2022 (6) TMI 1444 - AT - Income Tax

Educational trust wins exemption under section 10(23C)(iiiad) as section 13 violations don't apply to section 10 exemptions

The ITAT Amritsar allowed the appeal of an educational trust operating a Bachelor of Education college recognized by Jammu University. The AO had denied ... Exemption u/s 10(23C) - Violation of provisions of sections 13(1)(c), 13(2)(a), 13(2)(b), 13(2)(d) and 13(2)(g) - assessee trust made advances [interest free] to two persons who were trustees and settlers - HELD THAT:- In instant case the assessee is imparting education and has set up a College for Bachelor in Education and is duly recognized by the Jammu University. All its income is routed through the said University where the students are allotted by the said University. All the expenses have been incurred on the objects of the institution for education and no part thereof has been incurred on any other object whatsoever. In the present case, the AO while rejecting the exemption claimed by the trust u/s 10(23C) (iiiad) has invoked the provisions of sections 13(1)(c), 13(2)(a), 13(2)(b), 13(2)(d) and 13(2)(g) of the Act. In this connection it is pertinent mention that section 13 starts with the words, ‘Nothing contained in section 11 or section 12 shall operate as to’. This shows and makes it clear that the provisions contained in section 13 govern section 11 and section 12 of the Act and not section 10. These provisions are contradictory to each other. Section 13(1)(c) applies to application of income and property to specified persons. Sections 13(2)(a), 13(2)(b), 13(2)(d) and 13(2)(g) govern the provisions of lending, property made available for use, any service is made available and if any income is diverted respectively. The AO and the Ld. CIT(A) has not come to any conclusive finding as to what particular clause has been violated and as to how the same has been violated. In the absence of any such findings by the AO, the withdrawing of exemption was not in accordance with law. In the above view, we hold that the Ld. CIT (Appeals), was not justified, in confirming the finding of the AO against law, regarding rejecting the exemption claimed of the Assessee Trust under section u/s 10(23C) (iiiad) - Decided in favour of assessee. Issues Involved:1. Rejection of exemption claimed under section 10(23C) of the Income-Tax Act, 1961.2. Invocation of provisions of section 13 of the Income-Tax Act, 1961.3. Disallowance of interest amounting to Rs. 1,96,496/-.4. Charging of interest under sections 234A, 234B, and 234C of the Income-Tax Act, 1961.Issue-wise Detailed Analysis:1. Rejection of Exemption Claimed under Section 10(23C) of the Income-Tax Act, 1961:The assessee, an educational trust, claimed exemption under section 10(23C)(iiiad) for the Assessment Years 2005-06 to 2008-09. The Assessing Officer (AO) rejected the exemption, citing advances made to trustees without adequate security or interest, violating sections 13(1)(c)(ii) and 13(d)(i) read with sections 13(2) and 13(3). The AO added the exempted amount to the income of the trust and taxed it accordingly.The CIT(A) confirmed the AO's decision, stating that the trust's interest-free advances to trustees violated the provisions of section 13, thereby denying the exemption under section 10(23C). The CIT(A) referenced Circular No. 712, which was withdrawn, and emphasized the need for compliance with the investment modes specified under section 11(5).The Tribunal, however, noted that section 10(23C)(iiiad) provides exemption for educational institutions with annual receipts below one crore without any conditions. The Tribunal referenced Circular No. 772, which clarified that income of educational institutions below one crore is exempt without restrictions. The Tribunal also cited the case of 'Commissioner of Income-Tax Versus SEETHAKATHI TRUST,' where it was held that exemption under section 10(22) cannot be denied based on violations of section 11(5).The Tribunal concluded that the provisions of section 13 govern sections 11 and 12, not section 10. Therefore, the AO's and CIT(A)'s reliance on section 13 to deny exemption under section 10(23C) was incorrect. The Tribunal set aside the CIT(A)'s order and allowed the exemption claimed by the assessee.2. Invocation of Provisions of Section 13 of the Income-Tax Act, 1961:The AO invoked sections 13(1)(c), 13(2)(a), 13(2)(b), 13(2)(d), and 13(2)(g) to deny the exemption, alleging that the trust's advances to trustees violated these provisions. The CIT(A) upheld this view, asserting that the trust's funds were not utilized exclusively for educational purposes.The Tribunal clarified that section 13 applies to sections 11 and 12, not section 10. The AO and CIT(A) failed to conclusively demonstrate specific violations of section 13 provisions. The Tribunal held that the AO's invocation of section 13 to deny exemption under section 10(23C) was legally unfounded.3. Disallowance of Interest Amounting to Rs. 1,96,496/-:The AO disallowed interest of Rs. 1,96,496/- on the grounds that the trust made interest-free advances to trustees, violating section 13. The CIT(A) confirmed this disallowance.The Tribunal, however, found that the AO's disallowance was based on the incorrect application of section 13 to section 10(23C). Since the trust was entitled to exemption under section 10(23C), the disallowance of interest was unjustified. The Tribunal deleted the disallowance.4. Charging of Interest under Sections 234A, 234B, and 234C of the Income-Tax Act, 1961:The assessee contested the charging of interest under sections 234A, 234B, and 234C, arguing that no reasonable opportunity was provided before charging the interest. The CIT(A) upheld the interest charges.The Tribunal did not specifically address this issue, but by allowing the exemption under section 10(23C) and deleting the additions, the basis for charging interest under sections 234A, 234B, and 234C was effectively nullified.Conclusion:The Tribunal allowed the assessee's appeals, set aside the CIT(A)'s order, and deleted the additions made by the AO for the Assessment Years 2005-06 to 2008-09. The Tribunal held that the assessee trust was entitled to exemption under section 10(23C)(iiiad) and that the AO's and CIT(A)'s reliance on section 13 to deny the exemption was legally incorrect.