2011 (4) TMI 1494 - AT - Income Tax

Summary

Issues Involved:
1. Violation of provisions u/s 13 of the Income Tax Act.
2. Eligibility for exemption u/s 11 of the Income Tax Act.
3. Nature of lease rental advances as application of funds or investment.
4. Levy of interest u/s 234A and 234B.

Summary:

1. Violation of provisions u/s 13 of the Income Tax Act:
The Assessing Officer concluded that the provisions of section 13(2)/13(3) were violated for the direct benefit of the trustees of the trust, thus denying exemption u/s 11. The trustees were also directors of M/s Merit Resorts Pvt. Ltd (MRPL), and the leased premises were taken over by Canara Bank under the Securitization & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

2. Eligibility for exemption u/s 11 of the Income Tax Act:
The trust was registered u/s 12AA and engaged in providing Hotel Management Education. It had taken on lease premises owned by MRPL, M/s Nilgiris Enterprises, and M/s Prince Palace, paying lease rental advances. The Assessing Officer and CIT(A) denied exemption u/s 11, but the Tribunal found no evidence that trustees benefited from the lease rental advances. The trust had not paid any lease rentals but used the property, and the lease rental advance of Rs. 9.40 crores was repaid in full by MRPL before the bank took symbolic possession.

3. Nature of lease rental advances as application of funds or investment:
The Tribunal examined whether lease rental advances were an application of funds or an investment. Citing judicial precedents, it concluded that the advances were an application of funds for pursuing the trust's objectives, not an investment. The trust benefited from the agreement, and the trustees did not derive any personal benefit. Therefore, the provisions of section 13(1)(d) did not apply.

4. Levy of interest u/s 234A and 234B:
Since the trust was entitled to exemption u/s 11, the interest levied u/s 234A and 234B would not survive. The Tribunal set aside the order of the CIT(A) and allowed the appeal of the assessee-trust.

Conclusion:
The Tribunal held that the assessee-trust did not violate any provisions of section 11 or section 13 of the Act and was entitled to exemption u/s 11. The appeal of the assessee-trust was allowed. The order was pronounced in the open court on 19.4.2011.