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Facts
The assessee, a charitable educational institution, was granted registration under Section 12A. The AO observed that the assessee extended interest-free advances to related parties, violating Sections 11 and 13 of the Income Tax Act, and computed notional interest. The CIT(A) deleted this addition.
Held
The Tribunal held that while funds of a charitable institution cannot be used for purposes other than its objectives, a minor violation of Section 13(3) should not lead to the denial of exemption under Sections 11 and 12. The AO erred in denying exemption and making a blanket addition.
Key Issues
Whether notional interest on interest-free advances to related parties can be added to the income of a charitable institution when the advances are not for personal benefit and the institution's charitable status should not be revoked for minor violations?
Sections Cited
13(1)(C), 13(1)(d), 13(3), 11, 11(5), 12, 12A, 10(23), 143(2), 142(1)
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Income Tax Appellate Tribunal, DIVISION BENCH, ‘A’ CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI KRINWANT SAHAY
O R D E R PER RAJ PAL YADAV, VP The assessee and Revenue are in cross appeals against the order of the Commissioner of Income Tax & 7/CHD/2024 A.Y.2014-15 2 (Appeals) [in short ‘the CIT (A)’] dated 06.11.2023 passed for assessment year 2014-15. The appeal of the Revenue is a major appeal. The grounds of appeal taken by the Revenue read as under :
“1. That the Ld. C1T(A) has erred in law while not considering section 13(1)(C) and 13{l)(d) of the Income Tax Act, 1961 according to which any income of the trust directly or indirectly applied for the benefit of any person referred to in section 13(3) of the Act shall not be excluded from the total income and provision of Section 11 shall not apply to the same.
2. That the Ld.ClT(A) has erred in law in not considering the fact that the assessee is being assessed in the status of AOP for the relevant A.Y. and notional interest was calculated as the assessee trust was in violation of provision of Section 13(l)(d) r.w.s 11(5).
Similarly, if we peruse the grounds of appeal
taken by the assessee, it will reveal that the assessee has taken three grounds of appeal but its grievance revolves around a single issue namely; CIT(A) has erred in denying exemption under Section 11 and assessing the assessee in the status of AOP instead of granting benefit of Section 11 and 12. More so, the AO has erred in taxing the surplus of Rs.12,79,427/- which otherwise falls within the ambit of 15% of gross receipts because assessee has applied more than 95% of its gross receipts for charitable objectives.
The brief facts of the case are that assessee is a charitable institution imparting educations in the faculties of & 7/CHD/2024 A.Y.2014-15 3 Engineering, Management and computer applications. It is running K.C. Public School, K.C. College of Engineering & IT, K.C. College of Hotel Management, K.C. Polytechnic College, K.C. School of Education, K.C. School of Management and Computer Application. It has been granted registration under Section 12A and 10(23) by the CIT(E) on 31.01.2001 as well as 17.03.2010. Thus, assessee is a Trust running educational institutions. It has filed its return of income on 29.11.2014 declaring ‘Nil’ income. In the past, it has been always granted benefit of Section 11 and 12 by the Department. However, this year, the case of the assessee was selected for scrutiny and due notices under Section 143(2) and 142(1) were issued and served upon the assessee.
On scrutiny of the accounts, it revealed to the AO that assessee has shown a sum of Rs.49,97,15,731/- as recoverable from 17 parties. Ld. AO has formed an opinion that this advancement of interest free loan is hit by Section 13(1)(c), 13(1)(d) read with Section 13(3). Therefore, he conducted a deeper scrutiny of the accounts. In response to the different queries of the AO in one of the submission letter dated 30.12.2016, it was submitted by the assessee & 7/CHD/2024 A.Y.2014-15 4 that K.C. Group is based at Nawan Shahr , Punjab and has three business verticals , i.e. (a) Hospitality (Hotels), (b)
Education (Schools and colleges) and (c) Real Estate (Residential and commercial Projects).
It is a closely held group. The entire Group is owned and managed by members of one family namely, Shri Prem Pal Gandhi, Shri Hitesh Gandhi (son of Shri Prem Pal Gandhi) and Smt. Kamal Gandhi, wife of Shri Prem Pal Gandhi. Whatever funds have been raised, both are either through capital contribution or by way of funding from financial institution. There is no mis-management of funds of the Trust. The Trust has been allowed benefit of Section 11, 12 and 10(23)(c). It is registered under Section 12A also.
In the past, its objects have been accepted by the Revenue.
However, ld. AO did not accept the complete contentions of the assessee. He ultimately worked out that a sum of Rs.37,57,15,731/- is not covered under the objects of the assessee because it was advanced without charging interest.
The AO calculated notional interest at Rs.4,50,85,887/- and made addition of this amount. & 7/CHD/2024 A.Y.2014-15 5
The second addition made by the AO is of Rs.12,79,427/-. This addition was made by the AO after analyzing the cost receipts vis-à-vis application of funds towards charitable activities. It reveals that assessee has surplus of Rs.12,79,427/-. According to the AO, since assessee has violated 13(1)(d) read with Section 11(5) and 13(1)(c) read with Section 13(3) of the Income Tax Act, therefore, it is not entitled for benefit of 12A and Section 11(5), hence, it is to be assessed in the status of an AOP and surplus over and above the expenditure of the activities of Trust deserves to be assessed as an income. This addition has been confirmed by the ld. CIT(A) and assessee is impugning this addition in its appeal bearing No. ITA- 7/CHD/2024.
With regard to the first limb of addition, assessee has challenged both the issues in appeal but regarding first fold of addition, ld. CIT(A) has deleted the addition by recording following finding :
(e). I have gone through the assessment order and the written submission filed by the appellant. It is noticed that the AO was of the view that the appellant had advanced large sum to the related parties in violation of section 13 of the I.T Act. Hence, he proposed to tax notional interest @ 12% on those advances. Without having any specific charging section, the AO cannot & 7/CHD/2024 A.Y.2014-15 6 estimate notional interest @ 12% on those advances. Upon perusal of the detailed written submission, it is seen that charging notional interest on those advances made in the assessment order is not maintainable. Hence, the AO is directed to delete this addition. The appellant succeeds in this ground and it is allowed in favor of the appellant.
While impugning the order of ld. CIT(A), ld. CIT DR contended that this finding of the CIT(A) is not an analytical finding. The ld. CIT(A) has not dealt with the issue whether a charitable institution can advance its funds to the persons covered under Section 13(3) without charging interest. He emphasized that speaking order has not been recorded by the ld. CIT(A). On the other hand, Shri Rajinder Chopra appeared on behalf of the assessee. He filed a brief written Note, which read as under :
Written Submissions in respect of ( ITA/l/Chandi/2024 (A.Y 2014-15) Assistant Commissioner VS K C Social Welfare Trust of Income Tax Circle I ( Exemption ) Chandigarh Road Chandigarh. Nawanshahar 2) ITA/7/Chandi/2024. (A.Y 2014-15) K C Social Welfare Trust (Regd.) VS DCIT (Exemption) Circle-1, 5th Floor K C Tower, Chandigarh Road, Nawanshahar. CR Building, Sec-17 Chandigarh These two appeal are filed one by the department and other by the Assessee against the order of Ld CIT (A) NFAC Delhi. It is requested that the same may please be heard simultaneously and one single consolidated order may please be passed. In respect of ITA/l/Chandi/2024 filed by the Department. We rely on the order passed by Ld CIT(A).NFAC Delhi and request to dismiss the grounds taken by the Department. & 7/CHD/2024 A.Y.2014-15 7 The brief facts of the case are that the assessee is a Registered society/trust running charitable educational institutions and having Registration u/s 12A as well as 10(23C)(VI) of the Income Tax Act. The Assessing Officer observed that the Assessee extended interest free Advances to related parties in contravention of the Section 11 and Section 13 of the Act and Computed Notional Interest of Rs. 45085887/- on the interest free advances. Considering the submissions of the Assessee and based on the following points the Ld CIT(A) NFAC rightly allowed the ground taken by Assessee by observing as under "It is noticed that the AO was of the view that appellant had advanced large sum to the related parties in violation of Section 13 of the Act. Hence he proposed to tax "Notional Interest" @ 12% on those advances without having any specific charging Section the AO can't estimate Notional Interest @ 12% on those advances. Upon perusal of the detailed written submission It is seen that charging Notional Interest on those advances made in the assessment order is not maintainable" a) During the Assessment Year the assessee has a gross receipt of fee amounting to Rs. 229726618/- and has spent almost 99.45% i.e Rs. 228456189/- for the educational purposes. Audited Accounts are supplied along with paper book (Page 1 to 4). The question of applicability of Section 11(5) of the Act does not arise as there is no short fall of application of funds below 85% of total receipt during the relevant previous year. b) During the relevant previous year the Assessee was having following interest free funds on which no interest has been paid as per Balance Sheet annexed (PB-Page 1) i) Corpus fund Rs.13131000. ii) Reserve & Surplus Rs.35909740. iii) Students welfare activity fund Rs.28458653. iv) Building fund Rs.16558424. v) Unsecured Loans from trustees Rs.109650653. vi) Sundry creditors and other liabilities Rs.257432852. Total - 461141322.00 The AO did not give any finding that amount was advanced out of Bank Loans neither any Direct nexus proved by him. The notional interest on these interest free funds available with the assessee@12% could be Rs. 5.53 crores. The Assessee has placed reliance on the following Judgements, where in the aseessee's own group cases the disallowances/additions on the same facts have been deleted. i) Hero Cycles (P) Ltd. V. CIT(Central) Ludhiana in Supreme Court of India, Civil appeal no. 514 of 2008 (PB-Page 85-92). ii) PCIT (Central) Ludhiana vs MBD, In the High Court of Pb & Haryana Chandigarh. ITA 31/2017(O&M) and also in ITA/534/Asr/2014, ITAT Asr Bench, Amritsar (PB-Page 79-84). iii) Walia Traders (P) Ltd. V. DCIT CC-II, Jalandhar(assessee group concern). In ITAT Asr Bench, Amritsar ITA/43/ Asr/2015 (PB-Page 98-112). & 7/CHD/2024 A.Y.2014-15 8 c) In the counter comments to the remand report of AO dtd 19.02.19 mentioned at Page 10 of CIT(A) order , The AO failed to satisfy the Ld CIT(A) in respect of:- i) Nexus between Loans raised and advances given to different persons. ii) How the facts of the case for Ay 2014-15 were different from Ay 2013-14 and 2012-13 Assessment Order attached at (PB Page 147- 152) where in the predecessor Jurisdictional AO (same person DCIT CC) by same name held that the Assessee was working for charitable purposes and Income was exempt u/s 10(23C)(VI) of the Act. Even though in the earlier previous year Ay 2013-14 the interest free Advances were made to the tune of Rs 47197860. Which were carried forward in subsequent AY 2014-15) and no Notional Interest addition have been made. The same Jurisdictional AO can't apply his different mind and Pass contradictory order on same facts and that too when there was short span of time between these two Assessments order. Even the decision dated 02.02.2018 in assessee group case K.C Educational Welfare Society of The Commissioner of Income Tax (A)-5, Ludhiana for the A.Y 2012-13 where in the learned Commissioner of Income Tax (A) held, " A perusal of the ledger account show that the account M/s K.C Land and Finance Ltd., K.C Social Welfare Trust, M/s Walia Traders Ltd., M/s Faradays Pvt. Ltd. are running accounts having both credits and debit entries throughout the year. This gives support to contention of the A.R. that these business transaction and balances were on account of business purposes/ expediency. Hence, the disallowance made by the Assessing Officer in respect of these four parties is not found sustainable and thus deleted". iii) Notional Interest @12% has been charged on all the 17 persons to whom interest free advances made (even though 12 out of these were not related directly/indirectly with assessee u/s 13(3). In respect of remaining five persons who as per AO could be covered u/s 13(3) of the Act have advanced huge interest free Advances to the assessee. List of all the 17 persons along with copies of their Ledger Account has been supplied along with the paper book (PB-PAGES 9-62). iv) The AO did not comment why the Notional Interest for disallowance have been calculated imaginary for the year and not on day to day basis.
It is pertinent to mention here that the Assessee has been granted Regular Registration u/s 12A of the Act upto Ay 2026-27 by the PCIT(E). Chandigarh vide order dated 15.10.2021 after verifying all the books & record and no such adverse remarks have been passed. The copy of certificate is attached along with the paper book (PB-Page 128-130). It seems that AO in a haste for the want of additions thus made addition of Notional Interest and gave reference of sec 13(I)(C) 11(1) 13(i)(d) r.w.s 11(5) r.w.s 13(3) of the Act which only empowers the AO to disallow exemption u/s 11 and not to allow the Assessee having surplus amount tax free which he has already done in the A.order at Para 5.6 Page 8 for which the Assessee is also in appeal before your honour. Keeping in view the above & 7/CHD/2024 A.Y.2014-15 9 submission and relying on the order of Ld CIT(A) NFAC Delhi both the grounds taken by the Appellate Department may please be dismissed. Thanking You.
On the strength of his written note, he submitted that in the past, charitable status of the assessee never doubted by the same AO. Even in the immediately preceding year, he has accepted similar activities of the assessee. His next emphasis is that assessee has not advanced any interest bearing funds without charging interest. It has surplus funds, those have been given for exploring the investment in land for future expansion. Therefore, AO has erred in making an addition on account of notional interest.
We have duly considered the rival contentions and gone through the record carefully. The basic issue is, whether surplus funds of a charitable institution can be used for the purpose of other than objectives of the Trust. We are of the view that surplus funds of a charitable Institution who enjoys benefit of Section 11 and 12, are not akin to surplus funds of a business house because for a business entity, after payment of taxes on its own income, it is its discretion where to use that funds. It can donate, it can gift, it can give loan without charging interest, because Income Tax & 7/CHD/2024 A.Y.2014-15 10 Department can never persuade any assessee to earn income or a notional income out of those surplus funds, but this principle is not applicable on the funds of a charitable Institution. The Trust is not enjoying those funds as its own funds. It is being held in a fiduciary capicity. In other words, in a representative capacity of charitable Institution.
Thus, funds can never be used for any other purpose except for charitable activity. If it is surplus, accumulated after achieving the objects of the Society, then it is to be accumulated under Section 11(5) in a prescribed mode and if not applied in future years, it has to suffer tax. There is no concept of surplus fund with a charitable Institution because charitable Institution enjoys exemption on all those incomes which are applied for its objectives. Therefore, it is an incorrect stand of the assessee. However, we find that a careful perusal of Section 13(1)(d), 13(1)(c), 13(2) and 13(3), it will reveal that the status of the Institution cannot be changed from ‘charitable’ to ‘non charitable’ Institution if a minor violation is there. Sub-clause (3) of Section 13 would provide that if undue benefit is being provided to any Institution or individual because of its proximity with the & 7/CHD/2024 A.Y.2014-15 11 Management, then that undue benefit is to be brought to tax but Section 11 and 12 would not be denied to the overall Society/Institution. Therefore, the ld. CIT(A) has erred in not analytically examining the issue and the AO has erred in denying the exemption as a whole to the assessee. He ought to have examined more analytically what is the objective of making advance to any related person and then he ought to have worked out for any interest income can be allocated/assumed on such investment. It is also pertinent to note that AO cannot make addition of surplus over expenditure in the Society. He has to grant benefit under Section 11 and 12. The only exception is disallowance of any amount which was unduly extended by the assessee to the persons mentioned in clause 13(3). Therefore, we deem it appropriate to set aside both the orders and relegate both the issues to the file of AO for fresh adjudication. The observations made by us will not impair or injure the case of the AO. They will not cause any prejudice to the defence/explanation of the assessee. The observations are only with regard to bring the pointed issue at home. The AO will be at liberty to decide afresh in accordance with law. & 7/CHD/2024 A.Y.2014-15 12
In the result, both the appeals are allowed for statistical purposes.