2022 (4) TMI 335 - AT - Income Tax

Exemption u/s 11 - Violation of provisions of Section 13(1 )(c) and 13(1)(d) - loans and advances to interested persons - Managing Trustee and Founder of the Appellant Trust is also Proprietor of Sri Vekkaliamman Builders and Promoter to whom advances paid - HELD THAT - CIT appeal has not controverted the finding of the AO that Sri. Madurai Karthikeyan, managing director and founder member of the appellant trust has not been benefited by way of receiving advance of ₹ 24,78,316 to Sri Vekkaliamman Builders and Promoters, proprietor concern and an amount received and lying as outstanding loans and advances with Meru Shipping Lines Private Ltd. and likewise, a sum of is lying with Southern Academy of Maritime Studies Private Ltd as a substantial stake holders being benefited persons referred to in section 13(3) of the act. Hon ble Juridictional Madras High Court in the case of St. Xavier Educational Trust 2021 (6) TMI 143 - MADRAS HIGH COURT exemption has delivered a verdict that the denial of exemption under section 11 should only be too the extent of income which is violative of section 13(1)(d) and total denial of exemption and accordingly revenue was to only forfeit exemption under section 11 in respect of opening payments. Madras High Court in the case of Ms. V.G.P. Foundation 2002 (10) TMI 26 - MADRAS HIGH COURT held, under exactly similar circumstances that the trust would not be entitled to exemption us.11 of the IT Act, 1961, since the amount advanced was without interest and also without adequate security. Hence, the same set of transactions involved with interested persons are also violations u/s.13(1)(d) as well. We are of the considered view that the learned CIT appeal has been wrong interpretation of provisions of section 13(1)(d) and 13 (3) of the Act, qua the peculiar facts of the instant case. In our view, the appellant trust has violated the provisions of section 13(1)(c) and 13(1)(d) of the Act. Thus, the appellant is not entitled for exemption u/s 11 of the Act to that extent. According, the order of the learned CIT appeal is reversed and the assessment order is restored. Appeal of the revenue is allowed.

Summary

Issues:
1. Disallowance of depreciation.
2. Violation of sec.13(3)(a) read with sec.13(1)(c)(ii) of the Act.
3. Transactions with specific companies.
4. Purchase of gold coins.
5. Utilization of loan funds.
6. Violation of provisions of section 11(5), 13(1)(c), 13(3)(a), and 13(1)(d) of the Act.

1. Disallowance of Depreciation:
The CIT(A) allowed depreciation as an allowable deduction based on case laws and judicial discipline favoring the assessee, leading to the deletion of the addition made by the assessing officer. The AR successfully argued for the deduction of depreciation, citing relevant case laws and conflicting decisions of High Courts. The Tribunal upheld the CIT(A)'s decision in this regard.

2. Violation of sec.13(3)(a) read with sec.13(1)(c)(ii) of the Act:
The assessing officer concluded violations based on amounts due from specific entities. However, the AR successfully argued against these violations by referencing previous ITAT orders and the nature of transactions with the mentioned companies. The Tribunal agreed with the AR's contentions and held that no violation of sec.13 of the Act occurred.

3. Transactions with Specific Companies:
The Department contended that transactions with certain companies involved interested persons as per Section 13(3) of the IT Act, 1961. The Department argued that these transactions violated provisions of Section 13(1)(c) and 13(1)(d), rendering Section 11 inoperative. The Tribunal noted the involvement of interested persons and held that the appellant trust had indeed violated the specified sections, leading to the reversal of the CIT(A)'s decision.

4. Purchase of Gold Coins:
The purchase of gold coins by the appellant was justified as meant for distributing medals to students. The Tribunal deemed this a normal transaction not covered by sec.11(5) of the Act, rejecting the AO's contentions regarding the utilization of gold coins.

5. Utilization of Loan Funds:
The AO's contention that loan funds were utilized for various purposes was rejected by the AR, stating no prohibition in the Income Tax Act for availing loans from financial institutions. The Tribunal agreed with the AR, dismissing the AO's contentions as devoid of merit.

6. Violation of Provisions of Section 11(5), 13(1)(c), 13(3)(a), and 13(1)(d) of the Act:
The Tribunal reviewed the violations under sections 11(5), 13(1)(c), 13(3)(a), and 13(1)(d) of the Act. It found that the appellant trust had indeed violated the provisions of section 13(1)(c) and 13(1)(d), leading to the reversal of the CIT(A)'s decision and restoration of the assessment order.

In conclusion, the Tribunal allowed the appeal of the revenue, reversing the CIT(A)'s decision and restoring the assessment order based on the violations of specified sections of the IT Act.