Interest-Free Loans to Charitable Trusts Do Not Deny Sections 11 & 12 Exemption: ITAT Delhi

Society For Human Transformation And Research Vs ITO (ITAT Delhi)

Delhi ITAT: Interest-Free Loans to Registered Charitable Institutions Do Not Per Se Violate Sec 13; Sec 40A(2)(a) Cannot Tax Notional Interest – Sections 11 & 12 Exemption Restored

The Delhi ITAT allowed the charitable society’s appeal and directed restoration of exemption under Sections 11 and 12, deleting the disallowances arising from advances to related charitable entities and donations made to other registered trusts.

The AO noticed that the assessee had advanced substantial amounts to persons/entities specified under Section 13(3), some interest-free and one at 8%, while the assessee itself had borrowed funds at 12–13%. The AO notionally computed interest at 12.5%, made an addition of ₹1.64 crore under Section 40A(2)(a) and, alleging benefit to specified persons, denied exemption under Sections 11 and 12.

The ITAT found that the advance of ₹37.37 lakh to Divine Realbuild Pvt. Ltd. was made pursuant to a construction agreement for the society’s college building. There was no allegation or material showing that any specified person derived personal benefit, nor any finding that the contract was overpriced or not at arm’s length.

As regards advances to the other three entities, the Tribunal noted that they were themselves registered charitable institutions under Sections 12A and 80G. Merely because specified/common persons were connected with both institutions did not establish diversion of charitable funds for private benefit. Relying upon DIT v. Acme Educational Society (326 ITR 146, Delhi), the ITAT reiterated that an interest-free temporary loan by one charitable society to another having similar objects does not, merely because of common related persons, become an investment or deposit attracting Section 13(1)(d).