2021 (1) TMI 46 - AT - Income Tax

Exemption u/s 11 - interest payment u/s 11 (1) to 13 (1)(c) r. w. s 13 (3) - treat the amount paid to persons covered u/s 13(3) as excessive by treating the rate of interest of unsecured loan (liabilities) with rate of interest of deposits (assets) - assessee s interest derived from fixed deposits @ 7. 5 % to 7. 75 % with the interest paid in issue @ 10 % - HELD THAT - We find no reason to sustain either of the twin limbs of excessive as well as unjustified interest on aspects in favour of the Revenue. Paper Books suggest that the assessee had 17 fixed deposit accounts with the bank(s) out of which the first one was in the nature of margin money security in favour of the Dental Council of India whereas accounts 2 to 14 thereof are fund security(ies) of Nursing College(s) in favour of the Baba Farid University of Health Sciences. Meaning thereby that the said fixed deposit accounts are deposits are in the name(s) of affiliating/regulatory bodies than fixed deposit investment per se. We observe that these facts that it was very much justifiable on assessee s part to maintain all the said fixed deposits for the purpose of carrying out the trust s medical education activities. Excessive interest payments @ 10 % to its trustee Shri Grewal - As come on record that the department has itself accepted interest paid to the lender banks @ 14. 75 % in case of secured loans are against unsecured loans availed from Shri Grewal. That itself suggests that the impugned interest rate @ 10 % is not excessive so as to attract the impugned disallowance/addition. We are dealing with this assessee paying market rate of interest to the trustee. We go by all this elaborate reasoning to conclude that the assessing authority had erred in disallowing assessee s interest payment followed by the CIT(A) s enhancement action under challenge which is also not sustainable. The same stand reversed therefore. Assessee s appeal is allowed.

Summary

Issues Involved:
1. Denial of benefit under Section 11 of the Income Tax Act.
2. Treatment of interest paid to persons covered under Section 13(3) as excessive.
3. Jurisdiction of CIT(A) to enhance the income of the assessee.
4. Enhancement of entire income instead of restricting to the excessive amount paid to persons covered under Section 13(3).
5. Consideration of the appellant's submissions regarding consistency.

Issue-wise Detailed Analysis:

1. Denial of Benefit under Section 11:
The primary issue was whether the assessee, a charitable trust, was justified in claiming benefits under Section 11 of the Income Tax Act. The Assessing Officer (AO) observed that the trust paid interest at 10% to one of its trustees, Shri Hoshiar Singh Grewal, which was higher than the interest derived from its fixed deposits (7.5% to 7.75%). The AO disallowed the interest payment of ?1,13,41,361 under Sections 11(1) to 13(1)(c) read with Section 13(3) of the Act, leading to the denial of benefits under Section 11.

2. Treatment of Interest Paid to Persons Covered under Section 13(3) as Excessive:
The CIT(A) upheld the AO's decision and further enhanced the income by denying the benefit under Section 11 due to the excessive interest payment to the trustee. The CIT(A) noted that the trust had surplus funds in the form of fixed deposits earning lower interest rates and still paid a higher interest rate to the trustee, thereby violating Sections 13(1)(c), 13(2)(c), and 13(2)(g) of the Act.

3. Jurisdiction of CIT(A) to Enhance the Income:
The assessee contested the jurisdiction of the CIT(A) to enhance the income. The CIT(A) issued a show-cause notice for enhancement and concluded that the trust provided direct benefits to the trustee by paying higher interest rates, thus violating the provisions of the Act. Consequently, the CIT(A) enhanced the income to ?11,98,68,227 and initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income.

4. Enhancement of Entire Income Instead of Restricting to Excessive Amount Paid:
The CIT(A) enhanced the entire income of the trust rather than restricting the addition to the excessive amount paid to the trustee. The CIT(A) relied on the Delhi High Court judgment in the case of Pt. Kanahya Lal Punj Charitable Trust vs. DIT, which dealt with the denial of exemption under Sections 11 and 12 due to interest-free advances to interested parties. The CIT(A) concluded that the trust's funds were used to benefit the trustee, leading to the denial of exemption under Section 11.

5. Consideration of the Appellant's Submissions Regarding Consistency:
The assessee argued that the trust maintained fixed deposits as required by affiliating/regulatory bodies and that the interest payments to the trustee were reasonable compared to the higher interest rates paid to banks for secured loans. The tribunal observed that the AO erred in comparing the fixed deposit interest rates with the interest paid to the trustee and that the CIT(A) unnecessarily relied on the Delhi High Court judgment, which was not applicable in this case. The tribunal concluded that the interest payment of 10% to the trustee was not excessive and reversed the disallowance and enhancement made by the AO and CIT(A).

Conclusion:
The tribunal allowed the assessee's appeal, reversing the disallowance of ?1,13,41,361 and the enhancement of income by the CIT(A). The tribunal found that the interest payment to the trustee was reasonable and that the CIT(A) erred in applying the Delhi High Court judgment to the facts of the case. The tribunal also noted that the fixed deposits were maintained for regulatory purposes and not as investments, justifying the interest payments to the trustee.