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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI DUVVURU RL REDDY & SHRI G. MANJUNATHA
Per G. MANJUNATHA, AM:
These appeals filed by the Revenue and cross objections filed by the assessee are directed against the order of the Commissioner of Income Tax (Appeals), Salem, dated 05.10.2018 and pertains to the assessment years 2011-12 and 2012-13. Since, facts are identical and issues are common, for the sake of convenience these appeals are heard together and are being disposed of by this consolidated order.
The Revenue has raised common grounds of appeal for both assessment years. Therefore, for the sake of brevity, grounds of appeal filed for assessment year 2011-12 are reproduced as under:-
The order of the learned CIT (A) is contrary to the law and facts of the case. 2. The Ld CIT (A) erred on facts and circumstances in law by holding that the assessee trust is eligible for exemption u/s 11 relying on Hon’ble Jurisdictional High court in the case of CIT Vs Working Women’s Forum (2014) 365 ITR 353 where facts are on violation of provisions u/s 13(1)(d) whereas in the instant, case it is violation u/s 13(l)(c) of the IT Act,1961. 2.1 The Ld.CIT (A) erred in directing the Assessing Officer not to deny complete exemptions for trust u/s 11 ignoring sec. 13(1) which clearly reads that nothing contained in sec. ii or sec. 1 2 shall operate so as exclude from the total income of the previous year of the person in receipt thereof.
3 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 2.2 The Ld.CIT (A) erred by directing the Assessing Officer not to deny exemption for the trust u/s 11 to the amount of interest free advances amounting to Rs.2,49,93,576/- which was deemed to have been advanced to specified persons as per the sec.13(3) of the Income Tax Act,196l without charging adequate interest or adequate security in terms of Sec.13(2)(a) of the income Tax Act,1961 and continues to remain invested during the previous year within the meaning of sec.13(2)(h) of the Income Tax Act,1961 thereby benefitting such specified persons as per the provisions of sec.13(1)(c) of the Income Tax Act, 1961. 2.3 The Ld.CIT (A) failed to observe that as per SecJ64(2) of the Income Tax Act,1961, in case where exemption is denied u/s 13(i)(c) or 13(i)(d) to the trusts, tax shall be charged on the relevant income or part of relevant income on which exemption is denied at the maximum marginal rate (MMR), but the exemption u/s ii in respect of all other incomes denied due to operation of Sec. 13 will continue and the assessee is treated as an Association of persons and has to be taxed accordingly at normal rates. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned CIT (Appeals) may be set aside anti that of the Assessing officer may be restored.
The assessee has raised common grounds of cross objections for both assessment years. Therefore, for the sake of brevity, grounds of cross objection filed for assessment year 2011-12 are reproduced as under:- 1. The order of the assessing officer and Commissioner of Income Tax (Appeals) [‘CIT (A)’] is against the facts and circumstances of the case, law and the principles of equity and nature justice. 2. The CIT (A) erred in holding that the payments made by the appellant trust to M/s Star Educational Trust, Mr Bharath Kumar and M/s Mahaajay Spinners India Private Limited are not eligible for deduction under section 11. 3. The CIT (A) officer failed to appreciate that the monies paid by the appellant trust to M/s Star Educational Trust was in furtherance of the objects of the appellant trust and therefore is application of income of the appellant trust.
4 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 4. The CIT (A) erred in upholding the order of the assessing officer that the recipient trust must also be registered under section 12AA of the Act, which is not a statutory requirement for application of income. 5. The CIT (A) failed to appreciate that the payments made to M/s Star Educational Trust did not directly or indirectly benefit the trustees or their relatives. 6. The CIT (A) erred in upholding that that the payments made to M/s Star Educational Trust is in violation of Section 13 (1) (d). The assessing officer failed to appreciate that merely because M/s Star Educational Trust is not registered under section 12AA of the Act, does not convert the activities of the said trust as non-charitable. 7. The CIT (A) failed to appreciate that the sums advanced to Mr BharathKumar was for running the educational activities of M/s Star Educational Trust and there was no contravention of section 13. 8. The CIT (A) failed to appreciate that the sums advanced to M/s Mahaajay Spinners India Private Limited in not in contravention of section 13 (1) (c) and section 13 (1) (d) of the Act. The assessing officer and the CIT (A) erred in not considering the submissions of the appellant. 9. The CIT (A) ought to have appreciated, even if the sums were to be disallowed, the same should be reduced from application and not brought to tax. 10. The appellant craves the leave of the Hon’ble Tribunal to adduce additional grounds in support its contentions before and during the course of hearing of this appeal.
ITA No.125/CHNY/2019 & CO No.18/CHNY/2019: 4. The brief facts of the case extracted from assessment year 2011-12 are that, the assessee is a charitable trust registered u/s.12A of the Income Tax Act, 1961 (hereinafter the ‘Act’) and is imparting education by running various educational institutions, which includes 5 Engineering Colleges and 1 Arts & Science College, a Matriculation School, a Higher Secondary School, a Polytechnic College and 3 Colleges teaching B.Ed and 3 Teacher Training
5 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 Institutions. The assessee had filed its return of income for the assessment year 2011-12 declaring ‘Nil’ total income after claiming exemption u/s.11 of the Act, towards income applied for charitable purpose. The case was taken up for scrutiny and during the course of assessment proceedings, the AO noticed that the assessee has allowed benefit to the persons specified u/s.13 (1)(c) of the Act, by allowing various loans and advances to trustees or companies, in which trustees are interested, thereby violated provisions of section 13(1)(c) of the Act and hence, called upon the assessee, to explain as to why exemption claimed u/s.11 of the Act cannot be rejected. In response to show- cause notice, the assessee submitted that it has not allowed any benefit either to trustees or companies, in which trustees are interested, which violates provisions of section 13(1)(c) of the Act. But, the amount specified in the show-cause notice including a sum of Rs.10,24,860/- paid to Shri M.G. Bharathkumar, Founder trustee and the Chairman of the trust is amount paid to M/s Star Educational Trust, a charitable trust which is engaged in imparting education and hence, the same cannot be considered as loan or advance given to the trustee in contravention to provisions of section 13(1)(c) of the Act. Similarly, the trust has given a sum of Rs.1,88,59,716/- to M/s. Star Educational Trust for the purpose of imparting education to help said trust to tide over its
6 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 financial crisis for running the institution smoothly and hence, financial aid or help given to another charitable trust, which is having common objects cannot be considered as benefits allowed to an interested person in contravention of section 13(1)(c) of the Act. As regards, amount paid to M/s. Mahaajay Spinners India Pvt. Ltd., a company in which the Chairman Shri M.G. Bharathkumar and his son Shri B. Mahendran are Directors, it was submitted that a sum of Rs.50,50,000/- was paid as advance for purchase of uniforms and coats to students of the institutions coming under the trust. Further, said advance was given after due diligence and obtaining competitive quotation from various suppliers as per which Shri Mahaajay Spinners India Pvt. Ltd., was lowest bidder for supply of uniforms. The company has supplied uniforms and coats in subsequent years for which necessary bills and other evidences have been placed before the AO.
The AO, however was not convinced with the explanation furnished by the assessee and according to him, the assessee has allowed benefit to interested persons in contravention of provisions of section 13(1)(c) of the Act and thus, not entitled for exemption u/s.11 of the Act. The AO, further noted that the assessee has tried to justify the advance of Rs.1,88,59,716/- given to M/s. Star
7 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 Educational Trust by stating that objects of the assessee trust is to help in setting up or maintenance of schools and other institutions. But, fact remains that M/s. Star Educational Trust is not a registered charitable trust u/s.12AA of the Act, and hence, even though the objects of two trusts are similar, but because the trust was unregistered, the amount given to said trust cannot be regarded as application of income for charitable purpose, more specifically within the meaning of section 13(1)(d) of the Act. Therefore, the ld.AO opined that the assessee has violated provisions of section 13(1)(c)(ii)of the Act and hence, the income of the trust is not entitled for exemption u/s.11 of the Act. The AO, further observed that as regards advance to Shri M.G. Bharathkumar, the assessee has failed to justify advance of Rs.10,24,860/- given to Shri M.G.Bharathkumar, who is the Chairman of the assessee trust, although, the assessee claims that said amount has been used by M/s. Star Educational Trust for the purpose of maintaining educational institutions. As regards advance to M/s. Mahaajay Spinners India Pvt. Ltd., the ld.AO observed that although the assessee has justified advance given to the above company on the ground that, when the trust was in need of finance, the company had stood guarantors for the loan taken by the trust by mortgaging their properties, but fact remains that the amount given to M/s.
8 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 Mahaajay Spinners India Pvt. Ltd., has been issued in favour of Shri M.G. Bharathkumar, the Director of the company. From the above, it shows that the trust has given benefit to interested persons in contravention of section 13(1)(c) of the Act and accordingly, the ld.AO opined that there is a clear violation of section 13(1)(c) of the Act by giving benefit to interested persons and hence rejected exemption claimed u/s.11 of the Act and assessed excess of income over expenditure for tax. The AO, further noted that, although the assessee has taken an alternative stand in light of certain evidences that advance given to M/s. Mahaajay Spinners India Pvt. Ltd., is for supply of uniform and coats, but the circumstances which compel the assessee to pay such advance to the company for supply of lab coat has not been explained. Making advance to a company, which retain such money for more than a year without supplying the materials shows that the assessee has given trust funds to interested persons specified u/s.13(3) of the Act and hence, he opined that the assessee has violated provisions of section 13(1)(c) of the Act and consequently not entitled for the benefit of exemption u/s.11 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
9 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 assessee has filed detailed written submissions which has been reproduced at para 5 on page Nos.5 to 13 of ld.CIT(A) order. The sum and substance of arguments of the assessee before the CIT(A) are that, the AO was completely erred in holding that the assessee has given or allowed trust funds to the benefit of interested persons in contravention to section 13(1)(c) of the Act, without appreciating the fact that amount given to M/s. Star Educational Trust is for the purpose of imparting education, which is evident from the fact that said trust objects are charitable in nature similar to the objects of assessee trust and the loan has been used for running number of educational institutions. It was further submitted that M/s. Star Educational Trust is a public charitable trust with the objective of providing education to public at large. The mere fact, that the said trust is not registered u/s.12AA of the Act, does not convert the activities of the said trust as non-charitable. The non-registration of any trust may have adverse consequences on their tax liability, but the object would remain as charitable in nature. Further, while applying provisions of section 13(1)(c) of the Act, it is essential to see whether any part of income of the trust is directly or indirectly allowed to the interested persons or not. In this case, trust has given advance to another charitable trust for imparting education. Hence, the same cannot be considered as contravention to
10 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 provisions of section 13(1)(c) of the Act. As regards, advance made to Shri M.G. Bharathkumar, the facts remains that said amount has been given for the purpose of imparting education, which is evident from the fact that Shri M.G. Bharathkumar has transferred said funds to M/s. Star Educational Trust. Although, the money has been given through Shri M.G. Bharathkumar, but ultimate beneficiary of said funds is M/s. Star Educational Trust and said funds were used for imparting education. Similarly, advance made to M/s. Mahaajay Spinners India Pvt. Ltd., it was submitted that said amount has been given for supply of uniform and coats to students of institutions, for which necessary procedure and due diligence has been followed, where a competitive quotations have been obtained from various suppliers and M/s. Mahaajay Spinners India Pvt. Ltd., was considered to be least bidder for supply of uniforms and coats. Further, considering the least bid, an advance amount has been given for which they have supplied uniforms and coats in the subsequent financial year. Therefore, advance given in the normal course of activities of the trust to a company in which the trustees of the trust are Directors cannot be said as direct or indirect benefit allowed to the interested persons.
11 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 7. The ld.CIT(A) after considering relevant submissions of the assessee and also by following the decision of Hon’ble Jurisdictional High Court of Madras in the case of CIT vs. Working Women’s Foum [2014] 365 ITR 0353, which was subsequently affirmed by the Hon’ble Supreme Court by dismissal of SLP filed by the Department, held that denial of exemption for violation of provisions of section 13(1)(c) & 13(1)(d) of the Act, should be only to the extent of income which was violative of section 13(1)(d) and not the entire deduction claimed u/s.11 of the Act. The ld.CIT(A) further noted that as regards advance paid to M/s. Star Educational Trust, it was the claim of the assessee that advance to said trust over a period of years which was already disclosed in the return of income filed for the respective assessment years and AO has accepted the claim in the scrutiny assessment for those years. Further, having accepted the advance as amount given for charitable purpose, he cannot disturb the same in subsequent assessment years. The CIT(A), further observed that as regards payment to Shri M.G. Bharathkumar, it was the claim of the assessee that Shri M.G. Bharathkumar has transferred the total amount to M/s. Star Educational Trust and said amount was used for the objects of the trust, which is having coming objects of imparting education. Therefore, those 2 advances cannot be considered as violation of
12 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 section 13(1)(c) of the Act. But, in so far as, advance to M/s. Mahaajay Spinners India Pvt. Ltd., the ld.CIT(A) observed that since the assessee has failed to file any evidences to prove that said advance was given in the normal business activity of the trust, said payment is hit by the provisions of section 13(1)(c) of the Act. Accordingly, he directed the AO to restrict denial of exemption to the extent of advance given to M/s. Mahaajay Spinners India Pvt. Ltd. The relevant findings of the CIT(A) are as under:- 7. I have perused the submissions of the appellant made before me and the assessment order. The A.Q. has held that appellant has applied/diverted the income of the trust to the tune of Rs.2,49,93,576/- directly/indirectly for the benefit of the persons referred to the sub section (3) of Sec.13, thereby falling within the mischief of the provisions of Sec.13(1)(c)(ii). A perusal of the submissions of the appellant shows that Rs.1,88,59,716/- was advanced to M/s Star Educational Trust. The appellant submitted that said sum was advanced in various years commencing from assessment year 2006-07. The appellant furthers submitted that in none of the years in which the payments were made the assessing officer had considered the said advance to M/s Star Educational Trust as diversion of our trust funds. For this assessment year, viz., 2011- 12, the appellant has advanced Rs.4,84,944/- only. The table showing year wise closing balances of advances to the M/s Star Educational trust is as under: A.Y. Closing balance (Rs.) 2006-07 231938 2007-08 14803705 2008-09 18443214 2009-10 18376224 2010-11 18151574 2011-12 18636518
Similarly, the payment of Rs.10,24,860/- which was made through Shri M.G. Bharathkumar to the M/s Star Educational.Trust is also made during
13 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 the A.Y. 2007-08. The appellant argued that both transactions were already disclosed in the return of incomes filed for the respective assessment years and it was considered by the A.O. in the scrutiny assessment for these years. However, Rs.50,50,000/- to Mahaajay Spinners India (P) Ltd., was advanced during current A.Y. This payment has been considered to be violation of section 13 of the Act.7.1 Further, the appellant has submitted that the assessing officer should have restricted the denial and brining to the maximum marginal rate only in respect of sums considered by him as falling within the mischief of section 13 (1) (c) and 13 (1) (d) of the Act. In this connection the appellant has relied on the judgment of the Hon’ble jurisdictional High Court in the case of CIT Vs Working Women’s Forum (365 ITR 353 — SLP dismissed in (235 Taxman 516 SC) and that of the Hon’ble Bombay High Court in the case of DIT (E) Vs. Sheth Mafatlal Gagalbhai Foundation Trust [249 ITR 533 (Born)].
7.2 I have perused the case laws relied on by the appellant. The Hon’ble jurisdictional High Court in the case of CIT Vs Working Women’s Forum [2014] 365 ITR 0353 has held that the denial of exemption should only be to the extent of the income which was violative of section 13 (1)(d) and not the total denial of exemption under section ] 1. The Hon’ble Apex court also dismissed the SLP filed by the departrnent against the High Court’s ruling. Respectfully following the case laws cited supra, I direct the A.O. to restrict the additions to the income which were violative of section 13(1)(d) during the previous year relevant to the A.Y. 2011-12. Respectfully following the judicial pronouncements cited supra, I direct the A.O. not to deny the Section 11 benefits except as stated above. Hence, the grounds of appeal of the appellant are partly allowed.
Aggrieved by the order of the CIT(A), the Revenue is in appeal before us. The ld.DR submitted that the ld.CIT(A) has erred in holding that the assessee trust is eligible for exemption u/s.11 of the Act, relying on the decision of the Hon’ble Jurisdictional High Court of Madras in the case of CIT v. M/s. Working Women’s Forum, supra, where facts are on violation of provisions of section 13(1)(d)
14 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 of the Act, whereas in the instant case, it is violation of section 13(1)(c) of the Act. The ld.DR, further submitted that the ld.CIT(A) erred in directing the AO not to deny complete exemption for the trust u/s.11 of the Act, ignoring section 13(1) of the Act, which clearly reads that nothing contained in section 11 or 12 of the Act, shall operate so as to exclude from the total income of the previous year of the person in receipt thereof. The ld.DR, further submitted that the ld.CIT(A) has failed to appreciate the fact that interest free advances given to the founder trustee of the trust, advance given to M/s. Star Educational Trust and advance given to M/s. Mahaajay Spinners India Pvt. Ltd., were violative of section 13(3) of the Act, because said advances were given without charging adequate interest or adequate security in terms of section 13(2)(a) of the Act and continues to remain invested during the previous year within the meaning of section 13(2)(h) of the Act, thereby benefitting such specified persons as per the provisions of section 13(1)(c) of the Act. The ld.DR, further referring to the findings of the ld.CIT(A) submitted that as per section 164(2) of the Act, in case where exemption is denied u/s.13(1)(c) or 13(1)(d) to the trust, tax shall be charged on the relevant income or part of relevant income on which exemption is denied at the maximum marginal rate, but the exemption u/s.11 in respect of all other incomes denied due to
15 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 operation of section 13 will continue and the assessee is treated as an Association of persons and has to be taxed accordingly at normal rates.
The ld.AR on the other hand strongly supporting order of the CIT(A), submitted that except to the extent of considering advance given to M/s. Mahaajay Spinners India Pvt. Ltd., as violation of section 13(1)(c) of the Act, the ld.CIT(A) has recorded categorical finding in light of the decision of Hon’ble Jurisdictional High Court of Madras in the case of CIT v. Working Women’s Forum, supra, that denial of exemption should be limited to the extent of income, which is violative of section 13(1)(c) or 13(1)(d) of the Act. The ld.AR, further submitted that there is no diversion of funds to the benefits of the trustees as held by the ld.AO, in so far as three advances, because advance given to M/s. Star Educational Trust is for the purpose of imparting education and said trust was engaged in imparting education through various educational institutions. Similarly, advance given to Shri M.G. Bharathkumar, the Managing Trustee of the trust is also ultimately for the purpose of imparting education, which is evident from the fact that said amount has been transferred to M/s. Star Educational Trust and said amount has been utilized for objects of the trust. Once, amount has been given to
16 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 another charitable trust having common objects and such trust has ultimately used the funds for its objects without giving any benefit to the specified persons, then simply for the reason that said trust was not registered u/s.12A of the Act, the genuine advance given for charitable purpose cannot be considered as advance or diversion of funds given to the interested persons without adequate interest or guarantee. As regards, advance given to M/s. Mahaajay Spinners India Pvt. Ltd., the ld.AR submitted that, it is a fact on record that the assessee has given advance for purchase of lab coats and uniforms, for which necessary quotations from various vendors and bills issued by the supplier for supply of uniform and coat was furnished. Although, the assessee has initially taken a stand that it was given to the company without any benefit, but subsequently it was noticed that said advance was given for supply of materials in the normal course of business and hence, the same cannot be considered as diversion of funds to the interested persons in violation of provisions of section 13(1)(c) & 13(1)(d) of the Act.
We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The AO denied the benefit of exemption u/s.11 of the Act, for the reason that during the year under consideration, the income
17 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 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 applied directly or indirectly for the benefit of any persons referred to 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 has considered three advances for coming to a conclusion that the trust has allowed direct or indirect benefit to the interested persons referred to section 13(3) of the Act, as per which, advance given to M/s. Star Educational Trust has been considered to be violation of section 13(1)(c) of the Act. Similarly, the AO has considered advances given to Shri M.G. Bharathkumar, Managing Trustee of the trust as violative of section 13(1)(c) of the Act. Likewise, the AO has considered advance given to M/s. Mahaajay Spinners India Pvt. Ltd., is also in contravention of section 13(1)(c) of the Act. According to AO, all 3 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.
18 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 11. 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 IT Act. Similarly, provisions of sec. 164(2) 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, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate. Therefore, if the trust diverts its fund then, only that part of the income which is in violation of section 13(10© is chargeable to tax at the maximum marginal rate of tax; but not the whole income of the trust. This proposition is supported by the 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
19 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 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 section 13(1)(c)(c), then tax can be charged on such income which violates the provisions of section 13(1)(c); but not the whole income of the Trust. This position is further reiterated by the 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 violative 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. The CIT(A), after considering the relevant provisions has rightly held that only amounts that have been diverted by the assessee trust can only be assessed to tax at the maximum marginal rate. Accordingly, we do not find any infirmity in the findings of the CIT(A) and hence, the same is upheld.
Having said so, let us examine in the given facts and circumstances of the case is there any violation of provisions of
20 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 section 13(1)( c) of the Act, to deny the benefit of exemption u/s ii of the Act. The AO has considered advances given to M/s. Star Educational Trust as violative of section 13(1)(c) of the Act, on the sole ground that said trust was not registered u/s.12A of the Act. Except this, the AO has not denied the fact that the objects of M/s. Star Educational Trust is charitable in nature and said trust was imparting education by establishing various educational institutions. Once, the objects of the trust are charitable in nature and it is carrying out its activities according to is objects, then the mere fact that said trust is not registered u/s.12A of the Act, does not convert the activities of the said trust as non-charitable. The non- registration of the trust may have adverse consequences of their tax liability, but the object would remain as charitable purpose only. Further, while applying provisions of section 13(1)(c) of the Act, it is essential to see whether the income of the trust is used or applied for the benefit of the trustees directly or indirectly. 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 surplus can be utilized for their benefit. In our considered view, the reasoning given by the AO is totally ill founded, because in order to consider any payment within the ambit of provisions of section 13(1)(c) of the Act, he should bring on record necessary evidences
21 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 to prove that the trust has allowed direct or indirect benefit to the persons specified u/s.13(3) of the Act. Unless, the AO has brought on record, evidences to support his finding, merely for the reason the trust was unregistered and the trustees may utilized the surplus for their benefit is not a ground for denying exemption, more particularly when such advance is given to another charitable trust for imparting education. Thus, in our view advance given to M/s Star Education Trust is not violative of section 13(1)(c) of the Act.
Coming to another observation of the ld.AO, the ld.AO has considered advance given to Shri M.G.Bharathkumar, Managing trustee of the trust. According to the ld.AO, the trust has given direct benefit in contravention of section 13(1)(c) of the Act, by giving advance to Shri M.G. Bharathkumar. We have gone through the reasons given by the AO in light of various evidences filed by the assessee and found that advance made to Shri M.G. Bharathkumar was ultimately transferred to M/s. Star Educational Trust and said amount was used for charitable purpose. Though, the same was routed through the account of the common trustee Shri M.G. Bharathkumar, but evidences placed on record clearly indicate that Shri M.G. Bharathkumar had transferred said fund to trust account and trust has utilized the funds for object of the trust.
22 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 Further, out of the total advance of Rs.10,24,860/-, a sum of Rs.1,74,720/- was considered as donation given to said trust and balance amount of Rs.8,50,140/- as repayable to the trust. Therefore, merely for the reason that advance given to another charitable trust was routed through the account of the trustee, the genuine advance given for education purpose cannot be considered as diversion of funds of the trust to an interested person. Thus, in our view advance given to M G Bharat Kumar is not violative of section 13(1)(c) of the Act.
As regards advance to M/s. Mahaajay Spinners India Pvt. Ltd., although the AO has considered said advance as violative of section 13(1)(c) of the Act, but fact remains that said advance was given to the company for the purpose of supply of uniforms and coats to the students of the institution. We, further observe that before giving advance, the assessee has conducted due diligence and also followed due procedure of purchase by obtaining necessary quotations from the suppliers as per which M/s. Mahaajay Spinners Pvt. Ltd., was the least bidder. Considering the fact that the company has quoted least price for supply of uniforms and coats, the assessee has given advance of Rs.50,50,000/-. The said advance was adjusted against the bills issued by the company for
23 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 supply of uniforms and coats. The assessee has also placed on record, photographs of students along with bills issued by the party to prove that M/s. Mahaajay Spinners India Pvt. Ltd., has supplied uniforms and coats. Therefore, we are of the considered view that merely for the reason that advance has been given to a company, in which the trustees of the trust are Directors is not a ground for holding that the trust has allowed benefit to the interested persons in contravention of provisions of section 13(1)(c) of the Act. Further, the fact that needs to be considered is whether the advance given to a company is a benefit without any interest or security or a commercial transaction entered in the normal course of business of the trust. In this case, evidences placed on record clearly indicate that M/s/ Mahaajay Spinners India Pvt. Ltd., was engaged in the business of export of garments including readymade garments and the unit is equipped to execute the order. The assessee trust had evaluated the bids for purchasing the uniform and lab coat based on competitive coats received from the market and considered the price advantage. The terms of the order include payment of 100% in advance. Therefore, once it was found that the transaction is a normal business transaction entered in the course of activity of the trust, merely for the reason that the trustee of the trust are interested in that company is not a relevant ground to hold that
24 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 advance given to said company is hit by provisions of section 13(1)(c) of the Act and income of the trust was directly or indirectly given to the benefit of the persons referred to u/s.13(3) of the Act. Thus, in our view advance given to M/s Mahaajay Spinners India Pvt Ltd is not violative of section 13(1)(c) of the Act.
Coming to another observations of the ld.AO in light of provisions of section 13(2)(a) of the Act. The AO has observed that the assessee has given benefit to the interested persons without any interest or security. The said finding of the AO is not in accordance with law, because the AO has proceeded on the line that the assessee has lent the sum, but the transactions between the trust and the company was under normal circumstances as a prudent businessman and hence question of charging interest or taking a security against such advance does not arise. The observations of the AO that provisions of section 13(1)(d) of the Act, is also applicable is ill founded because, the provisions of section 13(1)(d) of the Act applies in respect of investment or deposit made by the trust in contravention of section 11(5) of the Act, but it does not apply to a case of advance for supplies to be made, in the normal course of activity of the trust. Therefore, we are of the considered view that advance made to M/s. Mahaajay
25 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 Spinners India Pvt. Ltd., for supply of uniforms and lab coats for the students and faculties would not be covered and resulting in any benefit directly or indirectly, so as to attract provisions of section 13(1)(c) of the Act. Further, the same not being investment or deposit also does not attract section 13(1)(d) of the Act.
Further, the Act prohibits persons specified under section 13(3) to get direct or indirect benefit from the trust or institution claims exemption u/s 11 of the Act. The specified persons cannot use funds or property of the trust for their personal purpose. 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 IT Act. If any specified person gets any benefit from the trust money or asset, then definitely it would hit by the provisions of section 13(1)(c) of the Act. But, the question is whether all transactions between trustees and trust are hit by the provisions of section 13(1)(c) of the Act. In our considered view normal commercial transactions between the persons specified u/s 13(3) and the trust are not regarded as diversion of trust fund or property for the benefit of trustees, if they are like any other commercial transactions with
26 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 outsiders. Therefore, to decide whether a particular transaction between the trust and trustees is hit by the provisions of section 13(1)(c) or not, have to be judged from the basic nature of transactions. In this case, facts borne out from record clearly indicate that there is no diversion of funds to the persons as specified u/s.13(3) of the Act. The advances considered by the AO including advance given to M/s. Star Educational Trust and advance given to Shri M.G. Bharathkumar, both were given to an another trust M/s. Star Educational Trust, which is having common objects of imparting education. The advance given by the assessee trust to another trust at best can be considered as a financial aid given to a trust for imparting education, but it cannot be considered as an advance given directly or indirectly to the benefit of persons specified u/s.13(3) of the Act. Similarly, as regards advance given to M/s. Mahaajay Spinners Pvt. Ltd., the facts borne out from record and evidence filed by the assessee clearly shows that the said advance was given in the normal course of activity of the trust and hence, the said advance cannot be considered as income or any part of property of the trust is given directly or indirectly to the benefit of the interested persons. This view is fortified by the decision of Hon’ble Delhi High Court in the case of DIT vs. Alarippu, [2000] 244 ITR 358, where it was held that a society registered u/s.12A(a)
27 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 gave money to an institution for utilization of object similar as available in its case, said amount could not be treated as investment or deposit constituting infringement of provision, of section 13(1)(d) of the Act. The Hon’ble Delhi High Court in the case of DIT v. Acme Educational Society, [2010] 326 ITR 146, had considered an identical issue and held that advancing of an interest- free temporary loan by one society to another society having similar objects, whose president was brother of president of assessee- society, would not amount to an ‘investment’ or a ‘deposit’ attracting section 13(1)(d) of the Act. The Hon’ble Delhi High Court, in yet another decision in the case of CIT v. HPS Social Welfare Foundation, [2010] 235 CTR 330, held that in absence of any material before Assessing Officer to show that funds given by assessee-trust to NGOs were used for personal benefits, he was not justified in denying exemption under section 11 to assessee on that ground.
In this case, on perusal of facts available on record, it is abundantly clear that advance given to M/s. Star Educational Trust and Shri M.G. Bharathkumar, were ultimately used by M/s. Star Educational Trust for the purpose of imparting education and there was no finding of fact from the authorities that any part of income
28 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 was directly or indirectly benefited to the persons specified u/s.13(3) of the Act. As regards, advance given to M/s. Mahaajay Spinners India Pvt. Ltd., the evidence brought on record clearly indicate that said advance was given in the normal course of activity of the trust for purchase of uniforms and coats for which necessary evidences including bill for supply of uniforms was placed on record. Therefore, all 3 advances cannot be considered as income or property of the trust was directly or indirectly allowed to the benefit of any person referred to sub-section (3) of section 13 of the Act.
In this view of the matter and considering the facts and circumstances of the case, and also by following the decisions of various judgments cited above, we are of the considered view that the ld.AO was erred in denying the benefit of exemption u/s.11 of the Act, to the trust for contravention of provisions of section 13(1)(c) of the Act. The ld.CIT(A) although has accepted the arguments of the assessee, in so far as advance given to M/s. Star Educational Trust and Shri M.G. Bharathkumar, but in so far as advance given to M/s. Mahaajay Spinners India Pvt. Ltd., held that said advance was violative of section 13(1)(c) of the Act, without assigning any reasons. Therefore, we are of the considered view that in so far as three advances considered by the ld AO, there is no
29 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 violation of section 13(1)(c) of the Income Tax Act, 1961 and accordingly, there is no reason to deny exemption u/s 11 of the Act, to income of the trust. Hence, we direct the ld. AO to allow the benefit of exemption u/s.11 of the Act, as claimed by the assessee.
In the result, appeal filed by the Revenue is dismissed and cross objection filed by the assessee is allowed.
ITA No.126/CHNY/2019 & CO No.19/CHNY/2019
The facts and issues involved in this appeal filed by the Revenue and cross objection filed by the assessee are identical to the facts and issues, which we have considered in ITA No.125/CHNY/2019 & CO No.18/CHNY/2019 for the assessment year 2011-12. The reasons given in preceding paragraph shall mutatis mutandis apply to this appeal and cross objection as well. Therefore, for similar reasons, we direct the AO to allow the benefit of exemption claimed u/s.11 of the Act for Asst. Year 2012-13.
In the result, appeal filed by the Revenue is dismissed and cross objection filed by the assessee is allowed.
30 I.T.A. Nos. 125 &126/CHNY/2019 & CO Nos. 18 & 19/CHNY/2019 22. As a result, appeals filed by the Revenue for Asst. years 2011-12 and 2012-13 are dismissed and the cross objections filed by the assessee for Asst. years 2011-12 and 2012-13 are allowed.
Order pronounced in the court on 11th February, 2021 at Chennai.
Sd/- Sd/- (धु�वु� आर.एल रे�डी) (जी. मंजुनाथ) (Duvvuru RL Reddy) (G. Manjunatha) लेखा सद�य /Accountant Member �याियक सद�य/Judicial Member चे�ई/Chennai, �दनांक/Dated, the 11th February, 2021 RSR आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. िनधा�रती/Assessee 2. राज�व/Revenue 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु� /CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF.