By TIOL News Service

KOLKATA, NOV 15, 2017: THE ISSUE BEFORE THE TRIBUNAL IS - Whether loan advanced by a charitable trust to relative of trustees, is violation of Section 11(5) and hence can form ground for denial of exemption u/s 80G(5)(vi), if such loan was adequately secured by way of gold ornaments and interest at more than prevailing market rate. NO is the answer.

Facts of the case:

The Assessee trust during the subject year, had filed an application in Form No.10G seeking renewal of exemption u/s 80G(5)(vi). The Director of Income Tax (Exemption), Kolkata, on perusal of the application and income and expenditure accounts, however observed that, the trust had given loan to Ms. Shruti Mohta, wife of one of the trustees, in violation of provisions of section 11(5). Accordingly, he held that Assessee trust was not eligible for granting exemption u/s 80G(5)(vi), because it had not made investment as per provisions of section 11(5).

Tribunal held that,

++ we are of the view that there is no violation of the provisions of section 11(5) because the assessee trust has taken the adequate security by way of gold ornaments and the loan was secured and bearing interest @12% per annum which was more than the prevailing rate in the market. Therefore, this loan given by the trust is not for personal benefit of the trustee or wife the trustee. The assessee trust is charging interest more than the market rate and there is a proper security. Section 13(2)(a) clearly says that if the loan given by the trust to the relative of a trustee and the said loan is secured with adequate security and interest, is at par with the prevailing market rate, then it should not be said that the funds of trust are being used for personal use of trustee’s wife and the exemption u/s 80G(5)(vi) should not be denied;

++ in the instant case, the assessee trust is deriving interest on loan given to wife of one of the trustees and the loan is secured by the gold ornaments. Therefore, it cannot be said that loan had been given by the assessee-trust with inadequate security or free of interest, therefore, exemption u/s 80G(5) should not be denied. Therefore, considering the factual position, we are of the view that there is no violation of the provisions of section 11(5), and therefore, we direct the Director of Income Tax (Exemption) to consider grant the exemption u/s 80G(5)(vi).

(See 2017-TIOL-1587-ITAT-KOL)