2024 (10) TMI 922 - AT - Income Tax

ITAT allows advances between trusts with common trustees under Sections 11-13, restores security deposits issue for fresh examination

Income Tax Officer, Ward (Exemption), Jodhpur Versus Rajasthan Vikas Sansthan

Income Tax Officer, Ward (Exemption), Jodhpur Versus Rajasthan Vikas Sansthan - TMI Issues Involved:1. Violation of Section 13 regarding loans and advances to related parties.2. Applicability of Section 13 for transactions with another trust having common trustees.3. Exemption under Section 11 despite alleged violations of Sections 13(1)(c) and 13(1)(d).4. Deletion of addition on account of notional interest.5. Allowance of capital expenditure despite denial of exemption under Section 11.Detailed Analysis:1. Violation of Section 13 regarding loans and advances to related parties:The primary issue was whether the assessee trust violated Section 13 by making advances to related parties. The Assessing Officer (AO) argued that advances to M/s Samarth Vivdhlaxi Seva Trust, where common trustees existed, violated Sections 11(5) and 13. The AO contended that such transactions amounted to a benefit to trustees, thus breaching Section 13(1)(c) and 13(1)(d). However, the CIT(A) and Coordinate Bench found that the transactions did not violate these provisions as the market rates were higher than what was charged, and no direct benefit was proven to the trustees. The Tribunal upheld that the transactions did not violate the Act, and the addition of notional interest was unwarranted.2. Applicability of Section 13 for transactions with another trust having common trustees:The Tribunal examined whether the advance to M/s Samarth Vivdhlaxi Seva Trust violated Sections 11 to 13. The trust in question was also registered under Section 12AA, and the advance was given under a Memorandum of Understanding for infrastructure development. The Tribunal, following precedents, held that such advances did not constitute an investment or deposit violating Section 13(1)(d). The AO's failure to demonstrate how the trustees benefited led to the dismissal of this ground, affirming no violation occurred.3. Exemption under Section 11 despite alleged violations of Sections 13(1)(c) and 13(1)(d):The Tribunal addressed whether the trust could retain its exemption under Section 11 despite alleged violations. It was concluded that while specific amounts violating the provisions should be taxed at the maximum marginal rate, the overall exemption under Sections 11 and 12 remained intact due to valid registration and recognition under Sections 10(23C) and 12AA. Thus, the trust did not lose its exemption entirely, and the appeal was partly allowed on this ground.4. Deletion of addition on account of notional interest:The AO had computed interest on amounts allegedly used in violation of Section 13. However, the Tribunal found that such an addition was not supported by law. Instead, the actual amount utilized in violation should be taxed at the maximum marginal rate. The CIT(A)'s deletion of the notional interest addition was upheld, as the AO's computation was flawed and inconsistent with the applicable provisions.5. Allowance of capital expenditure despite denial of exemption under Section 11:The Tribunal addressed the AO's denial of capital expenditure benefits due to alleged violations. It was determined that if the capital expenditure was for the trust's objectives, the trust was entitled to such deductions. The AO's refusal to grant this benefit was incorrect, and the Tribunal dismissed this ground, affirming the allowance of capital expenditure.Conclusion:The appeals for both assessment years were partly allowed. The Tribunal provided detailed directions for reassessment, emphasizing the need for comparable instances to determine any trustee benefits accurately. The decision clarified the application of Sections 11, 12, and 13, ensuring that only specific violations lead to taxation at the maximum marginal rate, while the trust's overall exemption status remained unaffected.