The appellant society is a charitable institution registered u/s 12A of the Income Tax Act, 1961 (the Act), engaged in the promotion of education. It claimed exemption u/s 11 of the Act for the surplus of income over expenditure for the assessment year. The Assessing Officer (AO) denied the exemption on the ground that the appellant society had violated the provisions of section 13(1)(c) and 13(2)(a) of the Act by diverting funds to a specified person, who is the son of the founder and the managing trustee of the society. The AO also added notional interest on the advance paid by the society to the individual in question, for the purchase of land, which remained in his name for more than 10 years. The Commissioner of Income Tax (Appeals) (CIT(A)) confirmed the additions made by the AO. The appellant society challenged the order of the CIT(A) before the Tribunal.

The Tribunal allowed the appeal of the appellant society and deleted the additions made by the AO and confirmed by the CIT(A). The Tribunal held that:

The advance paid by the appellant society to the individual for the purchase of land was a genuine and commercial transaction and not a diversion of funds to a specified person. The transaction was accepted by the department in the earlier and subsequent years and no adverse inference was drawn. The transaction was also examined and approved by the CIT(E) who dropped the proceedings for withdrawal of registration u/s 12AA of the Act. The provisions of section 13(1)(c) and 13(2)(a) of the Act were not applicable to the transaction as it was not a case of money lent to a specified person. The appellant society was entitled to the exemption u/s 11 of the Act for the surplus of income over expenditure.

The addition of notional interest on the advance paid by the appellant society to the individual for the purchase of land was not justified as there was no income accrued or received by the society. The interest income on notional basis cannot be subjected to tax as per the settled law. The provisions of section 13(1)(d) of the Act were not applicable to the transaction as it was not a case of investment in the name of a specified person. The appellant society had notionalized the agreement to sale and recorded the land in its balance sheet as an asset.  (AY. 2016-17)