2005 (8) TMI 90 - HC - Income Tax

Charitable trust - It may be remembered that section 13 carves out an exception to the general exemption granted under sections 11 and 12 to incomes derived by trusts/charitable institutions. The onus lies on the Revenue to bring on record cogent material/evidence to establish that the trust/charitable institution is hit by the provision of section 13. In the present case we find that as held by the Tribunal the Revenue has miserably failed to bring any material on record to establish that the trust in question fell within the prohibited category enumerated in section 13 Thus Tribunal was correct in holding that the assessee trust was not hit by the provisions of sections 13(1)(c) and 13(2)(b) read with sections 13(2) and 13(3) of the Income-tax Act 1961

Summary

Issues Involved:
1. Applicability of sections 13(1)(c) and 13(2)(b) read with sections 13(2) and 13(3) of the Income-tax Act, 1961 to the assessee trust.
2. Denial of exemption under section 11 of the Income-tax Act, 1961.

Detailed Analysis:

1. Applicability of sections 13(1)(c) and 13(2)(b) read with sections 13(2) and 13(3) of the Income-tax Act, 1961 to the assessee trust:

The primary issue revolves around whether the assessee trust was hit by the provisions of sections 13(1)(c) and 13(2)(b) read with sections 13(2) and 13(3) of the Income-tax Act, 1961. The trust was established with charitable objectives, including providing residential quarters, schools, hospitals, and other public utilities. The trust constructed houses on one plot and leased another plot to M/s. J.K. Synthetics Ltd. for 35 years. The assessing authority and the Commissioner of Income-tax (Appeals) argued that the trust violated the provisions by granting benefits to J.K. Synthetics Ltd., a company linked to the trustees, without adequate compensation, thus breaching sections 13(1)(c) and 13(2)(b).

The Tribunal, however, found merit in the assessee's stand that the trust is a public charitable trust as per the repeated findings of the High Court of Allahabad. It held that the allegation of trustees not giving effect to the trust's objects, even if true, would not disqualify the trust from being categorized as a public charitable trust. The Tribunal emphasized that unless a competent court finds a breach of trust, the Income-tax Officer cannot deny exemption based on alleged breaches. The Tribunal also noted that the income derived from rent was used for the trust's purposes, and no evidence was provided to suggest otherwise.

2. Denial of exemption under section 11 of the Income-tax Act, 1961:

The Revenue contended that the trust's funds were invested in concerns where trustees had substantial interests, thus invoking sections 13(1)(c) and 13(2)(b). The Tribunal observed that for section 13(1)(c) to apply, it must be shown that the trust's income or property was used for the benefit of persons mentioned in section 13(3). The Department failed to provide specific evidence of beneficiaries falling within the prohibited category. The Tribunal highlighted that the Department did not ascertain the number of shares held by trustees in J.K. Synthetics or whether it met the criteria under section 13(3).

The High Court concurred with the Tribunal's findings, noting the absence of evidence showing that the trust's investments or property usage benefited prohibited persons as defined in section 13(3). The Court emphasized the onus on the Revenue to bring cogent material to establish that the trust was hit by section 13. The Tribunal's finding that the Department did not attempt to identify specific beneficiaries or their shareholding remained unchallenged, leading the Court to uphold the Tribunal's decision.

Conclusion:

The High Court affirmed the Tribunal's judgment, holding that the assessee trust was not hit by the provisions of sections 13(1)(c) and 13(2)(b) read with sections 13(2) and 13(3). Consequently, the trust was entitled to exemption under section 11. The question referred was answered in the affirmative, in favor of the assessee and against the Revenue, with no order as to costs.