2021 (6) TMI 143 - HC - Income Tax

Exemption u/s 11 denied - trusts found to have made certain payments to company, the Trustees being specified persons are found to be having substantial interest - HELD THAT - As apprehension expressed by the petitioner may not be having any basis. The second respondent is only proposing to forfeit the exemption only in respect of the offending payments. The Trusts need not entertain any fear that exemption granted to them u/s 11 of the Act itself would be denied. The petitioner is therefore given three more weeks from the date of receipt of a copy of this order to offer their explanation in response to the impugned notices.

Summary

Issues:
1. Whether the payments made by the Public Charitable Trusts to specified persons violate Section 13(3) of the Income Tax Act, 1961?
2. Whether the show cause notices issued by the Income Tax Department threatening to cancel the exemptions claimed by the Trusts under Section 11 of the Act are valid?
3. Whether Circular 387 of 1984 dated 06.07.1984 issued by the CBDT provides clarity on the denial of exemption under Section 13(1)(c) and (d) of the Act?

Analysis:

1. The petitioners, Public Charitable Trusts, made payments to M/s.Amali Builders Private Limited, where the Trustees, being specified persons, had substantial interest. The department alleged that these payments were unreasonably high and directly benefited the specified persons under Section 13(3) of the Income Tax Act, 1961. The impugned notices called upon the Trustees to show cause as to why the exemptions claimed under Section 11 of the Act should not be denied. The department contended that these payments violated Section 13(1)(c) of the Act. The writ petitions challenged these notices.

2. The respondents filed a counter affidavit opposing the writ petitions, arguing that the petitions should be dismissed at the show cause notice stage itself. The standing counsel cited a Supreme Court decision in support of this argument. The court considered the contentions of both parties and examined the materials on record.

3. The senior counsel for the petitioners argued that the show cause notices were not in line with Circular 387 of 1984 issued by the CBDT. The circular clarified that the maximum marginal rate of income tax would apply only to the part of income forfeited due to violations of Section 13(1)(c) and (d) of the Act, not the entire income. Referring to a previous case, the court held that the exemption would only be forfeited in respect of the offending payments, not the total denial of exemption under Section 11. The court clarified that the Trusts need not fear a complete denial of the exemption granted under Section 11 and granted them three weeks to respond to the notices.

4. The court disposed of the writ petitions with the clarification provided, emphasizing that the exemption under Section 11 would only be forfeited in relation to the offending payments. No costs were awarded, and connected miscellaneous petitions were closed.