Commissioner Of Income Tax,Chennai v. M/S.sri Vekkaliamman Educational And Charitable Trust

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 24.08.2021 CORAM : The Hon'ble MR.JUSTICE T.S.SIVAGNANAMandThe Hon'ble MR.JUSTICE SATHI KUMAR SUKUMARA KURUP T.C.A.No.326 of 2015 Commissioner of Income tax,Chennai. ... Appellant/Appellant Vs M/s.Sri Vekkaliamman Educational and Charitable Trust,No.108, East Madha Street,Royapuram, Chennai – 600 013. ... Respondent/Respondent PRAYER : Tax Case Appeal filed under Section 260-A of the IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal, Madras, “C” Bench, Chennai dated 10.09.2014 passed inI.T.A.No.970/Mds/2014 against the order of the Commissioner ofIncome Tax (Appeals)-VII, Chennai-34, dated 27.12.2013 in ITANo.292/12-13 for the Assessment year 2010-2011, against theAssessment order of the Deputy Director of Income-Tax/ExemptionsII, Chennai, dated 25.02.2013 for PAN for theAssessment year 2010-11. For Appellant : Mr.J.Narayanasamy, SeniorStanding Counsel. For Respondent : Mrs.T.C.A.Sangeetha. This Tax Case Appeal filed under Section 260-A of theIncome Tax Act, 1961 ('the Act' for brevity) is directed againstthe order dated 10.09.2014 in I.T.A.No.970/Mds/2014 passed by https://hcservices.ecourts.gov.in/hcservices/ the Income Tax Appellate Tribunal “C” Bench, Chennai (forbrevity “the Tribunal”) for the Assessment Year 2010-2011. 2.The Appeal was admitted on 22.07.2015 to decide thefollowing substantial questions of law; “1.Whether on the facts and in thecircumstances of the case, the Appellate Tribunal wasright in holding that the assessee is entitled toclaim depreciation on the assets even though the costof purchase of asset was already treated asapplication of income under Section 11? 2.Whether on the facts and in thecircumstances of the case, the Tribunal was right inlaw in holding that there is no violation within themeaning of Section 13 (1) © read with Section 13 (2)and Section 13 (3) of the Income Tax Act when thebuilding contract work was awarded to the ManagingTrustee, thereby allowing him to earn profit from thesaid contract and the assessee is entitled forexemption under Section 11? 3.Whether on the facts and in thecircumstances of the case, the Tribunal was right inlaw in denying the exemption under Section 11 of theAct on the entire income of the assessee, even thoughit held that the “investment” in gold bullion is inviolation of the provisions of Section 11 (5) readwith Section 13 (10) (d) of the Act, more so when theSupreme Court in the case of CIT v. Dawoodi BohraJamat (2014) 364 ITR 31 (SC) at para 15 has clearlyheld that Section 13 enacts a complete bar to theavailability of exemption under Section 11?” 3.We have elaborately heard Mr.J.Narayanaswamy, LearnedSenior Standing Counsel appearing for the Appellant / Revenueand Mrs.T.C.A.Sangeetha, Learned Counsel appearing for theRespondent / Trust. 4.It is not disputed rather conceded before us thatsubstantial question of law No.1 has to be answered against theRevenue in the light of the decision of the Hon'ble SupremeCourt in the case of Commissioner of Income Tax Vs.Rajasthan andGujarati Charitable Foundation Poona reported in (2018) 402 ITR0441 (SC), wherein it was held that normal depreciation could beconsidered as legitimate deduction in computing real income ofassessee on general principles or u/s.11 (1)(a) of the Act.Accordingly, the substantial question of law No.1 is answeredagainst the Revenue by complying the above decision. https://hcservices.ecourts.gov.in/hcservices/ 5.In so far as the third substantial question of law isconcerned, in the Assessee's own case in T.C.A.No.890 of 2019dated 24.09.2020, the Division Bench of this Court had set asidethe order passed by the Tribunal and remanded the matter to theTribunal to consider the issue afresh and in accordance withlaw. The operative portion of the Judgment reads as follows: https://hcservices.ecourts.gov.in/hcservices/ 5.In so far as the third substantial question of law isconcerned, in the Assessee's own case in T.C.A.No.890 of 2019dated 24.09.2020, the Division Bench of this Court had set asidethe order passed by the Tribunal and remanded the matter to theTribunal to consider the issue afresh and in accordance withlaw. The operative portion of the Judgment reads as follows: “3.WehaveelaboratelyheardMs.T.C.A.Sangeetha,learnedcounselfortheappellant/assessee and Mr.J.Narayanaswamy, learnedSeniorStanding Counselappearingfortherespondent/Revenue. 4.The assessee is a registered PublicCharitable Trust, which has established andadministering an educational institution. It has beengranted registration under Section 12A of the Act.For the assessment year under consideration (AY 2010-11), the assessee filed their return of incomedeclaring its total income as 'Nil' and claimingexemption under Section 11 of the Act. The case wastaken up for scrutiny and notice under Section 143(2)of the Act was issued on the assessee on 14.09.2011.Inthescrutinyassessment,certaindisallowances/additions were made and the taxableincome of the assessee was determined asRs.2,52,28,792/- by order dated 25.02.2013.Aggrieved by such order, the assessee filed appealbefore the Commissioner of Income Tax (Appeals)-VII,Chennai (for brevity “the CIT(A)”). By order dated27.12.2013, the assessee's appeal was allowed.Aggrieved by the same, the Revenue filed appeal beforethe Tribunal. 5.We have gone through the grounds of appealraised by the Revenue before the Tribunal and for easyreference, we quote the same hereunder:- “5.1.The ld CIT(A) erred in holding that investmentmade in gold bullion to the extent of Rs.41.24 is notan investment in the modes other than specified inSec.11(5) of the Act. 5.2.The ld CIT(A) failed to appreciate the fact thatthe Assessing Officer had categorically analysed theissue and observed that the investment in gold bullionamounting to Rs.26.85 lakhs in M/s.Prince gem &Jewellery P. Ltd. for the purpose of distribution ofprizes and awards to meritorious students could not be https://hcservices.ecourts.gov.in/hcservices/ substantiated with evidence by the Trust by way ofname of student, address, etc. 5.3.The ld CIT(A) failed to appreciate that similarinvestment in Joyalukkas in the form of 26 gold coinsweighing 50 gms each and the assessee could notsubstantiate with evidence that the said investmentswere utilised for the purpose of gold metals either inthe current year or in the subsequent year (Asst. Year2011-12). 5.4.The ld CIT(A) ought to have appreciated that inthe final accounts of Asst. Year 2011-12, the saidinvestment in gold towards purchase of gold medalswere not shown as application of income. 5.5.The ld CIT(A) ought to have appreciated the factthat purchase of gold bullion and gold coins cannot beconsidered as a transaction connected with theeducational activity.” 6.On a perusal of the above grounds raisedbefore the Tribunal, it is seen that the stand takenby the Revenue was that the CIT(A) ought not to haveheld that the investment made in gold bullion is notan investment in the modes other than specified inSection 11(5) of the Act. Without examining thecorrectness of the said contention, the Tribunal inparagraph 8, while faulting the CIT(A) for acceptingthe stand taken by the assessee on the ground thatthere were only bald assertions, the Tribunal came tothe conclusion that the purchase of gold by theassessee was not application of funds, but aninvestment in gold bullion and this investment is inviolation of Section 11(5) of the Act. There isnothing on record to indicate that this opinion wasformed by the Tribunal and recorded in its order afterthe assessee had an opportunity to put forth theircontention. 7.The assessee's case is that if such was theview of the Tribunal, then the assessee's case shouldhave been considered as per the proviso (iia) toSection 13(1)(d) of the Act. The assessee wouldcontend before us that the asset, not been specifiedinvestment, can be held for a period of one year fromthe end of previous year in which such an asset wasacquired, which is the case of the assessee. Sincethis issue was not dealt with by the Tribunal, ratherthe assessee appears to have not been put on notice, the above opinion formed by the Tribunal holding thatthe purchase of gold by the assessee was notapplication of funds, but an investment in goldbullion, we find that the assessee has been put toprejudice. Therefore, they are required to be granteda fresh opportunity to put forth their contention. 8.In the light of the above, the appeal isallowed and the finding rendered by the Tribunal inparagraph 8 of the order dated 10.09.2014 is set asideand the matter is remanded to the Tribunal to considerthe said issue afresh and in accordance with law. 9.In the result, the appeal is allowed to theextent indicated. The substantial questions of lawframed for consideration are left open. No costs.” Thus, in the light of the above decision, the issue arising insubstantial question of law No.3 stands remitted back to theTribunal to be decided in terms of the Judgment in T.C.A.No.890of 2019 dated 24.09.2020. 6.This leaves us with substantial question of law No.2.The Assessee paid a sum of Rs.5.02 crores to M/s.SriVekkaliamman Builders which is a partnership firm in which theManaging Trustee of the assessee Trust was a partner. Thequestion was whether this payment would be hit by Section 13 (1)(c) read with Section 13 (2) and Section 13 (3) of the Act. 7.The Assessing Authority, while completing theassessment by order dated 25.02.2013, held that thattransactions of the Trust for the year have clearly violated theprovisions of law as per Section 13(1)(c) and 13(1)(d) of theAct and therefore, the provisions of Section 11 becomeinoperative and the surplus gained by the Trust for the yearneeds to be brought to taxation. The Assessee filed Appeal tothe Commissioner of Income Tax (Appeals) – VII ['the CIT(A)' forbrevity]. The Appeal was allowed by order dated 27.12.2013wherein, the CIT(A) after noting that the Builder was paid a sumof Rs.5.02 crores by the Assessee in the assessment year underconsideration and the firm has earned a net profit of Rs.21.51lakhs, but yet granted relief to the Assessee on the ground thatcontract was given to the said Builder on a competitive basisand they were the persons who quoted lowest rate and profitearned was only 5.8% which is very reasonable. These findingswere upheld by the Tribunal in the impugned order. 8.The question is as to how sub-clause (c) of sub-section (2) of Section 13 of the Act has to be interpreted. Withoutprejudice to the generality of the provisions of sub-clause (c)and sub-clause (d) of sub-section (1) of Section 13, the incomeor property of the trust or any part of such income or propertyshall, for the purpose of that clause, be deemed to have beenused or applied for the benefit of a person referred to in sub-section (3). 9.Admittedly, the Managing Trustee of the Trust was apartner who would fall within the definition of a person asdefined in sub-clause (cc) of sub-section (3). 8.The question is as to how sub-clause (c) of sub-section (2) of Section 13 of the Act has to be interpreted. Withoutprejudice to the generality of the provisions of sub-clause (c)and sub-clause (d) of sub-section (1) of Section 13, the incomeor property of the trust or any part of such income or propertyshall, for the purpose of that clause, be deemed to have beenused or applied for the benefit of a person referred to in sub-section (3). 9.Admittedly, the Managing Trustee of the Trust was apartner who would fall within the definition of a person asdefined in sub-clause (cc) of sub-section (3). 10.The argument of Mrs.T.C.A.Sangeetha, Learned Counselappearing for the Respondent is that Section 13(2)(c) would cometo the aid and assistance of the Assessee which states that ifany amount is paid by way of salary, allowance or otherwiseduring the previous year to any person referred in sub-section(3) of Section 13 out of resources of the Trust or institutionfor services rendered by such person to such Trust orinstitution and the amount so paid, is in excess of what may bereasonably paid for such services, the benefit granted by theCIT(A) requires to be confirmed. 11.The moot question would be as to how sub-section (2)of Section 13 should be interpreted and whether there is adeemed provision? In this regard, Mr.J.Narayanaswamy, LearnedSenior Standing Counsel appearing for the Appellant referred tothe decision of Hon'ble Division Bench of the Kerala High Courtin the case of Chandrika Educational Trust V.Commissioner ofIncome Tax reported in (1997) 90 TAXMAN 1 (KER.). “9.Section 11 of the Income-tax Act speaks ofthe situation relating to the incomes not to beincluded in the total income of the previous year ofthe person in receipt of the income in question. Inregard thereto provisions of section 11 (1A) enactthat if the income is derived from the property heldunder trust wholly for charitable or religiouspurposes and to the extent to which such income isapplied to such purposes in India, such income is notto be included in the total income of the previousyear under the benefit offered by section 11. This isnot the be-all and end-all of the situation becausethe statutory provisions of section 11 of the Act arerequired to be understood in the context of situationsof exception provided under section 13(1) of the Act.In fact the said statutory provision (section 13)enumerates situations in regard to which it can besaid that those situations would take out the items ofincome covered thereby from the benefit provided by section 11 of the Act. Illustratively section 13(1)(c) provides one such situation. The said provisionenacts that any income of a trust for charitable andreligious purposes will not get the benefit of section11 if such income is found directly or indirectly forthe benefit of any person referred to in section 13(3)of the Act. In other words, if the concerned incomein regard to which exemption is sought for underSection 11 of the Act is seen to have any connection,direct or indirect, for the benefit of any personreferred to under section 13(3), with regard to thatincome no benefit under section 11, would beavailable. In this connection section 13(3) specifieswho such persons would be. It is obvious that suchperson is not only the author of the trust or thefounder of the institution, but also any person whohas made a substantial contribution to the trust orinstitution, one whose total contribution during therelevant previous assessment year exceeds Rs.5,000,but also includes any relative of such author,founder, person, member, trustee or manager of theconcern asking for the benefit. 10.In addition thereto, section 13(2) of theAct introduces deeming situations and this is apartfrom the generality of the provisions of section 13(1)(c). The provision enacts that such income orproperty has to be deemed to have been used or appliedfor the benefit of a person who could be the onespecified in section 13(3). Provision of section 13(2)(h) is one such illustrative situation. The saidprovision, if reproduced, is as follows: “If any fundsof the trust or institution are, or continue toremain, invested for any period during the previousyear (not being a period before the 1st day of January,1971) in any concern in which any person referred toin sub-section (3) has a substantial interest.” It would be seen that the benefit of section11 would not be available to a situation which isdeemed to have been statutorily stated to be used orapplied for the benefit of such person, if the incomecontinues to remain invested for any period during theprevious year in question in any concern in which anyperson referred to in section 13(3) has a substantialinterest. Therefore, the provisions of section 13(2)(h) are also required to be understood as anadditional situation deemed to have been consideredstatutorily as taking out the situation for thepurpose of benefit under section 11.” 12.Thus, the issue to be considered is as to how tointerpret sub-section (2) of Section 13, which is a deemingprovision and also to test as to whether construction contractwhich has been granted to the firm in which the managing trusteewas a partner would tantamount to “service” as contemplatedunder Section 13(2)(c). We find from the order passed by theCIT(A) which has been confirmed by the Tribunal that there hasbeen no discussion on such aspects, nor the Assessee raised suchissue. Nevertheless the issue, being ultimately a legal issue,involves question of fact and law for the Tribunal is requiredto take a fresh decision considering all issues and also theeffect of sub-section (2) of Section 13. 13.In the result, the matter is remanded to the Tribunalto decide the issue regarding whether there was a violationcommitted by the Assessee Trust under Section 13(1)(c) read with13(2) and Section 13(3) of the Act in respect of buildingcontract awarded to a firm in which managing trustee was apartner and the firm having earned profit, whether the Assesseeis entitled for exemption under Section 11. 14.Thus, the first substantial question of law isanswered against the Revenue by following the Judgment of theHon'ble Supreme Court in the case of “Commissioner of Income TaxVs.Rajasthan and Gujarati Charitable Foundation Poona” reportedin “(2018) 402 ITR 0441 (SC)” and the third substantial questionof law stands remitted back to the Tribunal following thedecision of the Assessee's own case in T.C.A.No.890 of 2019dated 24.09.2020. 15.In the result, this Tax Case Appeal is dismissed inrespect of first substantial question of law and partly allowedin respect of second and third substantial questions of law andthe matter is remanded back to the Tribunal for freshconsideration. No costs. Sd/-Assistant Registrar(CS-VI) //True Copy// Sub Assistant Registrar ay https://hcservices.ecourts.gov.in/hcservices/ To 1. The Commissioner of Income tax,Chennai.Chennai. 2. The Income Tax Appellate Tribunal 'C' Bench,Chennai.Chennai. 3. The Commissioner of Income Tax (Appeals)-VIIChennai.Chennai. 4. The Deputy Director of Income Tax,Exemptions-II, Chennai.Exemptions-II, Chennai. T.C.A.No.326 of 2015 AK-II(CO)SU(24/09/2021)