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2025 (3) TMI 29 - AT - Income TaxDenial of exemption u/s 11 - diversion of funds for the benefit of the related parties mentioned in section 13(3) are not for charitable activities of the assessee and are not for the benefit of public at large - disallowance of interest expenditure made u/s 13(2)(a) 13(2)(b) and 13(2)(g) - HELD THAT - From a detailed analysis of various clauses of section 13(3) vis- -vis the facts of the present case we of the considered view that ABET does not fall within the purview of the specified person under section 13(3) of the Act. Accordingly we are of the view that the AO erred in invoking the provisions of section 13(2) r.w. section 13(3) of the Act for disallowing the interest expenditure on the term loan u/s 13(2)(a) 13(2)(b) and 13(2)(g). Accordingly we find no infirmity in the impugned order passed by the CIT(A) on this issue and therefore the same is upheld. Similarly we also do not find any merit in the disallowance of lease rent paid by the assessee for a building which was provided free of charge to ABET to enable them to start Aditya Birla World Academy School . Accordingly the impugned order passed by the learned CIT(A) on this issue is also upheld. As a result Grounds No.1 to 4 raised in Revenue s appeal are dismissed. Allowance of standard deduction u/s 24 while computing the income under the head income from house property - whether the assessee claiming exemption u/s 11 is entitled to claim a deduction of a sum equal to 30% of the annual value u/s 24(a) ? -We find that in CIT vs Rao Bahadur Calavala Cunnan Chetty Charities 1979 (8) TMI 17 - MADRAS HIGH COURT held that the income from property held under trust would have to be arrived at in a normal commercial manner without reference to the provisions which are attracted by section 14. Also in Girdhari Lal Shewnarain Tantia Trust 1991 (6) TMI 8 - CALCUTTA HIGH COURT rendered similar findings and held that the income from the property held under trust has to be arrived at in a normal commercial manner and when the income from property held under trust as such is excluded there is no scope for computing the income from house property by applying the provision of section 14 of the Act. We direct the AO to disallow the deduction of 30% claimed by the assessee on income declared under the head income from house property . Accordingly we do not concur with the findings of the learned CIT(A) on this issue. Interest accrued but not received - AO held that the system of hybrid accounting or mixed accounting has been done away with. Thus the taxpayers have to follow either the cash or mercantile system consistently. Accordingly the interest income was worked out by invoking the provisions of section 144 in accordance with the provisions of section 145 and added to the total income of the assessee - HELD THAT - We find that a similar issue pertaining to following the hybrid system of accounting came up for consideration before the co-ordinate bench of the Tribunal in assessee s own case in ITO vs. M/s. Vaibhav Medical and Education Foundation 2024 (3) TMI 1414 - ITAT MUMBAI deciding the issue in favour of the assessee as held that the assessee has been offering Income from Other Sources by following cash system of accounting i.e. on receipt basis consistently from inception. Therefore in our view there is merit in the contention there is no violation of section 145 since for the purpose computing income from Other Sources the assessee is not following hybrid system of accounting but has been consistently following cash system of accounting. Decided against revenue.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment are:
ISSUE-WISE DETAILED ANALYSIS 1. Exemption under Section 11 and Application of Sections 13(2) and 13(3) Relevant Legal Framework and Precedents: The provisions of Section 13 of the Income Tax Act outline circumstances where exemptions under Section 11 will not apply, particularly when income or property of a trust is used for the benefit of specified persons as defined in Section 13(3). Court's Interpretation and Reasoning: The Tribunal analyzed whether the Aditya Birla Education Trust (ABET) is a "specified person" under Section 13(3). The Tribunal examined the relationship between the assessee and ABET, focusing on the settlor's role and contributions. Key Evidence and Findings: The Tribunal noted that ABET is a charitable trust registered under Section 12A, and the interest-free loan was not granted to the settlor but to the trust itself. The contribution by the settlor to ABET did not exceed Rs. 50,000, which is a threshold for being considered a substantial contribution under Section 13(3)(b). Application of Law to Facts: The Tribunal concluded that ABET does not fall within the purview of a "specified person" under Section 13(3), as the contribution was not made to the assessee but to ABET. The Tribunal also noted that the loan was not granted to any individual related to the Key Management Personnel of the assessee. Treatment of Competing Arguments: The Tribunal rejected the Revenue's argument that the interest-free loan violated Sections 13(2)(a), 13(2)(b), and 13(2)(g), as ABET was not a specified person under Section 13(3). Conclusions: The Tribunal upheld the CIT(A)'s order, allowing the exemption under Section 11 and dismissing the Revenue's grounds on this issue. 2. Standard Deduction under Section 24 Relevant Legal Framework and Precedents: The issue revolves around whether a charitable trust can claim a standard deduction under Section 24 while computing income from house property. Court's Interpretation and Reasoning: The Tribunal referred to precedents from the Madras High Court and Calcutta High Court, which held that income from property held under trust should be computed in a normal commercial manner, without reference to Section 14. Key Evidence and Findings: The Tribunal noted that the CIT(A) allowed the deduction, reasoning that there is no provision in the Act preventing charitable trusts from claiming deductions under Section 24. Application of Law to Facts: The Tribunal disagreed with the CIT(A), citing higher court decisions that income from property held under trust should not be computed using the provisions applicable under Section 14. Treatment of Competing Arguments: The Tribunal found the Revenue's arguments more persuasive, relying on established precedents. Conclusions: The Tribunal reversed the CIT(A)'s decision, disallowing the standard deduction under Section 24 for the assessee. 3. Accounting Methods and Section 145 Relevant Legal Framework and Precedents: Section 145 mandates that income should be computed using either the cash or mercantile system of accounting, consistently applied. Court's Interpretation and Reasoning: The Tribunal examined whether the assessee's use of different accounting methods for financial statements and tax returns constituted a violation of Section 145. Key Evidence and Findings: The Tribunal noted that the assessee consistently used the cash basis for tax purposes, which had been accepted by the Revenue in previous years. Application of Law to Facts: The Tribunal found no violation of Section 145, as the assessee consistently applied the cash method for tax returns. Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument that the assessee employed a hybrid accounting system, noting the consistent application of the cash method for tax purposes. Conclusions: The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's grounds on this issue. SIGNIFICANT HOLDINGS Core Principles Established:
Final Determinations on Each Issue:
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