SURAJ DEVI MOHTA CHARITABLE TRUST,KOLKATA vs. DIT-EXEMPTION, KOLKATA, KOLKATA

The captioned appeal filed by the assessee, is directed against an order passed by the Director of Income Tax (Exemption), Kolkata dated 06.08.2014. 2.This appeal is time-barred by 21 days. The assessee moved an application for condonation of delay in filing the appeal. Having heard the petition of condonation of delay, we find that there was sufficient reason for not filing the appeal within the time limit, before the ITAT. Therefore, we condone the delay and admit the appeal for hearing. 3. The Grounds of appeal raised by the assessee are as under: “1.That on the facts and circumstances of the case, the ld. Director of Income Tax(Exemption), Kolkata erred in rejecting the Application for Renewal of Exemption u/s 80G(5)(vi) of the I.T. Act, 1961 on the ground that the loan given to Mrs. ShrutiMohta, wife of one of the Trustees, Shri Suraj Devi Mohta Charitable Trust RaghvendraMohta was in violation of provision of section 11(5) of the I.T. Act, 1961. 2.That on the facts and circumstances of the case, the ld. Director of Income Tax(Exemption), Kolkata should have considered that the loan given to the wife of one of the Trustees of the appellant Trust although was not in accordance with the Provisions of sec. 11(5) of the I.T Act, but the same is in accordance with the Provisions of Sec.13(2)(a) of the I.T. Act, 1961 considering the fact that the loan given was secured and bearing interest @12% per annum which is more than the prevailing rate in the market. 3.That the order passed by the ld. Director of Income Tax(Exemption), Kolkata is bad in law. 4.That the appellant craves leave to submit further grounds and to amend, alter or otherwise modify the grounds already taken, if necessary, before or at the time of hearing of Appeal.” 4.The brief facts qua the issue are that the assessee had filed an application on 30.04.2014 in Form No.10G seeking renewal of exemption u/s 80G(5)(vi) of the Income Tax Act, 1961. The Director of Income Tax (Exemption), Kolkata, on perusal of the application and income and expenditure accounts filed along with the application, observed that, the trust had given loan to Ms. ShrutiMohta, wife of one of the trustees, Shri R. Mohta in violation of provisions of section 11(5) of the I. T. Act, 1961. Section 11(5) of the Income Tax Act prescribes the mode where the assessee trust can make the investments and if the investment is not made in modes prescribed u/s 11(5) of the Income Tax Act 1961, then exemption u/s 80G(5)(vi) of the Income Tax Act, 1961 may be rejected. Therefore, considering the violation of provisions of section 11(5) of the Income Tax Act, 1961, Director of Income Tax(Exemption) held that the assessee trust was not eligible for granting exemption u/s 80G(5)(vi) of the Income Tax Act, 1961 because the assessee had not made investment as per provisions of section 11(5) of the I.T. Act 1961 as the assessee-trust had provided a loan to the wife of one of the trustees which is in Page | 2 Suraj Devi Mohta Charitable Trust violation of section 11(5) of the Act, therefore, exemption had been denied u/s 80G(5)(vi) of the Income Tax Act, 1961. 5.Aggrieved by the order of the Director of Income Tax (Exemption), the assessee is in appeal before us. The ld. Counsel for the assessee has stated that no doubt, the loan given to the wife of one of the trustees of the assessee trust, was not in accordance with the provisions of sec. 11(5) of the I. T. Act, but the same is in accordance with the provisions of Sec. 13(2)(a) of the I. T. Act, 1961, because this loan was secured and bearing interest at the rate of 12% per annum which is more than the prevailing rate in the market. The ld. Counsel took us through the provisions of section 13(2)(a) of the Act which reads as under: “Section 13.Section 11 not to apply in certain cases (2) Without prejudice to the generality of the provisions of clause (c) and clause (d)] of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub- section (3),- (a). if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub- section (3) for any period during the previous year without either adequate security or adequate interest or both;” Therefore, the ld. Counsel for the assessee had submitted before us that there was no violation of section 11(5) of the Act because the assessee trust had taken the adequate security of gold ornaments and the interest charged by the trust is more than the prevailing market rate. Therefore, assessee’s case falls within the purview of section 13(2)(a) of the Act as explained above hence there is no violation of section 11(5) of the Act.The ld Counsel pointed out that merely because the assessee trust has allowed the loan to the wife of one of the Trustees,the assessee trust should not be denied for exemption u/s 80G(5)(vi) of the Income Tax Act, 1961 because the loan was fully secured and bearing interest rate of 12% which is more than the prevailing rate in the market. In Page | 3 Suraj Devi Mohta Charitable Trust addition to this, the Counsel for the assessee has relied onjudgment of Hon`ble High Court of Allahabad in the case of J. K. Charitable Trust 196 ITR 31 wherein it was held with reference to cl. (a) of sub-s. (2) of s. 13 that the interest/rent charged by the assessee-trust on loans advanced and buildings leased out to certain concerns were hit by the said provisions on the ground that the interest/rent charged was adequate. The trust gave advanced to three companies on interest at the rate of six per cent. The Revenue's contention was that any interest below nine per cent must be deemed to be inadequate. The Tribunal, however, found that they were secured loans though the rate of interest during the calendar year 1971 was six per cent and during the calendar year 1972 interest paid by the borrowers was 7.5 per cent. The interest actually charged and the interest which ought to have been charged, the Tribunal held that the interest charged was not inadequate. So far as the lease rent of the building is concerned, it is brought to our notice that the property called Kamla Castle, Mussorie, was leased out at a meagre rent of Rs. 1,250 per month. It was submitted that it is a big bungalow at an important hill station and, therefore, the rent stipulated must be deemed to be inadequate. The Tribunal, however, pointed out that this property was donated by Sir PadampatSinghania in the ‘‘previous year'' relevant to the asst. yr. 1971-72 and its value, as per the balance-sheet, was Rs. 2,86,347. The Tribunal also took into consideration the fact that properties in hill stations do not fetch income throughout the year but only during the tourist season. Accordingly, it held that the rent charged cannot be said to be inadequate. The ld Counsel also relied on the judgment of Hon`ble High Court of Rajasthan in the case of SHREE POONGALIA JAIN SWETAMBER MANDIR168 ITR 516 wherein it was held that the Act does not lay down any criterion as regards determination of the adequacy of the interest paid on money lent by the trust. The rate of interest is dependent on various factors. The rate of interest is less where loan is with security and more where it is without security. The rate of interest for the purpose of deposit differs Page | 4 Suraj Devi Mohta Charitable Trust from the rate for the purpose of borrowing. For the purpose of judging the adequacy of the rate of interest in the present case, what is relevant to be considered is the rate prevalent in the market for the purpose of depositing money and the rate of interest for the purpose of borrowing money cannot be made the criterion for judging the adequacy of the rate of interest.The assessee-trust deriving interest on money deposited in a firm where the trustees are partners, against mortgage of properties belonging to the HUF of partners cannot be said be inadequate nor rate of interest inadequate to attract provisions of s. 13(2)(a) as none of partners of the firm could be regarded as persons mentioned in sub-s. (3) of s. 13 and hence exemption under s. 11 or 12 is not liable to be withdrawn. 6.On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Director of Income Tax (Exemption), which we have already noted in our earlier para and is not being repeated for the sake of brevity. 7.Having heard the rival submissions and perused the materials available on record, we are of the view that there is no violation of the provisions of section 11(5) of the Act because the assessee trust has taken the adequate security by way of gold ornaments and the loan was secured and bearing interest @12% per annum which was more than the prevailing rate in the market. Therefore, this loan given by the trust is not for personal benefit of the trustee or wife the trustee. The assessee trust is charging interest more than the market rate and there is a proper security. Section 13(2)(a) clearly says that if the loan given by the trust to the relative of a trustee and the said loan is secured with adequate security and interest, is at par with the prevailing market rate then it should not be treated that the funds of trust are being used for personal use of trustee’s wife and the exemption u/s 80G(5)(vi) of the Income Tax Act, 1961 should not be denied. Page | 5