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TaxTMI 
TaxTMI 
2021 (7) TMI 773
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.... order of the commissioner of Income Tax (Appeals) - 18, Chennai dated 19.08.2019 in I.T.A.No.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....
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....efore the time of hearing. 3. The brief facts of the case are that the assessee M/s. Jaya Educational Trust is registered u/s.12AA of the Income Tax Act, 1961 (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....
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....loyee and employer relationship between individuals and the Trust and hence, they cannot be brought within the ambit of section 13(3)(cc) of the Act to deny benefit 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 dis....
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....roperty to persons referred to in section 13(3) of the Act. 7. The ld.CIT(A) after considering relevant submissions of the assessee and also on analysis of provisions of 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 f....
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....e Trust is liable to be taxed at maximum marginal rate as prescribed u/s.164(2) of the Act and hence, there is no error in the reasons given by the AO to tax income of the Trust 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 ....
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....r.....:- "(a) if any part of the income or property of the trust or institution is or continues to be, lent to any person referred to in Sub-section (j) for any period during the previous year without either adequate security or adequate interest or both; (b)-(h) 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 indirec....
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....ith us, we are pleased to appoint you as Senior Consultants/Planning & Administration for the administrative and financial matters to closely monitor our projects, on terms and conditions set out hereunder. You shall interalia undertake and carry on following tasks and assignments on the date of your assuming for overall management and to monitor and exercise critically effective control on 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. â€....
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....itution in terms of Sec. 13(3)(cc)of the Act. The nomenclature of the designations is immaterial as the functions performed/expected of them by the Trust are clearly managerial functions. 13. It is seen from the records that the appellant had given a loan of Rs. 12,40,00,000/- to M/s. Ragas Educational Society on 3.10.2011 and in turn M/s. Raga Educational Society had transferred those funds [Rs. 6,20,00,000/- each to two individual namely Dr. K.Krishna Reddy and Dr. K.J. Reddy immediately on the next day as 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 Srinivas....
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....rt has granted SLP to the Revenue in the case of ClT(Exemptions) Vs Santokba Durlabhji Trust Fund [2028] 93 taxmann.com 325(SC) against the decision of the Hon'ble High Court of Rajasthan in the said case [2018] 93 taxmann.com 324 wherein it held that denial of exemption u/s 13(1)(d)(iii) will be restricted to the relevant income that was earned in violation of the said section and not the entire income of the assessee trust to be taxed at maximum marginal rate u/s 164(2) of the Act. 17. The Hon'ble High Court of Delhi in the case 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 in....
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....st) and clause (b), if any land -- of the Trust or institution ---.for any period during the previous year without adequate rent or other compensation (regarding gifting of the land, which has subsequently been cancelled, to M/s.PMR Bangaru Subbammal Educational Trust where the Managing trustee of the Trust is an interested person with substantial interest) In such cases, where violation of sub-section (2) of section 13 takes place the benefit, directly or indirectly, to any person referred to sub-section(3) of Section 13, then the First provisions of section 13(1) 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....
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....firming the action of the ld.AO in denial of exemption claimed u/s.11 of the Act on the ground of violation of provisions of section 13(1)(c) r.w.s.13(2) of the Act, without appreciating the fact that there is no violation of provision of section 13(1)(c) r.w.s.13(2) of the Act, as alleged by the AO. The ld.AR further submitted that the ld.CIT(A) failed to appreciate that equating the consultants as employee / managers and further applying provisions of section 13(3)(cc) of the Act to deny the benefit of exemption claimed u/s.11 of the Act is not in accordance with law. The ld.AR for the 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 ....
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....ons referred to u/s.13 (3) in violation of section 13(2) of the Act. The ld.AR has also referred Circular No.387 dated 06.07.1984 issued by CBDT and submitted that the CBDT has clarified that where a trust contravenes provisions of section 13(1)(c) and (d) of the Act, maximum marginal rate of income tax would apply only to that part of income which has forfeited exemption and not to entire income of the Trust. Therefore, he submitted that the AO as well as the ld.CIT (A) clearly erred in bringing income of the Trust to tax as per provisions of section 164(2) of the Act. 12. The ld. DR on the 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 c....
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....ct. Since, the Trust has given interest free loans to two persons by taking interest free loans from other trusts and further Shri A. Kanagaraj and Smt. K. Vijayakumari, wife of Shri Kanagaraj were common trustees of all trust, the impugned transactions were thus, hit by provisions of section 13(3)(c) of the Act. According to AO, the transactions are clearly diversion of funds in contravention of provisions of section 13(1)(c) of the Act, to the persons specified in subsection (3) of section 13 of the Act and thus, the trust is not entitled for exemption u/s 11 of the Act. He, therefore, rejected exemption 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....
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....ew that the AO as well as the ld. CIT (A) were erred in rejecting exemption claimed u/s 11 to total income of the trust. 15. Having said so, let us examine in the given facts and circumstances of the case is there any violation of provisions of section 13(1)( c) of the Act, and the AO was right in denying the benefit of exemption claimed u/s 11 of the Act. The AO has considered advances given to Shri K. Venkat Reddy and Smt. Subashini Vijayaragavan u/s 13(3)(cc) and held that said loans are clearly in the nature of direct / indirect benefit of Trust income / property to persons referred to in section 13(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 wi....
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....ctions of the Trust and hence, comes under the term manager as defined u/s.13 (3)(cc) of the Act. We have gone through the letter of appointment issued by the Trust to two individuals and find that those two individuals has been hired with a specific task of getting approval for starting a new medical college and also getting approval for deemed university status for the Trust. We further noted that from the letter of appointment, except providing consultancy services with regard to specific project, they are not involved in any kind of day to day activities of the Trust. They had been never given any kind of 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 ....
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....reated as payment in contravention to section13(1)(c) of the Act. As regards observations of the AO that the assessee has given benefit to the interested persons without any interest or security, we find that said finding of the AO is not on sound footing, because the AO has proceeded on the assumption that the assessee has lent the sum. But, the transactions between the trust and the consultants was under normal circumstances as a prudent businessman and hence question of charging interest or taking a security against such advance does not arise. Therefore, we are of the considered view that loans given to two consultants 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 a....
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....larly, the assessee has filed return of income for assessment year 2017-18 on 30.03.2018 with a delay of 5 months which is once again beyond the control of the assessee. The assessee further stated that it has filed a petition before the CBDT on 12.10.2019 to condone the delay in filing return of income for both assessment years in terms of CBDT circular No.6 of 2020 dated 19.02.2020. The assessee further claimed that as per the revised Circular of CBDT, it has submitted a petition before the Pr. CIT, Central-01 on 11.03.2020 to condone the delay in filing return of income for assessment year 2017-18. In spite of explaining 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 r....
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....with the due dates specified under the Act is bonafide and reasonable. In our view, reasons given by the assessee for not filing the return within due date specified under the Act for both assessment years is bonafide and reasonable and therefore, the AO ought to have condoned the delay in filing return of income and Form No 10 for accumulation of income. 20. Be that as it may. As per provisions of section 119(2b) Act, the authority competent to condone the delay in filing return of income is the Pr.CIT. Admittedly, the assessee has filed a petition before the competent authority for condoning the delay in filing return of income. 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....