2019 (4) TMI 196 - AT - Income Tax

Exemption u/s 11 and 12 - allowability of salary and perquisites to its trustees - allowability of utilization fees paid to the trustees for use of assets - Scope of section 13(1)(c) - HELD THAT - it is not not disputed that both trustees were professionally qualified doctors, who besides looking after the administration and running of hospital, were also providing services to the hospital. The payment to them was also linked to the fees collected from the patients. The total professional charges paid to them where the payment is made for rendering professional services to the assessee trust, it cannot be held to be for the direct or indirect benefit of trustees. We find no merit in the orders of authorities below in invoking provisions of section 13(1)(c) in the present set of facts. Accordingly, we hold that professional fees paid to two trustees is to be allowed as deduction. Disallowance of utilization fees paid to the trustees - payment against equipment and assets owned by trustees, but used by trust - HELD THAT - There is no finding that utilization fees paid is excessive or is for the direct or indirect benefit of any person. In the absence of the same and where the facilities of using equipment and services were provided by the trustees to the assessee trust, then utilization fees linked to such facilities or services is to be allowed as deduction in the hands of assessee. We find no merit in the orders of authorities below in this regard. Both the issues decided in favour of assessee

Issues Involved:
- Denial of deduction of professional charges paid to trustees
- Denial of utilization charges paid to trustees
- Interpretation of Section 13(1)(c) of the Income-tax Act, 1961

Analysis:

Issue 1: Denial of Deduction of Professional Charges Paid to Trustees

The appellant trust raised grounds of appeal against the denial of deduction of professional charges paid to two trustees, Dr. Alimiya Parkar and Dr. Mumtaz Parkar, amounting to ?6,52,748. The Assessing Officer disallowed the deduction under sections 11 and 12 of the Act, citing a violation of section 13(1)(c) due to the perceived lack of professional services provided by the trustees. The CIT(A) upheld the disallowance, stating that the payment did not align with the trust deed. However, the appellant argued that the professional charges were based on services rendered by the trustees, and there was no undue benefit granted. The tribunal found that the trustees were qualified doctors providing professional services to the hospital, and the fees were linked to patient fees, thus not for the direct or indirect benefit of the trustees. Consequently, the professional fees were allowed as a deduction.

Issue 2: Denial of Utilization Charges Paid to Trustees

The appellant also contested the denial of utilization charges paid to the trustees, amounting to ?75,000 and ?1,20,000. The Assessing Officer and CIT(A) disallowed these charges under section 13(1)(c) as they were deemed to grant undue benefit to the trustees. However, the appellant argued that the charges were for the use of assets owned by the trustees for the hospital's benefit, with no personal gain involved. The tribunal found that the utilization fees were for services provided by the trustees and were within market value, not benefiting the trustees directly or indirectly. Therefore, the utilization charges were allowed as a deduction.

Interpretation of Section 13(1)(c) of the Act

The tribunal emphasized that under section 13(1)(c), any income or property of a trust used for the benefit of specified individuals should not be allowed as a deduction. In this case, the trustees, being qualified doctors, provided professional services to the hospital, and the payments made were directly linked to services rendered. The tribunal ruled that the payments were not for the benefit of the trustees but for services provided to the trust. Therefore, the disallowance of both professional and utilization charges under section 13(1)(c) was overturned, and the deductions were allowed in favor of the appellant trust.

This judgment clarifies the application of Section 13(1)(c) concerning deductions for payments made to trustees for professional and utilization charges, emphasizing the necessity of assessing whether such payments directly or indirectly benefit the trustees. The tribunal's decision highlights the importance of considering the nature of services provided and the market value of such services in determining the allowability of deductions under the Income-tax Act, 1961.

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