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No exemption is permitted, if claim of statutory exemption u/s 11 is based on wrong premise as amount received income during relevant year was not used for religious & charitable purposes: ITAT

2019-TIOL-1389-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘F’ MUMBAI

ITA No.1097/Mum/2016
Assessment Year: 2011-12

UNIVERSAL EDUCATION FOUNDATION
1ST FLOOR, FILKA BUILDING, DAFTARY ROAD
MALAD (W), MUMBAI – 400097
PAN NO: AAABCU0516D

Vs

ASSISTANT DIRECTOR OF INCOME TAX
(EXEMPTION)-II(2), MUMBAI

Saktijit Dey, JM & N K Pradhan, AM

Date of Hearing: April 05, 2019
Date of Decision: June 26, 2019

Appellant Rep by: Mr Anant Pai, AR
Respondent Rep by:
 Mr Rajeev Gubgotra & Mr Ganesh Barc, DRs

Income Tax – Sections 11& 254(2).

Keywords – Claim of exemption – Wrong Premises – Use of funds.

The assessee filed its return of income for the relevant AY. The AO completed the assessment u/s 143(3) of Act. The AO held that assessee was not entitled to the benefit of Section 11(1) of the Act. On appeal, CIT(A) confirmed the assessment made by the AO. Aggrieved assessee filed an appeal before the Tribunal. The Tribunal dismissed the appeal filed by the assessee. Thereafter, the assessee filed a Miscellaneous Application before the Tribunal seeking rectification/recalling of the order u/s 254(2) of the Act. The Tribunal dismissed the MA filed by the assessee. Thereafter, the assessee filed a Writ Petition before the Bombay High Court.The application filed by the assessee was restored to the Tribunal for fresh disposal in accordance with the decision of Court in Safari Mercantile Pvt. Ltd. and Gyan Constructions. By following the order of the Bombay High Court, fresh hearing took place before the Tribunal. The primary grievance of the assessee was that the Tribunal did not consider in its order, the claim u/s 11(1) Explanation-2 of the Act to hold on merits that it was entitled to the benefit of Section 11(1) of the Act. According to assessee CIT(A) also erred in holding that the amount of Rs. 3,55,45,600 accrued to the assessee as income for the year under appeal and was also received. As per assessee CIT(A) failed to note that the amount of Rs. 3,55,45,600 was not factually received during the year under appeal and that in this circumstances the same should be deemed to be applied towards charitable purposes in terms of clause (2) of Explanation to Section 11(1) of the Act. This was more particularly so because the provision, for exercising option in writing under the Explanation before the expiry of time allowed for furnishing return u/s 139 (1) was not mandatory, but directory in nature and must therefore be liberally interpreted to confer exemption u/s 11 and not deny it. According to assessee both the lower authorities erred in passing their respective orders without granting to assessee adequate opportunity of being heard.

On appeal, Tribunal held that,

Whether since conclusion can only be correct if premises are correct and assessee claim of statutory exemption u/s 11 is based on wrong premise as evident from the finding that the assessee received income during the relevant year but did not used if for religious and charitable purposes, exemption can not be allowed – YES : ITAT

++ import of the statutory exemption under the first part of section 11(1)(a) is not the income earned from property held under trust but the actual application of the said income for religious and charitable purposes. As per the Act, for claiming full exemption of such income, the assessee is required to apply at least 85% of such income during the previous year for charitable or religious purposes. It can accumulate up to 15% of such income to be utilised for charitable or religious purposes in India at a later date. Let us illustrate the issue through an example. In a case where the income derived in a previous year amounted to Rs.1,00,000/- out of which an amount of Rs. 40,000/- was not received during the previous year, the person in receipt of income could obviously not apply Rs. 85,000/- to such purposes. In such a case if an amount not less than Rs.60,000/- has actually been applied to such purposes in the year in which the income of Rs.1,00,000/- was derived, the deficiency could be made up in the year in which the balance of income is received or in the previous year next following. For availing of the benefit of the extended time beyond the relevant previous year, the trust or institution will, in either case, have to exercise an option in writing under clause (2) of the Explanation to section 11(1) within the time allowed under subsection (1) of section 139 for furnishing the return of income. Income applied to such purposes shall be deemed to have been applied to such purposes during the previous year to which it was derived. In the instant case, the assessee has received Rs.3,55,45,600/- during the financial year 2010-11 relevant to the impugned assessment year. This is crystal clear from the (i) Deed of Assignment dated 19.01.2011 and the Schedule (ii)Receipt of Rs.3,55,45,600/- by the assessee through cheque No. 889388 dated 18.01.2011 drawn on UBI, Juhu, Tara Road and (iii) The Basis of Accounting & Revenue Recognition followed by the assessee during the present assessment year. In the written submission dated 18.03.2014 filed before the AO, the assessee’s main contention is “Since there is no definite possibility that receipt will be received the consideration was not taxed in AY 2011-12”. A reading of the written submission, clearly indicates that the assessee has not exercised the option under clause (2) of the Explanation to section 11(1) of the Act. In Sumati Dayal, the Supreme Court has held: “As laid down by this Court, apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities – CIT v. Durga Prasad More [1971] 82 ITR 540, at pp. 545, 547 (SC) = 2002-TIOL-877-SC-IT.”;

++ grounds of appeal filed by the assessee can be seen through the lens of deductive inference, in which it is asserted that the conclusion is guaranteed to be true if the premises are true. In the present case, it is the contention of the assessee vide the 2nd ground of appeal that the CIT(A) failed to note that the amount of Rs.3,55,45,600/- was not factually received during the year under appeal. This premise is not true as evident from the finding that the assessee has received Rs.3,55,45,600/- during the financial year 2010-11 relevant to the impugned assessment year. The inference drawn by the assessee is not a correct one as it is based on wrong premise. It was uphold the order of the CIT(A). In the result, the appeal is dismissed.

Assessee’s appeal dismissed

ORDER

Per: N K Pradhan:

The Background Facts The background facts in this case are to be narrated. The assessee filed its return of income for the assessment year (AY) 2011-12 on 30.09.2011 along with the Income & Expenditure Account, Balance Sheet and Audit Report in Form No. 10B declaring income at Rs. Nil.

2. The Assessing Officer (AO) completed the assessment u/s 143 (3) on 25.03.2014 on a total income of Rs. 2,03,37,630/-. In appeal, the Ld. Commissioner of Income Tax (Appeals)-1, Mumbai [in short ‘CIT (A)’] confirmed the assessment made by the AO. Aggrieved by the order of the Ld. CIT (A), the assessee filed an appeal before the Tribunal. The ITAT “F” Bench, Mumbai (ITA No. 1097/Mum/2016) vide order dated 25.05.2017 dismissed the appeal filed by the assessee. Thereafter, the assessee filed a Miscellaneous Application (MA) before the Tribunal seeking rectification/recalling of the order dated 25.05.2017 u/s 254 (2) of the Income Tax Act, 1961 [in short ‘the Act’]. The ITAT “F” Bench, Mumbai vide order dated 16.01.2018 dismissed the MA filed by the assessee.

3. Thereafter, the assessee filed a Writ Petition before the Hon’ble Bombay High Court challenging the order dated 16.01.2018 passed by the Tribunal rejecting the application for rectification. The Hon’ble High Court vide order dated 28.06.2018 held:

“3. The primary grievance of the petitioner in its rectification application to the Tribunal is that the order passed on 25th May, 2017 after recording the petitioner’s submission that the provisions of Section 11(1) Explanation-2 of the Act would warrant its appeal being allowed was not considered and its appeal was dismissed. This led to the filing of the Rectification Application under Section 254 (2) of the Act. 4. On 16th January, 2018 the impugned order was passed dismissing the Rectification Application. The impugned order while disputing the submission of the petitioner leading to the order dated 25th May, 2017 did not consider the claim of the petitioner under Section 11(1) Explanation-2 of the Act to hold on merits that it is not entitled to the benefit of Section 11(1) of the Act. This according to the petitioner is clearly contrary to and in defiance of the decisions of this Court in Safari Mercantile (P) Ltd. Vs. ITAT, 386 ITR 4 = 2016-TIOL-1303-HC-MUM-IT and Gyan Constructions v/s Income Tax Appellate Tribunal, [2015] 55 taxmann.com 479 = 2015-TIOL-328-HC-MUM-IT. 5. Mr. Walve, the learned Counsel for the respondent submits to the order of this Court. 6. We find that the issue is no longer res judicata as it stands concluded by the decision of this Court in Safari Mercantile (supra) and Gyan Constructions (supra) that while dealing with the application for rectification, the Tribunal where it finds there is an error apparent on record then it should recall the original order and place the Appeal for consideration of the issue on merits before the Regular Court. It is not appropriate to dispose of the controversy on merits of the submission, while disposing of the Rectification Application. 7. In the above view, the impugned order dated 16th January, 2018 is quashed and set aside. The Rectification Application filed by the petitioner is restored to the Tribunal for fresh disposal in accordance with the decision of this Court in Safari Mercantile Pvt. Ltd. (supra) and Gyan Constructions (supra).

8. The petition is disposed of in the above terms.”

4. By following the above order of the Hon’ble Bombay High Court, the ITAT “F” Bench, Mumbai vide order dated 24.08.2018 recalled the original order dated 25.05.2017 and directed the Registry to fix the appeal before the Regular Bench for fresh hearing. The fresh hearing took place before “F” Bench of the Tribunal.

The Appeal 5. As mentioned earlier, the primary grievance of the assessee in the Writ Petition filed before the Hon’ble High Court was that the Tribunal did not consider in its order dated 25.05.2017 the claim u/s 11(1) Explanation-2 of the Act to hold on merits that it is not entitled to the benefit of Section 11(1) of the Act. We may mention here the grounds of appeal filed by the assessee before the Tribunal which are as under:-

“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the amount of Rs. 3,55,45,600 accrued to the Appellant as income for the year under appeal and was also received. 2. The Ld. CIT(A) failed to note that the amount of Rs. 3,55,45,600 was not factually received during the year under appeal and that in this circumstances the same should be deemed to be applied towards charitable purposes in terms of clause (2) of Explanation to Section 11(1) of the Income Tax 1961. This is more particularly so because the provision, for exercising option in writing under the said Explanation before the expiry of time allowed for furnishing return u/s 139 (1) is not mandatory, but directory in nature and must therefore be liberally interpreted to confer exemption u/s 11 and not deny it. 3. Both the lower authorities erred in passing their respective orders without granting your appellant adequate opportunity of being heard.

The order passed by them are in contravention of the principles of natural justice and hence, bad in law.”

The Assessment 6. During the course of assessment proceedings, the AO found that the assessee had sold immovable property of Rs. 3,55,45,600/-; however the assessee failed to disclose this transaction while filing its return of income for the impugned assessment year. In response to a query raised by the AO vide order sheet noting dated 12.03.2014, the assessee filed a reply dated 20.03.2014 stating as under:-

“1. Assessee, Universal Education Foundation is a Section 25 Company incorporated with the object of running Educational Institution. The company is desirous of expanding its activities of running Educational Institution by establishing a school for the people living in and around the city of Thane. 2. The lessee i.e. Universal Education Foundation approached the lessor M/s Kabra Associates and requested the lessor to grant unto the lessee, the lease of the property of land bearing survey nos. 124/1A, 124/2, 124/4/2, 124/5A, 125/5A admeasuring 4900.125 sq. mts. situated at Village Kolset, District and Taluka Thane, Maharashtra to construct and establish a school. It has entered into the Lease Agreement with M/s Kabra Associates dated 27th January 2009 (Photocopy of Lease Deed Enclosed) in which the lessor has agreed to grant to the lessee, lease of the said property for the purpose of establishing a school. The lessee has acquired the said property for the lease term of 96 years. 3. Immediately upon the signing of this lease deed, the lessee at its own cost and expense has obtained the permission from the required Authorities for establishing and running a school upto primary school for Academic Year 2009-2010. The lessee was entitled to construct structure on the said property that would make it fit for carrying out the activities of the lessee. 4. But the lessee was unable to erect the structure as required for running the schools; hence it has assigned the right, in the property to M/s Super Value Properties Pvt. Ltd. 5. The Universal Education Foundation has entered into the Deed of Assignment with M/s Super Value Properties dated 19.01.2011 (Photocopy of the Deed of Assignment is enclosed). The said deed of Assignment was agreed between the parties (1- Universal Education Foundation as Assignor, 2- Kabra Associates as Confirming Party and 3- Super Value Properties Pvt. Ltd as Assignee) as for the consideration of the sum of Rs 3,55,45,600/- to be paid by the assignee to the assignor. As per deed of of assignment, assignor has assigned all rights in respect of land bearing survey nos. 124/1A, 124/2, 124/4/2, 124/5A, 125/5A admeasuring 4900,125 sq. mts. situated at Village Kolset, District and Taluka Thaw’ Maharashtra. 6. The Universal Education Foundation has entered into an Addendum dated 20.01.2011. Photocopy of the signed, stamped and duly notarized Addendum is enclosed. We are also producing the original for Your Honour’s verification. The said Addendum was agreed between the parties Universal Education Foundation as Assignor and Super Value Properties Pvt. Ltd as Assignee. Following clauses was included in the agreement

a. The consideration of the sum of Rs. 3,55,45,600/- to be paid by the assignee to the assignor on 31st March, 2015 or on the date B.C.C. of the building is obtained, whichever is earlier. b. The cost for construction of this school building will be incurred by the assignee.

c. The agreement shall be terminated without any further notice to Assignee in case of any further delay in making the payment and in such event the amount paid by the Assignee shall be forfeited.

7. Thus, no amount was received by Universal Education Foundation as on 31.03.2011. Also, there was no definite possibility of receipt of the same in future. The agreement of Assignment will be terminated if the payment is not received on time. 8. Assessee is committed to make payment in the year of receipt. We are not denying the agreement of assignment. The receipt will be offered for taxation in the year of receipt. Since there is no definite possibility that receipt will be received the consideration was not taxed in AY 2011-12. 9. Furthermore, capital gain is chargeable under section 45 read with section 48 of the Act on consideration received or accruing. As submitted above, the Assessee has received nothing in the assessment year 2011-12 nor for the submissions made hereinafter any consideration has accrued in the assessment year 2011-12. It is well settled that for accrual of right the assesses should have unequivocal legal right enforceable in law against the party for coining to a conclusion that any sum has accrued. This will be determined by the terms and conditions of the agreement between the parties. Clauses 3(d) of the amendment clearly provides that the agreement of assignment shall be terminated without any further notice to Assignee in case of any further delay in making the payment. 10. It is submitted that accrual is depended upon happening or non happening of future event which may or may not happen and hence is contingent which cannot be the basis of accrual or taxability. It is submitted that since in the assessment year 2011-12, this eventuality has not happened no right accrues in favour of the assessee to any consideration and hence since there is no accrual in the year under consideration no capital gain is chargeable for the assessment year 2011-12. 11. Hence, since the payment as mentioned in the assignment deed was not received by M/s. Universal Education Foundation and there was no surety of the receipt of the same in future it was not reflected in Balance Sheet and not taxed during the year. 12. There in uncertainty in the receipt of the consideration. When there is an uncertainty of a receipt it cannot be accrued in the books as per standard of accounting. As per AS-29 An enterprise should not recognise a contingent asset.13. Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise. Contingent assets are not recognised in financial statements since this may result in the recognition of income that may never be realised. 14. When it has become virtually certain that an inflow will arise, the asset and the related income will be recognised in the financial statements of the period in which the change occurs. The assessee is committed to tax the consideration in the year in which it is certain the payment is receivable. 15. Thus it is not certain on the date of entering into the Deed of assignment whether the consideration will be received or not. The addendum makes it further clearer that the consideration will be received on 32.03.2015 or B.C.C of the building whichever is earlier. 16. Thus as the possibility of the inflow in future in not certain, assessee has not taxed the consideration in the year of deed of assignment i.e AY 2011-12 but will offer the same in the year of actual receipt of the same. Assessee is committed to make the payment of tax in the year of receipt of the same. 17. Hence there is no tax incidence in AY 2011-12 because:

1. There was no incidence of accrual of income in the hands of the assessee 2. No amount has been actually received from the transferee against the sale of rights. 3. There is no definite possibility of inflow in the future years. 4. An enforceable legal right to receive an income should vest with the assessee.

5. Accrual of income depends upon the terms of an agreement and any subsequent agreements which should give rise to a definite right to the recipient and merely one agreement should not be the only test of chargeability to tax.

Thus since the consideration is not paid, not due and not accrued, the consideration of Rs. 3.5 crore will not be taxed in the A.Y. 2011-12 but in the year of actual receipt of the same. Hence the assessee has not taxed the same in AY 2011-12 but will offer the same for taxation in the year of receipt.”

7. However, the AO was not convinced with the above explanation of the assessee for the reason that (i) the assessee’s statement that it has forgone the consideration of Rs. 3,55,45,600/- is not acceptable because nobody can give its right, title and interest in such a precious property to anyone without consideration, (ii) the assessee could not explain as to what profit will M/s Super Value Properties Pvt. Ltd. get by constructing the infrastructure on the said land, (iii) when the assessee did not get any consideration from M/s Super Value Properties Pvt. Ltd., the said property belong to the assessee only and in that case why the assessee will pay any rent to M/s Super Value Properties Pvt. Ltd. on his own property. As the assessee failed to explain properly the queries on the above, the AO rejected the claim of the assessee that it has not received the consideration of Rs. 3,55,45,600/- from M/s Super Value Properties Pvt. Ltd. and thus brought to tax the above amount. The order of the CIT (A) 8. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT (A). The assessee contended before him that there was no incident of accrual of income in the year under consideration since as per the addendum to the deed of assignment dated 20.01.2011, the consideration of Rs. 3,55,45,600/- was to be paid by the assignee to the assignor on or before 31.03.2015. The Ld. CIT (A) observed that the original deed of assignment dated 19.01.2011 was signed by M/s Universal Education Foundation i.e. the assessee (assigner), M/s Kabra Associates (the confirming party) and M/s Super Value Properties Pvt. Ltd. (the assignee). This deed was duly registered on 19.01.2011 itself with the Sub-Registrar, Thane-II. In this deed, the following arrangement regarding payment of Rs. 3,55,45,600/- was made.

“now this deed witnesseth that in consideration of the sum of Rs. 3,55,45,600/- (Rupees Three Crore Fifty Five Lakhs Forty Five Thousands Six Hundred only) paid by the Assignee to Assignor (the payment and receipt whereof the Assignor hereby admits and acknowledge and of and from the same and every part whereof doth hereby acquit, release and discharge the Assignee forever), the Assigner with the consent and confirmation of the Confirming Party hereby assigns its right, title and interest in respect of land bearing Survey Nos. 124/1A, 124/2, 124/4/2…..”

From the above, the Ld. CIT (A) noted that the said amount is stated to have been paid by the assignee to the assignor which has been acknowledged by the assessee as received and in consequence, it has discharged the assignee forever and in confirmation of which, the deed has been signed. It is not only been signed by all the three parties but also by the witnesses and has also been duly registered on 19.01.2011 itself. The assessee claimed that subsequently it has entered into an addendum on 20.01.2011, wherein the conditions of this payment have been modified. The Ld. CIT (A) observed that the addendum has not been registered with the registering authority and also the assessee failed to explain as to why the subsequent arrangement was not registered although the original deed was duly registered. Further, it was noted by him that the said addendum is not signed by M/s Kabra & Associates, the confirming party and accordingly the authenticity of this addendum is not proved by the assessee and hence no cognizance of this document can be taken. Relying of the judgment of the Hon’ble Supreme Court in Sumati Dayal vs. CIT 214 ITR 801 (SC) = 2002-TIOL-885-SC-IT-LB, the Ld. CIT (A) held that as specifically mentioned in the original deed dated 19.01.2011, the consideration of Rs. 3,55,45,600/- had accrued to the assessee in AY 2011-12 itself and was also received. Also the assessee argued before the Ld. CIT (A) that as per the Explanation to section 11(1), since it has not received the consideration, the same was not to be treated as income and applied towards the objects of the trust. The Ld. CIT (A) noted that in the provisions itself, it is clearly mentioned that if there is such possibility, the assessee is required to intimate the AO before the date of filing of return u/s 139 (1) of the Act. No such document was filed before him indicating any such intimation given to the AO. Thus, he rejected the above contention of the assessee. In view of the above facts and position of law, the Ld. CIT (A) dismissed the appeal filed by the assessee. Contentions of the Assessee 9. Before us, the Ld. counsel for the assessee submits that the appellant has admittedly not received the sale consideration for assignment of lease during the year ended 31.03.2011 and is therefore entitled to exercise option as per Explanation-2 to section 11(1) and this option may be considered to have been exercised during the course of assessment proceedings in view of submission dated 20.03.2014 to the AO reproduced on page 2 & 3 of the assessment order, more particularly para no. 7 & 8 of the submission (page 3 of the assessment order). It is further stated that under the law applicable for the year under appeal, there is no requirement for submitting option in any particular prescribed form and the provision for prescribed form was introduced subsequently only by the Finance Act, 2015 w.e.f. 01.04.2016. Thus, the Ld. counsel refers to Explanation-2 to Section 11(1) prior to the said amendment which reads as under:

“Section 11 (2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount-

(i) for the reason that the whole or any part of the income 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 previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and

(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the 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 before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the 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), during the previous year immediately following the previous year in which the income was derived.”

10. The Ld. counsel files a copy and refers to the decision in CIT vs. Shivanand Electronics (1994) 75 TAXMANN 93 (Bom), CIT vs. Smt. Archana R. Dhanwatey (1981) 7 Taxman 121 (Bom), Balmukund Acharya vs. DCIT (2009) 176 TAXMAN 316 (Bom) = 2009-TIOL-05-HC-MUM-IT, CIT vs. Ziarat Mir Syed Ali Hamdani (2001) 248 ITR 769 (J&K), CIT vs. G.M. Knitting Industries (P.) Ltd. (2016) 71 taxman.com 36 (SC) and the order of the Tribunal dated 30.11.2016 in M/s Whistling Woods International Ltd. vs. ITO (ITA No. 556/Mum/2015 for AY 2004-05). Further reference is made by him to the Circular No. 14 (XI-35) of 1955, dated 11.04.1955. Contentions of the Revenue11. On the other hand, the Ld. DR submits that as per the original deed of assignment dated 19.01.2011, the amount of Rs. 3,55,45,600/- is stated to have been paid by the assignee to the assignor, which has been acknowledged by the assessee as received and in consequence it has discharged the assignee forever and in confirmation of which, the deed has been signed. It has not only been signed by all the three parties but also by the witnesses and has also been duly registered on 19.01.2011. It is further submitted that the addendum has not been registered with the Registering Authority. Also it is stated that the addendum is not signed by M/s Kabra & Associates, the confirming party. The ld. DR further submits that in the present case, the assessee has not exercised its option as per Explanation-2 to section 11 (1) of the Act. Thus, the Ld. DR submits that the order passed by the Ld. CIT (A) be confirmed. Reasons for the Decision 12. We have heard the rival submissions and perused the relevant material on record. The reasons for our decisions are given below. At this moment, we discuss the case-laws relied on by the Ld. counsel. In the case of Shivanand Electronics (supra), it is held that “the requirement of filing of the audit report ‘along with the return of income’ is directory and if the assessee complies with the same before completion of the assessment and offers a satisfactory explanation for his failure to submit the same in time, the ITO may consider the same and examine the claim of the assessee for deduction u/s 80J on the basis of his report. We, however, do not subscribe to the view taken by the Tribunal that it is the duty of the ITO to tell the assessee that as he had not submitted the report of audit required by sub-section (6A), his claim would not be allowed and to give him an opportunity to file the same.” In Smt. Archana R. Dhanwatey (supra), it is held that “the ITO’s jurisdiction is to compute the total taxable income in accordance with law. If, in fact and in law, the assessee was entitled to a deduction ultimately affecting taxable income, the assessment could not be made on a larger income. The ITO was therefore to consider whether the assessee was entitled to a deduction from other sources even though no such specific claim was made by the assessee. Therefore, the question whether the impugned amount was deductible from the assessee’s any other income should have been considered by the ITO even in the absence of specific claim for such deduction.” In Ziarat Mir Syed Ali Hamdani (supra), in the context of exercise of option to utilise income in following year under clause (2) of Explanation to Section 11(1) of the Act, it is held that “even assuming there was delay the requirement of exercising the option within the specified time is directory and the assessing authority has the power to condone the delay in exercise of the option, if he is satisfied about the sufficiency of the cause shown for the delay. The Tribunal was satisfied that there was sufficient cause for the delay in exercising the option by the assessee. Therefore, the exercise of the option by the assessee was valid.” In G.M. Knitting Industries (P.) Ltd. (supra), it is held that even if form 3AA was not filed along with return of income but same was filed during assessment proceedings before final order of assessment was made, the assessee was entitled for additional depreciation. Also it is held therein that even though necessary certificate in Form 10CCB along with return of income had not been filed but same was filed before the final order of the assessment was made, the assessee was entitled to claim deduction u/s 80IB. In the instant case, we find that the assessee has received Rs.3,55,45,600/- during the financial year 2010-11 relevant to the impugned assessment year. In the written submission dated 18.03.2014 filed before the AO, which we have extracted hereinbefore, the assessee’s main contention is “Since there is no definite possibility that receipt will be received the consideration was not taxed in AY 2011-12”. A reading of the said written submission extracted at para 6 hereinbefore clearly indicates that the appellant has not exercised the option under clause (2) of the Explanation to section 11(1) of the Act. Therefore, the case of the present assessee is distinguishable from the decision in Shivanand Electronics (supra); Smt. Archana R. Dhanwatey (supra); Ziarat Mir Syed Ali Hamdani (supra) and G.M. Knitting Industries (P.) Ltd. (supra)relied on by the Ld. Counsel. In Balmukund Acharya (supra) it is held that it is obligatory on the part of the Assessing Officer to apply his mind to the facts disclosed in the return and assess the assessee keeping in mind the law holding the field. It is fundamental that the provisions contained in section 11 concerning the exemption of a public charitable trust or institution does not take automatic effect. In the instant case as evident from the facts narrated herein, the AO has kept in mind the facts disclosed in the return of income and the law holding the field. In M/s Whistling Woods International Ltd. (supra), it is held that “the AO should not take undue advantage of ignorance of the assessee and should follow a fair approach by allowing legitimate claims of the assessee so that only that amount of tax is recovered from the assessee which is due as per law. In this manner, the faith of the taxpayers upon the working of Income Tax Department shall increase, which shall in turn give a boost to voluntary compliance by the assessee.” Also referring to Circular No. 14 (XI-35) of 1955, dated 11.04.1955, the Ld. counsel submits that:

‘Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessee on whom it is imposed by the law, officers should:

(a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other.

(b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs’.

In the instant case, the assessee has received Rs.3,55,45,600/- during the financial year 2010-11 relevant to the impugned assessment year. The assessee has not exercised the option under clause (2) of the Explanation to section 11(1) of the Act. In the present case, the AO has not taken any undue advantage of any ignorance of the assessee. Therefore, we find that the instant case is distinguishable from the decision in M/s Whistling Woods International Ltd. (supra) and Circular No. 14 (XI-35) of 1955, dated 11.04.1955 relied on by the Ld. counsel 13. The Ld. counsel has not controverted the findings of the Ld. CIT (A) that the subsequent agreement was not registered although the original deed was duly registered and further the addendum is not signed by M/s Kabra & Associates, the confirming party. Such being the position, no reliance can be placed on the addendum. The original deed of assignment dated 19.01.2011 was signed by M/s Universal Education Foundation i.e. the assessee (assigner), M/s Kabra Associates (the confirming party) and M/s Super Value Properties Pvt. Ltd. (the assignee). This deed was duly registered on 19.01.2011 itself with the Sub-Registrar, Thane-II. In this deed, the following arrangement regarding payment of Rs. 3,55,45,600/- was made.

“Now this deed witnesseth that in consideration of the sum of Rs. 3,55,45,600/- (Rupees Three Crore Fifty Five Lakhs Forty Five Thousands Six Hundred only) paid by the Assignee to Assignor (the payment and receipt whereof the Assignor hereby admits and acknowledge and of and from the same and every part whereof doth hereby acquit, release and discharge the Assignee forever), the Assigner with the consent and confirmation of the Confirming Party hereby assigns its right, title and interest in respect of land bearing Survey Nos. 124/1A, 124/2, 124/4/2, 124/5A. 125/5A admeasuring 4,900.125 square meters…..”

At page 8, which is the Schedule to the “Deed of Assignment” dated 19.01.2011, the following is mentioned in clear terms:

RECEIVED from the within named Assignee the sum of Rs. 3,55,45,600/- (Rupees Three Crore Fifty Five Lakhs Fourty Five Thousand Six Hundred only) being the full and final consideration paid by (it) to us, under these presents, as follows:

Chq/P.O. No.DateDrawn onAmount
88938818/01/2011UBI, Juhu Tara R’d3,55,45,600/-

14. That the assessee has received the above sum is supported by the fact that the above amount of Rs. 3,55,45,600/- was drawn by cheque No. 889388 dated 18.01.2011 on UBI, Juhu Tara Road. 15. As per ‘Schedules to the Accounts for the year ended 31.03.2011’, we are informed the following:

Basis of Accounting All the Income and Expenditure items having a method bearing on the financial statement are recognized on accrual basis. Revenue Recognition

The income is recognized on accrual basis

The assessee in the present case follows mercantile system of accounting.The Hon’ble Bombay High Court in the case of Taparia Tools Ltd. v. JCIT [2003] 260 ITR 102 = 2003-TIOL-16-HC-MUM-IT has described the mercantile system of accounting, which reads as follows:

“The mercantile system of accounting is based on accrual. Basically, it is a Double Entry System of accounting. Under the mercantile system of accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the mercantile system of accounting, therefore, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. The system postulates the existence of tax in so far as monies due and payable by the parties to whom they are debited [see Keshav Mills Ltd. v. CIT (1953) 23 ITR 230, 239 (SC)] = 2002-TIOL-601-SC-IT-LB. Therefore, under the Mercantile System of Accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed [expenses]. Under the mercantile system of accounting, this matching is required to be done on accrual basis. Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual outflow of cash.”

16. As mentioned earlier, subject to the provisions of sections 60 to 63, income derived from property held under trust, wholly for charitable and religious purposes shall be exempt u/s 11(1)(a)-

(i) to the extent such income is applied in India for such purposes; and

(ii) 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 15% of the income from such property.

The import of the statutory exemption under the first part of section 11(1)(a) is not the income earned from property held under trust but the actual application of the said income for religious and charitable purposes. As per the Act, for claiming full exemption of such income, the assessee is required to apply at least 85% of such income during the previous year for charitable or religious purposes. It can accumulate up to 15% of such income to be utilised for charitable or religious purposes in India at a later date. Let us illustrate the issue through an example. In a case where the income derived in a previous year amounted to Rs.1,00,000/- out of which an amount of Rs. 40,000/- was not received during the previous year, the person in receipt of income could obviously not apply Rs. 85,000/- to such purposes. In such a case if an amount not less than Rs.60,000/- has actually been applied to such purposes in the year in which the income of Rs.1,00,000/- was derived, the deficiency could be made up in the year in which the balance of income is received or in the previous year next following. For availing of the benefit of the extended time beyond the relevant previous year, the trust or institution will, in either case, have to exercise an option in writing under clause (2) of the Explanation to section 11(1) within the time allowed under subsection (1) of section 139 for furnishing the return of income. Income applied to such purposes shall be deemed to have been applied to such purposes during the previous year to which it was derived. 17. In the instant case, the assessee has received Rs.3,55,45,600/- during the financial year 2010-11 relevant to the impugned assessment year. This is crystal clear from the (i) Deed of Assignment dated 19.01.2011 and the Schedule (ii)Receipt of Rs.3,55,45,600/- by the assessee through cheque No. 889388 dated 18.01.2011 drawn on UBI, Juhu, Tara Road and (iii) The Basis of Accounting & Revenue Recognition followed by the assessee during the present assessment year. In the written submission dated 18.03.2014 filed before the AO, the assessee’s main contention is “Since there is no definite possibility that receipt will be received the consideration was not taxed in AY 2011-12”. A reading of the said written submission which we have extracted at para 6 hereinbefore, clearly indicates that the appellant has not exercised the option under clause (2) of the Explanation to section 11(1) of the Act. In Sumati Dayal (supra), the Hon’ble Supreme Court has held:

“As laid down by this Court, apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities – CIT v. Durga Prasad More [1971] 82 ITR 540, at pp. 545, 547 (SC) = 2002-TIOL-877-SC-IT.”

The grounds of appeal filed by the assessee can be seen through the lens of deductive inference, in which it is asserted that the conclusion is guaranteed to be true if the premises are true. In the present case, it is the contention of the assessee vide the 2nd ground of appeal that the Ld. CIT(A) failed to note that the amount of Rs.3,55,45,600/- was not factually received during the year under appeal. This premise is not true as evident from the finding above that the assessee has received Rs.3,55,45,600/- during the financial year 2010-11 relevant to the impugned assessment year. The inference drawn by the assessee is not a correct one as it is based on wrong premise. In view of the above facts and position of law, we uphold the order of the Ld. CIT(A). We also want to make it clear that all the cases relied on by both the sides have been duly taken into consideration while deciding the matter. The omission of reference to some of such cases in the order is either due to their irrelevance or to ease the order from the burden of the repetitive ratio decidendi laid down in such decisions. 18. In the result, the appeal is dismissed.

(Order pronounced in the open Court on 26.06.2019)

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