2011 (8) TMI 805 - HC - Income Tax

Whether the Tribunal had correctly held that the assessee has not contravened the provisions of Section 13(1)(c) and 13(3) of the Income Tax Act 1961 even though it was conclusively proved by the assessing officer that the loan was given without interest to the person referred to in Section 13(3) which is in contravention to the provisions of Section 13(2)(a) of the I.T. Act 1961 - Since in the instant case the interest was charged @10% 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 even subsequent document filed by the assessee except the resolution which cannot be relied and it can be considered an afterthought - in view of clause (c) of Section 13(1) rendering the entire income of Trust or charitable institution on liable to tax even if only part of income is directed to be applied for the benefit of the specified persons - Decided against the assessee

Summary

Issues:
Violation of provisions of Section 13(1)(c) and 13(3) of the Income Tax Act, 1961 regarding interest-free loan given to a person, denial of exemption under Section 11, and correctness of the Tribunal's decision.

Analysis:

The High Court of Allahabad heard an appeal under Section 260-A of the Income Tax Act, 1961 regarding a loan given by a society to its manager without charging interest. The society claimed the loan was personal, while the assessing officer added accrued interest to the manager's income. The Tribunal later deleted the additions, leading to the department's appeal.

The appellant argued that the society should have charged interest as per the mercantile system of accounting and failed to provide details in Form NO. 10-B. The appellant contended that the loan contravened Section 13(2)(a) of the Act. The appellant cited CBDT instructions to support the denial of exemption under Section 11.

On the other hand, the respondent defended the Tribunal's decision, stating that the loan was sanctioned with conditions, and interest was to be released after the principal amount was repaid. The respondent relied on a precedent to support their argument against the denial of exemption under Section 11.

After considering the arguments, the Court found that the society had indeed given an interest-free loan in violation of Section 13(1)(c) and 13(2)(a) of the Act. The Court noted that the society should have reflected the interest in its accounts as per the mercantile system of accounting. The Court highlighted the provisions of Section 13 and the circumstances under which income is deemed to have been used for the benefit of specified persons.

Ultimately, the Court set aside the Tribunal's decision and upheld the assessing officer's order, denying the exemption under Section 11. The Court ruled in favor of the revenue department, allowing the appeal filed by the department.