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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI S.R.RAGHUNATHA
आदेश / O R D E R
PER ABY T. VARKEY, JM: This is an appeal preferred by the Revenue against the order of the
Learned Commissioner of Income Tax (Appeals)-18, (hereinafter ‘the
Ld.CIT(A)’), Chennai, dated 30.10.2023 for the Assessment Year
(hereinafter ‘AY’) 2015-16.
The main grievance of the Revenue is action of the Ld.CIT(A)
deleting the additions made by the AO of Rs.30,88,08,620/-. Brief facts
are that the assessee is a trust enjoying registration u/s.12AA of the Act;
and had filed its return of income on 28.7.2016 declaring NIL income.
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Scrutiny assessment u/s.143(3) was completed by the AO on 08.12.2017
accepting NIL income. Later, the assessment passed u/s.143(3) was set
aside u/s.263 of the Act by the Pr. Commissioner of Income Tax (PCIT),
Central-1, Chennai vide order dated 20.3.2020 and directed the AO to
make the order de novo. In pursuance to the order of the Ld PCIT u/s.263
of the Act, re-assessment was completed by the AO by denying
exemption u/s.11 of the Act, for violating Sec.13(3) of the Act (since
assessee trust had advanced money to Shri K. Venkat Reddy &
Smt.Subhashiniraghavan in earlier AY 2012-13) and disallowed the entire
receipt/claim of exemption u/s.11 of the Act to the tune of
Rs.19,37,51,000/- and further charged interest of Rs.11,50,57,620/- on
interest free loan given to two persons (supra) and thus determined
taxable income at Rs.30,88,08,620/-.
Aggrieved by the aforesaid action of the AO, the assessee filed an
appeal before the Ld.CIT(A) who was pleased to delete the same by
holding as under:
7.1 The admitted facts in this case are as under: (i) The assessee is an educational trust founded in 1977 having registration u/s.12A of the I.T. Act. (ii) In this case, assessment u/s.143(3) was completed on 08.12.2017 accepting the returned income at 'Nil'. (iii) Subsequently, the PCIT set aside the assessment u/s.263 on 20.03.2020 on the ground that the assessee trust had advanced money to Mr.K.Venkat Reddy and Smt.Subashini Vijayaraghavan in the AY 2012-13 which was outstanding at the end of the Financial Year relevant for this assessment year and thereby, the specified persons in sec.13(3) derived indirect benefit as they fall within the category of persons mentioned in clause (cc) of sec.13(3) as Manager (by
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whatever name called) and the trust had no discretion to make interest free advances and the advances to the above persons would attract provisions of sec.13(2)(a) of the I.T Act.
(iv) Based on the above order u/s.263, the AO passed the impugned order on 03.04.2021 in which he denied exemption u/s.11 in respect of the entire receipts of Rs.19,37,51,000/- and further charged interest @1% for 100 months at Rs.11,50,57,620/- and determined taxable income at Rs.30,88,08,620/-.
(v) The contention of the assessee is that Shri K. Venkat Reddy and Smt. Subashini Vijayaraghavan cannot be treated as Managers and the payments made to them were made based on the contractual obligation as per the letters of appointment issued to the above individuals and therefore, sec.13(2)(a) is not attracted.
(vi) For this purpose, he relied on the order of the Hon'ble ITAT in the assessee's own case for AYs 2012-13, 2013-14, 2016-17 and 2017-18 in ITA Nos.2915, 3114, 3115/Chny./2019 and 916/Chny/2020 dated 16.07.2021.
(vii) The Hon'ble Tribunal after analyzing the entire facts of the case, held in paras 15, 16 & 17 that the loans given to the above two persons would not be covered u/s.13(2)(cc) and thus, not resulting in any benefit, directly or indirectly to the interested persons so as to attract the provisions of sec.13(1)(c) of the Act.
(viii) The same loans were outstanding during this year also for the above two persons and therefore, the above decision is squarely applicable for this AY also.
(ix) It is further seen that the Department filed Misc. petitions in MP Nos.225/Chny./2022 against the above orders of the Tribunal and the same was rejected for all 4 AYs vide order dated 01.07.2022.
7.2 In view of the above, it is held that the AO was not justified in holding that the persons mentioned in sec.13(1)(cc) derived direct or indirect benefit from the trust and thereby, sec.13(2)(a) is attracted and consequently, the addition of Rs.30,88,08,620/- made by the AO is deleted.
Aggrieved, by the aforesaid action of the Ld.CIT(A), the Revenue is
before us.
We have heard both the parties and perused the material available
on record. We note that the assessee is an Educational Trust formed in
1977 and having registration u/s.12A of the Act (hereinafter ‘the Act’).
Pursuant to the Ld.PCIT’s order u/s.263 of the Act dated 20.03.2020, the
AO re-assessed the return of income filed by the assessee Trust and
denied the exemption u/s.11 of the Act and taxed the entire receipts to
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the tune of Rs.19,37,51,000/- and further, charged interest @1% for 100
months at Rs.11,50,57,620/-. Thus, determined taxable income of
Rs.30,88,08,620/- for the reason as stated by the AO in the assessment
order as under:
On a perusal of the books of account of the Trust, it is noticed that the assessee had advanced loans to the related parties and violated the provisions of the section u/s.13(2) of the Income Tax Act. During the AY. 2012-13 the assessee had advanced loans to the other trust and individuals are as under:
Date Name of the Entities Amount (in Rs.) 03.10.2011 Ragas Educational Society 12,40,00,000/- 03.10.2011 Srinivasa Educational Trust 12,40,00,000/- 07.10.2011 Shri K Venkat Reddy 6,20,00,000/- 07.10.2011 Smt. Subhasini 6,20,00,000/- Vijayaragavan
On perusal and examination of the books of account for AY 2015-16, the loans advanced to the above person/entities were still remain unpaid even during the AY 2015-16 and the balance sheet of the assessee for AY 2015-16 contains the following advances:
Sl. No. Name of the Entities Amount (in Rs) 1 Shri K Venkat Reddy 5,75,28,810/- 2 Smt. Subhasini 5,75,28,810/- Vijayaragavan 3 Ragas Educational Society 13,77,56,492/- 4 Srinivasa Educational Trust 9,95,81,108/-
From the above, it is seen that the advances made during the AY 2012-13 are still outstanding in the books of the Trust even during the AY 2015-16. Since, the assessee is not charging any Interest on the advances given to Sri Venkata Reddy and Smt. Subhasini, the provision of the sub- clause(a) of the sub-section 2 of section 13 shall be applicable to this case and the assessee disqualify for claiming exemption u/s.11 of the Income Tax Act, 1961.
Whereas, with regard to the terms of appointment, that interest free loan of Rs.5.50 crores each shall have to be paid to them, it is envisaged in the statute that the funds of the Trust which is claiming exemption u/s 11, shall have to be utilized in the manner provided in Section 11 and subject to conditions of Section 13. The Trust has no discretion to make interest free advances and those advances will clearly attract provisions of Section 13(2)(a).
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Whereas, going by the above facts, the advances made to the above two persons will attract application of the provision of Section 13(2)(a) and consequential denial of claim of exemption u/s 11 of the Income tax Act, 1961.
In view of the above, the assessment is completed by making addition to extent of amount, exempted claimed u/s.11 of 1.T.Act, and charging interest at rate of 12% of the loan given.
Returned Income: Nil Assessed income u/s 143(3) dated: Nill Addition: disallowance of exemption 19,37,51,000/- Interest charged on loan u/s 11: given:
11,50,57620*1% 100 months 11,50,57,620 Total taxable income: Rs.30,88,08,620/-
It is further noted that the AO took similar action for previous AY’s
2012-13 & 2013-14 and subsequent AY’s 2016-17 & 2017-18 which was
later confirmed by the Ld.CIT(A); and the Tribunal was pleased to delete
the addition made for all the years noted (supra) by holding as under:
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 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 subsection (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 subsection (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 u/s.11 and taxed income at maximum marginal rate as per proviso to section 164(2) of the Income Tax Act, 1961.
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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 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 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 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
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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 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 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 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, 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
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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. 7. And the Ld.CIT(A) by passing the impugned order have followed the
order of the Tribunal(supra) in assessee’s own case for earlier/subsequent
years which is in conformity with the judicial discipline. The Ld.DR could
not point out any change in facts or law which could have allowed us to
take a different view. Since, there is no change in facts or law,
respectfully following the order of the Tribunal for earlier AY 2012-13 &
other years (supra) in the assessee’s own case, we are inclined to uphold
the action of the Ld.CIT(A).
In the result, appeal filed by the Revenue is dismissed.
Order pronounced on the 17th day of May, 2024, in Chennai.
Sd/- Sd/- (एस. आर. रघुनाथा) (एबी टी. वक�) (S.R.RAGHUNATHA) (ABY T. VARKEY) लेखा सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER
चे�ई/Chennai, �दनांक/Dated: 17th May, 2024. TLN, Sr.PS
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आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु� (अपील)/CIT(A) 4. आयकरआयु�/CIT 5. िवभागीय�ितिनिध/DR 6. गाड�फाईल/GF