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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
आदेश /O R D E R Per G Manjunatha, AM: This bunch of four appeals filed by the assessee are directed against separate, but identical orders of learned Commissioner of Income Tax (Appeals)-18, Chennai, even dated 19.08.2019, 19.08.2019, 21.08.2019 & 27.08.2020 and pertains to assessment years 2012-13, 2013-14, 2016-17 & 2017-18. Since facts are
2 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 identical and issues are common, for the sake of convenience these appeals are heard together and are being disposed off, by this consolidated order.
The assessee has more or less raised common grounds of appeal for all assessment years. Therefore, for the sake of brevity, grounds of appeal for assessment year 2012-13 are reproduced as under:- 1. The 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.
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.
The CIT(Appeals) failed to appreciate that the misreading of the terms of contract would vitiate the related findings to deny the benefit of tax exemption computation u/s 11 of the Act and further ought to have appreciated that the expression/scope of 'Manager' in contra distinction to the expression/scope of 'Consultant'; Hence, application of the provisions of section l3(3) read with section 13(2)(a)of the Act in treating the consultant as Manager should be reckoned as bad in law.
3 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020
The Learned Commissioner of Income tax (Appeals) has failed to appreciate that 'concern’ referred in section l3(3)(e) cannot include trust and the said concept of substantial interest cannot be made applicable to the trust. The section 13(3)(e) provides that ‘any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest.
The Appellant also further relies upon even in the case of alleged diversion of trust funds the ratio drawn by the Karnataka High Court and Bombay High Court in the case of CIT vs. Fr. Mullers Charitable Institution' (2014) (Kar) (363 ITR 230) and CIT (E) v. Audyogik Shikshan Mandal (2019) 261 Taxman 12 (Bom.)(HC) respectively "denial of exemption under S. 11 should be limited only to amount which was diverted to the persons referred under 13(3) in violation S 13(2)(b), read with S.13(3) of the Act"
The appellant further relies upon the circular No.387, Dated 6-7- 1984. Vide the said Circular, it has been laid down in para 28.6 that where a trust contravenes Section 13(1)(c) and (d) of the act, the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provision and not to the entire income.
The CIT (Appeals) and Assessing Officer erred in law and on facts with respect to the disallowance of Interest paid by the appellant on behalf of another trust which is registered u/s 12AA and moreover the payment of interest on behalf of another trust as assistance/donation is within the objects of the trust. The Assessing officer misunderstood this as interest paid to another trust whereas it is actually incurred on behalf of another Trust.
For these and other reasons that may be urged at the time of hearing, the appellant prays that the order of assessment u/s 143(3) r.w.s 263 be quashed, exemption u/s 11 be allowed and consequently addition needs to be deleted.
4 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020
The Appellant craves leave to add, alter and / or amend the aforesaid Grounds of Appeal at or before the time of hearing.
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 income of Rs.13,92,01,900/- as per
5 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 income and expenditure statement even though, exemption u/s.11 of the Act was denied to the Trust because of violation of section 13(1)(c) r.w.s. 13(2) of the Act, which disentitles the Trust from exemption of tax and further, the AO has failed to tax income which was diverted to interested persons in contravention of section 13(1)(c) at maximum marginal rate as per section 164(2) of the Act. Since, the AO has failed to do assessment as per provisions of the Act, the assessment has been set aside and the AO was directed to redo the assessment in accordance with law.
Pursuant to revision order of ld. Pr.CIT u/s.263 of the Act dated 31.03.2017, the AO had taken up the case for hearing and called upon the assessee to file its objection regarding violations referred to u/s.13 (1) (c) r.w.s. 13(2) of the Act and taxability of such income as per proviso to section 164(2) of the Act. In response, the authorized representative of the assessee vide its letter dated 02.08.2017 submitted that there is no violation of section 13(1)(c) r.w.s. 13(2) of the Act, as alleged by the ld. Pr.CIT in its revision proceedings insofar as loans and advances given to two persons viz., Shri. K. Venkat Reddy and Smt. Subashini Vijayaragavan totaling Rs.12,40,00,000/-, because those two persons are neither trustees nor relative to any trustees of the Trust. Further,
6 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 interest free loans given to two individuals is under contractual obligation between individual and the Trust under normal circumstances as per which, the assessee has given loans to two individuals as part of its operational strategies considering expertise possessed by them in the field of education and hence, the same cannot be considered as beneficial payment given to persons specified u/s.13 (2) of the Act. The assessee further submitted that in order to bring any payment within the ambit of section 13(3)(cc) of the Act, the person referred to u/s.13(3) of the Act, should be a Manager by whatever name called. But, in the present case, two individuals are consultants of the trust and had been given employment for a period of 5 years with a specific task for helping the Trust to establish new medical college. The appointment letter clearly specify nature of work required to be carried out by them and emoluments for such services required to be paid, as per which, there is no employee 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
7 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 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.
The AO however, was not convinced with the explanation furnished by the assessee and according to him, there is violation of section 13(1)(c) r.w.s. 13(2) of the Act, insofar as interest free advances given to Shri K. Venkat Reddy and Smt. Subashini Vijayaraghavan, because the Trust has allowed direct benefit to a person referred to in sub-section (3) of section 13 of the Act, and hence, it clearly disentitles from claiming exemption u/s.11 of the Act. The AO further observed that as regards taxation of income at Maximum Marginal Rate as applicable to AOP / BOI as per the provisions of section 164(2) of the Act, where whole or any part of the relevant income is not exempt u/s.11 due to provisions contained in section 13(1)(c) of the Act, tax will be charged on whole of relevant income or part of the relevant income at the maximum marginal rate. Therefore, he opined that there is no merit in the arguments taken by the assessee that there is no violation of provision of section 13(1)(c) r.w.s 13(2) of the Act and tax cannot be levied at
8 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 MMR as per proviso to section 164(2) of the Act, and accordingly surplus as per income and expenditure account has been added to total income and computed tax at maximum marginal rate as per provisions of section 164(2) of the Act.
Being aggrieved by the assessment order, the assessee preferred an appeal before the ld. CIT (A). Before the ld.CIT(A), the assessee has reiterated its arguments taken before the AO and submitted that there is no violation as referred to in section 13(1)(c) r.w.s 13(2) of the Act, as alleged by the AO insofar as loans given to two individuals, because said loans is given under contractual obligation between the parties in terms of employment letter issued to them as per which, they have been appointed for the purpose of specific work for a specific period and further they have been paid salary and other allowances. The Trust has further paid loans to them as per terms of agreement considering their yearly salary and allowances. The assessee further stated that although the assessee has issued appointment letters to two individuals specifying the nature of work to be carried out by them, but since they were not discharged their work in terms of employment, their services have been terminated with a direction to refund advances provided to them. The assessee has also made efforts to recover
9 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 money from them and filed arbitration petition before the Hon’ble Justice (Retd) G.K. Akbar Ali, Judge High Court of Madras and the proceeding is pending for disposal. Further, the assessee has recovered part of advance given to them in subsequent financial years. Therefore, the assessee submitted that advances given to two individuals cannot be considered as direct / indirect benefit of Trust income / property to persons referred to in section 13(3) of the Act.
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-
10 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 clause (cc) of sub-section (3) of section 13 of the Act. Further, two persons were entrusted with the task of vital management and administrative function and hence, definitely fall within the term of ‘manager’ and hence, they fall within the term ‘managers’ by whatever name called in terms of section 13(3)(cc) of the Act. Since, the Trust has given interest free loans to two persons by taking 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.
The ld.CIT(A) has discussed the issue at length in light of certain judicial precedents including decision of Hon’ble Supreme Court in the case of DIT v. Bharat Diamond Bourse, 259 ITR 280 and the decision of Hon’ble High Court of Karnataka in the case of CIT vs. Fr. Mullers Charitable Institution, (363 ITR 230) and held that once there is a violation referred to in section 13(1)(c) r.w.s. 13(2) of the Act, then the Trust is not entitled to exemption u/s.11 of the Act. He further noted that although Hon’ble Karnataka High Court has restricted the taxability of income to the extent of violations referred to in section 13(1)(c) of the Act, but because the Hon’ble Supreme Court has dismissed the SLP
11 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 filed by the Department without adjudicating the questions raised, the earlier decision of the Hon’ble Supreme Court in the case of CIT vs. Bharat Diamond Bourse(supra) is applicable on the facts and hence as per said decision, if there is violation referred to under section 13(1)(c) of the Act, then the Trust is not entitled for exemption u/s.11 of the Act and hence he opined that there is no error in reasons given by the AO to deny benefit of exemption u/s.11 of the Act. He, therefore rejected arguments of the assessee and confirmed denial of exemption claimed u/s 11 of the Act.
As regards, taxability of income at maximum marginal rate, as per proviso to section 164(2) of the Act, the ld.CIT(A) observed that when whole or relevant part of any income is not exempt u/s.11 on account of provisions enshrined in section 13(1)(c) of the Act, tax would be charged on the whole of the relevant income or part of the relevant income at the maximum marginal rate and thus, entire income shall be charged to tax at maximum marginal rate. Since, assessee has violated provisions of section 13(1)(c) r.w.s.13(2) / 13(3)(cc) of the Act, by advancing interest free loans to interested persons and disentitled itself from the benefit of exemption u/s.11, the total income of the Trust is liable to be taxed at maximum marginal rate as prescribed u/s.164(2) of the Act and hence,
12 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 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 the issue as under by addressing the two vital issues viz., (i) as to whether the appellant had lent interest free loan or advance in violation of Sec. 11 rw Sec. 13(2) (ii) as to whether the recipients of such interest free loans/advance are prescribed persons prescribed in sec. 13(3) of the Act.
Section 11(1)(a) of the Act has stipulated that income derived from property under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India, shall not be included in the total income of the previous year of the person receiving the income. S 12 of the Act prescribes that any voluntary contributions received by an institution established for charitable purposes shall, for the purposes of S 11 of the Act, be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of S 1l and 13 of the Act shall apply
13 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 accordingly. S 12 A of the Act provides for registration of the trust or institution in the appropriate form and S 12 AA of the Act deals with the procedure for such registration.
7.1. S 13 of the Act has delineated certain contingencies under which the exemption available u/s 1l will be denied to a Trust. S 13(2) of the Act prescribes situations wherein the property or income of the Trust concerned shall be deemed to have been used /applied for the benefit of persons referred to in S 13(3) of the Act. S 13 (1) (cc) of the Act is relevant provision in the appellant's case.
7.2."Section 13(1) - Nothing contained in Section l1 [or Section 12] shall operate so as to exclude from the total income of the previous year of the person in receipt thereof – xxx xxx xxx (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof- (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied. directly or indirectly for the benefit of any person referred to in sub-section (3).
7.3. S 13(2) provides as under.....:-
"(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"
14 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020
7.4. The relevant provisions of S l3(3) are as under:
"The persons referred to in Clause (c) of Sub-section (1) and Sub- section (2) are the following, namely:- (a) the author of the trust or the founder of the institution; (b).... (c)..... (cc) any trustee of the trust or manager (by whatever name called) of the institution ;) (d)... (e) any concern in which any of the persons referred to in clauses (a) (b)(c)(cc)and (d) has a substantial interest. (/).... 8. The scheme of the Act is that charitable entities can claim exemptions from exigency of taxation in the light of S 11 and 12 of the Act. Section 13 of the Act prescribes conditions, violation of which, shall affect the claim of such exemption u/s 11 and 12. section 13 (1) (c) prohibits use of trust property or income for direct or indirect benefit of the prohibited person(s). Proscriibed person(s) have been prescribed/specijied in S 13(3) of the Act, that include the author of the trust or founder of the institution, person who has made a substantial contribution to the trust, any trustee of the trust or manager, any relative of such author, founder or trustee or manager, or any concern in which any of these persons have substantial interest.
A perusal of the relevant provisions indicates that the main objective of section 13(1)(c) read with section 13(3) is to prevent the exploitation of the tax exempt status charitable institution by such persons who are in a position to exercise control over the management of the institution. S 13(2) enumerates the situations where it shall be deemed that the income or property of the trust or institution has been used or applied for the benefit of a person referred to in sectiont3(3) of the Act. It is relevant to observe that
15 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 while the conditions stipulated in these provisions and the attendant restrictions are clear and unambiguous, its application has raised controversies, as to whether violation of the conditions will lead to only such disallowance that is restricted to monetary value of the benefit to the prohibited person(s), or it will lead to complete denial of the exemption claimed by the assessee u/s 11 and 12 of the Act.
In the appellant's case it is noticed that it is running educational institutions. During the AY s under consideration, it was noticed by the AO that the appellant Trust hired two individuals viz K. Venkat Reddy and Mrs. Subashini Vijayaraghwan for the purpose. The AO has appropriately referred to the contents/terms and reference of the appointment and has brought on record that the impugned sum of Rs. 6,20,00,000 each to these two persons includes 6 months advance salary and interest free loan of Rs. 5.5 crs. So, there is thus diversion of fund as interest free loans to these two persons. It is further noticed that the appellant had not recovered the loan amount atleast tilt the financial year relevant to A.Y. 2016-17. The default thus stated this year and continues.
The AR of the appellant vehemently argued that they are not proscribed persons. On perusal of the appointment letter, it ids noticed that the appointment letter reads as under: "Further to our discussion you had with 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
16 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 Monitoring day to day operations including administration. Review of new projects as to implementation of the works. To effectively follow up the expansion of educational activities in other parts of the state as well as in India and outside. To evolve a team of people for ensuring the procedural formalities that are desired for securing necessary approvals and permissions including accreditation of the institution. To set up a core team for various courses offered and to constantly explore the changes that are taking place in Govt. and also the University guidelines. Detailed list of tasks in addition to above are given in Annexure 2 hereto. You shall directly and shall report to the Chairman for any of the policy decisions. The above position is for a minimum period of five years. on signing of this agreement, as agreed, you will be entitled to receive 6 months advance salary amounting to Rs. 62.5 lakhs (Rupees Sixty two lacs fitythousand only) from the annual salary of Rs. 1.25 crs which includes your remuneration, and all other allowances. Further you will-also be eligible interest free loan not exceeding Rs.5.5 crs(Rupees five crores Fifty lacs only). The loan amount to the extent availed by you and the advance would be regularly adjusted from your remuneration month to month, yearly incentive and the other allowances. During the pendency of the contract, in case your employment is terminated or cancelled by the employer or mutually cancelled, then the outstanding loan drown and the salary advance shall be refunded forthwith. You are requested to please go through the terms and conditions above and also in annexure hereto and return a duplicate copy of this offer as a token of your acceptance and confirm the exact date of your joining our organization".
The term manager is not defined in the Act. Hence, it is worthwhile to refer to the meaning of the term 'Manager' in Black’s Law Dictionary, as found in Eighth Edition:' Manger'-
17 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 person who administers or supervises the affairs of a business, office, or other organization. In the appellant case, it is very clear from the terms and conditions of the appointment letter that they are in charge of administration and have been entrusted with the task of projects, expansion of educational activities and to evolve a team of people for securing necessary approval and accreditations of the institutions that are being run by the Trust. The impugned persons are further tasked with setting up core team to explore changes that are taking place in respect of rules and regulations formulated by the Government. They are required to directly report to the Chairman for any of the policy decisions. Thus, these two persons are Senior Managers who execute the policy formulated by the Founders including the Chairman. Thus, Mr. Venkat Reddy and Smt Subashini Viiayaraghavan, Managers of the Institution 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.
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 Srinivasa Educational Trust. They are thus interested persons and
18 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 the impugned loans to Ragas Educational society and M/s Srinivasa Educational Trust without interest /security in terms of who hove substantial interest. Thus, the transaction will be hit by provisions of sec. 13(3)(e) of the Act. There is, thus , violation of Sec. 11 rw Sec. 13(2)(a) rw Sec. l3(3)(e) as well .
The Hon'ble Supreme Court decision in the case of, DIT vs. Bharat Diamond Bourse’ (259 ITR 280) (2003) has held that violation of conditions in S13 calls for denial of complete exemption. In the case of Bharat Diamond Bourse (supra), the assessee had advanced a sum to one of its members, being a prohibited person within the meaning of section 13(3)(a) r.w.s l3(1)(c)(ii) of the Act. There was contravention of Section 13(2)(a), and therefore, the Hon'ble High court held that the assessee is not entitled to exemption u/s 11. In para 7 of the judgement, the Hon,ble Apex court has approved complete denial of exemption u/s 11 and has reiterated the same view in para 20 of the judgement.
I am aware of the decision of Hon'ble High court of Karnataka in the case of CIT vs. Fr. Mullers Charitable Institution (2014) (Kar)(363 ITR 230). It is worth mentioning that while dismissing the SLP in the case of CIT vs. Father Mullers Charitable Institutions', the Hon'ble Supreme Court kept the question of law open (SLP(C) No.15907/2014). Hence, the latter judgment [Father Muller’s case] cannot be construed as reversing its earlier stand involved in the Bharat Diamond Bourse case, or that the issue has been adjudicated and reached finality. In the case of Fr. Muller case before the Hon'ble High court of Karnataka, the facts were the assessee trust had advanced huge amount to other parties as roans in violation of section 11 (5) of the Act; and thereby provisions section 13(1)(d) of the Act were attracted. The question was whether the entire income of the trust was taxable, and secondly whether maximum marginal rate of tax was leviable u/s 164 of the Act on the entire income. Though the Hon’ble High court of Karnataka decided in favour of the assessee, and SLP
19 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 filed against this decision has been dismissed by the Hon'ble Apex without adjudicating on the questions raised. In the result, the question of law has been kept open.
.The Hon'ble Apex Court 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.
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 income of trust, chargeable to tax. The appellant's case is hit by this judgment as well.
18.The Hon'ble High Court of Allahabad in the case of CIT Vs Vijeta Educational Society [2011-TIOL-591-HC-ALL-IT] has held that in view of s 13(1)(c ) of the Act rendering the entire income of Trust or Charitable institution is liable to tax even if only part of income is directed to be applied for the benefit of the specified persons. Thus , in the appellant's case, it will lose total exemption.
20 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 19. Further, the jurisdictional Tribunal in the case of DCIT vs M/s. Paramasiva Naidu Muthuvel Raj Education Trust in ITA No.2005/CHNY/2012 & C.O. No.60/CHNY/2013 dated 9th July,2018 has held that "It is also an undisputed fact that during relevant assessment year, the land had been made available to M/s.PMR Bangaru Subbammal Educational Trust, which is a Trust that does not have registration u/s.12AA of the Act. It is also an undisputed fact that the assessee trust has given loans, which are interest free to M/s.PMR Bangaru Subbammal Educational Trust, that the objects of the assessee-trust and that of M/s.PMR Bangaru Subbammal Educational Trust are identical, would not make M/s.PMR Bangaru Subbammal Educational Trust as having registration u/s.12AA of the Act. M/s. PMR Bangaru Subbammal Educational Trust must on its own independent status claim and have the registration u/s.12AA of the Act. In the absence of such registration, dealing with such an unregistered trust would affect the exemption available to the assessee- A perusal of provisions of the section 13(2) of the Act shows that without prejudice to the provisions in clause (c) & (d) of subsection (l) of Section 13, the income of the property of the trust is deemed to have been used for the benefit of a person referred to in sub-section (j), in clause (g), if any income or the property of the Trust or institution is diverted during the previous year in favour of any person referred to in subsection (3) (regarding electricity bill payment) and in clause (h), if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year ------ in which a person referred to sub-section(3) has substantial interest (the loan given to M/s.PMR Bangaru Subbammal Educational Trust where the Managing Trustee is an interested person with substantial interest) 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
21 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 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 and the order of the ld. Assessing Officer is restored”
It is further relevant to note that the proviso to Sec. 164(2) mentions that when whole or relevant part of any income is not exempt u/s.11 on account of provisions enshrined in Sec. 13(1)(c) of the Act, tax will be charged on the whole of the relevant income or part of the relevant income at the maximum marginal rate; and thus shows that once the whole of the relevant income denied exemption u/s. 11 of the Act, then such entire income shall have to be charged at the Maximum Marginal Rate in the case of the appellant Trust.
In the appellant's case it is noticed that the appellant had advanced interest free loan and that too without any security, to the said Mr. Venkatarama Reddy and Smt Subashini Vijayaraghavan; that the amount has not been recovered even during the subsequent years [atleat till FY 2015-16 relevant to AY 2016_17]; that the appellant has no explanation worth the name to substantiate as to why such substantial sums were advanced as loans without interest[as has been clearly brought on record by the AO by referring to the appointment letter, that has been perused by the undersigned as well and as discussed supra; that the two person, concerned were key functionaries of the trust
22 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 entrusted with the task of vital management and administrative functions ; and fall within the term 'managers' [as discussed earlier]and thus they fall within the term managers in terms of Section 13(3)( cc) of the Act.
In view of the facts of the case and in the light of provisions of Section 13 of the I.T.Act that stipulates restrictions, subject to which the trust should function; and violation of which would affect the exemption claimed by the assessee for these conditions/restrictions guarantee safeguards against misuse of trust property/income by the trustees or other persons who are in a position to misuse their power; and in view of the judicial precedents discussed supra, I am of the view that there is no infirmity in the decision of the AO who has held that the appellant trust shall lose complete exemption and also attracts maximum marginal rate of tax u/s l64(2) of the Act. Accordingly, the appellant's grounds connected to the issue of denial of exemption are dismissed”.
The ld.AR for the assessee submitted that the ld.CIT(A) has erred in confirming 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
23 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 the assessee, submitted that there is no doubt the assessee has given interest free loans to two individuals as alleged by the AO, but said loans are neither gracious / beneficial payments to any individuals referred to u/s.13(3) of the Act, nor in the nature of direct / indirect benefit of Trust property / income to any of the persons referred to therein. He, further submitted that ld.CIT(A) has failed to appreciate that the AO has misread the terms of contract between the parties to deny the benefit of tax exemption because the expression / scope of manager in contra distinction to the expression / scope of consultant. He, further submitted that the assessee has placed all possible evidences to prove that those two individuals are consultants having expertise in education field and the assessee has hired both of them for a specific period and for a specific purpose and such purpose has been explained before the AO. The AO has never disputed the fact that those two are outside consultants of the Trust, however, invoked sub-clause (cc) of section 13(3) of the Act, merely for the reason that terms of contract between the parties shows that they are in the nature of manager of the Trust. But, fact remains that they are neither employees nor managers of the Trust but, only outside consultants haired for specific purpose. He, further, submitted that the assessee has given interest free loans to two individuals as per contractual obligation. Further, when the desired
24 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 output is not forthcoming from them, their services have been terminated and further directed them to refund the loan amount. Since, the parties are not refunding the loan, an arbitration proceeding has been filed before the Hon’ble High Court of Madras Retired Judge Shri Akbar Ali to settle the matter amicably. Further, the parties have agreed to repay amount and accordingly repaid part of loan amount in subsequent financial years. Therefore, it is incorrect on the part of the AO as well as ld.CIT(A) to allege that advance given to two individuals is in the nature of loan which is hit by provisions of section 13(1)(c) r.w.s 13(2) of the Act.
The ld.AR for the assessee further submitted that assuming for a moment there is violation referred to u/s.13(1)(c) of the Act, but tax cannot be levied on total income of the Trust as laid by various High Courts including the Hon’ble High Court of Madras in the case of CIT vs. Working Women Association (2014) 365 ITR 353, where it was clearly held that where there is violation u/s.13(1)(d), maximum marginal rate of tax to be charged only on the income which violated the provisions of section 13(1)(d) but not on entire income of the Trust. A similar view has been taken by the Hon’ble High Court of Karnataka in the case of CIT vs. Fr. Mullers Charitable Trust (2014) 363 ITR 230, where it was clearly
25 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 held that denial of exemption u/s.11 should be limited only to amount which was diverted to persons 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.
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 coming within the ambit of provisions of section 13(3)(cc) of the Act as a manager by whatever
26 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 name called. Hence, although the assessee called them by name consultant but because of their nature of services rendered to the Trust, they are in the nature of managers and hence, advances given to them is clear violation of section 13(1)(c) of the Act. Since, there is violation of provision of section 13(1)(c), the assessee is disentitled for benefit of exemption u/s.11 of the Act and consequently assessee is liable for tax on total income at maximum marginal rate as per proviso to section 164(2) of the Act. The AO as well as the ld.CIT(A) have brought out various reasons to come to the conclusion that assessee is hit by provision of section 13(1)(c) r.w.s. 13(2) of the Act and thus, not entitled for benefit of exemption u/s.11 of the Act. Hence, there is no reason to take a different view to give the benefit of exemption to the assessee.
We have heard both the parties, perused the materials available on record and gone through orders of the authorities below along with case laws cited by both sides. The AO had denied the benefit of exemption u/s.11 of the Act, for the reason that during the year under consideration, the income of the trust has been directly or indirectly allowed for the benefit of persons specified in section 13(3) of the Act. The AO, further observed that as per the provisions of section 13(1)(c)(ii) of the Act, if any part of income or any property of the trust is used or
27 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 applied directly or indirectly for the benefit of any persons referred to in sub- section (3) of section 13 of the Act, then the trust will lose the benefit of exemption provided u/s.11 of the Act to whole income. The AO had considered loans 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 ld. AO 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. 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 sub- section (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
28 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 u/s 11 and taxed income at maximum marginal rate as per proviso to section 164(2) of the Income Tax Act, 1961.
The provisions of section 13(1)(c) imposed certain restriction on utilization of income of the trust which claims exemption u/s 11 of the Act. As per clause (c) of sub.sec (1) of section 13, if any part of income or any property of the trust or the institution, is used or applied directly or indirectly for the benefit of any person referred in sub. Section (3), then the trust is not entitled to exemption u/s 11 of the Income Tax Act, 1961. The specified persons has been referred to u/s 13(3) of the Act, and as per said section the persons specified are the ‘author’ or ‘founder’ of the trust, their relatives, any trustee of the trust or manager by whatever name called. The provisions of sec. 164(2) of the Act, states that in a case, where the whole or any part of the relevant income is not exempt u/s 11 or sec. 12 by virtue of the provisions contained in clause (c) or clause (d) of sub.sec. (1) of section 13 of the Act, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate. Therefore, if the trust allows any benefit to interested persons, then only that part of the income which is in violation of section 13(1)( c) is chargeable to tax at the maximum marginal rate of tax; but not whole income of the trust. This proposition is supported by the
29 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 decision of the Hon’ble Bombay High Court in the case of DIT (Exemption) v Sheth Mafatlal Gagalbai Foundation Trust [2001] 249 ITR 533/114 Taxman 19 and also the decision of the Hon’ble Kamataka High Court in the case of CIT v Fr. Mullers Charitable Institutions [2014] 363 ITR 230/44 taxmann.com 275/[2015] 228 Taxman 319. We further observe that the Hon’ble Supreme Court has dismissed the Special Leave Petition filed by the revenue against the order of the Hon’ble Karnataka High Court, in the case of CIT v Fr, Mullers Charitable Institutions [2014] 51 taxmann.com 378/227 Taxman 369 (SC). In view of the clear provisions of the Act, and also the decision of the Hon’ble Supreme Court in the case, cited supra, it is clear that in case there is violation referred to under section 13(1)(c), then tax can be charged on such income which violates the provisions of section 13(1)(c); but not whole income of the Trust. This position is further strengthened by the decision of Hon’ble Jurisdictional High Court of Madras in the case of CIT v. Working Women’s Forum (supra), where it was held that denial of exemption u/s.11 should be restricted to the extent of income, which is in violation of section 13(1)(c) & 13(1)(d) of the Act. The Hon’ble Supreme Court had dismissed the SLP filed by the Revenue and affirmed the findings of the Hon’ble Jurisdictional High Court of Madras. In this case, the AO has levied tax on total income of the Trust at maximum marginal
30 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 rate, contrary to settled position of law. We, therefore, are of the considered view 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.
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 without any security or interest and further said persons are in the nature
31 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 of managers by whatever name called as referred to u/s 13(3)(cc) of the Act, and thus, said payments violates sections 13(1)(c ) of the Act.
We have given our thoughtful consideration to facts brought out by the AO and arguments advanced by the ld. AR for the assessee and we ourselves do not subscribe to findings of the AO to bring two loans within the ambit of section 13(1)(c ) rws 13(3)(cc) of the Income Tax Act. In the present case, the AO has denied the benefit of exemption u/s.11 of the Act, for the simple reason that there 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 Vijayaragavan, on the ground that the assessee has allowed direct / indirect benefit of Trust income / property to interested persons referred to u/s.13(3)(cc) of the Act. The provisions of section 13(3)(cc) of the Act, refers to any trustee of the Trust or manager (by whatever name called) of the Trust as interested persons u/s.13(3) of the Act. Therefore, it is necessary to examine whether those two individuals are managers as defined u/s.13(3)(cc) of the Act or not to decide, is there any violation referred to u/s.13(1)(c ) of the Act. The legal dictionary Bakshi’s Law Lexicon has defined the term ‘manager’ as per which “manager has to be a person, has to be in the overall management of the company or trust, very importantly should be noted
32 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 that, manager specifically for trust is not just a word of art, it is a very serious word comprising of meaning of a overall management.” The term manager is very wide. Thus, in order to bring any persons within the term manager it is essential to see their position in the organization and duties and works performed by them. In this case, the AO has treated those two individuals as managers of the Trust in terms of section 13(3)(cc) of the Act, by considering the nature of work required to be carried out by them in terms of their letter of appointment. According to the AO, those two persons are tasked with setting up core team to explore changes that are taking place in respect of rules and regulations formulated by the Government. They are required to directly report to the Chairman for any of the policy decisions. Therefore, he opined that they are performing managerial functions 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
33 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 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 remuneration and further they have tasked with the work of setting up of new medical college and getting deemed university status for the institutions, which has nothing to do with the existing activities carried out by the assessee and hence, we are of the considered view that those two individuals cannot be considered as managers of the Trust, who are involved in day to day managerial functions. Thus, the AO as well as the ld. CIT(A) were erred in considering two persons within the ambit of section 13(3)(cc) of the Act.
Having said so, let us examine whether loans and advances given to two persons can be called as loan which is hit by the provisions of section 13(1)(c) of the Act. Shri Venkat Reddy and Smt. Subashini
34 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 Vijayaragavan have been appointed for a period of 5 years. The terms of employment provides for payment of salary and other allowances. Apart from salary and allowances, they have been provided with interest free loan. Further, their appointment has been cancelled for the reason that they are not able to provide services as agreed. Further, for recovery of loan, the Trust has initiated arbitrary proceedings and filed a petition before the Hon’ble Madras High Court Retired Judge Shri. Akbar Ali as sole arbitrator. The assessee has placed all records pertaining to arbitrary proceedings. Further, the arbitrator appointed by both the parties has commenced the hearing of the proceedings. Meantime, the parties have started repaying the loans given to them. Under those circumstances, interest free loan given to two consultants as per the terms of employment cannot be equated with loan given without any interest / security to persons referred to u/s.13(1)(c) r.w.s. 13(3) to deny the benefit of exemption u/s.11 of the Act. Further, it is important to note that if the assessee trust had written off the amount in financial year 2012-13, when the employment was terminated with two individuals, then legally the loans given to them would have been wiped out from the Trust balance sheet, and the Department could not have taken the plea of “continue to lend”. In that event the Trust would have logically missed the moral force to recover the amount. From the above,
35 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 it is clear that interest free advance given to two individuals is not a beneficial / gracious payment made to persons referred to u/s 13(3) of the Act and thus, the same cannot be treated 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.
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
36 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 Act, insofar as, loans given to two individuals. Apart from this, he has denied the benefit of exemption for assessment years 2016-17 & 2017- 18 on one more count that the assessee has not satisfied provisions of section 13(9) of the Act by filing the required Form No.10 within the due date of furnishing return of income u/s.139 (1) of the Act. He, further noted that the assessee has not filed return of income for relevant assessment years on or before the due date specified u/s.139 (1) of the Act. We have gone through reasons given by the AO for denying the benefit of exemption u/s 11 of the Act, and we ourselves do not agree with the AO. In order to get the benefit of accumulation of income u/s 11(2) of the Act, the assessee is required to file Form No.10 along with return of income before the due date specified u/s.139(1) of the Act. In this case, the assessee has filed Form No.10 electronically for assessment year 2016-17 on 17.10.2016, which is before the extended due date for filing the return of income. Similarly, the assessee has filed Form No.10 electronically on 30.10.2017, which is the extended due for filing the return of income for assessment year 2017-18. However, the assessee has not filed the return of income for both assessment years on or before due date for filing the return of income u/s 139(1) of the Act. But, assessee had filed its return of income for both assessment years on or before the due date specified u/s 139(4) of the Act. The assessee
37 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 has explained the reasons for not filing the return of income within the due date specified under section 139(1) the Act, as per which Mrs. Vijayakumar who is the secretary of the Trust and who has been in- charge of financial management had suddenly developed a serious kidney problem and was suffering from hyper tension and chronic kidney disease. Further she was undergoing home hemodialysis since 2014 had to undergo medical treatment during that period and because of this, she could not attend the work of preparation of financial statement to file return of income for relevant assessment years. Therefore, the Trust could not finalize accounts to file return of income within due date specified under the Act. However, immediately after her recovery from ailment, return of income for assessment year 2016-17 has been filed on 22.03.2017 with a delay of 5 months, which is beyond the control of the assessee. Similarly, 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
38 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 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.
We have gone through reason given by the assessee for not filing return of income and Form No. 10 within due date specified u/s 139(1) of the Act, and find that there is reasonable cause for not filing the return within due date specified under the Act. No doubt, in order to claim benefit of exemption provided u/s.11 and 13(2) of the Act, the assessee is required to file its return of income on or before due date specified u/s.139(1) of the Act. Further, the assessee also needs to file Form No.10 specifying amount and period of accumulation of income, if such income is not applied for objects of the Trust during the relevant financial year. But, the remote question is whether the assessee is disentitles itself from claiming exemption u/s 11 and accumulation income u/s 11(2), if return of income is not filed within due date or not has to be seen in the given facts and circumstances of the Act. In this case, the assessee has given reasons for not filing return of income within due date specified u/s.139(1) of the Act, as per which the person in-charge of finance and accounts was suffering from chronic disease and was
39 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 undergoing medical treatment. Further, due to the person’s ill-health, the Trust could not finalize accounts within reasonable time which caused 5 months delay in filing return of income for the relevant assessment years. In our view reasons given by the assessee are bonafide, and hence, we are of the considered view that the authorities concerned are required to condone the delay in filing return of income. Further, it is not a case of the AO as well as the CIT(A) that the assessee has not filed Form No.10 within due date specified under the Act. In fact, the assessee has filed Form No.10 for both assessment years indicating the amount and period of accumulation of income electronically on or before extended due date for filing return of income. But, only lapse is not filing return of income within due date specified u/s.139 (1) of the Act. But, fact remains that the assessee has filed return of income within due date specified u/s.139 (4) of the Act. It is well settled principles of law by the decisions of various Courts and Tribunals that for the purpose of exemption/ deduction provisions, if return of income is filed on or before due dates specified u/s.139 (4) of the Act, then the same is considered as valid return filed u/s 139 of the Act. It is also not in dispute that exemption provisions should be liberally construed to give the benefit to the assessee. The reason being that if the assessee has satisfied substantial conditions for getting
40 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 exemption/deduction , then for procedural lapses, a meritorious case cannot be ignored for the intended benefit, if the reasons given by the assessee for not complying 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.
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 that the Hon’ble
41 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 Supreme Court in the case of CIT vs. Nagpur Hotel Owners Association, (2001) 247 ITR 201 has held that if Form No.10 required to be filed u/s.11 (2) r.w.rule 17 is furnished on or before completion of assessment proceedings by the AO then the benefit of exemption u/s.11 cannot be denied to the Trust u/s.11 (2) of the Act. The Hon’ble High Court of Madras in the case of Chandraprabhuji Maharaj Jain Juna Mandir Trust v. DCIT (2019) 266 Taxman 399 held that when the assessee has filed Form No.10 belatedly but before completion of assessment by the AO, there would have been no error had AO taken copy of Board Resolution and Form No.10. The Hon’ble High Court of Bombay in the case of CIT vs. Sakal Relief Fund, (2017) 248 Taxman 31 held that for excluding accumulation of income, a charitable trust from net of taxation u/s.11, intimation in Form No.10 could be filed during reassessment proceedings.
In this case, although the assessee has not filed return of income on or before due date specified u/s.139 (1) of the Act, but said returns have been filed on or before due dates specified u/s.139(4) of the Act. Further, the assessee has filed Form No.10 electronically on or before due date specified u/s.139 (1) of the Act. Insofar as non-filing of return of income u/s.139(1) of the Act, the assessee has moved a petition
42 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 before the competent authority in terms of CBDT Circular No.6 of 2020 and such application is pending for disposal. Therefore, we are of the considered view that when the assessee has filed return of income on or before due date specified u/s.139 (4) of the Act and claimed accumulation of income by filing Form No.10 before completion of assessment, then the AO should not have rejected exemption claimed by the assessee for accumulation of income u/s.11 (2) of the Act. However, since the matter is pending before the competent authority i.e., Pr.CIT, Central-1 for condonation of delay in filing return of income, we are leaving the issue to the discretion of the authorities concerned for condoning the delay.
In this view of the matter and considering facts and circumstances of the case, we are of the considered view that the assessee is entitled for exemption u/s11 of the Act in respect of total income for the assessment years 2012-13 and 2013-14 because there is no violations as referred to u/s.13 (1)(c) r.w.s 13(2) of the Act. Hence, we direct the AO to allow exemption u/s 11 for Asst. year 2012-13 and 2013-14. As regards assessment years 2016-17 and 2017-18, insofar as exemption u/s.11 of the Act is concerned, the assessee is entitled for such exemption because there is no violations as referred to u/s.13(1)(c) of
43 I.TA. Nos. 2915, 3114 & 3115/Chny/2019 916/Chny/2020 the Act. But, in respect of accumulation of income u/s.11(2) of the Act, we direct the AO to consider the issue after taking note of outcome of petition filed by the assessee before the Pr.CIT, Central-1 for condonation of delay in terms of CBDT Circular No.6 of 2020 and also by considering ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. Nagpur Hotel Owners Association, supra.
In the result, appeals filed by the assessee for the assessment years 2012-13 & 2013-14 are allowed and for the assessment years 2016-17 & 2017-18 are treated as allowed for statistical purposes.
Order pronounced in the court on 16th July, 2021 at Chennai.
Sd/- Sd/- (वी दुगा� राव) (जी. मंजुनाथ) (V. Durga Rao) (G. Manjunatha) �याियक सद�य/Judicial Member लेखा सद�य /Accountant Member
चे�ई/Chennai, �दनांक/Dated, the 16th July, 2021 RSR आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF