Section 11 Exemption Allowed Despite High-Interest Loan from Specified Persons | ITAT

Case Details: Educate India Society vs. Deputy Commissioner of Income-tax, Exemption - [2025] 174 taxmann.com 119 (Delhi-Trib.)

Judiciary and Counsel Details

• Mahavir Singh, Vice President & Manish Agarwal, Accountant Member
• Ms Lalitha Krishnamurthy, Adv. for the Appellant.
• Surender Pal, CIT-DR & Rajesh Kumar Dhanesta, Sr. DR for the Respondent.

Facts of the Case

Assessee society was running educational institutions affiliated with MD University and was the sponsoring body of ITM University. During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had paid interest to specified persons under section 13(3) at a higher rate than the rate paid to the bank. The AO denied the benefit of exemption under sections 11 and 12 on the ground that the assessee violated the provisions of sections 13(2) and 13(1)(c).

On appeal, the CIT(A) upheld the order of the AO, and the matter reached the Delhi Tribunal.

ITAT Held

The Tribunal held that the only allegation was regarding the payment of interest at a higher rate compared with the prevailing bank rates. There was no quarrel that the assessee paid interest to the specified persons at higher rates than the prevailing market rates.

However, the assessee was in financial difficulties. If the amounts were not taken from the specified person at a higher rate, it could not carry out its day-to-day activities solely by relying on funds from banks.

The assessee was required to construct additional blocks of floors, car parking, an open Amphitheatre, a central auditorium, a canteen with a mess facility, a gymnasium, and a solar power plant. All these constructions required approximately Rs. 45 crores in total funds. Since sufficient securities in the form of assets were not available for the assessee to offer as security, borrowing from banks or financial institutions was almost impossible or challenging. Furthermore, the assessee was unable to repay the loan, as the only source of revenue was tuition fees.

Therefore, the assessee had to obtain an unsecured loan on a long-term basis from the specified persons who, under these circumstances, had charged interest at a higher rate. It is also a matter of fact that merely by violating provisions of Section 13(1), the entire exemption granted under sections 11 and 12 should not be denied. AO failed to bring on record any material to controvert the submission of the assessee that the interest at a higher rate was paid under compelling circumstances.

Thus, the benefit of exemptions under sections 11 and 12 cannot be denied.

List of Cases Reviewed

• Fr. Mullers Charitable Institutions [2014] 44 taxmann.com 275/228 Taxman 319/363 ITR 230 (Karnataka)
• CIT (Exemptions) v. Krupanidhi Education Trust [2022] 138 taxmann.com 339/441 ITR 154 (Karnataka)
• DIT (Exemption) v. Agrim Charan Foundation [2001] 119 Taxman 569/253 ITR 593 (Delhi)[para 21] followed
• DIT v. Bharat Diamond Bourse [2003] 126 Taxman 365/259 ITR 280 (SC)[para 20] distinguished

List of Cases Referred to

• DIT v. Bharat Diamond Bourse [2003] 126 Taxman 365/259 ITR 280 (SC) (para 8)
• DIT (Exemption) v. Charanjiv Charitable Trust [2014] 43 taxmann.com 300/223 Taxman 71 (Delhi) (para 8)
• Kanahya Lal Punj Charitable Trust v. DIT (Exemption) [2008] 171 Taxman 134/297 ITR 66 (Delhi) (para 8)
• Agappa Child Centre v. CIT [1997] 92 Taxman 327/226 ITR 211 (Kerala) (para 8)
• ACIT v. Space Age Research & Technology Foundation, Charitable Trust, Meerut [IT Appeal No. 4622 (Delhi) of 2012, dated 23-5-2017] (para 8)
• CIT v. CMR Jnanadhara Trust [2015] 55 taxmann.com 516/230 Taxman 238 (Karnataka) (para 12)
• Dy. CIT v. Ahmedabad Strips (P.) Ltd. [IT Appeal No. 2741 (Ahd.) of 2017, dated 26-6-2019] (para 13)
• Vogue Vestures (P.) Ltd. v. ACIT [IT Appeal No. 1284 (Bang.) of 2011, dated 22-11-2012] (para 14)
• DIT (Exemption) v. Agrim Charan Foundation [2001] 119 Taxman 569/253 ITR 593 (Delhi) (para 15)
• CIT (Exemptions) v. Krupanidhi Education Trust [2022] 138 taxmann.com 339/441 ITR 154 (Karnataka) (para 16)
• CIT v. Fr. Mullers Charitable Institutions [2014] 44 taxmann.com 275/228 Taxman 319/363 ITR 230 (Karnataka) (para 17)
• CIT v. Kamla Town Trust [2006] 201 CTR 281/[2005] 279 ITR 89/[2006] 150 Taxman 107 (Allahabad) (para 20).