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2016 (3) TMI 746 - AT - Income TaxEntitlement to the exemption under section 11 - Violation of provisions of section 13(1)(c) and 13(2)(a)/(b)/(g) - Held that - Having held that the Poddar Trust comes within the list of prohibited persons under section 13(3), now we are left to examine the transaction which has taken place between the assessee and the said M/s. Poddar Trust. The AO, after examination has found that the assessee has given a loan of ₹ 42,69,615/- to PMTI College, a unit of M/s. Poddar Trust which is a prohibited person within the meaning of section 13(3) of the Act. In our view, the fact of giving the loan by the assessee trust to M/s. Poddar Trust does not violate section 13(1)(d) read with section 11(5) of IT Act, 1961, as the said loan is neither an investment nor a deposit and the said amount has been given to M/s. Poddar Trust which is also a registered trust having the similar objects under the Act of 1961. The said trust has, in fact, returned back the money to the assessee trust in the subsequent assessment year and, therefore, the AO has not disallowed the exemption. In view thereof, though M/s. Poddar Trust is a prohibited person within the meaning of section 13(3) of the Act, however, the transaction of ₹ 42,69,615/- does not fall within the provisions of section 13(1)(d) read with section 11(5) of the Act. In view thereof, the assessee is entitled to the exemption under section 11 of the Act. - Decided in favour of assessee
Issues Involved:
1. Whether the assessee trust violated the provisions of section 13(1)(c) and 13(2)(a)/(b)/(g) of the I.T. Act, 1961 by extending a loan to another trust. 2. Whether the assessee trust is entitled to exemption under section 11 of the I.T. Act, 1961. Issue-wise Detailed Analysis: 1. Violation of Section 13(1)(c) and 13(2)(a)/(b)/(g): The primary issue revolved around whether the assessee trust violated sections 13(1)(c) and 13(2)(a)/(b)/(g) by extending a loan of Rs. 42,69,615 to another educational institution, PMTI, a unit of Poddar Trust. The AO noted that the governing persons of both trusts were essentially the same family members, and the loan was given without adequate interest, suggesting a misuse of funds meant for charity. The AO concluded that this constituted a violation of section 13(1)(c) and denied the exemption under section 11, adding Rs. 70,01,172 to the total income of the assessee. 2. Entitlement to Exemption under Section 11: The CIT (A) allowed the appeal of the assessee, granting the exemption under section 11. The CIT (A) examined whether Poddar Trust was a specified person under section 13(3) and concluded it was not. It was also determined that the loan was an application of income, not an investment. The CIT (A) referenced Notification No. 1827 dated 20.08.2010, which granted the assessee approval under section 10(23C), indicating no violation of section 13. Judgment Analysis: 1. Applicability of Section 13(3): The Tribunal analyzed the definition of a "person" under section 2(31) and concluded that a trust where family members of the assessee have an interest falls under the realm of section 13(3)(b). Therefore, the AO was correct in concluding that the transaction occurred between prohibited persons. 2. Nature of the Loan Transaction: The Tribunal considered the contention that the transaction was akin to a current account between the trusts, where both lent money to each other. However, referencing the Delhi High Court judgment in DCIT vs. Charanjiv Charitable Trust, it was concluded that even if funds were interchanged, it constituted a violation if no interest or security was involved. The Tribunal found that the transaction did not fall within the provisions of section 13(1)(d) read with section 11(5), as the loan was neither an investment nor a deposit and was returned in the subsequent year. 3. Precedent Cases: The Tribunal distinguished the case from others cited by the assessee, such as Acme Educational Society and Maa Vaishnav Education Society, noting that the issue of prohibited persons under section 13(3) was not addressed in those cases. Conclusion: Despite Poddar Trust being a prohibited person under section 13(3), the Tribunal held that the loan transaction did not violate section 13(1)(d) read with section 11(5). Consequently, the assessee was entitled to exemption under section 11. The appeal of the Revenue was dismissed, upholding the CIT (A)'s decision to grant exemption. Order Pronouncement: The order was pronounced in the open court on 5/02/2016, dismissing the appeal of the Revenue.
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