TMI Blog2017 (1) TMI 1085X X X X Extracts X X X X X X X X Extracts X X X X ..... terest. Disallowance under section 40 (a)(ia) - Held that:- The assessee submitted that payee has furnished its return of income under section 139 (1) on 30/10/2008. That the payee has taken into account such interest for computing income. The payee has paid the tax due on the income declared. That certificate from the accountant under form 26A has been furnished. In this regard Learned counsel of the assessee has relied upon the decision of Honourable Delhi High Court in the case of CIT vs Ansal Land Marktownship [2015 (9) TMI 79 - DELHI HIGH COURT] for the proposition that second proviso to section 40(a)(ia) of the Income Tax Act is declaratory and curative in nature and has retrospective effect from 1/4/2005.We find that the above submission of the Learned counsel of the assessee is cogent. However the issue requires factual verification of the submissions made. Disallowance towards provision for salary and DA - Held that:- Upon careful consideration we find that the issue needs verification on the part of the Assessing Officer. Hence in the interest of justice we remit this issue to the file of the Assessing Officer. The Assessing Officer shall examine the issue afresh af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome on 28-01-2009 showing income of Rs. Nil as exemption u/s 11 has been claimed. The assessee trust runs several educational institutions in Nagpur and Mumbai. The majority of the trustees belong to the Chaturvedi family of Nagpur. The AO has observed in the course of assessment proceedings that during the financial year 2007-08 the trust has advanced interest free loans to two members of the trust who are also son and daughter of the founders of the trust namely Shri Satish Chaturvedi and Smt. Abha Satish Chatuvedi. The amounts advanced are as follows : Sr. No. Name of assessee Amount. i) Pallavi Satish Chaturvedi Rs.76,54,799/- ii) Dushyant Chaturvedi ₹ 9,05,350/- The AO pointed out that these members are covered by the definition of specified persons given in section 13(3) of the Act and the loans and advances were outstanding in the books of the trust for financial year 2008-09. The AO has therefore, held that the assessee trust is hit by provisions of section 13(1)(c) r.w.s. 13(2)a of the Act an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant is fallacious. It is worth taking into account that from the submissions of the appellant it is stated that while the total income and property accumulated upto 2008 amounting to ₹ 142.78 crores and the total application on the object of the Trust is amountlnq to ₹ 155.77 crores. Therefore according to appellant's own admission the trust was under compulsion to borrow amounts on loan of ₹ 13.82 crores from vari~us groups - concerns to meet the deficit utilized for appllcatlon of the trust. Accordinq to appellant these amounts orrowed are as follows.- i) ₹ 1,32,34,526/- from Permanent Agro Tech. P. Ltd. ii) ₹ 13.36.056/- from Sheetal Chaturvedi iii) ₹ 12,58,52,299/- from Prowess Financial Services Pvt. Ltd. 8.2 Thus it is clear that the appellant trust was constrained to borrow amounts to discharge its obligations of meeting the objects of the trust. The natural corollary to this would be that amounts borrowed would therefore not be available for utilization towards any other purpose other than the objects of the trust and that includes for the purpose of making loans and advances to member trustees. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d college buildings and other allied uses. Thus it is seen that this general permission categorically and unequivocally states that loans are to be utilized to meet the objectives of the trust. Appellant has not produced before me any copy of any specific order or permission received from the Charity Commissioner regarding prior permission to receive loans or funds from any individual or institution and make them available as interest free loans and advances to member trustees. Therefore the appellant's explanation that the amounts received as loans from Permanent Construction (P) Ltd and smt Sheetal Chaturvedi have been utilised for making interest free advances to trustees Sri Dushyant Chaturvedi and Smt Pallavi Chaturvedi is neither feasible nor plausible. 8,4 Even if it is accepted hypothetically that the transactions of borrowing loans from related concerns and in turn advancing them to related concerns have taken place, it would be in violation of the memorandum and objectives of the trust deed. If loans have been obtained which are meant to be utilized towards the objectives of the trust, but have in reality and in contradiction of its avowed purpose been d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustees. It was only vide letter dt. 24-12-2010 in response to the final show cause notice that the security agreement suddenly materialized. AO has therefore held that this security agreement is dearly an afterthought. Aa has also pointed out that M/s Permanent Construction ep) Ltd. which has given purported security against the loan has withdrawn the amounts from the trust on 18-08- 2007 in violation of the agreement of indemnity and that another sister concern Mls Prowess Financial Services P. Ltd. has been paid interest of ₹ 52,00,000/- during the year. The question also arises as to why the security for the loans have not been provided by Shri Dushyant Chaturvedi and Smt. Pallavi Satish Chaturvedi who both have sufficient assets and property but been provided by third parties. The Allahabad High Court in the case of CIT Vs. Audh Educational Society 203 Taxman 166 (All.) has while addressing similar issue held that the security offered by a third party is not acceptable when the assessee itself has sufficient assets and funds. It is also necessary to point out that issue of guarantee being provided by M/s Permanent Construction P. Ltd. and M/s Prowess Financial Services P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is necessary to note that the provisions of section 164(2) read with proviso is applicable in the case where income derived from property held under the trust where only part of such income is eligible for exemption u/s 11. The section relied upon by the appellant has no relevance to the facts of the case as pointed out by AO in the remand report. The perusal of the legislative history of section 13(1)(c) clearly shows that law contemplates denial of exemption u/s 11 when there is a violation u/s 13(1)(c). Further AO has elaborated the exceptions to the rule of complete denial in para 8 of the assessment order which is as follows :- i) The exemption will not be denied merely because some funds of the trust or institution are invested in a concern in which the specified persons have a substantial interest unless such investment exceeds five percent of the capital of that concern. ii) The exemption will also not be denied where the aggregate of the income and value of property diverted in favour of the specified person does not exceed ₹ 1,000/- iii) The second proviso to clause (c) of sub-section (1) of section 13 provides one exception. In the case of a reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose that certain sums would be admissible as deduction only if taxes due on such amounts are deducted as required by provisions of chapter-XVII. In the appellant's case there is no ambiguity that tax was required to be deducted at source on interest payments to Mls Prowess Financial Services Pvt. Ltd. Appellant has committed a default by not deducting the taxes due. Therefore the provision of section 40(a)(ia) are clearly attracted. The main argument of the appellant is that the assessee trust is not engaged in any business or profession and does not: have any income under the head profits gains of business or profession. However as it has already been held by me in ground no. 2 to 4 that assessee is not eligible for exemption u/s 11 this argument of the appellant is not tenable. The requirement to deduct tax at source does not exclude entities which are exempted u/s :11. The intent of the legislature was that deduction of tax at source is to be ensured in the case of all persons who are liable and obliged to do so. There are: no exceptions set out to this statutory obligation. Once income is to be computed as per the provisions laid down in section 28 to 44, all the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have heard both the counsel and perused the records. Learned counsel of the assessee s submission in this regard is summarized as under : Gr.No. 1 to 3: / Denial of exemption U/s. 11 of I.T. Act, 1961 A) Trust is holding registration U/s. 12A vide certificate dated 29/08/2003 and income of charitable institution is exempt U/s. 11 of I.T. Act, 1961. B) The assessee is charitable institution running education institutions for past 12 years. It is enjoying benefit of income being exempt u/s 11 of I.T. Act 1961. The perusal of assessment order would indicate that assessee institution is pursuing the same objects of imparting education and all activities are in promotion of. its objects. The assessee institution is running many educational institution and is imparting education to approximately 15,000 students. C) AO. has not granted benefit of exemption U/s. 11 of I.T. Act, 1961 according to him amount given to managing committee members Shri Dushyant Chaturvedi Pallavi Chaturvedi is in violation of provision of Sec. 13(1 )(c) of I.T. Act, 1961. AO. otherwise than this has no Objection/dispute as to eligibility of its income being exempt u/s 11 of I.T. Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of fact situation. K) The amount of interest receivable on amount given calculated at 5.5% was submitted before A.O. at ₹ 2,23,304/-. Both the persons are working for the Charitable Institution. Shri Dushyant Chaturvedi and Smt. Pallavi Chaturvedi are members. Both the persons are not drawing any compensation for services rendered. Benefit for amount taken by them in monetary value is ₹ 2,23,304/-. It is much less than reasonable compensation for services rendered. Thus there is no benefit in excess of fair market value to hold breach of provisions of Sec. 13 of I. T. Act, 1961. Without prejudice benefit of Sec. 11 is not applicable only to the extent of application of income in violation of provision of section. L) Income arising from educational activities has been granted exemption u/s. 11 in past subsequent years. Income arising during the year is solely from activities of imparting education qualifies for being exempt u/s. 11 of the LT. Act, 1961. Benefit u/s. 11 cannot be denied to income from education which is charitable object. M) Sec 11 (4A) envisage activities of business by trust which is not exempt u/s. 11 of the IT. Act, 1961. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 161 ITJ (Mum.) 0742 Jamshetji Tata Trust vs. Joint Director of Income Tax (Exemption) 21) (2016) 46 CCH 0040 (Del.) Institute of Haematology vs. Addl. Director of income Tax 22) ITAT order in ITA No.146/Nag/2013 in the case of Sushrut Hospital and Research Centre vide order dated 18/11/2015 23) (2012) 143 TTJ 0352 (Pune) Sinhgad Technical Education Society vs. ACIT Gr. No.4: Disallowance u/s 40(a)(ia) of ₹ 52,79,636/-. A) Assessee, during the concerned assessment year has provided interest on unsecured advances received from M/s. Prowess Financial Services Pvt. Ltd. at the rate of 5.5% amounting to ₹ 52,79,636/-. B) The assessee is not deemed to be in default as mentioned under the second proviso to sec. 40a)(ia) of the I.T. Act 1961 as the conditions under the first proviso to sec. 201 of the I.T. Act 1961 are complied with i.e. Vol IV i) M/s. Prowess Financial Services Pvt. Ltd. has furnished its return of income uls 139(1) on 30109/2008. ii) M/s. Prowess Financial Services Pvt. Ltd. has taken into account such interest for computing income in such return of income. iii) M/s. Prowess Financial Services Pvt. Ltd. has paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipts 41.63 crores Net Profit 1.70 crores 4.08% Revenue Expenditure on object of Trust 39.93 crores 95.91% Capital Expenditure on Object of Trust. 8.63 crores. 48.56 crores. It is further noted that in the past as well as subsequent assessment year's assessee has been granted exemption under section 11 of the Income Tax Act. 11. The learned counsel of the assessee has challenged the revenue's action in this regard on two counts. Firstly it has been assailed that there were sufficient interest-free funds available from related parties which has been utilised in giving these loans. Secondly it has been assailed that section 11 (4A) envisages activities of business by trust which is not exempt under section 11 of the Income Tax Act. Hence the concept of income being partly exempt and not exempt is built in this scheme of exemption under section 11 of the Income Tax Act. It has further been submitted that provisions of section 164 (2) support this proposition. 12. First we deal with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ravenes section 13(1)(d), the maximum marginal rate of income-tax will apply only to that part of income which has forfeited exemption under the said provision and not the entire income. For the assessment year 1994-95, the assessee trust earned dividend as well as interest income as a holder of equity shares in M The trust claimed exemption on interest income. The Assessing Officer denied exemption holding that the trust had forfeited its exemption in respect of its entire income. On appeal, the Commissioner held likewise. The Tribunal allowing the appeal held that only dividend income was to be taxed at maximum marginal rate. On appeal by the Department: Held, dismissing the appeal, that violation of section 11(5) read with section 13(1)(d) by the assessee trust would result in the maximum marginal rate of tax only on the dividend income on shares and not on the entire income. Therefore, income other than dividend income was to be taxed at the at the normal rate of taxation under the Act. Similar view was expressed by the ITAT Delhi Bench in the case of ACIT vs Indicula Trust Society : Para 11. A bare perusal of section 13 (1 )(c) would suggest that whatever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of the association of persons. This is subject to application of other provisions of Act like exemptions, deduction etc. Therefore, a proviso was inserted by the Finance Act, 1984, with effect from April 1, 1985, under which in cases where the whole or any part of the relevant income is not exempt under section 11 or section 12, because of the contravention of section 13(1)(c) or (d), then tax shall be charged on such income or part thereof, as the case may be, at the maximum marginal rate. In other words, only non-exempt income portion would fall in the net of tax, as if it was the income of an association of persons. 15. In the case of Mafatlal Gagalbhai Foundation (supra) also it was held by the High Court that as per proviso to section 164(2), it is, inter alia, laid down that in cases where the whole or part of the relevant income is not exempt by virtue of section 13(1)(d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. The phrase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer's action. 20. In this regard Learned counsel of the assessee submitted that payee has furnished its return of income under section 139 (1) on 30/10/2008. That the payee has taken into account such interest for computing income. The payee has paid the tax due on the income declared. That certificate from the accountant under form 26A has been furnished. In this regard Learned counsel of the assessee has relied upon the decision of Honourable Delhi High Court in the case of CIT vs Ansal Land Marktownship 377 ITR 635 for the proposition that second proviso to section 40(a)(ia) of the Income Tax Act is declaratory and curative in nature and has retrospective effect from 1/4/2005. 21. We find that the above submission of the Learned counsel of the assessee is cogent. However the issue requires factual verification of the submissions made. Hence in the interest of justice we remit this issue to the file of the Assessing Officer. The Assessing Officer shall examine the factual aspects of the asseessee s submission in this regard and decide as per the ratio emanating from the aforesaid case law from Honourable Delhi High Court. 22. Since we have principa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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