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TMI Blog2021 (2) TMI 640X X X X Extracts X X X X X X X X Extracts X X X X ..... it of any person referred to sub-section (3) of section 13 of the Act. AO was erred in denying the benefit of exemption u/s.11 of the Act, to the trust for contravention of provisions of section 13(1)(c) of the Act. The ld.CIT(A) although has accepted the arguments of the assessee, in so far as advance given to M/s. Star Educational Trust and Shri M.G. Bharathkumar, but in so far as advance given to M/s. Mahaajay Spinners India Pvt. Ltd., held that said advance was violative of section 13(1)(c) of the Act, without assigning any reasons - in so far as three advances considered by the ld AO, there is no violation of section 13(1)(c) of the Income Tax Act, 1961 and accordingly, there is no reason to deny exemption u/s 11 of the Act, to income of the trust. Hence, we direct the ld. AO to allow the benefit of exemption u/s.11 of the Act, as claimed by the assessee. - Decided in favour of assessee. - ITA Nos. 125 & 126/CHNY/2019 CO Nos. 18 & 19/CHNY/2019 - - - Dated:- 11-2-2021 - SHRI DUVVURU RL REDDY , JUDICIAL MEMBER AND SHRI G. MANJUNATHA , ACCOUNTANT MEMBER Assessee by : Shri N. V. Balaji , Advocate Revenue by : Shri G. Chandrababu , Addl.CIT ORDER Per G. MA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will continue and the assessee is treated as an Association of persons and has to be taxed accordingly at normal rates. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned CIT (Appeals) may be set aside anti that of the Assessing officer may be restored. 3. The assessee has raised common grounds of cross objections for both assessment years. Therefore, for the sake of brevity, grounds of cross objection filed for assessment year 2011-12 are reproduced as under:- 1. The order of the assessing officer and Commissioner of Income Tax (Appeals) [ CIT (A) ] is against the facts and circumstances of the case, law and the principles of equity and nature justice. 2. The CIT (A) erred in holding that the payments made by the appellant trust to M/s Star Educational Trust, Mr Bharath Kumar and M/s Mahaajay Spinners India Private Limited are not eligible for deduction under section 11. 3. The CIT (A) officer failed to appreciate that the monies paid by the appellant trust to M/s Star Educational Trust was in furtherance of the objects of the appellant trust and therefore is application of income of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed benefit to the persons specified u/s.13 (1)(c) of the Act, by allowing various loans and advances to trustees or companies, in which trustees are interested, thereby violated provisions of section 13(1)(c) of the Act and hence, called upon the assessee, to explain as to why exemption claimed u/s.11 of the Act cannot be rejected. In response to show- cause notice, the assessee submitted that it has not allowed any benefit either to trustees or companies, in which trustees are interested, which violates provisions of section 13(1)(c) of the Act. But, the amount specified in the show-cause notice including a sum of ₹ 10,24,860/- paid to Shri M.G. Bharathkumar, Founder trustee and the Chairman of the trust is amount paid to M/s Star Educational Trust, a charitable trust which is engaged in imparting education and hence, the same cannot be considered as loan or advance given to the trustee in contravention to provisions of section 13(1)(c) of the Act. Similarly, the trust has given a sum of ₹ 1,88,59,716/- to M/s. Star Educational Trust for the purpose of imparting education to help said trust to tide over its financial crisis for running the institution smoothly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s India Pvt. Ltd., the ld.AO observed that although the assessee has justified advance given to the above company on the ground that, when the trust was in need of finance, the company had stood guarantors for the loan taken by the trust by mortgaging their properties, but fact remains that the amount given to M/s. Mahaajay Spinners India Pvt. Ltd., has been issued in favour of Shri M.G. Bharathkumar, the Director of the company. From the above, it shows that the trust has given benefit to interested persons in contravention of section 13(1)(c) of the Act and accordingly, the ld.AO opined that there is a clear violation of section 13(1)(c) of the Act by giving benefit to interested persons and hence rejected exemption claimed u/s.11 of the Act and assessed excess of income over expenditure for tax. The AO, further noted that, although the assessee has taken an alternative stand in light of certain evidences that advance given to M/s. Mahaajay Spinners India Pvt. Ltd., is for supply of uniform and coats, but the circumstances which compel the assessee to pay such advance to the company for supply of lab coat has not been explained. Making advance to a company, which retain such mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imparting education. Similarly, advance made to M/s. Mahaajay Spinners India Pvt. Ltd., it was submitted that said amount has been given for supply of uniform and coats to students of institutions, for which necessary procedure and due diligence has been followed, where a competitive quotations have been obtained from various suppliers and M/s. Mahaajay Spinners India Pvt. Ltd., was considered to be least bidder for supply of uniforms and coats. Further, considering the least bid, an advance amount has been given for which they have supplied uniforms and coats in the subsequent financial year. Therefore, advance given in the normal course of activities of the trust to a company in which the trustees of the trust are Directors cannot be said as direct or indirect benefit allowed to the interested persons. 7. The ld.CIT(A) after considering relevant submissions of the assessee and also by following the decision of Hon ble Jurisdictional High Court of Madras in the case of CIT vs. Working Women s Foum [2014] 365 ITR 0353, which was subsequently affirmed by the Hon ble Supreme Court by dismissal of SLP filed by the Department, held that denial of exemption for violation of provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, viz., 2011- 12, the appellant has advanced ₹ 4,84,944/- only. The table showing year wise closing balances of advances to the M/s Star Educational trust is as under: A.Y. Closing balance (Rs.) 2006-07 231938 2007-08 14803705 2008-09 18443214 2009-10 18376224 2010-11 18151574 2011-12 18636518 Similarly, the payment of ₹ 10,24,860/- which was made through Shri M.G. Bharathkumar to the M/s Star Educational.Trust is also made during the A.Y. 2007-08. The appellant argued that both transactions were already disclosed in the return of incomes filed for the respective assessment years and it was considered by the A.O. in the scrutiny assessment for these years. However, ₹ 50,50,000/- to Mahaajay Spinners India (P) Ltd., was advanced during current A.Y. This payment has been considered to be violation of section 13 of the Act.7.1 Further, the appellant has s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounder trustee of the trust, advance given to M/s. Star Educational Trust and advance given to M/s. Mahaajay Spinners India Pvt. Ltd., were violative of section 13(3) of the Act, because said advances were given without charging adequate interest or adequate security in terms of section 13(2)(a) of the Act and continues to remain invested during the previous year within the meaning of section 13(2)(h) of the Act, thereby benefitting such specified persons as per the provisions of section 13(1)(c) of the Act. The ld.DR, further referring to the findings of the ld.CIT(A) submitted that as per section 164(2) of the Act, in case where exemption is denied u/s.13(1)(c) or 13(1)(d) to the trust, tax shall be charged on the relevant income or part of relevant income on which exemption is denied at the maximum marginal rate, but the exemption u/s.11 in respect of all other incomes denied due to operation of section 13 will continue and the assessee is treated as an Association of persons and has to be taxed accordingly at normal rates. 9. The ld.AR on the other hand strongly supporting order of the CIT(A), submitted that except to the extent of considering advance given to M/s. Mahaajay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er consideration, the income of the trust has been directly or indirectly allowed for the benefit of persons specified in section 13(3) of the Act. The AO, further observed that as per the provisions of section 13(1)(c)(ii) of the Act, if any part of income or any property of the trust is used or applied directly or indirectly for the benefit of any persons referred to sub- section (3) of section 13 of the Act, then the trust will lose the benefit of exemption provided u/s.11 of the Act to whole income. The AO has considered three advances for coming to a conclusion that the trust has allowed direct or indirect benefit to the interested persons referred to section 13(3) of the Act, as per which, advance given to M/s. Star Educational Trust has been considered to be violation of section 13(1)(c) of the Act. Similarly, the AO has considered advances given to Shri M.G. Bharathkumar, Managing Trustee of the trust as violative of section 13(1)(c) of the Act. Likewise, the AO has considered advance given to M/s. Mahaajay Spinners India Pvt. Ltd., is also in contravention of section 13(1)(c) of the Act. According to AO, all 3 transactions are clearly diversion of funds in contravention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he SLP filed by the Revenue and affirmed the findings of the Hon ble Jurisdictional High Court of Madras. The CIT(A), after considering the relevant provisions has rightly held that only amounts that have been diverted by the assessee trust can only be assessed to tax at the maximum marginal rate. Accordingly, we do not find any infirmity in the findings of the CIT(A) and hence, the same is upheld. 12. Having said so, let us examine in the given facts and circumstances of the case is there any violation of provisions of section 13(1)( c) of the Act, to deny the benefit of exemption u/s ii of the Act. The AO has considered advances given to M/s. Star Educational Trust as violative of section 13(1)(c) of the Act, on the sole ground that said trust was not registered u/s.12A of the Act. Except this, the AO has not denied the fact that the objects of M/s. Star Educational Trust is charitable in nature and said trust was imparting education by establishing various educational institutions. Once, the objects of the trust are charitable in nature and it is carrying out its activities according to is objects, then the mere fact that said trust is not registered u/s.12A of the Act, does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, merely for the reason that advance given to another charitable trust was routed through the account of the trustee, the genuine advance given for education purpose cannot be considered as diversion of funds of the trust to an interested person. Thus, in our view advance given to M G Bharat Kumar is not violative of section 13(1)(c) of the Act. 14. As regards advance to M/s. Mahaajay Spinners India Pvt. Ltd., although the AO has considered said advance as violative of section 13(1)(c) of the Act, but fact remains that said advance was given to the company for the purpose of supply of uniforms and coats to the students of the institution. We, further observe that before giving advance, the assessee has conducted due diligence and also followed due procedure of purchase by obtaining necessary quotations from the suppliers as per which M/s. Mahaajay Spinners Pvt. Ltd., was the least bidder. Considering the fact that the company has quoted least price for supply of uniforms and coats, the assessee has given advance of ₹ 50,50,000/-. The said advance was adjusted against the bills issued by the company for supply of uniforms and coats. The assessee has also placed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 13(1)(d) of the Act applies in respect of investment or deposit made by the trust in contravention of section 11(5) of the Act, but it does not apply to a case of advance for supplies to be made, in the normal course of activity of the trust. Therefore, we are of the considered view that advance made to M/s. Mahaajay Spinners India Pvt. Ltd., for supply of uniforms and lab coats for the students and faculties would not be covered and resulting in any benefit directly or indirectly, so as to attract provisions of section 13(1)(c) of the Act. Further, the same not being investment or deposit also does not attract section 13(1)(d) of the Act. 16. Further, the Act prohibits persons specified under section 13(3) to get direct or indirect benefit from the trust or institution claims exemption u/s 11 of the Act. The specified persons cannot use funds or property of the trust for their personal purpose. As per clause (c) of sub.sec (1) of section 13, if any part of income or any property of the trust or the institution, is used or applied directly or indirectly for the benefit of any person referred in sub. Section (3), then the trust is not entitled to exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - free temporary loan by one society to another society having similar objects, whose president was brother of president of assessee- society, would not amount to an investment or a deposit attracting section 13(1)(d) of the Act. The Hon ble Delhi High Court, in yet another decision in the case of CIT v. HPS Social Welfare Foundation, [2010] 235 CTR 330, held that in absence of any material before Assessing Officer to show that funds given by assessee-trust to NGOs were used for personal benefits, he was not justified in denying exemption under section 11 to assessee on that ground. 17. In this case, on perusal of facts available on record, it is abundantly clear that advance given to M/s. Star Educational Trust and Shri M.G. Bharathkumar, were ultimately used by M/s. Star Educational Trust for the purpose of imparting education and there was no finding of fact from the authorities that any part of income was directly or indirectly benefited to the persons specified u/s.13(3) of the Act. As regards, advance given to M/s. Mahaajay Spinners India Pvt. Ltd., the evidence brought on record clearly indicate that said advance was given in the normal course of activity of the trust ..... X X X X Extracts X X X X X X X X Extracts X X X X
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