2018 (4) TMI 1056 - AT - Income Tax

Denial of exemption u/s 11 - payment made to the persons are related to the trustee or founder of the institution? - Held that - No violation of Section 13(1) as in this case it is not the case of the Revenue that the payment made to contractor was excessive and above market rate. Ms. Savitha and Ms. Swatika appear to be the daughters of the trustees. There was a payment said to be made to them. From the material available on record it appears that the amounts were transferred to Ms. Savitha and Ms. Swatika and retransferred to the assessee-trust / educational institution on the same day. Therefore it is obvious that the funds of the trust were not applied or used for the benefit of the above said Ms. Savitha and Ms. Swatika. The funds of the trust were applied for the benefit of the close relatives of the trustee or founder of the trust - no violation of Section 13 of the Act as contended by the Revenue. Since the amounts were transferred to the trust as disclosed in the accounts copies of which are available in the paper-book the CIT(Appeals) is not justified in disallowing the claim of the assessee. Loan taken for Lease of the computers - repayment of loan taken - Held that - Admittedly the loan was taken from M/s Hewlett Packard Financial Services (India) Pvt. Ltd. The funds were used by the assessee for the purpose of carrying on the activities of the trust. The repayment of loan either in the name of payment of rental or otherwise has to be construed as application of income under Section 11 of the Act. The availability of computers in the premises of the assessee-trust or its institutions is not in dispute. No question of any disallowance for repayment of loan taken by the assessee-trust - the exemption claimed by the assessee is allowed. - Assessee appeal allowed.

Summary

Issues Involved:
1. Denial of exemption under Section 11 of the Income-tax Act, 1961.
2. Alleged violation of Section 13 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11 of the Income-tax Act, 1961:

The appellant, a trust registered under Section 12A of the Act since 1999, has been administering several educational institutions. A survey under Section 133A conducted on 19.03.2014 led to the denial of exemption under Section 11. The trust had taken computers on loan from M/s Hewlett Packard Financial Services (India) Pvt. Ltd. for educational purposes, with a lease agreement facilitated through M/s A-Team Computers. The trust claimed the lease payments as revenue expenditure. The Revenue authorities did not dispute the lease charges or the availability of computers in the institutions.

2. Alleged Violation of Section 13 of the Income-tax Act, 1961:

During the survey, the Revenue authorities found that certain amounts were paid to interested persons under Section 13(3). The payments made to the daughters of the trustees were transferred back to the trust on the same day and credited in the trust's books. The appellant argued that there was no violation of Section 13 since the funds were not used for the benefit of the trustees' relatives. The appellant cited several judgments to support their claim that even if there was a violation, the maximum marginal rate should only apply to the non-exempt income.

The Department contended that the payments to construction creditors and the financial transactions for computers were not genuine loans but redistributions to interested persons. They argued that the repayment of the loan, claimed as rental payment, could not be allowed as revenue expenditure.

Tribunal's Findings:

The Tribunal examined the provisions of Section 13 and concluded that the payments to construction creditors, even if related to the trustees, were not excessive or above market rates. The amounts transferred to the trustees' daughters and re-transferred to the trust on the same day did not constitute a violation of Section 13.

Regarding the lease of computers, the Tribunal noted that the loan from M/s Hewlett Packard Financial Services (India) Pvt. Ltd. was used for the trust's activities. The repayment of the loan, whether termed as rental or otherwise, was considered an application of income under Section 11. The availability of computers in the trust's premises was undisputed, and thus, no disallowance for the repayment of the loan was warranted.

Conclusion:

The Tribunal set aside the orders of the lower authorities, allowing the exemption claimed by the assessee. The appeal filed by the assessee was allowed, and the judgment was pronounced on 22nd March 2018 at Chennai.