2015 (7) TMI 1447 - AT - Income Tax

Tax Exemption Challenged: Trustees' Interest-Free Advances Prompt Comprehensive Review of Trust's Objectives and Potential Indirect Benefits

Addl. Director of Income Tax (Exemption) Circle-1 (2), Mumbai Versus Sai Shiva Educational Trust

The SC remanded the case back to the lower tribunal, finding the previous order insufficiently substantiated. The key issues involved tax exemption under ... Denial of exemption u/s 11 - interest free advance given by the assessee trust to the related parties / trustees was not for the benefit of any trust - HELD THAT:- Certain questions still remain unanswered and assessee could not show any material to find answers of these questions e.g., what happened to the advance and whether any such or any other property was actually purchased, or whether the advance was returned, or the same was squared off, or it was adjusted against some other property and whether the property proposed to be purchased was of any use for the assessee trust, etc. All these facts need to be analysed and only then appropriate decision can be taken to decide the issue whether the interest free advance was for the benefit of trust or was for the benefit of the trustee. CIT(A), while adjudicating this issue, has not passed a speaking order and has not given any such facts or referred to any such evidence in support of the contentions of the assessee. In our opinion, this issue deserves to be restored to the file of the CIT (A) for denovo adjudication after examining all the evidences which the assessee may place before the CIT (A) to decide the issue with the help of actual facts and figures, as to whether the interest free advance was given for the benefit of the assessee trust, or for the benefit of the trustees. The questions that came to our mind some of which have been referred to herein above, need to be answered with the help of evidences and in addition to that the learned CIT (A) is free to call for any other details / evidence to decide the issue as per law and facts. We thus set aside the impugned order passed by the Commissioner (Appeals) and allow ground no.1, raised by the Revenue for statistical purposes. Addition of sum to the building funds which had not been expended but was taken to the Balance Sheet and credited to the building funds - According to AO this was merely a book entry and not actual expenditure - CIT (A) has deleted the addition on the ground that the assessee filed application in Form no.10, along with a copy of resolution of the members of the trustees for accumulation of income as required by law - Since we have restored the issue of exemption to the file of the learned CIT(A), in our considered opinion, this issue also needs to be restored to the file of the learned CIT (A) for deciding the issue afresh by passing a speaking order after deciding the issue raised in ground no.1 as aforesaid. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the exemption under section 11 of the Income Tax Act is rightly denied by the Assessing Officer on the ground that the assessee trust gave interest-free advances to related parties/trustees, thereby contravening section 13(3) of the Act and resulting in ineligibility for exemption under section 11.(b) Whether the deletion of the addition of Rs. 1,35,00,000 made by the Assessing Officer on account of transfer to building funds, which was not actually expended but credited in the balance sheet, was justified.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Eligibility for exemption under section 11 in light of interest-free advances to related partiesRelevant legal framework and precedents: Section 11 of the Income Tax Act provides exemption to income derived from property held for charitable or religious purposes. Section 13(3) prohibits an entity from directly or indirectly benefiting any person referred to therein (such as trustees or their relatives) by way of income or assets, failing which exemption under section 11 is denied. The Assessing Officer invoked section 13(3) on the basis that interest-free advances were made to trustees and related parties, thereby constituting a violation.Court's interpretation and reasoning: The Assessing Officer held that giving interest-free advances to parties covered under section 13(3) amounted to diversion of income for the benefit of trustees, and thus exemption under section 11 was not available. The Commissioner (Appeals), however, reversed this view, reasoning that the advances were given for acquisition of land and building as per an agreement, and therefore were not for the personal benefit of trustees but for the trust's objects. The CIT(A) concluded that exemption under section 11 should be allowed.Key evidence and findings: The Assessing Officer's finding was based on the fact that advances were interest-free and given to trustees and related companies without any surety, suggesting indirect benefit. The CIT(A) relied on the assessee's assertion that advances were for purchase of property but did not elaborate on or verify evidentiary support such as whether the property was actually acquired, the advances returned, adjusted, or the utility of the property to the trust.Application of law to facts: The Tribunal found that the CIT(A)'s order was non-speaking and lacked evidentiary support. Several critical questions remained unanswered, including the fate of the advances, the actual purchase of property, and whether the property benefited the trust. Without these facts, it was not possible to determine if the advances were indeed for trust purposes or constituted indirect benefit to trustees, contravening section 13(3).Treatment of competing arguments: The Revenue argued that the CIT(A) failed to provide a reasoned order supported by facts and evidence, and that the onus was on the assessee to prove that the advances were not for the trustees' benefit. The assessee contended that advances were for land acquisition, supporting exemption. The Tribunal held that the assessee had not discharged the evidentiary burden and that the CIT(A) had not examined the matter in sufficient detail.Conclusions: The Tribunal set aside the CIT(A)'s order and remanded the issue for de novo adjudication, directing the CIT(A) to consider all relevant evidence and facts to determine whether the interest-free advances were for the trust's benefit or for trustees, applying section 13(3) and section 11 accordingly.Issue (b): Deletion of addition relating to transfer to building funds without actual expenditureRelevant legal framework and precedents: The Assessing Officer made an addition of Rs. 1,35,00,000 on the ground that the amount transferred to building funds was a mere book entry and not an actual expenditure, which would disallow the claim under section 11.Court's interpretation and reasoning: The CIT(A) deleted the addition relying on the assessee's filing of Form No. 10 and a trustee resolution for accumulation of income as per the legal requirements. This indicated compliance with procedural requirements for accumulation under section 11(2).Key evidence and findings: The assessee submitted the requisite application and resolution for accumulation of income, which was accepted by the CIT(A). However, since the issue of exemption itself was remanded for fresh adjudication, the Tribunal opined that this issue should also be reconsidered in conjunction with the primary issue.Application of law to facts: The Tribunal held that since the question of exemption under section 11 was restored to the CIT(A) for fresh consideration, the issue of addition related to building funds also required reconsideration to ensure consistency and correctness in light of the final determination on exemption.Treatment of competing arguments: The Revenue challenged the deletion as the expenditure was not actual and was only a book entry. The assessee relied on procedural compliance for accumulation. The Tribunal did not decide on the merits but remanded the issue for fresh consideration.Conclusions: The Tribunal allowed the ground for statistical purposes and directed the CIT(A) to decide the issue afresh after deciding the primary issue of exemption.3. SIGNIFICANT HOLDINGSThe Tribunal emphasized the need for a speaking order supported by facts and evidence when dealing with exemption under section 11, especially where section 13(3) allegations of indirect benefit to trustees arise. It held:'Certain questions still remain unanswered and the learned Counsel for the assessee could not show any material to find answers of these questions e.g., what happened to the advance and whether any such or any other property was actually purchased, or whether the advance was returned, or the same was squared off, or it was adjusted against some other property and whether the property proposed to be purchased was of any use for the assessee trust, etc., etc. All these facts need to be analysed and only then appropriate decision can be taken to decide the issue whether the interest free advance was for the benefit of trust or was for the benefit of the trustee.'The Tribunal further stated that the CIT(A) is 'free to call for any other details / evidence to decide the issue as per law and facts.'The core principles established include:The exemption under section 11 can be denied if income or assets are diverted directly or indirectly for the benefit of trustees or related parties as per section 13(3).The burden lies on the assessee to prove that transactions with related parties are for the trust's objects and not for trustees' benefit.A non-speaking order lacking evidentiary support cannot sustain denial or grant of exemption.Issues of exemption and related additions must be decided consistently and on the basis of complete facts and evidence.On the final determinations, the Tribunal set aside the CIT(A) order allowing exemption and deleting addition, and remanded both issues for fresh adjudication after detailed examination of evidence, directing the CIT(A) to pass speaking orders addressing all relevant aspects.