2024 (10) TMI 922 - AT - Income Tax

Exemption u/s 11 - Violation of Section 13 regarding loans and advances to related parties - assessee has diverted the funds of the trust and thereby violated third and 14th proviso to Section 10(23C)(vi) - funds are diverted for the benefit of the trustees and the associates concerns of the trustee - whether the advance given to M/s Samarth Vivdhlaxi Seva Trust is in violation of provisions of Sections 11 to 13 of the Act or not? - HELD THAT - We do not find that the provisions of the income tax act are violated when the assessee has given an advance to another trust having the common object and also registered u/s 12AA of the act though having the common trustees. Even otherwise, if there is a violation of section 13 of the trust if the loan is given to another trust, an addition of Rs. 40,20,000/- on account of notional interest @ 12 % per annum only Rs. 3.35 crores advance to the above trust, could not have been made. In fact, if assessee is found to be in violation of Rs. 3.35 crores then assessee trust is charged to tax at maximum marginal rate at Rs. 3.35 crores and not only on 12% of such income. Therefore, also we do not find any infirmity in the order of CIT(A) in deleting the addition. Assessee has paid a security deposit - For the purpose of deciding the benefit one has to compare the Apple with the Apple and not oranges with the Apple. Against this the learned assessing officer has categorically cited a comparable instance of the property having four times more value than the impugned property at substantially lower and without deposit. AO on submission of such details by the assessee of comparable instance, then decide the issue afresh whether there is any benefit to the trustees or not. If, no benefit is found to be accruing to the trustees on comparable of similar instance, the denial of exemption to the assessee is not permissible. If, benefit accrued to the trustee by giving such a huge deposit in the form of security deposit, then on the amount of security deposit, the tax at the maximum marginal rate is required to be charged - Thus restore this issue back to the file of the learned assessing officer. Advance given by the assessee trust to Mr. Manish Vyas and Mrs.Asha Vyas - AO held that amount of advance given is clear cut violation of Section 13(1)(c) and, therefore, he imputed 12% thereon charged with interest income to the maximum marginal rate - We restore this issue back to the file of AO to consider that amount paid by the assessee as a loan to Mr. Manish Vyas and Mrs.Asha Vyas is a direct benefit to the trustees of the trust which is in clear-cut violation of the provisions of section 13 (1) (c) of the act. However as only opening and closing balances are considered by the assessing officer, the peak amount of loan for each year is required to be considered for the purpose of taxation at the maximum marginal rate. Because of the reason that the assessee has not given us the Ledger with balances, this issue needs to be restored back. AO after examination decide the issue in accordance with the above directions. Allowing the capital expenditure to the assessee - We find that the learned assessing officer is not correct in not granting benefit of this capital expenditure to the assessee because if the capital expenditure is utilized for the object of the trust, the assessee trust is entitled to such deduction. Accordingly, this ground of appeal is dismissed.

Summary

Issues Involved:

1. Violation of Section 13 regarding loans and advances to related parties.
2. Applicability of Section 13 for transactions with another trust having common trustees.
3. Exemption under Section 11 despite alleged violations of Sections 13(1)(c) and 13(1)(d).
4. Deletion of addition on account of notional interest.
5. Allowance of capital expenditure despite denial of exemption under Section 11.

Detailed Analysis:

1. Violation of Section 13 regarding loans and advances to related parties:

The primary issue was whether the assessee trust violated Section 13 by making advances to related parties. The Assessing Officer (AO) argued that advances to M/s Samarth Vivdhlaxi Seva Trust, where common trustees existed, violated Sections 11(5) and 13. The AO contended that such transactions amounted to a benefit to trustees, thus breaching Section 13(1)(c) and 13(1)(d). However, the CIT(A) and Coordinate Bench found that the transactions did not violate these provisions as the market rates were higher than what was charged, and no direct benefit was proven to the trustees. The Tribunal upheld that the transactions did not violate the Act, and the addition of notional interest was unwarranted.

2. Applicability of Section 13 for transactions with another trust having common trustees:

The Tribunal examined whether the advance to M/s Samarth Vivdhlaxi Seva Trust violated Sections 11 to 13. The trust in question was also registered under Section 12AA, and the advance was given under a Memorandum of Understanding for infrastructure development. The Tribunal, following precedents, held that such advances did not constitute an investment or deposit violating Section 13(1)(d). The AO's failure to demonstrate how the trustees benefited led to the dismissal of this ground, affirming no violation occurred.

3. Exemption under Section 11 despite alleged violations of Sections 13(1)(c) and 13(1)(d):

The Tribunal addressed whether the trust could retain its exemption under Section 11 despite alleged violations. It was concluded that while specific amounts violating the provisions should be taxed at the maximum marginal rate, the overall exemption under Sections 11 and 12 remained intact due to valid registration and recognition under Sections 10(23C) and 12AA. Thus, the trust did not lose its exemption entirely, and the appeal was partly allowed on this ground.

4. Deletion of addition on account of notional interest:

The AO had computed interest on amounts allegedly used in violation of Section 13. However, the Tribunal found that such an addition was not supported by law. Instead, the actual amount utilized in violation should be taxed at the maximum marginal rate. The CIT(A)'s deletion of the notional interest addition was upheld, as the AO's computation was flawed and inconsistent with the applicable provisions.

5. Allowance of capital expenditure despite denial of exemption under Section 11:

The Tribunal addressed the AO's denial of capital expenditure benefits due to alleged violations. It was determined that if the capital expenditure was for the trust's objectives, the trust was entitled to such deductions. The AO's refusal to grant this benefit was incorrect, and the Tribunal dismissed this ground, affirming the allowance of capital expenditure.

Conclusion:

The appeals for both assessment years were partly allowed. The Tribunal provided detailed directions for reassessment, emphasizing the need for comparable instances to determine any trustee benefits accurately. The decision clarified the application of Sections 11, 12, and 13, ensuring that only specific violations lead to taxation at the maximum marginal rate, while the trust's overall exemption status remained unaffected.