2011 (9) TMI 1133 - HC - Income Tax

Assessment of trust - Interest Free Loan given in violation of Provisions u/s 13(1)(c) and 13(2)(a) - Assessee Society gave interest free loan to Treasurer of the society and no provision for accrued interest was made by him. A.O. added the surplus to the total income of assessee society - HELD THAT - In the case of CIT VERSUS VIJETA EDUCATIONAL SOCIETY 2011 (8) TMI 805 - ALLAHABAD HIGH COURT , it was held that, the interest was charged, as alleged by the assessee, it should have been reflected in the books of accounts of the assessee as well as in the audit report but the same was not reflected in any document. In the instant case, the assessee was liable to show this interest as income in the books of account as per mercantile system of accounting. Thus, the A.O. has rightly concluded that the appellant has given interest free loan to treasurer is in violation of the provisions of Section 13(1)(c) and also giving loan without any adequate surety in violation of Section 13(2)(a). In the present case, A.O. has denied exemption u/s 11 in view of the provision of Section 13(1)(c) 13(2)(a). Respectfully following the decision made in aforementioned case, we, therefore, restore the order passed by the A.O. - Decision against Assessee.

Summary

Issues:
1. Interpretation of provisions of Section 13(1)(c) and 13(2)(a) of the Income Tax Act, 1961.
2. Application of mercantile system of accounting in assessing accrued interest on loans.
3. Compliance with statutory requirements for exemption under Section 11 of the Income Tax Act.

Analysis:
1. The judgment involves a dispute regarding the denial of exemption under Section 11 of the Income Tax Act, 1961 to an assessee Society due to the provision of Section 13(1)(c) and 13(2)(a). The issue revolves around whether the loan given to the Treasurer without making provisions for accrued interest violates the statutory provisions. The Tribunal upheld the First Appellate Authority's decision, emphasizing that the loan terms included interest and security, thus not contravening Section 13(1)(c) and 13(2)(a).

2. The Court analyzed the application of the mercantile system of accounting in assessing accrued interest on loans. It was observed that the assessee failed to reflect the charged interest in their books of accounts as required by the mercantile system. Consequently, the Assessing Officer rightly concluded that the loan provided without interest and adequate surety violated the provisions of Section 13(1)(c) and 13(2)(a) of the Act, leading to the denial of exemption under Section 11.

3. The judgment delves into the compliance requirements for exemption under Section 11 of the Income Tax Act. The Court highlighted the significance of Section 13(1) and (2) in rendering the income of a Trust or charitable institution liable to tax if directed for the benefit of specified persons. The judgment emphasized the statutory provisions and the necessity to adhere to the prescribed conditions to claim exemptions under Section 11, ultimately ruling in favor of the revenue-appellant and against the assessee based on the specific circumstances and legal interpretations presented in the case.

In conclusion, the judgment addressed complex legal issues surrounding the interpretation of statutory provisions, application of accounting principles, and compliance requirements for tax exemptions under the Income Tax Act, providing a detailed analysis and ruling in favor of the revenue-appellant based on the specific facts and legal arguments presented in the case.