2021 (7) TMI 773 - AT - Income Tax

Ruling finds interest-free advances not 'benefit' under s.13(3)/(1)(c); allows s.11 exemption, directs s.11(2) accumulation decision

M/s. Jaya Educational Trust Versus The DCIT, Central Circle 1 (2), Chennai.

ITAT CHENNAI - AT held that interest-free advances to two consultants did not amount to benefit to persons under s.13(3)/(1)(c), so the AO erred in ... Denial of tax exemption computation u/s 11 - taxability of income at maximum marginal rate, as per proviso to section 164(2) - interest free loans to interested persons - AO had denied the benefit of exemption u/s.11 for the reason that during the year under consideration, the income of the trust has been directly or indirectly allowed for the benefit of persons specified in section 13(3) - assessee has not filed return of income on or before due date specified u/s.139 (1) but said returns have been filed on or before due dates specified u/s.139(4) - only allegation is that the trust has given loans to two persons without any security or interest and further said persons are in the nature of managers by whatever name called as referred to u/s 13(3)(cc) of the Act, and thus, said payments violates sections 13(1)(c ) - HELD THAT:- It is clear that interest free advance given to two individuals is not a beneficial / gracious payment made to persons referred to u/s 13(3) of the Act and thus, the same cannot be treated as payment in contravention to section13(1)(c) of the Act. As regards observations of the AO that the assessee has given benefit to the interested persons without any interest or security, we find that said finding of the AO is not on sound footing, because the AO has proceeded on the assumption that the assessee has lent the sum. The transactions between the trust and the consultants was under normal circumstances as a prudent businessman and hence question of charging interest or taking a security against such advance does not arise. Therefore, we are of the considered view that loans given to two consultants would not covered u/s 13(3)(cc ) and thus, not resulting in any benefit directly or indirectly to interested persons so as to attract provisions of section 13(1)(c) of the Act. Consequently, on this ground the benefit of exemption u/s.11 of the Act cannot be denied to the assessee for Asst. year 2012.13, 2013-14 and 2016-17 and 2017-18. Assessment years 2016-17 and 2017-18 AO has denied benefit of exemption u/s.11 of the Act to total income of the Trust on the ground that there is violation referred to u/s.13(1)(c) insofar as, loans given to two individuals - In order to get the benefit of accumulation of income u/s 11(2) of the Act, the assessee is required to file Form No.10 along with return of income before the due date specified u/s.139(1) of the Act. In this case, the assessee has filed Form No.10 electronically for assessment year 2016-17 on 17.10.2016, which is before the extended due date for filing the return of income. Similarly, the assessee has filed Form No.10 electronically on 30.10.2017, which is the extended due for filing the return of income for assessment year 2017-18. However, the assessee has not filed the return of income for both assessment years on or before due date for filing the return of income u/s 139(1) We are of the considered view that the assessee is entitled for exemption u/s 11 of the Act in respect of total income for the assessment years 2012-13 and 2013-14 because there is no violations as referred to u/s.13 (1)(c) r.w.s 13(2) of the Act. Hence, we direct the AO to allow exemption u/s 11 for Asst. year 2012-13 and 2013-14. As regards assessment years 2016-17 and 2017-18, insofar as exemption u/s.11 of the Act is concerned, the assessee is entitled for such exemption because there is no violations as referred to u/s.13(1)(c) of the Act. In this case, the assessee has given reasons for not filing return of income within due date specified u/s.139(1) of the Act, as per which the person in-charge of finance and accounts was suffering from chronic disease and was undergoing medical treatment. Further, due to the person’s ill-health, the Trust could not finalize accounts within reasonable time which caused 5 months delay in filing return of income for the relevant assessment years. In our view reasons given by the assessee are bonafide, and hence, we are of the considered view that the authorities concerned are required to condone the delay in filing return of income. As per provisions of section 119(2b) Act, the authority competent to condone the delay in filing return of income is the Pr.CIT. Admittedly, the assessee has filed a petition before the competent authority for condoning the delay in filing return of income. In this case, although the assessee has not filed return of income on or before due date specified u/s.139 (1) of the Act, but said returns have been filed on or before due dates specified u/s.139(4) of the Act. The assessee has filed Form No.10 electronically on or before due date specified u/s.139 (1) of the Act. Insofar as non-filing of return of income u/s.139(1) of the Act, the assessee has moved a petition before the competent authority in terms of CBDT Circular No.6 of 2020 and such application is pending for disposal. Therefore, we are of the considered view that when the assessee has filed return of income on or before due date specified u/s.139 (4) of the Act and claimed accumulation of income by filing Form No.10 before completion of assessment, then the AO should not have rejected exemption claimed by the assessee for accumulation of income u/s.11 (2) of the Act. However, since the matter is pending before the competent authority i.e., Pr.CIT, Central-1 for condonation of delay in filing return of income, we are leaving the issue to the discretion of the authorities concerned for condoning the delay. We are of the considered view that the assessee is entitled for exemption u/s11 of the Act in respect of total income for the assessment years 2012-13 and 2013-14 because there is no violations as referred to u/s.13 (1)(c) r.w.s 13(2) of the Act. Hence, we direct the AO to allow exemption u/s 11 for Asst. year 2012-13 and 2013-14. As regards assessment years 2016-17 and 2017-18, insofar as exemption u/s.11 of the Act is concerned, the assessee is entitled for such exemption because there is no violations as referred to u/s.13(1)(c) of the Act. But, in respect of accumulation of income u/s.11(2) of the Act, we direct the AO to consider the issue after taking note of outcome of petition filed by the assessee before the Pr.CIT, Central-1 for condonation of delay in terms of CBDT Circular No.6 of 2020 and also by considering ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. Nagpur Hotel Owners Association [2000 (12) TMI 99 - SUPREME COURT] - Decided partly in favour of assessee statistically. Issues Involved:1. Denial of tax exemption under Section 11 due to alleged violations of Section 13(2) and Section 13(3) of the Income Tax Act.2. Classification of consultants as employees/managers under Section 13(3)(cc).3. Misreading of contract terms and its impact on tax exemption.4. Application of Section 13(3)(e) concerning substantial interest in a trust.5. Taxability of income at the Maximum Marginal Rate (MMR) under Section 164(2).6. Disallowance of interest paid on behalf of another trust.7. Filing of Form No.10 and its impact on exemption under Section 11(2).Detailed Analysis:1. Denial of Tax Exemption under Section 11:The assessee, a public charitable trust registered under Section 12AA, claimed tax exemption under Section 11 for various assessment years. The Assessing Officer (AO) denied this exemption, alleging violations of Sections 13(1)(c) and 13(2) due to interest-free loans given to two individuals, Shri K. Venkat Reddy and Smt. Subashini Vijayaragavan. The AO argued these loans constituted direct/indirect benefits to persons specified under Section 13(3), thus disqualifying the trust from exemption.2. Classification of Consultants as Employees/Managers:The AO classified the two individuals as managers under Section 13(3)(cc), based on their roles described in their appointment letters, which included tasks related to administration and project management. The CIT(A) upheld this view, considering their functions akin to managerial duties, thus bringing them under the ambit of Section 13(3)(cc).3. Misreading of Contract Terms:The assessee contended that the AO misread the terms of the contract, arguing that the individuals were consultants, not managers. They were hired for specific tasks related to setting up a medical college and obtaining deemed university status, without involvement in the trust's day-to-day operations. The Tribunal agreed with the assessee, noting that the individuals' roles were limited to consultancy services and did not amount to managerial functions.4. Application of Section 13(3)(e):The AO also argued that the transactions were hit by Section 13(3)(e) because the loans were given without interest or security, benefiting persons with substantial interest in the trust. The Tribunal found no merit in this argument, noting that the loans were given under contractual obligations and were not gratuitous payments.5. Taxability of Income at Maximum Marginal Rate (MMR):The AO taxed the trust's entire income at the MMR under Section 164(2), citing violations of Section 13(1)(c). The Tribunal disagreed, referencing judicial precedents that restrict the application of MMR to the income portion violating Section 13(1)(c), not the entire income. The Tribunal directed the AO to tax only the income portion violating the provisions.6. Disallowance of Interest Paid on Behalf of Another Trust:The AO disallowed interest paid by the assessee on behalf of another trust, misunderstanding it as interest paid to another trust. The Tribunal clarified that the payment was within the trust's objects and should not be disallowed.7. Filing of Form No.10 and Its Impact on Exemption:For assessment years 2016-17 and 2017-18, the AO denied exemption under Section 11(2) due to the late filing of Form No.10. The Tribunal noted that the assessee filed Form No.10 within the extended due dates but filed returns late due to the secretary's medical issues. The Tribunal directed the AO to consider the petition for condonation of delay and allow exemption if the petition is accepted.Conclusion:The Tribunal allowed the appeals for assessment years 2012-13 and 2013-14, granting exemption under Section 11. For assessment years 2016-17 and 2017-18, the Tribunal directed the AO to consider the outcome of the petition for condonation of delay before deciding on the exemption under Section 11(2).