Ita/18/2019 Of Ilahia Trust v. The Commissoner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE BASANT BALAJI MONDAY, THE 15 DAY OF NOVEMBER 2021 / 24TH KARTHIKA, 1943 ITA NO. 18 OF 2019 AGAINST THE ORDER IN ITA 313/2018 OF I.T.A.TRIBUNAL,COCHIN BENCH,ERNAKULAM APPELLANT/S: M/S.ILAHIA TRUST,MARKET ROAD, VELLORKUNNAM VILLAGE, ILAHIA TRUST, MUVATTUPUZHA-686673, REPRESENTED BY ITS CHAIRMAN, SHRI K.M. PAREETH. BY ADVS.T.M.SREEDHARAN (SR.)SRI.V.P.NARAYANANSMT.DIVYA RAVINDRANSRI.R.BHASKARA KRISHNAN RESPONDENT/S: THE COMMISSONER OF INCOME TAX,C.R BUILDING, I.S. PRESS ROAD, COCHIN-682018. OTHER PRESENT: SC CHRISTOPHER ABRAHAM THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 15.11.2021,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: J U D G M E N T S.V. Bhatti, J. Heard learned Senior Advocate Mr T M Sreedharan forappellant and learned Standing Counsel Mr ChristopherAbraham for respondent. 2.M/s. Ilahia Trust/Assessee is the appellant herein. The Commissioner of Income Tax, Cochin/Revenue is therespondent. The assessee is a Trust registered under Section12AA of the Income Tax Act 1961 (for short ‘the Act’). Theinstant appeal arises from the order of the Income TaxAppellate Tribunal (for short ‘Tribunal’) Cochin Bench dated29.10.2018 in I.T.A. No.313/Coch/2018. The issues relate to thereturn filed by the assessee for the Assessment Year 2012-13. I T Appeal No. 18/2019 2.1As an Educational Trust registered under Section12AA, the assessee claims that the income of the Trust for theAssessment Year up to and including the Assessment Year 2010-11 is exempt from the computation of total income of theassessee. The assessee for the subject assessment year, on01.01.2013, filed the return under the Act declaring the totalincome of the assessee as ‘Nil’. The assessee, admittedly,established and running four educational institutions. The caseof the assessee was selected for scrutiny and statutory noticesunder Section 143(2) and 142(1) were issued by the AssessingOfficer. The Assessing Officer issued notice calling upon theassessee to explain the advance of a sum of Rs.72,45,000/- infavour of M/s.VUS Timbers. M/s. VUS Timbers is a proprietaryconcern of Mrs. K Sainaba. The Proprietrix K Sainaba is the wifeof Managing Trustee Sri V U Sidhik of the assessee/Educational I T Appeal No. 18/2019 Trust. The advance made in favour of M/s. VUS Timbers sinceis not compliant with the general purpose of running the Trust,the Assessing Officer called upon the assessee to show-cause asto why the provisions of Section 13(1)(c) of the Act should notbe invoked and disallow the advances made by the assessee infavour of M/s. VUS Timbers. The assessee, in its reply dated19.11.2014, stated that the assessee had taken steps to establisha medical college; the wood requirement of the proposedbuilding for the medical college has been placed on M/s. VUSTimbers and, therefore, the amount has been advanced to M/s.VUS Timbers. The assessee does not dispute the standing ofM/s. VUS Timbers vis-a-vis the Managing Trustee of theassessee. It is stated the amount received from the assessee wasrepaid by M/s. VUS Timbers during the Financial Years 2012-13;2013-14; and 2014-15. 2.2The other issue which needs to be referred to at this I T Appeal No. 18/2019 2.2The other issue which needs to be referred to at this I T Appeal No. 18/2019 stage is, the assessee has described one Mr Varghese Innocentin the list of sundry creditors. The total amount shown againstthe name of Varghese Innocent is Rs.21,27,846/-. The assesseewas called upon to explain the outflow from the Trust account asum of Rs.21,27,846/-. The reply is that the said VargheseInnocent carried out a few works for the assessee/Trust and theamount has been paid towards consideration for the workscarried out by the said contractor. Then, the next questionraised by the Department is what are the works carried out byVarghese Innocent and whether TDS was effected while makingthe payment. The assessee could not place on record the detailsof effecting TDS on the amount paid to Varghese Innocent. Thefailure to comply with Section 40(a)(ia) of the Act has beennoted and the amount claimed towards capital investment hasbeen disallowed by the Assessing Officer. 2.3The Assessing Officer, through order in Annexure-A I T Appeal No. 18/2019 dated 11.03.2015, finalized the assessment of the assesseecalling upon the total tax payable by the assessee together withinterest amounting to Rs.2,86,95,959/-. The assessee filedappeal before the Commissioner of Income Tax (Appeals). TheCIT (Appeals), through the order dated 10.04.2018 in Annexure-B, dismissed the appeal. The assessee filed second appeal beforethe Tribunal in ITA No.313/Coch/2018. The Tribunal, throughthe order dated 29.10.2018 filed as Annexure-D, dismissed theappeal filed by the assessee. Hence, the appeal under Section260A of the Act. 3.The issues relate to the payment of Rs.72,45,000/- in favour of M/s. VUS Timbers and Rs.21,27,846/- in favour ofVarghese Innocent. Rs.72,45,000/- is claimed as advance paidfor the purchase of wood and the sum of Rs.21,27,846/- is shownas expenses incurred for construction work and payment madewithout TDS to the contractor Varghese Innocent. I T Appeal No. 18/2019 Substantial Question Nos. 1 to 3 3.Substantial question nos. 1 to 3 read thus: “(i)Whether on the facts and in the circumstances of thecase, the Appellate Tribunal is justified in dismissing the appealby rejecting all the claims for exemption/deduction in theAssessment Order Annexure-A? (ii)Is the Appellate Tribunal justified in making addition ofRs.72,45,000/- and estimating interest thereon as diversion offunds of the Trust amounting to violation of exemption u/s.11of the Act r.w.s. 13(1)(c) and in levying tax at maximummarginal rate thereon? (iii)Whether on the facts and in the circumstances of thecase, the assessing and Appellate Authorities, including theAppellate Tribunal are justified in estimating and addingRs.13,04,700/- as income of the Trust and assessing the same atmaximum marginal rate as stated in the ground above? Are notthe above additions arbitrary, illegal and unsustainable inlaw?” 4.Senior Advocate Mr T M Sreedharan contends that the assessee was granted registration under Section 12AA of the Act on 01.04.2000 and the assessee being an Educational Trust, the income is exempt from the computation of total income for I T Appeal No. 18/2019 (iii)Whether on the facts and in the circumstances of thecase, the assessing and Appellate Authorities, including theAppellate Tribunal are justified in estimating and addingRs.13,04,700/- as income of the Trust and assessing the same atmaximum marginal rate as stated in the ground above? Are notthe above additions arbitrary, illegal and unsustainable inlaw?” 4.Senior Advocate Mr T M Sreedharan contends that the assessee was granted registration under Section 12AA of the Act on 01.04.2000 and the assessee being an Educational Trust, the income is exempt from the computation of total income for I T Appeal No. 18/2019 the subject assessment year as well. The conduct of assesseesince its inception till the show-cause notice issued by theAssessing Officer is completely blemishless. The assessee, beingan Educational Trust, is discharging the objects for which theTrust has been established. The assessee, as part of providingeducation and establishing more colleges, planned to establish amedical college in the State of Kerala. The assessee, as ameasure in this behalf, paid a sum of Rs.72,45,000/- to M/s. VUSTimbers and the said amount is an advance made by theassessee in favour of M/s. VUS Timbers. The Assessing Officererred in fact by prejudicially presuming against the assessee byreferring to the solitary circumstance that the Proprietrix ofM/s. VUS Timbers is the wife of the Managing Trustee – Mr V USidhik. The plan of the assessee since could not go forward, theassessee during the Financial Years referred to above hasreceived the advance paid to M/s. VUS Timbers. Therefore, the I T Appeal No. 18/2019 order of the Assessing Officer, as confirmed by the CIT (Appeals)and the Tribunal, is suffering from the erroneous and illegalunderstanding of the normal circumstances which had takenplace in the subject Assessment Year. The order, giving effectto the provision under Section 13(1)(c),is untenable. Accordingto him, the issues require reconsideration, if this Court is notconvinced on the ground that the findings recorded by theauthorities suffer from excessive subjective satisfaction, to wit,matter could be remanded to Tribunal. 5.Learned Standing Counsel Mr Christopher Abraham,replying to the argument of assessee, states that the AssessingOfficer and the CIT (Appeals) have, in fact, taken note of eachone of the circumstances stated by the assessee by way of replyto the show-cause notice, and the authorities were convincedbecause of the failure of the assessee to establish the bona fidesof the reply given by it in the payment made to M/s. VUS I T Appeal No. 18/2019 Timbers. In other words, the assessee failed to place materialrelating to permissions granted for establishing a medicalcollege, the timing of payments made to M/s. VUS Timbers andthat the advance payment was made in furtherance of a projectplanned by the assessee. In the absence of material on the verybasic reply given by the assessee, acceptance of reply given bythe assessee would be illegal and the Officers do not enjoy somuch discretion under the Act to accept unsupported reply. Heinvited our attention to each one of the findings recorded by allthe three authorities and argued that the questions raised,firstly, do not arise for consideration and secondly, there is noperversity in any of the findings recorded by the orders inAnnexures-A, B and D. This Court ought not to decide thelegality of the conclusions recorded by the authorities bylooking at fresh material now placed by the assessee before thisCourt. Even, such material does not inspire confidence for the I T Appeal No. 18/2019 limited purpose of remitting the matter to the Tribunal. Heprays for answering all the three questions in favour of theRevenue and against the assessee. I T Appeal No. 18/2019 limited purpose of remitting the matter to the Tribunal. Heprays for answering all the three questions in favour of theRevenue and against the assessee. 6.The argument of assessee proceeds to convince thisCourt that the reply given by the assessee is not considered andled to a finding which resulted in the inclusion of Rs.72,45,000/-as income of the assessee. The further argument is that theorders did not consider the material placed by the assessee insupport of its plan to establish a medical college and/orsubsequent inability to go ahead with the establishment ofmedical college as planned. Therefore, the assessee prays forfirstly answering the questions in favour of the assessee, andsecondly for sending the matter back to Tribunal forconsideration and disposal afresh. We can, having perused therecord, state that the argument is de horswhat has beencategorically and specifically adverted to by the Assessing I T Appeal No. 18/2019 Officer, CIT (Appeals) and the Tribunal. However, we wouldlook at a few circumstances to appreciate the argument ofassessee. 7.To begin with, this Court takes note of the fact thatM/s. VUS Timbers is a proprietary concern of Mrs K Sainaba,and Mrs K Sainaba is the wife of Managing Trustee Sri V USidhik. From Annexure-E ledger account extract of Ilahia Trust,of M/s. VUS Timbers it is shown that on 16.02.2012 under tworeceipts a sum of Rs.72,45,000/- was paid to M/s. VUS Timbers.As per Annexure-G(a) the communication received by theassessee from Kerala University of Health Sciences dated03.12.2012 shows that the application of the assessee wasreturned. The assessee, in Annexure-G(b)(5) dated 29.11.2012,has applied for the grant of Essentiality Certificate by theHealth University. A bare look at even the very documents nowfiled by the assessee discloses that the payment/advance in I T Appeal No. 18/2019 favour of M/s. VUS Timbers is anterior to any of the steps now relied on by the assessee. This circumstance is sufficient tobelie the entire explanation offered by the assessee in thisbehalf. The admitted circumstances are that advances havebeen made in favour of the Managing Trustee’s wife. Theexplanation offered is for the purchase of wood for proposedconstruction of a medical college. The purchasing of wood isfor the medical college to be established by theassessee/Educational Trust. Each one of the above reasonslooked at independently, in the background of material placedon record by the assessee, this Court is of the view that thefindings recorded by the Tribunal confirming the findings offacts recorded by the authorities under the Act are availableconclusions, and do not warrant interference of this Court. Thereasoning of Tribunal's order in paragraph 3.5, reads as follows:“3.5We have heard the rival submissions and perused the material on record. Section 13(1)(c) of the I.T.Act states that ifany income of the trust during the previous year is used orapplied directly or indirectly to any person referred to in sub-section (3) of section 13, provisions of section 11 will not haveapplication. Admittedly, the amount has been advanced toM/s. VUS Timbers, a proprietory concern of wife of theManaging trustee. Therefore, the advance clearly comes withinthe mischief of section 13(1)(c) of the I.T.Act unless it is provedthat the said advance is for the purpose of assessee-trust itself.It is the claim of the assessee that the amount has beenadvanced for purchase of timber for the proposed constructionof a medical college. It is an admitted fact that permission wasgiven for the setting up of medical college. The assessee hasalso not produced any application or other documents whichought to have been submitted to the Governmental authoritiesor Medical Council of India for the proposal for setting up ofmedical college. The story of the assessee is far from convincingthat the advance has been made for the purchase of timber. Thetimber is normally purchased only subsequent to theconstruction of the building and even without constructing anybuilding, the assessee had made the advance for purchase oftimber. It is also an admitted fact that no wood was received bythe assessee. Therefore, in the garb of purchase of timber, theadvance amounts were diverted for the personal benefit of an interested party, who is mentioned in section 13(3) of theI.T.Act. Therefore, there is clear violation of provisions ofsection 13(1)(c) of the I.T.Act. The contention of the assesseethat the amounts were returned by account payee cheques andwithin a short period is of no consequence. Only a small portionof the advance was repaid to the assessee trust within fourmonths from the date of advance. Therefore, the repayment byM/s.VUS Timbers of all the advance by account payee chequesis of no significance insofar as there was already a violation ofprovisions of section 13(1)(c) of the I.T.Act. Therefore, theCIT(A) is justified in directing the A.O. to treat an amount of Rs.72,45,000 as advance as income the assessee. The assessee waspaying interest on borrowings, and therefore, notional interestat the rate of 18% on the of advance of Rs.72,45,000 was rightlybrought to tax as income of the assessee by the A.O. Therefore,we see no reason to interfere with the findings of the CIT (A).Accordingly, we confirm the order of the CIT (A) on this issue.” Nothing more is needed except to record that the findings offact recorded are tenable from available circumstances andthere is no substantial question involved warrantinginterference of this Court. Hence, the questions are answered I T Appeal No. 18/2019 -16- in favour of the Revenue and against the assessee. Substantial Question nos. 4 and 5 8.Substantial question nos. 4 and 5 deal with issues arising under Section 40(a)(ia) related to non-compliance with the requirement of deduction of TDS. The questions read thus: “(iv)Did not the Appellate Tribunal err in law in disallowanceof Rs.21,27,846/- being the amount paid for contract executedby invoking Sec.40(a)(ia) and in levying income thereon atmaximum marginal rate, as if the same constituted income ofthe appellant? (v)Did not the Appellate Tribunal err in law in disallowinglabour charges expenses to the extent of Rs.5,40,390/- andtreating the same as payment in violation of the statutoryprovision and levying income tax thereon at maximummarginal rate? Are not the findings of the Appellate Tribunalperverse in law and liable to be set aside?” 8.1The statutory obligation of the assessee to conform to the requirement of Section 40(a)(ia) of the Act is not indispute. The fact that no TDS was effected while making the I T Appeal No. 18/2019 “(iv)Did not the Appellate Tribunal err in law in disallowanceof Rs.21,27,846/- being the amount paid for contract executedby invoking Sec.40(a)(ia) and in levying income thereon atmaximum marginal rate, as if the same constituted income ofthe appellant? (v)Did not the Appellate Tribunal err in law in disallowinglabour charges expenses to the extent of Rs.5,40,390/- andtreating the same as payment in violation of the statutoryprovision and levying income tax thereon at maximummarginal rate? Are not the findings of the Appellate Tribunalperverse in law and liable to be set aside?” 8.1The statutory obligation of the assessee to conform to the requirement of Section 40(a)(ia) of the Act is not indispute. The fact that no TDS was effected while making the I T Appeal No. 18/2019 payment of Rs.21,27,846/- in favour of one Varghese Innocenttowards consideration for contract works is also not in dispute.The explanation, in the understanding of this Court, does notdeal with any of the relevant aspects of law or fact forindependently examining the question to find out whether thefindings recorded by the orders referred to above warrantinterference. It is sufficient to refer to the findings recorded bythe Tribunal in this behalf which read as follows: “4.4 We have heard the rival submissions and perused thematerial on record. Admittedly, no tax was deducted on thepayment of Rs.21,27,846. The assessee has not proved that theprovisions of section 40(a)(ia) of the I.T.Act does not have anyapplication on the said payment of Rs.21,27,846. Hence, the A.O.was correctly disallowed the expenditure by invoking theprovisions of section 40(a)(ia) of the I.T.Act, which wasconfirmed by the CIT(A). Hence, we see no reason to interferewith the order of the CIT(A) and we confirm the same.” 8.2The assessee failed to demonstrate how the above I T Appeal No. 18/2019 finding warrants interference of this Court, particularly byreferring to the substantial questions framed in this behalf. Thequestions are not substantial questions of law, and theadjudication is in accordance with the requirements of law andcircumstances presented by the very return filed by theassessee. The questions are answered, hence, in favour of theRevenue and against the assessee. Substantial Question Nos. 6 & 7 9.Substantial question nos. 6 & 7 read as follows: “(vi) Is not the computation of total income and the levy ofinterest u/s 234A and 234B as per the modified order dated25.05.2018 erroneous and contrary to the statutory provisionand hence, liable to be set aside?interest u/s 234A and 234B as per the modified order dated25.05.2018 erroneous and contrary to the statutory provisionand hence, liable to be set aside? (vii) Is not the entire order of the Appellate Tribunal arbitrary,illegal and unsustainable in law?”illegal and unsustainable in law?” 9.1The questions relate to the levy of interest underSection 234A and 234B of the Act. The non-compliance with I T Appeal No. 18/2019 statutory requirements and inviting one or the otherconsequence thereof is not disputed. The discretion is rightlyexercised by the Assessing Officer for levying interest on the taxdetermined in this behalf. Since the other questions areanswered in favour of the Revenue and against the assessee,these questions follow suit and are answered, accordingly, infavour of the Revenue and against the assessee All the findingsof the Tribunal are confirmed. The order of the Tribunal is inaccordance with law and no exception could be taken andquestions answered accordingly. Income Tax Appeal is dismissed. No order as to costs. Sd/- S.V.BHATTIJUDGE jjj Sd/- BASANT BALAJIJUDGE I T Appeal No. 18/2019 APPENDIX OF ITA 18/2019 PETITIONER ANNEXURE ANNEXURE ATRUE COPY OF THE ASST. ORDER DATED 11/3/2015 PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTION), KOCHI.PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTION), KOCHI. Income Tax Appeal is dismissed. No order as to costs. Sd/- S.V.BHATTIJUDGE jjj Sd/- BASANT BALAJIJUDGE I T Appeal No. 18/2019 APPENDIX OF ITA 18/2019 PETITIONER ANNEXURE ANNEXURE ATRUE COPY OF THE ASST. ORDER DATED 11/3/2015 PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTION), KOCHI.PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTION), KOCHI. ANNEXURE BTRUE COPY OF THE ORDER IN APPEAL NO.ITA 300/EXEM/EKM/CIT(A)III/2015-16 DATED 16/4/2018 PASSED BY THE CIT (A)-II, KOCHI.300/EXEM/EKM/CIT(A)III/2015-16 DATED 16/4/2018 PASSED BY THE CIT (A)-II, KOCHI. ANNEXURE CTRUE COPY OF ORDER OF THE MODIFIED ORDER DATED 25/5/2018 PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX (EXEMPTIONS), KOCHI.25/5/2018 PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX (EXEMPTIONS), KOCHI. ANNEXURE DTRUE COPY OF THE ORDER IN ITA NO.313/COCH/2018 DATED 29/10/2018 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH.DATED 29/10/2018 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH. ANNEXURE ETRUE COPY OF LEDGER ACCOUNT OF M/S.VUS TIMBERS, MUVATTUPUZHA.MUVATTUPUZHA. ANNEXURE FTRUE COPY OF LEDGER FOLIO OF SHRI VARGHESE - CONTRACTOR FOR THE PERIOD FROM 1/4/2011 TO 31/3/2012.CONTRACTOR FOR THE PERIOD FROM 1/4/2011 TO 31/3/2012. ANNEXURE GTRUE COPY OF THE ORDER U/S 12AA OF THE I.T.ACT 1961 DATED 30./11/2007 PASSED BY THE COMMISSIONEROF INCOME TAX, KOCHI.1961 DATED 30./11/2007 PASSED BY THE COMMISSIONEROF INCOME TAX, KOCHI. ANNEXURE G(A)COPY OF COMMUNICATION RECEIVED FROM THE KERALA UNIVERSITY OF HEALTH SCIENCES NO.6924/AC.1/1/2012/KUHS DATED 3/12/2012.KERALA UNIVERSITY OF HEALTH SCIENCES NO.6924/AC.1/1/2012/KUHS DATED 3/12/2012. ANNEXURE G(B)TRUE COPY OF APPLICATION FOR STARTING NEW MEDICAL COLLEGE, BEFORE THE KERALA UNIVERSITY OFHEALTH SCIENCES AND ITS ENCLOSURES.MEDICAL COLLEGE, BEFORE THE KERALA UNIVERSITY OFHEALTH SCIENCES AND ITS ENCLOSURES. I T Appeal No. 18/2019 ANNEXURE G(C)TRUE COPY OF THE REPLY TO THE NOTICE DATED 29/12/2014 TO THE ASSESSING AUTHORITY PURSUANT TO THE HEARING CONDUCTED ON 26/12/2014 FOR THE ASSESSMENT YEAR 2012-13. ANNEXURE G(D)TRUE COPY OF LETTER SUBMITTED ON 26/12/2014 BY THE APPELLANT TO THE ASSESSING OFFICER.