ITO EXEMPTION 2 4 MUMBAI, MUMBAI vs. VAIBHAV MEDICAL AND EDUCATION FOUNDATION, MUMBAI

The Assessing Officer (“AO”) vide order dated 18.03.2014 passed under section 143(3) disagreed with the submission of the assessee and held that ABET is a related party of the assessee since the settlor of ABET is related to Key Management Personnel of the assessee, and accordingly, would fall within the category of “specified person” as per the provisions of section 13(3) of the Act. The AO further noted that ABET was formed by the settlor by remitting to the Trustees a sum of Rs.50,000/- towards the settlement of the Trust. Accordingly, the AO concluded that the interest-free loan advanced by the assessee to ABET is in violation of the provisions of sections 13(2)(a), 13(2)(b) and 13(2)(g) of the Act. Consequently, the interest expenditure on the term loan amounting to Rs.4,99,11,658/- was disallowed and added to the total income of the assessee. Further, on a similar basis, the AO disallowed the lease rental paid by the assessee in respect of the building taken on leave and licence basis by it and provided free of charge to ABET to enable them to start “Aditya Birla World Academy School”.

The learned CIT(A), vide impugned order, allowed the grounds raised by the assessee on this issue held that ABET is a charitable trust and is for the benefit of the Public, therefore, the question of substantial interest in ABET does not arise. The learned CIT(A) further held that the fact that the Key Management Personnel of the assessee exercises significant influence over the ABET does not mean that ABET would fall within the purview of the person specified under section 13(3) of the Act. Thus, it was held that the interest- free loan advanced to a Trust, where the wife of the lineal descendant of Key Management Personnel is a settlor, cannot be the reason for attracting the -Mum-2024 (A.Y. 2011-12) 5 provisions of section 13(2) r.w. section 13(3) of the Act. Accordingly, the learned CIT(A) deleted the addition amounting to Rs.4,99,11,658/- made under sections 13(2)(a), 13(2)(b), 13(2)(g) of the Act. Similarly, the learned CIT(A) also deleted the addition of Rs.22,86,000/- made by the AO on account of rental expenses. Being aggrieved, the Revenue is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, there is no dispute regarding the fact that the assessee is registered as a charitable trust under section 12A of the Act and also holds registration under section 80G of the Act. Further, there is no dispute regarding the fact that ABET is also registered as a charitable trust under section 12A of the Act. Since the loan obtained by the assessee from Grasim Industries Ltd. and Aditya Birla Nuva Ltd., at an interest of 9%, was advanced interest-free to ABET, the AO concluded that such an interest-free loan to ABET is covered with the provisions of section 13(2)(a), section 13(2)(b) and section 13(2)(g) of the Act, as ABET is a person specified in section 13(3) of the Act. On the contrary, it is the plea of the assessee that even though ABET was formed by the settlor, who is the wife of a lineal descendant of the Key Management Personnel of the assessee, the same by itself does not lead to the conclusion that ABET falls in any of the clauses of section 13(3) of the Act.

Therefore, in order to decide the issue at length, i.e., whether ABET is a person specified in section 13(3), and therefore, the interest-free loan advanced by the assessee to ABET is covered within the provisions of section 13(2), it is necessary to analyse the provision of section 13 of the Act. Section -Mum-2024 (A.Y. 2011-12) 6 13 of the Act deals with circumstances in which the exemption granted under section 11 shall not be applicable. Sub-section (2) to section 13 of the Act, more particularly clauses (a), (b) and (g), invoked by the AO for disallowing the interest paid by the assessee, reads as follows: - “(2) Without prejudice to the generality of the provisions of clause (c) [and clause (d)] of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3),— (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 (3) for any period during the previous year without either adequate security or adequate interest or both; (b) if any land, building or other property of the trust or institution is, or continues to be, made available for the use of any person referred to in sub-section (3), for any period during the previous year without charging adequate rent or other compensation; ******** (g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3): …………………….”

Thus, as per the aforesaid provisions of section 13 of the Act, if any part of the income, land, building or property of the Trust or institution is lent, made available, or diverted without adequate security or adequate interest or adequate rent or compensation to any person referred to in sub-section (3) to section 13, then such income, land, building or property of the Trust shall be deemed to have been used or applied for the benefit of the person referred to in sub-section (13) to section 13, and accordingly shall not be excluded from the total income of the previous year of the person in receipt thereof under section 11 of the Act. Further, section 13(3) of the Act reads as follows:-

In the present case, as per the AO, since the assessee advanced the interest-bearing loans availed by it to ABET without charging any interest, such a transaction falls within the ambit of provisions of section 13(2) of the Act. In this regard, the AO has laid emphasis on the fact that even though the assessee is a company registered under section 25 of the Companies Act, 1956 and is thus limited by guarantee, however, the Key Management Personnel of the assessee includes - (i) Smt. Rajashree Birla, (ii) Shri Ashwin K. Kothari, (iii) Shri A.K. Agarwala. Further, the AO also took note of the fact that Smt. Neerja Birla, the settlor of ABET and Shri Kumar Mangalam Birla are the son and daughter-in-law of Smt. Rajashree Birla, the Key Management Personnel of the assessee. Since ABET was formed by the settlor, Smt. Neerja Biral by remitting on to the Trustees a sum of Rs.50,000/- towards settlement of the trust, as per the AO, under section 13(3)(b) of the Act, she is considered to be a person who has made a substantial contribution to the trust.

Further, it is undisputed that the assessee is a company registered under section 25 of the Companies Act, 1956, and therefore, there is no author or founder of the assessee. Further, neither the assessee nor its subscriber is a Hindu Undivided Family (“HUF”). Further, the interest-free advance was also -Mum-2024 (A.Y. 2011-12) 9 not given to HUF or any member of HUF. Thus, the provisions of clause (a) and clause (b) of section 13(3) of the Act can also not be applied in the present case. Even if for an argument’s sake, Smt. Rajashree Birla, being the Key Management Personnel of the assessee, is considered as manager of the assessee, it is pertinent to note that in the present case, the loan was not granted to Smt. Rajashree Birla or any of her relatives. Thus, we are of the considered view that the provisions of clause (cc) and clause (d) of section 13(3) of the Act cannot also be applied in the present case.

Insofar as the provisions of Section 13(3)(e) of the Act, we find that the same considers any concern, in which any person referred to any clause (a), clause (b), clause (c), clause (cc) and clause (d) held substantial interest, as a person specified under section 13(3) of the Act. Extending the aforementioned argument that Smt. Rajashree Birla is a manager of the assessee and Smt. Neerja Birla, being her daughter-in-law and also as the settlor of ABET made contributions while creating the ABET, it is pertinent to examine whether Smt. Neeraj Birla can be said to have a substantial interest in ABET, as she satisfies the condition of being the relative of the manager of the assessee. In this regard, it is relevant to note that the provisions of Explanation – 3 of Section 13 of the Act which reads as follows:

Clause (i) of Explanation 3 to section 13 of the Act deals with the case where the concern is a company, and since ABET is a Trust, therefore, the same is not applicable to the present case. Insofar the provisions of clause (ii) of Explanation 3 to section 13 of the Act, same deal with the case of any other concern and require that for a person to be considered to have a substantial interest in the concern, it is necessary that such person is entitled to not less than 20% of the profit of such concern. However, in the present case, undisputedly ABET is a charitable trust registered under section 12A of the Act, and there is no material available on the record to infer that it exists for the purpose of profit. Therefore, the question of entitlement to any profit of ABET does not arise in the present case. Thus, we are of the considered view that even though for an argument's sake, Smt. Rajashree Birla is considered to be a manager of the assessee and Smt. Neerja Birla, being the settlor of ABET and also a daughter-in-law of Shri Rajshree Birla, and thus a relative, however, the same does not lead to the conclusion that Smt. Neerja Birla has a substantial interest in ABET. Hence, the provisions of section 13(3)(e) of the Act are also not applicable to the facts of the present case.

Therefore, from a detailed analysis of various clauses of section 13(3) of the Act vis-à-vis the facts of the present case, we of the considered view that ABET does not fall within the purview of the “specified person” under section 13(3) of the Act. Accordingly, we are of the view that the AO erred in -Mum-2024 (A.Y. 2011-12) 11 invoking the provisions of section 13(2) r.w. section 13(3) of the Act for disallowing the interest expenditure on the term loan amounting to Rs.4,99,11,658/- under sections 13(2)(a), 13(2)(b) and 13(2)(g) of the Act. Accordingly, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue, and therefore, the same is upheld. Similarly, we also do not find any merit in the disallowance of lease rent paid by the assessee for a building which was provided free of charge to ABET to enable them to start “Aditya Birla World Academy School”. Accordingly, the impugned order passed by the learned CIT(A) on this issue is also upheld. As a result, Grounds No.1 to 4 raised in Revenue’s appeal are dismissed.

Ground No.5 raised in Revenue’s appeal pertains to allowance of standard deduction under section 24 of the Act while computing the income under the head “income from house property”.

We have considered the submission of both sides and perused the material available on record. The brief facts of the case are that during the assessment proceedings, the AO observed that the assessee has entered into a lease agreement with New Era Education Trust and earned rental income amounting to Rs.8,38,000/-, which was offered to tax under the head “income from house property”. The AO further noted that while computing its income, the assessee has claimed 30% as a Standard Deduction under section 24 of the Act. Disagreeing with the submission of the assessee, vide assessment order, the AO held that the computation of income from property held under trust is distinct from the provisions of section 14, and therefore, denied the deduction claimed under section 24 of the Act. The learned CIT(A), vide -Mum-2024 (A.Y. 2011-12) 12 impugned order allowed the ground raised by the assessee on this issue, and held that there is no provision in the Act that if the property of the trust is held for charitable purpose, no deduction under section 24 of the Act would be available. Thus, the learned CIT(A) held that the provisions of section 24 of the Act will also apply to income from house property earned by a charitable trust. Being aggrieved the Revenue is in appeal before us.

Thus, the issue arises whether the assessee, claiming exemption under section 11, is entitled to claim a deduction of a sum equal to 30% of the annual value under section 24(a) of the Act. We find that the Hon’ble Madras High Court in CIT vs Rao Bahadur Calavala Cunnan Chetty Charities, reported in [1982] 135 ITR 485 (Mad.), held that the income from property held under trust would have to be arrived at in a normal commercial manner without reference to the provisions which are attracted by section 14. The relevant findings rendered by the Hon’ble Madras High Court, in the aforesaid decision, are as follows: -

We further find that the Hon’ble Calcutta High Court in DIT(Exemption) vs. Girdhari Lal Shewnarain Tantia Trust, reported in (1993) 199 ITR 215 (Kol), rendered similar findings and held that the income from the property held under trust has to be arrived at in a normal commercial manner and when the income from property held under trust as such is excluded, there is no scope for computing the income from house property by applying the provision of section 14 of the Act. The relevant findings of the Hon’ble Calcutta High Court, in the aforesaid decision, are reproduced as follows: -

During the hearing, in support the submission that the deduction under section 24 of the Act is available to the assessee, the learned Authorized Representative (“learned AR”) placed reliance upon the decisions of the Co- ordinate Bench of the Tribunal in ADIT vs. Sri Sathya Sai Trust, in and in Shantaram Bhatt Charitable Trust, reported in (2020) 180 ITD 735 (Mum-Trib). From the perusal of both the decisions, relied upon by the learned AR we find that there is no reference to the decision of the Hon’ble Madras High Court in Rao Bahadur Calavala Cunnan Chetty Charities (supra), which has been considered by the Hon’ble Calcutta High Court in the decision cited (supra) and was also followed by the AO in disallowing the deduction claimed under section 24 of the Act by the assessee. Thus, respectfully following the aforesaid decision of the Hon’ble Madras High Court and the Hon’ble Calcutta High Court, we direct the AO to disallow the deduction of 30% claimed by the assessee on income declared under the head “income from house property”. Accordingly, we do not concur with the findings of the learned CIT(A) on this issue. As a result, Ground No.5 raised in Revenue’s appeal is allowed.

The issue arising in Ground No.6 raised in Revenue’s appeal pertains to the addition on account of interest accrued but not received.

We have considered the submissions of both sides and perused the material available on record. During the assessment proceedings, it was observed that the assessee has followed mercantile system of accounting. However, while computing its income, the assessee has not offered interest income on an accrual basis but has offered interest on a cash basis. As the income was not computed in accordance with the accounting principles of the assessee, the assessee was asked why the interest accrued but not received should not be taken as income in the income statement. In response, the assessee submitted that for the purpose of income tax returns, it has followed a cash basis of accounting since inception which is a method for computing the income. The assessee further submitted that since its amounts are prepared on an accrual basis, the same is adjusted for non-receipt of income accrued but not received and effectively the income received in cash is shown as income. The AO, vide impugned order, disagreed with the submissions of the assessee and held that the system of hybrid accounting or mixed accounting has been done away with. Thus, the taxpayers have to follow either the cash or mercantile system consistently. Accordingly, the interest income was worked out by invoking the provisions of section 144 in accordance with the provisions of section 145 and added to the total income of the assessee. The learned CIT(A) vide impugned order, allowed the grounds raised by the assessee on this issue and deleted the addition of Rs.5,51,16,611/- made by the AO.

We find that a similar issue pertaining to following the hybrid system of accounting came up for consideration before the co-ordinate bench of the Tribunal in assessee’s own case in ITO vs. M/s. Vaibhav Medical and Education Foundation, in for the assessment year 2012-13. While deciding the issue in favour of the assessee, the co-ordinate bench of the Tribunal vide order dated 04.03.2024, observed as follows: -

The alternate contention of the Id AR is that there is no real loss to the revenue since the interest income reduced in the earlier year is offered in the subsequent year on receipt basis. From the perusal of the below table as submitted by the Id. AR during the course of hearing it is clear that the assessee is adding the interest income which was deducted in the previous AY to the income of the current AY on receipt basis and the amount of interest not received during the year under consideration is reduced (Amount in Rupees) Particulars AY 2011-12 AY 2012-13 AY 2013-14 AY 2014-15 Interest income as per 2,78,54,824 6,60,47,102 6,99,96,295 6,47,56,485 Financial Statement Add: Accrued interest 2,81,42,396 5,51,16,611 3,82,40,749 67,98,483 of previous year and received in current year Sub Total 5,59,97,220 12,11,63,713 10,82,37,044 7,15,54,968 Less : Accrued interest 5,51,16,611 3,82,40,749 67,98,483 of current year and not received in current year Interest income offered 8,80,609 8,29,22,964 10,14,38,561 7,15,54,968 to tax in Return of Income

Since the issue under consideration has already been decided in assessee’s own case by the co-ordinate bench of the Tribunal in the preceding year, in the absence of any change in facts or law, respectfully following the same findings of the learned CIT(A) on this issue are upheld and Ground No.6 raised in Revenue’s appeal is dismissed.

In the result, the appeal by the Revenue is partly allowed.