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Facts
The assessee, a registered charitable organization, made several advances and unsecured loans to various parties. The Assessing Officer (AO) denied the exemption under Section 11 of the Income Tax Act, alleging violations of Section 13(1)(d) and Section 11(5). The CIT(A) upheld the AO's additions.
Held
The Tribunal held that the advances were for the purpose of acquiring property for the trust's educational activities and not for the personal benefit of trustees or related parties. The additions made under Section 68 were also found to be based on opening balances or duly confirmed amounts.
Key Issues
Whether advances made by a charitable trust for acquiring property for its educational activities constitute a violation of Section 13(1)(d) and Section 11(5) of the Income Tax Act, thereby disentitling it from exemption under Section 11. Whether additions under Section 68 for loans are justified based on the facts.
Sections Cited
11, 13(1)(d), 11(5), 68, 148, 147, 143(3), 13(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HON’BLE & SHRI SANDEEP SINGH KARHAIL, HON’BLE
Assessee by : Shri Ketan L. Vajani, C.A. Revenue by : Shri Vivek Perampurna, CIT, D/R सुनवाई की तारीख/Date of Hearing : 15/04/2025 घोषणा की तारीख /Date of Pronouncement: 21/04/2025 आदेश/O R D E R PER NARENDRA KUMAR BILLAIYA, AM: are two separate appeals by the assessee preferred against two separate orders dated 27/06/2023 and 21/06/2023 by NFAC, Delhi, pertaining to AYs 2015-16 & 2016-17.
Since common issues are involved, both these appeals were heard together and are disposed of by this common order for the sake of convenience and brevity.
Both the appeals are barred by limitation. The assessee has filed affidavits explaining the facts causing the delay in filing the appeal. Considering the facts, the delay is condoned.
AY 2015-16 4. The grievance of the assessee reads as under:- “1. The grounds of appeal mentioned hereunder are without prejudice to one another.
2. The learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre [CIT(A)] erred on facts as also in law in confirming addition of Rs.87,74,730/-. The addition has been made on the alleged ground of denial of the benefit of exemption u/s 11 and taxing net receipt of 87,74,730/- stating advance of Rs. 13,53,39,422/- hit by the provision of section 13. The addition confirmed by CIT
(A) is bad in law as also on facts and therefore the same may kindly be deleted.
3. The learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre [CIT(A)] erred on facts as also in law in confirming addition of Rs.69,75,000/-. The addition has been made u/s 68 on the alleged ground of unsecured loan taken from trustee. The addition confirmed by CIT (A) is bad in law as also on facts and therefore the same may kindly be deleted.
4. The appellant craves leave to add, to amend, alter, or withdraw any or more grounds of appeal on or before the hearing of appeal.”
Briefly stated the facts of the case are that the assessee is a registered charitable organization with DIT(E), Mumbai, u/s 12A of the Act vide Registration No. 34500 and with Charity Commissioner, Mumbai. The assessee is engaged in charitable activities in field of education and has claimed exemption u/s 11 of the Act.
The return was selected for scrutiny assessment and accordingly a questionnaire was issued and served upon the assessee. On perusing the details, the AO found that the assessee has given advance to the following parties:- Ritika Hotels Pvt Ltd 68732439 Rainbow Tech 1000000 Arun Muchhala Engineering College 655819831 Anin Muchhala Research & Education Centre 25000 135339422
The assessee was asked to explain the nature and purpose of these advances. The assessee filed necessary details along with the copies of accounts of the aforementioned parties. After perusing the details, the AO was of the opinion that the investment made by the assessee by way of loan/deposit to another trust does not fulfill the requirements of the forms and modes of investment permitted by Section 11(5) of the Act. The AO accordingly denied the benefit of exemption u/s 11 of the Act in view of contravention of provisions of Section 11(5) r.w.s. 13(1)(d) of the Act and made the addition of Rs. 13,53,39,422/-. 7.1. Proceeding further, the AO noticed that the assessee taken unsecured loans from the following parties:- Sr. No. Name of the person Amount (Rs.) 1 Sai Shiva Developers 3250000 2 Muchhala Magic Land P. Ltd. 3525000 3 Arun Muchhala Co-owners 2,00,000 7.2. The assessee was asked to explain the credits in light of the provisions of Section 68 of the Act. The assessee furnished necessary documents/details which did not find any favour with the AO who proceeded by making addition of Rs. 69,75,000/- u/s 68 of the Act.
Assessee carried the matter before the ld. CIT(A) but without any success. 9. Before us, the ld. Counsel for the assessee explained that advance given to Ritika Hotels Pvt. Ltd., amounting to Rs. 6,87,32,439/- was for the purpose of acquiring the building of Ritika Hotels which the assessee is also using for its educational activities. It is the say of the ld.
Counsel for the assessee that as per the memorandum of understanding as and when the assessee is able to purchase the property on payment of the consideration, the property shall be transferred to the assessee but in the mean-time, the assessee is allowed to run its educational activities from the impugned property. Insofar as, advance given to Rainbow Tech, the ld. Counsel for the assessee pointed out that it is a opening balance and the advance given to Arun Muchhala Engineering College is nothing but advance given to the second limb of the Trust and the advance given to Arun Muchhala Research & Education Centre is nothing but the closing balance out of the opening balance of Rs.29.25 Lakhs, given in earlier year.
We have carefully perused the copies of the ledger accounts. We find that Ritika Hotels Pvt. Ltd. had an opening balance of Rs.6,79,90,564/-. This advance was given in earlier years. We find that the same was subject to scrutiny in AY 2006-07 and the quarrel travelled upto the Tribunal and the Co-ordinate Bench in & C.O. No. 71/Mum/2022 has considered this issue and held as under:- “3. Briefly stated, the facts of the case are that the assessee is a public charitable trust and during the year under consideration was engaged in running a polytechnic college. The assessee filed its return of income for the year under consideration on 31.10.2006 declaring Nil income. The assessment was reopened by way of issue of notice u/s 148 of the Act on 25.03.2011. The Assessing Officer completed re- assessment u/s 147 r.w.s. 144 of the Act on 30.12.2011. In the said assessment order, the claim of exemption u/s 11 of the Act was denied and income of the assessee was determined at ₹2,32,12,740/-. The said exemption was withdrawn, in view of the finding of the Ld. Assessing Officer in assessment year 2008-09 on the ground that interest-free advances were given to one of the trustee and the business concern wherein the trustee’s were having substantial interest. On further appeal, the assessee filed additional evidence before the Ld. CIT(A). The Ld. CIT(A) after considering the remand report of the Assessing Officer and rejoinder of the assessee, directed the Assessing Officer to grant exemption to the assessee u/s 11 of the Act.
Before us, the Ld. Counsel of the assessee has filed a Paper Book containing pages 1 to 60.
5. We have heard rival submissions of the parties on the isuse-in- dispute and perused the material on record. In the case of the assessee addition in assessment year 2008-09 was made on the ground that interest-free advances have been granted to the persons covered u/s 13(3) of the Act and therefore, the assessee was not entitled for exemption u/s 11 of the Act. In the assessment year 2008-09, the Tribunal in restored the issue to the Assessing Officer for verification of the fact whether the interest-free advances was for benefit of the trust or was for the benefit of the trustee. The relevant finding of the Tribunal (supra) is reproduced as under: “6. We have heard the rival contentions and have perused the material available on record. It is seen that the learned CIT(A) as well as by the learned Counsel for the assessee seems to be plausible. But on these contentions, reasonings have to be supported with the facts and evidences. Certain questions still remain unanswered and the learned Counsel for the assessee could not show any material to find answers of these questions e.g., what happened to the advance and whether any such or any other property was actually purchased, or whether the advance was returned, or the same was squared off, or it was adjusted against some other property and whether the property proposed to be purchased was of any use for the assessee trust, etc., etc. All these facts need to be analysed and only then appropriate decision can be taken to decide the issue whether the interest free advance was for the benefit of trust or was for the benefit of the trustee. The learned CIT(A), while adjudicating this issue, has not passed a speaking order and has not given any such facts or referred to any such evidence in support of the contentions of the assessee. In our opinion, this issue deserves to be restored to the file of the learned CIT(A) for denovo adjudication after examining all the evidences which the assessee may place before the learned CIT(A) to decide the issue with the help of actual facts and figures, as to whether the interest free advance was given for the benefit of the assessee trust, or for the benefit of the trustees. The questions that came to our mind some of which have been referred to herein above, need to be answered with the help of evidences and in addition to that the learned CIT(A) is free to call for any other details / evidence to decide the issue as per law and facts. We thus set aside the impugned order passed by the learned Commissioner(Appeals) and allow ground no.1, raised by the Revenue for statistical purposes.”
5.1. All the grounds raised by the Revenue are related to the issue-in-dispute of exemption u/s 11 of the Act. In Ground No. 1, the Revenue has urged that since order for the assessment year 200809 has been restored to the file of the Assessing Officer. Therefore, in the year under consideration also the issue should be restored to the file of the Assessing Officer. However, we find that in the year under consideration, the Ld. CIT(A) sent the additional evidences to the Assessing Officer for calling his comments. The Ld. Assessing Officer in the remand report after verifying the documents furnished by the assessee has categorically stated that no direct benefit or advantage had been given to the persons specified u/s 13(3) of the Act. The relevant finding of the Assessing Officer has been reproduced by the Ld. CIT(A) in para 5.7 and 5.8 of the impugned order. For ready reference, the said finding is extracted as under:
5.7 During the course of the appellate proceedings the appellant furnished the copies of the land agreement made with Ritika Hotels Pvt. Ltd., Memorandum of Understanding with Ritika Hotels Pvt. Ltd. and with Shri. Arun Kumar Muchhala. Since these before the Assessing Officer, the same were sent to the Assessing hese werences were not produced Officer for submission of a remand report. 5.8. The Assessing Officer vide his reply dated 11/03/2020 submitted that the trustees Shri. Arunkumar Muchhala and Smt. Ritika Arun kumar Muchhala were also directors in Ritika Hotels Pvt. Ltd. It could be seen that as per the MOU between the Trust and Ritika Hotels Pvt. Ltd., it was mentioned that developers shall be entitled to retain the 5th floor of the building for their own exclusive and the bona fide use, however no direct benefit to/advantage has been given to these persons. 5.9. From the remand report of the Assessing Officer, it could be observed that no evidence has been brought on record against the appellant to prove that the provisions of Section 13(1)(c)(ii) could be applied to the appellant's case. Appellant had clearly established that the advances made to the trustee Shri. Arun Kumar Muchhala was towards purchase of vacant plot/land for the use of the trust.
5.2. In our opinion, the Assessing Officer himself has verified these facts and accepted that there is no direct benefit or advantage to the person specified u/s 13(3) of the Act. In such circumstances, there is no need to restore the matter back to the file of the Assessing Officer. The Assessing Officer himself has accepted that no advantage has been passed on to the specified persons u/s 13(3) of the Act still the Assessing Officer has filed the appeal on the same issue. This action of the Assessing Officer is not justified unless same is not bonafide. Before us, the Revenue has nowhere said anything on the bonafide of the Assessing Officer while sending the remand report.
5.3. In view of the above facts and circumstances, we do not find any error in the order of the Ld. CIT(A) on the issue-in-dispute and accordingly, we uphold the same.”
Again this issue arose in AY 2013-14 and the ld. First Appellate Authority held as under:- “7.1. The AO has concluded that the amounts given to M/s Ritika Hotels Pvt. Ltd. is in violation of section 11(5) r.w.s. 13(1)(d) of the I.T. Act, 1961. The appellant, under the facts and circumstances of the case has relied on the decision in the case of CIT Vs Brihdaranyak Mandal Trust (2009) 319 ITR 363 (All.) where it was held that income of educational institution use to purchase Land and construct building constituted application of income. 7.2. It is on record that the appellant has made the transaction for the purpose of acquiring piece and parcels of land admeasuring 12 acres purpose only (as appearing in clause-3, pg. of the said agreement, reproduced above). It Is also stipulated In clause-s of the agreement that the cost of the construction shall be borne by the assignee i.e. the appellant. Thus, it can be seen that the amount has been given to M/s Ritika Hotels Pvt. Ltd. with a view to acquire capital asset for the purpose of the object - educational building - of the trust. The AO has specifically referred to section 13(1)(d) which reads as under – " (d) If the services of the trust or institution are made available to any person referred to in sub-section (3) during the previous year without adequate remuneration or other compensation.”
There is no dispute on the nature of transaction which is duly supported by registered document that the amounts are for the purpose of acquiring capital assets for the objects of the trust. The AO has not raised any question on the genuineness of the transaction. There is no instance recorded by A.O pointing out any inadequacy or undue benefit derived by transacting parties.
7.3 The issue relating to this transaction had come up for adjudication in appeal for A.Y. 2008-09 in Ground No. 1 of the said appeal that – "1. (a) The Ld. AO failed to appreciate that:- i. The appellants have not given any interest free loan / Advances to any trustees or any concern wherein trustees or any concern wherein trustees are interested in violation of the provision of Sec. 13 of the I.T. Act. (b) The appellants have advanced money to M/s. Ritika Hotels Pvt. Ltd. towards the purchase of land / development rights and providing accommodation to run the polytechnic. (c) The appellants have not advanced any interest free advances/loan to Shri Arunkumar J. Muchhala, trustee, the amount is given for the loan to purpose of trust activities."
My predecessor had decided this Issue after considering the facts and circumstances of the case in detail in favour of the appellant in the following "DECISION 3.2 I have duly considered the appellant ARs submission and facts of the case. I find that the assessee trust has not given any Interest free advance for the benefit of any trusty, but the advance was given for acquiring land and building as per the agreement. Therefore, it is to be regarded that the advance was not Interest free but for acquiring land and building for the purpose of 8 Educational Institute run by the appellant trust. U/s. 13, If any, benefit directly or indirectly is given to any trustee, the exemption cannot be allowed u/s. 11 of the Act. In this case, the assessee has only given advance for purchase of property: therefore, it has to be held that advance was given not for the benefit of the specified persons u/s. 13(3) but for the purchase of property for running educational Institute. Hence, I hold that the assessee has given the advance for the purpose of the object of the trust and the same is not hit by the provisions of Section 13(3), but for the furtherance of the objects of the Trust. The assessee trust was already allowed registration u/s. 12A by DIT(E) on the basis of the object of the trust. The AO is directed to allow exemption u/s. 11 as the assessee has given advance for the purpose of the object of the trust and not for the personal benefit of any trustee. This ground of appeal is allowed." Therefore, under the same and similar facts and circumstances of the case, I do not find any reason to deviate from the decision of my predecessor on this issue.”
Considering the past history of the assessee and decision of the Co-ordinate Bench (supra), we direct the AO to verify the facts for the advance given for the year under consideration only after affording reasonable and adequate opportunity of being heard to the assessee.
The next disputed advance relates to Rainbow Tech. We find from the copy of accounts that Rs.18,00,000/- was given in the earlier year. Therefore, the same cannot be questioned during the year under consideration, out of which the assessee has received Rs.5,00,000/- back and the closing balance stands at Rs.30,00,000/- which cannot be added during the year under consideration. Moreover, in subsequent financial year, the entire advance has been received as per the copy of account exhibited at page 41 of the paper book. 15. The next disputed advance is in respect of Arun Muchhala Engineering College. A perusal of the copy of account shows that there was a pending balance of Rs. 6,65,09,376/-. Moreover, this engineering college is part of the Trust as can be seen from the financial statements and audit report of the Trust exhibited at pages 37 & 38 of the paper 9 book. Therefore, we do not find any merit in considering this advance as violative of the provisions of Section 11(5) r.w.s. 13(1)(d) of the Act. 16. The fourth disputed advance relates to Arun Muchhala Research & Education Centre. A perusal of the copy of account shows that there was an opening balance of Rs.29.25 lakhs. Therefore, there is no question of making any addition of the balance outstanding amount of Rs. 25,000/-. 17. Accordingly, this ground is partly allowed for statistical purposes. 18. Insofar as the addition u/s 68 of the Act is concerned, the first disputed loan is in respect of Sai Shiva Developers which has an opening balance of Rs.67.50 Lakhs and the closing balance of Rs.32,50,000/- is out of the pending balance. Therefore, the same cannot be added u/s 68 of the Act for the year under consideration. 18.1. The second loan is from Mucchala Magic Land P. Ltd.. The copy of accounts shows that there is a credit balance of Rs.17,75,000/- which cannot be added during the year under consideration. Other amounts received during the year have been duly confirmed by the creditor. Since the opening balance has been accepted in the earlier year, there is no question of treating the party as non-genuine and all the transactions have been done through banking channels. Therefore, we do not find any merit in the impugned additions u/s 68 of the Act. 18.2. The third loan is from Arun Muchhala Co-owners is again the opening balance, therefore, cannot be added u/s 68 of the Act for the year under consideration.
Accordingly, the additions made u/s 68 of the Act are directed to be deleted. AY 2016-17 20. The grievance of the assessee reads as under:- “1. The grounds of appeal mentioned hereunder are without prejudice to one another
2. The leared Commissioner of Income-tax (Appeals), National Faceless Appeal Centre [CIT(A)] erred on facts as also in law in confirming addition. The addition has been made on the alleged ground of denial of the benefit of exemption u/s 11 stating advance of Rs.6,70,83,844/- hit by the provision of section 13. The addition confirmed by CIT (A) is bad in law as also on facts and therefore the same may kindly be deleted.
3. The learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre [CIT(A)] erred on facts as also in law in confirming addition of Rs.80,50,061/-. The addition has been made under income from other sources on the alleged ground of interest income @ 12% on interest fee advances of Rs.6,70,83,844/- . The addition confirmed by CIT (A) is bad in law as also on facts and therefore the same may kindly be deleted.
4. The appellant craves leave to add, to amend, alter, or withdraw any or more grounds of appeal on or before the hearing of appeal.”
While scrutinising the return of income, the AO found that the assessee has given advance to the following parties:- Ritika Hotels Pvt Ltd 86,51,624 Arun Muchhala Engineering College 97,62,220 Tarapur Textile Park Ltd 4,66,70,000 Divina 10,00,000 S.M.G. Securities Ltd. 5,00,000 J. M. Consruction 5,00,000 6,70,83,844
The AO was of the opinion that the assessee has violated the provisions of Section 13(1)(d) r.w.s. 11(5) of the Act and denied the claim of exemption u/s 11 of the Act.
I.T.A. No. 4081/Mum/2023 11 22.1. Proceeding further taking a leaf out of the preceding AY 2015-16, the AO was of the opinion that since the assessee has given interest free advances, he went on to compute the notional interest on the advance given in earlier years and made the addition of Rs. 80,50,061/-.
The assessee carried the matter before the ld. CIT(A) without any success.
Before us, the ld. Counsel for the assessee reiterated what has been stated before him AY 2015-16. The ld. D/R placed strong reliance on the findings of the AO.
We have carefully perused the orders of the authorities below and the relevant documentary evidence brought to our notice.
Insofar as advances to Ritika Hotels Pvt Ltd. and Arun Muchhala Engineering College, are concerned, the same have been considered by us in detail in (supra). For our detailed discussion therein, we hold accordingly.
Advance given to Tarapur Textile Park Ltd., is for the use of property as per the memorandum of understanding exhibited at page 86 to 92 of the paper book. Since advances given for the use of property belonging to Tarapur Textile Park Ltd., for the purpose of carrying on the objects of the Trust, we do not find such advances violative of Section 11(5) r.w.s. 13(1)(d) of the Act.
Advance given to Divina, is for furniture and that too not a related party. Therefore, provisions of Section 13(1)(d) of the Act are not applicable.
Advance given to S.M.G Securities Ltd. is for arranging finance, again not a related party. Moreover, the payment made to S.M.G.