2011-VIL-906-ALH-DT

ALLAHABAD HIGH COURT

Income Tax Appeal No. 132 of 2006

Date: 17.08.2011

CIT

Vs

VIJETA EDUCATIONAL SOCIETY

D.D. Chopra for the Appellant  
Neerav Chitravanshi for the Respondent  

BENCH

Devi Prasad Singh, Satish Chandra, JJ.

JUDGMENT

"Whether the Tribunal had correctly held that the assessee has not contravened the provisions of Section 13(1)(c) and 13(3) of the Income Tax Act, 1961 even though it was conclusively proved by the assessing officer that the loan was given without interest to the person referred to in Section 13(3) which is in contravention to the provisions of Section 13(2)(a) of the I.T. Act, 1961."  

The brief facts of the case are that the assessee is a society registered under the Societies Registration Act, U.P. The assessee is also registered under Section 12-A of the Income Tax Act, w.e.f. 01.04.1997. For the assessment year under consideration, the assessee has filed the returned. During the scrutiny, it was noticed by the A.O. that the assesee has given a loan/advance of Rs.3,25,000/- to Sri C.P. Singh, Manager of the Society, where no interest was charged on this amount nor any provision for accrued interest was made. The assessee vide letter dated 20.02.2003 explained that the loan given to Sri C.P. Singh was a personal loan. The assessee vide letter dated 09.05.2003 stated that as per policy of management, recovery of principal amount has to be made first, then interest shall be charged. However, the assessee could not furnish the details of mode of recovery of loan, any resolution of society for sanction of loan or sanction letter in this regard. So, the A.O. has made the addition of the interest of Rs.2,137/- accrued on the loan to Sri C.P. Singh. The A.O. also observed that the assessee had followed the provisions of Section 13(1) read with Section 13 (2) (a) of the Income Tax Act and added the net surplus of Rs.60,73,146/- as an income of the assessee-society. The CIT has confirmed the order passed by the A.O. However, in second appeal, the Tribunal has deleted the said additions and allowed the claim of the assessee. Not being satisfied, the department has filed the present appeal.  

With this background, Sri D. D. Chopra learned counsel for the appellant submits that as per the instruction No.1025 dated 15.11.1976, the CBDT has clarified that since the specific provisions provide with regard to the grant of exemption to the income of Educational institution in section 10(23B) and 10(23C), so now the assessee could not claim exemption under Section 11 of the Income Tax Act, 1961. He further submits that the assessee is following the mercantile system of the accounting and, therefore, it was required to charge the interest on accrual basis. In Form NO. 10-B attached with the return, no details were furnished by the assessee. He also submits that the assessee could not furnish any explanation as to why the accrued interest received from Sri C.P. Singh had not been accounted for in its books of accounts. He read out the relevant provision of the Income Tax Act, which are as under:  

Section 13(1)(c):-  

(c) In the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof-  

(i) If such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income ensures, or  

(ii) If any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied.  

Section 13(2):-  

(2) Without prejudice to the generality of the provisions of clause (c) [and clause (d)] of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3).-  

Section 13(2)(a):-  

(a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3) for any period during the previous year without either adequate security or adequate interest or both;  

Section 13(3):-  

(3) The persons referred to in clause (c) of sub-section (1) of sub-section (2) are the following namely:-  

(a) the author of the trust or the founder of the institution;  

(b) any person who has made a substantial contribution to the trust or institution, [that is to say, any person whose total contribution up to the end of the relevant previous year exceeds [fifty] thousand rupees];  

(c) where such author, founder or person is a Hindu undivided family, a member of the family;  

(cc) any trustee of the trust or manager (by whatever name called) of the institution;  

(d) any relative of any such author, founder, person, [member, trustee or manager, as aforesaid;  

(e) any concern in which any of the persons referred to in clauses (a), (b), (c) [(cc)] and (d) has a substantial interest."  

Lastly, he justified the order passed by the lower authorities and made a prayer to set aside the impugned order passed by the Tribunal.  

On the other hand, Sri Neerav Chitravanshi, learned counsel for the assessee relied on the Tribunal's order. He submits that there is no doubt about chargeable interest of the society and the only reason for denial of the exemption under section 11 is on account of the alleged interest free secured loan to the Manager Sri C.P. Singh. He also submits that as per the resolution passed by the Management Committee, a loan can be advanced @10% to various members and employees of the institution. Sri C. P. Singh is the Manager and loan of Rs.3.25 lacs was sanctioned to him @10% interest which was to be returned with the condition that principal amount will have to be repaid first and thereafter the interest was to be released. For this purpose, he relied on the ratio laid down in the case of CIT v. Polisetty Somasundaram Charities; 183 ITR 377 (A.P.). He further submits that the payment of loan cannot be held to be hit by Section 13 regarding the claim of exemption. The A.O. has wrongly made the addition on account of accrued interest only on exemption basis and the same may be deleted.  

On specific query from the Bench, he accepted that the assessee has charged the interest from other employees of educational institution. The assessee had duly accounted accrued interest on FDRs. He also submits that the assessee has wrongly denied the exemption under Section 11 primarily on the ground that it had contravened the provision of Sections 13(2); and Section 13 (1) (c) of the Act. Subclause (ii) of Section 13 (c) of the Act states that any part of income or property, which is applied directly or indirectly for the benefit of any person, referred to in section 13 (3), will form part of the income of the Trust. According to him, against the loan, a security in the form of surety was given.  

We have heard both the parties at length and gone through the material available on record.  

From the record, it appears that the assessee is a society registered under the Societies Registration Act, with the Registrar of the Societies and Sri C.P. Singh is the Manager of the Society. The assessee is also registered under Section 12-A of the Income Tax Act w.e.f. 01.04.1997. For the assessment year under consideration, the assessee has filed return showing nil income. The return was accompanied with Form No. 10-B and the accounts of the assessee has been audited. In Part-II of Form 10B, application or use of income of property for the benefit of the person referred to in Section 13(3) were not mentioned.

Since, in the instant case, the interest was charged @10%, as alleged by the assessee, it should have been reflected in the books of accounts of the assessee as well as in the audit report but the same was not reflected in any document even subsequent document filed by the assessee except the resolution, which cannot be relied and it can be considered an afterthought. In the instant case, the assessee was liable to show this interest as income in the books of account as per mercantile system of accounting. Thus, the A.O. has rightly concluded that the appellant has given interest free loan to Sri C. P. Singh in violation of the provisions of Section 13 (1)(c) of the Income Tax Act and also giving loan without any adequate surety in violation of Section 13 (2)(a) of the Act. In these circumstances, we are of the view that the A.O. has rightly denied the exemption to the assessee under Section 11 of the I.T. Act.  

It may be mentioned that in view of clause (c) of Section 13(1) rendering the entire income of Trust or charitable institution on liable to tax even if only part of income is directed to be applied for the benefit of the specified persons. The legislature, however, also creates a fiction and enumerates in clauses (a) to (h) of sub-section (2) of Section 13, a list of circumstances in which the income shall be deemed to have been used or applied for the benefit of the specified persons. These clauses comprehend various types of benefits such as by way of interest free loans, loans without security, permission or licence to use land or other property without charging adequate recompense, excessive payment for service, sale of property for inadequate consideration and investment of the trust funds in concern belonging to the specified person or in which he has substantial interest as observed in the case of Talaprolu Bapanaiah Vidya Dharma Nidhi Trust v. CIT (1987) 167 ITR 482 (AP). In the instant case, the beneficiary is not covered by the list of persons mentioned in Section 13 (3) of the Act.

Hence, we set aside the impugned order passed by the Tribunal and restored the order passed by the A.O. The answer to the question is in negative i.e. in favour of the revenue and against the assessee.  

The appeal filed by the department is allowed.

 

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