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Judgment
PER NAVEEN CHANDRA [A. M]:
The above captioned appeal is preferred by the Revenue against the order dated 22.07.2025, passed by National Faceless Appeal Centre/Learned Commissioner of Income Tax(Appeals), New Delhi (hereinafter referred to as ‘ld. CIT(A)), under section 250 of the Income Tax Act, 1961 [hereinafter referred to as, “Act”] for Assessment Year 2018-19. The assessment order in this appeal is passed by the Assessing Officer [for short, AO] under section 143(3) of the Act.
The Revenue has raised following grounds of appeal:-
“1.The Ld. CIT(A) (NFAC) has erred in law and on facts in deleting the addition made by the Assessing Officer under Section 13(1)(c) r.w.s. 13(2)/13(3) of the Income Tax Act, 1961, without appreciating the fact that the assessee trust had advanced loans of Rs. 2,55,00,000/- and Rs. 25,00,000/-to specified persons (Chairman and his wife), which were in violation of the statutory provisions.
2.The Ld. CIT(A)(NFAC) has erred in law and on facts by not considering the fact that the assessee had borrowed funds amounting to Rs.3,46,39,395/- from DHFL Bank by pledging the immovable property of the trust and diverted the same to specified persons in contravention of Section 13(1)(c), thereby disentitling the assessee from exemption under Sections 11 and 12.
3.The Ld. CIT(A)(NFAC) has erred in law and on facts by not appreciating the fact that no adequate security was taken from the specified persons for the loans advanced, and such loans were not in continuance of the charitable objectives of the trust but were instead utilized for personal/business purposes of the specified persons.
4.The Ld. CIT(A)(NFAC) has erred in law and on facts by ignoring the fact that the assessee itself had stated that the loan from DHFL was taken for expansion of charitable activities, and not for advancing to the Chairman and his wife. Such diversion of funds clearly constituted application of income/property of the trust for the benefit of specified persons, attracting the provisions of Section 13(1)(c) of the 1.T. Act.
5.The Ld. CIT(A)(NFAC) has erred in law and on facts in holding that charging interest at 13% from the specified persons justifies the transaction, without appreciating the fact that the source of the funds was borrowed and secured against the trust's property, and such use was not in consonance with the charitable objectives of the trust.
6.The Ld. CIT(A) (NFAC) has erred in law and on facts by ignoring the fact that the assessee had invested /parked its funds in the hands of specified persons by advancing loan, which is of the specified mode as per the section 11(5) of the I. T. Act.
None appeared on behalf of the assessee so we decided to hear the case exparte with the assistance of the ld DR. We have carefully perused the materials on record.
The Brief facts of the case is that the Assessee is a charitable trust registered under section12AA of the I.T Act. A return of income for A.Y 2018-19 was filed on 30.3.2019 declaring total income Nil after claiming exemption under section 11 of the Act. Assessment under section 143(3) r.w.s 144B of the Act was completed on 16.8.2021 assessing total income at Rs.2,67,63,316/-. The AO denied the exemption claimed under section 11 by holding that the loan advanced of Rs.2.8 crores to Shri Bharat Bhushan Suri and Smt. Shikha Suri is in violation of provisions section 13(1)(c) r.w.s 13(2) and 13(3) of the I.T Act.
The CIT(A), after considering the submissions of the assessee, held that the assessee has not violated the provisions of section 13(1)(c) as under:
7.During the assessment proceedings, on perusal of balance sheet the AO noted that the assesse has given short term loan of Rs. 2.55 crs to Shri Bharat Bhushan Suri and loan of Rs. 25 lacs to Smt. Shikha Suri. The assesse in the written submissions filed has submitted that the Trust has taken loan from DHFL at the interest of 11.6% and out of this loan, the amount of Rs. 2.55 crs and 0.25 cr. has been advanced as loan to Bharat Bhushan Suri and Shikha Suri @ 13% interest. It is further submitted that the loan funds were cost bearing and hence the loan was advanced to these persons to reduce the cost of the assesse trust as the loans funds could not be utilised in a short span of time. Hence, there is no benefit given to these persons and rather the assesse has earned interest on the idle funds. The purpose of restriction under the statute is only for restricting to take undue benefit by the controlling persons out of the funds of the society. Hence, there is no violation of provisions of sec.13(1)(c) r.w.s 13(2) and 13(3) of the I.T Act. It is further submitted that, Shri Bharat Bhushan Suri has repaid the loan amount of Rs. 47,63,668/- as on 31.3.2020. After considering the submissions of the assesse, the AO held that Shri Bharat Bhushan Suri and Smt Shikha Suri are covered by the definition of specified persons under section13(3) of the Act. The fund which were borrowed by the assesse for the purpose of trust were diverted for benefit of specified persons of the trust. Further, no security has been obtained against the advancement of loans to these persons. Therefore, it is a violation of provisions of sec.13(1)(c) r.w.s 13(2) and 13(3) of the I.T Act. Hence, the AO held that the assesse is not entitled for exemption under section11 of the Act and the total income is to be computed considering the status of the assesse as AOP. Accordingly, the AO computed the total income as AOP.
8.In the written submissions filed, the appellant has submitted that the loan was obtained on interest @ 11.6% , however, the same could not be used immediately . Hence, to set off the cost, the loan was advanced to these two persons on the interest @ 13%. Thus, no benefit has been accrued to these two persons, rather the assesse has benefited by an income @ 1.4% as interest differential. The appellant further contested that as the interest has been charged on this loan, the conditions stipulated in sec.13(2)(a) are satisfied. It is further contended that as per audit report, this loan is secured by the immovable property and hence there is no violation of provisions of sec.13(1)(c) r.w.s 13(2) and 13(3) of the IT Act. Without prejudice to this contention, it is submitted that even assuming it is case of violation of sec.13, under no circumstances additions of loan given can be made for determining assessable income. From the plain reading of provisions of sec 13(1), it is clear that in case of violation of sec.13(1), the income claimed as exempted under section11 & 12 shall not be allowed as exempted income. It is nowhere provided that in case of violation is made on account of loan given to these specified persons covered under section.13(3), the consequences of such violation will result into addition of such loan amount to the total income. To support its contention, the appellant has relied on the decisions of CIT(Exemption) vs. Rajkot Diocese Trust (435 ITR 367) (Guj. High /court).
9.I have considered the assessment order, submission of the appellant and facts available on record. The only issue under dispute is that whether the loan given on interest to the persons specified under section.13(3) is the violation of provisions of sec.13(1)(c) r.w.s 13(2) and 13(3) of the I.T Act and this loan is to be added for computing the income of the assesse. In this case it is an admitted fact that the appellant has advanced the loan to the two persons which are the specified persons as per the provisions of sec.13(3) of the I.T Act. It is also a fact that this loan has been advanced from the interest bearing funds obtained by the appellant from DHFL. This loan was obtained at the interest rate of 11.6% and thereafter the loan was advanced to the specified persons @ 13% interest. On perusal of audit report, it is also seen that these loans are secured by the immovable property of these persons. As per the provisions of sec.13(2)(a) of the Act, if any part of the income or property of the trust or institutions is, or continues to be, lent to any persons referred to in sub sec.3 for any period during the previous year without either adequate security or adequate interest or both, then exemption u/s 11 is not allowable. Thus, as per the provisions of sec.13(2)(a), if the loan given to the persons specified in sub sec.3 of sec.13 is on interest or such loan is adequately secured then there will not be any violation of provisions of sec.13(2) of the I.T Act. In this case, the loan given to the specified persons is secured as well as given on adequate interest hence, there is no violation of provisions of sec.13(2) of the I.T Act. It is also evident that, the appellant has earned interest from these specified persons which is over and above the interest payable on the source of such loans. Thus, there is no benefit derived from advancing such loan to the specified persons. Further, such loans are not given out of any income or any property of the trust. Therefore, in my considered view there is no violation of provisions of sec. 13(1)(c) of the Act. Therefore, exemption under section11 and 12 cannot be denied to the appellant.
10.I have also considered the alternate argument raised by the appellant that even if it is considered as a violation of sec.13, the loans cannot be added to the total income. So as per the provisions of sec.13(1), the loan advanced to the specified persons cannot be held as income of the trust. Therefore, this contention of the appellant is acceptable.
11.In view of the above discussions, it is held that advancing loan to the specified persons of the trust on interest and with security do not violate the provisions of sec.13(1)(c) rws 13(2) and 13(3) of the I.T Act. Hence, exemption claimed under section11 cannot be denied to the appellant. The AO is accordingly directed to allow the exemption claimed under section11 & 12 of the Act. Appeal on these grounds is thus ALLOWED.
Considering the factual matrix of the case, we find that the CIT(A) has given a well reasoned order. The loans given by the assessee Trust is secured and earning higher interest and therefore do not fall under the ‘benefit’ as defined in section 13(2) of the Act. We are therefore of the considered view that that there is no reason to interfere with the decision of the CIT(A). The grounds of the Revenue are dismissed.
In the result the appeal of the Revenue in ITA No.5575/Del/2025 Is dismissed.