AO Can’t Deny Sec. 11 Exemption on Notional Interest Income on Advance Given to Specified Person | ITAT

Case Details: Rastogi Education Society v. Income-tax Officer - [2024] 161 taxmann.com 220 (Raipur-Trib.)

Judiciary and Counsel Details

• • Ravish Sood, Judicial Member & Arun Khodpia, Accountant Member
  • S.R. Rao, Adv. for the Appellant.
  • Ram Tiwari, Sr. DR for the Respondent.

Facts of the Case

The assessee was a charitable institution registered under sections 12A and 80G. During the relevant assessment year, the assessee made certain advances to a specified person for purchasing land without charging any interest.

Assessing Officer (AO) treated the transaction as a violation of provisions of section 13(1)(c) and section 13(2)(a) and computed notional interest @ 12% on such advances. Accordingly, he denied the exemption claimed under section 11 of the Act and made additions to the income of the assessee.

On appeal, CIT(A) upheld the additions made by AO, and the matter reached the Raipur Tribunal.

ITAT Held

The Tribunal held that the AO treated the transaction as a violation of section 13(1)(c) and section 13(2)(a) and computed notional interest @ 12% on such advances. Accordingly, he denied the exemption claimed under section 11 of the Act and made additions to the income of the assessee.

However, it was an admitted fact that the transaction of purchase had been accepted by the department in the earlier years when the advance was actually provided, for which no disallowances were imposed either in the earlier AYs or in the relevant AY.

Only a notional interest @ 12% was computed on the outstanding advance and added to the assessee’s income. The CIT(E) has specifically examined and characterized the impugned transactions pertaining to advances for land purchase as genuine transactions, thereby dropping the proceedings for withdrawal of the registration under section 12AA.

Thus, the observations of AO were rendered arbitrary, without basis and bereft of any substance, especially when the transaction was authorized by CIT(E) as commercial in nature. Considering the overall circumstances of the case, since the advances extended to the specified person, pertaining to the purchase transaction, were accepted as a genuine business deal, no adverse inference was drawn, and the proceedings for cancellation of 12AA were dropped. The same cannot be treated as a transaction in violation of section 13(1)(c).

Regarding adequate security and interest as mandated by the provisions of section 13(2)(a), since the transaction pertains to the purchase of land on which the assessee proposed to conduct its educational activities, the same does not fall under the category of money lent to a specified person.

The provisions of section 13(2)(a) thus cannot be triggered on such transactions. Thus, additions on account of notional interest were uncalled for, and the AO was directed to vacate the additions.

List of Cases Referred to

• • Satna Diocesan Society v. ACIT [IT Appeal No. 124 (Nag.) of 2018, dated 8-11-2019] (para 2)
  • Radhasoami Satsang v. CIT [1992] 60 Taxman 248/193 ITR 321 (SC) (para 2)
  • Highways Construction Co. (P.) Ltd. v. CIT [1993] 199 ITR 702 (Gau.) (para 2)
  • CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) (para 2).