Saturday, November 17, 2012

Subsequent reversal of a transaction among group entities isn’t colourable device, if effect carried in ledgers

The assessee-trust was managed by Ansal group. It had entered into agreement with its group concern (‘APIL’) for purchase of plots to open a school in furtherance of its objects. The assessee had paid 95 per cent of the sale consideration and obtained possession of the plots. Subsequently, the sale agreement was cancelled and entire sale consideration was returned to assessee by APIL. During assessment, AO held that the transactions were not genuine and were devised with an intention to advance surplus money to APIL. The AO withdrew the benefit of exemption under section 11 and 12 on the ground that the directors and trustees of both concerns were connected persons falling within the purview of specified persons under section 13(1)(c), and the money had been advanced without interest for the benefit of specified persons. The CIT(A) reversed the order of AO.

On appeal, the Tribunal held in favour of assessee as under:

1) The assessee was a charitable institution and there was no change in its objects;

2) From assessee's books of account, it clearly emerged that more often than not APIL had credit balance; thus, it had been providing monetary support to trust now and then. Therefore, a presumption could not be drawn that APIL had diverted the funds without proper justification for its use;

3) Assessee's debiting of 95 per cent advance to asset acquisition account itself indicated that because of substantial advance and possession it treated the plots as its assets. Treatment of these amounts as advances in APIL books did not militate against assessee's method of accounting. Therefore, the alleged variation in categorization of accounting in two different sets of books would not convert valid transactions into colourable transactions;

4) It could not be found that there was any motivation on the part of APIL to clandestinely divert Trust’s Funds for its personal use;

5) Assessee contended that cancellation of plots was in the interest of trust as by that time it had moved on to better projects including a university. Since no cancellation charges were to be levied, it terminated the agreements;

6) From objective view every entity has a right to carry on its objectives in the manner it best considers. Revenue couldn’t step in the shoes of the trustee in these matters.

Therefore, the exemption under Sec. 11 was allowed to assessee - Chiranjiv Charitable Trust v. ADIT [2012] 27 99 (Delhi - Trib.)