2022 (8) TMI 621 - AT - Income Tax

Exemption u/s. 11 - exemption denied on violation of provisions u/s. 13 - Scope of second proviso to section 13(1)(c)(ii) of the Act - HELD THAT - As in view of the fact following the order latest being in A.Y. 2013-14 we deem it proper to remand the matter to the file of AO for its fresh consideration to pass order in accordance with the directions rendered by this Tribunal in A.Ys. 2010-11 and 2011-12 2017 (6) TMI 1369 - ITAT PUNE Capital expenditure incurred towards Mandir and Vidyalaya - CIT(A) allowing exemption u/s. 11 without appreciating the expenditure on the objects of the trust is negligible as compared to expenditure incurred on maintenance of commercial property - HELD THAT - We note that the case of the AO is that the expenditure incurred on other than the object is Rs.423.38 lakhs which was incurred for the purpose of commercial adventure. He also found that the said amount is part of total expenditure incurred - contention of ld. AR is that the AO nowhere held the said expenditure incurred into violating the objects of trust and no adverse remark as held by the assessee violated the provisions of section 13 of the Act while incurring the said expenditure. CIT(A) by placing reliance on the decision of St. George Forana Church 1987 (7) TMI 44 - KERALA HIGH COURT held that where surplus funds were utilized for additions to a building, which was let out and the income thereof applied for charitable or religious purposes, the utilization of such surplus was held to amount to application of income for religious or charitable purposes. CIT(A) placed reliance on the decision of Karimla Trust 2007 (9) TMI 229 - JHARKHAND HIGH COURT which held that breach of conditions would not disentitle assessee from getting benefits. CIT(A) examined the issue in detail from Page No. 11 of the impugned order and held the assessee is entitled to claim exemption u/s. 11 of the Act. Thus, we agree with the reasons recorded by the CIT(A) and it is justified. Thus, ground No. 6 raised by the Revenue is dismissed. Non-applicability of section 60 - HELD THAT - The provisions u/s. 60 of the Act explains all the income arising to any person by virtue of a transfer is chargeable to Income Tax as the income of the transferor shall be included in his total income. As we discussed above that the assessee is a trust applying its income towards its objective and other trust Lohia Pratisthan also running school in the said premises. Therefore, we find force in the arguments of ld. AR that the exemption u/s. 11 is to be examined independently and the provisions u/s. 60 is not applicable to the facts on hand. On examination of the reasons recorded by the CIT(A) we note that the assessee in the capacity of owner is not deriving any income from the other trust to which a property has been given to run a school. Therefore, we find no infirmity in the order of CIT(A) in holding the non-applicability of section 60 of the Act. Thus, we agree with the reasons recorded by the CIT(A) - ground raised by the Revenue is dismissed.

Summary

Issues Involved:

1. Exemption under Section 11 of the Income Tax Act.
2. Applicability of Section 13(1)(c)(ii) of the Income Tax Act.
3. Expenditure on objects of the trust vs. maintenance of commercial property.
4. Applicability of Section 60 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Exemption under Section 11 of the Income Tax Act:

The Revenue challenged the CIT(A)'s decision to allow the exemption under Section 11 to the extent of Rs. 13,57,70,750/-, ignoring the second proviso to Section 13(1)(c)(ii). The Tribunal noted that a similar issue had arisen in the assessee's case for previous assessment years (2010-11 and 2011-12). The Tribunal had remanded the matter to the AO for fresh consideration based on directions provided in those years. The Tribunal decided to follow the same approach for the current assessment year (2012-13) and remanded the issue back to the AO for fresh consideration in line with the directions from the earlier years.

2. Applicability of Section 13(1)(c)(ii) of the Income Tax Act:

The Tribunal referenced its previous orders for assessment years 2010-11 and 2011-12, which involved examining whether the trust had violated the provisions of Section 13(1)(c)(ii). The Tribunal noted that if the property or income of the trust is used for the benefit of trustees or related persons, the benefits under Section 11 are forfeited. However, an exception exists if the trust was established before the Income Tax Act and the benefit is in compliance with the trust's mandatory terms. The Tribunal instructed the AO to ascertain if the disputed property was part of the property in possession of the trust's author at the time of its creation. If the shops in question were part of this property, the trust would fall within the exception. Otherwise, any violation should be taxed accordingly.

3. Expenditure on objects of the trust vs. maintenance of commercial property:

The Revenue contended that the expenditure on the objects of the trust was negligible compared to the expenditure on maintaining commercial property. The AO found that the trust incurred significant capital expenditure on Mandir and Vidyalaya, which was part of the total expenditure of Rs. 544.54 lakhs. The CIT(A) noted that the AO's inference that expenditure on the property was for commercial purposes was incorrect. The CIT(A) cited various judicial precedents to support that administrative and capital expenditures on trust property are considered application of income for charitable purposes. The Tribunal agreed with the CIT(A)'s reasoning and upheld the decision to allow the exemption under Section 11, dismissing the Revenue's ground.

4. Applicability of Section 60 of the Income Tax Act:

The AO found that the assessee had shown the value of Lohiya Vidyalaya in its fixed assets and questioned the income application for charitable purposes. The assessee argued that Lohiya Vidyalaya was given to another trust, Lohiya Pratisthan, for running a school, and no income was derived from it. The CIT(A) held that Section 60 was not applicable, as the provisions of Sections 11 to 13 provide an independent scheme of taxation for trusts. The Tribunal agreed with the CIT(A)'s reasoning, noting that the assessee was not deriving any income from the property given to Lohiya Pratisthan and upheld the non-applicability of Section 60.

Conclusion:

The Tribunal remanded the matter regarding the exemption under Section 11 back to the AO for fresh consideration. It upheld the CIT(A)'s decisions on the expenditure related to the trust's objects and the non-applicability of Section 60, dismissing the Revenue's grounds on these issues. The appeal of the Revenue was partly allowed for statistical purposes.