2013 (9) TMI 487 - AT - Income Tax

Exemption u/s 11 - Violation of section 13 - Surplus fund not applied for charitable purpose - accumulation of funds - Held that - CIT(A) was not justified in sitting in Judgment over the order passed by the DIT (Exemption) in condoning the delay and approving the accumulation and setting apart of the surplus fund by the assessee as per section 11 (2) of the Act. From para 7.2 of the CIT(A) s order, it is very much clear that the Assessing Officer, in his remand report, has also very clearly submitted that after condonation of delay in accepting revised Form No. 10, the assessee is eligible for deduction under section 11 of the Act. That being the case, the CIT(A) was not justified in denying exemption under section 11 of the Act. Denial of exemption on the ground that persons specified u/s 13 are benefited - Held that - Section 13(2)(h) of the Act provides that the income or the property of the trust be deemed to have been used or applied for the benefit of a person referred to in sub-section (3), if any funds of the trust or institution are continue to remain invested during the previous year in any concern in which such person as referred to in sub-section (3) has a substantial interest. The person referred to in sub-section (3) are the Author of the Trust or founder of the Institution, any person who has made a substantial contribution to the trust or institution where his contribution up to the end of the relevant previous year exceeds ₹ 50,000/-, any trustee of the trust or manager of the institution any relief of such other founder person, Member, Trustee or Manager any concern in which any of the persons referred to hereinabove has a substantial interest - The person who has shareholding in Matrix Laboratories of only 17.09% which cannot be considered as substantial for the purpose of section 13(2)(h) - Therefore, exemption to the assessee under section 11 is granted - Decided in favour of assessee. AO directed to o grant exemption to the assessee under section 11 of the Act. - Decided in favor of assessee.

Issues Involved:
1. Denial of exemption under section 11 of the Income Tax Act.
2. Alleged violations of sections 13(2)(h) and 13(1)(d) of the Income Tax Act.
3. Validity of accumulation of income as per section 11(2) and the filing of Form No. 10.
4. Application of income towards the objects of the trust.

Detailed Analysis:

1. Denial of Exemption under Section 11:
The assessee, a registered charitable trust, claimed exemption under section 11 of the Income Tax Act for the A.Y. 2007-08. The Assessing Officer (AO) denied this exemption, arguing that the trust had not applied its surplus funds for charitable purposes as per its objectives. The AO noted that the trust's activities were limited to buying and selling shares and had not undertaken any charitable activities during the financial year.

2. Alleged Violations of Sections 13(2)(h) and 13(1)(d):
The CIT(A) upheld the AO's decision, citing violations of sections 13(2)(h) and 13(1)(d). It was observed that the trust's settlor, Mr. N. Prasad, had taken a loan of Rs. 40 crores from M/s. G2 Corporate Services Ltd. (a company where he held 80% equity shares) to purchase shares of M/s. Matrix Labs Ltd., where he was a promoter. The CIT(A) concluded that this transaction benefited the settlor, violating section 13(2)(h). Additionally, the investment in shares was not in accordance with section 13(1)(d), which prescribes specific modes of investment under section 11(5).

3. Validity of Accumulation of Income and Filing of Form No. 10:
The assessee argued that it had filed a revised Form No. 10 for accumulation of income, which was accepted by the Director of Income Tax (Exemption) [DIT (Exemption)]. The CIT(A), however, deemed the purpose of accumulation stated in Form No. 10 as too general and not specific. The assessee contended that the DIT (Exemption) had condoned the delay in filing Form No. 10 and approved the accumulation, thus making the exemption under section 11 valid.

4. Application of Income Towards Objects of the Trust:
The CIT(A) also held that the repayment of the Rs. 40 crores loan could not be considered as application of income towards the trust's objectives. The assessee argued that the surplus funds were invested in fixed deposits and the interest income was accumulated as per section 11(2). The trust had also announced donations for charitable activities, which commenced in full strength from April 2007.

Tribunal's Findings:
The Tribunal found that the DIT (Exemption) had condoned the delay in filing Form No. 10 and approved the accumulation of income, thus satisfying the conditions under section 11(2). The Tribunal also noted that the CIT(A) had considered new grounds for denial of exemption without giving the assessee an opportunity to explain, which violated the principles of natural justice.

Conclusion:
The Tribunal concluded that the CIT(A) was not justified in denying the exemption under section 11. The grounds for rejecting the exemption were not considered by the AO and were introduced by the CIT(A) without proper opportunity for the assessee to respond. The Tribunal directed the AO to grant exemption under section 11 to the assessee, allowing the appeal.

Order:
The appeal of the assessee was allowed, and the AO was directed to grant exemption under section 11 of the Income Tax Act. The order was pronounced in the open court on 28th June 2013.

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