2015 (6) TMI 346 - AT - Income Tax

Exemption claimed u/s. 11 denied - Managing Trustee enjoyed benefits out of the income derived by the trust which is against the provisions of Section 13(1)(c)/(d) - Held that - In the present case, the Assessing Officer has out rightly held that the assessee is not entitled to the benefit of Section 11 without ascertaining the reasonableness of the amount paid for the services rendered. We find that, the construction contract has been awarded to the firm M/s. Sri Vekkaliamman Builders on the basis of open bid. Since, the firm quoted lowest rates, the contract was awarded to the firm. The CIT(Appeals) has given a categoric finding that in cases of civil construction contracts, especially were no proper books are maintained the Act recognizes normal profit margins @ 8%. Whereas, the firm M/s. Sri Vekkaliamman Builders has earned a profit of 5.8% which is very reasonable. We are of the considered opinion that since, the contract was awarded on competitive basis and the profit earned is reasonable, the provisions of Section 13(2)(c) are not violated. We do not agree with the submissions of the ld. DR that the Trust has advanced a sum of ₹ 19,25,657/- as on 31-03-2009 which is against the provisions of Act and thus disentitles the assessee to claim exemption u/s. 11 as the CIT(Appeals) has given a well reasoned finding that the sum advanced by the assessee to M/s. Sri Vekkaliamman Builders in not advance simpliciter but business advance. The aforesaid advances do not come within the ambit of advances u/s. 13(1)(d) of the Act. The amounts were advanced for the on-going construction work in the normal course of business activity. - Decided against revenue.

Summary

Issues:
1. Interpretation of Section 13(1)(c)/(d) of the Income Tax Act.
2. Application of Section 13(2)(g) in determining benefits derived by trustees.
3. Reasonableness of payments made for services rendered by trustees.
4. Treatment of advances made by a trust as per the provisions of the Act.

Analysis:

1. The primary issue in this case revolves around the interpretation of Section 13(1)(c) and (d) of the Income Tax Act, concerning the use of income or property of a trust for the benefit of certain individuals. The Assessing Officer disallowed the exemption claimed by the assessee under Section 11 of the Act, alleging that the Managing Trustee enjoyed benefits from a construction contract awarded by the trust, which violated the provisions of Section 13(1)(c)/(d).

2. The application of Section 13(2)(g) was also a crucial point of contention. The Revenue argued that benefits exceeding a certain threshold were diverted to the Managing Trustee, triggering the proviso to Section 13(2)(g). The Revenue contended that the Managing Trustee derived a substantial benefit from a construction contract, thus falling afoul of the provisions.

3. The reasonableness of payments made for services rendered by the Managing Trustee was extensively debated. The assessee's representative argued that the payments were within reasonable limits, especially considering that the contract was awarded through a competitive bidding process. The CIT(Appeals) found that the profit margin earned by the Managing Trustee was reasonable, given the circumstances of the contract award.

4. Another issue addressed was the treatment of advances made by the trust to the Managing Trustee's firm. The Assessing Officer contended that these advances violated the provisions of the Act, disentitling the assessee from claiming exemption under Section 11. However, the CIT(Appeals) reasoned that the advances were business-related and not covered under the provisions cited by the Assessing Officer.

In conclusion, the Tribunal upheld the decision of the CIT(Appeals), dismissing the Revenue's appeal. The Tribunal found that the benefits derived by the Managing Trustee were reasonable, the advances made were business-related, and the provisions of Section 13 were not violated. The judgment provides a detailed analysis of the various legal provisions and their application in the context of the trust's activities, ensuring a comprehensive understanding of the case.