2018 (6) TMI 1099 - AT - Income Tax

Denying exemption u/s 11 and 12 - assessee paid interest free deposit - denying of application of income in respect of donation given to Pacific Society for Education and Social Activities - Held that - No doubt, NRPL is a specified person but then the Act does not bar any normal transaction done with a specified person. All that is provided in the provisions of section 13 of the Act is that any transaction with specified person should not enure any benefit to that person directly or indirectly. If we consider the transaction with NRPL in its right perspective, the only logical conclusion comes is that no benefit has been passed on to NRPL by the assessee-society. The assessee paid interest free deposit only when NRPL has purchased the land and leased out to the assessee on which the assessee constructed the school building and started its operation. We are of the considered opinion that since no benefit has been enured to the specified person from the impugned transaction, denial of exemption u/s 11/12 of the Act is uncalled for. We, accordingly, set aside the findings of the CIT(A) and direct the AO to allow exemption u/s 11/12 of the Act. Donation to PSESA - PSESA is not a registered society during the year under consideration u/s 12A - Held that - Charitable purpose has been defined u/s 2(15) of the Act and education is very much a charitable purpose. It is also an undisputed fact that PSESA was registered u/s 12A and 80G of the Act w.e.f. A.Y 2015-16. While granting registration u/s 12A of the Act revenue has to see objects of the trust and since PSESA has been registered u/s 12A of the Act, the revenue has accepted its objects. Merely because PSESA was not registered u/s 12A of the Act for the year under consideration that cannot be a reason for not allowing corpus donation of ₹ 8.02 crores to the assessee society, keeping in mind that the donee society is also a like minded society. We accordingly direct the AO to allow the corpus donation of ₹ 8.02 crores as application of income. - Decided in favour of assessee

Summary

Issues Involved:
1. Denial of exemption under sections 11 and 12 of the Income-tax Act, 1961.
2. Denial of application of income in respect of donation given to Pacific Society for Education and Social Activities (PSESA).

Issue-wise Detailed Analysis:

1. Denial of Exemption under Sections 11 and 12:

The primary grievance of the assessee was the denial of exemption under sections 11 and 12 of the Income-tax Act, 1961. The assessee, a registered society under the Society Registration Act, 1860, and notified under section 80G, had entered into an agreement with Delhi Public School Society (DPSS) to set up a school. The land for the school was acquired by Nirbhay Realtors (P) Ltd (NRPL) and leased to the assessee for 30 years, extendable by another 30 years, against an interest-free refundable security deposit equivalent to the cost of the land.

The Revenue contended that the ?5.53 crores paid by the assessee to NRPL as an interest-free deposit passed on a benefit to a related concern, violating section 13 of the Act. The AO believed that the provisions of section 13(1)(c) were violated, and thus denied the benefits of sections 11 and 12, assessing the income under normal provisions. The AO also noted that the assessee had incurred substantial capital expenses for constructing the building on the land owned by NRPL, which would benefit NRPL at the time of land sale.

The Tribunal found that the AO had not drawn any adverse inference for the same transaction in the preceding assessment year (A.Y 2013-14), where the exemption under sections 11 and 12 was granted. The Tribunal noted that the assessee had entered into a legitimate lease agreement with NRPL and paid a nominal lease rent of ?2000 per month. The interest-free deposit was akin to a security deposit, and the provisions of section 13(2) allowed transactions with specified persons if at arm's length.

The Tribunal concluded that no benefit was passed on to NRPL by the assessee-society. The decision in the case of Chiranjiv Charitable Trust was distinguished as the facts were different. The Tribunal directed the AO to allow the exemption under sections 11 and 12, setting aside the CIT(A)'s findings.

2. Denial of Application of Income for Donation to PSESA:

The second issue was the denial of application of income for a donation of ?8.02 crores to PSESA, which was not registered under section 12A during the year under consideration. The AO denied the deduction, noting that members of the assessee society were also members of PSESA, making it a specified person under section 13(3).

The Tribunal observed that PSESA was an educational institution and a like-minded society engaged in imparting education. Although PSESA was not registered under section 12A during the year in question, it was registered from A.Y 2015-16. The Tribunal referred to CBDT Circulars and Instructions, which clarified that donations from one charitable trust to another for charitable purposes are a proper application of income.

The Tribunal held that the donation to PSESA, a like-minded society, should be allowed as an application of income. The Tribunal directed the AO to allow the corpus donation of ?8.02 crores as an application of income.

Conclusion:

The appeal of the assessee was allowed. The Tribunal directed the AO to allow the exemption under sections 11/12 and the corpus donation of ?8.02 crores as an application of income. The order was pronounced in the open court on 18.06.2018.