Exemption u/s 10 (23C) not to be Denied Unless Donation to Trusts Evidentiated as Bogus: ITAT [Read Order]

The Income Tax Appellate Tribunal ( ITAT ), Mumbai Bench, has recently, in an appeal filed before it, held that the exemption u/s 10(23C) shall not be denied, unless the donation made to trusts, is evidentiated as bogus.

The aforesaid observation was made by the Mumbai ITAT,when a bunch of 5 appeals were filed by the Deputy Commissioner of income tax, central circle, Mumbai (the AO), in case of a charitable trust by the name Podar Education & Sports Trust ,for assessment year 2014 – 15 to 2018 – 19.

The brief fact of the case were that assessee was a charitable trust registered under Section 12AA (1) (b) (i) of The Income-tax Act, 1961, from 3 January 2006 as per registration granted by the Director of Income tax (Exemption), Bangalore.

 During the year, assessee had earned income from educational activities as well as interest income, and had  filed a return of income under Section 139 of the Income Tax Act, on 21 September 2021 at ₹Nil, wherein the assessment was completed under Section 143(3) of the Income Tax Act as per the order dated 27 March 2014 at ₹ nil.

Subsequently, a search under Section 132 of the Income Tax Act was carried out in case of Podar Group ,on 9 January 2018, where the case of the assessee was also covered, and consequent to that, the search notice under Section 153A of the Income Tax Act was issued on 16th August, 2018, in response to which assessee filed a return of income on 11th September, 2019 at ₹ nil.

During the course of search, the income tax department found that there were three trust belonging to Podar Group i.e. (i) Anandilal and Ganesh Podar society (ii) Podar Education Trust & (iii) Podar Education & Sports Trust, and that these trusts gave allegedly bogus donation to other trusts, wherein the other trusts returned back cash to Podar Group, and the cash was introduced into various companies with the help of entry providers.

Further, during the search proceedings, the Income Tax Department had also obtained various evidences as well as recorded the statements of several persons, with the connected survey  also being carried out under Section 133A of the Income Tax Act on different persons, working with the group, wherein one such statement was recorded of Mr. Kiritkumar suba, under Section 131 of the Act on 11th January, 2018 and on 12th January, 2018.

 He explained the modus operandi of the Podar Group, with his communication chats on mobile message confirming the same, and also admitted that the cash, generated out of the donation were being brought back into the companies, the same being unaccounted cash. A further statement under Section 131 of the Act was also recorded of Mr. N.K. Sodhani, who  also confirmed the transactions with relate to Anandilal Ganesh and Podar society donations. Also, during the course of search, messages in the form of digital evidences were also found from the mobile of one Mr. Navin Nishar, wherein the cash trail through messages was found.

The statement of  Mr. Navin Nishar were  also recorded from whose mobile,the  messages were found, and the statements of Mr. Dhirubhai Thakkar ,being a person associated with Dhara Angadia Services, Ahmadabad, were also recorded under Section 131 of the Income Tax Act, while similar statements of Mr. Sureshbhai Thakkar were also recorded by the department.

 On 11 January 2018, the statement of one Mr. Shirish Shah, alleged entry operator, was recorded under Section 131 of the Income Tax Act, wherein the information with respect to various share capital introduced in the companies were  found. And, based on this, the statement of Jayesh Zanani, who was the manager in Podar group was also recorded, wherein he confirmed the same.

Based on this, the assessee’s trust was asked the details with respect to the donation made as per the letter dated 26 September 2019, wherein the Assessee furnished it, subsequent to which,a notice under Section 133(6) of the Income Tax Act were issued to the various trust to whom donations were made by the assessee for verification of genuineness. A show cause notice dated 12th December, 2019, was issued to the assessee also,to show why the donation given by the assessee trust should not be treated as bogus, as the same was not given for the object of the trust for the relevant assessment years during the A.Ys. 2012-13 to 2018-19, to which the assessee furnished his reply on 23 December 2019.

Thereafter, the reply to the notice under Section 133(6) of the Income Tax Act was also received from Donee trust, following which the Assessing Officer further had asked the bank statement of the Donee trust from F.Y. 2011-12 to 2017-18. And as the bank accounts of Donee trust were not received by the Assessing Officer, he held that the genuineness of the transaction is not proved.

Meanwhile, it was submitted by the  assessee that Mr. Kiritkumar suba, Mr. Navin Nishar, Mr. N.K. Sodhani & Mr. Jayesh Zanani, all had retracted their statements and that they had also filed the affidavit to this effect. The Assessing Officer , however rejected retraction of statement as well as the affidavit of the parties and held  the information as per statement originally given to be correct. And in the appellate proceedings also, in some of the cases in cross-examinations of all these persons, he affirmed their retraction and the affidavit denying the allegations, thus  holding  that the retractions as well as the affidavit filed by those persons were not reliable and hence, could not be treated as evidence.

The Assessing Officer referred to several judicial precedents for this proposition, and further noted that Mr. Shirish Shah, Mr. Sureshbhai Thakkar, Mr. Dhirubhai Thakkar had neither contradicted their statements  nor retracted them, and further that the assessee was claiming exemption under Section 10(23C) (vi) of the  Income Tax Act, and that as per the third proviso, the assessee is required to apply the income wholly and exclusively for the objects for which it was formed.

The Assessing Officer thus noting that the assessee’s trust had not applied the same in accordance with the provisions of the law, held the assessee to have donated ₹1 crores to Ramrao Adik Education Society, having PAN No. AAATR3978A, being bogus in nature, and therefore that the exemption, be non available to the assessee on the above sum.

Having further found that the assessee had made a provision of gratuity of ₹1,76,72,365/, the Assessing Officer questioned and held that the above provision was not in the nature of utilization of the donation and was merely a ‘provision’ and further that section 11 and 12 of the Income Tax Act, do not provide for such deduction. And therefore, he held that it was not applied for education purposes.

Accordingly, he also found that assessee had a total income of ₹31,19,82,582/- ,out of which ₹29,38,72,711/- were utilized for the purpose of object of the trust, wherein the said utilization included the provision for gratuity of ₹1,76,72,365/-. And accordingly, the AO computed the application of income for educational purposes of Rs. ₹27,62,00,346/- which resulted into excess of income over expenditure of ₹3,57,82,234/-. And on this sum, he allowed the exemption under Section 10(23C) (via) of the Income Tax Act , computing the total income at ₹nil.

Holding the sum of ₹1 crore donated to Ramrao Adik Education Society as bogus and thereby denying exemption as allegedly not applied for educational purposes, the AO  accordingly passed the assessment order under Section 153A read with section 143 of the  Income Tax Act, on 29th December, 2019, computing the total taxable income at ₹ 1 crore and  denying deduction as application of income of provision for gratuity of Rs 1,76,73,365/-.

Aggrieved by the same, the assessee preferred an appeal before the CIT (A),challenging the assessment order , who passed an appellate order on 11 August 2021 , dismissing  all the contentions of the assessee with respect to the challenge to the order on technical ground, thereby deleting the addition of ₹ 1 crore based on the remand report of the learned Assessing Officer, further deleting the addition / disallowance based on the decision of co-ordinate Bench in assessee’s own case for A.Y. 2014-15 dated 3 August 2021 with respect to the disallowance of gratuity. And accordingly,  he passed an appellate order on 11 August 2021 ,in opposition to which the Revenue has now filed the instant appeal before the Mumbai ITAT.

With the Assessing Officer having raised the grounds of the appeals to be as to whether on the facts and in the circumstances of the case and in law, the  CIT (A) has erred in passing its order  deleting the disallowance of bogus donation of ₹ 5 crores u/s 10 (23C) of the Income Tax Act, 1961 ,which was made in the course of assessment u/s 143 (3) read with Section 153A, as the assessee trust contravened the provisions of Section 11 and 12 , thereby rendering itself  ineligible for exemption u/s 10 (23C) , the ITAT Bench consisting of Amit Shukla, the Judicial Member and Prashant Maharisi, the Accountant Member observed :

“We have carefully considered the rival contention and perused the orders of the lower authorities. We find that in all these appeals, the grounds with respect to alleged bogus donation and ground with respect to the provision of leave encashment and gratuity and on both these issues the learned assessing officer has disallowed exemption claimed by the assessee u/s 10 (23C) of the act.”

“On appeal before the learned CIT – A, exemption was allowed to the assessee with respect to the alleged bogus donation holding that there is no evidence available with the learned assessing officer that the donation made by the assessee to those trust are bogus and further the exemption is allowable on provision for leave encashment and gratuity following the decision of the coordinate bench in case of Podar Education Trust. Therefore, we confirm the order of the learned CIT – A for all these years and dismiss the appeal of the learned assessing officer”, the Mumbai ITAT thus held.

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