2025 (5) TMI 16 - AT - Income Tax

Denial of the benefit of exemption u/s 11 - AO was of the opinion that the investment made by the assessee by way of loan/deposit to another trust does not fulfill the requirements of the forms and modes of investment permitted by Section 11(5) - Addition u/s 68 made by AO - HELD THAT - Considering the past history of the assessee and decision of the Co-ordinate Bench for AY AY 2006-07 2022 (8) TMI 1572 - ITAT MUMBAI we direct the AO to verify the facts for the advance given for the year under consideration only after affording reasonable and adequate opportunity of being heard to the assessee. Advance relates to Rainbow Tech - We find from the copy of accounts that Rs. 18, 00, 000/- was given in the earlier year. Therefore the same cannot be questioned during the year under consideration out of which the assessee has received Rs. 5, 00, 000/- back and the closing balance stands at Rs. 30, 00, 000/- which cannot be added during the year under consideration. Moreover in subsequent financial year the entire advance has been received as per the copy of account exhibited. Advance is in respect of Arun Muchhala Engineering College - A perusal of the copy of account shows that there was a pending balance of Rs. 6, 65, 09, 376/-. Moreover this engineering college is part of the Trust as can be seen from the financial statements and audit report of the Trust exhibited at pages 37 38 of the paper book. Therefore we do not find any merit in considering this advance as violative of the provisions of Section 11(5) r.w.s. 13(1)(d) of the Act. Advance relates to Arun Muchhala Research Education Centre - A perusal of the copy of account shows that there was an opening balance of Rs. 29.25 lakhs. Therefore there is no question of making any addition of the balance outstanding amount of Rs. 25, 000/-. Addition u/s 68 - As the first disputed loan is in respect of Sai Shiva Developers which has an opening balance of Rs. 67.50 Lakhs and the closing balance of Rs. 32, 50, 000/- is out of the pending balance. Therefore the same cannot be added u/s 68 of the Act for the year under consideration. Loan is from Mucchala Magic Land P. Ltd.. The copy of accounts shows that there is a credit balance of Rs. 17, 75, 000/- which cannot be added during the year under consideration. Other amounts received during the year have been duly confirmed by the creditor. Since the opening balance has been accepted in the earlier year there is no question of treating the party as non-genuine and all the transactions have been done through banking channels. Therefore we do not find any merit in the impugned additions u/s 68 of the Act. Loan from Arun Muchhala Co-owners is again the opening balance therefore cannot be added u/s 68 of the Act for the year under consideration. Accordingly the additions made u/s 68 of the Act are directed to be deleted.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

- Whether the advances made by the assessee to various entities, including Ritika Hotels Pvt. Ltd., Arun Muchhala Engineering College, Rainbow Tech, Tarapur Textile Park Ltd., and others, violate the provisions of Section 11(5) read with Section 13(1)(d) of the Income-tax Act, thereby disqualifying the assessee from claiming exemption under Section 11.

- Whether the unsecured loans taken by the assessee from certain parties are liable to be added to income under Section 68 of the Income-tax Act.

- Whether the notional interest computed by the Assessing Officer on interest-free advances given by the assessee constitutes taxable income under the Income-tax Act.

- Whether the delay in filing the appeals is excusable and the appeals are maintainable despite being time-barred.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of Advances in light of Section 11(5) and Section 13(1)(d)

Relevant legal framework and precedents: Section 11 provides exemption to income derived from property held for charitable or religious purposes, subject to conditions. Section 11(5) restricts modes of application of income, and Section 13(1)(d) disallows exemption if the services of the trust are made available to any person specified in Section 13(3) without adequate remuneration.

Precedent cited includes the decision in CIT vs Brihdaranyak Mandal Trust (2009) 319 ITR 363 (All.), which held that income used for purchase of land and construction of building for educational institutions constitutes application of income.

Court's interpretation and reasoning: The Tribunal examined the nature and purpose of advances given by the assessee. It noted that advances to Ritika Hotels Pvt. Ltd. were for acquiring property used for educational activities of the trust, supported by a memorandum of understanding (MOU) stipulating that the property would be transferred to the trust upon payment of consideration. The Tribunal referred to prior scrutiny and appellate orders, including a coordinate bench ruling on AY 2008-09, which found no direct benefit to trustees or persons specified under Section 13(3) and held that advances were for the trust's objects.

The Tribunal emphasized that the Assessing Officer (AO) had verified the facts through a remand report and accepted that no direct benefit or advantage was passed to trustees or related persons. It rejected the Revenue's contention to restore the matter for reassessment, noting the AO's acceptance of the genuineness of transactions.

Regarding advances to Arun Muchhala Engineering College and Arun Muchhala Research & Education Centre, the Tribunal found these entities to be parts of the trust and thus not violative of Section 11(5) or Section 13(1)(d). Advances to Rainbow Tech were also held to be opening balances from earlier years and not subject to addition.

For AY 2016-17, advances to Tarapur Textile Park Ltd. were held to be for use of property for trust objects, not violating Section 11(5) or Section 13(1)(d). Advances to Divina and S.M.G. Securities Ltd. were not related parties and thus not hit by Section 13(1)(d).

Key evidence and findings: The Tribunal relied on ledger accounts, MOUs, prior appellate orders, remand reports of the AO, and audit reports establishing the trust's ownership and use of properties and advances. The AO's remand report confirmed no direct benefit to trustees.

Application of law to facts: The Tribunal applied the legal provisions to the facts, concluding that advances were made for trust purposes and did not confer undue benefit on specified persons under Section 13(3). It held that the advances constituted application of income in accordance with the trust's objects and were therefore eligible for exemption under Section 11.

Treatment of competing arguments: The Revenue argued that advances violated Section 11(5) and Section 13(1)(d), seeking restoration for reassessment and denial of exemption. The Tribunal found the AO's acceptance of the genuineness of advances and absence of benefit to trustees persuasive, rejecting Revenue's contentions as unjustified and lacking bonafide basis.

Conclusions: The Tribunal upheld the CIT(A)'s orders allowing exemption under Section 11 in respect of advances, directing the AO to verify facts only after giving reasonable opportunity to the assessee.

Issue 2: Additions under Section 68 on Unsecured Loans

Relevant legal framework: Section 68 deals with unexplained cash credits, allowing addition to income if the assessee fails to satisfactorily explain the nature and source of loans or credits.

Court's interpretation and reasoning: The Tribunal examined loans from Sai Shiva Developers, Muchhala Magic Land Pvt. Ltd., and Arun Muchhala Co-owners. It noted that opening balances existed from earlier years, which had been accepted previously. Transactions were conducted through banking channels, and creditors confirmed the amounts.

Key evidence and findings: Ledger accounts showing opening and closing balances, confirmations from creditors, and prior acceptance of opening balances.

Application of law to facts: Since the loans were genuine, supported by confirmations and prior acceptance, and no fresh unexplained credits arose during the year under consideration, additions under Section 68 were unwarranted.

Treatment of competing arguments: Revenue contended loans were unsecured and unexplained. The Tribunal found no merit in this, given the evidence and prior acceptance.

Conclusions: Additions under Section 68 were deleted.

Issue 3: Taxability of Notional Interest on Interest-Free Advances

Relevant legal framework: Income tax is generally levied on real income; notional or hypothetical income is not ordinarily taxable unless specifically provided.

Court's interpretation and reasoning: The AO computed notional interest at 12% on interest-free advances and added it to income. The Tribunal held that only real income should be taxed and notional interest does not constitute real income.

Conclusions: The addition of notional interest was deleted.

Issue 4: Condonation of Delay in Filing Appeals

The Tribunal noted that both appeals were barred by limitation but accepted the assessee's affidavits explaining the delay and condoned the delay in the interest of justice.

3. SIGNIFICANT HOLDINGS

"The Assessing Officer himself has verified these facts and accepted that there is no direct benefit or advantage to the person specified u/s 13(3) of the Act. In such circumstances, there is no need to restore the matter back to the file of the Assessing Officer."

"The assessee has only given advance for purchase of property: therefore, it has to be held that advance was given not for the benefit of the specified persons u/s. 13(3) but for the purchase of property for running educational Institute."

"Only real income has to be taxed and notional interest computed by the AO does not pass the test of real income."

"Since the opening balance has been accepted in the earlier year, there is no question of treating the party as non-genuine and all the transactions have been done through banking channels."

Core principles established include that advances made for acquisition of capital assets for trust objects do not violate Section 11(5) or Section 13(1)(d), and that only real income, not notional interest, is taxable under the Act. Further, prior acceptance of opening balances precludes additions under Section 68 for those amounts unless new unexplained credits arise.

Final determinations were in favor of the assessee on all issues: exemption under Section 11 was allowed on advances, additions under Section 68 were deleted, notional interest additions were deleted, and delay in filing appeals was condoned.