2018 (7) TMI 1908 - AT - Income Tax

Denial of exemption u/s 11 - violation of provisions of section 13 - assessee had given interest-free loan to one M/s Baba Amarnath Educational Society and or other societies/trusts - HELD THAT - Following the decision in the D.C.I.T., CHANDIGARH VERSUS AMRITSAR INTERNATIONAL 2017 (12) TMI 1682 - ITAT CHANDIGARH we hold that the CIT(A) has rightly held that the provisions of section 13(1)(c) are not attracted since the AO has failed to point out how persons specified as per section 13(3). Nothing has been brought on record by the Revenue to prove that the main object of the assessee actually was giving loans and not providing education. We also agree with the CIT(A) that the loan given to the respective Educational Society do not qualify as a deposit/investment for the purposes of section 11(5) of the Act, and therefore the assessee cannot be said to have violated the provisions of section 11(5) so as to be denied exemption u/s 11, as per section 13(1)(d) of the Act. Moreover since the impugned loans/advances were made in earlier years, the provisions of section 13(1)(c)/(d) could in any case not have been invoked in the impugned year. We therefore uphold the order of the Ld. CIT(appeals) and dismiss the appeal filed by the Revenue.

Summary

Issues Involved:
1. Denial of exemption under section 11 of the Income Tax Act, 1961.
2. Violation of provisions of section 13 of the Act.
3. Determination of whether loans given to other societies/trusts constitute investments or deposits under section 11(5) of the Act.

Detailed Analysis:

1. Denial of Exemption under Section 11 of the Income Tax Act, 1961:
The appeals were filed by the revenue against the orders passed by the Commissioner of Income Tax (Appeals)-4, Ludhiana, which had set aside the orders of the Assessing Officer (AO) denying exemption under section 11 to the assessees. The AO had denied the exemption on the grounds that the assessees, which were registered as charitable trusts, had given interest-free loans to other societies/trusts, thereby allegedly violating the provisions of section 13 of the Act. The CIT(A) had allowed the appeals of the assessees, holding that the assessees had not violated the provisions of section 13 and that their main object was not making loans and advances but advancing education.

2. Violation of Provisions of Section 13 of the Act:
The AO contended that the loans to sister concerns amounted to extending benefits to persons specified under section 13(3), thus violating section 13(1)(c) and section 13(1)(d) of the Act. The CIT(A), however, concluded that the group societies to whom the loans were given were not specified persons under section 13(3) and that the loans were in accordance with the objects of the appellant societies. The CIT(A) also noted that no undue benefit was drawn by any members of the appellant societies and that similar loans in earlier years had not been disallowed.

3. Determination of Whether Loans Constitute Investments or Deposits under Section 11(5):
The AO held that the loans were investments in modes other than those specified under section 11(5), thus violating section 13(1)(d). The CIT(A) disagreed, stating that the loans were applications of funds in line with the charitable objectives of the societies. The CIT(A) relied on various judicial pronouncements, including the case of CIT vs V.G.P. Foundation, to support that loans to charitable institutions with similar objects do not constitute investments or deposits in violation of section 11(5).

ITAT’s Findings:
The ITAT upheld the CIT(A)’s orders, referencing the case of DCIT vs Amritsar International Foundation (Trust), where similar issues were decided in favor of the assessee. The ITAT noted that the loans in question were given in earlier years, not the impugned years, thus section 13(1)(c)/(d) could not be invoked for the impugned years. The ITAT also found that the loans were not investments or deposits under section 11(5) and that the AO had failed to establish how the recipient societies were specified persons under section 13(3). The ITAT concluded that the assessee societies were primarily engaged in advancing education and not in making loans and advances.

Conclusion:
The appeals filed by the revenue were dismissed, and the orders of the CIT(A) allowing the exemption under section 11 were upheld. The ITAT found no violation of sections 13(1)(c) or 13(1)(d) as the loans were applications of income for charitable purposes, and the recipient societies were not specified persons under section 13(3). The decision in the case of Amritsar International Foundation (Trust) was deemed applicable, and the exemption under section 11 was granted to the assessees.