2015 (8) TMI 14 - HC - Income Tax

Exemption under Section 11 denied - construction activity on the land belong to the trustee and used by the trust - whether application of income for the benefit of trustee u/s 13 (1)(c) - Held that - Department while accepting that the Trust has not paid any rent or any compensation to the trustee for the land used by the assessee trust which belongs to one of the trustees, the income for construction of the building on the land belonging to one of the trustee would amount to income for the benefit of the trustee which will fall under Section 13 (1)(c) of the Act unmindful of the agreement which states that in the event of the trust vacating the building in future, the trustee shall compensate the trust for the value for the building in question. De hors this agrement, there is nothing to show that there was any manner of use of application of the income or property of the Trust to the person set out in sub section 13 (1) (3) (c) of the Act. It is only when there is an application of income or any part of the property or building directly or indirectly put to use for the benefit of person referred to above, the provision will get attracted we do not find such application in the facts of the present case. We are in agreement with the decision arrived at by the Commissioner Appeals on this point. Yet another plea raised by Department is that the acquisition of ownership of the building to the trustee itself is a benefit in the form of right and therefore, it deemed to be an application of fund of the trust for the benefit of the trustee. That contention is replied by appellant / assessee stating that there is no vesting of the property on the trustee per se because, as per the agreement, on surrender of the building the trustee will have to pay compensation and, therefore, the question of application of funds for the benefit of the trustee does not arise. The definition of Beneficial Owner in terms of Black Law Dictionary, relied upon by the counsel for the department, will not further the case of the department because as the definition of Owner also has a restrictive meaning as in this case. We extract the said portion hereunder Owner. The person in whom is vested the ownership, dominion, or title of property, proprietor. He who has dominion of a thing, real or personal, corporeal or incorporeal, which he has a right to enjoy and do with as he pleases, even to spoil or destroy it, as far as the law permits, unless he be prevented by some agreement or covenant which restrains his right. - Decided in favour of assessee.

Summary

Issues:
1. Denial of exemption under Section 11 of the Income Tax Act, 1961.
2. Alleged violation of Section 13 (1) (c) of the Act.

Analysis:

Issue 1: Denial of exemption under Section 11 of the Income Tax Act, 1961:
The appellant, a Trust formed for promoting Indian Classical Dance, was denied exemption under Section 11 of the Act by the Assessing Officer in 2009-2010. The denial was based on the income of the Trust falling within the amended provisions of Section 2 (15) of the Act and the alleged violation of Section 13 (1) (c) of the Act. The Commissioner allowed the appeal in favor of the Trust, but the Tribunal reversed this decision, leading to the present appeal by the assessee.

Issue 2: Alleged violation of Section 13 (1) (c) of the Act:
The Tribunal's finding was that the Trust's use of income to construct a building on land belonging to one of the trustees amounted to applying the income for the benefit of the trustee, thus violating Section 13 (1) (c) of the Act. The Tribunal held that as long as the trustee held the property and the Trust used it for dance classes, the trustee indirectly benefited. However, the appellant contended that there was an agreement stating that if the Trust decided not to use the premises, the trustee would compensate the Trust for the building's value, and no income was derived by the trustee as a result. The Court found that there was no direct or indirect use or application of the Trust's income or property for the benefit of the trustee as per the provisions of Section 13 (1) (c) of the Act.

The Court disagreed with the Tribunal's finding that the Trustee enjoyed direct or indirect benefit, emphasizing that the Trust had an agreement to return the building to the individual trustee and receive compensation if needed. The Court highlighted that there was no evidence of any income or property being used for the trustee's benefit as per the Act's provisions. The Court also addressed the Department's argument that the trustee acquiring ownership of the building constituted a benefit, stating that the trustee would have to compensate the Trust upon surrendering the building, negating any application of funds for the trustee's benefit. The Court concluded that the tax case appeal was allowed, with no costs awarded.