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Facts
The revenue appealed an order allowing the assessee's claim for repayment of loans as application of income. The dispute centers on whether the loan repayment, used for acquiring capital assets and constructing a commercial complex, violates Section 13(1)(c) of the Income Tax Act.
Held
The Tribunal, considering the High Court's directive for de novo consideration, set aside the CIT(A)'s order and restored the matter to the Assessing Officer. The AO is to conduct a detailed factual inquiry into the transactions between the assessee trust and M/s. Tamil Nadu Real Estates Ltd. regarding potential violations of Section 13(1)(c).
Key Issues
Whether the repayment of loans for acquisition of capital assets and construction of a commercial complex constitutes an application of income and if it violates Section 13(1)(c) of the Income Tax Act, requiring fresh factual verification by the Assessing Officer.
Sections Cited
143(3), 11, 12A(a), 13(1)(c), 147
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI S.R. RAGHUNATHA
आदेश / O R D E R
PER S.R.RAGHUNATHA, AM.
This appeal by the revenue is arising out of the order No.68/06-07 dated 22.12.2006, passed by the Learned Commissioner of Income Tax (A) - XI, Chennai (in short “ld.CIT(A)”) for the assessment year (A.Y) 2003-04 against the order u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) passed by the AO dated 31.03.2006.
2. This appeal is reinstated before this Income Tax Appellate Tribunal in consequence to the judgement passed by the Hon’ble Madras High Court in TCA No. 453 of 2012 vide their order dated 08.07.2025, wherein the Hon’ble Madras High Court had held as follows:
JUDGMENT (Delivered by the Hon'ble Chief Justice)
Both counsels jointly request that the impugned order be quashed and set aside and the matter be remanded to the Tribunal for de novo consideration.
Ordered accordingly. All rights and contentions are kept open.
3. Since the matter pertains to assessment year 2003-04, the Tribunal is requested to dispose of the appeal expeditiously and, in any case, by 31.12.2025.
Appeal is disposed of accordingly. There shall be no order as to costs. Consequently, interim application stands closed.
3. Brief facts of the case are that the assessee is a Trust registered u/s.12A(a) of the Act, filed its return of income for A.Y 2003-04 on 19.12.2003 claiming exemption u/s.11 of the Act. The case was selected for scrutiny, and the statutory notices were issued to the assessee. During the assessment proceeding for the A.Y.2003-04 the assessee submitted the details called for and the assessment was completed u/s.143(3) of the Act dated 31.03.2006 disallowing the repayment of loans towards acquisition of capital assets for which loans were taken as application for the assessment year 2001-02. The assessee has claimed the following repayment of loans as application; Sundry creditors(TNRE – Tamil Nadu Real Estate Limited) of Rs.12,03,12,724/- & Centurion Bank of Rs.73,31,499/- The claim of the assessee was disallowed as repayment of loans cannot be considered as an application income and a Demand of Rs.2,87,52,564/- was raised.
4. Aggrieved by the above order, the assessee went on appeal before the Ld.CIT(A). The Ld.CIT(A) vide its order dated 22.12.2006 allowed the appeal of the assessee considering the CBDT circular No.100 dated 24.01.1973, wherein it is stated that the repayment of loan is allowed if the same is used as application towards the objects.
5. Aggrieved by the above order of the Ld.CIT(A) for the A.Y.2003-04, the Revenue preferred an appeal before the Tribunal stating that the loan taken is not for charitable purpose but for construction of commercial complex which was disallowed as application during the assessment for A.Y.2001-02. The Tribunal in its order in & 2125/Mds/2007 for the Asst Years 2001-02 and 2003-04 dated 12.09.2008 relied on the Apex court order in the case of Kapurchand Srimal v.CIT Andhra Pradesh 131 ITR 451 and directed for further investigation on the violation of the Section 13(1)(c) by the assessee Trust, where the Tribunal has stated as below:-
“It is well known that the appellate authority has the jurisdiction as well the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute”
The ITAT remitted the issue to the file of the Assessing Officer to give a finding regarding the violation of provisions contained in section 13(1)(c) of the Act. The relevant para is reproduced as follows; “5. We have heard both the counsels and perused the relevant records. At the threshold we note that the assessing officer has observed that the trustees of the trust and the Directors of the builder were common persons. In terms of the agreement between the trustees and the builder and the nature of transactions, the Assessing officer was initially harbouring the opinion that there was violation of Section 13 of the Income Tax Act. However, he failed to come to any conclusive finding and left the matter undecided. In the appellate order, learned Commissioner of Income Tax (Appeals) notices this aspect and on more than one occasion in his appellate order, he observed that, no case has been made out by the Assessing Officer with regard to violation of provisions of Section 13 of the Act. We find that this aspect is very important for proper adjudication of this case. It is settled law that commissioner of Income Tax (Appeals)’s power is co-terminus with that of the Assessing officer. If the Assessing Officer had failed to examine this issue in proper perspective, the learned commissioner of Income Tax (Appeals) had on several occasions taken the plea that Assessing Officer has not made out any findings in this regard.
6. We find that the Hon’ble Apex Court in the case of Kapurchand Shrimal Vs CIT, Andhra Prasdesh 131 ITR 451 has held as under:- “it is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statue.”
In the background of aforesaid discussion and precedent, we remit this issue to the file of the Assessing Officer to give a finding regarding the violation of provisions contained U/s 131 of the Act. Needless to add, the assessee should be given adequate opportunity of being heard.
7. We further note that there are certain other issues raised in these appeals but in our opinion, this matter has to be decided at the threshold. Hence, we are not commenting on other aspects raised in this appeal. We make it clear that we have not decided the issue on merits in any matter whatsoever. It will be open to the assessee to raise whatever points on this issue before ethe Assessing Officer as he may be advised and as he may be entitled in law.”
Aggrieved by the order of the Tribunal, the assessee went on appeal before the Hon’ble Madras High Court vide TCA Nos.179 and 180 of 2009. The Hon’ble Madras High Court vide its order in TCA Nos.179 & 180 of 2009 dated 04.10.2010 remitted back the issue to the Tribunal for fresh consideration after giving due opportunity. The relevant portion of the Hon’ble High Court order is reproduced as below:
“Q4. The issue that falls for consideration is in a very narrow campus.
The question of law raised in these appeals reads as under:- “ Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in disposing of the appeals holding that it has not decided the issue actually arising in appeal and that the question of the violation of Section 13 which was not an issue in appeal has to be decided at the threshold?”
Mr.Ramachandran, learned senior counsel for the appellant made a reference to paragraph 4.12 of the order of the assessing authority dated 31.03.2004, wherein the assessing authority has made an observation as under: “Hence it is not possible to give a finding as of now and with materials available on record whether any violations has been made under section examined in detail and action taken, if provisions of Section 13 was found violated.” Learned senior counsel further contended that while the appellant went before the Commissioner of Income Tax (Appeals) also did not interfered with the said observation of the assessing authority made on section 13 of the Income Tax Act, the order of the Tribunal in directing the assessing officer to give a finding regarding violation of the provisions contained in Section 13 of the Income Tax Act by the impugned order was wholly illegal.
As against the above admissions, Mr. Patty B.Jaganathan, learned standing counsel for the respondent drew our attention to paragraph 4.8- 4.11 of the assessing authority dated 31.3.2004 and by specifically pointing out that the authority having regard to the agreement dated 1.11.1994 as between the appellant and M/s. T.N. Real Estate Limited, in which the trustees of the appellant were directors and various other documents and also the reference to the file of M/s. Tamil Nadu real Estates Ltd., wherein net profit of Rs.
1,35,45,911/- has been admitted for the year ending 31.3.2001 after referring to the payment made by the appellant trust in a sum of Rs. 2,13,91,731/-. Which included commission of Rs. 23,91,731/- as well as the expenses claimed by the above company, which included a sum of Rs. 3 lakhs by way of remuneration to its director. Mrs. R. Ispahani, one of the trustees of the appellant trust and the further fact of construction of the commercial complex between 1995- 2001 by M/s. Tamil Nadu Real Estate Limited, contented that the assessing authority failed in its duty in examining the violation of Section 13 of the Income Tax Act and therefore, the tribunal’s direction to the assessing authority to examine the valid violation cannot be faulted.
6. Having heard the learned senior counsel for the appellant as well as the learned senior counsel for the respondent and the grievances raised on behalf of the learned senior counsel for the appellant that in the absence of any specific ground raised
by the respondent before the tribunal as regards the said issue, namely, violation of Section 13 of the Income Tax Act and when the appellant had no opportunity to deal with the said issue before the tribunal, the tribunal’s direction to the assessing officer, lacks in jurisdiction and was not justified in issuing such an order to the assessing authority for examining the issue relating to violation of Section 13 of the Income Tax Act. The learned senior counsel would, therefore, content that the order of the tribunal is liable to be set aside and the appellant should be given an opportunity to put forward its submissions on that very issue as to whether or not the issue relating to violation of Section 13 could be examined by the tribunal. The learned standing counsel for the respondent has also no objection for giving an opportunity to the appellant before the tribunal.
7. Having regard to such a grievance expressed on behalf of the appellant, we do not want to probe into the contentions raised on behalf of the respondent based on various fats intoned in paragraphs 4.8 to 4.11 of the order of the assessing authority dated 31.03.2004 at this juncture we leave it open for the tribunal to examine those factors while giving a fresh opportunity top the appellant before passing any final orders on the issue relating to violation of Section 13 of the Income Tax Act and non-consideration of the same by the assessing authority.
8. With that view, we set aside the order of the tribunal dated 12.9.2008 remitting the matter back to the Tribunal for fresh consideration, after giving due opportunity to the appellant. We make it clear that we have not dealt with the merits of the issue in this order and we leave it open for the tribunal to decide the whole issue afresh.”
Meanwhile, the Assessment for the A.Y.2002-03 was reopened u/s.147 and Assessment Order u/s.143(3) r.w.s 147 of the Act was passed on 30.12.2009. In the said order the AO suo-moto examined the matter keeping in mind the directions of the ITAT for the A.Y.2001-02 and 2003-04 and reasoned that the details gathered for the A.Y.2002-03 do not indicate any violation u/s.13 of the Act. Thus, the income offered by the assessee was accepted and nil order was passed. It is to be noted that the ITAT has directed the Assessing Officer to investigate the A.Y.2001-02 and A.Y.2003-04 based on ample evidence brought out by the Assessing Officer for the A.Y.2001-02. However, that verification has not been carried out for these two assessment years.
The sole paragraph in the assessment order A.Y.2002-03 is reproduced as follows: “For the A.Y.2001-02, additions were made on the cost of construction of commercial complex refusing to treat it as application of income. The commissioner of Income- tax (Appeals) allowed the appeal of the assessee after quoting various case laws in favour of the assessee. The department went on appeal against this order. The ITAT have a direction for the Asst. Years 2001-02 and 2003-04 of Section 13 of the Act. Keeping this in mind, elaborate details were gathered to ascertain whether the cost of construction paid to Tamil Nadu real Estate (P) ltd were excessive, whether the payments made to Tamil Nadu (P) Ltd for maintaining the building were excessive and whether any benefits have been derived by the person referred U/s.13(3) of the Act. The details gathered do not indicate any violations U/s.13 of the Act. Hence, based on the case laws referred to in the orders of the commissioner of Income Tax(Appeals), the cost of construction of building is considered as application of income in the case of assessee.” –
The ITAT in its new order in Asst Year 2001-02 and A.Y.2003-04 dated 29.02.2012, considered the Assessment Order for the A.Y.2002-03 where the AO has stated that there is no indication of any violaton u/s.13 of the Act.
Aggrieved by this order of the ITAT in A.Y.2001-02 and A.Y.2003-04 dated 29.02.2012, the Revenue preferred an appeal before the Hon’ble Madras High Court vide TCA no.453 of 2012 challenging the decision of the ITAT based on the Assessment order for the A.Y.2002-03.
The Hon’ble Madras High Court in its order in TCA No.453 of 2012 dated 08.07.2025 has set aside the matter to the ITAT for de novo consideration and to dispose of the case before 31.12.2025.
Before us the ld.DR submitted that the Hon’ble High Court has left the issues open for investigation as evident from the order itself. Also, the grounds of the Appeal that were before the Hon’ble High Court referred the entire issue relating to A.Y.2001-02 and A.Y.2003-04.
Further, the ld.DR stated that the assessment order for the A.Y.2003-04 where the repayment of loan for the acquisition of capital asset was disallowed flows from the order of the A.Y.2001-02 where the preliminary violation of the Section 13(1)(c) are detailed by the AO. The repayment of the loan to the sister concern by the assessee Trust is continued in the A.Y.2003-04. Thus, this violation originates from the periods of the activities related to the construction of the commercial complex and repayment of the loan to the construction company, the sister entity of the assessee Trust, which continued for the A.Y.2003-04 as well.
Hence, the order of the Hon’ble High Court of Madras regarding violation of section 13 of the Act flows from the Assessment Order and ld.CIT(A) Order for the A.Y.2001-02 and 2003-04. In the whole proceedings from the initial findings of the AO to the final Hon’ble High court order, the much required investigation on the violation of the Section 13(1)(c) of the Act, which was directed by the Income Tax Appellate Tribunal on first instance has not happened. Also, it is to be noted that the second order of the Income Tax Appellate Tribunal was primarily based on the non- speaking order of the Assessing Officer for A.Y.2002-03.
Therefore, the following issues that is emanating on the transactions between the assessee- trust and M/s.Tamil Nadu real Estate Pvt Ltd are not investigated by the AO:
a. The market rates for construction and the rates considered for construction by M/s Tamil Nadu Real Estates is not verified – Relates to construction and loan availed by the sister entity TN Real Estate Private Limited for construction which in turn is getting paid back by the assessee Trust - Applicable for the AY 2003-04. b. It is seen from the books of M/s.Tamil Nadu Real Estates Ltd that the company has paid a renumeration of Rs.3,00,000 to its director Mrs. R. Ispahani who also a trustee of the assessee trust. The assessee trust has paid a sum of Rs.1,90,00,000 as professional fees and Rs.23,91,731 as commission expenses (totalling Rs.2,13,91,731) to M/s Tami Nadu Real Estates Ltd. This needs to be verified w.r.t to section 13 of the IT Act. c. The assessee states that the agreement entered into on 01.11.1994 was not acted upon. But has not produced a new agreement. Prima facie, incorrect information was furnished before the Assessing Officer - Applicable for the AY 2003-04. d. Since, the assessee trustee and the Directors of the M/s Tamil Nadu Real Estates Ltd are same and without any proper agreement for construction, it is inferred that the assessee trustee/ directors were compensated and thus is an issue to be verified with respect to Section 13 of the IT Act - Applicable for the AY 2003-04. e. The sale agreement between the buyers (Assessee Trust, TN Real Estate Pvt Ltd and two buyers ) evidence that the funding has been done by the two buyers and the sister entity acted as a middle man between the assessee Trust and the buyers, whereas the construction contract was between the assessee Trust and the sister entity and repayment of the loan was made to the sister entity by the assessee Trust – Applicable for the AY 2003-04.
Also, in the Order for the A.Y.2001-02 the ld.CIT(A) refers to a resolution dated 17.05.1995 where in the terms of the agreement were modified as under:
a. The assessee trust shall be the owner of the entire building b. TNRE shall be entitled to a remuneration of 10% of the total cost of construction c. TNRE shall provide necessary funds for construction as also technical assistance d. The assessee shall reimburse TNRE, the cost of construction.”
And stated that these modified agreements were agreed by TNRE, whereas there is a clear finding by the Assessing Officer that the original agreement dated 01.11.1994 was acted upon and not the modified one. Also, the so-called modified resolution or agreement was never furnished before the Assessing Officer.
In view of the above arguments, the ld.DR contended that the issue of the investigation of the violation of the 13(1)(c) has not been conducted at any stage and there are no facts available at present on record to negate the preliminary findings of violation of the Section 13(1)(c) of the Act for the A.Y.2001-02 and A.Y.2003-04, it is prayed that an investigation may be ordered to be conducted to find the correct facts of the case. The present appeal is with respect to the A.Y.2003-04 and but the entire gamut of the issues that emanate from the A.Y.2001-02 is applicable to A.Y.2003-04 as the issue of the loan repayment of the assessee trust to the sister entity Tamil Nadu Real Estate Limited for the A.Y.2003- 04 was availed for the construction of the commercial complex.
It is hereby humbly prayed that a specific investigation by the Assessing officer to examine and determine on the issue of the violation under Section 13(1)(c) of the Act may be ordered and therefore, it is further prayed that the issue may be remitted back to the Assessing officer on this issue.
Per contra, the ld.AR submitted that the issue of violation as per section 13(1)(c) of the Act was not before CIT(A) and that the AO has allowed the exemption u/s. 11 of the Act for Assessment Year 2003-04. If there is a violation as per section 13(1)(c) of the Act, the AO would not have allowed the exemption u/s.11 of the Act. Further, the ld.AR submitted that the only point in dispute is as to whether the repayment of loans borrowed can be considered as application of money or not. AO did not consider the repayment of loans (Rs.12,03,12,724/-) as the application of income. In this regard, the AO has not mentioned that the assessee had violated as per 13(1)(c) of the Act.
In respect of the ld.DR’s allegation that the assessee failed to reveal complete facts before AO and appeared to have provided incorrect information, as evidenced from the assessment order, the ld.AR submitted that these are vague allegations without any evidence. The ld.DR has not mentioned as to the facts which have not been revealed and as to what were incorrect particulars furnished.
Further, the ld.DR’s contention about the Page No.7 deals with the order of the ITAT dated 12.09.2008, the ld.AR stated that the point to be considered is as to whether ITAT has got powers to deal with an issue which does not arise from the order of ld.CIT(A).
The ld.AR further submitted that the ld.DR has only relied upon the assessment order for A.Y.2001-02. However, each assessment year is independent. Hence, the ld.DR has not pointed out as to how the respondent had violated as per sec 13(1)(c) for the A.Y.2003-04. The Assessee is not able to make its submissions on this issue. The ld.DR has submitted that the matter may be recommended to AO for fresh consideration. If it is so, it is not clear as to why the Department filed an appeal to the Hon’ble High court against this order dated 12.09.2008, in which the ITAT remanded the matter to AO for fresh consideration. In view of the above, the ld.AR prayed for confirming the order of the ld.CIT(A).
We have heard the rival parties and perused the material available on record and gone through the orders of the lower authorities. At the outset, it is not in dispute that the assessee is a trust registered under section 12A of the Act and has claimed exemption u/s.11 for the A.Y.under consideration. The dispute before us arises from the disallowance of repayment of loans amounting to Rs.12,03,12,724/- payable to M/s.Tamil Nadu Real Estates Ltd. and Rs.73,31,499/- payable to Centurion Bank, which the assessee claimed as application of income for A.Y. 2003-04. The ld.CIT(A) allowed the claim of the assessee by relying upon CBDT Circular No.100 dated 24.01.1973, holding that repayment of loans taken for charitable purposes constitutes application of income. The Revenue is in appeal against the said finding.
The present appeal has been restored to the Tribunal pursuant to the judgment of the Hon’ble Madras High Court in TCA No.453 of 2012 dated 08.07.2025, wherein the Hon’ble High Court, on a joint request by both parties, set aside the earlier order of the Tribunal and remanded the matter for de novo consideration, keeping all rights and contentions open, and directing the Tribunal to dispose of the appeal expeditiously.
Further, the Hon’ble High Court in its earlier judgment dated 04.10.2010 in TCA Nos.179 & 180 of 2009 had specifically held that the Tribunal should examine afresh, after granting due opportunity to the assessee, the issue relating to non-examination of possible violation of section 13 of the Act by the Assessing Officer, without expressing any opinion on merits.
Thus, the legal position emerging from the successive orders of the Hon’ble High Court is that: • the Tribunal is required to adjudicate the appeal afresh, • the issue of violation of section 13(1)(c) cannot be summarily concluded without factual verification, and • the matter must be examined in accordance with law after providing adequate opportunity to the assessee.
We find substance in the submission of the ld.DR that the transactions giving rise to the present dispute for A.Y.2003-04 have their genesis in the construction of the commercial complex undertaken during the earlier years and the financial arrangements entered into with M/s.Tamil Nadu Real Estates Ltd., a sister concern in which trustees of the assessee trust were also directors.
It is an admitted fact that the loans repaid during A.Y.2003-04 were availed for construction of the commercial complex, the construction activity and financial dealings with M/s.Tamil Nadu Real Estates Ltd. span multiple assessment years, and the issue of potential violation of section 13(1)(c) was noticed by the AO in A.Y. 2001- 02 but left inconclusive. The Tribunal, in its order dated 12.09.2008, had specifically remitted the matter to the AO to record a finding on violation of section 13(1)(c). However, such a factual determination has admittedly not been carried out for A.Ys. 2001-02 and 2003-04.
Much reliance has been placed by the assessee on the reassessment order passed for A.Y.2002-03 dated 30.12.2009, wherein the AO observed that no violation of section 13 was found on the basis of details gathered.
Therefore, while the reassessment order for A.Y.2002-03 is a relevant piece of material, it cannot by itself be treated as conclusive for adjudicating the issue of violation of section 13(1)(c) for A.Y. 2003-04, particularly when the Hon’ble High Court has ordered de novo consideration. The ld.DR has specifically pointed out several factual aspects requiring verification, including reasonableness of construction costs vis-à-vis market rates, payments of commission and professional fees to M/s.Tamil Nadu Real Estates Ltd., remuneration paid to a director who is also a trustee, applicability and genuineness of agreements and resolutions relied upon, and the actual flow of funds and benefit, if any, to persons specified under section 13(3). These aspects go to the root of the applicability of section 13(1)(c) and cannot be adjudicated in absence of a detailed factual inquiry by the AO.
At the same time, we also note the contention of the ld. AR that violation of section 13(1)(c) was not the subject matter of the original appeal before the ld.CIT(A), the AO has not recorded a categorical finding of violation in A.Y. 2003-04, and each assessment year is independent.
We are of the considered view that these rival contentions themselves underscore the necessity of a comprehensive factual examination, rather than an adjudication based on presumptions or incomplete records. In view of the categorical directions of the Hon’ble Madras High Court for de novo consideration, the absence of a conclusive factual finding by the AO on the issue of violation of section 13(1)(c), the interlinked nature of transactions spanning multiple assessment years, and the requirement of natural justice, we deem it appropriate to set aside the order of the ld. CIT(A) for A.Y.2003-04 on this limited issue and restore the matter to the file of the AO to examine afresh whether there is any violation of section 13(1)(c) of the Act for A.Y.2003-04, carry out detailed verification of transactions between the assessee trust and M/s.Tamil Nadu Real Estates Ltd., consider the agreements, resolutions, flow of funds, market comparables, and benefit, if any, to persons specified under section 13(3), take into account the reassessment order for A.Y.2002-03, without treating it as conclusive, and pass a speaking order in accordance with law after
granting adequate opportunity of being heard to the assessee. We make it clear that we have not expressed any opinion on the merits of the case, and all contentions of both parties are left open.
In the result, the appeal filed by the Revenue is allowed for statistical purposes.
Order pronounced in the open court on 29th December, 2025 at Chennai.