2018 (5) TMI 630 - AT - Income Tax

Denying registration granted u/s 10(23C) - Denying the exemption u/s 11 & 12 - violation of mode of investment in terms of section 11(5) by advancing a loan to another charitable trust - Held that - As per provisions of section 13(1)(d), it is only the income from such investment or deposit which has been made in violation of section 11(5) of the Act, that is liable to be taxed and violation under section 13(1)(d) does not result in the denial of exemption under section 11 to the total income of the trust - Similarly, as per the provisions of section 13(1)(c), it is only the income or value of the property misused by trustee that is liable to be taxed and violation under section 13(1)(c) will not automatically result in denial of exemption under section 11 of total income of the trust. - As regards the provisions of section 13(2), the same being an extension of the provisions of section 13(1)(c) / 13(1)(d), the violations there under will be dealt with on similar lines as the violations under section 13(1)(c) / 13(1)(d) of the Act. On the basis of the above discussions and plethora decisions referred to hereinabove, we are of the considered opinion that Ld.CIT(A) erred in denying benefit available to assessee and registration granted u/s 10(23C) of the Act. For withdrawal of exemption u/s 11 on such funds advanced as loan to another trust sum of ₹ 1,54,40,000/- was a loan given to another Trust. Neither the object of assessee before us has been disputed, nor that of the recipient trust by authorities below. CIT(A) has overlooked the applicability of Sec.13(2)(a) to the facts of present case. Admittedly the money has been advanced as a loan to other trust for which assessee has not received any securities or interest. The said sum has been returned by the other trust during financial year ending on 31.03.2008 to assessee. Authorities below are alleging that these are common trustees and therefore s.13(1)(d) of the Act comes into play. But nothing has been brought on record to establish that the common trustees have substantial interest in the other trust. Thus the amount advanced cannot be held to be in violation of Sec.13(1)(d). Sec.11(5) cannot be applied to present facts as the money advanced is not an investment but a loan. - Decided in favour of assessee.

Issues Involved:

1. Denial of exemption under section 11 and 12.
2. Violation of section 13(1)(c) and 13(1)(d) read with section 13(2)(a) and section 11(5).
3. Reworking of taxable income by Ld. AO.

Detailed Analysis:

1. Denial of exemption under section 11 and 12:

The appellant challenged the denial of exemption under sections 11 and 12 by the Ld. CIT(A) and Ld. AO. The Ld. AO had denied the exemption on the grounds that the assessee had advanced a loan of ?1,54,50,000/- to another trust, which was not an approved mode of investment under section 11(5). The Ld. CIT(A) upheld this decision, further directing the Ld. AO to rework the taxable income.

2. Violation of section 13(1)(c) and 13(1)(d) read with section 13(2)(a) and section 11(5):

The core issue was whether the loan advanced to another trust constituted a violation of section 11(5), thus attracting the provisions of section 13(1)(c) and 13(1)(d). The assessee contended that the loan was given out of its corpus fund, which does not form part of its income, and was returned in the subsequent financial year. The Ld. Counsel argued that the loan did not contravene section 11(5) or section 10(23C)(vi) and cited various judgments supporting the view that loans given by a trust for furtherance of its objects should not be treated as investments or deposits.

3. Reworking of taxable income by Ld. AO:

The Ld. CIT(A) had directed the Ld. AO to rework the taxable income considering the provisions of sections 11 to 13. The Tribunal examined whether the violation of section 11(5) read with section 13(1)(c) or 13(1)(d) would result in the denial of exemption under section 11 and 10(23C) and whether it would attract the maximum marginal rate of tax on the entire income of the trust.

Tribunal's Findings:

The Tribunal analyzed the relevant provisions of sections 13(1)(c), 13(1)(d), 13(2), and 11(5) of the Act. It was observed that section 13(1)(c)(ii) implies that if any part of the income or property of the trust is applied for the benefit of any trustee, the exemption under section 11 would not be available. Section 13(1)(d) specifies that if the funds are invested or deposited otherwise than in approved forms, the trust will lose the benefit of exemption under section 11 for that income.

The Tribunal referred to various judgments, including CIT Vs Fr. Mullers Charitable Institutions, DIT(E) Vs Sheth Mafatlal Gagalbhai Foundation Trust, and CIT Vs. Red Rose School, which established that only the income from the investment or deposit violating section 11(5) is taxable, and not the entire income of the trust.

Conclusion:

1. The Tribunal concluded that the loan advanced did not constitute an investment or deposit violating section 11(5) but was an application of income in furtherance of the trust's objectives.
2. It was held that the violation of section 13(1)(d) does not result in the denial of exemption under section 11 for the entire income, but only the income from the non-compliant investment is taxable.
3. The Tribunal reversed the findings of the Ld. CIT(A) and deleted the disallowance made by the Ld. AO, allowing the appeal filed by the assessee.

Order:

The appeal filed by the assessee was allowed, and the disallowance made by the Ld. AO was deleted. The order was pronounced in the open court on 04.05.2018.

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