TMI Blog2021 (7) TMI 773X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. Assessment years 2016-17 and 2017-18 AO has denied benefit of exemption u/s.11 of the Act to total income of the Trust on the ground that there is violation referred to u/s.13(1)(c) insofar as, loans given to two individuals - In order to get the benefit of accumulation of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) of the Act. Insofar as non-filing of return of income u/s.139(1) of the Act, the assessee has moved a petition before the competent authority in terms of CBDT Circular No.6 of 2020 and such application is pending for disposal. Therefore, we are of the considered view that when the assessee has filed return of income on or before due date specified u/s.139 (4) of the Act and claimed accumulation of income by filing Form No.10 before completion of assessment, then the AO should not have rejected exemption claimed by the assessee for accumulation of income u/s.11 (2) of the Act. However, since the matter is pending before the competent authority i.e., Pr.CIT, Central-1 for condonation of delay in filing return of income, we are leaving the issue to the discretion of the authorities concerned for condoning the delay. We are of the considered view that the assessee is entitled for exemption u/s11 of the Act in respect of total income for the assessment years 2012-13 and 2013-14 because there is no violations as referred to u/s.13 (1)(c) r.w.s 13(2) of the Act. Hence, we direct the AO to allow exemption u/s 11 for Asst. year 2012-13 and 2013-14. As regards assessment years 2016- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to deny the benefit of tax exemption computation u/s 11 of the Act was wholly unjustified and should be reckoned as bad in law and ought to have appreciated that the said provisions of the Act. 4. The CIT(Appeals) failed to appreciate that the misreading of the terms of contract would vitiate the related findings to deny the benefit of tax exemption computation u/s 11 of the Act and further ought to have appreciated that the expression/scope of 'Manager' in contra distinction to the expression/scope of 'Consultant'; Hence, application of the provisions of section l3(3) read with section 13(2)(a)of the Act in treating the consultant as Manager should be reckoned as bad in law. 5. The Learned Commissioner of Income tax (Appeals) has failed to appreciate that 'concern referred in section l3(3)(e) cannot include trust and the said concept of substantial interest cannot be made applicable to the trust. The section 13(3)(e) provides that any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest. 6. The Appellant also further relies upon even in the case of alleged diversion of trust funds the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various expenses u/s.40(a)(ia) of the Act. The assessment has been subsequently, revised u/s.263 of the Act by the Pr. CIT, Central -1, Chennai on the ground that assessment order passed by the AO u/s.143(3) of the Act on 27.03.2015 was erroneous insofar as it is prejudicial to the interest of the Revenue, because the AO has failed to consider the issue of taxability of net income of ₹ 13,92,01,900/- as per income and expenditure statement even though, exemption u/s.11 of the Act was denied to the Trust because of violation of section 13(1)(c) r.w.s. 13(2) of the Act, which disentitles the Trust from exemption of tax and further, the AO has failed to tax income which was diverted to interested persons in contravention of section 13(1)(c) at maximum marginal rate as per section 164(2) of the Act. Since, the AO has failed to do assessment as per provisions of the Act, the assessment has been set aside and the AO was directed to redo the assessment in accordance with law. 4. Pursuant to revision order of ld. Pr.CIT u/s.263 of the Act dated 31.03.2017, the AO had taken up the case for hearing and called upon the assessee to file its objection regarding violations referred to u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot convinced with the explanation furnished by the assessee and according to him, 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 Vijayaraghavan, because the Trust has allowed direct benefit to a person referred to in sub-section (3) of section 13 of the Act, and hence, it clearly disentitles from claiming exemption u/s.11 of the Act. The AO further observed that as regards taxation of income at Maximum Marginal Rate as applicable to AOP / BOI as per the provisions of section 164(2) of the Act, where whole or any part of the relevant income is not exempt u/s.11 due to provisions contained in section 13(1)(c) of the Act, tax will be charged on whole of relevant income or part of the relevant income at the maximum marginal rate. Therefore, he opined that there is no merit in the arguments taken by the assessee that there is no violation of provision of section 13(1)(c) r.w.s 13(2) of the Act and tax cannot be levied at MMR as per proviso to section 164(2) of the Act, and accordingly surplus as per income and expenditure account has been added to total income and computed tax at maximum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 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 sub-section (3) of section 13 of the Act. Further, two persons were entrusted with the task of vital management and administrative function and hence, definitely fall within the term of manager and hence, they fall within the term managers by whatever name called in terms of section 13(3)(cc) 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. 8. The ld.CIT(A) has discussed the issue at length in light of certain judicial precedents including decision of Hon ble Supreme Court in the case of DIT v. Bharat Diamond Bourse, 259 ITR 280 and the decision of Hon ble High Court of Karnataka in the case of CIT vs. Fr. Mullers Charitable Institution, (363 ITR 230) and held that once there is a violation referred to in section 13(1)(c) r.w.s. 13(2) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest free loan/advance are prescribed persons in terms of sec. 13(3)(cc) of the Act and 13 3(e). The observations are extracted for ready reference: 6.1. I have gone through the facts of the case and bestowed my personal thoughts to the issues on hand, materials available on record, written/oral submissions of the AR and proceed to adjudicate the issue as under by addressing the two vital issues viz., (i) as to whether the appellant had lent interest free loan or advance in violation of Sec. 11 rw Sec. 13(2) (ii) as to whether the recipients of such interest free loans/advance are prescribed persons prescribed in sec. 13(3) of the Act. 7. Section 11(1)(a) of the Act has stipulated that income derived from property under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India, shall not be included in the total income of the previous year of the person receiving the income. S 12 of the Act prescribes that any voluntary contributions received by an institution established for charitable purposes shall, for the purposes of S 11 of the Act, be deemed to be income derived from property held under tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from exigency of taxation in the light of S 11 and 12 of the Act. Section 13 of the Act prescribes conditions, violation of which, shall affect the claim of such exemption u/s 11 and 12. section 13 (1) (c) prohibits use of trust property or income for direct or indirect benefit of the prohibited person(s). Proscriibed person(s) have been prescribed/specijied in S 13(3) of the Act, that include the author of the trust or founder of the institution, person who has made a substantial contribution to the trust, any trustee of the trust or manager, any relative of such author, founder or trustee or manager, or any concern in which any of these persons have substantial interest. 9. A perusal of the relevant provisions indicates that the main objective of section 13(1)(c) read with section 13(3) is to prevent the exploitation of the tax exempt status charitable institution by such persons who are in a position to exercise control over the management of the institution. S 13(2) enumerates the situations where it shall be deemed that the income or property of the trust or institution has been used or applied for the benefit of a person referred to in sectiont3(3) of the Act. It is rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding accreditation of the institution. To set up a core team for various courses offered and to constantly explore the changes that are taking place in Govt. and also the University guidelines. Detailed list of tasks in addition to above are given in Annexure 2 hereto. You shall directly and shall report to the Chairman for any of the policy decisions. The above position is for a minimum period of five years. on signing of this agreement, as agreed, you will be entitled to receive 6 months advance salary amounting to ₹ 62.5 lakhs (Rupees Sixty two lacs fitythousand only) from the annual salary of ₹ 1.25 crs which includes your remuneration, and all other allowances. Further you will-also be eligible interest free loan not exceeding ₹ 5.5 crs(Rupees five crores Fifty lacs only). The loan amount to the extent availed by you and the advance would be regularly adjusted from your remuneration month to month, yearly incentive and the other allowances. During the pendency of the contract, in case your employment is terminated or cancelled by the employer or mutually cancelled, then the outstanding loan drown and the salary advance shall be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Srinivasa Educational Trust. Further, Smt.K.Vijayakumari, [Wife of Shri.A.Kanagaraj], a trustee of the appellant is the chairperson of Ragas Educational society and is a Trustee in Srinivasa Educational Trust. They are thus interested persons and the impugned loans to Ragas Educational society and M/s Srinivasa Educational Trust without interest /security in terms of who hove substantial interest. Thus, the transaction will be hit by provisions of sec. 13(3)(e) of the Act. There is, thus , violation of Sec. 11 rw Sec. 13(2)(a) rw Sec. l3(3)(e) as well . 14. The Hon'ble Supreme Court decision in the case of, DIT vs. Bharat Diamond Bourse (259 ITR 280) (2003) has held that violation of conditions in S13 calls for denial of complete exemption. In the case of Bharat Diamond Bourse (supra), the assessee had advanced a sum to one of its members, being a prohibited person within the meaning of section 13(3)(a) r.w.s l3(1)(c)(ii) of the Act. There was contravention of Section 13(2)(a), and therefore, the Hon'ble High court held that the assessee is not entitled to exemption u/s 11. In para 7 of the judgement, the Hon,ble Apex court has approved complete denial of exemption u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trust from total income of previous year and, consequently, all receipts of trust either by voluntary contribution or from income derived from its property would be an income of trust, chargeable to tax. The appellant's case is hit by this judgment as well. 18.The Hon'ble High Court of Allahabad in the case of CIT Vs Vijeta Educational Society [2011-TIOL-591-HC-ALL-IT] has held that in view of s 13(1)(c ) of the Act rendering the entire income of Trust or Charitable institution is liable to tax even if only part of income is directed to be applied for the benefit of the specified persons. Thus , in the appellant's case, it will lose total exemption. 19. Further, the jurisdictional Tribunal in the case of DCIT vs M/s. Paramasiva Naidu Muthuvel Raj Education Trust in ITA No.2005/CHNY/2012 C.O. No.60/CHNY/2013 dated 9th July,2018 has held that It is also an undisputed fact that during relevant assessment year, the land had been made available to M/s.PMR Bangaru Subbammal Educational Trust, which is a Trust that does not have registration u/s.12AA of the Act. It is also an undisputed fact that the assessee trust has given loans, which are interest free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the sections 13(1)(c) and 13(1)(d) read with section 13(2) of the Act. In the circumstances, the order of the CIT(Appeals) on this issue stands reversed and the order of the ld. Assessing Officer is restored 20. It is further relevant to note that the proviso to Sec. 164(2) mentions that when whole or relevant part of any income is not exempt u/s.11 on account of provisions enshrined in Sec. 13(1)(c) of the Act, tax will be charged on the whole of the relevant income or part of the relevant income at the maximum marginal rate; and thus shows that once the whole of the relevant income denied exemption u/s. 11 of the Act, then such entire income shall have to be charged at the Maximum Marginal Rate in the case of the appellant Trust. 21. In the appellant's case it is noticed that the appellant had advanced interest free loan and that too without any security, to the said Mr. Venkatarama Reddy and Smt Subashini Vijayaraghavan; that the amount has not been recovered even during the subsequent years [atleat till FY 2015-16 relevant to AY 2016_17]; that the appellant has no explanation worth the name to substantiate as to why such substantial sums were advanced a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to appreciate that the AO has misread the terms of contract between the parties to deny the benefit of tax exemption because the expression / scope of manager in contra distinction to the expression / scope of consultant. He, further submitted that the assessee has placed all possible evidences to prove that those two individuals are consultants having expertise in education field and the assessee has hired both of them for a specific period and for a specific purpose and such purpose has been explained before the AO. The AO has never disputed the fact that those two are outside consultants of the Trust, however, invoked sub-clause (cc) of section 13(3) of the Act, merely for the reason that terms of contract between the parties shows that they are in the nature of manager of the Trust. But, fact remains that they are neither employees nor managers of the Trust but, only outside consultants haired for specific purpose. He, further, submitted that the assessee has given interest free loans to two individuals as per contractual obligation. Further, when the desired output is not forthcoming from them, their services have been terminated and further directed them to refund th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both individuals are carrying out day to day functions of the Trust which is clearly in the nature of managerial position and hence, both of them are coming within the ambit of provisions of section 13(3)(cc) of the Act as a manager by whatever name called. Hence, although the assessee called them by name consultant but because of their nature of services rendered to the Trust, they are in the nature of managers and hence, advances given to them is clear violation of section 13(1)(c) of the Act. Since, there is violation of provision of section 13(1)(c), the assessee is disentitled for benefit of exemption u/s.11 of the Act and consequently assessee is liable for tax on total income at maximum marginal rate as per proviso to section 164(2) of the Act. The AO as well as the ld.CIT(A) have brought out various reasons to come to the conclusion that assessee is hit by provision of section 13(1)(c) r.w.s. 13(2) of the Act and thus, not entitled for benefit of exemption u/s.11 of the Act. Hence, there is no reason to take a different view to give the benefit of exemption to the assessee. 13. We have heard both the parties, perused the materials available on record and gone through ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 16. 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 Act. The provisions of section 13(3)(cc) of the Act, refers to any trustee of the Trust or manager (by whatever name called) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 17. 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 prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit of exemption u/s.11 of the Act to total income of the Trust on the ground that there is violation referred to u/s.13(1)(c) of the Act, insofar as, loans given to two individuals. Apart from this, he has denied the benefit of exemption for assessment years 2016-17 2017- 18 on one more count that the assessee has not satisfied provisions of section 13(9) of the Act by filing the required Form No.10 within the due date of furnishing return of income u/s.139 (1) of the Act. He, further noted that the assessee has not filed return of income for relevant assessment years on or before the due date specified u/s.139 (1) of the Act. We have gone through reasons given by the AO for denying the benefit of exemption u/s 11 of the Act, and we ourselves do not agree with the AO. In order to get the benefit of accumulation of income u/s 11(2) of the Act, the assessee is required to file Form No.10 along with return of income before the due date specified u/s.139(1) of the Act. In this case, the assessee has filed Form No.10 electronically for assessment year 2016-17 on 17.10.2016, which is before the extended due date for filing the return of income. Similarly, the assessee has filed For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified under the Act. No doubt, in order to claim benefit of exemption provided u/s.11 and 13(2) of the Act, the assessee is required to file its return of income on or before due date specified u/s.139(1) of the Act. Further, the assessee also needs to file Form No.10 specifying amount and period of accumulation of income, if such income is not applied for objects of the Trust during the relevant financial year. But, the remote question is whether the assessee is disentitles itself from claiming exemption u/s 11 and accumulation income u/s 11(2), if return of income is not filed within due date or not has to be seen in the given facts and circumstances of the Act. In this case, the assessee has given reasons for not filing return of income within due date specified u/s.139(1) of the Act, as per which the person in-charge of finance and accounts was suffering from chronic disease and was undergoing medical treatment. Further, due to the person s ill-health, the Trust could not finalize accounts within reasonable time which caused 5 months delay in filing return of income for the relevant assessment years. In our view reasons given by the assessee are bonafide, and hence, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (1) of section 139 of the Act, by filing electronic Form No.10 within due date prescribed under the Act for both assessment years. We, further noted that the Hon ble Supreme Court in the case of CIT vs. Nagpur Hotel Owners Association, (2001) 247 ITR 201 has held that if Form No.10 required to be filed u/s.11 (2) r.w.rule 17 is furnished on or before completion of assessment proceedings by the AO then the benefit of exemption u/s.11 cannot be denied to the Trust u/s.11 (2) of the Act. The Hon ble High Court of Madras in the case of Chandraprabhuji Maharaj Jain Juna Mandir Trust v. DCIT (2019) 266 Taxman 399 held that when the assessee has filed Form No.10 belatedly but before completion of assessment by the AO, there would have been no error had AO taken copy of Board Resolution and Form No.10. The Hon ble High Court of Bombay in the case of CIT vs. Sakal Relief Fund, (2017) 248 Taxman 31 held that for excluding accumulation of income, a charitable trust from net of taxation u/s.11, intimation in Form No.10 could be filed during reassessment proceedings. 21. In this case, although the assessee has not filed return of income on or before due date specified u/s.139 (1) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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