Trust fund loans to a firm may not defeat exemption when backed by adequate security and adequate interest.

Section 13(2)(h) was applied on the footing that it targets investment of trust funds in a firm's capital, not a loan transaction. On that reasoning, a charitable trust could retain section 11 exemption if the funds were advanced on adequate security and for adequate interest, subject to factual verification by the Income-tax Officer. The alternative claim under section 10(22) was not examined because it had not been raised before the assessing authority and the primary relief was left undisturbed.

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Issues: Whether the assessee-trust was entitled to exemption under section 11 of the Income-tax Act, 1961 despite the deposit of trust funds with a firm in which the trustees were partners, and whether the claim of exemption under section 10(22) of the Income-tax Act, 1961 required adjudication.

Analysis: The dispute turned on the application of section 13(2)(h) of the Income-tax Act, 1961 to trust funds placed with a firm. The relevant view accepted in the order was that this provision was understood to apply to investment of trust funds in the capital of a firm and not to a loan transaction. On that basis, the assessee would remain entitled to section 11 exemption if the funds were advanced on adequate security and for adequate interest. The factual verification on these aspects was left to the Income-tax Officer. The alternative claim under section 10(22) was not examined, as the other relief was not interfered with and the issue had not been raised before the assessing authority in the first instance.

Conclusion: The assessee was held entitled to exemption under section 11, subject to verification of adequate security and adequate interest, and the alternative claim under section 10(22) was not decided.

Final Conclusion: The appellate challenge failed, and the exemption under section 11 stood sustained on the basis indicated by the lower appellate authority.

Ratio Decidendi: Section 13(2)(h) does not bar section 11 exemption where trust funds are advanced as a loan on adequate security and for adequate interest, as distinguished from an investment in the capital of a firm.

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