TaxTMI 
TaxTMI 
2017 (1) TMI 1085
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.... 3. On the facts and circumstances of the case the Commissioner 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....
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....rom M/s Permanent Construction 'P. Ltd. and Smt. Sheetal Chaturvedi to the extent of Rs.l,45,72;578/- have been' 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....
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....purpose of making loans and advances to member trustees. In response to this query in the course of appellate. proceedings, 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 avail....
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.... the strict parameters laid down in the act have not been adhered to and appellant has also violated the objectives of the trust. 8.6 The appellant has further contented 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 amou....
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....ointed out that in the case of Bharat Diamond Bourse the amount advance was also without interest and without security. I therefore hold that the AO was entirely justified in concluding 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....
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....n this regard is therefore upheld." 5. As regards the disallowance of interest paid of Rs. 52,79,636/- by invoking provisions of section 40(a)(ia), learned CIT(Appeals) affirmed the AO's action holding as under : "15. I have 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....
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....ly shows that no independent verification has been carried out by auditors and that they have merely relied on the explanation given by assessee trust that the provisions are made as per Government GR. AO has also emphasized that the basis of this 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 inst....
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....were sufficient to explain amount withdrawn by Dushyant Chaturvedi & Pallavi Chaturvedi. I) Combined account of entities of managing committee memberswas submitted to explain that income of assessee trust is not applied for amount withdrawn by Dushyant Chaturvedi and Pallavi Chaturvedi same is reproduced at page 9 of assessment order. Factual position is not disputed by A.O. 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. Pallav....
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....it Fund. 10. (2003) 259 ITR 0280 (SC) Director of Income Tax vs. Bharat Diamond Bourse 11. (2014) 364 ITR 0031 (SC) CIT vs. Dawoodi Bohara .Jarnat 12) (2002) 253 ITR 0593 (Delhi) Director of Income Tax vs. Agrim Charan Foundation 13) (2000) 244 ITR 0494 (Raj.) DCIT vs. Cosmopolitan Education Society 14) (1988) 173 ITR 0248 (Guj.) CIT vs. Insaniyat Trust 15) Hon'ble Punjab & Haryana High Court order in ITA No.1 of 2011 (0 & M) in the case of M/s. Idicula Trust Society vide 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 Haem....
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....der section 11 of the Income Tax Act, The undisputed facts of the case are that the assessee is a charitable institution running educational institutions for the past 12 years. It is enjoying benefit of income being exempt under section 11 of the Income Tax Act. The perusal of the assessment order indicates that the assessee institution is pursuing the same objects of imparting education and all activities are in promotions of its objects. 10. The Assessing Officer has not granted exemption under section 11 of the Income Tax Act on the ground that assessee trust has given loans to its managing committee members Shri Dushyant Chaturvedi and Pallavi Chaturvedi in violation of provisions 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 3....
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.... [Provided that in case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate] 13. The Honourable jurisdictional High Court had an occasion to expound on this subject in the case of Director of Income Tax (Exemptions) vs Sheth Mafatlal Gagalbhai Foundation Trust 249 ITR 533. It was expounded that as under : "The proviso to section 164(2) of the Income-tax Act, 1961, was inserted by the Finance Act, 1984. It specifically refers to violation of section 13(1)(d) and its consequences. The proviso to section 164(2)refers 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, ....
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....ion u/s 11/12 qua the entire receipts of assessee society or to be restricted qua the amount to which default is attracted. We find that this issue is no more res integra and is covered by the decisions of various High Courts and the ITAT, holding that disallowance is to be restricted only qua amounts to which violation u/s 13(1)(c)/ 13(2) is attracted and the exemption in respect of other income cannot be forfeited." 14. A reading of the above makes it amply clear that a harmonious construction of the relevant provisions is required. Legislature has clearly contemplated that in a case where the whole or part of the relevant income is not exempt under section 11, by virtue of violation of section 13(1)(c) or (d), tax shall be charged on the relevant income or part of the relevant income at the maximum 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 perso....
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....e amount which has not been utilised for the objects of the trust but has been advanced to the rated related persons should be subjected to denial of exemption and taxation thereof. 17. Accordingly we are of the opinion that the assessee is eligible for exemption under section 11 of Income Tax Act. Only the advancement of loan to the above related persons need to be brought under the purview of tax. The Assessing Officer is directed to disallow interest at the market rate on the sums advanced to the above persons. 18. Since we have already held that the trust deserves to be allowed exemption under section 11 of the Income Tax Act, adjudication on the other limb of assessee's contention will only be of academic interest. 19. Apropos issue relating to disallowance under section 40 (a)(ia): The Assessing 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....