2015 (11) TMI 115 - AT - Income Tax

Denial exemption U/s.11 & U/s.12 - one of the trustees was a minor and not competent to hold the post of trustee - Held that - A trustee may also disclaim to be a trustee and shall prevent the trust property from vesting in him. A disclaimer by one or two or more co-trustees vests the trust property in the others and makes him or them sole trustee or trustees from the date of the creation of the trust. Thus, if one of the trustees appointed is not competent to contract, he cannot be made as a trustee as rightly pointed out by the Revenue. However, in this given case, there are other trustees on whom the property in the trust can be legally vested. Therefore, it cannot be said that the creation of the trust is void ab initio as held by the Revenue. Further, there are no provisions in the Indian Trusts Act,1882, to debar the trustees if they reside outside India. Section-11(1)(a) of the Act only provides that the income of the trust has to be applied in India and in the case of the assessee that is not disputed. Moreover, there are no statutory provisions in any Act to debar the family members of the author of the trust to be the trustees of a charitable trust. As long as the objects of the Trust are charitable and for the benefit of the general public at large the charitable nature of the trust cannot be denied. Therefore, we hereby direct the Ld. Assessing Officer to treat the trust as a charitable trust recognized U/s.12AA of the Act since the registration granted by the Ld.DITE is not withdrawn and assess the income of the Trust, if any, in accordance with the provisions of the Act and on merits. - Decided in favour of assessee.

Summary

Issues:
1. Validity of the trust under Sections 11 and 12 of the Income Tax Act.
2. Denial of exemption under Sections 11 and 12 of the Act due to minor trustee and trustees residing outside India.
3. Confirmation of interest levy under Section 234B of the Act.

Analysis:

Issue 1: Validity of the trust under Sections 11 and 12 of the Income Tax Act:
The appeal raised concerns about the denial of exemption under Sections 11 and 12 of the Act by the Commissioner of Income Tax (Appeals) (CIT(A)). The key contention was the appointment of a minor trustee and trustees residing outside India, rendering the trust invalid. The Assessing Officer (AO) held the trust void ab initio due to the minor trustee and family-centric succession clauses in the trust deed. The CIT(A) endorsed this view, emphasizing the minor trustee's incapacity to hold the post. However, the Appellate Tribunal noted that the trust had been recognized as valid by the Director of Income Tax (Exemptions) at the time of registration under Section 12AA of the Act. Citing legal principles from the Indian Trusts Act, the Tribunal concluded that the trust's creation was not void ab initio, as there were other competent trustees available. It emphasized that trustees residing abroad did not disqualify the trust, and family members could serve as trustees for charitable trusts. Consequently, the Tribunal directed the AO to treat the trust as valid and assess its income in accordance with the law.

Issue 2: Denial of exemption under Sections 11 and 12 of the Act due to minor trustee and trustees residing outside India:
The AO and CIT(A) had denied exemption under Sections 11 and 12 of the Act to the trust, citing the minor trustee and trustees residing abroad as reasons for invalidity. The AO treated the trust as an Association of Persons (AOP) and assessed its income at the maximum marginal rate. However, the Tribunal highlighted that the trust's charitable nature and compliance with Indian income application requirements were undisputed. It referenced legal precedents to support the validity of the trust despite the minor trustee and foreign-residing trustees. The Tribunal directed the AO to recognize the trust as a charitable entity under Section 12AA of the Act and assess its income accordingly.

Issue 3: Confirmation of interest levy under Section 234B of the Act:
The Tribunal addressed the issue of interest levy under Section 234B of the Act, emphasizing that such levies were consequential in nature. It disposed of this issue accordingly, without affecting the overall decision on the trust's validity and entitlement to exemptions under the Act.

In conclusion, the Appellate Tribunal allowed the appeal, directing the Assessing Officer to treat the trust as a valid charitable entity under Section 12AA of the Act and assess its income based on the merits of the case.