2013 (8) TMI 39 - AT - Income Tax

Entitlement for exemption u/s 11 - whether there was no violation as mentioned under Section 13(1)(c)(ii) - noted by AO that the amounts were due from two concerns in which Managing Trustee of the assessee, namely, Shri P. Subramani was an interested party - Held that - Treatment of transactions in the books of accounts are prima facie evidence of the nature of such transactions. If an assessee wants to say that payments were for a different purpose than what was shown by it in its account, then the burden of evidence which lies on it is much more rigorous. Except for two Memorandum of Understandings, nothing was brought on record by the assessee. Such Memorandum of Understandings were blindly believed by the CIT(Appeals) without appreciating that these were nothing but self- servicing documents, and not sufficient to dislodge the nature of the transaction recorded by the assessee in its books. Thus, for the impugned assessment year, what was find is that as at the end of the relevant year, even if the three concerns were considered together, a sum of Rs. 1,41,05,523/- was due to the assessee. Assessee has no case that any interest was received from such parties to which money was lent. There was no security whatsoever given to the assessee. Thus there was an indirect benefit to Shri P. Subramani, Managing Trustee of the assessee- Trust and this fell clearly within the scope of Section 13(1)(c) r.w.s. 13(2)(a) - Such violation did warrant denial of exemption claimed under Section 11, therefore, CIT(Appeals) fell in error in blindly following the order of preceding assessment year and accepting the case of the assessee - appeal filed by the Revenue is allowed.

Summary

Issues Involved:
1. Eligibility for exemption under Section 11 of the Income-tax Act, 1961.
2. Alleged violation of Section 13(1)(c)(ii) and Section 13(2)(a) of the Act.

Issue-wise Detailed Analysis:

1. Eligibility for Exemption under Section 11:

The Revenue's grievance was that the Commissioner of Income Tax (Appeals)-XII, Chennai, allowed the assessee, a trust, exemption under Section 11, despite alleged violations under Section 13(1)(c)(ii) of the Act. The assessee, registered under Section 12AA, declared NIL income after claiming exemptions under Sections 11 and 12. The Assessing Officer (A.O.) noted that the trust had lent significant amounts to two concerns where the Managing Trustee had substantial interest, thereby attracting Section 13 violations. The A.O. concluded that the trust forfeited its right to claim exemption under Section 11 due to these transactions and assessed the total taxable income at Rs. 7,36,21,715/-.

2. Alleged Violation of Section 13(1)(c)(ii) and Section 13(2)(a):

The assessee argued before the CIT(A) that the payments to the concerns were repayments of loans taken from another concern, AIHMC&FT, also linked to the Managing Trustee. The assessee claimed that the accounts of all three concerns should be consolidated to determine any violations under Section 13(1). The CIT(A) accepted this argument, noting that similar transactions in the preceding year were ruled in favor of the assessee. The CIT(A) found that when considered together, the payments made were less than the amounts due from the assessee, thus no violation of Section 13(1) occurred, and the exemption under Section 11 was justified.

3. Revenue's Argument:

The Revenue contended that the CIT(A) erred in consolidating accounts of a limited company with proprietorship concerns for set-off purposes. The Revenue highlighted that in the impugned year, the assessee's books showed a debit balance, unlike the preceding year where a net credit balance justified the exemption. The Revenue argued that the CIT(A) wrongly relied on the previous year's order.

4. Tribunal's Analysis:

The Tribunal noted that in the preceding year, the Tribunal upheld the CIT(A)'s view that all three concerns should be considered together. However, for the impugned year, the Tribunal found that the closing balance was a debit balance, indicating amounts were due to the assessee. The Tribunal rejected the assessee's claims regarding the exclusion of certain payments for construction and training expenses, citing lack of evidence and proper accounting entries. The Tribunal emphasized that the transactions' treatment in the books is prima facie evidence of their nature and found that the CIT(A) erred in accepting the assessee's contentions without rigorous evidence.

5. Conclusion:

The Tribunal concluded that the assessee's transactions fell within the scope of Section 13(1)(c) read with Section 13(2)(a) due to the lack of adequate security or interest on the lent amounts, resulting in indirect benefits to the Managing Trustee. Consequently, the Tribunal set aside the CIT(A)'s order and reinstated the A.O.'s order, denying the exemption under Section 11.

Final Order:

The appeal filed by the Revenue was allowed, and the order of the Assessing Officer was reinstated.

Pronouncement:

The order was pronounced in the Court on Thursday, the 13th of June, 2013, at Chennai.