Exemption u/s. 11 & 12 can be denied for Investment of borrowed fund by trust in Companies in which founders have substantial interest

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ITAT CHENNAI BENCH ‘B’

Income-tax Officer (OSD) Exemptions, Chennai

v.

KAS Foundation

IT APPEAL NOS. 1892 & 1893 (MDS.) OF 2010

C.O. NoS. 83 & 84 (MDS.) of 2011

[ASSESSMENT YEAR 2007-08]

MAY 10, 2012

The assessee borrowed money and instead of financing in rural areas invested the same in the company ‘J,’ where the founders of the assessee-trust are having substantial interest, which is contrary to the object of which the registration was granted to the assessee under section 12AA. Apart from the above, the assessee is paying interest on money borrowed without receiving any benefit from ‘J’. Therefore, the assessee borrowed money for the benefit of ‘J’ and not for the purpose of carrying on its object.

The assessee contrary to its object invested the borrowed funds in the private company ‘J,’ where the founders are having substantial interest. Therefore, the assessee has violated the provisions of section 13(1)(d)(iii). As per the provisions of section 13(1)(d)(iii), to get exemption under sections 11 and 12 the assessee has to invest the money in a public sector company as per section 11(5). It is an undisputed fact that the assessee had not invested money in a public sector company as provided under section 11(5). Therefore, it is clear violation of section 13(1)(d)(iii). On this count alone, the assessee is not eligible for exemption under sections 11 and 12. Insofar as section 13(2)(h) is concerned, the Assessing Officer has already given a specific finding that the investment made by the assessee in company ‘J’ was approximately 10 per cent of the subscribed and paid-up share capital of ‘J’. Therefore, it has also violated section 13(2)(h). Insofar as the decision of the Bombay High Court in the case of Sheth Mafatlal Gagalbhai Foundation Trust (supra) is concerned, the Assessing Officer has distinguished the case by observing that the facts are entirely on a different footing from the case in hand. The Bench is in full agreement with the observation of the Assessing Officer on this count. Apart from that, the Commissioner (Appeals) simply followed the decision in the case of Sheth Mafatlal Gagalbhai Foundation Trust (supra) without examining section 13(1)(d)(iii). Sub-clause (iii) of section 13(1)(d) was substituted by the Finance Act, 2007 w.r.e.f. 1-4-1999. This was not considered by the Bombay High Court in the case of Sheth Mafatlal Gagalbhai Foundation Trust (supra). The Commissioner (Appeals) without examining the legal provisions which are relevant to decide the issue simply by following the decision of the Bombay High Court and the CBDT Circular No. 387, dated 6-7-1984 allowed the claim of the assessee for exemption. In view of the aforesaid, the Commissioner (Appeals) was not correct in allowing the claim of the assessee.