2015 (11) TMI 982 - AT - Income Tax

Exemption under section 11 denied - According to the Assessing Officer, the assessee had committed an act in violation of section 13(1)(c) - Held that - In this case, the funds have been transferred from the assessee-trust to the accounts of Mahalakshmi Garments Exports, wherein Shri S. Kunjithapatham is the proprietor. The peak debit balance in the books of account of the trust as on October 8, 2009 was at ₹ 20,98,480. According to the learned authorised representative, the outstanding balance due to one of the trustees, Smt. Mahalakshmi Kunjithapatham was ₹ 2,22,74,985. If these two accounts are jointly considered, there is no question of any benefit to the trustees. In our opinion, these arguments of the learned authorised representative are farfetched. Each trustee has to be considered independently and distinctly. In the present case, there is a transfer of funds to one of the trustees' benefit, Shri S. Kunjithapatham, who is the proprietor of Mahalakshmi Garments Exports. In our opinion, the expression person used in section 13(1)(c)(ii) includes a person, who is the trustee. Thus, the amounts are transferred to Shri S. Kunjithapatham for his benefit and the outstanding balance in the name of Smt. Mahalakshmi Kunjithapatham cannot be clubbed together with funds outstanding from another trustee and each one is a person in terms of section 2(31) of the Act. That being so, the assessee-trust having transferred the income or the property to the benefit of Shri S. Kunjithapatham is construed to be in violation of section 13(1)(c)(ii) of the Act. Accordingly, we uphold the order of the Assessing Officer. - Decided against assessee.

Summary

Issues:
Violation of section 13(1)(c) of the Income-tax Act, 1961 leading to denial of exemption under section 11 for the impugned assessment year.

Detailed Analysis:

1. Facts of the Case:
The Assessing Officer noted a part of the trust's income was used for the benefit of a proprietorship concern where the trustee was the proprietor. This led to the denial of exemption under section 11 of the Act. The Commissioner of Income-tax (Appeals) observed a steady credit balance in the trustee's name and his wife's account, indicating no violation of section 13(1)(c) and granted exemption under section 11.

2. Contentions of the Departmental Representative:
The Departmental Representative argued that the trust funds were used for personal benefit, violating sections 13(1)(c) and 13(1)(d) of the Act. They emphasized the need to view transactions independently with each trustee. They disputed the Commissioner's decision to consider the wife's credit balance, asserting a violation still existed.

3. Arguments by the Authorized Representative:
The Authorized Representative contended that the trust funds were utilized for establishing an arts college, with interest-free loans from the trustees. They maintained there was no violation of section 13(1)(c) based on the purpose of the fund transfers.

4. Judgment and Analysis:
The tribunal upheld the Assessing Officer's order, emphasizing that each trustee should be considered independently. Transferring funds to the trustee for personal benefit constituted a violation of section 13(1)(c)(ii) of the Act. The tribunal rejected the argument of jointly considering balances, asserting that each trustee is a distinct entity under the law.

5. Conclusion:
The tribunal allowed the Revenue's appeal, concluding that the transfer of funds to the trustee for personal benefit violated section 13(1)(c)(ii) of the Act. The judgment highlighted the importance of treating each trustee as a separate entity and upheld the denial of exemption under section 11 based on the violation observed.

This comprehensive analysis of the judgment highlights the key arguments presented by both sides, the interpretation of relevant sections of the Income-tax Act, and the final decision reached by the tribunal regarding the violation of section 13(1)(c) leading to the denial of exemption under section 11.