Sri Lokabandhu Educational Society,, Bobbili v. THE ITO, WARD -3(2), VISAKHAPATNAM., Visakhapatnam

ITA 479/VIZ/2012 | 2003-2004
Pronouncement Date: 28-04-2014 | Result: Allowed

Appeal Details

RSA Number 47925314 RSA 2012
Assessee PAN AAPHS6525M
Bench Visakhapatnam
Appeal Number ITA 479/VIZ/2012
Duration Of Justice 1 year(s) 4 month(s) 11 day(s)
Appellant Sri Lokabandhu Educational Society,, Bobbili
Respondent THE ITO, WARD -3(2), VISAKHAPATNAM., Visakhapatnam
Appeal Type Income Tax Appeal
Pronouncement Date 28-04-2014
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted DB
Tribunal Order Date 28-04-2014
Assessment Year 2003-2004
Appeal Filed On 17-12-2012
Judgment Text
1 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM BEFORE: SHRI J. SUDHAKAR REDDY ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY JUDICIAL MEMBER ITA NO.175/VIZAG/2012 ASSESSMENT YEAR : 2009-10 SRI SIVANI EDUCATIONAL SOCIETY SRIKAKULAM VS. ITO WARD-2 SRIKAKULAM (APPELLANT) (RESPONDENT) PAN NO.AAPHS 6525M ITA NOS.479 TO 481/VIZAG/2012 ASSESSMENT YEAR : 2003-04 2004-05 & 2006-07 SRI LOKABANDHU EDUCATIONAL SOCIETY BOBBILI VS. ITO WARD-3(2) VISAKHAPATNAM (APPELLANT) (RESPONDENT) PAN NO.AABTS 1284R ITA NO.447/VIZAG/2012 ASSESSMENT YEAR : 2005-06 ITO WARD-3(2) VISAKHAPATNAM VS. SRI LOKABANDHU EDUCATIONAL SOCIETY BOBBILI (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI G.V.N. HARI ADVOCATE REVENUE BY: SHRI K.V.N. CHARYA CIT SMT D.KOMALI KRISHNA ADDL. CIT DATE OF HEARING : 07.03.2014 DATE OF PRONOUNCEMENT : 28.04.2014 ORDER PER J. SUDHAKAR REDDY ACCOUNTANT MEMBER:- ASSESSEES APPEALS: (ITA NO.175/V/2012 & ITA NOS.47 9 TO 481/V/2012): APPEAL OF THE ASSESSEE IN ITA NO.175/V/2012 IS DIRE CTED AGAINST THE ORDER OF THE CIT(A) VISAKHAPATNAM DATED 28.3.2012 AND APPEA LS OF THE ASSESSEE IN 2 ITA NOS.479 TO 481/V/2012 ARE DIRECTED AGAINST THE ORDER OF CIT(A) VISAKHAPATNAM DATED 27.9.2012. SINCE ALL THE ISSUE S ARISING IN THESE APPEALS ARE COMMON FOR THE SAKE OF CONVENIENCE THEY ARE HE ARD TOGETHER AND DISPOSED OF BY THIS COMMON ORDER. FACTS IN BRIEF:(ITA NO.175/V/2012) : 2. THE ASSESSEE SRI SIVANI EDUCATIONAL SOCIETY SRIKAKULAM IS A SOCIETY REGISTERED UNDER THE SOCIETIES ACT. IT HAS BEEN GRA NTED REGISTRATION U/S 12A OF THE INCOME TAX ACT 1961 BY THE CIT-II VISAKHAPA TNAM VIDE PROCEEDING NO.CIT-2/TRUSTS/62/2005-06 DATED 29.9.2006. THE AS SESSEE IS AN EDUCATIONAL INSTITUTION RUNNING ENGINEERING AND PHARMACY COLLE GES. DURING THE ASSESSMENT YEAR THE ASSESSEE FILED ITS RETURN OF I NCOME ON 30.9.2009 DECLARING NIL INCOME AFTER CLAIMING EXCESS OF INCO ME OVER EXPENDITURE AMOUNTING TO RS.84 32 548/-. IT CLAIMED EXEMPTION U /S 11 R.W.S. 12A OF THE ACT. THE RETURN OF INCOME WAS SCRUTINIZED UNDER SEC TION 143(3) OF THE ACT. ASSESSING OFFICERS FINDINGS : 3. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEED INGS THE AO NOTICED THAT THE ASSESSEE HAS BEEN CONTRIBUTING TO M/S. MAR GADARSHI CHIT FUNDS. THE CHIT VALUE IS RS.15 LAKHS AND EACH INSTALLMENT IS R S.30 000/- AND THE TOTAL INSTALLMENTS ARE 50. DURING THE YEAR UNDER CONSIDE RATION THE ASSESSEE SOCIETY HAS CONTRIBUTED RS.2 65 300/- AND RECEIVED RS.1 24 700/- AS DIVIDEND FROM THE SAID CHIT FUND COMPANY. THE ASSESSING OFF ICER ON THE GROUND THAT THE ASSESSEE HAS NOT INVESTED OR DEPOSITED ITS FUND S IN THE MODE OF FORM SPECIFIED U/S 11(5) OF THE ACT HELD THAT THE PROVIS IONS OF SECTION 13(1)(D) OF THE ACT ARE ATTRACTED AND THUS CAME TO A CONCLUSION THAT THE ASSESSEE IS NOT ELIGIBLE FOR EXEMPTION U/S 11 OF THE ACT. A SHOW C AUSE NOTICE WAS ISSUED TO THE ASSESSEE SOCIETY. IN REPLY THE ASSESSEE SUBMI TTED THAT (A) THE PURPOSE OF SUBSCRIBING TO THE CHITS WAS FOR OBTAINING FUNDS FOR ACQUIRING FIXED ASSETS AND HENCE WAS NOT AN INVESTMENT. (B) CBDT INSTRUCTI ON NO.1175 STATES THAT IN THE CASE OF THE BUSINESS ENTITY THE LOSS INCURR ED BY THE ASSESSEE IN THE CHIT TRANSACTION IS TO BE TREATED AS BUSINESS LOSS AND HENCE THE SUBSCRIPTION TO CHIT FUNDS CANNOT BE REGARDED AS INVESTMENT OR D EPOSIT. 3 4. THE ASSESSING OFFICER REJECTED THE CONTENTIONS O F THE ASSESSEE. HE HELD THAT THE DIVIDEND RECEIVED IS NOT INTEREST UND ER THE ACT AND HENCE THE CONTRIBUTION MADE BY THE ASSESSEE SOCIETY DO NOT TA KE THE COLOUR OF FINANCE ON THE CONTENTION OF THE ASSESSEE THAT IT HAS MADE CONTRIBUTION FOR THE PURPOSE OF OBTAINING FUNDS FOR ACQUIRING FIXED ASSE TS A.O. AT PARA 5 OF HIS ORDER STATED THAT THE ASSESSEE IS HAVING EXCESS OF INCOME OVER EXPENDITURE OF RS.38 74 707 RS.84 32 548 RS.1 02 74 514/- AND RS .1 13 93 673/- FOR THE FINANCIAL YEARS 2007-08 2008-09 2009-10 & 2010-11 RESPECTIVELY. HE HELD THAT EVERY YEAR THERE IS A SURPLUS OF INCOME AND TH IS SURPLUS LEFT AT THE END OF THE FINANCIAL YEAR IS INCREASING YEAR BY YEAR. HEN CE HE HELD THAT THERE IS NO NEED OF FINANCING FROM THE BIDDING OF CHITS. HE DI STINGUISHED THE CASE LAWS RELIED UPON BY THE ASSESSEE. HE REFERRED TO THE DE CISION OF M/S. PRIYADARSHINI EDUCATIONAL SOCIETY VS. CIT 23 DTR 331 (VISAKHAPATN AM) AND HELD THAT CONTRIBUTION TO CHIT FUNDS IS VIOLATIVE OF THE PROV ISIONS OF SECTION 11(5) AND THEREFORE THE EXEMPTION U/S 11 OF THE ACT CANNOT BE GRANTED. HE BROUGHT TO TAX THE TOTAL INCOME OF THE ASSESSEE. 5. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN AP PEAL. CIT(A)S FINDINGS: 6. THE FIRST APPELLATE AUTHORITY IN A VERY DETAILE D ORDER HAS UPHELD THE ORDER OF THE ASSESSING OFFICER. HE HELD THAT (A) T HE ASSESSEE STARTED CONTRIBUTION TO MARGADARSHI CHIT FUND IN JUNE 2007 AND GOT DIVIDEND ON SUCH CONTRIBUTION DURING THE YEARS 2007 2008 & 2009. T HE ASSESSEE HAS EXCESS OF INCOME OVER EXPENDITURE AS ON MARCH 2009 AS IN EARLIER YEARS. AS ON 31.3.2009 THE ASSESSEE IS HOLDING DEPOSITS OF MORE THAN RS.1.1 CRORES IN VIJAYA BANK FDR. HENCE THE ASSESSEE IS NOT IN DIR E AND IMMEDIATE NEED OF FUNDS (B) IT IS NOT DISPUTED THAT THE ASSESSEE WOUL D NEED MORE MONEY FOR HIS EXPANSION PLAN (C) HOWEVER FOR ASSESSMENT YEAR 200 7-08 2008-09 & 2009- 10 THE ASSESSEE IS HAVING EXCESS FUNDS EVEN AFTER INVESTING THE FUNDS IN THE FIXED ASSETS. (D) IT IS CLEAR FROM THE BALANCE SHEE T THAT THE ASSESSEE HAS TAKEN SECURED LOANS FROM THE BANKS AND HENCE IT CANNOT BE SAID THAT THE ASSESSEE IS NOT HAVING RECOURSE TO APPROVED METHODS OF FUNDI NG AND THUS HAD TO GO IN FOR CHIT BORROWALS (E) ASSESSEE AT THE TIME OF INVE STING IN THE CHITS IS NOT 4 EXPECTING THAT IT WOULD REQUIRE FUNDS IN MAY 2009 AND HENCE WOULD USE THIS AS A METHOD OF BORROWAL. (F) WHEN THE ASSESSEE STA RTED CONTRIBUTING TO CHITS IT IS WITH AN INTENTION TO PARK ITS EXTRA FUNDS AND EARN DIVIDEND ON THE SAME. (G) IT IS ONLY INVESTING OF MONEY IN CHITS AND GOT CATEGORIZED AS INVESTMENT. (H) ON THE RELIANCE PLACED BY THE ASSESSEE ON THE D ECISION OF THE VISAKHAPATNAM BENCH OF THE ITAT IN THE CASE OF M/S. GURAJADA EDUCATIONAL SOCIETY IN ITA NO.471/VIZAG/2004 THE LD. CIT(A) HE LD THAT THE FACTS ARE DIFFERENT AS IN THAT CASE THE ASSESSEE HAS BID THE CHIT FIRST AND REPAID THE MONEY SO BORROWED. HE REFERRED TO DECISION OF THE VISAKHAPATNAM ITAT IN THE CASE OF M/S. PRIYADARSHINI EDUCATIONAL SOCIETY 123 TTJ 195 AND POINTED OUT THAT THE TRIBUNAL THEREIN HAS EXPLAINED THE EAR LIER DECISION IN THE CASE OF M/S. GURAJADA EDUCATIONAL SOCIETY (SUPRA). 7. HE RELIED ON THE DECISION OF THE HONBLE A.P. HI GH COURT IN THE CASE OF M/S. PRIYADARSHINI EDUCATIONAL ACADEMY 333 ITR 347 (AP) FOR THE PROPOSITION THAT INVESTMENT IN THE CHIT FUNDS IS NOT ONE OF THE MODES APPROVED OR SPECIFIED U/S 11(5) OF THE ACT AND HENCE THE PROVIS IONS OF SECTION 13(1)(D) OF THE ACT ARE ATTRACTED. ON THE ARGUMENT OF THE ASSE SSEE THAT VIOLATION OF SECTION 13(1)(D) OF THE ACT WILL NOT ATTRACT TOTAL DENIAL OF EXEMPTION AND THE TAXABILITY OF INCOME SHOULD BE RESTRICTED ONLY TO T HE AMOUNT OF INVESTMENT THE LD. CIT(A) DISCUSSED SECTION 13 OF THE ACT AND AT PARA 3.11 REFERRED TO THE TERM ANY FUNDS AND CAME TO A CONCLUSION THAT ENTIRE EXEMPTION U/S 11 WAS TO BE DENIED. HE PLACED RELIANCE ON THE FOLLOW ING CASE LAWS: 1. TALAPROLU BAPANAIAH VIDHYADHARMA NIDHI TRUST 167 ITR 482 2. SARDARNI UTTAM KAUR EDUCATIONAL SOCIETY 173 TAXM AN 229 (BY HONBLE P&H HIGH COURT) 3. P. SUBRAMANYAM RELIGIOUS TRUST 226 ITR 393 (BY H ONBLE KERALA HIGH COURT) 4. KANNAHIYALAL PUNJ CHARITABLE TRUST 297 ITR 66 (B Y HONBLE DELHI HIGH COURT) 5. VGP FOUNDATION 262 ITR 187 (BY HONBLE MADRAS HI GH COURT) 8. HE ALSO REFERRED TO THE DECISION OF THE HYDERABA D BENCH OF THE ITAT IN THE CASE OF NATIONAL ACADEMY FOR CONSTRUCTION AND CAME TO A CONCLUSION THAT ONCE THE ASSESSEE SOCIETY VIOLATED THE PROVISI ONS OF SECTION 13(1)(D) OF THE ACT IT LOSES EXEMPTION TO THE WHOLE OF ITS INC OME AND NOT ONLY FOR THAT 5 PART WHICH IS EARNED FROM SUCH INVESTMENT. HE REF ERRED FOR THIS PROPOSITION ON THE JUDGEMENT OF THE KERALA HIGH COURT IN THE CA SE OF MUNDAKAPADAM MANDHIRAMS SOCIETY VS. CIT 258 ITR 395 (KER). THUS HE DISMISSED THE CASE OF THE ASSESSEE. FACTS IN BRIEF:(ITA NOS. 479 TO 481/V/2012 AND 447/ V/2012) : 9. THE ASSESSEE IS A SOCIETY REGISTERED U/S 1 2A OF THE INCOME-TAX ACT. IT FILED ITS RETURN OF INCOME FOR ALL THE ABOVE ASSESS MENT YEARS. THERE WAS A SURVEY CONDUCTED U/S 133A ON 18.3.2010. DURING THE COURSE OF SURVEY IT WAS FOUND THAT THE ASSESSEE SOCIETY HAS CONTRIBUTED TO CHIT FUNDS BY NAME M/S. NITCHALA CHIT FUNDS PVT. LTD. HAVING A BRANCH OFFICE AT PARVATHIPURAM VIZIANAGARAM DIST. THE CONTRIBUTION WAS IN RESPECT OF TWO CHITS OF RS. 5 LAKHS EACH AND THE MONTHLY SUBSCRIPTION AMOUNT WAS RS.10 000/- EACH. FURTHER ON VERIFICATION OF THE BALANCE SHEET OF THE ASSESSE E UNDER THE HEAD SCHEDULE- E DETAILS OF INVESTMENTS AND DEPOSITS RS.60 000/- HAS BEEN SHOWN TOWARDS INVESTMENT IN CHITS AS AT 31 ST MARCH 2003. SUBSEQUENTLY CONTRIBUTIONS WERE MADE TO ANOTHER CHIT BY NAME M/S.SRINIVASA CHIT FUN DS PRIVATE LIMITED AND THE TOTAL AMOUNT MENTIONED IN THE BALANCE SHEET AT THE END OF 31 ST MARCH OF 2004 2005 AND 2006 RESPECTIVELY WAS RS.4 00 000; R S.7 80 000 AND RS.6 91 540. THE ASSESSEE HAD DECLARED CHIT DIVIDE ND INCOME AND ALSO DEBITED CHIT LOSS. THE ASSESSING OFFICER REOPENED ASSESSMENTS FOR THE ALL THE FOUR YEARS AND IN THE REASSESSMENT HE HELD THAT THE ASSESSEE HAS VIOLATED SECTION 13(1)(D) OF THE ACT BY NOT MAKING INVESTMEN TS IN THE MODE SPECIFIED U/S 11(5) OF THE ACT AND DENIED EXEMPTION U/S 11 AN D BROUGHT TO TAX THE ENTIRE SURPLUS FOR ALL THE FOUR YEARS. 10. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN A PPEAL. BEFORE THE FIRST APPELLATE AUTHORITY THE ASSESSEE CHALLENGED REOPEN ING AS WELL AS ON MERITS. THE LD. CIT(A) IN HIS EXHAUSTIVE ORDER UPHELD THE F INDINGS OF THE ASSESSING OFFICER. WE ARE NOT REFERRING TO THE OBSERVATIONS OF THE CIT IN DETAIL FOR THE REASON THAT THE OBSERVATIONS OF THE CIT ARE IDENTIC AL TO THOSE NARRATED ABOVE IN ITA NO.175/V/2012. 6 11. AGGRIEVED THE ASSESSEES FILED THESE APPEALS ON THE FOLLOWING GROUNDS:- GROUNDS OF APPEAL : ITA NO.175/V/2012: 1.A APPELLANT SUBMITS THAT CIT(A) IS NOT JUSTIFIED IN HOLDING THAT SUBSCRIPTION TO THE CHIT FUND MADE BY THE APPELLANT FOR THE PURPOSE OF RAISING FINANCIAL RESOURCES BEING A SOCIETY REGIST ERED U/S 12A OF THE INCOME TAX ACT 1961 ENGAGED ONLY IN IMPARTING EDUCAT ION ATTRACTS DENIAL OF EXEMPTION OF ITS ENTIRE INCOME UNDER THE PROVISI ONS OF SECTION 11 READ WITH THOSE OF SECTION 13(1)(D) ON THE GROUND THAT SUBSCRIPTION TO THE CHIT FUND IS ONLY AN INVESTMENT WHEREAS THE APPELLANT H AD MADE SUCH SUBSCRIPTION ONLY AS A SOURCE FOR RAISING FINANCES REQUIRED TO MEET ITS FINANCIAL REQUIREMENTS BUT NOT AS AN INVESTMENT OUT OF ITS SURPLUS INCOME. 1.B APPELLANT FURTHER RESPECTFULLY SUBMITS THAT TH E RELIANCE PLACED BY THE CIT(A) ON THE JUDGEMENT OF THE HONBLE JURISDICTION AL HIGH COURT OF ANDHRA PRADESH IN THE CASE OF PRIYADARSHINI EDUCATIONAL AC ADEMY V. DIRECTOR GENERAL OF INCOME TAX (INVESTIGATION) & ORS. 333 ITR 347 (AP) IS NOT JUSTIFIED AS THE FACTS IN THE SAID CASE ARE THAT T HE CONTRIBUTION TO CHIT FUND HAS BEEN HELD TO HAVE BEEN MADE AS AN INVESTMENT OU T OF INCOME WHEREAS IN THE APPELLANTS CASE SUCH CONTRIBUTION H AS BEEN MADE ONLY AS A SOURCE FOR RAISING FINANCES AND FURTHER SUCH CONTRI BUTION NOT HAVING BEEN MADE OUT OF SURPLUS FUNDS OF THE APPELLANT SOCIETY. 1.C APPELLANT FURTHER RESPECTFULLY SUBMITS THAT THE DECISION OF THE HONBLE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH IN THE CASE OF GURAJADA EDUCATIONAL SOCIETY (ITA NO.471/VISAKHA/20 04) IS SQUARELY APPLICABLE TO THE FACTS IN THE APPELLANTS CASE AND THAT THE RELIANCE PLACED BY THE CIT(A) ON THE DECISION OF THE HONBLE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH IN THE CASE OF PRIYA DARSHINI EDUCATIONAL ACADEMY V ASSISTANT COMMISSIONER OF INCOME TAX 125 ITD 141 (VISAKHA) IS NOT APPLICABLE TO THE FACTS IN APPELLANTS CASE. 7 GROUND NO.2 2.A WITHOUT PREJUDICE TO GROUND NO.1 APPELLANT SUB MITS THAT CIT(A) IS NOT JUSTIFIED IN UPHOLDING THE ACTION OF ASSESSING OFFI CER THAT THE ENTIRE INCOME OF THE APPELLANT BEING A SOCIETY REGISTERED U/S 12 A OF THE INCOME TAX ACT 1961 ENGAGED ONLY IN IMPARTING EDUCATION IS LIABLE TO LEVY OF INCOME TAX AT THE MAXIMUM MARGINAL RATE UNDER THE PROVISIONS OF S ECTION 164(2) OF THE INCOME TAX ACT 1961 ONLY ON ACCOUNT OF SUBSCRIPTIO N TO A CHIT FUND MADE BY THE APPELLANT FOR THE PURPOSE OF RAISING FI NANCIAL RESOURCES WHEREAS APPELLANT MOST RESPECTFULLY PRAYS THAT AT T HE MOST IT IS ONLY THE AMOUNT OF INCOME DERIVED FROM SUCH CONTRIBUTION TO CHIT FUND WHICH OUGHT TO HAVE BEEN HELD AS INCOME LIABLE TO LEVY OF INCOM E TAX AT THE MAXIMUM MARGINAL RATE UNDER THE PROVISIONS OF SECTION 164 O F THE INCOME TAX ACT BUT NOT THE ENTIRE INCOME OF APPELLANT. 2.B APPELLANT MOST RESPECTFULLY SUBMITS THAT THE RE LIANCE PLACED BY THE CIT(A) ON THE DECISION OF THE HONBLE HYDERABAD BEN CH OF INCOME TAX APPELLATE TRIBUNAL IN THE CASE OF NATIONAL ACADEMY OF CONSTRUCTION IS NOT CORRECT AND JUSTIFIED WHEN PARTICULARLY THE SAID J UDGEMENT IS CONTRARY TO THE JUDICIAL PRINCIPLE LAID DOWN BY THE HONBLE HIG H COURT OF BOMBAY IN THE CASE OF DIT (EXEMPTIONS) V S.M.F.B.B. FOUNDATION TR UST 259 ITR 533 (BOM.). GROUND NO.3: WITHOUT PREJUDICE TO GROUND NOS.1 AND 2 APPELLANT PRAYS THAT CIT(A) IS NOT JUSTIFIED IN CONFIRMING THE ACTION OF ASSESSING OFFICER IN SUBJECTING TO LEVY OF INCOME TAX AT THE MAXIMUM MARGINAL RATE OF TAX OF 33.66% ON THE ENTIRE INCOME UNDER THE PROVISIONS OF SECTION 164(2 ) WITH PARTICULAR REFERENCE TO THE PROVISO THEREOF AS AGAINST THE NO RMAL RATES OF INCOME TAX APPLICABLE TO AN ASSOCIATION OF PERSONS PARTICULAR LY WHEN THE PROVISO TO SECTION 164(1) IS CLEARLY AND BEYOND DOUBT APPLICAB LE ONLY TO THE INCOME CONSIDERED AS NOT EXEMPT BUT NOT IN RESPECT OF THE ENTIRE TOTAL INCOME. 8 GROUNDS OF APPEAL : ITA NOS.479 TO 481/V/2012: GROUND NO.1: THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) VISAKHAPATNAM IS CONTRARY TO THE FACTS A ND LAW APPLICABLE TO THE CASE OF THE APPELLANT. GROUND NO.2: THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) VISAKHAPATNAM OUGHT TO HAVE HELD THAT THE NOTICE IS SUED UNDER THE PROVISIONS OF S.148 OF THE INCOME TAX ACT 1961 IS INVALID AND CONSEQUENTLY THE ENTIRE REASSESSMENT PROCEEDINGS AR E VOID-AB-INTIO. GROUND NO.3: THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) VISAKHAPATNAM IS NOT JUSTIFIED IN UPHOLDING THE ACT ION OF THE ASSESSING OFFICER IN DENYING EXEMPTION UNDER THE PROVISIONS O F SECTION 11 OF THE INCOME TAX ACT 1961 AND IN BRINGING TO TAX THE SURP LUS OF RS.73 32 589. GROUND NO.4: THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) VISAKHAPATNAM IS NOT JUSTIFIED IN HOLDING THAT THE APPELLANT HAS VIOLATED THE PROVISIONS OF S.13(1)(D) R.W.S.11(5) OF THE INCO ME TAX ACT 1961. GROUND NO.5: THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) VISAKHAPATNAM IS NOT JUSTIFIED IN HOLDING THAT THE CONTRIBUTION TO CHIT FUND ISIN THE NATURE OF INVESTMENT. GROUND NO.6: WITHOUT PREJUDICE TO THE ABOVE THE LE ARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD THT THE APPE LLANT IS UNDER A BONAFIDE BELIEF THAT CONTRIBUTION TO CHIT FUND DOES NOT RESULT IN VIOLATION OF THE PROVISIONS OF S.11(5) OF THE INCOME TAX ACT 196 1 AND HENCE CONDONED THE ALLEGED VIOLATION OF PROVISIONS OF S.1 3(1)(D) OF THE INCOME TAX ACT 1961. ASSESSEES SUBMISSIONS : 12. THE LD. COUNSEL FOR THE ASSESSEE MR. G.V.N. HAR I SUBMITTED THAT: (A) BOTH THE ASSESSEES HAD NET DEFICIT DURING THE R ELEVANT PREVIOUS YEARS AS DEMONSTRATED IN THE CHART FILED DURING THE COURSE O F HEARING. HE SUBMITTED THAT IN THE CASE OF LOKABANDU EDUCATIONAL SOCIETY T HE CHART IS PREPARED BY FOLLOWING THE LAW LAID DOWN BY VARIOUS HIGH COURTS THAT THE DEFICIT WHICH IS CARRIED FORWARD FROM THE PREVIOUS YEAR IS ALSO TO BE CONSIDERED FOR THE CURRENT YEAR WHILE ARRIVING AT THE NET DEFICIT. FO R THIS PROPOSITION HE RELIED ON THE FOLLOWING CASE LAWS: 9 CIT VS. RAGHUVANSHI CHARITABLE TRUST & ORS. (2010) 44 DTR (DEL) 223 GOVINDU NAICKER ESTATE VS. ADIT (2001) 248 ITR 368 (MAD) CIT VS. SHRI PLOT SWETAMBER MURTI PUJAK KAIN MANDAL (1995) 211 ITR 293 CIT VS. SHRI GUJRATI SAMAJ (REGD) (2011) 64 DTR (MP ) 76 (B) THE ASSESSEE HAS COMPLIED WITH THE CONDITIONS P RESCRIBED U/S 11(1) OF THE ACT WHICH CONFERS EXEMPTION FROM THE INCOME DERIVED FROM PROPERTY HELD UNDER THE TRUST IN TWO WAYS (I) AMOUNT ACTUALLY APP LIED FOR SUCH PURPOSES DURING THE YEAR (II) AMOUNT NOT EXCEEDING 15% OF TH E INCOME THOUGH NOT ACTUALLY SPENT DURING THE YEAR. HE SUBMITTED THAT THE RESTRICTION CONTAINED IN SECTION 13(1)(D) OF THE ACT IS RELATABLE ONLY TO TH E SECOND LIMB OF SECTION 11(1)(A) OF THE ACT I.E. AMOUNT NOT EXCEEDING 15% O F THE TOTAL INCOME NOT ACTUALLY SPENT DURING THE YEAR. HE SUBMITTED THAT IF THE CONSEQUENCES OF VIOLATION OF SECTION 13(1)(D) OF THE ACT ARE APPLIE D TO THE FIRST LIMB I.E. AMOUNT ACTUALLY APPLIED FOR CHARITABLE PURPOSES DUR ING THE PREVIOUS YEAR THEN IT WOULD LEAD TO AN ABSURD RESULT AS WHAT IS ACTUALLY SPENT CANNOT BE INVESTED. (C) WHEN THE ENTIRE INCOME IS ACTUALLY SPENT BY THE ASSESSEE THEN THERE IS NO AMOUNT WHICH COULD BE INVESTED IN THE FORMS AND MOD E SPECIFIED U/S 11(5) AND CONSEQUENTLY SECTION 13(1)(D) OF THE ACT IS NOT ATTRACTED. (D) HE RELIED ON THE CBDT CIRCULAR NO.335 DATED 13. 4.1982 IN SUPPORT OF HIS ABOVE ARGUMENT. HE POINTED OUT THAT SECTION 13(5) OF THE ACT WAS DELETED AND SECTION 11(5) OF THE ACT WAS BROUGHT IN BUT TH E INTERPRETATION PLACED BY THE BOARD ON THE ABOVE REQUIREMENT HAS BEEN DEMONST RATED BY WAY OF EXAMPLE IN THAT CIRCULAR AND THE BENEFICIAL CIRCULA R ISSUED BY THE CBDT IS BINDING ON THE ASSESSING OFFICER. (E) THAT THE AMENDMENT BROUGHT OUT WITH REGARD TO THE PROVISIONS GOVERNING THE TAXATION OF CHARITABLE TRUST ARE DULY EXPLAINED IN THE RESPECTIVE DEPARTMENTAL CIRCULARS. HE RELIED ON (I) CIRCULAR NO.4P DATED 21.7.1966 EXPLAINING THE PROVISIONS OF THE FINANCE ACT 1966. (II) CIRCULAR NO.12P (LXX- 7) DATED 26.11.1968 AND CIRCULAR NO.29 DATED 23.8.1 969. (III) CIRCULAR NO.45 DATED 2.9.1970 EXPLAINING THE PROVISIONS OF FINANCE ACT 1970. (IV) CIRCULAR 10 NO.108 DATED 20.3.1973 EXPLAINING THE PROVISIONS OF THE FINANCE ACT 1972. (V) CIRCULAR NO.204 DATED 24.7.1976 EXPLAINING THE PROVISIONS OF THE TAXATION LAWS (AMENDMENT ACT 1975). (VI)CIRCULAR NO.372 DA TED 8.12.1983 EXPLAINING THE PROVISIONS OF THE FINANCE ACT 1983. REFERRING TO THE ABOVE CIRCULARS HE SUBMITTED THAT THE UNDERLYING PRINCIPLE BEHIND ALL THESE AMENDMENTS WAS THAT THE PROVISIONS OF SECTION 13 WAS INTRODUCED ON LY TO RESTRICT THE EXEMPTION WITH REGARD TO THE AMOUNTS ACCUMULATED U/ S 11 (1) OF THE ACT. HE POINTED OUT THAT BUT FOR THE PROVISIONS OF THE ACT A CHARITABLE TRUST WAS ABLE TO MISUSE THE FUND ACCUMULATED U/S 11(1) OF THE ACT AND ALSO THE VOLUNTARY CONTRIBUTIONS U/S 12 OF THE ACT AS INITIALLY THE P ROVISIONS OF SECTION 11(5) WERE MADE APPLICABLE TO ONLY ACCUMULATIONS U/S 11( 2) OF THE ACT. AT THE SAME TIME THE GOVERNMENT DID NOT WANT TO COMPLETEL Y RESTRICT THE FREEDOM OF THE INSTITUTION WITH REGARD TO THE AMOUNTS ACCU MULATED U/S 11(1) OF THE ACT. HENCE INITIALLY THE LEGISLATURE HAS PUT ONLY A NEGATIVE CONDITION THAT THESE FUNDS ACCUMULATED U/S 11(1) OF THE ACT SHALL NOT BE USED FOR THE BENEFIT OF THE SPECIFIED PERSONS AND IT WAS LATER T HAT VOLUNTARY CONTRIBUTIONS WERE BROUGHT INTO THE PURVIEW OF THE RESTRICTIVE CO NDITIONS. A LITTLE LATER A POSITIVE CONDITION WAS IMPOSED EVEN WITH REGARD TO UTILIZATION OF FUNDS ACCUMULATED U/S 11(1) OF THE ACT. HOWEVER THE CHOI CE OF INVESTMENT AVAILABLE TO A CHARITABLE INSTITUTION IN RESPECT OF ACCUMULATION U/S 11(1) WAS A LITTLE WIDER THAN THE CHOICE AVAILABLE WITH REGARD TO THE ACCUMULATION U/S 11(2) OF THE ACT AND THAT ULTIMATELY THE ADDITIONAL LEVERAGE AVAILABLE TO FUNDS ACCUMULATED U/S 11(1) OF THE ACT WAS WITHDRAWN AND THAT BOTH THE ACCUMULATIONS U/S 11(1) AND 11(2) OF THE ACT HAVE B EEN BROUGHT AT PAR. (F) THAT THE HONBLE HIGH COURT OF ANDHRA PRADESH IN THE CASE OF M/S. PRIYADARSHINI EDUCATIONAL ACADEMY VS. DGIT (INV.) ( 2011) 333 ITR 347 (AP) HAS HELD THAT WHAT IS REQUIRED TO BE INVESTED IS ON LY THE INCOME OF THE EDUCATIONAL INSTITUTIONS. (G) FOR THE MEANING OF THE TERM FUND HE RELIED O N THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SRI RAM FOUNDATION (2001) 250 ITR 55 (DELHI) AND SUBMITTED THAT FUND MEANS WHAT IS AVAILABLE FOR BEING SPENT. HE ARGUED THAT AS THE ENTIRE INCOME OF THE ASSESSEE WAS APPLIED FOR 11 CHARITABLE PURPOSES THERE WAS NO FUND AVAILABLE AN D HENCE THE QUESTION OF RELATING THE FUND TO CONTRIBUTIONS MADE TO CHIT DOE S NOT ARISE. (H) THE LD. COUNSEL FOR THE ASSESSEE CLAIMED THAT THE CASE OF THE ASSESSEE FALLS WITHIN THE EXCEPTION OF SECTION 13(1)(D) I.E. WITHIN THE AMBIT OF THE PROVISO TO SECTION 13(1)(D). HE SUBMITTED THAT WHE N THE INCOME OF THE TRUST IS FROM ANY OTHER SOURCE THEN SEPARATE BOOKS OF AC COUNTS ARE TO BE MAINTAINED IN RESPECT OF SUCH BUSINESS ACTIVITY AND IN SUCH SITUATION IN VIEW OF THE PROVISO TO SECTION 13(1)(D) IT FALLS WITHIN THE EXCEPTION. HE RELIED ON THE DECISION OF THE DELHI BENCH OF THE ITAT IN THE CASE OF DCIT VS. BEER SHIVA SOCIAL WELFARE SOCIETY (2007) 107 ITD 403 (DEL) W HEREIN IT IS HELD THAT RUNNING SCHOOLS IN A SYSTEMATIC MANNER AND GENERATI NG PROFITS FROM YEAR TO YEAR ALSO CONSTITUTE A BUSINESS ACTIVITY AND THAT O NLY BECAUSE OF SECTION 11(4A) AND THE PROVISIONS OF SECTION 2(15) WHICH PE RMIT COMMERCIAL ACTIVITY IN RESPECT OF CHARITABLE OBJECTS OF EDUCATION THAT THE INCOME FROM RUNNING EDUCATIONAL INSTITUTIONS IS EXEMPT FROM TAX. HE SU BMITS THAT THE ASSESSEES ACTIVITY IS AKIN TO BUSINESS ACTIVITY AND THE INCOM E WOULD HAVE IN THE NORMAL COURSE BE ASSESSED UNDER THE HEAD PROFITS & GAINS OF BUSINESS. HE SUBMITS THAT THE ASSESSEE HAS ONLY ONE SOURCE OF INCOME I.E . RUNNING OF EDUCATIONAL INSTITUTION AND HENCE MAINTENANCE OF SEPARATE BOOKS OF ACCOUNTS IS NOT REQUIRED. ALTERNATIVELY HE RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF GSI INDIA (2013) 86 CCH 76 (DEL ) AND SUBMITTED THAT WHEN THE OBJECTS PURSUED AND THE ACTIVITIES GENERAT ING THE INCOME ARE INTEGRAL IT IS SUFFICIENT IF ALL THE RECEIPTS AND EXPENSES OF THAT ACTIVITY ARE SEPARATELY IDENTIFIED THOUGH NOT BY WAY OF MAINTE NANCE OF SEPARATE BOOKS OF ACCOUNTS. THUS HE SUBMITTED THAT THE ASSESSEE I S COVERED BY THE PROVISO TO SECTION 13(1)(D). (I) THE LD. COUNSEL SUBMITTED THAT THE CONTRIBUTION TO CHIT IN THE CASE OF THE ASSESSEE IS NOT AN INVESTMENT. HE ARGUED THAT INVE STMENT CONNOTES PARTING WITH MONEY WITH A VIEW TO EARN SOME INCOME/RETURN O N OR BEFORE THE MONEY PARTED WITH IS RETURNED TO THE PERSON PARTING WITH THE MONEY. HOWEVER THE CASE OF CONTRIBUTION TO A CHIT FUND THERE IS NO RE LATIONSHIP OF DEBTOR AND CREDITOR BETWEEN THE PERSON MANAGING THE CHIT FUNDS AND THE PERSON WHO 12 CONTRIBUTE TO THE CHIT FUND THAT THERE IS NO LEGAL RIGHT TO CLAIM REFUND OF THE AMOUNT CONTRIBUTED BY THE PERSON JOINING THE SCHEM E. FOR THIS PROPOSITION HE RELIED ON THE FOLLOWING CASE LAWS: 1) SRI RAM CHITS AND INVESTMENTS VS. UOI AIR 1993(SC ) 2063 2) DHOOSA NARASIMLOO VS. YELALA RAJANNA AND ANOTHER ILR (1958) AP 409 (J) IT WAS SUBMITTED THAT CERTAIN DECISIONS WERE NOT BROUGHT TO THE NOTICE OF HONBLE AP HIGH COURT IN THE CASE OF PRIYADARSHI NI EDUCATIONAL ACADEMY (SUPRA) AND THAT THE ISSUE WHETHER CONTRIBUTION TO A CHIT FUND CONSTITUTES INVESTMENT OR NOT WAS NOT A QUESTION BEFORE THE HO NBLE HIGH COURT AND HENCE IT CANNOT BE SAID THAT IT IS A BINDING PRECED ENT. HE RELIED ON THE DECISION OF HONBLE ANDHRA PRADESH HIGH COURT IN TH E CASE OF CIT VS. SUMAN CHIT FUNDS IN ITTA NO.120 OF 2013 ORDER DATED 27.6. 2013 WHEREIN IT IS HELD THAT IN RESPECT OF DIVIDEND PAID BY THE FOREMAN TO THE SUBSCRIBER OF THE CHIT PROVISIONS OF SECTION 194A ARE NOT APPLICABLE. (K) THE LD. COUNSEL RELIED UPON THE DECISION OF THE APEX COURT IN THE CASE OF SRI RAM CHITS AND INVESTMENTS (SUPRA) AND THE JUDGEM ENT OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF RAGHAVAN VS. ARMUG HAM (1934) 38 MLI 283 FOR THE PROPOSITION THAT CONTRIBUTION TO CHIT C ONTINUES TO BE OWNED BY THE ASSESSEE AND THE FOREMAN ACT ONLY AS A TRUSTEE AND HENCE THERE IS NO PARTING OF FUNDS AND PRINCIPLES OF MUTUALITY APPLY AND THE QUESTION OF VIOLATION OF SECTION 11(5) DOES NOT ARISE. (L) THE LD. COUNSEL FURTHER ARGUED THAT THE ASSESSE E NEVER INTENDED TO MAKE AN INVESTMENT AS DURING THE RELEVANT PERIOD THE AS SESSEE HAS APPLIED MORE MONEY TOWARDS THE CHARITABLE OBJECTS OF THE TRUST T HAN THE INCOME OF THE TRUST AND THE ASSESSEE HAD TO RESORT TO BORROWING A ND IN SUCH SITUATION THE QUESTION OF ASSESSEE INTENDING TO INVEST DOES NOT A RISE. REFERRING TO THE FINDINGS THAT THE ASSESSEE HAS FIXED DEPOSITS THE LD. COUNSEL SUBMITTED THAT THE ASSESSEE HAD TO COMPULSORILY MAKE DEPOSITS IN F DRS FOR GETTING THE NECESSARY PERMISSION TO RUN THE EDUCATIONAL INSTITU TION. HE FURNISHED COPIES OF THE FIXED DEPOSITS TO DEMONSTRATE THE POINT THAT ALL THESE FIXED DEPOSITS 13 WERE HELD JOINTLY WITH THE GOVERNMENT AUTHORITY. H E ARGUED THAT THE ASSESSEE INTENDED TO BID FOR THE CHIT IN THE AUCTIO N SO THAT IT COULD RECEIVE MONEY IN ADVANCE BUT IT COULD ONLY BID ONE CHIT AN D WITH REGARD TO THE OTHER CHITS THE ASSESSEE COULD NOT MANAGE TO BID THE OTH ER CHITS TILL MATURITY AS THE BIDDER WAS CHOSEN BY LOTTERY SYSTEM. HE SUBMIT TED THAT AS THE DOMINANT MOTTO OF THE ASSESSEE IN CONTRIBUTING TO THE CHITS WAS ONLY TO AUGMENT ITS RESOURCES AND NOT TO INVEST IN THE CHIT FUNDS THE PROVISIONS OF SECTION 11(5) ARE NOT APPLICABLE AS IT WAS SO HELD BY THE HONBLE ITAT IN THE CASE OF M/S. GURAJADA EDUCATIONAL SOCIETY (SUPRA). FURTHER HE REFERRED TO THE DECISIONS OF DIT(E) VS. ALARIPPU 244 ITR 358 (DEL) AND KUMUDAM E NDOWMENT VS. ITO 32 ITD 210 (1990) (MADRAS TRIBUNAL). (M) THE LD. COUNSEL SUBMITTED THAT THE CONTRIBUTION TO CHIT FUND IN QUESTION WAS DONE IN A BONAFIDE MANNER AND THE ASSESSEE NEVE R KNEW THAT A QUESTION WOULD ARISE THAT SUCH CONTRIBUTION TO CHITS WOULD B E CONSIDERED AS A POSSIBLE VIOLATION OF SECTION 13(1)(D) R.W.S. 11(5) OF THE A CT. IT WAS SUBMITTED THAT (IN THE CASE OF LOKABANDU EDUCATIONAL SOCIETY) ONLY IN THE YEAR 2005-06 WHEN 143(3) ORDER WAS PASSED THE ASSESSEE CAME TO KNOW OF THIS POSSIBLE INTERPRETATION AND THEREAFTER HE DID NOT CONTRIBUT E TO ANY CHIT FUNDS. HE FURTHER SUBMITS THAT THE CONTRIBUTION MADE BY THE A SSESSEE TO THE CHIT FUNDS IS VERY MARGINAL AND NEGLIGIBLE WHEN COMPARED TO T HE SCALE OF OPERATION OF THE ASSESSEE. THUS HE CONTENDS THAT TAKING AWAY TH E ENTIRE EXEMPTION U/S 11 OF THE ACT WOULD BE HIGHLY DISPROPORTIONATE CONS EQUENCE TO THE MARGINAL ERROR ON THE PART OF THE ASSESSEE WHILE ACTING IN A BONAFIDE MANNER. HE RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS. AGRIM CHARAN FOUNDATION (2002) 253 ITR 593 (DEL). (N) ALTERNATIVELY HE SUBMITTED THAT THE ENTIRE SURP LUS CANNOT BE BROUGHT TO TAX EVEN IF IT IS TREATED AS A VIOLATION OF SECTION 13(1)(D) R.W.S. 11(5) OF THE ACT AND FOR THIS PROPOSITION HE RELIED ON THE FOLLO WING CASE LAWS: 1. GURUDAYAL CHARITABLE TRUST VS. ITP (1990) 34 ITD (BOM) 489 2. DIT (EXEMPTION) VS. SHETH MAFATLAL GALALBHAI FOU NDATION TRUST (2001) 249 ITR 533 (MUM). 14 (O) HE SUBMITTED THAT INCOME CANNOT BE TAXED AT MAX IMUM MARGINAL RATE AS THE ASSESSEE IS A NON-PROFIT ORGANIZATION AND ITS B YE LAWS PROHIBITED EXPLICITLY DISTRIBUTION OF SURPLUS AND HENCE THE SOCIETYS INC OME HAS TO BE TAXED AS IN THE CASE OF AN ORDINARY AOP AT PROGRESSIVE RATE OF TAXATION. RELIANCE WAS PLACED ON THE DECISION IN THE CASE OF SAMAKAR NASTI K KENDRAM VS. ITO (1993) 46 TTJ (HYD) 283. (P) HE SUBMITTED THAT THE ISSUE IS COVERED IN FAVOU R OF THE ASSESSEE BY THE JUDGEMENT OF THE CHENNAI BENCH OF THE TRIBUNAL IN T HE CASE OF M/S. SETHU VALLIAMMAL EDUCATIONAL TRUST VS. ITO (EXEMPTION-3) ITA NO.1445/MAS/2012 DATED 10.1.2013 AND THE DECISION OF THE HONBLE BOM BAY HIGH COURT IN THE CASE OF CIT VS. DOCTOR VIKHE PATEL FOUNDATION 42 TA XMAN.COM 190 (BOMBAY). REVENUES SUBMISSIONS : 13. THE LD. D.R. SHRI K.V.N. CHARYA CIT(DR) ITAT VISAKHAPATNAM ON THE OTHER HAND STRONGLY CONTROVERTED THE ARGUMENTS OF THE ASSESSEE. HE SUBMITTED THAT: A) THE ARGUMENT OF THE ASSESSEE THAT CONTRIBUTION T O CHITS IS A MODE OF BORROWAL AND NOT AN INVESTMENT IS DEALT WITH BY THE CIT(A) AT PARA 3.6 AND 3.7 OF HIS ORDER DT.28.03.2012 AND HE RELIED ON THE SE FINDINGS. HE TOOK THIS BENCH TO THESE PARAGRAPHS AND SUBMITTED THAT THE A SSESSEE IN THIS CASE HAS DELIBERATELY SELECTED CHIT CONTRIBUTION AS AN INVES TMENT AND THAT THIS FACT REMAINS UNDISPUTED AS THE ASSESSEE FROM 2007 TO THE YEAR UNDER CONSIDERATION HAS ONLY CONTRIBUTED MONEY AND EARNED DIVIDEND YEAR AFTER YEAR. B) ON THE SECOND ARGUMENT OF THE ASSESSEE THAT ONLY THAT PART OF THE INCOME WHICH IS RELATABLE TO THE VIOLATION IS TO BE TAXED AT THE MAXIMUM MARGINAL RATE BUT NOT THE ENTIRE INCOME OF THE TRUST HE RE FERRED TO THE ORDER OF THE LD. CIT(A) AT PARA 3.9 TO 3.11 AND RELIED ON THE SA ME. C) HE RELIED ON THE LANGUAGE OF SECTION 13(1)(D) OF THE ACT AND SUBMITTED THAT VIOLATION OF THIS SECTION WOULD RESULT IN DENI AL OF THE EXEMPTION U/S 11 OF THE ACT FOR THE ENTIRE INCOME. FOR THIS PROPOSITIO N HE RELIED ON THE DECISION OF 15 THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF NATIONAL ACADEMY OF CONSTRUCTION IN ITA NO.193/H/2010. D) ON THE ARGUMENT OF THE ASSESSEE THAT AS THE ASS ESSEE HAS FULFILLED THE CONDITIONS LAID DOWN U/S 11(1) OF THE ACT AND THAT SECTION 13(1)(D) OF THE ACT OPERATES ONLY IN RESPECT OF THE SECOND LIMB OF SECT ION 11(1) TO THE EXCLUSION OF THE FIRST LIMB HE SUBMITTED THAT THE LANGUAGE O F THE SECTION 13 OF THE ACT IS CLEAR AND UNAMBIGUOUS AND THAT THE PROVISION ST ATES THAT NOTHING CONTAINED IN SECTION 11 OR SECTION 12 SHALL OPERATE IN CASE OF ANY INCOME THEREOF IF ANY FUNDS ARE INVESTED OR DEPOSITED OTHE RWISE THEN THE FORMS/MODE PRESCRIBED IN SECTION 11(5) OF THE ACT. HE REFERRE D TO THE SECTION AND SUBMITTED THAT A PLAIN READING WOULD LEAD TO CONCLU SION THAT THE INTENTION OF THE LEGISLATURE WAS TO REMOVE THE BENEFIT OF SECTIO N 11 IF ANY FUNDS OUT OF ANY INCOME OF THE ASSESSEE IS INVESTED OTHER THAN THE MODE SPECIFIED IN SECTION 11(5) OF THE ACT. HE SUBMITTED THAT ANY OT HER INTERPRETATION WOULD DEFEAT THE PURPOSE OF LEGISLATION ITSELF AND HENCE IT SHOULD BE AVOIDED. HE RELIED ON THE CIRCULAR NO.229 DATED 9.8.1977 BROUGH T IN BY THE FINANCE ACT (NO.2 OF 1977) AS WELL AS THE CBDT CIRCULAR NO.335 DATED 13.4.1982 AND SUBMITTED THAT IT HAS CLEARLY STATED THAT BOTH THE REQUIREMENTS OF APPLYING 85% OF THE INCOME TO CHARITABLE PURPOSES AND INVEST ING THE REMAINING INCOME IN THE MODE SPECIFIED U/S 11(5) OF THE ACT I S MANDATORY FOR CLAIMING EXEMPTION U/S 11 OF THE ACT. E) ON THE ARGUMENT OF THE ASSESSEE THAT THE ENTIRE INCOME HAS BEEN SPENT HE SUBMITTED THAT THERE IS A BASIC FLAW IN THE ARGU MENT AS THE ASSESSEE IS TAKING ONLY REVENUE RECEIPTS AS INCOME FOR THE PURP OSE OF CALCULATIONS. HE GAVE AN EXAMPLE AND SUBMITTED THAT WORD ANY FUND USED IN THE ACT APPLIES TO BOTH CAPITAL RECEIPTS AND REVENUE RECEIPTS AND T HE UNSPENT CAPITAL RECEIPT HAS TO BE INVESTED IN THE MODE SPECIFIED U/S 11(5) OF THE ACT. F) FROM THE FACTS IN THE CASE OF SRI SIVANI EDUCATI ONAL SOCIETY HE SUBMITTED THAT THE ASSESSEE HAS EXCESS OF INCOME OVER EXPEN DITURE OF RS.84 32 548/- AND THAT OUT OF THE RECEIPT OF RS.6.9 CRORES ONLY AN AMOUNT OF RS.6.05 CRORES WAS SPENT ON REVENUE ACCOUNT AND THAT THE ASSESSEE SPENT RS.7.61 CRORES ON CAPITAL ACCOUNT AND WHILE TAKING THIS FIGURE INTO C ONSIDERATION THE ASSESSEE IS CLAIMING THAT IT HAS A DEFICIT OF RS.6.76 CRORES. HE POINTED OUT THAT THE 16 ASSESSEE IS NOT TAKING INTO CONSIDERATION CAPITAL R ECEIPT LIKE LOANS DEDICATED FUNDS ACCUMULATED FUNDS ETC. WHICH IS WRONG. WH ILE REITERATING THAT EVEN THESE FUNDS CANNOT BE INVESTED IN CHITS HE SUBMITT ED THAT THE ASSESSEE HAS NOT STATED FROM WHERE THE MONEY CONTRIBUTED TO CHIT S HAS COME FROM IF IT CLAIMED THAT THE ENTIRE INCOME WAS UTILIZED TOWARDS ITS OBJECTIVES. HE SUBMITTED THAT THE AMOUNT CONTRIBUTED BY THE ASSESS EE TOWARDS CHITS HAS NOT COME OUT OF THIN AIR. HE SUBMITTED THAT IF THE ARG UMENT OF THE ASSESSEE IS ACCEPTED THAT ONCE 85% OR 100% OF THE REVENUES REC EIPTS ARE APPLIED FOR THE OBJECTIVES OF THE TRUST THEN ANY TRUST CAN INV EST THE REMAINING FUNDS IN THE MANNER IT WANTS AFTER MEETING BOTH REVENUE AND CAPITAL EXPENDITURE OUT OF REVENUE RECEIPTS. SUCH AN INTERPRETATION WOULD DEFEAT THE PURPOSE OF THE SECTION IN THE ACT. HENCE HE ARGUED THAT SECTION AND CIRCULAR NO.335 SHOULD BE UNDERSTOOD/INTERPRETED TO MEAN THAT MINIMUM 85% OF THE INCOME SHOULD BE SPENT TOWARDS THE OBJECTIVES OF THE TRUST AND AL L THE REMAINING FUNDS IRRESPECTIVE OF THE SOURCE AND NATURE BE INVESTED IN THE PRESCRIBED MODES OR OTHERWISE SECTION 13(1)(D) OF THE ACT WOULD BE ATTR ACTED. G) ON THE ARGUMENT THAT THE ASSESSEE FALLS WITHIN T HE EXCEPTIONS LAID DOWN U/S 13(1)(D) HE SUBMITTED THAT EVEN IF THIS PROPOS ITION IS ACCEPTED WITHOUT CONCEDING IT WOULD NOT MAKE A DIFFERENCE AS THE BO OKS HAVE TO BE PREPARED ON COMMERCIAL LINE AND IN SUCH A SITUATION ONLY REV ENUE EXPENSES ARE ALLOWED AND CAPITAL EXPENDITURE CANNOT BE ALLOWED. H) ON THE ARGUMENT THAT CONTRIBUTION TO CHITS IS NO T AN INVESTMENT AND THE PRINCIPLES OF MUTUALITY WOULD BE ATTRACTED HE RELI ED ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF PRIYADARSH INI EDUCATIONAL ACADEMY (SUPRA) AND SUBMITTED THAT THE ARGUMENT IS DEVOID O F MERIT. HE SUBMITS THAT THE CASE LAWS RELIED UPON BY THE LD. A.R. ARE ENTIR ELY IN A DIFFERENT CONTEXT AND ARE DISTINGUISHABLE. I) ON THE ARGUMENT THAT THE ASSESSEE HAD NO INTENTI ON OF MAKING AN INVESTMENT AND THAT IT ACTED IN A BONA FIDE MANNER HE RELIED AGAIN ON THE DECISION OF THE HIGH COURT IN THE CASE OF PRIYADARS HINI EDUCATIONAL ACADEMY (SUPRA). 17 J) ON THE ASSESSEES ARGUMENT THAT THE ENTIRE SURPL US CANNOT BE BROUGHT TO TAX HE SUBMITTED THAT THERE ARE CATENA OF DECISION S IN FAVOUR OF THE REVENUE AND THAT THESE ARE BROUGHT OUT BY THE AO AS WELL AS THE CIT IN THEIR ORDER. HE POINTED OUT THAT THE DECISIONS IN THE CASE OF GU RUDAYAL CHARITABLE TRUST (SUPRA) AND SHETH MAFATLAL GAGALBHAI FOUNDATION TRU ST (SUPRA) HAVE BEEN RIGHTLY DISTINGUISHED BY THE AO. LD. CIT(DR) IN VIEW OF THE ABOVE FACTUAL AND LEGAL POSITION ARGUED THAT THE ORDERS OF THE LOWER AUTHORITIES HAVE TO BE SUSTAINE D AND THE ASSESSEES APPEAL BE DISMISSED. OUR FINDINGS: 14. RIVAL CONTENTIONS WERE HEARD. ON A CAREFUL CON SIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON PERUSAL OF THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITED WE HOLD AS FOLLOWS: THE RELEVANT SECTIONS THAT COME UP FOR OUR CONSIDER ATION I.E. 11 (1) SECTION 11(5) AND 13(1)(D) ARE EXTRACTED FOR READY REFERENC E. SECTION 11(1) : SUBJECT TO THE PROVISIONS OF SECTIONS 60 TO 63 T HE FOLLOWING INCOME SHALL NOT BE INCLUDED IN THE TOTAL INCOME OF THE PREVIOUS YEAR OF THE PERSON IN RECEIPT OF THE INCOME (A) INCOME DERIVED FROM PROPERTY HELD UNDER TRUST WHOLLY FOR CHARITABLE OR RELIGIOUS PURPOSES TO THE EXTENT TO WHICH SUCH INCOME IS APPLIED TO SUCH PURPOSES IN INDIA; AND WHERE ANY SUCH INCOME IS ACCUMULATED OR SET APART FOR APPLICATION TO SUCH PURPOSES IN INDIA TO THE EXTENT TO WHICH THE INCOME SO ACCUMULATED OR SET APART IS NOT IN EXCESS OF [FIFTEEN] PERCENT OF THE INCOME FROM SUCH PROPERTY; (B) INCOME DERIVED FROM PROPERTY HELD UNDER TRUST IN PART ONLY FOR SUCH PURPOSES THE TRUST HAVING BEEN CREATED BEFORE THE COMMENCEMENT OF THIS ACT TO THE EXTENT TO WHICH SUCH INCOME IS APP LIED TO SUCH PURPOSES IN INDIA; AND WHERE ANY SUCH INCOME IS FI NALLY SET APART FOR 18 APPLICATION TO SUCH PURPOSES IN INDIA TO THE EXTENT TO WHICH THE INCOME SO SET APART IS NOT IN EXCESS OF [FIFTEEN] P ER CENT OF THE INCOME FROM SUCH PROPERTY; (C) INCOME [DERIVED] FROM PROPERTY HELD UNDER TRUS T (I) CREATED ON OR AFTER THE 1 ST DAY OF APRIL 1952 FOR A CHARITABLE PURPOSE WHICH TENDS TO PROMOTE INTERNATIONAL WELFAR E IN WHICH INDIA IS INTERESTED TO THE EXTENT TO WHICH SUCH INCOME IS A PPLIED TO SUCH PURPOSES OUTSIDE INDIA AND (II) FOR CHARITABLE OR RELIGIOUS PURPOSES CREATED BEFORE THE 1 ST DAY OF APRIL 1952 TO THE EXTENT TO WHICH SUCH INCOME IS APPLIED TO SUCH PURPOSES OUTSIDE INDIA: PROVIDED THAT THE BOARD BY GENERAL OR SPECIAL ORDER HAS DI RECTED IN EITHER CASE THAT IT SHALL NOT BE INCLUDED IN THE TO TAL INCOME OF THE PERSON IN RECEIPT OF SUCH INCOME; (D) INCOME IN THE FORM OF VOLUNTARY CONTRIBUTIONS M ADE WITH A SPECIFIC DIRECTION THAT THEY SHALL FORM PART OF THE CORPUS O F THE TRUST OR INSTITUTION.] EXPLANATION FOR THE PURPOSES OF CLAUSES (A) AND ( B) -- (1) IN COMPUTING THE FIFTEEN PERCENT OF THE INCOME WHIC H MAY BE ACCUMULATED OR SET APART ANY SUCH VOLUNTARY CONTRI BUTIONS AS ARE REFERRED TO IN SECTION 12 SHALL BE DEEMED TO BE PAR T OF THE INCOME; (2) IF IN THE PREVIOUS YEAR THE INCOME APPLIED TO CHA RITABLE OR RELIGIOUS PURPOSES IN INDIA FALLS SHORT OF EIGHT-FIVE PER CENT OF THE INCOME DERIVED DURING THAT YEAR FROM PROPERTY HELD UNDER T RUST OR AS THE CASE MAY BE HELD UNDER TRUST IN PART BY ANY AMOUN T (I) FOR THE REASON THAT THE WHOLE OR ANY PART OF THE IN COME HAS NOT BEEN RECEIVED DURING THAT YEAR OR (II) FOR ANY OTHER REASON THEN (A) IN THE CASE REFERRED TO IN SUB-CLAUSE (I) SO MUCH OF THE INCOME APPLIED TO SUCH PURPOSES IN INDIA DURING THE PREVIO US YEAR IN WHICH THE INCOME IS RECEIVED OR DURING THE PREVIOUS YEAR IMMEDIATELY FOLLOWING AS DOES NOT EXCEED THE SAID AMOUNT AND 19 (B) IN THE CASE REFERRED TO IN SUB-CLAUSE (II) SO MUCH OF THE INCOME APPLIED TO SUCH PURPOSES IN INDIA DURING THE PREVIOU S YEAR IMMEDIATELY FOLLOWING THE PREVIOUS YEAR IN WHICH TH E INCOME WAS DERIVED AS DOES NOT EXCEED THE SAID AMOUNT MAY AT THE OPTION OF THE PERSON IN RECEIPT OF THE INCOME (SUCH OPTION TO BE EXERCISED IN WRITING BEFORE THE EXPIRY OF THE TIME ALLOWED UNDER SUB-SECTION (1) OF SECTION 139 FOR FURNISHING THE R ETURN OF INCOME) BE DEEMED TO BE INCOME APPLIED TO SUCH PURPOSES DURING THE PREVIOUS YEAR IN WHICH THE INCOME WAS DERIVED; AND THE INCOM E SO DEEMED TO HAVE BEEN APPLIED SHALL NOT BE TAKEN INTO ACCOUNT I N CALCULATING THE AMOUNT OF INCOME APPLIED TO SUCH PURPOSES IN THE C ASE REFERRED TO IN SUB-CLAUSE (I) DURING THE PREVIOUS YEAR IN WHICH T HE INCOME IS RECEIVED OR DURING THE PREVIOUS YEAR IMMEDIATELY FOLLOWING AS THE CASE MAY BE AND IN THE CASE REFERRED TO IN SUB-CLAUSE (II) DU RING THE PREVIOUS YEAR IMMEDIATELY FOLLOWING THE PREVIOUS YEAR IN WHICH TH E INCOME WAS DERIVED. SECTION 11(5): THE FORMS AND MODES OF INVESTING OR DEPOSITING TH E MONEY REFERRED TO IN CLAUSE (B) OF SUB-SECTION (2) SHALL BE THE FOLLOWING NAMELY:- (I) INVESTMENT IN SAVINGS CERTIFICATES AS DEFINED IN CL AUSE (C) OF SECTION 2 OF THE GOVERNMENT SAVINGS CERTIFICATES ACT 1959 (46 OF 1959) AND ANY OTHER SECURITIES OR CERTIFICATES ISSUED BY THE CENTRAL GOVERNMENT UNDER THE SMALL SAVINGS SCHEMES OF THAT GOVERNMENT; (II) DEPOSIT IN ANY ACCOUNT WITH THE POST OFFICE SAVINGS BANK; (III) DEPOSIT IN ANY ACCOUNT WITH A SCHEDULED BANK OR A C O-OPERATIVE SOCIETY ENGAGED IN CARRYING ON THE BUSINESS OF BANK ING (INCLUDING A CO-OPERATIVE LAND MORTGAGE BANK OR A CO-OPERATIVE L AND DEVELOPMENT BANK). EXPLANATION IN THIS CLAUSE SCHEDULED BANK MEAN S THE STATE BANK OF INDIA CONSTITUTED UNDER THE STATE BANK OF IN DIA ACT 1955 (23 OF 1955) A SUBSIDIARY BANK AS DEFINED IN THE S TATE BANK OF INDIA (SUBSIDIARY BANKS) ACT 1959 (38 OF 1959) A C ORRESPONDING NEW BANK CONSTITUTED UNDER SECTION 3OF THE BANKING COMPANIES (ACQUISITION AND TRANSFER OF UNDERTAKINGS) ACT 197 0 (5 OF 1970) 20 OR UNDER SECTION 3 OF THE BANKING COMPANIES (ACQUIS ITION AND TRANSFER OF UNDERTAKINGS) ACT 1980 (40 OF 1980) O R ANY OTHER BANK BEING A BANK INCLUDED IN THE SECOND SCHEDULE T O THE RESERVE BANK OF INDIA ACT 1934 (2 OF 1934); (IV) INVESTMENT IN UNITS OF THE UNIT TRUST OF INDIA ESTA BLISHED UNDER THE UNIT TRUST OF INDIA ACT 1963 (52 OF 1963); (V) INVESTMENT IN ANY SECURITY FOR MONEY CREATED AND IS SUED BY THE CENTRAL GOVERNMENT OR A STATE GOVERNMENT; (VI) INVESTMENT IN DEBENTURES ISSUED BY OR ON BEHALF OF ANY COMPANY OR CORPORATION BOTH THE PRINCIPAL WHEREOF AND THE I NTEREST WHEREON ARE FULLY AND UNCONDITIONALLY GUARANTEED BY THE CEN TRAL GOVERNMENT OR BY A STATE GOVERNMENT; (VII) INVESTMENT OR DEPOSIT IN ANY PUBLIC SECTOR COMPANY: PROVIDED THAT WHERE AN INVESTMENT OR DEPOSIT IN ANY PUBLIC S ECTOR COMPANY HAS BEEN MADE AND SUCH PUBLIC SECTOR COMPAN Y CEASES TO BE A PUBLIC SECTOR COMPANY -- (A) SUCH INVESTMENT MADE IN THE SHARES OF SUCH COMPANY SHALL BE DEEMED TO BE AN INVESTMENT MADE UNDER THIS CLAUSE F OR A PERIOD OF THREE YEARS FROM THE DATE ON WHICH SUCH P UBLIC SECTOR COMPANY CEASES TO BE A PUBLIC SECTOR COMPANY ; (B) SUCH OTHER INVESTMENT OR DEPOSIT SHALL BE DEEMED TO BE AN INVESTMENT OR DEPOSIT MADE UNDER THIS CLAUSE FOR TH E PERIOD UPTO THE DATE ON WHICH SUCH INVESTMENT OR DEPOSIT B ECOMES REPAYABLE BY SUCH COMPANY; (VIII) DEPOSITS WITH OR INVESTMENT IN ANY BONDS ISSUED BY A FINANCIAL CORPORATION WHICH IS ENGAGED IN PROVIDING LONG TERM FINANCE FOR INDUSTRIAL DEVELOPMENT IN INDIA AND WHICH IS ELIGIBL E FOR DEDUCTION UNDER CLAUSE (VIII) OF SUB-SECTION (1) OF SECTION 3 6; (IX) DEPOSITS WITH OR INVESTMENT IN ANY BONDS ISSUED BY A PUBLIC COMPANY FORMED AND REGISTERED IN INDIA WITH THE MAIN OBJECT OF CARRYING ON THE BUSINESS OF PROVIDING LONG TERM FIN ANCE FOR CONSTRUCTION OR PURCHASE OF HOUSES IN INDIA FOR RES IDENTIAL PURPOSES AND WHICH IS ELIGIBLE FOR DEDUCTION UNDER CLAUSE (V III) OF SUB-SECTION (1) OF SECTION 36; 21 (IXA) DEPOSITS WITH OR INVESTMENT IN ANY BONDS ISSU ED BY A PUBLIC COMPANY FORMED AND REGISTERED IN INDIA WITH THE MAI N OBJECT OF CARRYING ON THE BUSINESS OF PROVIDING LONG TERM FIN ANCE FOR URBAN INFRASTRUCTURE IN INDIA. EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE -- (A) LONG TERM FINANCE MEANS ANY LOAN OR ADVANCE WHERE THE TERMS UNDER WHICH MONEYS ARE LOANED OR ADVANCED PRO VIDE FOR REPAYMENT ALONG WITH INTEREST THEREOF DURING A PERI OD OF NOT LESS THAN FIVE YEARS; (B) PUBLIC COMPANY SHALL HAVE THE MEANING ASSIGNED TO IT IN SECTION 3 OF THE COMPANIES ACT 1956 (1 OF 1956); (C) URBAN INFRASTRUCTURE MEANS A PROJECT FOR PROVIDIN G POTABLE WATER SUPPLY SANITATION AND SEWERAGE DRAINAGE SO LID WASTE MANAGEMENT ROADS BRIDGES AND FLYOVERS OR URBAN TR ANSPORT; (X) INVESTMENT IN IMMOVABLE PROPERTY EXPLANATION -- IMMOVABLE PROPERTY DOES NOT INCLUD E ANY MACHINERY OR PLANT (OTHER THAN MACHINERY OR PLANT I NSTALLED IN A BUILDING FOR THE CONVENIENT OCCUPATION OF THE BUILD ING) EVEN THOUGH ATTACHED TO OR PERMANENTLY FASTENED TO ANY THING ATTACHED TO THE EARTH; (XI) DEPOSITS WITH THE INDUSTRIAL DEVELOPMENT BANK O F INDIA ESTABLISHED UNDER THE INDUSTRIAL DEVELOPMENT BANK OF INDIA ACT 1964 (18 OF 1964); (XII) ANY OTHER FORM OR MODE OF INVESTMENT OR DEPOS IT AS MAY BE PRESCRIBED. SECTION 13(1)(D): NOTHING CONTAINED IN SECTION11 OR SECTION 12 SHALL OPERATE SO AS TO EXCLUDE FROM THE TOTAL INCOME OF THE PREVIOUS YEAR OF THE P ERSON IN RECEIPT THEREOF__ .. (D) IN THE CASE OF A TRUST FOR CHAIRTABLE OR RELIGIOUS P URPOSES OR A CHARITABLE OR RELIGIOUS INSTITUTION ANY INCOME THEREOF IF FO R ANY PERIOD DURING THE PREVIOUS YEAR 22 (I) ANY FUNDS OF THE TRUST OR INSTITUTION ARE INVESTED OR DEPOSITED AFTER THE 28 TH DAY OF FEBRUARY 1983 OTHERWISE THAN IN ANY ONE OR MORE OF THE FORMS OR MODES SPECIFIED IN SUB-SECTION (5) OF SECTION 11; OR (II) ANY FUNDS OF THE TRUST OR INSTITUTION INVESTED OR D EPOSITED BEFORE THE 1 ST DAY OF MARCH 1983 OTHERWISE THAN IN ANY ONE OR MO RE OF THE FORMS OR MODES SPECIFIED IN SUB-SECTION (5) OF SECTION 11 CONTINUE TO REMAIN SO INVESTED OR DEPOSITED AFTER T HE 30 TH DAY OF NOVEMBER 1983; OR (III) ANY SHARES IN A COMPANY NOT BEING A GOVERNMENT COM PANY AS DEFINED IN SECTION 617 OF THE COMPANIES ACT 1956 ( 1 OF 1956) OR A CORPORATION ESTABLISHED BY OR UNDER A CENTRAL STAT E OR PROVINCIAL ACT ARE HELD BY THE TRUST OR INSTITUTION AFTER THE 30 TH DAY OF NOVEMBER 1983: PROVIDED THAT NOTHING IN THIS CLAUSE SHALL APPLY IN RELATION TO (I) ANY ASSETS HELD BY THE TRUST OR INSTITUTION WHERE S UCH ASSETS FORM PART OF THE CORPUS OF THE TRUST OR INSTITUTION AS O N THE 1 ST DAY OF JUNE 1973; (IA) ANY ACCRETION TO THE SHARES FORMING PART OF THE CORPUS MENTIONED IN CLAUSE (I) BY WAY OF BONUS SHARES ALLOTTED TO T HE THE TRUST OR INSTITUTION; (II) ANY ASSETS (BEING DEBENTURES ISSUED BY OR ON BEHAL F OF ANY COMPANY OR CORPORATION) ACQUIRED BY THE TRUST OR IN STITUTION BEFORE THE 1 ST DAY OF MARCH 1983; (IIA) ANY ASSET NOT BEING AN INVESTMENT OR DEPOSIT IN ANY OF THE FORMS OR MODES SPECIFIED IN SUB-SECTION (5) OF SECTION 11 W HERE SUCH ASSET IS NOT HELD BY THE TRUST OR INSTITUTION OTHERWISE THA N IN ANY OF THE FORMS OR MODES SPECIFIED IN SUB-SECTION (5) OF SECT ION 11 AFTER THE EXPIRY OF ONE YEAR FROM THE END OF THE PREVIOUS YEA R IN WHICH SUCH ASSET IS ACQUIRED OR THE 31 ST DAY OF MARCH 1993 WHICHEVER IS LATER; (III) ANY FUNDS REPRESENTING THE PROFITS AND GAINS OF BUS INESS BEING PROFITS AND GAINS OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON THE 1 ST DAY OF APRIL 1984 OR ANY SUBSEQUENT ASSESSMENT YEAR. 23 EXPLANATION:- WHERE THE TRUST OR INSTITUTION HAS AN Y OTHER INCOME IN ADDITION TO PROFITS AND GAINS OF BUSINESS THE PROV ISIONS OF CLAUSE (III) OF THIS PROVISO SHALL NOT APPLY UNLESS THE TRUST OR IN STITUTION MAINTAINS SEPARATE BOOKS OF ACCOUNT IN RESPECT OF SUCH BUSINE SS. EXPLANATION.-- FOR THE PURPOSES OF SUB-CLAUSE (II) OF CLAUSE (C) IN DETERMINING WHETHER ANY PART OF THE INCOME OR ANY P ROPERTY OF ANY TRUST OR INSTITUTION IS DURING THE PREVIOUS YEAR USED OR APPLIED DIRECTLY OR INDIRECTLY FOR THE BENEFIT OF ANY PERSON REFERRED TO IN SUB-SECTION (3) IN SO FAR AS SUCH USE OR APPLICATION RELATES TO ANY PE RIOD BEFORE THE 1 ST DAY OF JULY 1972 NO REGARD SHALL BE HAD TO THE AMENDM ENTS MADE TO THIS SECTION BY SECTION 7 OTHER THAN SUB-CLAUSE (II) OF CLAUSE (A) THEREOF OF THE FINANCE ACT 1972. 15. THE FIRST ISSUE THAT ARISES FOR ADJUDICATION I S WHETHER THE PROVISIONS OF SECTION 13(1)(D) OF THE ACT ARE APPLICABLE TO THE C ASE OF THE ASSESSEES. BEFORE WE CONSIDER THIS ASPECT WE DISCUSS THE NATU RE OF CHIT BUSINESS. THERE ARE A CATENA OF DECISIONS OF VARIOUS COURTS INCLUDI NG HONBLE SUPREME COURT ON THIS ISSUE. THE HONBLE DELHI HIGH COURT IN THE CASE OF DELHI CHIT FUNDS ASSOCIATION VS. UOI AND ANOTHER W.P.(C) 4512/2012 AT PARA 6 & 7 OF PAGE 6 OF JUDGEMENT DATED 23.4.2013 STATED AS FOLLOWS: 6. IT IS NECESSARY TO GIVE A BRIEF ACCOUNT OF THE O PERATIONS OF A CHIT FUND BUSINESS. SUPPOSING 50 PERSONS COME TOGETHER TO ORG ANISE A CHIT. LET US FURTHER SUPPOSE THAT EACH OF THEM UNDERTAKE TO CONT RIBUTE RS.1 000/-. THE TOTAL CHIT AMOUNT WOULD BE `50 000/-. LET US FURTHE R SUPPOSE THAT THE FUND WOULD OPERATE FOR A PERIOD OF 50 MONTHS. THUS THE M EMBER SUBSCRIBERS AND THE NUMBER OF MONTHS FOR WHICH THE CHIT WOULD O PERATE WOULD BE THE SAME. IN THIS EXAMPLE AT THE END OF EACH MONTH AN A MOUNT OF RS.50 000/- (RS.1 000/- X 50) WOULD BE AVAILABLE IN THE KITTY OF THE CHIT FUND. THE SAID AMOUNT WOULD BE PUT TO AUCTION AND T HOSE SUBSCRIBERS WHO ARE INTERESTED IN DRAWING THE MONEY EARLY BECAUSE O F THEIR NEEDS MAY PARTICIPATE IN THE AUCTION. THE SUCCESSFUL BIDDER W HO IS NORMALLY THE PERSON WHO OFFERS THE HIGHEST DISCOUNT IS GIVEN THE CHIT AMOUNT. FOR 24 EXAMPLE IF THERE ARE THREE BIDDERS OFFERING TO TAKE THE CHIT OF RS.50 000/- FOR RS.40 000/- RS.37 500/- AND RS.35 000/- RESPEC TIVELY THE CHIT WOULD BE GIVEN TO THAT SUBSCRIBER WHO IS WILLING TO TAKE IT FOR RS.35 000/- SINCE HE HAS OFFERED A DISCOUNT OF `15 000/-. THIS LEAVE A B ALANCE OF RS.15 000/- (RS.15 000 RS.50 000) IN THE KITTY. THE AMOUNT OF RS.15 000/- WHICH REPRESENTS THE DISCOUNT WHICH THE SUCCESSFUL BIDDER HAS FOREGONE BECOMES THE DIVIDEND WHICH IS TO BE DISTRIBUTED TO ALL THE SUBSCRIBERS AFTER DEDUCTING A FIXED AMOUNT REPRESENTING THE COMMISSIO N PAYABLE TO THE FOREMAN. A FOREMAN IS NORMALLY A PERSON WHO ORGAN ISES THE AUCTION AND CONDUCTS THE PROCEEDINGS. IF IN THE EXAMPLE GIVEN AB OVE THE COMMISSION PAYABLE TO THE FOREMAN IS FIXED AT 5% THEN AFTER D EDUCTING RS.2 500/- (5% OF RS.50 000/- THE CHIT AMOUNT) THE BALANCE OF RS.12 500/- WOULD BE DISTRIBUTED AMONG ALL THE 50 SUBSCRIBERS SO THAT EA CH WOULD GET RS.250/-. THIS AMOUNT OF RS.250/- CAN BE SET OFF BY THE SUBSC RIBERS AGAINST THE SECOND MONTH'S INSTALLMENT OF RS.1 000/- PAYABLE BY HIM AND HE CAN GIVE ONLY RS.750/-. THE AUCTION WOULD BE REPEATED IN THE SUBSEQUENT MONTHS AND THE SAME PROCEDURE IS FOLLOWED. ANY SUBSCRIBER WHO DELAYS THE BIDDING OR DOES NOT BID AT ALL STANDS TO GAIN THE M AXIMUM DISCOUNT. THE CHIT IS THUS SOMEWHAT LIKE A RECURRING DEPOSIT WITH THE BANK. THERE IS NO BAR ON THE FOREMAN OF THE CHIT FUND ALSO PARTICIPAT ING AS A SUBSCRIBER. 7. THE BUSINESS OF CHIT FUNDS IS STRICTLY REGULATED BY THE CHIT FUNDS ACT 1982. IT CONTAINS DETAILED PROVISIONS RELATING TO RE GISTRATION OF CHITS COMMENCEMENT AND CONDUCT OF CHIT BUSINESS. RIGHTS AND DUTIES OF FOREMAN RIGHTS AND DUTIES OF THE SUBSCRIBERS TERM INATION OF CHITS MEETINGS OF GENERAL BODY OF SUBSCRIBERS PROVISIONS RELATING TO WINDING UP DISPUTES AND ARBITRATION AND OTHER MISCELLANEOUS PR OVISIONS. SUFFICE TO NOTE THAT SECTION 11 RECOGNISES THAT A CHIT BUSINESS CAN BE KNOWN BY SEVERAL NAMES SUCH AS CHIT CHIT FUND CHITTY KURI ETC. D EALING WITH THE CHIT FUNDS ACT THE SUPREME COURT IN SRIRAM CHITS & INVESTMENT (P) LTD. VS. UNION OF INDIA : AIR 1993 SC 2063 HAS LAID DOWN THE FOLLOWING PROP OSITIONS: - 25 (A) THE ACT IN PITH AND SUBSTANCE DEALS WITH SPEC IAL CONTRACT AND CONSEQUENTLY FALLS WITHIN ENTRY 7 OF LIST III OF THE 7 THE SCHEDULE TO THE CONSTITUTION OF INDIA; (B) A CHIT FUND TRANSACTION IS NOT A CASE OF BORROW ING NOR IS IT A LOAN TRANSACTION. IF A SUBSCRIBER ADVANCES ANY AMOUNT HE DOES SO ONLY TO ONE OF THE MEMBERS; (C) THE FUNDS OF THE CHIT FUND BELONG TO THE ENTIRE LOT OF SUBSCRIBERS; (D) THE AMOUNTS ARE IN DEPOSIT WHICH THE STAKE HOLD ER ONLY HOLDS IN TRUST FOR THE BENEFIT OF THE MEMBERS OF THE FUND; (E) THE FOREMAN ACTS ONLY AS A PERSON TO BRING TOGE THER THE SUBSCRIBERS AND HE IS SUBJECT TO CERTAIN OBLIGATIONS WITH A VIE W TO PROTECTING THE SUBSCRIBERS FROM ANY MISCHIEF OR FRAUD COMMITTED BY HIM BY USING THE POSITION; (F) COMMISSION IS PAYABLE TO THE FOREMAN FOR THE SE RVICE RENDERED BY HIM AS HE DOES NOT LEND MONEY BELONGING TO HIM . 16. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS . BILAHARI INVESTMENTS PVT. LTD. 299 ITR 1 STATED AS FOLLOWS: THE SUPREME COURT NOTED THAT CHIT FUNDS ARE BASIC ALLY SAVING SCHEMES IN WHICH A CERTAIN NUMBER OF SUBSCRIBERS JOIN TOGETHER AND EACH CONTRIBUTES A CERTAIN FIXED SUM EACH MONTH THE TOTAL NUMBER OF MONTHS BEING EQUAL TO THE TOTAL NUMBER OF SUBSCRIBERS. THE SUBSCRIPTIO NS ARE PAID TO THE MANAGER OF THE FUND BY A CERTAIN PRESCRIBED DATE EA CH MONTH AND THE TOTAL SUBSCRIPTIONS TO THE FUND ARE AUCTIONED EACH MONTH AMONGST THE SUBSCRIBERS. AT EACH AUCTION THE LOWEST BIDDER IS PAID THE AMOUNT OF HIS BID AND THE BALANCE RECEIVED FROM OUT OF THE TOTAL SUBSCRIPTIONS RECEIVED IS DISTRIBUTED EQUALLY AMONGST OTHER SUBSCRIBERS A S PREMIUM. THE MANAGER IS PAID A CERTAIN PERCENTAGE OF THE COLLECT IONS EACH MONTH ON ACCOUNT OF EXPENSES AND CHARGES FOR CONDUCTING THE AUCTION. IN THE AUCTION A MAXIMUM AMOUNT WHICH THE HIGHEST BIDDER AGREES TO FORGO IS 26 THE AMOUNT WHICH IS DISTRIBUTED TO THE OTHER MEMBE RS SUBJECT TO DEDUCTION OF THE MANAGERS COMMISSION. 17. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SAHEB CHITS (DELHI) PVT. LTD. ITA NO.44 OF 2008 JUDGEMENT DATED 24.7.20 09 HAS OBSERVED AS FOLLOWS: FURTHER IT WAS OBSERVED BY THE HONBLE SUPREME CO URT IN SRIRAM CHITS AND INVESTMENTS (P) LTD. (SUPRA) THAT IT WOULD NOT BE CORRECT TO STATE THAT EACH SUBSCRIBER LENT MONEY TO THE PERSON WHO G ETS CHITS EARLIER. IT CANNOT ALSO BE CONSTRUED THAT THE PERSON WHO GET S CHIT LATER SHOULD BE TREATED AS A MONEY LENDER. THE AGREEMENT BETWEEN THE PARTIES THOSE ENTERED AS PER SECTION 6 OF THE A CT ONLY PROVIDES FOR DISTRIBUTION OF THE CHIT AMOUNT. THE SUPREME COURT HOWEVER RELIED ON THE JUDGEMENT OF THE KERALA HIGH COURT IN JANARDHANA MALLAN AND OTHERS VS. GANGADHARAN AND OT HERS AIR 1983 KERALA 178 WHEREIN IT WAS OBSERVED THAT ON ENTERIN G INTO A CHIT AGREEMENT A DEBT IS NOT INCURRED BY THE SUBSCRIBER FOR THE AMOUNT OF ALL THE FUTURE INSTALMENTS AND IN RESPECT OF SUCH A MOUNT THERE IS NO DEBTORS-CREDITORS RELATIONSHIP. THE HONBLE DELHI HIGH COURT FURTHER OBSERVED AS FO LLOWS: THIS APPROACH IS FALLACIOUS ON THE FACE OF IT AND P ARTICULARLY IN VIEW OF THE PRINCIPLE LAID DOWN IN THE AFORESAID JUDGEMENT OF THE SUPREME COURT IN SRIRAM CHITS AND INVESTMENT PVT. LTD. (SUP RA) WHEREIN THE APEX COURT OBSERVED THAT THE SUBSCRIPTION RECEIVED FROM THE MEMBERS OF THE CHIT FUND COMPANY IN TERMS OF CONTRACT ARE N OT TREATED AS DEPOSITS FOR THE PURPOSE OF RESERVE BANK OF INDIA D IRECTION. THE AMOUNT CONTRIBUTED BY THE MEMBERS EVERY MONTH IS GI VEN BACK TO THEM IN THE FOLLOWING MANNER. THE SUCCESSFUL BIDDE R TAKES THE ENTIRE AMOUNT (MINUS) THE BID AMOUNT AND THE BID AMOUNT IS DISTRIBUTED EQUALLY AMONG THE MEMBERS. THEREFORE BY NO STRETCH OF IMAGINATION THE AFORESAID AMOUNT CONTRIBUTED BY TH E 27 MEMBERS CAN BE TREATED AS A DEPOSIT WITH THE COMPAN Y MUCH LESS MONEY BORROWED BY THE ASSESSEE. 18. THE HONBLE SUPREME COURT IN THE CASE OF M/S. S RIRAM CHITS AND INVESTMENTS VS. UNION OF INDIA AND OTHERS AIR 1993 (S C)2063 AT PARA 14 HELD AS FOLLOWS: 14. THE QUESTION AS TO THE NATURE OF CHIT AGREEMEN T CAME UP FOR CONSIDERATION BEFORE A FULL BENCH OF FIVE JUDGES OF THE KERALA HIGH COURT IN JANARDHANA MALLAN AND ORS. V. GANGADHARAN AND ORS.. THE FULL BENCH THERE WAS CONCERNED WITH THE CHIT AGREEM ENT UNDER THE KERALA CHITTIES ACT (ACT 23 OF 1975) WHERE THE KERALA HIGH COURT SPEAKING THROUGH POTI ACTING CHIEF JUSTICE TOOK THE VIEW THAT ON ENTERING INTO THE CHITTY AGREEMENT A D EBT IS NOT INCURRED BY THE SUBSCRIBER FOR THE AMOUNT OF ALL TH E FUTURE INSTALLMENTS AND IN RESPECT OF SUCH AMOUNT THERE IS NO DEBTOR- CREDITOR RELATIONSHIP. THE CHITTY VARIOLA ONLY EMBO DIES A PROMISE TO PAY ON FUTURE DATES. THAT IS NOT A PROMI SE TO REPAY AN EXISTING DEBT BUT TO PAY IN DISCHARGE OF A CONTRACTUAL OBLIGATION. FOR SIMILAR REASONS NEITHER THE PRIZING OF THE CHITTY NOR THE EXECUTION OF THE SECURITY BON D WOULD GIVE RISE TO A DEBT FOR THE PRIZE AMOUNT IS NOT RECEI VED AS A LOAN BUT AS OF RIGHT BY VIRTUE OF THE TERMS OF THE CONTR ACT BETWEEN THE PARTIES. THEREFORE NO DEBT DUE TO THE FOREMAN ARISES BY RE ASON OF THE RECEIPT OF THE PRIZE AMOUNT OR OF THE EXECUTION OF THE SECURITY BOND FOR SECURING FUTURE SUBSCRIPTIONS. THE FULL BE NCH IN THIS DECISION OVER-RULED ITS EARLIER DECISION IN THE CASE OF P.K ACHUTAN V. STATE BANK OF TRAVANCORE CALICUT. WHILE RENDERING THE DECISIO N IN JANARDHANA MALLAN AND ORS. (SUPRA) THE FULL BENCH OF THE KERAL A HIGH COURT CONSIDERED A CATENA OF DECISIONS STARTING FROM 1937 IN THE MATTER OF RAMANATHA LYYAR V. NARAYANASWAMI. THE ANDHRA PRADESH HIGH COURT ALSO WHILE DEALING WITH THE TRANSACTION OF A CHIT FUND ORGANISATION IN THE MATTER OF DHOOSA NARSIMLOO V. YELALA RAJANNA AND ANR. I.L.R. (1958) ANDHRA PRADESH 409 WHERE THE 28 PETITIONER HAD FILED A SUIT IN THE COURT OF THE DIS TRICT JUDGE AGAINST THE RESPONDENTS ON A PROMISSORY NOTE EXECUTED BY THEM F OR THE AMOUNT THEY DREW IN A POOL FROM A CHIT FUND ORGANISATION AND WHERE THE DISTRICT JUDGE HAD DISMISSED THE SUIT FOR WANT OF A LICENSE UNDER SECTION 9(2) OF THE HYDERABAD MONEY LENDERS ACT (ACT V OF 1349 F.) AND ON REVISION THE QUESTION THAT CAME FOR CONSIDERATION WAS WHETHE R THE CHIT FUND ORGANISATION COULD BE REGARDED AS A MONEY LENDER WI THIN THE MEANING OF THE SAID ACT AND WHETHER ITS TRANSACTION PARTAKE TH E NATURE OF A LOAN. SRINIVASACHARI J. SPEAKING FOR THE COURT HELD THAT THE AMOUNT DRAWN BY A MEMBER OF A CHIT FUND WHO BID AT THE PERIODICAL A UCTION GIVING THE LARGEST DISCOUNT COULD NOT COME WITHIN THE DEFINITI ON OF A LOAN WITHIN THE MEANING OF THE MONEY LENDERS ACT NOR COULD SUCH A TRANSACTION BE REGARDED AS A MONEY LENDING TRANSACTION BE AND IN T HE CIRCUMSTANCES SECTION 9 OF THE HYDERABAD MONEY LENDERS ACT (V OF 1349 F.) COULD HAVE NO APPLICATION TO SUCH A CASE. AT PAGE 415 OF THE AFORESAID REPORT IT HAS BEEN OBSERVED 'IN OUR OPINION THERE IS NOTHING IN THE CH IT FUND TRANSACTION WHICH COULD BE CALLED THE BUSINESS OF MONEY LENDING. IT IS IN ESSENCE AN ORGANISATION FOR MUTUA L BENEFIT.' IT APPROVED THE DECISION OF THE MADRAS HIGH COURT I N RAGHAVAN V. ARMUGHAM: (1934) 38M.L..I. 283. THAT WAS ALSO A CAS E OF CHIT FUND TRANSACTION AND THE QUESTION FOR DECISION WAS WHETH ER A PROVISION IN THE BOND FOR PAYMENT OF THE WHOLE AMOUNT IN DEFAULT OF ANY ONE INSTALMENT WAS IN THE NATURE OF A PENALTY COMING WITHIN SECTIO N 74 ILLUSTRATION (G) OF THE CONTRACT ACT. THE LEARNED JUDGES RULED THAT A CHIT FUND TRANSACTION WAS NOT A CASE OF BORROWING AT ALL AND IT WAS ENTIRELY DIFFERENT FROM A LOAN TRANSACTION. THE LEARNED JUDG ES FURTHER HELD THAT 'A LOAN ENVISAGES THE RELATIONSHIP OF A CREDITOR AN D DEBTOR IN SO TAR AS THE LENDER AND THE BORROWER ARE CONCERNED. THERE CA NNOT BE THE RELATIONSHIP OF A CREDITOR AND DEBTOR BETWEEN THE S TAKE HOLDER AND A SUBSCRIBER IN A CHIT FUND TRANSACTION. IF THE STAKE-HOLDER ADVANCES ANY AMOUNT HE ADVANCES ONLY TO ONE OF THE MEMBERS THE FUNDS OF THE WHOLE BODY OF THE CHIT FUND AS THE FU NDS BELONG TO THE WHOLE LOT OF SUBSCRIBERS THE MEMBERS BORRO WER IS AS MUCH A CREDITOR AS A DEBTOR. THE AMOUNTS ARE IN DEP OSIT WITH 29 THE STAKE-HOLDER ONLY AS A TRUSTEE FOR THE BENEFIT OF THE MEMBERS OF THE FUND.' SRINIVASACHARI J. NOTICED THE OBSERVATIONS OF SRINIVASA LYENGAR J. IN TIM-MARSA PAI V. SUBBA RAO : AIR (1928) MADRAS 256 WHERE SRINIVASA LYENGAR J. REGARDED THE POSITION OF THE MANAGER OF A KURI CHIT AS A TRUSTEE FOR ALL THE SUB SCRIBERS OF THE CHIT FUND. 19. ON A CONSPECTUS OF THE ABOVE JUDGEMENT IT IS C LEAR THAT THE HONBLE SUPREME COURT HAS APPROVED THE OPINION OF HONBLE A NDHRA PRADESH HIGH COURT IN THE CASE OF DHOOSA NARASIMLOO VS. YELLALA RAJANNA AND ANOTHER (SUPRA) THAT IT IS IN ESSENCE AN ORGANIZATION FOR MUTUAL BENEFI T . IT IS FURTHER MADE CLEAR THAT CHIT TRANSACTION IS NOT A M ONEY LENDING TRANSACTION AND THAT THERE IS NO RELATIONSHIP OF DEBTOR AND CRE DITOR. THE ROLE OF THE FOREMAN IS THAT OF A TRUSTEE. HE CHARGES COMMISSIO N FOR HIS SERVICE. THE MONEY CONTRIBUTED BY THE SUBSCRIBERS TO THE CHIT DO ES NOT BELONG TO THE FOREMAN. IT BELONGS TO ALL THE STAKE HOLDERS. UNDER THESE CIRCUMSTANCES IT HAS TO BE CONCLUDED THAT THE CONTRIBUTION TO CHIT F UND IS A MUTUAL ACTIVITY AND THE FUND BELONGS TO ALL THE PARTICIPANTS. THERE IS NO MONEY LENT OR KEPT BY ONE PARTY WITH ANOTHER PARTY AS AN INVESTMENT OR DE POSIT. 20. HONBLE HARYANA HIGH COURT IN THE CASE OF SODA SILICATE & CHEMICAL WORKS VS. CIT 179 ITR 588 (P&H) HELD AS FOLLOWS: 'IN ORDER TO ANSWER THE QUESTION POSED REGARD MUST BE HAD TO THE NATURE AND WORKING OF THE CHIT FUND IN THE CONTEXT OF THE ASS ESSEE WITH PARTICULAR REFERENCE TO THE FACT THAT RUNNING A CHIT FUND OR BEING A MEMBER OF SUCH FUND WAS NOT THE BUSINESS O F THE ASSESSEE. THE TRANSACTIONS CONCERNED HERE ARE CONTRIBUTIONS MADE TO THE FUND BY THE ASSESSEE AND THE LUMP SUM RECEIVED BY IT TH OUGH AT A DISCOUNT AND THE SUBSEQUENT DISTRIBUTION AND RECEIP T OF AMOUNTS AMONGST THE PARTICIPANTS AS PREMIA OR DIVIDEND. THERE IS CLEARLY MUTUALITY AMONGST THE CONTRIBUTORS AND THE PARTICIP ANTS OF THE CHIT FUND WITH THEIR IDENTITY BEING KNOWN AND ESTABLISHED. WHEN SUCH IS THE CASE CONTRIBUTIONS M ADE TO THE CHIT FUND CANNOT BE TREATED AS REVENUE EXPENDIT URE NOR 30 INDEED COULD THE PAYMENT AND RECEIPT OF ANY AMOUNT TO AND FROM THE CHIT FUND BE TREATED TO BE THE BUSINESS AC TIVITY OF THE ASSESSEE. THE TEST OF MUTUALITY IN THIS BEHALF AS LAID DOWN IN CIT VS. NATARAJ FINANCE CORPORATION (1988) 69 CTR (AP) 15: (1988)- 169 ITR 732 (AP) IS THAT THE ENTITY WOULD BE A MUTUAL BENEFIT ASSOCIATION IF ALL THE PARTICIP ATORS TO THE COMMON FUND ARE ALSO CONTRIBUTORS AND THEIR IDE NTITY IS ESTABLISHED. THE CONTRIBUTORS TO THE COMMON FUND AN D THE PARTICIPATORS IN THE SURPLUS MUST BE AN IDENTICAL B ODY. THE COURT WENT ON TO OBSERVE THAT THIS DOES NOT MEAN THAT EACH MEMBER SHOULD CONTRIBUTE TO THE COMMON FUND OR THAT EACH MEMBER SHOULD PARTICIPATE IN THE SURPLUS OR GET BAC K FROM THE SURPLUS PRECISELY WHAT HE HAS PAID. WHAT IS REQ UIRED IS THAT THE MEMBER AS A CLASS SHOULD CONTRIBUTE TO THE COMMON FUND AND PARTICIPATORS AS A CLASS MUST BE AB LE TO PARTICIPATE IN THE SURPLUS'. 21. THE SAME JUDGMENT RELIED ON ANOTHER DECISION OF THE MADRAS HIGH COURT IN THE CASE OF BOARD OF REVENUE VS. NORTH MADRAS MUTUA L BENEFIT CO. LIMITED 1922 I ITC 172 (MADRAS) WHEREIN IT WAS HELD THAT TH E OPERATIONS OF CHIT FUND CANNOT BE SAID TO BRING ANY PROFIT TO ITS SUBSCRIBERS AS A BODY AND THE INCOME REPRESENTED BY PREMIA WAS THUS NOT A SSESSABLE TO INCOME TAX. 22. THE HONBLE HIGH COURT OF ANDHRA PRADESH IN TH E CASE OF CIT (TDS) VS. SUMAN CHIT FUNDS PRIVATE LIMITED HELD THAT THE DISCOUNT PAID BY THE FOREMAN TO THE SUBSCRIBERS TO A CHIT FUND TRANSACTI ON DOES NOT PARTAKE THE CHARACTER OF INTEREST WITHIN THE MEANING OF SEC TION 2(28A) OF THE INCOME TAX ACT. THIS DECISION WAS RENDERED FOLLOWI NG THE PRINCIPLES LAID DOWN BY THE HONBLE DELHI HIGH COURT IN SAHIB CHITS (DELHI) (P) LIMITED IN ITA NO.44 OF 2008 AND ALSO THE HONBLE SUPREME COUR T IN THE CASE OF CIT VS. BILAHARI INVESTMENT PRIVATE LIMITED. REFERENCE WAS MADE TO A DECISION OF BANGALORE BENCH OF ITAT IN THE CASE OF MARGA SOOCHI PRIVATE LIMITED IN ITA NO.995/BANGALORE/2008. 31 23. THUS FROM THE ABOVE IT IS CLEAR THAT THE CONTRI BUTION TO A CHIT IS A MUTUAL ACTIVITY AND CANNOT BE HELD AS AN INVESTMENT AS T HERE IS NO QUESTION OF A INDIVIDUAL SUBSCRIBER BEING ENTITLED TO RECEIVE P ROFIT OR INCOME UNDER A SCHEME OF CHIT FUNDS. NO MONEY IS LAID OUT WITH A S ECOND 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) OF THE ACT ONLY REFERS MONEY THAT IS TO BE INVESTED OR DEPOSITED WITH A PE RSON 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 WE CAN CONCLU DE THAT CHIT FUND BUSINESS IS GOVERNED BY THE PRINCIPLES OF MUTUALITY AND CONT RIBUTING TO A CHIT FUND IS CONTRIBUTION TO ONESELF ON THE PRINCIPLE OF MUTUALI TY AND HENCE IT IS NOT AN INVESTMENT AS CONTEMPLATED BY SEC 13(1) (D) R.W.S. 11(5) OF THE ACT. 24. NOW WE PROCEED TO EXAMINE TO WHAT EXTENT A CHA RITABLE INSTITUTION IS REQUIRED TO INVEST THE FUNDS FOR PURPOSES OF S.13(1 )(D). FOR THIS PURPOSE WE ANALYSE THE FOLLOWING TERMS USED IN SECTION 13(1)(D ): I) ANY FUNDS II) INVESTMENT OR DEPOSIT 25. THE TERM ANY FUNDS WHEN READ WITH THE PHRASE ANY INCOME THEREOF IN OUR OPINION SIGNIFIES INCOME DEFINED U/S 2(24) O F THE ACT. THUS ANY RECEIPT WHICH FALLS WITHIN THE DEFINITION OF INCOM E U/S 2(24) OF THE ACT IS TO BE CONSIDERED. AS RIGHTLY CONTENDED BY THE LEARNED COUNSEL FOR THE ASSESSEE THE RESTRICTION ON UTILIZATION OF FUNDS BELONGING T O A CHARITABLE INSTITUTION HAVE BEEN BROUGHT IN TO CURB THE MISUSE OF TAX EXEMPT FU NDS BY THESE CHARITABLE INSTITUTIONS. THEREFORE ON A HARMONIOUS CONSTRUCT ION OF THE PROVISIONS OF S.13(1)(D) WE ARE OF THE CONSIDERED VIEW THAT THE T ERM ANY FUNDS REFERS TO ONLY THE INCOME OF A CHARITABLE INSTITUTION. 26. THE TERM ANY FUNDS HAS BEEN EXPLAINED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SHREE SRI RAM FOUNDATI ON 250 ITR 55 WHEREIN IT IS HELD AS FOLLOWS: A SIMILAR ISSUE HAD COME UP BEFORE VARIOUS HIGH CO URTS AND THERE IS UNANIMITY IN THE VIEW AS THAT TAKEN BY THE TRIBUNA L. IN CONSTRUING THE 32 PROVISIONS OF SECTION 13(2)(H) THE EXPRESSION 'FUN DS' HAS TO BE UNDERSTOOD IN THE CONTEXT OF THE PROVISION AND NOT ONLY WITH REFERENCE TO DICTIONARIES OR TO COMMERCIAL PARLANCE OR TO THE PRINCIPLES OF ACCOUNTANCY. IT IS TO BE NOTED THAT THE EXPRESSION U SED IS 'FUNDS' AND NOT 'FUND'. 'FUNDS' MEANS MONEY IN HAND OR CASH ACC ORDING TO SOME DICTIONARIES. THIS ACCORDING TO US WOULD BE THE P ROPER MEANING TO BE ATTRIBUTED TO THE EXPRESSION 'FUNDS' AS APPEARING I N THE PROVISION. THE FUNDAMENTAL REQUIREMENT OF SECTION 13(2)(H) IS THAT THERE MUST BE INVESTMENT OF FUNDS OF A TRUST. IF ANY EXPANDED MEA NING IS GIVEN TO INCLUDE ASSETS OTHER THAN MONEY IN HAND OR CASH OR CREDIT BALANCE IN A BANK ACCOUNT IT IS EVIDENT THAT THEY ARE NOT CAPAB LE OF BEING INVESTED AS SUCH. OTHER ASSETS OF THE TRUST APART FROM MONEY IN HAND OR CASH OR BALANCE IN BANK WILL HAVE TO BE CONVERTED INTO MONE Y OR CASH BEFORE THE SAME CAN BE INVESTED AS WAS OBSERVED BY THE CA LCUTTA HIGH COURT IN CJT V. BIRLA CHARITY TRUST [1988] 170 ITR 150. T HE EXPRESSION 'INVEST' CONNOTES A POSITIVE ACT ON THE PART OF THE TRUST WH ERE-BY THE FUNDS OF THE TRUST ARE LAID OUT OR COMMITTED IN ANY PARTICULAR P ROPERTY OR BUSINESS OR TRANSACTION WITH THE OBJECT OF EARNING A PROFIT OR FINANCIAL ADVANTAGE OR RETURN. WHAT IS CONTEMPLATED IS THAT THE TRUST HAVI NG ASSETS IN THE FORM OF MONEY OR CASH OR BALANCE IN A BANK OR ANY OTHER FORM CAPABLE OF BEING INVESTED OR BY A POSITIVE ACT AND PURSUANT TO A DECISION OF THE TRUST WAS LAID OUT OR COMMITTED IN A CONCERN OF A N ATURE SPECIFIED BEFORE IT CAN BE HELD THAT SUCH AN INVESTMENT COMES WITHIN TH E MISCHIEF OF SECTION 13(2)(H). THE MEANING OF THE EXPRESSION 'FUNDS' GIVEN IN THE STANDARD DICTIO- NARIES ARE AS FOLLOWS : 'BLACK'S LAW DICTIONARY FIFTH EDITION : 'FUND'... AN ASSET OR GROUP OF ASSETS SET ASIDE FOR A SPECIFIC PURPOSE . . A GENERIC TERM AND ALL-EMBRACING AS COMPARED WITH T ERM 'MONEY' ETC. WHICH IS SPECIFIC. A SUM OF MONEY OR OTHER LIQUID A SSETS SET APART FOR A SPECIFIC PURPOSE OR AVAILABLE FOR THE PAYMENT OF DE BTS OR CLAIMS. IN THE PLURAL THIS WORD HAS A VARIETY OF SLIGHTLY DIFFERE NT MEANINGS AS FOLLOWS : 'MONEYS' AND MUCH MORE SUCH AS NOTES BILLS CHE QUES DRAFTS STOCKS 33 AND BONDS AND IN BROADER MEANING MAY INCLUDE PROPE RTY OF EVERY KIND . . . MONEY IN HAND ASSETS CASH MONEY AVAILABLE FOR THE PAYMENT OF A DEBT LEGACY ETC. CORPORATE STOCKS OR GOVERNMENT S ECURITIES ; IN THIS SENSE USUALLY SPOKEN OF AS THE 'FUNDS'. ASSETS SEC URITIES BONDS OR REVENUE OF A STATE OR GOVERNMENT APPROPRIATED FOR T HE DISCHARGE OF ITS DEBTS. GENERALLY WORKING CAPITAL ; SOMETIMES USED TO REFER TO CASH OR TO CASH AND MARKETABLE SECURITIES.' '(B) DICTIONARY FOR ACCOUNTANTS FOURTH EDITION BY ERIC L. KOHLER : 1. AN ASSET OR GROUP OF ASSETS WITHIN ANY ORGANISATION S EPARATED PHYSICALLY OR IN THE ACCOUNTS OR BOTH FROM OTHER ASSETS AND LI MITED TO SPECIFIC USES. EXAMPLES : A PETTY CASH OR WORKING FUND ; A R EPLACEMENT AND RENEWAL FUND ; AN ACCIDENT FUND ; A CONTINGENT FUND ; A PENSION FUND. EXAMPLE : A TRUST FUND CREATED BY A WILL ; AN ENDOW MENT FUND ; A SINKING FUND. 4. PL. : CURRENT ASSETS LESS CURRENT LIABILITIES (O N AN ACCRUAL BASIS) ; WORKING CAPITAL ; A TERM USED IN CASH FLOW STATEMEN TS. 5. PL. : CASH (PP. 204-208).' 'CHAMBERS' TWENTIETH CENTURY DICTIONARY NEW EDITION : FUND : N. A SUM OF MONEY ON WHICH SOME ENTERPRISE I S FOUNDED OR EXPENSE SUPPORTED : A SUPPLY OR SOURCE OF MONEY :' 'THE CONCISE OXFORD DICTIONARY FIFTH EDITION : FUND N. 1. PERMANENT STOCK OF SOMETHING READY TO BE DRAWN UPON STOCK OF MONEYPECUNIARY RESOURCES.' 'WEBSTER'S SEVENTH NEW COLLEGIATE DICTIONARY-BASED ON WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY (P. 538) : FUND. 1. AN AVAILABLE QUANTITY OR MATERIAL OR INTAN GIBLE RESOURCES ; SUPPLY ; 2. A SUM OF MONEY OR OTHER RESOURCES THE P RINCIPAL OR INTEREST OF WHICH IS SET APART FOR A SPECIFIC OBJECTIVE.' THE EXPRESSION 'INVEST' I N THE SAID SECTION 13(2)(H) IS USED AS A VERB AND THE MEANING OF THE SAID EXPRESSION IN THE STAND ARD DICTIONARIES IS AS FOLLOWS : 'CHAMBER'S TWENTIETH CENTURY DICTIONARY NEW EDITIO N : ... TO LAY OUT FOR PROFIT AS BY BUYING PROPERTY SHARES ETC.' 'THE CONCISE OXFORD DICTIONARY FIFTH EDITION: 34 ... LAY OUT MONEY ON AS (INVEST) IN A CAR.' 'WEBST ER'S SEVENTH NEW COLLEGIATE DICTIONARY : VB. VT 1: TO COMMIT (MONEY) IN ORDER TO EARN A FINA NCIAL RETURN ; 2 TO MAKE USE OF FOR FUTURE BENEFITS OR ADVANTAGESVT. T O MAKE AN INVESTMENT.' 'CORPUS JURIS SECUNDUM VOLUME XXXVII: IN GENERAL.THE WORD HAS A VARIETY OF MEANINGS BUT THE SENSE IN WHICH IT IS EMPLOYED MUST BE GATHERED FROM THE CONT EXT. IT IS NOT A LEGAL TERM WITH A SETTLED MEANING BUT IT IS A TERM IN COMMON USE SUGGESTING MONEY IN COMMON SPEECH ALTHOUGH TECHNI CALLY IT MAY BE EMPLOYED TO COVER OTHER ARTICLES OF VALUE FOR THE TERM 'FUND' OR 'FUNDS' IS GENERIC AND ALL-EMBRACING AS COMPARED WITH THE T ERM 'MONEY' ETC. WHICH IS SPECIFIC . . IN THE PLURAL 'CAPITAL : C ASH MONEY OR MONEYS ; MONEY AND NEGOTIABLE PAPER IMMEDIATELY OR READILY C ONVERTIBLE INTO CASH AVAILABLE PECUNIARY RESOURCES ; MONEY IN HAND OR AVAILABLE FOR THE PAYMENT OF A DEBT LEGACY ETC. SPECIE OR A S TOCK OF CONVERTIBLE WEALTH; AND 'FUNDS' MAY MEAN OR INCLUDE NOT ONLY MO NEY AS THE TERM IS GENERALLY UNDERSTOOD BUT OTHER CIRCULATING MEDI UM OR INSTRUMENT OR TOKENS IN GENERAL USE IN THE COMMERCIAL WORLD AS TH E REPRESENTATIVES OF VALUE SUCH AS BANK NOTES BILLS CHEQUES DRAFT S NOTES STOCKS AND BONDS DEPOSITS OR CERTIFICATES OF DEPOSIT EVIDENC ES OF MONEY LENT TO THE GOVERNMENT CONSTITUTING A NATIONAL DEBT FOR WHICH INTEREST IS PAID AT PRESCRIBED INTERVALS. ... .' IN R. K. DALMIA V. DELHI ADMINISTRATION [1962] 32 CO MP CAS 699 ; AIR 1962 SC 1821 IT WAS OBSERVED THAT THE WORD 'FUND' MAY MEAN ACTUAL CASH RESOURCES OF A PARTICULAR KIND (E.G. MONEY IN A DRAWER OR IN A BANK OR IT MAYBE A MERE ACCOUNTANCY EXPRESSION USED TO DESCRIBE A PARTICULAR CATEGORY WHICH A PERSON USES IN MAKING U P HIS ACCOUNTS). A SIMILAR VIEW WAS EXPRESSED IN AHCHM V. COULLKARD [1 942] 2 KB 228. THE EXPRESSION 'FUND' OR 'FUNDS' HAS A VARIETY OF MEANI NGS BUT THE SENSE IN WHICH IT IS EMPLOYED MUST BE GATHERED FROM THE CONT EXT. IT WOULD NOT BE CORRECT TO ADOPT A STRICTLY LITERAL OR TECHNICAL MEANING OF THIS EXPRESSION WHILE CONSTRUING SECTION 13(2)(H). IN OT HER WORDS WE MUST NOT CONSTRUE THAT PROVISION MECHANICALLY. WE MUST C ONSTRUE IT HAVING REGARD TO THE OBJECT WHICH THE LEGISLATURE HAD IN V IEW IN ENACTING IT AND 35 IN THE CONTEXT OF THE SETTING IN WHICH IT OCCURS. T HAT PROVISION CAME TO BE INSERTED IN THE ACT BY THE FINANCE ACT 1970. ON A PLAIN READING OF THAT PROVISION IT IS CLEAR THAT CLAUSE (H) OF SUB- SECTION (2) OF SECTION 15 COVERS INVESTMENT OF THE TRUST FUNDS IN ANY CONCERN IN WHICH ANY OF THE PERSONS SPECIFIED IN SUB-SECTION (3) HAS SUBSTANTIA L INTEREST ('SPECIFIED PERSONS' IN SHORT) AND IF SUCH INVESTMENT OF THE TR UST FUNDS IS MADE AFTER DECEMBER 31 1970 IT WOULD RESULT IN FORFEITURE OF EXEMPTION FROM TAX. HOWEVER IF THE TRUST FUNDS HAVE ALREADY BEEN INVES TED IN ANY CONCERN AS AFORESAID BEFORE JANUARY 1 1971 THE EXEMPTION WOULD BE FORFEITED IF THE FUNDS CONTINUED TO REMAIN SO INVESTED EVEN A FTER DECEMBER 31 1970. THE OBJECT OF THE ABOVE PROVISION IS TO DISCO URAGE INVESTMENT OF TRUST FUNDS IN THE CONCERNS IN WHICH SPECIFIED PERS ONS HAVE SUBSTANTIAL INTEREST AND IF AN INVESTMENT IS ALREADY MADE IN SU CH CONCERNS TO DISCOURAGE CONTINUANCE THEREOF AFTER DECEMBER 31 1 970. IN ORDER TO ATTRACT THE PROVISIONS OF SECTION 13(2)(H) WHAT IS ESSENTIAL IS THAT THE FUNDS OF THE TRUST ARE INVESTED IN A CONCERN COVERE D BY SECTION 13{2)(C) AND IF SUCH INVESTMENT IS MADE PRIOR TO JA NUARY 1 1971 FUNDS ARE CONTINUED TO BE NOT INVESTED AFTER DECEMBER 31 1970. IT IS ONLY IF THE FUNDS OF THE TRUST ITSELF ARE UNDER SECTION 11 THE FUNDS HAVE TO BE SUCH AS ARE CAPABLE OF INVESTMENT. THEREFORE IN OR DER TO ATTRACT SECTION 13(2)(H} IT HAS TO BE ESTABLISHED THAT THE FUNDS O F THE TRUST WHICH ARE CAPABLE OF BEING INVESTED HAVE BEEN UTILISED FOR MA KING INVESTMENT AS PROVIDED THEREIN. WHEN THE FUNDS OF THE TRUST ARE S O INVESTED AND SUCH INVESTMENT IS CONTINUED AFTER DECEMBER 31 1970 TH E TRUST WHOSE FUNDS ARE SO INVESTED WILL NOT BE ENTITLED TO CLAIM EXEMPTION UNDER SECTION 11. THE ABOVE POSITION HAS BEEN ELABORATELY DEALT WITH BY THE GUJARAT HIGH COURT IN CIT V. INSANIYAT TRUST [1988] 173 ITR 248. THE WORD 'INVESTMENT' MEANS TO LAY OUT MONEY IN BU SINESS WITH A VIEW TO OBTAIN INCOME OR PROFIT. IN ORDER TO CONSTIT UTE AN INVESTMENT THE AMOUNT LAID DOWN SHOULD BE CAPABLE OF RESULTING IN AN INCOME OR RETURN OR PROFIT TO THE INVESTOR AND IN EVERY CASE OF INVESTMENT THE INTENTION AND POSITIVE ACT ON THE PART OF THE INVES TOR SHOULD BE TO EARN SUCH INCOME RETURN OR PROFIT TO THE INVESTOR. IN O RDER TO CONSTITUTE AN 36 INVESTMENT THE MONEY SHALL BE LAID OUT IN SUCH MAN NER AS TO ACQUIRE SOME SPECIES OF PROPERTY WHICH BRINGS IN AN INCOME TO THE INVESTOR. AN INVESTMENT POPULARLY MEANS EVERY APPLICATION OF MON EY WHICH IS INTENDED TO FETCH RETURN BY WAY OF INTEREST INCOME OR PROFIT. THUS ONLY EMPLOYED AS CAPITAL IN A BUSINESS IS MONEY INVESTED IN BUSINESS. (VIDE EDWARDS ]. IN TAX COMMISSIONER V. AUSTRALIAN MUTUA L PROVIDENT FUND SOCIETY [1902] 22 NZLR 445). IN ARNAJLD V. GRINSTEAD (21 WR ENG 155) IT WAS OBSERVED THAT IN ITS MOST COMPREHENSIVE SENS E IT IS GENERALLY UNDERSTOOD TO SIGNIFY THE LAYING OUT OF MONEY IN SU CH A MANNER THAT IT PRODUCES A REVENUE. AN ILLUMINATING OBSERVATION WAS MADE IN IRC V. DESOUTTER BROS LTD. [1946] 1 ALL ER 58 (CA) ABOUT WHAT 'INVESTMENT' MEANS. IT WAS OBSERVED THAT THE WORD 'INVESTMENT' IS NOT A WORD OF ART BUT HAS TO BE INTERPRETED IN A POPULAR SENSE. IT IS NOT CAPABLE OF LEGAL DEFINITION BUT A WORD OF CURRENT VERNACULAR. THE WORDS 'INVEST' AND 'INVESTMENT' ARE TO BE TAKEN IN THE BUSINESS SE NSE OF LAYING OUT OF MONEY FOR INTEREST OR PROFIT. A PLEA SIMILAR TO THE ONE TAKEN BY LEARNED COUNSEL FOR THE REVENUE WAS RAISED BEFORE THE KERALA HIGH COURT IN CIT V. CHAND RIKA EDUCATIONAL TRUST [1994] 207 ITR 108. THERE ALSO IT WAS PLEADE D THAT THE EXPRESSION CONTINUED TO REMAIN QUALIFIES THE EXPR ESSION IN ANY CONCERN WHETHER IT WAS AN INVESTMENT OR NOT. THE PLEA WAS REJECTED BY THE KERALA HIGH COURT. IT WAS OBSERVED THAT IT W OULD BE DOING VIOLENCE TO THE PLAIN LANGUAGE OF THE PROVISION. S ECTION 13(2)(H) REQUIRES THAT THE FUNDS OF THE TRUST ARE OR CONTIN UE TO REMAIN INVESTED IN ANY CONCERN OF THE NATURE MENTIONED THEREIN. (U NDERLINED FOR EMPHASIS). 27. IN THE CASE OF DIT (EXEMPTION) VS. ALARIPPU 244 ITR 358 IT IS HELD AS FOLLOWS: THE EXPRESSIONS USED IN BOTH THE PROVISIONS QUOTED ABOVE ARE INVESTMENT AND DEPOSIT. THE FORMER EXPRESSION MEANS TO LAY OUT MONEY IN BUSINESS WITH A VIEW TO OBTAIN AN INCOME O R PROFIT. DEPOSIT ON THE OTHER HAND MEANS THAT WHICH IS PLACED ANYWH ERE AS IN ANY 37 ONES HANDS FOR SAFE-KEEPING SOMETHING ENTRUSTED T O THE CARE OF ANOTHER. THESE TWO EXPRESSIONS HAVE BEEN USED IN A COGNATE SENSE AND HAVE TO BE UNDERSTOOD AS SUCH. IN ORDER TO CONSTITUTE AN INVESTMENT THE AMOUNT LAID DOWN SHOULD BE CAPABLE O F AND RESULT IN ANY INCOME RETURN OR PROFIT TO THE INVEST OR AND IN EVERY CASE OF INVESTMENT THE INTENTION AND POSITIV E ACT ON THE PART OF THE INVESTOR SHOULD BE TO EARN SUCH INCOME RETURNS PROFIT IN ORDER TO CONSTITUTE AN INVESTMENT THE MO NIES SHALL BE LAID OUT IN SUCH A MANNER AS TO ACQUIRE SOME SPECIE S OF PROPERTY WHICH WOULD BRING IN AN INCOME TO THE INVE STOR. A LOAN ON THE OTHER HAND IS GRANTING TEMPORARY DEP OSIT AND LOAN ARE CERTAINLY DIFFERENT. SECTION 11(5) REFERS TO PATTE RN OF INVESTMENT BY THE ASSESSEE. SECTION 11(5) WAS INTRODUCED BY THE FINANCE ACT 1983 WITH EFFECT FROM APRIL 1 1983 I.E. FOR AND FROM ASSESSMENT YEAR 1983-84. IT PRESCRIBES THE FORMS AND MODES OF INVE STING AND DEPOSITING MONEY REFERRED T IN SECTION 11(2)(B). S UBSEQUENTLY NEW FORMS AND MODES HAVE BEEN ADDED. SECTION 13(1)(D) AS AMENDED BY THE FINANCE ACT 1983 PROVIDES THAT THE INCOME OF ANY CHARITABLE OR RELIGIOUS TRUST OR INSTITUTION WILL NOT BE ENTITLED TO EXEMPTION UNDER SECTION 11 AND 12 IF CERTAIN CONDITIONS STIPULATED THEREIN ARE NOT COMPLIED WITH. THE WORD DEPOSIT DOES NOT COVER TRA NSACTION OF LOAN WHICH CAN BE MORE APPROPRIATELY DESCRIBED AS DIRECT BAILMENT. THE ESSENCE OF DEPOSIT IS THAT THERE MUST BE A LIABILIT Y TO RETURN IT TO THE PARTY BY WHOM OR ON WHOSE BEHALF HAS BEEN MADE ON F ULFILLMENT OF CERTAIN CONDITIONS. IN THE COMMERCIAL SENSE THE T ERM IS USED TO INDICATE THE AFORESAID TRANSACTION AS DEPOSIT OF MO NEY FOR EMPLOYMENT IN BUSINESS DEPOSITS FOR VALUE TO INITIATE SECURIT Y FOR DEPOSIT OF TITLE DEEDS SIMILAR DOCUMENTS AS SECURITY FOR LOAN DEPO SIT OF MONEY BILLS IN A BANK IN THE ORDINARY COURSE OF BUSINESS OF CURREN T ACCOUNT AND DEPOSITS OF A SUM AT INTEREST AT A FIXED DEPOSIT IN A BANK. THE AMOUNT GIVEN TO MAHILA HAAT WAS NEITHER FOR THE PURPOSE OF INVESTMENT NOR FOR DEPOSIT MORE PARTICULARLY IN THE FACTUAL BACKGROUN D AS HIGHLIGHTED ABOVE. THE TRANSACTION WITH WHICH THE PRESENT DISP UTE IS LINKED CANNOT BE TREATED AS AN INVESTMENT OR DEPOSIT AS HAS BEEN FACTUALLY FOUND BY 38 THE TRIBUNAL. THE CONCLUSION BEING ESSENTIALLY FAC TUAL NO QUESTION OF LAW ARISES OUT OF THE ORDER OF THE TRIBUNAL. ACCOR DINGLY THE PETITION IS DISMISSED. 28. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF INCOME TAX OFFICER VS. DR. VIKHE PATEL FOUNDATION (SUPRA) HELD AS FOLLOWS: IT IS WELL SETTLED THAT THE DEPICTION IN BOOKS OF A CCOUNTS IS NOT A DETERMINATIVE TEST BUT THE FACTUAL NATURE OF THE TR ANSACTION WHICH HAS TO BE CONSIDERED FOR THE PURPOSE OF TAXATION. IN THIS CASE THE INVESTMENT IN THE SHARES OF COOPER ATIVE BANK WAS A PRE CONDITION FOR RAISING LOANS AND IT WAS THEREFOR E NOT AN INVESTMENT AS NORMALLY UNDERSTOOD. THE TRIBUNAL HAS RECORDED A FINDING OF FACT THAT THE SHARES WAS SUBSCRIBED ONLY FOR PURPOSES OF OBTAINING THE LOAN AND THE AMOUNTS SO OBTAINED WERE USED FOR FURTHERAN CE OF THE OBJECTS OF THE TRUST. THERE IS NO DISPUTE ABOUT THE FACTS THAT LOANS TAKEN FROM THE SAID TWO COOPERATIVE BANKS WERE NOT COMPLETELY REPAID IN THE ASSESSMENT YEAR 2008-09 AND THEREFORE THE ASSESSE E WOULD BE REQUIRED TO HOLD SHARES TO CONTINUE AS MEMBER OF TH E COOPERATIVE SOCIETY RUNNING THE BANKING BUSINESS. 29. THE `C BENCH OF THE ITAT DELHI IN THE CASE OF ADIT (EXEMPTION) VS. INDIA FRINGE CENTRE FOR THE PROMOTION OF ADVANCED R ESEARCH ITA NO.3065 AND 6164 DELHI 2012 ASSESSMENT YEARS 2008-09 AND 2009-1 0 HELD AS FOLLOWS: THE EXPRESSION INVESTMENT IMPLIES TO LAY OUT MON EY IN BUSINESS WITH A VIEW TO OBTAIN INCOME ON PROFIT. THE TERM DEPOS IT INDICATES THE TRANSACTION AS DEPOSIT OF MONEY FOR EMPLOYMENT IN B USINESS DEPOSIT OF TITLE DEEDS SIMILAR DOCUMENT AS SECURITY FOR LOA N DEPOSIT OF MONEY IN A BANK IN THE ORDINARY COURSE OF BUSINESS OF CUR RENT ACCOUNT AND TO DEPOSIT A SUM OF INTEREST AT A FIXED DEPOSIT IN A B ANK. THUS BOTH INVESTMENT AND DEPOSIT REQUIRE A POSITIVE ACT O N THE PART OF THE ASSESSEE WITH AN INTENTION TO EARN INCOME/INTEREST. 39 30. THE MADRAS `C BENCH OF THE TRIBUNAL IN ITA NO. 1445/MADRAS/2012 IN THE CASE OF M/S. SETHU VALLIAMMAL EDUCATIONAL TRUST (SUPRA) ORDER DATED 10.1.2013 AT PARA 8 AND 9 HELD AS FOLLOWS: 8. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THERE IS NO DISPUTE THAT ASSESSEE HAD DURING THE RELEVAN T PREVIOUS YEAR SUBSCRIBED TO TWO CHITS ONE CONDUCTED BY M/S TERN CREDITS & CHITS PRIVATE LIMITED AND THE OTHER BY M/S K.R. PALANIAPP AN (CHIT). LEARNED D.R. HAS ALSO NOT DISPUTED THE AVERMENT THAT BOTH T HESE WERE REGISTERED CHIT FUNDS RUNNING CHITS. ASSESSEE HAD PLACED MONEY WITH THESE CHIT COMPANIES BY WAY OF SUBSCRIPTIONS. THE 9 I.T.A. NO. 1445/MDS/12 AMOUNTS WERE PAID ON A MONTHLY BASIS TO THE TWO CHIT COMPANIES. THIS IS CLEAR FROM PAPER-BOOK PAGES 14 T O 17 WHICH ARE COPIES OF RELEVANT LEDGER FOLIOS IN THE BOOKS OF TH E ASSESSEE. THE TOTAL AMOUNT PLACED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR WITH M/S TERN CREDITS & CHITS PRIVATE LIMITED WAS R S.2 08 456/- AND WITH M/S K.R. PALANIAPPAN (CHIT) WAS RS.96 230/-. T HE ANNUAL INCOME OF THE TRUST CAME TO RS.7 35 19 954/- AGAINST WHICH UTILIZATION FOR CHARITABLE PURPOSE CAME TO RS. 6 98 07 198/- WHICH WAS WELL ABOVE THE LIMIT OF 85% PRESCRIBED UNDER SECTION 11(1)(A) OF THE ACT. AS PER THE ASSESSEE SUBSCRIPTIONS PAID TO CHIT FUNDS WERE NOT DEPOSITS NOR INVESTMENTS AND IT COULD NOT HAVE BEEN A REASON FOR DENYING IT THE EXEMPTION CLAIMED UNDER SECTION 11 OF THE ACT. SUBS CRIPTION PAID BY A SUBSCRIBER OF A CHIT TO A CHIT COMPANY ACTING AS TH E FOREMAN OF THE CHIT IN OUR OPINION CANNOT BE CONSIDERED AS AN IN VESTMENT. SUBSCRIBING TO A CHIT FUND IS NOT WITH AN INTENTION TO EARN INTEREST OR DIVIDEND. THE ONLY INTENTION IS TO PRIZE THE CHITS EITHER BY COMPETITIVE BIDDING OR WHEN LOTS ARE DRAWN. IF THERE WAS NO BIDD ING DONE IN A GIVEN MONTH THERE WILL BE NO INCOME WHATSOEVER DER IVED. THE INCOME THAT CAN BE DERIVED WAS ONLY THE AMOUNT FORGONE BY THE BIDDERS IN AN AUCTION. THUS A CHIT FUND IS PRIMARILY INTENDED TO OPERATE AS A SCHEME FOR ADVANCING LOANS FROM A COMMON FUND 10 I.T.A. NO. 1445/MDS/12 CREATED BY THE SUBSCRIBERS AND THEIR TURN FOR GETT ING SUCH LOAN IS DECIDED EITHER BY AUCTION OR BY DRAWING LOTS. THE N ATURE OF CHIT AS 40 AFORESAID HAS BEEN VIVIDLY DESCRIBED IN THE JUDGMEN T OF KERALA HIGH COURT IN THE CASE OF KOTTAYAM CO-OPERATIVE BANK LTD . (SUPRA). 9. AMRITSAR BENCH OF THIS TRIBUNAL IN THE CASE OF O NKAR CAPITAL GROWTH (P) LTD. (SUPRA) HAS CLEARLY HELD THAT THE SUBSCRIB ERS TO A CHIT FUND WERE ENTITLED ONLY FOR PRIZING THE CHITS AND THE MO NEY PLACED BY A SUBSCRIBER TO A CHIT FUND COULD NOT BE EQUATED WITH DEPOSITS. THE FOREMAN OF A CHIT FUND IS ONLY ACTING AS A CONDUIT FOR THE SUBSCRIBERS TO POOL THEIR MONEY EVERY MONTH FOR THE BENEFIT OF ONE OF THEM. CHIT FUNDS ACT 1982 REQUIRES THE CONCERN RUNNING A CHIT TO A SUBSCRIBER OF THE CHIT ALSO. WE CANNOT SAY THAT PERSONS WHO ARE SUBSCRIBERS TO A CHIT ARE MAKING ANY INVESTMENT IN THE CONCERN RUNN ING THE CHIT FUND. WE CANNOT SAY THAT SUBSCRIBER TO A CHIT FUND IS PLA CING ANY DEPOSIT IN THE CONCERN RUNNING THE CHIT FUND. POOLING OF MONEY BY A GROUP OF PERSONS FOR THE BENEFIT OF ONE OF THEM THROUGH CHI TS CANNOT BE EQUATED WITH INVESTMENTS OR DEPOSITS. THEREAFTER IT HELD AS FOLLOWS: IT IS CLEAR FROM THE ABOVE CONSEQUENCE THAT THE INTE NTION OF LEGISLATURE IS TO REGULATE THE MANNER OF INVESTMENT OF THE MONEY LEFT WITH THE ASSESSEE TRUST AFTER UTILIZATION FOR CHARI TABLE PURPOSE. 11. THEREFORE IN OUR OPINION THE LOWER AUTHORITIE S FELL IN ERROR IN CONCLUDING THAT SUCH SUBSCRIPTIONS WERE INVESTMENTS WHICH VIOLATED THE MODES SPECIFIED UNDER SECTION 11(5) OF THE ACT. THE QUESTION OF DENIAL OF EXEMPTION UNDER SECTION 11 WOULD ARISE ON LY IF INVESTMENTS WERE THERE. WE ARE THEREFORE OF THE OPINION THAT ASSESSEE COULD NOT HAVE BEEN DENIED EXEMPTION CLAIMED BY IT UNDER SEC TION 11OF THE ACT FOR A REASON THAT IT HAD SUBSCRIBED TO THE CHIT FUN DS. THERE IS NO CASE FOR THE REVENUE THAT ANY OF THE TRUSTEES MANAGERS CONTRIBUTORS OF RELATIVES OF SUCH PERSONS WERE HAVING INTEREST IN T HE TWO CHIT COMPANIES. WE ARE THEREFORE OF THE OPINION THAT A SSESSEE WAS ELIGIBLE FOR EXEMPTION UNDER SECTION 11 OF THE ACT AND ITS C LAIM WAS DENIED 41 UNJUSTLY. WE THEREFORE SET ASIDE THE ORDERS OF TH E AUTHORITIES BELOW AND DIRECT THE A.O. TO GRANT THE ASSESSEE ITS CLAIM OF EXEMPTION UNDER SECTION 11 OF THE ACT FOR THE IMPUGNED ASSESSMENT Y EAR. 31. THE KOLKATA HIGH COURT IN THE CASE OF CIT VS. B IRLA CHARITY TRUST (1988) 170 ITR 150 GUJARAT HIGH COURT IN CIT VS. I NSANIYAT TRUST (1988) 173 ITR 248 AND THE BOMBAY HIGH COURT IN TRUSTEES OF MA NGALDAS N. VERMA CHARITABLE TRUST VS. CIT 203 ITR 322 HAVE TAKEN A V IEW THAT THE TERM FUNDS MEANS MONEY OR CASH AND THE TERM INVEST CONNOTES A POSITIVE ACT ON THE PART OF THE TRUST WHEREBY THE FUNDS OF THE TRUST ARE LAI D OUT OR COMMITTED IN ANY PARTICULAR PROPERTY OR BUSINESS OR TRANSACTION WITH A VIEW OF EARNING A PROFIT OR FINANCIAL ADDITION OR RETURN. THE COURTS THEREF ORE HELD THAT SECTION 13(2)(H) DID NOT APPLY TO ASSETS RECEIVED AS A DONA TION SINCE NO FUNDS WERE INVESTED. IN OUR VIEW THIS PROPOSITION THOUGH G IVEN IN A CONTEXT OF SECTION 13(2)(H) WOULD EQUALLY APPLY TO SECTION 13(1)(D) OF THE ACT AS THE LANGUAGE AND PURPOSE OF THE SECTIONS ARE THE SAME. 32. WE NOW CONSIDER THE FACTS OF THIS CASE. A PERU SAL OF THE ORDER OF THE FIRST APPELLATE AUTHORITY REVEALS THAT THERE IS NO DISPUTE ON THE LEGAL PRINCIPLE THAT IF THE CHIT FUND CONTRIBUTION IN QUESTION IS NOT MADE AS AN INVESTMENT THEN THE PROVISIONS OF SECTION 13(1)(D) ARE NOT ATT RACTED. IN OTHER WORDS IT IS AN ACCEPTED POSITION THAT SEC 13(1)(D) IS ATTRACTED ONLY IF ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE CONTRIBUTION TO CHIT IS HELD TO BE AN INVESTMENT. THE LEARNED CIT(DR) PLACED RELIANCE I N THE CASE OF PRIYADARSHINI EDUCATIONAL ACADEMY VS. DGIT (SUPRA) . HONBLE A.P . HIGH COURT IN THAT CASE WAS CONSIDERING IN A WRIT PETITION A CASE WHERE E XEMPTION WAS DENIED U/S 10(23C)(VI) OF THE ACT. THE ARGUMENT OF THE LD. CO UNSEL IN THIS CASE ARE AT PARA 4. THESE ARE EXTRACTED FOR READY REFERENCE: THE SURPLUS INCOME IF ANY AND ALL THEIR FUNDS ST OOD INVESTED IN ACQUISITION OF ASSETS AND IN THE MODES AND FORMS S PECIFIED IN SECTION 11(5) FOR THE ASSESSMENT YEAR 2008-09 I.E. THE Y EAR FOR WHICH APPROVAL WAS SOUGHT; THE LEGAL INFIRMITY ON THE BA SIS OF WHICH EXEMPTION WAS DENIED TO THE SOCIETY IN THE PAST ASS ESSMENT YEARS WAS BECAUSE OF ITS CONTRIBUTION TO A CHIT FUND SCHEME W HICH WAS CONSIDERED 42 BY THE ASSESSING OFFICER AS A CONTRAVENTION OF SECT ION 13(1)(D) OF THE ACT; THE SAID INFIRMITY DID NOT EXIST IN THE ASSESS MENT YEAR 2008-09 INASMUCH AS THE INSTALLMENT HAD BEEN FULLY PAID IN THE EARLIER YEAR ITSELF; IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT Y EAR 2008-09 ALL THE PETITIONERS FUNDS STOOD INVESTED IN THE FORMS APPR OVED UNDER SECTION 11(5) OF THE ACT. 33. THE HONBLE HIGH COURT AT PARA 8 & 9 HELD AS FO LLOWS: 8. THE THIRD PROVISO TO SECTION 10(23C) OF THE ACT REQUIRES THE EDUCATIONAL INSTITUTION REFERRED TO IN SUB-CLAUSE (VI) NOT TO INVEST OR DEPOSIT ITS FUNDS FOR ANY PERIOD DURING THE PREVIO US YEAR OTHERWISE THAN IN ANY ONE OR MORE OF THE FORMS OR MODES SPECI FIED IN SECTION 11(5) OF THE ACT. SECTION 11(5) PRESCRIBES THE FORMS AND MODES OF INVESTING OR DEPOSITING MONEY AS THOSE SPECIFIED IN CLAUSES (I) TO (XII) THEREUNDER. INVESTMENT/DEPOSIT IN A CHIT FUND IS NOT ONE OF THE MODES OF INVESTMENT OR DEPOSIT OF MONEY REFERRED TO IN CLAUSES (I) TO ( XII) OF SECTION 11(5) OF THE ACT. AS SECTION 10(23C)(VI) OF THE ACT REQUIRES THE INCOME RECEIVED BY ANY PERSON ON BEHALF OF THE EDUCATIONAL INSTITUTIO N EXISTING SOLELY FOR EDUCATIONAL PURPOSES AND NOT FOR PROFIT TO BE EXCL UDED WHILE COMPUTING THE TOTAL INCOME OF THE PREVIOUS YEAR OF SUCH A PER SON THE THIRD PROVISO THERETO STIPULATES THAT THE INVESTMENT OR DEPOSIT O F FUNDS OF THE EDUCATIONAL INSTITUTION OTHERWISE THAN IN ANY ONE OF THE FORMS OR MODES SPECIFIED IN SECTION 11(5) FOR ANY PERIOD DURING T HE PREVIOUS YEAR WOULD RESULT IN DENIAL OF THE BENEFIT OF EXCLUSION OF SUCH INCOME FROM THE TOTAL INCOME OF THE PREVIOUS YEAR OF THE SAID P ERSON. EVEN IN CASES WHERE APPROVAL WAS GRANTED EARLIER UNDER SECTION 10 (23Q(VI) OF THE ACT FAILURE OF THE SOCIETY (EDUCATIONAL AGENCY) TO INVE ST IN THE MODES AND FORMS SPECIFIED IN SECTION 11(5) OF THE ACT WOULD D ISENTITLE THEM FROM CLAIMING THE BENEFIT OF EXCLUSION OF THE INCOME RE CEIVED ON BEHALF OF AN EDUCATIONAL INSTITUTION FROM THEIR TOTAL INCOME FOR THE PREVIOUS YEAR. IN C ASES WHERE INITIAL APPROVAL OR EXTENSION OF THE AP PROVAL GRANTED EARLIER IS SOUGHT THE PRESCRIBED AUTHORITY WOULD B E ENTITLED TO EXAMINE THE ANNUAL ACCOUNTS OF THE APPLICANT-SOCIETY FOR TH E PREVIOUS THREE YEARS TO ASCERTAIN WHETHER INVESTMENT/DEPOSITS MADE IN AN Y OF THE PREVIOUS 43 THREE YEARS ARE IN THE FORMS AND MODES OTHER THAN T HOSE SPECIFIED IN SECTION 1.1(5) OF THE ACT. IT IS ONLY IF THE PRESCRI BED AUTHORITY IS SATISFIED THAT THE APPLICANT HAS APPLIED ITS INCOME EXCLUSIVE LY FOR THE PURPOSE OF EDUCATION AND HAS ADHERED TO THE MODES SPECIFIED I N SECTION 11(5) OF THE ACT THAT HE WOULD GRANT APPROVAL OR RENEW THE APP ROVAL GRANTED EARLIER UNDER SECTION 10(23C)(VI) OF THE ACT. 9. ACCEPTING THE SUBMISSION OF THE LEARNED COUNSEL FOR THE PETITIONER THAT SINCE THE PETITIONER'S INVESTMENT IN A CHIT F UND (WHICH IS NOT ONE OF THE MODES AND FORMS SPECIFIED IN SECTION 11(5) OF T HE ACT) WAS IN THE ASSESSMENT YEAR 2007-08 PRIOR TO THE ASSESSMENT YE AR 2008-09 FOR WHICH APPROVAL WAS SOUGHT SUCH INVESTMENT OR DEPOSIT CAN NOT RESULT IN DENIAL OF GRANT OF EXEMPTION WOULD RENDER THE REQUIREMENT OF FURNISHING THE AUDITED ANNUAL ACCOUNTS FOR THE PREVIOUS THREE YEAR S AS STIPULATED IN FORM 56D WHOLLY UNNECESSARY. A LOGICAL COROLLARY O F THE AFORESAID SUBMISSION WOULD BE THAT ONLY THE INCOME OF THE PRE VIOUS FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR IN QUESTION WOULD BE REQUIRED TO BE EXAMINED BY THE PRESCRIBED AUTHORITY AND NOT THE T WO PREVIOUS YEARS PRIOR THERETO. 34. ON PERUSAL OF THE ABOVE JUDGMENT IT IS CLEAR T HAT THE ISSUE WHETHER THE CONTRIBUTION MADE BY THE ASESSEE TO A CHIT FUND AS AN INDIVIDUAL SUBSCRIBER EITHER ON THE FACTS OF THE CASE OR UND ER 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 ISSU E BEFORE THE HONBLE HIGH COURT. THE ISSUE AS TO WHETHER THE CONTRIBUTION T O THE CHIT FUND IS AN INVESTMENT/DEPOSIT WAS NOT CONTESTED BY THE PARTIES . HENCE THIS JUDGEMENT 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 CONTEMPLAT ED U/S 13(1)(D) R.W.S. SEC 11(5) OF THE ACT. THE VARIOUS JUDGMENTS OF THE HONBLE 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 GOVER NED BY THE PRINCIPAL OF MUTUALITY AND HENCE IT IS NEITHER AN INVESTMENT NOR A DEPOSIT. 44 35. EVEN OTHERWISE IN THE CASE OF THE ASSESSEE TH E UNDISPUTED FACT IS THAT ASSESSEE REQUIRES MONEY FOR ITS EXPANSION. THIS FA CT IS NOT DISPUTED BY THE LD. CIT(DR). IT IS ALSO CLEAR THAT THE ASSESSEE SO CIETIES HAVE TAKEN HUGE LOANS FROM VARIOUS BANKS FOR UNDERTAKING EXPANSION AND TO CREATE INFRASTRUCTURE. THESE LOANS WERE TAKEN BY THE SOCIE TIES AS THEY DID NOT HAVE SURPLUS FUNDS TO UNDERTAKE EXPANSION AND CREATE INF RASTRUCTURE. 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 LAY O UT 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 A SSESSEES 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. 36. IN THIS CASE CONTRIBUTION TO THE CHIT FUND WAS MADE TO ENABLE THE ASSESSEE SOCIETY TO RAISE FUNDS FOR EXPANSION. THI S IS CLEAR FROM FUNDS FLOW STATEMENT AND THE PROJECTED INVESTMENT REQUIRED BY THE ASSESSEE. WHEN THE ASSESSEE IS PAYING HUGE AMOUNT OF INTEREST TO VARIO US BANKS IT IS WRONG TO CONCLUDE THAT ASSESSEE HAS WITH AN INTENTION TO EAR N PROFIT OR INCOME MADE A CONTRIBUTION TO THE CHIT FUND. 37. THE ALLEGATION OF REVENUE THAT THE ASSESSEE HAS NOT WITHDRAWN THE CHIT AMOUNT HAS BEEN ANSWERED BY THE ASSESSEE BY POINTI NG 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 TH E OCCASION. THE ALLEGATION THAT THE ASSESSEE HAS SURPLUS FUND KEPT AS DEPOSITS IS ALSO WRONG FOR THE REASON THAT THESE FIXED DEPOSITS WERE JOINT LY 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 INSTITUT ION. THUS FOR ALL THESE REASONS WE UPHOLD THE CONTENTION OF THE ASSESSEE T HAT THE CONTRIBUTION TO CHIT IN THE CASES ON HAND IS NOT AN INVESTMENT NO R A DEPOSIT AND HENCE SECTION 13(1)(D) OF THE ACT IS NOT ATTRACTED. 45 38. THE TERM FUND USED IN SECTION 13(1)(D) OF THE ACT IN OUR OPINION HAS TO BE R.W.S. 11(5) OF THE ACT. UNDER SECTION 1 1(5) THE WORDING IS FORMS AND MODES OF INVESTING AND DEPOSITING THE MONEY REF ERRED TO IN CLAUSE (B) OF SUB-SECTION (2) IS AS FOLLOWS: SEC.11 (2) (B) READS AS FOLLOWS: THE MONEY SO ACCUMULATED OR SET APART IS INVESTED OR DEPOSITED IN THE FORMS OR MODES SPECIFIED IN SUB-SECTION (5). 39. THUS THE REQUIREMENT OF INVESTING OR DEPOSITING U/S 11(5) OF THE ACT IS CONFINED TO MONEY IN HAND OR CASH. WHEN THE ENTIRE INCOME OF THE YEAR HAS ALREADY BEEN SPENT TOWARDS THE OBJECTS OF THE SOCIE TY 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 HA NDS. IF THE ENTIRE MONEY IN HAND IS ALREADY SPENT FOR A PARTICULAR PURPOSE T HEN THE QUESTION OF SPENDING THE SAME AMOUNT FOR ANOTHER PURPOSE AS WEL L DOES NOT ARISE. THUS THE INTERPRETATION OF THE TERM ANY FUNDS BY THE H ONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SRI SRIRAM FOUNDATION 250 ITR 5 5 THOUGH MADE IN THE CONTEXT OF SECTION 13(2)(H) IS ON ALL FOURS APPLIC ABLE WHILE INTERPRETING SECTION 13(1)(D) OF THE ACT. EVEN THE CBDT CIRCUL AR NO.335 DT.13.4.1982 EXPLAINS THE SAME POSITION. THE EXAMPLE GIVEN THER EIN CLEARLY EXPLAINS THAT IN A CASE WHERE THE TRUST DERIVES INCOME OF RS.40 0 00 IN A YEAR AS PER S.11(1)(A) IT HAS TO SPEND AT LEAST RS.30 000 ON CH ARITABLE PURPOSE AND THE BALANCE OF RS.10 000 WILL HAVE TO BE INVESTED IN TH E FORMS OR MODES PRESCRIBED U/S 13(5)(NOW S.11(5)). THEREFORE IN A CASE WHERE THE ENTIRE INCOME OF RS.40 000 IS SPENT FOR CHARITABLE PURPOSE S EXEMPTION U/S 11(1)(A) HAS TO BE GRANTED AND THERE IS NO NEED TO FURTHER E XAMINE WHETHER ANY INVESTMENTS WERE MADE IN VIOLATION OF S.11(5) OF TH E ACT IN AS MUCH AS THE TRUST IS LEFT WITH NO MORE FUNDS OUT OF THE INCOME OF RS.40 000 RECEIVED. IN THE CASE OF BOTH THE ASSESSEES AS PER THE CHARTS S UBMITTED BY THE ASSESSEES IT IS EVIDENT THAT THEY HAVE INCURRED DEFICIT IN EV ERY YEAR AND THUS ENTIRE INCOME OF EACH ASSESSMENT YEAR WAS FULLY SPENT TOWA RDS THE CHARITABLE OBJECTS. 46 40. AS WE HAVE HELD THAT CONTRIBUTION TO CHIT FUND IN THIS CASE IS NOT AN INVESTMENT AND MUCH LESS AN INVESTMENT WITH SOMEON E ELSE AND FURTHER THAT THE PROVISIONS OF S.11(1)(A) HAVE BEEN COMPLIE D BY INVESTING THE ENTIRE INCOME OF THE YEAR TOWARDS CHARITABLE PURPOSES WE CONCLUDE THAT THERE IS NO VIOLATION OF SECTION 13(1)(D) R.W.S. 11(5) OF THE A CT. 41. AS WE HAVE UPHELD THE CONTENTION OF THE ASSESSE E IN THIS ASPECT WE DO NOT EXPRESS ANY OPINION ON THE OTHER ARGUMENTS R AISED BY BOTH PARTIES AS IT WOULD BE AN ACADEMIC EXERCISE. 42. IN THE RESULT ALL THE APPEALS OF THE ASSESSEES ARE ALLOWED. REVENUE APPEAL: (ITA NO.447/V/2012) : 43. THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A) DT.29 TH SEPTEMBER 2012 IN THE CASE OF LOKABANDU EDUCATION AL SOCIETY. GROUNDS RAISED IN THE APPEAL ARE AS UNDER: 1. THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE RE-AS SESSMENT PROCEEDINGS FOR THE ASSESSMENT YEAR 2005-06 AS INVA LID. 2. THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE ASSESS MENT IS REOPENED MERELY ON CHANGE OF OPINION. 3. THE CIT(A) OUGHT TO HAVE CONSIDERED THE FACT THAT T HE ASSESSMENT IS REOPENED WITHIN FOUR YEARS FROM THE E ND OF THE RELEVANT ASSESSMENT YEAR AND THE REQUIREMENT OF FUL L AND TRUE DISCLOSURE OF MATERIAL FACTS ARE NOT APPLICABLE TO THIS CASE. 4. IN VIEW OF THE EXPLANATION 2(C)(III) OF SECTION 147 WHERE ASSESSMENT HAS BEEN MADE BUT SUCH INCOME HAS BEEN MADE THE SUBJECT OF EXCESSIVE RELIEF UNDER THIS ACT THE PRINCIPLE OF CHANGE OF OPINION IS NOT APPLICABLE TO THIS CASE. 44. WHILE ALL THE OTHER FACTS ARE IDENTICAL TO THE ASSESSMENT YEARS INVOLVED IN THE APPEALS OF THE ASSESSEE THE ONLY PECULIAR FACT FOR THIS ASSESSMENT YEAR IS THAT THE ASSESSMENT WAS ORIGINALLY COMPLETED U/S 14 3(3) OF THE ACT. IN THE ASSESSMENT COMPLETED VIDE ORDER DT.18.9.2006 THE AS SESSING OFFICER MADE ADDITION FOR THE AMOUNT CONTRIBUTED TO THE CHIT FUN D INSTEAD OF BRINGING THE SURPLUS TO TAX. IN THE REASSESSMENT PROCEEDINGS T HE ASSESSING OFFICER TOOK A DIFFERENT VIEW AND BROUGHT TO TAX THE SURPLUS EARNE D BY THE ASSESSEE FOR THE ASSESSMENT YEAR. 47 45. THE CIT(A) HELD THAT THE REASSESSMENT PROCEEDI NGS FOR THE IMPUGNED ASSESSMENT YEAR ARE NOT VALID AND HIS FINDINGS IN T HIS REGARD AS CONTAINED IN PARA 6.1.3. ARE AS UNDER: WHEN THE FACTS OF THE PRESENT CASE ARE EXAMINED IN THE LIGHT OF ABOVE CONTEXTUAL BACK-GROUND THERE CAN BE NO TWO OPINION S THAT AO BEING IN POSSESSION OF TANGIBLE INFORMATION HAS VALIDLY ARRI VED AT A REASONABLE BELIEF THAT INCOME CHARGEABLE TO TAX ESCAPED ASSESS MENT. THOUGH AO HAD REASONS TO BELIEVE HE IS REQUIRED TO MEET MORE STRINGENT STANDARDS AS FAR AS ASSESSMENT YEAR 2005-06 IS CONCERNED BECA USE THE ASSESSMENT WAS ORIGINALLY MADE U/S 143(3). AS FAR AS OTHER ASSESSMENT YEARS ARE CONCERNED THE REASONS RECORDED ARE SUFFIC IENT TO REOPEN THE ASSESSMENT AS THE CONCEPT OF CHANGE OF OPINION DOES NOT APPLY BECAUSE THEY WERE ORIGINALLY COMPLETED U/S 143(1). AS HELD BY THE HONBLE DELHI HIGH COURT IN THE CASE OF SUN INVESTMENTS PRIVATE LI MITED 344 ITR 001 WHEN THE ORIGINAL ASSESSMENT IS MADE BY WAY OF PROC ESSING THE RETURN THERE IS NO OCCASION FOR THE AO TO EXAMINE THE ISSU ES. THEREFORE IT COULD NOT BE SAID THAT AO FORMED AN OPINION WHICH C AN BE ALLEGED TO BE CHANGED. SIMILAR OPINION WAS HELD BY VARIOUS COURT S IN A CATENA OF DECISIONS. THEREFORE I HOLD THAT THERE IS NO CHANG E OF OPINION BY AO IN CASE OF ASSESSMENT YEARS 2003-04 2004-05 AND 2006- 07 BECAUSE NO REGULAR ASSESSMENT WAS MADE IN THOSE YEARS. THEREF ORE I UPHOLD THE ACTION OF ISSUE OF NOTICE U/S 148 FOR THOSE THREE A SSESSMENT YEARS. AS FAR AS ASSESSMENT YEAR 2005-06 IS CONCERNED AO ASSE SSED THE INCOME ORIGINALLY U/S 143(3). THE ISSUE OF VIOLATION OF P ROVISIONS OF S.11(5) WAS DULY CONSIDERED IN THE ORIGINAL ASSESSMENT AND IT W AS HELD BY AO THAT THE INCOME WHICH WOULD ATTRACT DENIAL OF EXEMPTION IS ONLY THE CUMULATIVE CONTRIBUTION OF RS.7 80 000 MADE IN CHIT FUNDS. AO HAVING EXAMINED THIS ISSUE AND FORMED AN OPINION THOUGH ER RONEOUS IS NOT ENTITLED TO REVISE HIS OPINION AND REOPEN THE ASSES SMENT ON THE SAME ISSUE AND TAKE A DIFFERENT STAND IN THE REASSESSMEN T. THUS AS FAR AS A.Y.2005-06 IS CONCERNED ASSESSEES RELIANCE ON TH E DECISIONS OF KELVINATOR INDIA LIMITED 320 ITR 561 AND EICHER LIM ITED 294 ITR 310 IS WELL FOUNDED. THEREFORE I HOLD THAT THE ASSESSMENT FOR ASSESSMENT YEAR 2005-06 IS REOPENED MERELY ON CHANGE OF OPINIO N AND HENCE I 48 HAVE NO HESITATION IN HOLDING THAT REASSESSMENT PRO CEEDINGS AS FAR AS ASSESSMENT YEAR 2005-06 ARE CONCERNED ARE NOT VALID AND THEREFORE THE ASSESSMENT MADE FOR A.Y.2005-06 IS QUASHED. AS ALR EADY STATED REOPENING OF ASSESSMENTS FOR ASSESSMENT YEARS 2003- 04 2004-05 AND 2006-07 IS HELD TO BE VALID. 46. LEARNED DR SMT.KOMALI KRISHNA SUBMITS THAT THE CIT(A) IS NOT JUSTIFIED IN QUASHING THE ASSESSMENT FOR THE A.Y.2005-06. SHE A RGUED THAT THE VIEW TAKEN BY THE ASSESSING OFFICER AT THE TIME OF COMPL ETING THE ASSESSMENT ORIGINALLY U/S 143(3) OF THE ACT IS AN ERRONEOUS VI EW AND THEREFORE THE REOPENING WAS IN ACCORDANCE WITH LAW. 47. LEARNED COUNSEL FOR THE ASSESSEE PLACED STRONG RELIANCE IN THE ORDER OF THE CIT(A) AND BROUGHT OUR ATTENTION TO PARA 6.1.3. OF THE ORDER OF CIT(A). FURTHER HE PLACED RELIANCE IN THE DECISIONS OF HON BLE DELHI HIGH COURT IN THE CASES OF ORIENT CRAFT LIMITED (ORDER DT.12.12.2012 IN ITA NO.555/2012) MOHAN GUPTA (HUF) (ORDER DT.28.1.2014 IN WP(C)7660/ 2012 AND DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF INDUCTOTH ERM (INDIA) PRIVATE LIMITED (ORDER DT.6.8.2012 IN SPECIAL CIVIL APPLICA TION NO.858 OF 2006). IT IS THE SUBMISSION OF THE A.R. THAT IN ALL THE ABOVE CA SES IT WAS CATEGORICALLY HELD THAT IN THE ABSENCE OF NEW MATERIAL THE ASSESSING O FFICER IS PRECLUDED FROM REOPENING AN ASSESSMENT COMPLETED U/S 143(3) OF THE ACT MERELY ON ACCOUNT OF CHANGE OF OPINION. HE FURTHER SUBMITTED THAT TH E VIEW TAKEN BY THE ASSESSING OFFICER IN THE ASSESSMENT U/S 143(3) OF T HE ACT IS NOT ERRONEOUS AS SUCH A VIEW IS SUPPORTED BY VARIOUS DECISIONS. FUR THER HE SUPPORTED THE ORDER OF CIT(A) ON THE GROUND THAT CONTRIBUTION TO A CHIT FUND IS NOT VIOLATIVE OF THE PROVISIONS OF S.11(5) R.W.S. S.13(1)(D) AND HENCE THE RELIEF GIVEN BY THE CIT(A) IS SUSTAINABLE EVEN ON THIS SCORE. 48. WE HAVE HEARD THE RIVAL CONTENTIONS. ON A CARE FUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON PERUSAL OF THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITED WE HOLD AS FOLLOWS: 49 49. IT IS AN UNDISPUTED FACT THAT AT THE TIME THE A SSESSMENT WAS ORIGINALLY COMPLETED U/S 143(3) THE ASSESSING OFFICER WAS AWAR E OF THE CONTRIBUTION MADE BY THE ASSESSEE TO CHIT FUNDS. HOWEVER THE A SSESSING OFFICER WAS OF THE VIEW THAT IN SUCH CIRCUMSTANCES THE DENIAL OF E XEMPTION U/S 11 WOULD BE RESTRICTED TO THE AMOUNT INVESTED IN VIOLATION OF S .11(5). AS RIGHTLY ARGUED BY THE LEARNED COUNSEL FOR THE ASSESSEE THIS VIEW TAK EN BY THE ASSESSING OFFICER IS SUPPORTED BY A FEW DECISIONS. WE DO NOT WISH TO EXPRESS ANY VIEWS ON THE CORRECTNESS OF THESE DECISIONS. SUFFICE TO SAY THA T ON THESE FACTS AND CIRCUMSTANCES OF THE CASE THE VIEW TAKEN BY THE AS SESSING OFFICER CANNOT BE TERMED AS PATENTLY ERRONEOUS. IT IS THE CONSISTENT VIEW OF VARIOUS HIGH COURTS THAT IN THE ABSENCE OF ANY FRESH MATERIAL AN ASSESS MENT CONCLUDED U/S 143(3) CANNOT BE REOPENED ON MERE CHANGE OF OPINION. IN T HE DECISIONS CITED BY THE COUNSEL FOR ASSESSEE THIS WAS THE VIEW TAKEN BY THE HONBLE DELHI HIGH COURT AND GUJARAT HIGH COURT. RESPECTFULLY FOLLOWING THE SE DECISIONS WE HOLD THAT THE CIT(A) WAS JUSTIFIED IN QUASHING THE ASSESSMENT FOR A.Y.2005-06 ON THE GROUND THAT THE REOPENING OF THE ASSESSMENT WAS INV ALID. 50. EVEN OTHERWISE IN THE APPEALS OF THE ASSESSEE WE HAVE TAKEN A VIEW THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE CO NTRIBUTION TO CHIT FUNDS WOULD NOT DISENTITLE THE ASSESSEE FROM CLAIMING EXE MPTION U/S 11(1) OF THE ACT. THEREFORE THE RELIEF GRANTED BY CIT(A) IS SU STAINABLE EVEN ON MERITS. 51. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED . PRONOUNCED IN THE OPEN COURT ON 28 TH APR14 SD/- SD/- (SAKTIJIT DEY) (J. SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER VG/SPS MANGA/SPS VISAKHAPATNAM DATED 28 TH APRIL 2014 50 COPY TO 1 SRI SIVANI EDUCATIONAL SOCIETY D.NO.2-1-116 NEA R VIJAYA BANK PALAKONDA ROAD SRIKAKULAM 2 SRI LOKABANDHU EDUCATIONAL SOCIETY MAHARAJUPETA COLLEGE ROAD BOBBILI VIZIANAGARAM DIST. 3 ITO WARD-2 SRIKAKULAM 4 ITO WARD-3(2) VISAKHAPATNAM 5 THE CIT VISAKHAPATNAM 6 THE CIT(A) VISAKHAPATNAM 7 THE DR ITAT VISAKHAPATNAM. 8 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM