2020 (8) TMI 715 - AT - Income Tax

Exemption u/s 11 denied - property which was acquired by utilising the loan availed from the bank by the Appellant Trust - assesse-trust was registered u/s.12AA - assessee was assessed as AOP - HELD THAT - The assessee is paying interest on said loans and also repaying principal amount out of its own funds. The factum of Mrs. Mercy Latha standing personal guarantor to the said loan as well offering of personal properties as collateral securities to secure said loan shall also be considered by AO in denovo assessment to arrive at decision whether the assessee has infringed provisions of Section 13(1)(c), 13(1)(d) and 13(2) of the 1961 Act. The post acquisition activities such as long term lease granted, utilization of said land, approvals obtained from competent authorities in the name of assessee-trust as well status of construction of School Building and amount spent by assessee for construction of School Building shall also be considered by AO in denovo assessment, before coming to conclusion whether any benefit was derived by Managing Trustee out of said land. The said land is incorporated in the Balance Sheet on asset side as Leasehold Land -₹ 4,00,00,000/- and an amount of ₹ 4,00,00,000/- was borrowed by assesee from UBI in September, 2015, which was later transferred to bank account of Mrs. Mercy Latha in the first week of October 2015. As per Sale deed dated 28.10.2015, the land was acquired for ₹ 3,50,00,000/- by Mrs. Mercy Latha , while Mrs. Mercy Latha has got transferred ₹ 4,00,00,000/- from assessee-trust and the said land is capitalized at ₹ 4,00,00,000/- in the books of accounts of assessee-trust. The differential of ₹ 50,00,000/- retained by Mrs. Mercy Latha was not explained by the assessee-trust neither the same was enquired by authorities below in first round of litigation and whether the said differential leads to benefit of ₹ 50 lacs derived by Mrs. Mercy Latha as the said amount was not refunded by Mrs. Mercy Latha to the assessee-trust, as is emerging from records. This aspect also need to be carefully enquired by the AO and assessee is directed to place on record before the AO, complete explanation of differential amount of ₹ 50 lacs retained by Mrs. Mercy Latha . The assessee is directed to explain this differential of ₹ 50 lacs before the AO in set aside denovo assessment proceedings. It is also made out that the bankers were insisting on the registration of property in the name of Mrs. Mercy Latha and hence land was registered in her name , but perusal of sale deed shows that Mrs. Mercy Latha made first payment for acquiring the aforesaid land way back in 28.11.2014 when two cheques, firstly of ₹ 25 lacs and secondly of ₹ 5 lacs was given to the seller of land by Mrs. Mercy Latha. The agreement to sale entered into at the time of advancing of ₹ 30 lacs is not brought on record. The assessee is directed to provide explanation to that effect before the AO in set aside proceedings. This aspect is also to be looked into by AO before framing denovo assessment. The learned counsel for the assessee has referred to provisions of Section 31 of Tamil Nadu Recognised Private Schools (Regulation) Act, 1973 and stated that the procedure for getting permission for purchase of property is very cumbersome . In our considered view, difficulty in complying with procedure is no excuse unless assessee is able to demonstrate impossibility of performing an act and that too under these circumstances also, execution in deviation with provisions of statute has to be within the realm of legality as illegality cannot be perpetuated. The assessee is directed to submit detailed explanation to that effect before the AO in denovo assessment proceedings. In view of additional evidences filed by assessee for the first time before the tribunal, we are inclined to restore the matter back to the file of AO for framing denovo assessment. We clarify that the AO is free to make such enquiries as may deem fit to decide the issue denovo in set aside proceedings. The AO will allow assessee to file necessary evidences in its defense in support of its contentions. - Appeal of the assessee is allowed for statistical purposes

Summary

Issues Involved:
1. Denial of exemption under Section 11 due to alleged violation of Section 13(1)(c) and 13(2).
2. Disallowance of interest on bank loan.
3. Disallowance of depreciation.
4. Disallowance of expenses not connected to earning income.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11:
The primary issue was whether the trust violated Section 13(1)(c) and 13(2) of the Income-tax Act, 1961, by transferring funds to the Managing Trustee for purchasing land in her name, thereby rendering the trust ineligible for exemption under Section 11. The Assessing Officer (AO) observed that the trust transferred ?4 Crores to the Managing Trustee, who then purchased land and leased it to the trust. The AO held that this constituted misutilization of trust funds, leading to the denial of exemption under Section 11. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, noting that the Managing Trustee did not repay the ?4 Crores to the trust, nor did she pay any interest on it, thus attracting Section 13(1)(c) read with Section 13(2)(a). The tribunal decided to remand the matter back to the AO for a fresh examination, considering additional evidence provided by the assessee, including minutes of the trustees' meeting and a fresh lease deed.

2. Disallowance of Interest on Bank Loan:
The AO disallowed the interest paid on the loan taken by the trust, reasoning that the loan was not utilized for the trust's purposes but was transferred to the Managing Trustee. The CIT(A) upheld this disallowance, noting that the loan was not used wholly and exclusively for earning the trust's income. The tribunal agreed that this issue is consequential to the primary issue of whether the trust violated Section 13(1)(c) and 13(2) and thus remanded it back to the AO for fresh consideration.

3. Disallowance of Depreciation:
The AO allowed depreciation on the capital assets purchased during the year, assuming the trust had already claimed the entire amount of capital expenditure as a deduction. The assessee contested this, stating it had not claimed any depreciation. The CIT(A) upheld the AO's decision. The tribunal noted that this issue is also consequential to the primary issue and remanded it back to the AO for reconsideration.

4. Disallowance of Expenses Not Connected to Earning Income:
The AO and CIT(A) disallowed certain expenses, including scholarships, flood relief work, salary payable, PF payable, and rent payable, as they were not connected to earning income and the exemption under Section 11 was denied. The tribunal decided that this issue, too, is consequential to the primary issue and remanded it back to the AO for fresh determination.

Conclusion:
The tribunal remanded the case back to the AO for a fresh examination of all issues, considering the additional evidence provided by the assessee. The AO is directed to conduct a thorough inquiry into the acquisition of the property, the utilization of the loan, and the fiduciary capacity of the Managing Trustee, among other aspects. The AO is to allow the assessee to present necessary evidence and provide a proper opportunity for being heard. The appeal is allowed for statistical purposes.