.The assessee carried the matter in appeal. The commissionercalled for remand report and thereafter deleted the disallowanceby observing that the rates of purchase by the assessee from therelated party were same as with unrelated party. Further, therewere no findings in the assessment order on the basis of whichadditions were made except that purchases have been made fromthe related party. The appellant has also proved that suchpurchases were made at the same rate as paid to unrelated party. 5.The department carried the matter in appeal before theTribunal. The Tribunal confirmed the view of CIT (Appeals)observing that assessing officer has not come to the conclusionthat purchases made from the related party were on payment ofexcess amount. There was no allegation that assessee had paidhigher price to the related party as compared to the unrelatedparty. It was observed that merely because a transaction is donewith the related party the same cannot be disallowed if it is donestrictly as per normal terms and conditions and no undue benefitis given to the unrelated party. 6.Having heard learned counsel for the parties and havingperused the documents on record we do not see any error in theview of the Commissioner of Appeals and the Tribunal. As is wellknown Section 11 of the Act pertains to income from property heldfor charitable and religious purposes. Section 13 on the otherhand pertains to cases where Section 11 would have noapplication. Sub-section (1) of Section 13 provides that nothingcontained in section 11 or section 12 shall operate so as toexclude from the total income of the previous year of the personin receipt thereof under specified circumstances. Sub-section (2)of Section 13 provides that without prejudice to the generality ofthe provisions of clause (c) and clause (d) of sub-section (1), theincome or the property of the trust or institution or any partthereof shall for the purposes of that clause would be deemed tohave been used or applied for the benefit of a person referred toin sub-section (3), as provided in clauses (a) to (h) of sub-section(2). We are concerned with clause (g) which reads as under:- "(g) if any income or property of the trust orinstitution is diverted during the previous year infavour of any person referred to in sub-section (3): "(g) if any income or property of the trust orinstitution is diverted during the previous year infavour of any person referred to in sub-section (3): Provided that this clause shall not apply where theincome, or the value of the property or, as the casemay be, the aggregate of the income and the valueof the property, so diverted does not exceed onethousand rupees;" 7.Clause (g) would be applicable in a case where any incomeor property of a trust or institution is diverted during previousyear in favour of any person referred to in sub-section (3). Sub-section (3) in turn relates to persons or institutions which areclosely related such as the author of the trust or the founder ofthe institution, any trustee of the trust or manager of theinstitution etc. It is not in dispute that the assessee and the M/sPawansut Trading Company Pvt. Ltd. are entities covered undersub-section (3) of Section 13. However the question is merelybecause such sale and purchase transaction took place betweentwo such persons, clause (g) of sub-section (2) of Section 13would automatically kick in? The answer has to be in thenegative. Clause (g) would apply where any income or propertyof the trust or institution is 'diverted' during the previous year infavour of any person referred to in sub-section (3). The crux ofthis provision is diversion of income. Mere transaction of sale andpurchase between two related persons would not be coveredunder the expression 'diversion' of income. Diversion of incomewould arise when transaction is not at arm's length and the saleor purchase price is artificially inflated so as to cause undueadvantage to other person and divert the income. 8.As noted in the present case, the assessing officer neverexamined whether the transactions between the assessee and the said company were at arm's length. He merely referred tostatutory provisions and without further discussion came to theconclusion that disallowance had to be made. CIT (Appeals) notonly criticised this approach of the assessing officer but alsoindependently examined whether the transaction was at arm'slength. It was found that the rate paid to the related person wassame as paid to the unrelated party. The tribunal confirmed thisview and in our opinion correctly so. 9.In the result no question of law arises. The appeal isdismissed. (SUDESH BANSAL),J (AKIL KURESHI),CJ KAMLESH KUMAR /54