Charitable Trust’s Exemption Restored Despite High-Interest Loans from Specified Persons Due to Financial Hardship.
Issue:
Whether a charitable trust providing education should be denied exemption under sections 11 and 12 of the Income-tax Act, 1961, if it takes loans from specified persons at interest rates higher than the prevailing market rate, specifically concerning the violation of sections 13(1)(c) and 13(2) read with section 13(3).
Facts:
The assessee-trust, engaged in providing education, faced financial difficulties. To sustain its day-to-day activities, as it could not solely depend on bank funds, it took loans from private parties (specified persons) and paid interest at a rate higher than the prevailing market rate. The Assessing Officer (AO) denied the exemption under sections 11 and 12, citing this high-interest payment to specified persons as a violation. The assessee demonstrated that these circumstances were beyond its control and that not borrowing funds at a higher rate would have led to heavy losses for the society, thus arguing that the funds were taken for the benefit of the society.
Decision:
In favor of the assessee: It was held that the assessee had not violated the provisions of sections 13(1)(c) and 13(2) read with section 13(3) with the sole intention to transfer any direct or indirect benefit to specified persons. The court acknowledged the financial difficulties and the commercial expediency of taking loans at a higher rate to ensure the continuation of the trust’s charitable activities and prevent heavy losses. Therefore, the exemption under sections 11 and 12 was restored to the assessee.
Key Takeaways:
- Commercial Expediency for Charitable Trusts: Even for charitable trusts, financial decisions driven by genuine commercial expediency and the need to sustain charitable activities, even if involving transactions with specified persons at non-market rates, may not automatically lead to the denial of exemption.
- Intent Behind Transactions with Specified Persons: The crucial factor in disallowing exemption under section 13(1)(c) (read with other relevant sub-sections) is the intention to confer a direct or indirect benefit on specified persons. If the higher interest payment was necessitated by genuine financial distress and was demonstrably for the benefit of the trust’s objectives, rather than to unduly benefit the specified person, the exemption may be preserved.
- Burden of Proof: While the AO may initially raise concerns about transactions with specified persons, the onus is on the trust to demonstrate the legitimate reasons and commercial expediency behind such transactions, proving that they were not entered into with the sole intention of benefiting specified persons.
- Contextual Analysis: The court will consider the overall financial situation and the compelling circumstances that led to the transactions with specified persons, rather than just a simplistic comparison of interest rates.
IN THE ITAT DELHI BENCH ‘B’
Educate India Society
v.
Deputy Commissioner of Income-tax, Exemption
Mahavir Singh, Vice President
and Manish Agarwal, Accountant Member
and Manish Agarwal, Accountant Member
IT Appeal Nos. 4682, 4683, 4684 and 4685 (Delhi) of 2024
[Assessment Years 2017-18, 2018-19 AND 2020-21]
[Assessment Years 2017-18, 2018-19 AND 2020-21]
APRIL 30, 2025
Ms. Lalitha Krishnamurthy, Adv. for the Appellant. Surender Pal, CIT-DR and Rajesh Kumar Dhanesta, Sr. DR for the Respondent.
ORDER
Manish Agarwal, Accountant Member.- These are four appeals filed by the Assessee against the order of National Faceless Appeal Centre (NFAC), Delhi u/s 250 of the Act. All are dated 09.08.2024 for the following Assessment Years:
| ITA | Assessment Year | Remarks |
| 4682 | 2017-18 | Order u/s 143(3)/154 |
| 4683 | 2017-18 | Order u/s 143(3) |
| 4684 | 2018-19 | Order u/s 143(3) |
| 4685 | 2020-21 | Order u/s 143(3)/144 |
2. In ITA No.4683/Del/2024 for Assessment Year 2017-18, the assessee has challenged the order passed u/s 143(3) and in ITA No.4682/Del/2024 for Assessment Year 2017-18 rectification order passed by AO wherein certain calculation mistakes were rectified, is also challenged, however, the primary issues in both the appeals with regard to allegation that assessee has violated the provisions of section 13(2) and 13(1)(c) read with Section 13(3) of the Act are common. In remaining two appeals for Assessment Year 2018-19 and 2020-21, similar issues are involved. This fact is also confirmed by ld. CIT DR, therefore, all the four appeals are disposed of by a single order as per the discussion made herein below. We now take ITA No. 4683/Del/2024 as the lead case for which both the parties were agreed during the course of hearing.
3. Brief facts of the case are that assessee society is registered in 1995 under the Society Registration Act, 1860. The Assessee is running educational institutions affiliated with MD University and is sponsoring body of ITM University (now known as North Cap University) till 2015 and thereafter thein terms of the state notification dt. 22.7.2015 issued by the Govt. of Haryana, The North Cap University become the private self-financed University. The return of income for the year under appeal was filed on 30.10.2017 declaring nil income and the case was selected under CASS. The assessee is registered u/s 12A of the Act in terms of the registration granted vide orders dated 01.07.1996 and further registered u/s 80G(5)(vi) vide order dated 26.09.2007. During the course of assessment proceedings, it was noticed by the AO that assessee had paid interest at comparatively higher rate than from the rates paid to bank, to the persons specified u/s 13(3) of the Act. He thus, hold that the interest paid to specified persons being excess of prevailing market rate on which the assessee has taken loan from the bank denied the benefit of exemption u/s 11 & 12 of the Act. Thereafter, the income of the assessee is computed as AOP and tax is charged at MMR. Further deprecation was allowed on the assets which were acquired during the year by observing that the assets acquired in earlier years were treated and allowed as application of income in the year of purchase, therefore, no depreciation could be allowed on the same.
4. Aggrieved by the said order, the assessee filed first appeal before Ld. CIT(A) who dismissed the appeal of the assessee on the issue on denial of exemption u/s11 and 12 of the Act and allowed part relief on account of depreciation. Against such order, the assessee in appeal before the Tribunal by taking following grounds of appeal:
“1. That the Ld. CIT(A) had erred in upholding the disallowance made by the Id. AO of exemption claimed u/s 11/12 of the Act with regard to application of income of Rs.2,27,84,632/- and with regard to accumulation of income of Rs.10,34,79,043/-on irrelevant considerations not contemplated under Section 11 of the Act.
2. That the Id. CIT(A) had erred in upholding the disallowance made by the Id. AO of exemption claimed u/s 11/12 of the Act with regard to application of income of Rs.2,27,84,632/- and with regard to accumulation of income of Rs. 10,34,79,043/-on the ground of alleged violation of Sections 13(2) and 13(1)(c) read with Section 13(3) of the Act not applicable to assessee consequently the assessment so framed by the Id. AO at an income of Rs.2,82,77,832/-is arbitrary, unjust and bad in law.
3. That the only activity under taken by the assessee is education and the income derived from such educational activity has been applied in the furtherance of education, consequently the denial of benefit under Section 11 of IT Act sustained by ld. CIT(A) on the erroneous inference that unsecured loans need not necessarily be costlier since here the risks are more controllable and the risk formalities capable of being drastically curtailed is unwarranted and unsustainable on the facts and in law.
4. That the Id. CIT(A) / AO had failed to discharge the burden cast upon them to prove that the interest rates paid by the assessee society to related parties and accepted in earlier years was in excess of market rates consequently the denial of benefit under Section 11/12 of IT Act sustained by ld. CIT(A) on the ground of alleged violation of Sections 13 (2) and 13(1)(c) read with Section 13(3) of the Act not applicable to assessee is unjust, unwarranted, based on irrelevant considerations and against rules of consistency.
5. That the ld. CIT(A) / AO had failed to notice that as the loan advanced by related parties was not secured by either a primary security or a collateral security of the assets of the appellant Society, the interest rates on such unsecured loan would be higher than a term loan advanced to the appellant Society by Kotak Mahindra Bank which was fully secured against all assets of the Society consequently assessment so framed was bad in law.
6. That the Id. CIT(A) had erred in sustaining the disallowance of exemption claimed under Section 11(1)(a) of IT Act of Rs. 10,34,79,043/- and consequently assessment sustained at an income of Rs.2,82,77,832/ is arbitrary, unjust and bad in law.
7. That the Id. CIT(A) had erred in sustaining the disallowance of fixed assets purchased of Rs.2,27,84,632/-claimed as an application of income consequently assessment sustained at an income of Rs.2,82,77,832/ is arbitrary, unjust and bad in law.
8. The appellant denies its liability to be levied tax at maximum marginal rates along with surcharge, cess and interest thereon under Section 234B of the Act and interest recovered u/s 234D of the Act.
9. Without prejudice to the above grounds:
| (i) | Id. CIT(A) having directed Id. AO in para 7.2.2 of the impugned order to verify if any carried forward losses are available to set off the same should be given, ground no. 8 in first appeal of the appellant society should have been held by him as partly allowed and not as dismissed. |
| (ii) | That only such part of the income of the trust that was alleged to be used or applied for the benefit of specified persons could have been brought to tax at maximum marginal rate and the entirety of income cannot be denied exemption under Section 11 of the Act, as was done by the Id. AO, consequently charging the entire income of the trust at maximum marginal rate along with surcharge, cess and interest, by the Id. CIT(A)/AO was unjust, unwarranted and unsustainable on facts and in law. |
10. The above grounds are independent and without prejudice to one another.
11. Your appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing.”
5. Since, ground No.1 to 7 are in relation to withdrawal of exemption u/s 11 & 12 after invoking the provisions of section 13(2) and 13(1)(c) read with section 13(3) of the Act. Therefore, they are taken together for consideration.
6. Before us, the Ld. AR of the assessee submitted that the assessee is sponsoring body of the North Cap University (formerly known as ITM University) which is a private self-financed multidisciplinary University established vide State Notification dated 22.07.2015 and recognized u/s 2(f) of the UGC Act, 1965. As per UGC norms for a sanctioned strength of the students under various schemes total area required was of 21,959 Sqm., however, assessee was having 18,814 Sqm. in the year 2011, therefore, it was decided to construct additional buildings to meet out the deficiency in total area required as per the UGC guidelines. Accordingly, in year 201213, construction of new block was commenced to accommodate the additional strength of the students from new academic session from 2013-14 and onwards. This construction includes the construction of additional block of four floors, two level car parking, an open Amphitheatre with a seating capacity of 2,000 students as per UGC expert committee recommendation. According to ld.AR said construction required the funds of around Rs.45 Crores and sine the appellant society was having deficit on year to year basis and further looking to the fact that the securities available in the shape of land and building of the appellant society were not sufficient for granting loans by the banks, therefore, assessee has to borrowed funds on long term basis from the private parties. As assessee financial were not promising looking to the fact that it regularly suffered losses, no private party would agreed to advance funds to the assessee society, therefore, the assessee society had to depending upon the members of the society for arranging such funds. Accordingly, assessee has M/s Progressive Developers and thereafter refinance loan of 25.00 crores was taken from Kotak Mahindra Bank. Besides this bridge loans were taken from the private. The Ld. AR submitted that the Kotak Mahindra bank has charged rate of interest @ 12%, however, the remaining loans were taken at interest rate ranging between 15% to 19% per annum which is the sole basis of withdrawal of exemption u/s 11 & 12.
7. With respect to the payment of high rate of interest, the Ld. AR submitted that in commercial words nobody will grant loan to educational institution running into losses and even the financial institutions were reluctant of grant the loan of desired amount in such cases. Further, it is an admitted position that financial institutions and banks requires sufficient securities against the funds provided by them. Since in the instant case, the assessee society was in hurry to construct the blocks to accommodate the full strength of students in the coming academic sessions, therefore, in order to complete the construction it had no option but to take the borrowings at a higher rate of interest. The Ld. AR further submitted that in the case of loan from bank monthly instalment was paid, however, in case of the finance from private parties, there is no such requirement of making monthly payment of instalment. In the case of loan from Progressive Developers, loan was repayable in 120 months however, in case of loan from Kotak Bank, it was repayable in 60 months. Due to these facts, higher rate of interest was paid on the loans taken from the private parties. It is further submitted by Ld. AR that in some cases loan were taken from specified person for short period to bridge the gap of funds as besides the construction, funds were required for day to day running of the institutions, therefore, they were taken at a comparative higher rates since bankers were not desired the advance the assessee for these short term loans. In the last it was submitted by the Ld. AR that in Financial Year 2014-15 relevant to Assessment Year 2015-16 when these loans were taken, the assessment was completed u/s 143(3) wherein no doubts were raised about the payment of higher rate of interest. Thus, following the principle of consistency, the same should not be doubted the subsequent years. It is finally concluded by the Ld. AR that as compare to the loans taken from the bank, the loan taken from the private parties are having higher risk where repayment of principal is dependent upon the availability of the funds with the assessee where the only source of receipt of the assessee was from the tuition fee which was not sufficient even to meet out the day to day running expenses of the institutions and also to serve the bank. Under these circumstances, the Ld. AR submitted that the interest was paid to specified persons at a higher rate interest rate of the society and, therefore, it should not be treated as violation of Section 13(2), 13(1)(c) read with section 13(2) and consequently the assessee society be granted exemption available to assessee society u/s 11 & 12 of resumed.
8. On the other hand, the Ld. CIT-DR supports the order of the lower authorities and submitted that admittedly in the instant case interest was paid to the specified persons more than the prevailing market rates which is in violation of section 13(2) and 13(1)(c) read with Section 13(2) of the Act. The Ld. CIT-DR has further placed reliance on the judgments of the Hon’ble Supreme Court in the case of DIT v. Bharat Diamond Bourse ITR 280 (SC) wherein it is held that if the assessee is falling under the mischief of section 13(3)(a) read with section 13(1)(c)(ii) of the Act, the assessee would lose the benefit under section 11 of the Act. He also placed reliance on the following judgments
| (i) | DIT (Exemption) v. Charanjiv Charitable Trust [2014] |
| (ii) | Kanahya Lal Punj Charitable Trust v. DIT (Exemption) |
| (iii) | ACIT v. Space Age Research & Technology Foundation, Charitable Trust, Meerut [IT Appeal No. 4622 (Delhi) of 2012, dated 23-5-2017] for Assessment Year 2009-10. |
| (iv) | Agappa Child Centre v. CIT |
Ld. CIT DR thus prayed for the confirmation of the orders of the lower authorities of withdrawal of exemption u/s 11 & 12 of the Act.
9. We have considered the rival submissions and perused the materials available on record, there is no quarrel in the instant case that assessee has paid interest to the specified persons at higher rates than the prevailing market rates. In the instant case, it is not in doubt that assessee is engaged in providing education which is one of the object of the society. The only allegation is with regard to the payment of interest at higher rate as compared with the prevailing bank rates. We find that Assessing Officer in the instant case has denied the exemption u/s 11 & 12 for the saole reason that the assessee was found violating the provisions of section 13(2) and 13(1)(c) of the Act, however, the authorities below has failed to appreciate the fact that the assessee was under financial difficulties and if the amounts were not taken from the specified person at higher rate, it could not even be able to even carried out its day to day activities solely depending upon the funds from banks.
10. The assessee had a strength of 2,744 students in September 2011 with total land area of 10 acres approx. For the Academic Year 2013-2014, for the total sanctioned strength of 3130 students, total built up area as per the UGC guidelines required was 21,959 sq. mtr. As against this total built up area available with the assessee was only 18,814 sq. mtrs. Thus, additional built up area of around 3,145 sq. mtrs. was immediately required to accommodate full strength of 3,130 students. Besides this, certain deficiencies were also pointed out by the UGC Expert Committee in the University such as salary was not paid as per pay scales prescribed by the State Government and medical facilities needs to be extended to family members of staff,. Accordingly, the assessee has to construct an additional block of four floors, two level car parking, an open Amphitheatre with a seating capacity of 2,000 students and a Central Auditorium with a seating capacity of 400 students and a canteen with mess, gymnasium and solar power plant having a capacity of 150 KVA in the University campus. All these constructions required total funds of Rs.45 crores approx. which was to be arranged immediately to get these facilities ready for use by the students in coming academic year which was going to start from FY 2013-14.
11. Since the assessee society had losses of Rs.9.22 crores and was having investment of Rs.3.07 crores only in FDR which was under lien with Haryana Government and Rs.15 lakhs were kept with AICTE for the MBA course. The total cost of Rs. 45.00 could not be meet out though bridge loans and can be done through financial institution/ banks etc. Since sufficient securities in the shape of assets were not available with the assessee to offer as security borrowings from banks / financial institutions was almost impossible/ very difficult task. Further the assessee did not have capacity to repay the loan as the only source of revenue was tuition fees. Therefore, assessee has to obtain unsecured loan on long term basis from M/s Progressive Developers who under these circumstances had charged interest 19%. It is admitted position that bank loans are fully secured against the securities and their repayment is also secured in terms of the instalments where on the failure of any the instalments in scheduled time, the banks levied high penalties. If this amount of penalty is taken together with interest, the resultant rate would be higher than the rate of interest paid on unsecured loans. The assessee in order to reduce the interest burden had approached the Kotak Mahindra Bank who provided Rs. 25 crores which were utilized to repay the part loan taken from M/s Progressive Developers and had reduced the effective rate of interest from 19% to 14.73%.
12. It is also a matter of fact that merely by the violation of provisions of section 13(1) entire exemption granted under section 11 & 12 should not be denied. The Co-ordinate Bench of ITAT, Bangalore in the case of CIT v. CMR Jnanadhara Trust Karnataka) considering the payments of the amounts to the trustees, out of the trust amount, when the trust was availing the services of the trustees on account of service rendered by them, there was a substantial growth of its activity, held it cannot be said that it contravene section 31(c) of the Act.
13. The co-ordinate bench of ITAT, Ahmedabad in the case of Dy. CIT v. Ahmedabad Strips (P.) Ltd. [IT Appeal No. 2741 (Ahd.) of 2017, dated 26-6-2019] vide para 7 held that loans availed by the assessee were unsecured loans. It has avoided a large number of formalities, such as, giving securities, pledging something etc. In such situation a little payment of higher rate of interest could not be termed as excessive.
14. The co-ordinate bench of Bangalore tribunal in the case of Vogue Vestures (P.) Ltd. v. ACIT [IT Appeal No. 1284 (Bang.) of 2011, dated 22-11-2012] in para 6.3 had held as under:
“6.3. Moreover, it has been acknowledged universally that there were plenty of limitations/restrictions in borrowing from the Banks and financial institutions as they were obliged to follow various statutory regulations laid down by the RBI. Further, countering the AO’s and CIT(A)’s observations that the interest on secured loans were lower than the unsecured loans, the learned A R submitted that it was generally accepted trade practice that unsecured loans carry higher rate of interest than that of the secured loans because in secured loans the lender had more security and the chances of recovery of the principal amount and interest are higher and thus, the lenders were obliged to lend at a lesser rate of interest for secured loans. This argument of the learned AR, in our view, carries more weight.
15. In the instant case, the Assessing Officer has denial the exemption u/s 11 & 12 of the Act for the sole reason that assessee has paid interest to specified person more than bank rates. It is settled proposition of law that the income which has been applied in violation to section 13(1) of the Act could only be brought to tax and not the entire income. The Hon’ble Delhi High Court in the case of DIT (Exemption) v. Agrim Charan Foundation (Delhi) has held that the legislature has clearly contemplated that in a case, where the whole or part of the relevant income is not exempted under Section 11 by virtue of violation of Section 13(1)(d) of the Act, tax shall be levied on the relevant income or a part of the relevant income at the maximum marginal rate. Thus, the entire income of the assessee society cannot be assessed for tax even for violation of Section 13(1)(c) of the Act.
16. The Hon’ble Karnataka High Court in the case of CIT (Exemptions) v. Krupanidhi Education Trust ITR 154 (Karnataka) has held in para 9 that the alleged breach of Section 13(1)(c) of the Act based on these factors was baseless, wholly untenable on the ground that the revenue cannot sit in the armchair of the assessee and decide the pattern of working / methodology to be adopted for the administration of the educational body. That the revenue cannot manage or control the managerial affairs of the educational body. These aspects would not come within the purview of the authorities to decide the income tax liability merely on suspicion that the assessee is claiming huge expenditures to get the corresponding benefits of allowable deductions. Para 9 of the judgement is reproduced below:
“9. The ground on which violation of section 13(1)(c) of the Act has been alleged is based mainly on the salary/remuneration paid to Sri. Suresh Nagpal and Smt. Geetha Nagpal, the trustees of the assessee-trust, not in proportionate to service rendered by them but a device designed to divert the income of the assessee. This allegation has no basis. It is well settled that the revenue cannot sit in the armchair of an assessee and decide the pattern of working, methodology to be adopted for whole administration of the educational trust including the payment structure of salary/remuneration to be paid to the professors/ administrative staffs. In other words, the department cannot manage or control the managerial affairs of the educational trust. These aspects would not come within the purview of the authorities to decide the income tax liability merely on suspicion that the assessee is claiming huge expenditures to gel the corresponding benefits of allowable deductions. No grounds are raised by the revenue relating to the deletion of the additions made by the CIT (Appeals) before the Tribunal, whereas reference was made to the provisions of section 13(1)(c) of the Act only to draw support for denying exemption under section 11 of the Act. The Tribunal has rightly rejected the plea of the revenue as bereft of merit. The alleged breach of section 13(1)(c) of the Act based on these factors is baseless, wholly untenable. Thus, we answer the substantial question of law No. 1 in favour of the assessee and against the revenue.
17. The Hon’ble Karnataka high court in the case Fr. Mullers Charitable InstitutionsITR 230 (Karnataka) held as under:
11. With regard to second and third substantial questions of law are concerned, reading of Section 13(1)(d) of the Act makes it clear that it is only the income from such investment or deposit which has been made in violation of Section 11(5) of the Act that is liable to be taxed and that violation under Section 13(1)(d) does not tantamount to denial of exemption under Section 11 on the total income of the assessee. An identical question came before the Bombay High Court in the case reported in (2001) 249 ITR 533 (Bom) (supra). The question before the Bombay High Court is “Whether violation of Section 11(5) r/w Section 13(1)(d) by the assessee-Trust attracts maximum marginal rate of tax on the entire income of the Trust? The Bombay High Court held that in case of contravention of Section 13(1)(d), maximum marginal rate of tax under Section 164(2), proviso is applicable only to that part of income of the Trust which has forfeited exemption and not the entire income. Relevant paragraph reads as under:
Sec.164(2) refers to the relevant income which is derived from property held under trust wholly for charitable or religious purposes. If such income 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 an AOP. Therefore, a proviso was inserted by the Finance Act, 1984 w.e.f. 1st April 1985, under which in cases where the whole or any part of the relevant income is not exempt under s.11 or s.12 because of the contravention of s.13(1)(d), the tax shall be charged on such income or part thereof, as the case may be, at the maximum marginal rate. In other words, only the non-exempt income portion would fall in the net of tax as if it was the income of an AOP. The phrase ‘relevant income or part of the relevant income’ in the proviso is required to be read in contradistinction to the phrase ‘whole income’ under s.161(1A). This is only by way of comparison. Under s.161(1A), which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, the tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the above two phrases shows that the legislature has clearly indicated its mind in the proviso to s.164(2) when it categorically refers to forfeiture of exemption for breach of s.13(1)(d), resulting in levy of maximum marginal rate of tax only to that part of the income which has for forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. This interpretation is also supported by Circular No.387, dt. 6th July, 1984. Vide the said Circular, it has been laid down in para 28.6 that where a trust contravenes s.13(1)(d), the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provision and not to the entire income. There is a vital difference between eligibility for exemption and withdrawal of exemption/forfeiture of exemption for contravention of the provisions of law. These two concepts are different. They have different consequences. In the circumstances, there is merit in the contention of the assessee that in the present case the maximum marginal rate of tax will apply only to the divided income from shares held in contravention of s.13(1)(a) and not to the entire income. Therefore, income other than dividend income shall be taxed at normal rate of taxation under the Act.
A similar view has been taken by the Delhi High Court in a judgment reported in (2002) 253 ITR 593 (supra).
Reading of the proviso to Section 142 is very clear that the legislature has clearly contemplated that in a case, where the whole or part of the relevant income is not exempted under Section 11 by virtue of violation of Section 13(1)(d) of the Act, tax shall be levied on the relevant income or a part of the relevant income at the maximum marginal rate. The said analogy is applicable to the facts of the present case.
12. We are in respectful agreement with the views expressed by the Bombay High Court as well as Delhi High Court for violating Section 11(5) of the Act and the entire income of the respondent-Trust cannot be assessed for the tax.
13. We do not find any infirmity or irregularity in the order passed by the Tribunal restoring the order passed by the Assessing Authority. Accordingly, both second and third substantial questions of law are answered against the revenue and in favour of the assessee. Accordingly, both the appeals are dismissed.
18. It is further seen that in the case of the assessee itself, for Asst. Year 2015-16, the assessment was completed u/s 143(3) where after making detailed verification of loans taken for expansion at higher rate no doubts were raised and payments at higher rate of interest was accepted and allowed the claim of the exemption to the assessee. The copy of the said order dated 15.12.2017 passed u/s 143(3) is available in PB 18 to 20. From the perusal of the details filed before the AO in assessment proceedings for Assessment Year 2015-16, as available in Paper Book Pages 23 onwards, we find that assessee had made specific submissions towards the interest paid to the persons specified u/s 13(3) of the Act. It is further seen that assessee had submit a chart of the interest paid to the related parties, however, no adverse observations were made by the AO. Thus, following the principle of consistency also the claim of the assessee should be allowed and exemption granted u/s 11 & 12 could not be withdrawn.
19. Further from the perusal of the chart given at pages 14,15 & 16 of the Paper Book which contained the details of the interest paid on unsecured loans to the persons specified u/s 13(3) and to the others, we find that the rate of interest paid on the loans from specified persons are almost equal with the rate of interest paid on loans from non-specified persons. The assessee has also filed copies of sanction letters of various other non-banking finance companies who offered loans but their rate of interest were higher than the rate already paid. This further supports the arguments of the assessee that the rate of interest paid to specified persons was not higher. As observed above, amounts were borrowed from specified persons for short term bridge loand just to meet out the short term requirements of funds which was not served by the banks/ financial institutions or NBFc’s. Further they always asked to furnish sufficient securities whereas unsecured loans from specified persons were available at demand. It is also seen that the loan from M/s Triad Service which is covered u/s 13(3), the said loan was taken after the re-finance facility obtained from the Kotak Mahindra Bank. It is also seen that in case of Progressive Developers, the rate of interest was higher than the interest rate paid to Triad Services and by taking such loan, the assessee had been able to save the amount of interest paid.
20. With regard to the judgement of Hon’ble Supreme court in the case of Bharat Diamond Bourse (supra) relied by revenue, we find in that case, the assessee was failed to furnish the reason for not charging the interest on the loan given to trustee. However, in the instant case, the assessee has been able to demonstrate that there were circumstances beyond its control and if the funds were not borrowed at a higher rate, it would lead to heavy losses to the society and thus in the benefit of society funds were taken at the higher rate of interest. Except alleging that the assessee has paid interest to specified persons at a higher rate as compared to bank, the AO was failed to bring on record any material to controvert the submission of the assessee that the interest at higher rate was paid under compelling circumstances. Thus the benefit of exemptions u/s 11 & 12 of the Act cannot be denied. Hon’ble Allahabad high court in the case of CIT v. Kamla Town Trust (Allahabad) has held as under :
17. It may be remembered that Section 13 carves out an exception to the general exemption granted under Sections 11 and 12 of the Act to incomes derived by trusts/charitable institutions. The onus lies on the Revenue to bring on record, cogent material/evidence to establish that the trust/ charitable institution is hit by the provision of Section 13 of the Act. In the present case, we find that as held by the Tribunal from the passage reproduced above, the Revenue has miserably failed to bring any material on record to establish that the trust in question fell within the prohibited category enumerated in Section 13 of the Act. In our considered opinion, therefore, the Tribunal was justified in holding that the aforesaid provisions were not attracted.
21. In view of above discussion, and also considering the fact that assessee under the circumstances beyond its control had obtained loans at a higher rate solely for the benefit of society thus it cannot be held that it had violated the provisions of section 13(1)(c) and 13(2) read with Section 13(3) of the Act with the sole intention to transfer any direct or indirect benefit to them. Accordingly, we set aside the orders of the AO and CIT(A) withdrawing the exemption available to the assessee u/s 11 & 12 which is hereby restored. The grounds of appeal No. 1 to 7 are allowed.
22. In other grounds of appeal, the assessee made alternate prayer to allow the depreciation on the assets so created. Once we have allowed the exemption u/s 11 & 12 of the Act, the question of exemption u/s 11 & 12 of the ACT become academic and thus needs no discussion.
23. As a result appeal of the assessee for Assessment Year 2017-18 in ITA No.4683/Del/2024 is allowed.
24. The other appeal for AY 2017-18 in ITA no. 4682/Del/2024 is against the order passed u/s 154, where the issue of withdrawal of exemptions u/s 11 & 12 is challenged. Since except making rectification of calculation errors, in this order AO has not commented on the merits of denial of benefit u/s 11 & 12 of the Act which is hereby restored in terms of the order passed in ITA No. 4683/Del/2024, thus this appeal become infructuous and thus dismissed.
25. In ITA No.4684/Del/2024 for Assessment Year 2018-19 and 4685/Del/2024 for AY 2020-21 identical facts are involved which has been accepted by both the parties. Therefore, in view of the observations made in ITA No.4683/Del/2024 above, in assessee’s own case for Assessment Year 2017-18 which was applied mutatis mutandis, both the appeal of the assessee are allowed.