AI Structured Summary
Not yet generated for this judgment
Judgment
PER S. RIFAUR RAHMAN, ACCOUNTANT MEMBER :
This appeal is filed by the assessee against the order of ld. Addl./JCIT (A)-1, Chennai [“Ld. CIT(A)”, for short] dated 24.02.2026 for the Assessment Year 2017-18.
At the time of hearing, ld. AR of the assessee brought to our notice the relevant facts of the case and his submissions are as under. He submitted that the assessee is a society engaged in charitable activities and duly registered under section 12A of the Income Tax Act, 1961 ("the Act"). Return of income for AY 2017-18 was filed on 07.10.2017 declaring taxable income at Rs.Nil. He further submitted that the case was selected for scrutiny and assessment was completed u/s 143(3) of the Act at an assessed income of Rs.2,53,80,431/-, effectively denying the benefit of exemption u/s 11 & 12 of the Act and assessed the income of the assessee as an AOP.
He submitted that vide rectification order dated 18.02.2020 passed u/s 154 r.w.s. 143(3) of the Act, the income was reworked and finally assessed at Rs.2,53,80,430/-, while sustaining, inter alia, the following three additions/disallowances were made:
Rs. 30,79,700/- on account of an alleged difference between the balance reflected in the assessee’s books qua M/s Divine International and the balance reflected in the ledger extract of M/s Divine International;
Rs. 1,36,55,949/- on account of alleged lesser/no interest charged by the assessee on advances/loans to persons specified u/s 13(3) of the Act, by invoking s. 40A(2)(a)/(b) of the Act, and consequent denial of exemption u/s 11 & 12 alleging violation of s. 13(1)(c) r.w.s. 13(2)(g)/13(3);
Rs. 55,00,000/- being donation paid by the assessee to M/s Divine International (Trust), disallowed for want of a certificate u/s 80G of the donee.
He submitted that issues (b) and (c) above are squarely covered in the assessee’s favour by the order of ITAT, Bench 'B' order dated 07.08.2026 in ITA No.6718/Del/2025 for AY 2018-19, in assessee’s own case on identical facts and involving the very same four related concerns/entities.
With regard to Issue No.(b) above regarding addition of Rs.1,36,55,949/-being interest not charged/short-charged on advances to related concerns u/s 40A(2)(a) and denial of exemption u/s 11 & 12, he submitted that for AY 2018-19, on identical facts, the AO made an addition of Rs.1,64,90,055/- on the very same footing that the assessee had advanced interest-free/low-interest loans to four related concerns, namely, (i) M/s Divine Realbuild Pvt. Ltd., (ii) M/s Divine International, (iii) M/s Divine Education Trust and (iv) Dr. B.P. Singh Public Charitable Trust, while simultaneously paying substantial interest on secured loans taken by it, and invoked section 40A(2)(a) to deny the assessee the benefit of exemption u/s 11 & 12 alleging violation of section 13(1)(c) r.w.s. 13(2)(g)/13(3) of the Act. He submitted that this is verbatim the same allegation, the same four concerns, and the same statutory provisions as have been invoked for AY 2017-18 in the impugned rectification order. He further submitted that the ITAT, after considering the rival contentions, was pleased to delete the said addition and restore the benefit of ss. 11 & 12 of the Act, holding as under :-
(i)As regards M/s Divine Realbuild Pvt. Ltd., the advance was found to have been given in the ordinary course of a construction contract (agreement dated 08.03.2013) for construction of the DSPSR College building, completed in FY 2018-19; there was no material to show that any specified person derived personal benefit, or that the contract was over-priced or not at arm's length. (Completion Certificate at Page 108 to 109)
(ii)As regards the remaining three entities — M/s Divine International, M/s Divine Education Trust and Dr. B.P. Singh Public Charitable Trust — since these entities are themselves duly registered charitable institutions u/s 12A and 80G of the Act, it could not be alleged that any direct or indirect benefit was extended to "specified persons" merely because certain persons/trustees were common. Reliance was placed on the Hon'ble Delhi High Court's decisions in DIT v. Acme Educational Society (2010) 326 ITR 146 (Del) and DIT v. Alarippu (2000) 111 Taxman 511 (Del), holding that an interest-free temporary loan by one society to another society with similar objects does not attract s. 13(1)(d) merely because some related parties are common to both institutions. (80G/12A of the above 3 Trusts at Page 87 to 92)
(iii)On principle, s. 40A(2)(a) of the Act operates to disallow expenditure in computing income from business or profession where such expenditure is paid to related parties and is excessive/unreasonable. In the Appellant's case, the interest expenditure was in fact paid to banks — admittedly unrelated parties — and the Appellant's income from business/profession is Nil as per its own computation. The invocation of s. 40A(2)(a) to impute notional interest income and consequently deny exemption u/s 11 & 12 was accordingly held to be legally unsustainable.
It is submitted that the facts for AY 2017-18 are identical in every material particular i.e. the same four related concerns, the same nature of interest-free/concessional advances, the same absence of any finding of personal benefit to a specified person, and the same computation reflecting Nil business income. Following the rule of consistency and the binding effect of the Tribunal's own decision in the assessee’s case for the immediately succeeding year on identical facts, the addition of Rs.1,36,55,949/- for AY 2017-18 may be deleted and the benefit of exemption u/s 11 & 12 restored to the assessee. He also relied on the following case laws :-
Director of Income-tax vs. Acme Educational Society [2010] 326 ITR 146 (Delhi)[28-07-2010](Delhi High Court)
(2000)111 TAXMAN 511 (DELHI) (HIGH COURT OF DELHI) Director of Income-tax v. Alarippu
On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.
Considered the rival submissions and material placed on record. We observed that for AY 2018-19, on identical facts, the AO made an addition of Rs.1,64,90,055/- on the very same footing that the assessee had advanced interest-free/low-interest loans to four related concerns, namely, (i) M/s Divine Realbuild Pvt. Ltd., (ii) M/s Divine International, (iii) M/s Divine Education Trust and (iv) Dr. B.P. Singh Public Charitable Trust, while simultaneously paying substantial interest on secured loans taken by it, and invoked section 40A(2)(a) to deny the assessee the benefit of exemption u/s 11 & 12 alleging violation of section 13(1)(c) r.w.s. 13(2)(g)/13(3) of the Act. We observed that the coordinate Bench of ITAT in AY 2018-19 in assessee’s own case (supra) has decided the issue in favour of the assessee by observing as under:-
“5.We have heard the rival contentions and perused the material on record and primarily ld. Representatives of both sides have relied their respective cases as contested before ld. Tax authorities below. Now, with regard to ground No. 6 we find that assessee’s case before ld. Tax authorities was that vide an agreement dated 08.03.2013 copy of which is available at page No. 36-42, of the paper book assessee had engaged in Devine Realbuild Pvt. Ltd. to execute a work of construction of the DSPSR College building and the advance was given in ordinary course of carrying out of construction activity. The project was completed in F.Y. 2018-19 and completion cum occupation of certificate was received in the year 2020 from the North Delhi Municipal Corporation. Now, going through the impugned order we find that there is no allegation or material to demonstrate that any specified person has derived any personal benefit from the said advance. Specially that contract was overpriced or not at arms’s length.
6.Then, with regard to other 3 entities M/s Divine International, M/s Divine Educational and Dr. B.P. Singh Public Charitable Trust, assessee has claimed that these 3 entities are duly registered charitable institutions u/s 12A and 80G of the Act. Thus, where the impugned transactions of alleged loan are with entities and institutions which themselves are registered u/s 12A and 80G, it was questionable as if any direct or indirect benefit is extended to specified persons who may be the members of such institutions. There appears to be no justification to allege that these transactions would lead to diversion of charitable fund for private benefit. Our attention has also been drawn to the decision of Hon’ble Delhi High Court in the case of Director of Income Tax Vs. Acme Educational Society (2010) 326 ITR 146 (Delhi) wherein Hon’ble High Court has held that advancing of interest free temporary loan by one society to another society having similar objects would not amount to an investment or a deposit attracting Section 13(1)(d) of the Act only for the reason that there is some related party are common to the two institutions. Similar has been the proposition of law propounded in Director of Income Tax Vs. Alarippu (2000) 111 taxman 511 (Delhi).
7.Furthermore, as we go through the impugned order we find that AO has invoked provision of Section 40A(2)(a) of the Act whereby disallowance has been made by attributing an allegation of unreasonable receipt of interest alleging that assessee should have charged interest amounting to Rs.4,67,112/- on outstanding balance of Rs.37,36,900/- from M/s Divine Real Build Pvt. Ltd. and Rs.60,53,279/- on outstanding balance of Rs.4,84,26,233/-from M/s Divine Education Trust and Rs.88,100/- from outstanding balance of Rs.7,04,874/- from M/s Dr. B.P. Singh Public Charitable Trust and accordingly had benefitted the related parties by total interest of Rs.1,64,90,055/-.
8.However, the provision of Section 40A(2)(a) of the Act makes taxable by way of disallowance expenditure incurred in the course of business or profession where such expenditure is paid to related parties and is found to be excessive or unreasonable. In the present case the assessee has incurred expenditure by way of interest paid to banks on loans obtained from such banks which are admittedly not related parties. Thus, invocation u/s 40A(2)(a) of the Act and denial of the benefit of Section 11 & 12 is not sustainable.
9.Thus, corresponding ground No. 6 along with 4 & 5 deserves to be sustained in favour of the assessee.”
Respectfully following the aforesaid decision in assessee’s own case, we are inclined to allow Issue No.(b) in favour of the assessee.
With regard to Issue No.(c) regarding disallowance of donation of Rs.55,00,000/- for want of certificate u/s 80G, ld. AR submitted that for AY 2018-19, the AO had similarly disallowed donations aggregating Rs.80,91,000/- (of which Rs. 72,90,000/- was found to be actual donation) paid by the assessee to other registered charitable entities, for want of an 80G certificate, treating the same as inadmissible u/s 37 of the Act. He submitted that the ITAT, Delhi Bench in assessee’s own case (supra) deleted the disallowance and sustained the corresponding ground of appeal, holding that:
(i)There is no prohibition under the Act against a registered charitable trust applying its income by way of donation to another entity, provided the recipient is also engaged in charitable activity and is duly registered — both of which conditions stood satisfied on facts; and
(ii)Reliance was placed on the Hon'ble Gujarat High Court's decision in CIT v. Sarladevi Sarabhai Trust (1988) 172 ITR 698 (Guj), and the Coordinate Bench decision in DCIT (Exemption), Ghaziabad v. Divya Yog Mandir Trust (ITA No. 5612/Del/2015), to hold that such donation constitutes valid application of income for charitable purposes, once the donee's charitable registration is otherwise demonstrated.
He submitted that for AY 2017-18, the donation of Rs.55,00,000/- was similarly paid by the assessee to a registered charitable entity out of its income, in furtherance of its charitable objects, and documentary evidence establishing the donee's registered charitable status u/s. 12A/80G was placed on record before the AO in the course of the proceedings. Accordingly, he pleaded to allow the grounds raised by the assessee.
On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.
Considered the rival submissions and material placed on record. We observed that this issue is decided by the coordinate Bench in assessee’s own case (supra) and the relevant findings of the same is reproduced below:-
“10.Ground No. 7 arises out of disallowance of Rs.80,91,000/- being donation made by appellant to other entities which are claimed to be also entities holding Section 80G certificate. In this context, the case of assessee is that incurred donations were only Rs.72,90,000/- and the balance pertain to scholar ships granted by the assessee which are in the nature of application of income for charitable purposes. Then, at page No. 30-35 documents supporting 80G and 12A of the recipient trust have been provided and at page No. 106-111 of the paper book copies of receipt of donation have been provided. There is no prohibition under the Act against such application for fund provided recipient trust is also engaged in charitable activities and is duly registered. In the present case both these conditions has been complied. Reliance in this regard is placed in the decision of Hon’ble Gujarat High Court in CIT Vs. Sarladevi Sarabhai Trust (1988) 172 ITR 698 (Guj) and the Coordinate Bench decision in the case of DCIT Exemption Circle, Ghaziabad Vs. M/s Divya Yog Mandir Trust vide ITA No. 5612/De/2015. In the light of aforesaid state of affairs as discussed we are inclined to sustain ground No. 7.
11.As a consequence of aforesaid discussion, the remaining grounds become academic or are otherwise general in nature. Consequently, we allow the appeal. The impugned disallowances are deleted and ld. AO is directed to extend the benefit of Section 11 & 12 of the Act to the assessee.”
Respectfully following the aforesaid decision, we are inclined to allow Issue No.(c) in favour of the assessee.
With regard to Issue No.(a) regarding addition of Rs.30,79,700/- on account of alleged mismatch in ledger balance with M/s. Divine International, ld. AR submitted that this addition stands on an independent factual footing and does not arise in the assessee’s case for AY 2018-19. It is submitted that this addition is the result of a purely mechanical and incomplete comparison of ledger extracts and does not reflect any real or unreconciled difference between the books of the assessee and those of M/s Divine International.
He submitted that as recorded in the rectification order itself, the assessee’s balance sheet reflects an amount receivable from M/s Divine International of Rs.1,90,69,515/-, and this very figure of Rs.1,90,69,515/- is independently confirmed and reflected as the closing/outstanding current liability towards the assessee in the Audited Balance Sheet of M/s Divine International as on 31.03.2017 — filed by M/s Divine International itself in response to the notice issued u/s 133(6) of the Act. He submitted that both audited financial statements, prepared and filed independently by two separate assessees, thus corroborating one another and tally in entirety at Rs.1,90,69,515/-.
He further submitted that the discrepancy of Rs.30,79,700/- arose only because the AO, instead of relying on the reconciled/aggregate figure appearing in the audited financials of both parties, proceeded to compare selective ledger folios extracted from the books of account of the two parties. The running ledger accounts maintained by the assessee and by M/s Divine International are internally maintained on a unit-wise/project-wise basis, and by picking up certain unit-wise entries from one party's books and a different set of unit-wise entries from the other party's books, without reconciling them against the aggregate/total figure that both parties had furnished, an artificial and non-existent difference was generated.
He further submitted that it is significant that the complete, consolidated ledger account and the Audited Financial Statements of both parties — which represent the correct, total position — were placed on record, and both independently confirm the identical figure of Rs.1,90,69,515/-. Once the audited books of account of both the payer and the payee, examined independently by the Department itself (through the notice u/s 133(6) issued to M/s Divine International), tally in entirety, no addition can survive merely on the basis of an apparent variance thrown up by comparing partial ledger extracts. It is a settled principle that additions cannot be sustained on surmise or on a mechanical/partial reading of records where the books of account, taken in their entirety and on reconciliation, disclose no real difference.
He further submitted that Audited Financials of Both the Parties and the Ledgers of each of the other party, as appearing in the other party’s books, is placed at Page 44 to 67 of Paperbook (Relevant Pages are – 48, 51, 59 and 63 of Paperbook). It is accordingly submitted that the addition of Rs.30,79,700/- is wholly unwarranted on facts and deserves to be deleted.
On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.
Considered the rival submissions and material placed on record. We observed that during assessment proceedings AO noticed that there is mismatch in ledger balance with Divine International, after comparing the confirmations of the parties, unit wise, came to the conclusion that there is mismatch of balance, which was apparent on record, hence there is under statement of income by the assessee. After careful consideration of the documents and confirmations submitted before us, it establishes that there is no mistake in the confirmation and ledger account maintained by the assessee, the addition based on mismatch of balances are hereby deleted.
In the result, appeal preferred by the assessee is allowed.