2021 (3) TMI 368 - HC - Income Tax

Exemption u/s 11 - assessee advanced interest-free loans to the sister concerns - whether grant of loan by assessee trust to its group trust cannot be treated as deposit or investment made in violation of Section 13(1)(d) r/w 11(5)? - HELD THAT - ollowing the ratio laid down in the Judgments reported ACME EDUCATIONAL SOCIETY 2010 (7) TMI 159 - DELHI HIGH COURT and WORKING WOMEN'S FORUM 2014 (8) TMI 681 - MADRAS HIGH COURT the question of law is decided against the Revenue and in favour of the assessee.

Summary

Issues Involved:
1. Violation of provisions of section 13(1)(d) read with 11(5) of the Income Tax Act.
2. Entitlement to exemption under section 11 of the Income Tax Act.
3. Treatment of interest-free loans to sister concerns as investments or deposits.

Detailed Analysis:

1. Violation of provisions of section 13(1)(d) read with 11(5) of the Income Tax Act:
The Assessing Officer found that the assessee trust had lent money to its group trusts, which was deemed a violation of section 13(1)(d) read with 11(5). This section mandates that funds must be invested in specified modes. The assessee advanced interest-free loans to sister concerns, which the Assessing Officer argued did not comply with the prescribed investment modes.

2. Entitlement to exemption under section 11 of the Income Tax Act:
The Commissioner of Income Tax (Appeals) allowed the assessee's appeal, holding that the loans to group trusts did not violate section 13(1)(d) read with 11(5) because the objects of both the assessee trust and the recipient trusts were similar. The Tribunal upheld this decision, confirming that the loans were neither investments nor deposits, thus not infringing upon the stipulated sections.

3. Treatment of interest-free loans to sister concerns as investments or deposits:
The Tribunal and Commissioner of Income Tax (Appeals) concluded that the interest-free loans given to other societies with similar objectives and registered under section 12A did not constitute investments or deposits. Hence, they did not violate section 13(1)(d) read with 11(5).

Supporting Judgments:
- The Kerala High Court in Mundakapadam Mandirams Society v. Commissioner of Income Tax held that any funds not invested in specified modes under section 11(5) would result in denial of exemption under section 13(1)(d). However, this was distinguished as it pertained to investments in private companies, which was not the case here.
- The Delhi High Court in Director of Income Tax v. ACME Educational Society ruled that interest-free loans to societies with similar objects do not amount to investments or deposits under section 13(1)(d).
- The Division Bench of the Madras High Court in Commissioner of Income Tax v. Working Women's Forum held that only the income related to the violation should be taxed at the maximum marginal rate, not the entire income.

Conclusion:
The High Court of Madras, aligning with the judgments of the Delhi High Court and its own Division Bench, decided that the interest-free loans to sister concerns did not violate section 13(1)(d) read with 11(5). Consequently, the assessee was entitled to the exemption under section 11. The appeal by the Revenue was dismissed, affirming the decisions of the Tribunal and the Commissioner of Income Tax (Appeals).