The Kerala High Court upheld the addition as diversion of funds of the Trust amounting to a violation of exemption under section 11 of the Income Tax Act.
The assessee, Ilahia Trust was granted registration under Section 12AA of the Act on 01.04.2000 and the assessee being an Educational Trust, the income is exempt from the computation of total income for the assessee.
The assessee has described one Mr. Varghese Innocent in the list of sundry creditors. The total amount shown against the name of Varghese Innocent is Rs.21,27,846/-. The assessee was called upon to explain the outflow from the Trust account to a sum of Rs.21,27,846/-. The reply is that the said Varghese Innocent carried out a few works for the assessee/Trust and the amount has been paid towards consideration for the works carried out by the said contractor. Then, the next question raised by the Department is what are the works carried out by Varghese Innocent and whether TDS was affected while making the payment. The assessee could not place on record the details of effecting TDS on the amount paid to Varghese Innocent. The failure to comply with Section 40(a)(ia) of the Act has been noted and the amount claimed towards capital investment has been disallowed by the Assessing Officer.
The issues related to the payment of Rs.72,45,000/- in favor of M/s. VUS Timbers and Rs.21,27,846/- in favour of Varghese Innocent. Rs.72,45,000/- is claimed as advance paid for the purchase of wood and the sum of Rs.21,27,846/- is shown as expenses incurred for construction work and payment made without TDS to the contractor Varghese Innocent.
The division bench of Justice S.V.Bhatti and Justice Basant Balaji held that the CIT(A) is justified in directing the A.O. to treat an amount of Rs. 72,45,000 as advance as income to the assessee. The assessee was paying interest on borrowings, and therefore, notional interest at the rate of 18% on the advance of Rs.72,45,000 was rightly brought to tax as income of the assessee by the A.O. Therefore, the court saw no reason to interfere with the findings of the CIT (A).
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