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Income Tax Appellate Tribunal - Ahmedabad

K.M. Shah Charitable Trust , Baroda vs Department Of Income Tax on 2 April, 2013

      IN THE INCOME TAX APPELLATE TRIBUNAL
               'B' BENCH - AHMEDABAD
(BEFORE SHRI G.C. GUPTA, V.P. AND SHRI T.R. MEENA, A.M.)

                     ITA No.1807/Ahd/2009
                           (2006-07)

     ACIT, Circle-5, 5th Floor,    Vs M/s. K.M. Shah
     Aayakar Bhavan, Race             Charitable Trust, Village
     Course Circle,                   Piparia, Tal. Waghodia,
     Baroda - 390 007                 Dist. Baroda.

                                       PAN: AAATK 4485 H
            (Appellant)                  (Respondent)

      Appellant by           Smt. Roli Agarwal
      Respondent by          Shri Vijay Ranjan

               Date of hearing       : 02.04.2013
               Date of pronouncement : 31.05.2013

                                  ORDER


PER SHRI T.R. MEENA, A.M.:

This is an appeal at the behest of the Revenue which has emanated from the order of CIT(A)-V, Baroda dated 12.03.2009. The effective grounds of appeal are as under:

"On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in holding that there was no violation of section 13(1)(c) and 13(1)(d) of the Act rendering the assessee ineligible for exemption u/s. 11 of the Act.

Furthermore, ld CIT(A) has erred in not appreciating the fact that giving advance is beyond the ambit of 'charitable purpose' as defined in section 2(15) of the Act as well as clear violation of section 11(5) of the Act.

The ld. CIT(A) has further erred in holding that the related persons were not 'specified person' as per section 13(3) of the Act."

2. All the grounds of appeal of the Revenue are revolving around violation of Section 13(1)(c) and Section 13(1)(d) of the IT Act. The factual matrix of the case is that assessee had given interest free advance to the Sumandeep Charitable Trust to the tune of Rs.61,05,164/-. Sumandeep Charitable Trust is related to the present trustee of K.M. Shah Charitable Trust. The present trustee of K.M. Shah Charitable are Dr.Mansukh K. Shah and Dr. Varsha Dixit Shah, whereas Dr. Purvesh M. Shah is the son of Dr. Mansukh K. Shah and Dr. Varsha Dixit Shah who is the wife of Dr. Dixit Shah, are the two trustees in Sumandeep Charitable Trust. The registration of Sumandeep Charitable Trust had been cancelled under Section 12AA of the IT Act, therefore, AO. had given reasonable opportunity of being heard on this issue and assessee was asked to furnish an explanation on interest free advance given. The assessee filed the reply which was considered by the AO but he did not satisfy with the submission of the appellant. He also analyzed the legal position for claiming of exemption under Section 11 of the Act and held that the charitable purposes have been defined in Section 2(15) which does not take care of any advance given to other trust. The assessee had not explained that the advance given was out of its corpus fund or donations or accumulated income, the advance given to Sumandeep Charitable Trust is treated as a default under Section 11(5) of the Act. The exemption is withdrawn to the extent of advance given and this investment which is in the form of interest free advance along with the notional interest thereon is treated as income of the assessee for A.Y: 2006-07 and is taxed at maximum marginal rate. Thus, the learned AO has made the addition of Rs.68,37,780/-.

3. The assessee carried the matter before learned CIT(A) who had allowed the appeal by observing that the assessee trust is a charitable trust and apply its income for the purpose of object of the objects of Sumandeep Charitable Trust, registered with the Charity Commissioner. It is not in dispute that the Memorandum of the Trust Deed of the assessee empowers the trustee to help other charitable institutions which carry out the objects and purposes similar to that of the appellant trust. The amount was given to Sumandeep Charitable Trust from out of the fund made available by the trustee by way of advance to the appellant trust. It is thus, not the case that the assessee had utilized its income for the purposes of giving such advances to other charitable trust. Section 11(5) refers to the application of income of the trust at least 85% for the purpose of object during the year and for the balance income it can be accumulated for the utilization in future and such fund has to be invested in the prescribed manner. Sumandeep Charitable Trust cannot be considered to be a related entity as defined in Section 13(3) of the Income Tax Act. The amount of advance is made from out of the fund available by the trustees by way of the advance to the assessee trust and thus it is not utilization of income for the purposes of such advances to Sumandeep Charitable Trust. Section 13(1)(c) and Section 13(1)(d) refer to the application of income of the trust directly or indirectly for the benefit of persons referred to in section 13(3) or investment of the surplus income as referred to in section 13(1)(d). As the income is not utilized for such advance, there is no question of invoking Section 11(5) or Section 13(1)(c) or Section 13(1)(d) of the I.T. Act on this ground. Therefore, he deleted the addition. Further notional interest income had not justified by the CIT(A). The learned AO had not proved that these advances to the Sumandeep Charitable Trust made out of interest bearing fund but was given out of interest free funds provided by the trustee and it did not carry any interest, ITA No.1807/Ahd/2009 (AY:2006-07) (4) therefore, notional interest calculated by the AO is not justified and he deleted the addition.

4. Now Revenue is before us. Learned DR for the Revenue has filed the paper book which includes copy of balance sheet as on 31.3.2006, copy of income and expenditure account, copy of trust deed of the assessee trust, copy of statement to the trust deed, copy of registration deed dated 12.6.2000, and vehemently argued that the assessee trust had violated Section 13(1)(c) and Section 13(1)(d) of the Income Tax Act and the assessee trust is not entitled for exemption under Section 11 of the IT Act. As per Section 2(15) of the IT Act, a trust cannot make advance to the other trust for uncharitable purpose. The assessee had advanced interest free loan to Sumandeep Charitable Trust where son trustee of assessee and wife trustee of the assessee trust are the trustee of Sumandeep Charitable Trust. The registration of the trust under Section 12AA has been cancelled in the case of Sumandeep Charitable Trust. As per sub clause (ii) clause (c) of sub section 1 of Section 13 any trustee uses or applies any part of such income or any property of the trust or the institution for the person referred under Section 11(3) of the Act is deemed to be not applied under Section 11 of the IT Act, therefore, he prayed to reverse the order of CIT(A).

5. At the outset, learned AR for the assessee has relied upon the order of the CIT(A). He further argued that trusts are not related and only trustee are related. Registration of other trust is not required for application of fund. Thus, trust is not hit by Section 13(1)(C) of IT Act and this interest free advance was given from the fund of the trust which are in the nature of advance only and therefore, there is no diversion of income and requested to confirm the order of the CIT(A).

6. We have heard the rival contentions of both the parties and perused the material available on record. Undisputedly, the interest free advance given to unregistered trust where son of the trustee of the assessee trust and wife of the trustee of the assessee trust are trustee of Sumandeep charitable trust. The registration of Sumandeep charitable trust has been cancelled by the department. If Assessee trust diverts any income or property to related trust then section 13(1)(c) & 13(1)(d) are applicable and violates the application of fund u/s 11 of the IT Act. The assessee trust hit by section 13(1)(c) & 13(1)(d). The advance even given from the fund provided by the trustee bears the fruits in form of either interest or accretion of value of assets in the hand of related trust. It is true that there is no relation between trusts but trustees of both the trusts are related. Thus, we have considered view that CIT(A) was not justified in allowing the appeal of the Assessee. Accordingly, we reverse the order of CIT(A).

7. In the result, the revenue's appeal is allowed.

Order pronounced in the open Court on 31-5-2013.

                          Sd/-                                       Sd/-
                   (G.C. Gupta)                                 (T.R. MEENA)
                  Vice President                            ACCOUNTANT MEMBER
Prabhat/-
                                                  TRUE COPY
Copy of the order forwarded to:
1.   The Appellant
2.   The Respondent
3.   The CIT concerned
4.   The CIT(A) concerned
5.   The DR, ITAT, Ahmedabad
6.   Guard File
                                                       BY ORDER


                                         Assistant Registrar, ITAT, Ahmedabad