2016 (7) TMI 455 - AT - Income Tax

Exemption u/s 11 denied - Eligibility for exemption u/s 10(23C) - whether society is existed for profit motive? - A.O. denied the benefit of exemption for the sole reason that the assessee society has diverted its funds to other societies and violated the provisions of section 13(1)(d) - Held that - On perusal of the documents available on record, we find that the assessee has advanced loans to other societies under the same management having similar objects and also registered under the provisions of section 12A of the Act and charged interest. The assessee also proved that it has advanced loans out of the funds borrowed from founder members of the society. When the loans are given out of the funds borrowed from the society, the A.O. was not correct in holding that the assessee has diverted the funds in violation of the provisions of section 13(1)(d) of the Act. Therefore, we are of the view that advancing loans to other societies having similar object whether or not registered u/s 12A of the Act, is not a violation of the provision of section 13(1)(d) of the Act. A.O. cannot borrow the findings of the Chief Commissioner of Income Tax in the order cancelling the registration u/s 10(23C) of the Act to deny the benefit of exemption u/s 11 of the Act, unless he had specifically points out the activities carried out by the assessee are not in accordance with the objects of the trust. As far as the observation of A.O. with regard to letting out of properties on commercial lines is concerned, we noticed that the assessee has let out its place to telecom companies for erection of telecom tower and used the proceeds for the objects of the society. Similarly, the assessee society has maintaining a hostel for the benefit of the students. Maintaining hostels for the benefit of the students and letting out properties cannot be considered has ingenuine activity to deny the benefit of exemption u/s 11 of the Act. In the present case on hand, on perusal of the facts, we noticed that the A.O. without pointing out any specific violations referred to in section 13(1)(c) or 13(1)(d) of the Act, simply rejected benefit of exemption. A.O. was erred in denying exemption u/s 11 of the Act. The CIT(A) without appreciating the facts has confirmed the order passed by the A.O - Decided in favour of assessee Disallowance of expenditure under the provisions of section 40(a)(ia) - A.O. was of the opinion that once assessee looses benefit of exemption u/s 11 of the Act, then the income of the assessee should be computed under the normal provisions of business or profession, accordingly, the provisions of section 40(a)(ia) of the Act are applicable - Held that - Disallowance u/s 40(a)(ia) of the Act is not applicable, when income is computed under the provisions of section 11 of the Act. Therefore, we direct the A.O. to delete the additions made u/s 40(a)(ia) of the Act as assessee has been entiled for exemption u/s 11 - Decided in favour of assessee

Summary

Issues Involved:
1. Eligibility for exemption under Section 11 of the Income Tax Act.
2. Applicability of disallowance under Section 40(a)(ia) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Eligibility for Exemption under Section 11 of the Income Tax Act:

Facts and Arguments:
The assessee, a registered society engaged in imparting education, filed a return for the assessment year 2008-09 claiming exemption under Section 10(23C) of the Income Tax Act. The Chief Commissioner of Income Tax later withdrew this approval, leading the assessee to claim exemption under Section 11 as an alternate. The Assessing Officer (A.O.) denied this exemption, citing profit motives and fund diversion to related entities, thus violating Section 13(1)(d) of the Act.

CIT(A) Decision:
The CIT(A) agreed that provisions of Sections 10(23C) and 11 are not mutually exclusive but upheld the denial of exemption under Section 11 due to specific violations, including diversion of funds and maintaining luxury cars without proper justification.

Tribunal Analysis:
The Tribunal found that the assessee advanced loans to societies with similar objects and registered under Section 12A, which does not violate Section 13(1)(d). The Tribunal also noted that the A.O. borrowed findings from the Chief Commissioner without specific violations for the relevant year. The Tribunal emphasized that activities like letting out properties and maintaining hostels are in line with the society's objectives and do not constitute violations. Therefore, the Tribunal directed the A.O. to allow the exemption under Section 11.

Relevant Case Laws:
- Director of Income Tax (Exemption) Vs. ACME Educational Society: Advancing interest-free temporary loans to similar societies is not an investment or deposit, hence no violation of Section 13(1)(d).
- CIT Vs. M/s. Kanpur Subhash Shiksha Samiti: Loans given from out of 15% of income do not attract Section 13(1)(d).

2. Applicability of Disallowance under Section 40(a)(ia) of the Income Tax Act:

Facts and Arguments:
The A.O. disallowed advertisement and interest expenses under Section 40(a)(ia) for non-deduction of TDS, arguing that once exemption under Section 11 is denied, the income should be computed under normal business provisions.

Tribunal Analysis:
The Tribunal held that Section 40(a)(ia) is applicable only if income is computed under "profits and gains of business or profession." Since the income of the assessee is exempt under Section 11, the provisions of Section 40(a)(ia) do not apply. The Tribunal referenced several judgments, including:
- Mahatma Gandhi Seva Mandir Vs. Dy. DIT (Exemption): Section 40(a) is not applicable for charitable trusts where income is computed under Section 11.
- ITO Vs. Mother Teresa Educational Society: Disallowance under Section 40(a)(ia) is not applicable when income is computed under Sections 11, 12, and 13.

Conclusion:
The Tribunal directed the A.O. to delete the disallowance made under Section 40(a)(ia) and allowed the appeal filed by the assessee, confirming the eligibility for exemption under Section 11 and negating the applicability of Section 40(a)(ia) disallowance.