2017 (11) TMI 848 - AT - Income Tax

Application for Renewal of Exemption u/s 80G(5)(vi) rejected - claim disallowed on the ground that the loan given to wife of one of the Trustees was in violation of provision of section 11(5) - Held that - There is no violation of the provisions of section 11(5) of the Act because the assessee trust has taken the adequate security by way of gold ornaments and the loan was secured and bearing interest @12% per annum which was more than the prevailing rate in the market. Therefore, this loan given by the trust is not for personal benefit of the trustee or wife the trustee. The assessee trust is charging interest more than the market rate and there is a proper security. The assessee trust is deriving interest on loan given to wife of one of the trustees and the loan is secured by the gold ornaments. Therefore, it cannot be said that loan had been given by the assessee-trust with inadequate security or free of interest, therefore, exemption u/s 80G(5)(vi) of the Income Tax Act, 1961 should not be denied. - Decided in favour of assessee.

Summary

Issues:
1. Condonation of delay in filing the appeal.
2. Rejection of application for renewal of exemption u/s 80G(5)(vi) of the IT Act, 1961.
3. Interpretation of provisions of section 11(5) and 13(2)(a) of the IT Act, 1961.
4. Denial of exemption u/s 80G(5)(vi) based on the loan given to a trustee's wife.
5. Applicability of precedents in similar cases.

Analysis:
1. The appeal was time-barred by 21 days, and the assessee sought condonation of delay. The Tribunal found sufficient reason for the delay and admitted the appeal for hearing.
2. The Director of Income Tax (Exemption) rejected the application for renewal of exemption u/s 80G(5)(vi) due to a loan given to a trustee's wife, violating section 11(5) of the IT Act, 1961. The Director held that the investment did not comply with the prescribed modes under section 11(5), leading to the denial of exemption.
3. The counsel argued that the loan to the trustee's wife was in accordance with section 13(2)(a) as it was secured and bore interest higher than the market rate. Citing relevant provisions, the counsel contended that the loan did not violate section 11(5) and should fall under the purview of section 13(2)(a).
4. The Tribunal noted that the loan, secured by gold ornaments and bearing interest at 12% per annum, did not serve personal benefits but was a legitimate transaction. As per section 13(2)(a), if the loan is adequately secured and the interest rate is market-compliant, it should not be deemed for personal use. Therefore, the exemption u/s 80G(5)(vi) should not be denied.
5. Relying on precedents, including judgments from the High Courts of Allahabad and Rajasthan, the counsel highlighted cases where interest rates and security measures were deemed adequate, supporting the argument that the loan in question was legitimate and should not lead to exemption denial.
6. After considering submissions, the Tribunal found no violation of section 11(5) as the loan was appropriately secured and had a higher interest rate. Consequently, the Director was directed to grant the exemption if the conditions under section 80G(5)(vi) were met, leading to the allowance of the appeal.