2019 (1) TMI 160 - HC - Income Tax

Charitable activities - denial of exemption u/s 11 - payments made on account of advertisement to prohibited persons - default u/s section 13(1)(c) and 13(2)(c) - Held that - Clause (c) of sub-section 2 of Section 13 of the Act can be invoked, if any amount is paid by way of salary, allowance or otherwise to any person referred to in sub-section 3 out of resources of the Trust for services rendered to the Trust and the amount so paid is in excess of what may be reasonably paid for such services. Thus, essential requirement for invoking the said provision is that the amount paid was in excess of what may be reasonably paid for the services. In the present case, the CIT(A) and the Tribunal have elaborately examined the accounts of the assessee, the payments made to the SBC, the payments made to other agencies for similar work, comparative rates of payments and came to the conclusion that no excess payment was made to the related person. Essentially, this is a pure question of fact. Two authorities concurrently held in favour of the assessee.

Summary

Issues:
1. Interpretation of provisions of Section 13(1)(c) and 13(2)(c) of the Income Tax Act.
2. Claiming exemption under Section 11 of the Income Tax Act.
3. Application of Section 13(3)(e) of the Income Tax Act.
4. Disallowance of expenditure made to a partnership firm consisting of trustees of a charitable trust.

Analysis:

1. The appeals involved questions regarding the interpretation of Section 13(1)(c) and 13(2)(c) of the Income Tax Act. The Tribunal was questioned for not applying these provisions despite payments made to prohibited persons for advertisements. The respondent, a charitable trust, was accused of making payments to a partnership firm consisting of trustees, leading to a denial of benefits under Section 11 of the Act by the Assessing Officer.

2. The CIT(A) reviewed the case and disagreed with the Assessing Officer's decision to invoke Section 13(2)(c) for disallowance. The CIT(A) found that the payments were not unreasonably high for the services provided. The Revenue challenged this decision before the Tribunal, which ultimately dismissed the appeal. The High Court concurred with the lower authorities, emphasizing that no excess payment was made to the related person, thus a factual determination without any legal question.

3. Section 13(3)(e) of the Act was crucial as it defined the firm SBC as a prohibited entity in connection with the trust. The Assessing Officer's analysis focused on payments made to SBC for advertisements, leading to the denial of benefits under Section 11. However, both the CIT(A) and the Tribunal found no excessive payments to SBC, ultimately benefiting the assessee.

4. The judgment highlighted that the essential requirement for invoking Section 13(2)(c) is the payment being in excess of what is reasonable for the services provided. The High Court supported the decision of the lower authorities, emphasizing the factual analysis conducted by the CIT(A) and the Tribunal. As no legal question arose, the tax appeals were dismissed, upholding the favorable rulings for the assessee.