2018 (9) TMI 1558 - AT - Income Tax

Exemption u/s.11 & 12 disallowed - assessee has violated the provisions of section 13(1)(c) on account of payment to Adhikar Micro Finance Ltd., and Adhikar Grameen Products Pvt Ltd. and violation of the provisions of section 13(1)(d) by making payment of remuneration to the Secretary and President of the assessee society - Held that - No material has been brought on record before us by the department to show that according to the provisions referred to in section 13(1)(c) of the Act, the trustee has substantial interest either singly or jointly in M/s. Adhikar Micro Finance Pvt Ltd and M/s. Adhikar Grameen Products ltd. The allegation of the department of violation of provisions of section 13(1)(c) is not sustainable . On a bare perusal of provisions of section 13(1)(d) of the Act show that to attract these provisions, it is not enough that remuneration has been paid to trustees but it has to be also shown that the remuneration paid is excessive or unreasonable as compared to the services rendered by those persons. In the instant case, nowhere the Assessing Officer has even alleged that the remuneration paid to four persons stated above were excessive or unreasonable. AO proceeded on the assumption that section 13(1)(d) of the Act is attracted merely on making of payment of remuneration to the trustees whereas the legal position is not such. In absence of any material brought before us by the revenue to show that the remuneration paid to the four persons in question were excessive or unreasonable having regard to the services rendered by them, the allegation of the Assessing Officer that there was violation of provisions of section 13(1)(d) is also unsustainable. We, therefore, set aside the orders of lower authorities and direct the Assessing Officer to allow exemption u/s.11 & 12 of the Act to the assessee as per law. - Decided in favour of assessee

Summary

Issues Involved:
1. Violation of provisions of section 13(1)(c) of the Income Tax Act.
2. Violation of provisions of section 13(1)(d) of the Income Tax Act.
3. Denial of exemption under sections 11 & 12 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Violation of Provisions of Section 13(1)(c) of the Income Tax Act:
The Assessing Officer (AO) observed that the assessee, a charitable trust registered under section 12A, had advanced interest-free loans to Adhikar Micro Finance Pvt Ltd. and Adhikar Grameen Products Pvt Ltd., where trustees held shares, thus violating section 13(1)(c). For the assessment year 2010-2011, a sum of ?50,00,000 was advanced, and for 2011-2012, interest-free advances amounted to ?3,95,00,000 and ?7,48,851 respectively. The AO concluded that these transactions benefited the trustees, thus breaching section 13(1)(c).

2. Violation of Provisions of Section 13(1)(d) of the Income Tax Act:
The AO also noted that the assessee paid salaries and consultancy fees to trustees and their relatives, which was seen as a violation of section 13(1)(d). For 2010-2011, payments included ?6,45,600 to the President, ?1,63,000 to the Secretary, and other amounts to relatives. For 2011-2012, similar payments were made, leading the AO to conclude a breach of section 13(1)(d).

3. Denial of Exemption Under Sections 11 & 12 of the Income Tax Act:
Based on the alleged violations of sections 13(1)(c) and 13(1)(d), the AO denied the assessee exemption under sections 11 & 12 for both assessment years and levied tax at the maximum marginal rate on the entire income of the trust. The CIT(A) upheld the AO’s decision.

Tribunal’s Findings:

1. On Section 13(1)(c) Violation:
The Tribunal found no material evidence from the lower authorities showing that the trustees had substantial interest in the said companies as defined under section 13(3) and Explanation 3. The Tribunal referenced the Allahabad High Court's decision in CIT vs. Kamla Town Trust, emphasizing that the Revenue failed to prove the trustees had substantial interest. Thus, the allegation of violating section 13(1)(c) was deemed unsustainable.

2. On Section 13(1)(d) Violation:
The Tribunal clarified that for section 13(1)(d) to apply, it must be shown that remuneration paid to trustees was excessive or unreasonable. The AO did not allege or prove that the remuneration was excessive or unreasonable. The Tribunal thus found the AO's assumption incorrect and the allegation of violating section 13(1)(d) unsustainable.

Conclusion:
The Tribunal set aside the orders of the lower authorities, directing the AO to allow exemption under sections 11 & 12 to the assessee as per law. The appeals of the assessee were allowed.

Order Pronounced:
The order was pronounced on 24/09/2018.