2022 (8) TMI 1572 - AT - Income Tax

Revenue's appeal dismissed after AO verified no advantage given to specified persons under section 13(3)

The Income-tax Officer (Exemption) Ward 2 (1), Mumbai Versus Sai Shiva Educational Trust And (Vice-Versa)

The ITAT Mumbai dismissed the Revenue's appeal regarding denial of exemption under section 11. The assessee had granted interest-free advances to persons ... Denial of exemption u/s 11 - interest-free advances have been granted to the persons covered u/s 13(3) of the Act - AO the remand report after verifying the documents furnished by the assessee has categorically stated that no direct benefit or advantage had been given to the persons specified u/s 13(3) - HELD THAT:- AO himself has verified these facts and accepted that there is no direct benefit or advantage to the person specified u/s 13(3). In such circumstances, there is no need to restore the matter back to the file of the AO. AO himself has accepted that no advantage has been passed on to the specified persons u/s 13(3) of the Act still the AO has filed the appeal on the same issue. This action of the AO is not justified unless same is not bonafide. Before us, the Revenue has nowhere said anything on the bonafide of the AO while sending the remand report. No error in the order of the Ld. CIT (A) on the issue-in-dispute and accordingly, we uphold the same. Appeal filed by the Revenue dismissed. The core legal questions considered by the Tribunal in this appeal revolve around the applicability of exemption under section 11 of the Income-tax Act, 1961, specifically concerning the treatment of interest-free advances made by a charitable trust to a private company in which trustees have substantial interest. The issues include:Whether the appellate authority erred in granting relief to the assessee by relying on a prior appellate order that was set aside for de novo adjudication.Whether the provisions of section 13(1)(c)(ii) of the Act apply when interest-free advances are made to persons specified under section 13(3), particularly trustees or their related concerns.Whether the property or funds of the trust were used directly or indirectly for the benefit of the private company related to the trustees, thereby violating section 13(1)(c)(ii).Whether the agreements and purported construction activities were a facade to enable use of trust funds without interest, indicating misuse of charitable funds.Whether the assessing officer's addition to income was justified, considering the facts and evidence.Cross-objection issues raised by the assessee concerning procedural compliance in reopening the assessment, jurisdictional validity of notices, and allowance of deductions under section 11.Issue-wise Detailed Analysis1. Reliance on Prior Appellate Order and Its ValidityThe Revenue contended that the CIT(A) erred in granting relief by relying on an appellate order dated 29.05.2011 for AY 2008-09, which the ITAT had set aside for de novo adjudication. The Revenue argued that since the prior order was no longer in existence, it could not be relied upon for the current assessment year 2006-07.The Tribunal noted that the CIT(A) had not merely relied on the earlier appellate order but had also considered additional evidence filed by the assessee and had sought a remand report from the Assessing Officer. The Assessing Officer, after examining the documents including land agreements and Memorandum of Understanding (MOU) with Ritika Hotels Pvt. Ltd., submitted a remand report confirming that no direct benefit or advantage was conferred upon the trustees or related persons under section 13(3).The Tribunal emphasized that the Assessing Officer's own verification and acceptance of no direct benefit obviated the need to restore the matter back for reassessment. The Tribunal held that the CIT(A)'s approach was factually and legally sound, and the reliance on prior orders was supplemented by fresh evidence and findings.2. Applicability of Section 13(1)(c)(ii) and Section 13(3)The Revenue argued that the provisions of section 13(1)(c)(ii) apply because the trustees of the trust were also directors of the private company (M/s Ritika Hotels Pvt. Ltd.), and thus the interest-free advances amounted to indirect benefit to persons specified under section 13(3), which disqualifies exemption under section 11.The Tribunal referred to the remand report and the MOU which stated that the developers were entitled to retain a portion of the building for their exclusive use but found no evidence of direct benefit or advantage to the trustees themselves. The Tribunal relied on the principle that application of section 13(1)(c)(ii) requires proof that the trust property or income is used for the benefit of specified persons.It was found that the advances were made towards purchase of vacant land for the trust's use, and no evidence was brought on record to prove misuse or benefit to trustees. The Tribunal held that mere identity of trustees as directors in the company does not automatically trigger section 13(1)(c)(ii) unless misuse is established.3. Use or Application of Trust Property for Benefit of Private CompanyThe Revenue contended that the trust property was used for the benefit of Ritika Hotels Pvt. Ltd. by way of advances for construction of a school building, which had not commenced, and the agreements were a ruse to use trust funds interest-free.The Tribunal analyzed the evidence including agreements and the remand report. It found no material to conclude that the advances were misused or that the school construction was a sham. The Assessing Officer's report stated that no direct benefit was given to the trustees or the company beyond the agreed terms.The Tribunal underscored that the absence of evidence showing that the trust's property was diverted for personal gain or misuse is fatal to the Revenue's claim under section 13(1)(c)(ii).4. Validity of Addition and Assessment ProceedingsThe Revenue challenged the deletion of addition made by the Assessing Officer, urging that the AO's findings in assessment and remand proceedings were ignored.The Tribunal found that the Assessing Officer himself, after examining the evidence, had concluded no direct benefit to trustees or related persons. The Tribunal observed that the Assessing Officer's subsequent appeal on the same issue without contesting the remand report's findings was not justified unless shown to be mala fide, which the Revenue failed to demonstrate.5. Procedural Compliance and Cross-Objections Raised by the AssesseeThe assessee's cross-objection raised issues regarding procedural lapses in reopening the assessment, including non-compliance with section 151(2) (recording of reasons for reopening), non-service of notice under section 143(2), and failure to provide opportunity before passing ex parte orders under section 144(1).The Tribunal noted that these procedural objections were not pressed before it and were thus dismissed as infructuous. However, the issues highlight the importance of adherence to principles of natural justice and statutory requirements in reassessment proceedings.The assessee also argued that the Assessing Officer erred in not allowing deductions for expenses incurred for the trust's objects and inappropriately including gross receipts as income. This issue was not elaborated upon in the Tribunal's order, indicating no substantial dispute on this point at this stage.Significant HoldingsThe Tribunal held that:'No evidence has been brought on record against the appellant to prove that the provisions of Section 13(1)(c)(ii) could be applied to the appellant's case. Appellant had clearly established that the advances made to the trustee Shri. Arun Kumar Muchhala was towards purchase of vacant plot/land for the use of the trust.'The Tribunal established the core principle that the mere identity of trustees as directors in a private company receiving interest-free advances does not ipso facto attract disqualification under section 13(1)(c)(ii); rather, tangible evidence of benefit or advantage to specified persons is necessary.The Tribunal also clarified that reliance on prior appellate orders set aside for de novo adjudication must be supplemented by fresh evidence and findings, and where the Assessing Officer himself accepts no misuse, restoration of the matter is unnecessary.On procedural grounds raised by the assessee, the Tribunal dismissed the cross-objections as not pressed, implicitly affirming the need for strict compliance with statutory provisions in reopening and reassessment.In conclusion, the Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s order granting exemption under section 11, affirming that the trust's advances did not violate provisions disqualifying exemption and that procedural compliance was maintained to the extent contested.