2015 (6) TMI 856 - AT - Income Tax

Eligibility to claim exemption u/s 11 denied - assessee has advanced a sum of ₹ 47.71 lakhs to a sister-Trust so diverted by the assessee is liable to be taxed as income of the assessee as held by AO - Held that - the assessing officer has failed to refer to any of the provisions of the Act, under which he is forming such an opinion, i.e., he has not shown as to how the assessee has violated any of the provisions of the Act, which would warrant rejection of claim of exemption made u/s 10(23C)(iiiad) of the Act. On the contrary, the contention of the assessee is that the amount so advanced to another educational institution falls within its object of the assessee society. The said contention of Ld A.R could not be rebutted by the revenue. Hence the said reasoning given by the assessing officer also fails. Thus the assessing officer has brought to tax the amount of ₹ 47,71,058/- in the hands of the assessee without the authority of law. Accordingly, we are of the view that the Ld CIT(Appeals) was not justified in confirming the assessment of the above said amount. Hence, we are unable to sustain the order of Ld CIT(Appeals) on this issue. Accordingly, we set aside the order of Ld CIT(Appeals) and direct the Assessing Officer to delete the assessment of ₹ 47,71,058/- referred above. - Decided in favour of assessee.

Summary

Issues:
Assessment of diverted funds as income under Section 10(23C)(iiiad) of the Income-tax Act, 1961.

Analysis:
1. The appeal concerned the addition of Rs. 47.71 lakhs made by the Assessing Officer, which the Ld. CIT(Appeals) confirmed. The assessee, a society running an educational institution, claimed exemption under Section 10(23C)(iiiad) of the Act but was found to have advanced funds to another trust for non-charitable purposes.

2. The Assessing Officer observed that the assessee did not have registration under Section 12A of the Act and had advanced funds without a plan approval or agreement, leading to the diversion of funds. The AO held that advancing money to another trust did not align with the society's objectives, thus disallowing the exemption under Section 10(23C)(iiiad).

3. Both societies involved had common members in their Management Committees. Relying on a decision of the Hon'ble Madras High Court, the AO treated the diverted funds as the assessee's income. The Ld. CIT(Appeals) upheld this decision, emphasizing the diversion of funds for non-charitable purposes.

4. The Ld. AR argued that the advances were made for constructing a building for educational purposes, aligning with the society's objectives. Citing relevant case law, the AR contended that the funds were not investments or deposits, thus not violating provisions of the Act.

5. The AR highlighted the society's consistent practice of making such advances and challenged the AO's assessment of the entire outstanding amount as income. The AR emphasized that the society's actions were in line with its objectives and not claimed as an application of income.

6. The AR further argued against contradictory statements by the assessee, asserting that the advances were made to a charitable society registered under the Act. The Tribunal found the AO's reasoning flawed, as the advances did not breach any provisions of the Act, leading to the allowance of the appeal and the deletion of the assessed amount from the assessee's income.

7. The Tribunal concluded that the AO had assessed the funds without legal authority, overturning the Ld. CIT(Appeals) decision and directing the Assessing Officer to delete the assessment of the diverted funds from the assessee's income.

This detailed analysis outlines the key legal arguments, decisions, and reasoning behind the judgment regarding the assessment of diverted funds as income under Section 10(23C)(iiiad) of the Income-tax Act, 1961.