2019 (4) TMI 99 - AT - Income Tax

Charitable activity - benefit under section 11 - unsecured loan to its sister concern covered u/s 13(3) without any consideration - assessee had given interest free loans without any consideration or security to M/s Baba Amarnath Educational Society which was covered u/s 13(1)(c) and 13(1)(d) - - HELD THAT - As decided in assessee s own case for the AYs 2013-14 and 2014-15 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.- Decided in favour of assessee.

Summary

Issues Involved:

1. Whether the benefit under Section 11 of the Income Tax Act, 1961, was correctly allowed despite alleged violations of Section 13.
2. Whether there was a violation of Section 13(1)(c) of the Income Tax Act, 1961, due to income applied for the benefit of persons referred to in Section 13(3).
3. Whether the exemption under Section 11 was justified given the alleged diversion of funds beyond the scope of the assessee's objectives.

Issue-wise Detailed Analysis:

1. Benefit under Section 11 and Alleged Violations of Section 13:

The Department argued that the CIT(A) erred in allowing the benefit under Section 11 without considering the violations of Section 13. The AO observed that the assessee provided interest-free loans to its sister concerns, which were not in compliance with Section 13(1)(c) and 13(1)(d). The AO noted that these loans were unsecured and without consideration, benefiting the sister concerns unduly, thus violating the provisions of Section 13. Consequently, the AO denied the exemption under Section 11 and assessed the income at ?1,56,70,649.

2. Violation of Section 13(1)(c):

The AO found that the assessee gave unsecured loans to its sister concerns, falling under Section 13(3), without any interest or security, which provided undue benefit to these concerns. The AO cited the case of CIT Vs V.G.P. Foundation, where it was held that funds given to a sister company without interest or security could not be regarded as applied for charitable purposes. The AO concluded that this act violated Section 13(1)(c) and 13(1)(d), leading to the denial of exemption under Section 11.

3. Justification of Exemption under Section 11:

The assessee contended that the loans were given to other educational societies with similar objects, which were also registered under Section 12A. The assessee argued that financial aid in the form of loans to similar charitable societies should be considered as an application of income under Section 11(1)(a). The CIT(A) agreed with the assessee, noting that similar issues had been decided in favor of the assessee in previous assessment years (2013-14 and 2014-15) by the ITAT Chandigarh. The CIT(A) observed that the AO did not provide evidence of any personal benefit to the trustees or members, and the transactions were aimed at fulfilling the educational objectives of the societies.

Conclusion:

The ITAT upheld the CIT(A)'s decision, noting that the Department failed to bring any new evidence to substantiate the alleged violations. The ITAT referenced previous decisions where similar transactions were deemed compliant with Section 11 and not in violation of Section 13. The appeal by the Department was dismissed, and the cross-objection by the assessee was rendered infructuous as it supported the CIT(A)'s order.

Order:

The appeal of the Department and the cross-objection of the assessee were both dismissed. The decision was pronounced in open court on 28/03/2019.