TaxTMI 
TaxTMI 
2021 (7) TMI 773
X X X X Extracts X X X X
X X X X Extracts X X X X
....109/17-18 for the above mentioned Assessment year is contrary to law, facts, and in the circumstances of the case. 2. The CIT (Appeals) failed to appreciate that the denial of tax exemption computation u/s 11 of the Act on the other facet of violation of the provisions of section 13(2) of the Act and consequential sustenance of the decision of the Assessing Officer in this regard in the impugned order from para 6 was wrong, erroneous. unjustified, incorrect and not sustainable in law. 3. The CIT (Appeals) failed to appreciate that equating the consultants as employees / Managers with a view to apply the provisions of section 13(3) read with section 13(2)(a) of the Act to deny the benefit of tax exemption computation u/s 11 of the Act was wholly unjustified and should be reckoned as bad in law and ought to have appreciated that the said provisions of the Act. 4. The CIT(Appeals) failed to appreciate that the misreading of the terms of contract would vitiate the related findings to deny the benefit of tax exemption computation u/s 11 of the Act and further ought to have appreciated that the expression/scope of 'Manager' in contra distinction to the expression/scope of &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....61 (hereinafter the 'Act') as a public charitable trust with the object of imparting education. The assessee is running various educational institutions. The assessee has filed its return of income for the assessment year 2012-13 on 26.03.2014 admitting 'Nil' total income after claiming the benefit of exemption u/s.11 of the Act. The assessment for the impugned assessment year has been completed u/s.143(3) of the Act on 27.03.2015 determining total income at Rs. 10,77,44,938/- by making various additions including addition towards disallowance of interest on diversion of borrowed funds, disallowance of corpus donations u/s.37 of the Act and disallowance of various expenses u/s.40(a)(ia) of the Act. The assessment has been subsequently, revised u/s.263 of the Act by the Pr. CIT, Central -1, Chennai on the ground that assessment order passed by the AO u/s.143(3) of the Act on 27.03.2015 was erroneous insofar as it is prejudicial to the interest of the Revenue, because the AO has failed to consider the issue of taxability of net income of Rs. 13,92,01,900/- as per income and expenditure statement even though, exemption u/s.11 of the Act was denied to the Trust because of violation of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fit of exemption u/s.11 of the Act. The term manager as per dictionary meaning is a person who is entrusted with managerial work who performs day to day work of any organization. In this case, both individuals are hired as external consultants for a specified period on specified terms and conditions. Further, nature of works assigned to them does not come under day to day activities of the trusts. Therefore, loan given to two persons as per contractual obligation cannot be considered as benefit or payment of trust property or income to interested persons as referred to under section 13(3) of the Income Tax Act, 1961. 5. The AO however, was not convinced with the explanation furnished by the assessee and according to him, there is violation of section 13(1)(c) r.w.s. 13(2) of the Act, insofar as interest free advances given to Shri K. Venkat Reddy and Smt. Subashini Vijayaraghavan, because the Trust has allowed direct benefit to a person referred to in sub-section (3) of section 13 of the Act, and hence, it clearly disentitles from claiming exemption u/s.11 of the Act. The AO further observed that as regards taxation of income at Maximum Marginal Rate as applicable to AOP / BOI as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f section 13(1)(c) r.w.s. 13(2) of the Act, held that there is a clear violation of provisions of section 13(1)(c) r.w.s. 13(2) of the Act, in as much as, the assessee has advanced interest free loan and that too without any security to Shri K. Venkat Reddy and Smt. Subashini Vijayaragavan and hence, said loans are clearly in the nature of direct / indirect benefit of Trust income / property to persons referred to in section 13(2) of the Act. The ld. CIT (A) further observed that although the assessee claims to have advanced loans and advances to consultants of the Trust, but if you go through the letter of employment issued to them, functions and duties carried out by them are in the nature of duties and function carried out by a Manager and hence, said persons definitely comes under sub- clause (cc) of sub-section (3) of section 13 of the Act. Further, two persons were entrusted with the task of vital management and administrative function and hence, definitely fall within the term of 'manager' and hence, they fall within the term 'managers' by whatever name called in terms of section 13(3)(cc) of the Act. Since, the Trust has given interest free loans to two persons by taking in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st at MMR, accordingly rejected ground taken by the assessee. The relevant findings of ld.CIT (A) are as under:- 6. I have considered the issue with reference to materials available on record and written/oral submissions, the extant legal position and the judicial pronouncements on the subject as to whether violation of conditions prescribed u/s. 11 would entail total denial of exemption or not. 6.l I have on the subject matter decided against the appellant in A.Y. 2012-13 in ITA No.270/15-16 dated 19.8.2019 and has held that the appellant indeed violated conditions of Sec.11 rws 13(2) on the ground that the impugned recipients of interest free loan/advance are prescribed persons in terms of sec. 13(3)(cc) of the Act and 13 3(e). The observations are extracted for ready reference: "6.1. I have gone through the facts of the case and bestowed my personal thoughts to the issues on hand, materials available on record, written/oral submissions of the AR and proceed to adjudicate the issue as under by addressing the two vital issues viz., (i) as to whether the appellant had lent interest free loan or advance in violation of Sec. 11 rw Sec. 13(2) (ii) as to whether the recipients ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) xxxxx" 7.4. The relevant provisions of S l3(3) are as under: "The persons referred to in Clause (c) of Sub-section (1) and Subsection (2) are the following, namely:- (a) the author of the trust or the founder of the institution; (b).... (c)..... (cc) any trustee of the trust or manager (by whatever name called) of the institution ;) (d)... (e) any concern in which any of the persons referred to in clauses (a) (b)(c)(cc)and (d) has a substantial interest. (/).... 8. The scheme of the Act is that charitable entities can claim exemptions from exigency of taxation in the light of S 11 and 12 of the Act. Section 13 of the Act prescribes conditions, violation of which, shall affect the claim of such exemption u/s 11 and 12. section 13 (1) (c) prohibits use of trust property or income for direct or indirect benefit of the prohibited person(s). Proscriibed person(s) have been prescribed/specijied in S 13(3) of the Act, that include the author of the trust or founder of the institution, person who has made a substantial contribution to the trust, any trustee of the trust or manager, any relative of such author, founder or trustee or manager, or any concern in which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the departments functioning in the college and outside the institution but under the support. The areas need your dedicated attention and time * Monitoring day to day operations including administration. * Review of new projects as to implementation of the works. * To effectively follow up the expansion of educational activities in other parts of the state as well as in India and outside. * To evolve a team of people for ensuring the procedural formalities that are desired for securing necessary approvals and permissions including accreditation of the institution. * To set up a core team for various courses offered and to constantly explore the changes that are taking place in Govt. and also the University guidelines. * Detailed list of tasks in addition to above are given in Annexure 2 hereto. * You shall directly and shall report to the Chairman for any of the policy decisions. * The above position is for a minimum period of five years. on signing of this agreement, as agreed, you will be entitled to receive 6 months advance salary amounting to Rs. 62.5 lakhs (Rupees Sixty two lacs fitythousand only) from the annual salary of Rs. 1.25 crs which includes your rem....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... salary advances. Similarly, appellant had given a loan of Rs. 12,40,00,000/- to M/s. Srinivasa Educational Trust on 3.10.2011 and in turn M/s. Srinivasa Educational Trust had transferred these funds [Rs. 6,20,00,000/- each to Shri T. Vijayaraghavon and Shri K. Ram Reddy on the very next day i.e. 4.10.2011 as salary advance. It is material to note that the Chairman of the appellant trust Shri A. Kanakaraj is also a Trustee in M/s. Ragas Educational Society and is the chairman of M/s..Srinivasa Educational Trust. Further, Smt.K.Vijayakumari, [Wife of Shri.A.Kanagaraj], a trustee of the appellant is the chairperson of Ragas Educational society and is a Trustee in Srinivasa Educational Trust. They are thus interested persons and the impugned loans to Ragas Educational society and M/s Srinivasa Educational Trust without interest /security in terms of who hove substantial interest. Thus, the transaction will be hit by provisions of sec. 13(3)(e) of the Act. There is, thus , violation of Sec. 11 rw Sec. 13(2)(a) rw Sec. l3(3)(e) as well . 14. The Hon'ble Supreme Court decision in the case of, DIT vs. Bharat Diamond Bourse' (259 ITR 280) (2003) has held that violation of conditions ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ase of Kanahya Lal Punj Charitable Trust Vs Director of Income-tax (Exemption) [2008]71 Taxman 134 (Delhi) has held that when loans are advanced by the trust to any interested persons without security or adequate interest, the same amounts to conferring benefits directly or indirectly on the interested persons and is to be treated as violation of sections 13(1)(c) and 13(2)(a) ; and therefore that the provisions of sections 11 and 12 would not operate as to exclude income of trust from total income of previous year and, consequently, all receipts of trust either by voluntary contribution or from income derived from its property would be an income of trust, chargeable to tax. The appellant's case is hit by this judgment as well. 18.The Hon'ble High Court of Allahabad in the case of CIT Vs Vijeta Educational Society [2011-TIOL-591-HC-ALL-IT] has held that in view of s 13(1)(c ) of the Act rendering the entire income of Trust or Charitable institution is liable to tax even if only part of income is directed to be applied for the benefit of the specified persons. Thus , in the appellant's case, it will lose total exemption. 19. Further, the jurisdictional Tribunal in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... clearly states that nothing contained in section11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof which clearly shows that provisions of the section-11and section- 12 are no more available in such cases. This being so, we are of the view that the ld. Assessing Officer was right in denying the benefit of section-11 in respect of the income of assessee as there has been violation of the provisions of the sections 13(1)(c) and 13(1)(d) read with section 13(2) of the Act. In the circumstances, the order of the CIT(Appeals) on this issue stands reversed and the order of the ld. Assessing Officer is restored" 20. It is further relevant to note that the proviso to Sec. 164(2) mentions that when whole or relevant part of any income is not exempt u/s.11 on account of provisions enshrined in Sec. 13(1)(c) of the Act, tax will be charged on the whole of the relevant income or part of the relevant income at the maximum marginal rate; and thus shows that once the whole of the relevant income denied exemption u/s. 11 of the Act, then such entire income shall have to be charged at the Maximum Marginal Rate in the case of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee further referring to Paper-Book filed by the assessee, submitted that there is no doubt the assessee has given interest free loans to two individuals as alleged by the AO, but said loans are neither gracious / beneficial payments to any individuals referred to u/s.13(3) of the Act, nor in the nature of direct / indirect benefit of Trust property / income to any of the persons referred to therein. He, further submitted that ld.CIT(A) has failed to appreciate that the AO has misread the terms of contract between the parties to deny the benefit of tax exemption because the expression / scope of manager in contra distinction to the expression / scope of consultant. He, further submitted that the assessee has placed all possible evidences to prove that those two individuals are consultants having expertise in education field and the assessee has hired both of them for a specific period and for a specific purpose and such purpose has been explained before the AO. The AO has never disputed the fact that those two are outside consultants of the Trust, however, invoked sub-clause (cc) of section 13(3) of the Act, merely for the reason that terms of contract between the parties sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....other hand strongly supporting order of the ld.CIT (A) submitted that there is a clear violation of provision of section 13(1)(c) r.w.s. 13(2) of the Act, in as much as interest free advances given to two individuals without any interest and security is clearly in the nature of direct / indirect benefit of Trust income / property to persons referred to u/s.13(3) of the Act. The ld. DR further referring to letter of appointment, submitted that both individuals are carrying out day to day functions of the Trust which is clearly in the nature of managerial position and hence, both of them are coming within the ambit of provisions of section 13(3)(cc) of the Act as a manager by whatever name called. Hence, although the assessee called them by name consultant but because of their nature of services rendered to the Trust, they are in the nature of managers and hence, advances given to them is clear violation of section 13(1)(c) of the Act. Since, there is violation of provision of section 13(1)(c), the assessee is disentitled for benefit of exemption u/s.11 of the Act and consequently assessee is liable for tax on total income at maximum marginal rate as per proviso to section 164(2) of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....emption claimed u/s 11 and taxed income at maximum marginal rate as per proviso to section 164(2) of the Income Tax Act, 1961. 14. The provisions of section 13(1)(c) imposed certain restriction on utilization of income of the trust which claims exemption u/s 11 of the Act. As per clause (c) of sub.sec (1) of section 13, if any part of income or any property of the trust or the institution, is used or applied directly or indirectly for the benefit of any person referred in sub. Section (3), then the trust is not entitled to exemption u/s 11 of the Income Tax Act, 1961. The specified persons has been referred to u/s 13(3) of the Act, and as per said section the persons specified are the 'author' or 'founder' of the trust, their relatives, any trustee of the trust or manager by whatever name called. The provisions of sec. 164(2) of the Act, states that in a case, where the whole or any part of the relevant income is not exempt u/s 11 or sec. 12 by virtue of the provisions contained in clause (c) or clause (d) of sub.sec. (1) of section 13 of the Act, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate. Therefore, if the trust allows an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....3(3) of the Act. The provisions contained in section 13(1)(c ) put a restriction on persons referred to in section 13(3) to take any benefit of either income or property of the trust. Therefore, in order to consider any payments to any person u/s 13(1)(c ), it is essential to see whether the income/property of the trust is directly or indirectly used or applied for the benefit of the trustees. In this case, there was no such finding from the AO that the income was used or applied for the benefit of trustees. The only allegation is that the trust has given loans to two persons without any security or interest and further said persons are in the nature of managers by whatever name called as referred to u/s 13(3)(cc) of the Act, and thus, said payments violates sections 13(1)(c ) of the Act. 16. We have given our thoughtful consideration to facts brought out by the AO and arguments advanced by the ld. AR for the assessee and we ourselves do not subscribe to findings of the AO to bring two loans within the ambit of section 13(1)(c ) rws 13(3)(cc) of the Income Tax Act. In the present case, the AO has denied the benefit of exemption u/s.11 of the Act, for the simple reason that there ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... services to existing institutions of the Trust like engineering college and other institutions run by the Trust. From the above, it is clear that services required to be provided by them to the Trust are in the nature of external consultancy providers, who often comes to the client business place for providing consultancy services in respect of specialized knowledge which is required by any person. In this case, evidences filed by the assessee including letter of appointment clearly shows that those two individuals are appointed for a specific period of 5 years for a specific remuneration and further they have tasked with the work of setting up of new medical college and getting deemed university status for the institutions, which has nothing to do with the existing activities carried out by the assessee and hence, we are of the considered view that those two individuals cannot be considered as managers of the Trust, who are involved in day to day managerial functions. Thus, the AO as well as the ld. CIT(A) were erred in considering two persons within the ambit of section 13(3)(cc) of the Act. 17. Having said so, let us examine whether loans and advances given to two persons can ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ltants would not covered u/s 13(3)(cc ) and thus, not resulting in any benefit directly or indirectly to interested persons so as to attract provisions of section 13(1)(c) of the Act. Consequently, on this ground the benefit of exemption u/s.11 of the Act cannot be denied to the assessee for Asst. year 2012.13, 2013-14 and 2016-17 and 2017-18. 18. Coming back to assessment years 2016-17 and 2017-18. The AO has denied benefit of exemption u/s.11 of the Act to total income of the Trust on the ground that there is violation referred to u/s.13(1)(c) of the Act, insofar as, loans given to two individuals. Apart from this, he has denied the benefit of exemption for assessment years 2016-17 & 2017- 18 on one more count that the assessee has not satisfied provisions of section 13(9) of the Act by filing the required Form No.10 within the due date of furnishing return of income u/s.139 (1) of the Act. He, further noted that the assessee has not filed return of income for relevant assessment years on or before the due date specified u/s.139 (1) of the Act. We have gone through reasons given by the AO for denying the benefit of exemption u/s 11 of the Act, and we ourselves do not agree with ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing reasons for delay in filing return of income, the AO as well as the ld.CIT (A) has rejected the claim of the assessee and denied benefit of accumulation of income as per Form No.10. 19. We have gone through reason given by the assessee for not filing return of income and Form No. 10 within due date specified u/s 139(1) of the Act, and find that there is reasonable cause for not filing the return within due date specified under the Act. No doubt, in order to claim benefit of exemption provided u/s.11 and 13(2) of the Act, the assessee is required to file its return of income on or before due date specified u/s.139(1) of the Act. Further, the assessee also needs to file Form No.10 specifying amount and period of accumulation of income, if such income is not applied for objects of the Trust during the relevant financial year. But, the remote question is whether the assessee is disentitles itself from claiming exemption u/s 11 and accumulation income u/s 11(2), if return of income is not filed within due date or not has to be seen in the given facts and circumstances of the Act. In this case, the assessee has given reasons for not filing return of income within due date specified ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....come. Therefore, we left open the decision to the discretion to the competent authority to condone the delay in filing return of income, however direct him to exercise his quashi-judicial powers considering the reasons given by the assessee for not filing return of income within due date allowed under the Act and also considering the fact that the assessee has satisfied conditions prescribed under sub-section (1) of section 139 of the Act, by filing electronic Form No.10 within due date prescribed under the Act for both assessment years. We, further noted that the Hon'ble Supreme Court in the case of CIT vs. Nagpur Hotel Owners Association, (2001) 247 ITR 201 has held that if Form No.10 required to be filed u/s.11 (2) r.w.rule 17 is furnished on or before completion of assessment proceedings by the AO then the benefit of exemption u/s.11 cannot be denied to the Trust u/s.11 (2) of the Act. The Hon'ble High Court of Madras in the case of Chandraprabhuji Maharaj Jain Juna Mandir Trust v. DCIT (2019) 266 Taxman 399 held that when the assessee has filed Form No.10 belatedly but before completion of assessment by the AO, there would have been no error had AO taken copy of Board Resolut....