TaxTMI 
TaxTMI 
TaxTMI 
2017 (1) TMI 1085
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....sioner of Income Tax (Appeals) erred in observing that the Loans and advances given to Managing Committee Members were without security or interest. 4. On the facts and circumstances of the case the Commissioner of Income Tax (Appeals) erred in arriving at a conclusion that the AO has rightly disallowed payment of interest of Rs. 52.79 lacs to Powers Financial Services Pvt. Ltd. under the provisions of section 40(a)(ia) of the Income-tax Act, 1961. 5. On the facts and circumstances of the case the Commissioner of Income Tax (Appeals) erred in holding that the A.O. rightly disallowed the amount of Rs. 2,74,79,379/- towards provision made for Salary and DA payable to staff as per statutory provisions. 2. Brief facts of the case are as under : The assessee has filed a return of income on 28-01-2009 showing income of Rs. Nil as exemption u/s 11 has been claimed. The assessee trust runs several educational institutions in Nagpur and Mumbai. The majority of the trustees belong to the Chaturvedi family of Nagpur. The AO has observed in the course of assessment proceedings that during the financial year 2007-08 the trust has advanced interest free loans to two members of the trust wh....
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....en' utilized for advancing amounts to the two beneficiaries who' are members of the trust viz. Smt. Pallavi Chaturvedi and Shri Dushyant -Chaturvedl, Appellant has in fact" stated that if - this is taken into ' consideration, a net sum of Rs. 60,12A64/- can be said .to have been received by the trust in 'excess, than what was given to the specified 'persons and' members of the Governing Council to the Assessee Trust. Further according to 'appellant no part of income of the appellant trust has been utilized for making the advances. 8.1 However it is evident that this argument of the appellant is fallacious. It is worth taking into account that from the submissions of the appellant it is stated that while the total income and property accumulated upto 2008 amounting to Rs. 142.78 crores and the total application on the object of the Trust is amountlnq to Rs. 155.77 crores. Therefore according to appellant's own admission the trust was under compulsion to borrow amounts on loan of Rs. 13.82 crores from vari~us groups - concerns to meet the deficit utilized for appllcatlon of the trust. Accordinq to appellant these amounts....
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....ngs, appellant has furnished a copy of an order dt. 12-10-1999 issued by Joint Charity Commissioner, Nagpur stating that sanction has been accorded u/s 56A(3) of the Bombay Public Trust Act, 1959 for borrowing money by way of loan, deposits or advances from banks/public institutions/private companies or other individuals from time to time amounting to not more than Rs. 50 crore at interest rates which are not more than levied by nationalized bank rates. Further thtsl: order clearly lays down the condition that loan amount should be utilized for meeting the bjectives of the trust namely construction of the schools and college buildings and other allied uses. Thus it is seen that this general permission categorically and unequivocally states that loans are to be utilized to meet the objectives of the trust. Appellant has not produced before me any copy of any specific order or permission received from the Charity Commissioner regarding prior permission to receive loans or funds from any individual or institution and make them available as interest free loans and advances to member trustees. Therefore the appellant's explanation that the amounts received as loans from Permanent Co....
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....ed that loans have been given after obtaining- adequate security vide document executed on 9th June, 2007 between Smt. Abha Chaturvedi and Directors of M/s Prowess Financial Services Pvt. Ltd and M/s Permanent Construction Co. Pvt. Ltd. The said concerns have credit balance to stand for security against the advance of total Rs. 85,60,114/- to Shri Dushyant Chatruvedi and Smt. Pallavi Chatruvedi. As pointed out by the A.O. the existence of such an agreement was never pointed out by the appellant during the course of investigation and in fact vide letter dt. 16-02-2010 Shri Dushyant Chaturvedi accepted that no loan agreement for the loans given to the trustees. It was only vide letter dt. 24-12-2010 in response to the final show cause notice that the security agreement suddenly materialized. AO has therefore held that this security agreement is dearly an afterthought. Aa has also pointed out that M/s Permanent Construction ep) Ltd. which has given purported security against the loan has withdrawn the amounts from the trust on 18-08- 2007 in violation of the agreement of indemnity and that another sister concern Mls Prowess Financial Services P. Ltd. has been paid interest of Rs....
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....oncluding that the benefit of exemption u/s 11 will not be applicable to the trust as there is a clear violation of the provisions of section 13(1)(c) r.w.s 13(2) and S 13 (3) as income of trust has been utilized and interest free loans have been advanced to members of the trust without adequate security or interest. 4. Learned CIT(Appeals) further held as under : "12. I have carefully considered te facts of the case. The appellant's counsel has mainly relied on the provisions of section 164 interpreting it to contend that trust would not lose exemption in entirety but only the quantum of violation is to be treated as income subject to tax. It is necessary to note that the provisions of section 164(2) read with proviso is applicable in the case where income derived from property held under the trust where only part of such income is eligible for exemption u/s 11. The section relied upon by the appellant has no relevance to the facts of the case as pointed out by AO in the remand report. The perusal of the legislative history of section 13(1)(c) clearly shows that law contemplates denial of exemption u/s 11 when there is a violation u/s 13(1)(c). Fur....
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.... carefully considered the issue before me. In this case AO has made a factual observation that tax has i not been deducted at source on interest payment of Rs. 52.79 lacs made to M/s! Prowess Financial Services Pvt. Ltd. It is seen that the basic justification offered by the appellant is that no tax is deductible since the assessee's income: is exempted uls 11 and income is not required to be computed as per sections 28 to 44. As pointed out by AO the assessee is liable to deduct tax at source on' payment of interest. Section 40(a)(ia) introduced in the Income tax Act by Finance Act, 2004 w.e.f. 1st April 2005 with the explicit purpose that certain sums would be admissible as deduction only if taxes due on such amounts are deducted as required by provisions of chapter-XVII. In the appellant's case there is no ambiguity that tax was required to be deducted at source on interest payments to Mls Prowess Financial Services Pvt. Ltd. Appellant has committed a default by not deducting the taxes due. Therefore the provision of section 40(a)(ia) are clearly attracted. The main argument of the appellant is that the assessee trust is not engaged in any business or profession and ....
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....is quantification has not been furnished and the copy of the said GR relied upon by the appellant was not produced before him in spite of specifically being required to be produced. It is highly un-likely and un- characteristic that amounts due to salaried to the employee in the category of teaching and non teaching staff are kept outstanding for long periods when they have once crystallized. I am therefore of the opinion that AO has rightly disallowed an amount of Rs. 2,74,79,379/- as the claim is unsupported. This ground is therefore dismissed." 7. Against the above order, the assessee is in appeal before us. 8. We have heard both the counsel and perused the records. Learned counsel of the assessee's submission in this regard is summarized as under : Gr.No. 1 to 3: / Denial of exemption U/s. 11 of I.T. Act, 1961 A) Trust is holding registration U/s. 12A vide certificate dated 29/08/2003 and income of charitable institution is exempt U/s. 11 of I.T. Act, 1961. B) The assessee is charitable institution running education institutions for past 12 years. It is enjoying benefit of income being exempt u/s 11 of I.T. Act 1961. The perusal of assessment order would indicate that ....
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.... J) A.O. was explained that interest at 5.5% on interest free fund of entities of interested persons available with assessee was Rs. 6,39,545/- and interest on 'advances given to interested person was Rs. 2,23,304/-. (P- 9 of assessment order). The net result is that interested person have not derived any advantage from assessee trust so as to take any adverse view of the matter. In fact assessee institution has not passed any benefit to interested persons. On the contrary assessee charitable institution has availed benefit considering the totality of fact situation. K) The amount of interest receivable on amount given calculated at 5.5% was submitted before A.O. at Rs. 2,23,304/-. Both the persons are working for the Charitable Institution. Shri Dushyant Chaturvedi and Smt. Pallavi Chaturvedi are members. Both the persons are not drawing any compensation for services rendered. Benefit for amount taken by them in monetary value is Rs. 2,23,304/-. It is much less than reasonable compensation for services rendered. Thus there is no benefit in excess of fair market value to hold breach of provisions of Sec. 13 of I. T. Act, 1961. Without prejudice benefit of Sec. 11 is not appli....
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....order dated11/04/2014. 16) ITAT order in ITA No.4514/De1/2011 in the case of M/s. Idicula Trust Society vide order dated 30104/2012. 17) ITAT order in ITA No.169/JP/2012 in the case of M/s. Santokba Durlabvhji Trust Fund vide order dated 05/11/2014 18) ITAT order in ITA No.5503/De1/2012 in the case of Institute of Human Development vide order dated 10/10/2014. 19) ITAT order in ITA No.3807/Mum/2015 in the case of Jamshetjee Tata Trust vide order dated 04/02/2016 20) (2014) 161 ITJ (Mum.) 0742 Jamshetji Tata Trust vs. Joint Director of Income Tax (Exemption) 21) (2016) 46 CCH 0040 (Del.) Institute of Haematology vs. Addl. Director of income Tax 22) ITAT order in ITA No.146/Nag/2013 in the case of Sushrut Hospital and Research Centre vide order dated 18/11/2015 23) (2012) 143 TTJ 0352 (Pune) Sinhgad Technical Education Society vs. ACIT Gr. No.4: Disallowance u/s 40(a)(ia) of Rs. 52,79,636/-. A) Assessee, during the concerned assessment year has provided interest on unsecured advances received from M/s. Prowess Financial Services Pvt. Ltd. at the rate of 5.5% amounting to Rs. 52,79,636/-. B) The assessee is not deemed to be in default as mentioned under the secon....
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....s of section 13(1)c of the Income Tax Act. The Assessing Officer has otherwise no objection/dispute as to the eligibility of the trusts income being exempt under section 11 of the Income Tax Act. The amounts advanced are as under Pallavi Chaturvedi Rs. 76,54,799 Dushyant Chaturvedi Rs. 9,05,350 The brief financial data of the trust's performance is as under : Gross Receipts 41.63 crores Net Profit 1.70 crores 4.08% Revenue Expenditure on object of Trust 39.93 crores 95.91% Capital Expenditure on Object of Trust. 8.63 crores. 48.56 crores. It is further noted that in the past as well as subsequent assessment year's assessee has been granted exemption under section 11 of the Income Tax Act. 11. The learned counsel of the assessee has challenged the revenue's action in this regard on two counts. Firstly it has been assailed that there were sufficient interest-free funds available from related parties which has been utilised in giving these loans. Secondly it has been assailed that section 11 (4A) envisages activities of business by trust which is not exempt under section 11 of the Income Tax Act. Hence the concept of income being partly exe....
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....rs to forfeiture of exemption for breach of section J 3(1) (d) resulting in levy of maximum marginal rate of tax only to that part of the income which has forfeited exemption. Where a trust contravenes section 13(1)(d), the maximum marginal rate of income-tax will apply only to that part of income which has forfeited exemption under the said provision and not the entire income. For the assessment year 1994-95, the assessee trust earned dividend as well as interest income as a holder of equity shares in M The trust claimed exemption on interest income. The Assessing Officer denied exemption holding that the trust had forfeited its exemption in respect of its entire income. On appeal, the Commissioner held likewise. The Tribunal allowing the appeal held that only dividend income was to be taxed at maximum marginal rate. On appeal by the Department: Held, dismissing the appeal, that violation of section 11(5) read with section 13(1)(d) by the assessee trust would result in the maximum marginal rate of tax only on the dividend income on shares and not on the entire income. Therefore, income other than dividend income was to be taxed at the at the normal rate of taxation under the A....
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....ximum marginal rate. Section 164(2) refers to the relevant income which is derived from property held under the trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of the association of persons. This is subject to application of other provisions of Act like exemptions, deduction etc. Therefore, a proviso was inserted by the Finance Act, 1984, with effect from April 1, 1985, under which in cases where the whole or any part of the relevant income is not exempt under section 11 or section 12, because of the contravention of section 13(1)(c) or (d), then tax shall be charged on such income or part thereof, as the case may be, at the maximum marginal rate. In other words, only non-exempt income portion would fall in the net of tax, as if it was the income of an association of persons. 15. In the case of Mafatlal Gagalbhai Foundation (supra) also it was held by the High Court that as per proviso to section 164(2), it is, inter alia, laid down that in cases where the whole or part of the relevan....
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....ing Officer has disallowed is sum of Rs. 52,79,636/- on account of interest payment for non-deduction of tax deduction at source. The Ld CIT(Appeals) has affirmed the Assessing Officer's action. 20. In this regard Learned counsel of the assessee submitted that payee has furnished its return of income under section 139 (1) on 30/10/2008. That the payee has taken into account such interest for computing income. The payee has paid the tax due on the income declared. That certificate from the accountant under form 26A has been furnished. In this regard Learned counsel of the assessee has relied upon the decision of Honourable Delhi High Court in the case of CIT vs Ansal Land Marktownship 377 ITR 635 for the proposition that second proviso to section 40(a)(ia) of the Income Tax Act is declaratory and curative in nature and has retrospective effect from 1/4/2005. 21. We find that the above submission of the Learned counsel of the assessee is cogent. However the issue requires factual verification of the submissions made. Hence in the interest of justice we remit this issue to the file of the Assessing Officer. The Assessing Officer shall examine the factual aspects of the asseessee....