2023 (2) TMI 249 - AT - Income Tax

Exemption u/s. 11 - income derived from property held under the Trust - violation of provisions of section 13(1)(c) - HELD THAT - We find that the sole basis for the AO to deny exemption u/s. 11 of the Act, is in light of the transactions between appellant trust and Shri. Vekkaliamman Builders and Promoters, where the appellant trust has awarded civil contract for construction of building in the earlier financial years. AO, held that said transaction between appellant trust and firm is violation of section 13(1)(c), because the appellant trust did not follow due procedure while awarding tender and further the firm has earned substantial profit which amounts to direct benefit to the interested persons. Tribunal has held in the impugned assessment year that the appellant trust has followed due procedure while awarding tender. It is very clear that the observations of the Assessing Officer that the trust has not followed due procedure is devoid of merits. As regards, second observation of the AO with regard to profit earned by Shri. Vekkaliamman Builders and Promoters, the Tribunal has recorded a categorical finding in their order that the firm has earned net profit of Rs. 21.51 Lakhs and the profit earned by the firm is 4.28% of total turnover, which is quite reasonable. Therefore, from the above it is very clear that the observations of the AO, that the firm has made substantial profit which amounts to direct benefit to interested persons as referred to u/s. 13(1)(c) of the Act is also fails. Therefore, there is no error in the reasons given by the ld. CIT(A) to hold that there is no violation of provisions of section 13(1)(c) in respect of civil contract awarded to Vekkaliamman Builders and Promoters by the appellant trust and for this reason, the benefit of exemption u/s. 11 cannot be denied, and thus, we are inclined to uphold the findings of the CIT(A) and reject ground taken by the Revenue. Whether construction contract which has been granted to the firm in which the managing trustee was a partner would tantamount to service as contemplated u/s. 13(2)(c) of the Act. We find that civil contract has been included in the definition of services as per GST laws and also as per Erstwhile Service Tax laws. Therefore, in our considered view, civil contract awarded to a firm in which the managing trustee of the trust is proprietor is tantamount to services as defined u/s. 13(2)(c) - Since, payment made in pursuant to services rendered by the interested persons is not in excess of consideration paid for relevant work, it cannot be held that there is a direct or indirect benefit to the interested persons as referred to u/s. 13(2) of the Act and violation of provisions of section 13(1)(c) of the Act. We are of the considered view that there is no violation of provisions of section 13(1)(c) of the Act, in so far as payment made by the appellant trust to said Vekkaliamman Builders and Promoters for civil contract - CIT(A) after considering relevant facts has rightly held that there is no violation of provisions of section 13(1)(c) of the Act in respect of civil contract awarded to a firm in which managing trustee of the trust is proprietor. Thus, we are inclined to uphold the findings of the CIT(A) and reject the ground taken by the Revenue.

Summary

Issues:
Violation of provisions of section 13(1)(c) of the Income-tax Act, 1961 regarding civil contract awarded to a firm where the managing trustee is proprietor.

Analysis:

Issue 1: Violation of Section 13(1)(c) of the Act

The appellant, a charitable trust, claimed exemption under section 11 of the Act for income derived from property held under the trust. The Assessing Officer (AO) noted a violation under section 13(1)(c) as the trust awarded a civil contract to a firm where the managing trustee was a proprietor, leading to direct benefits to the trustee. The AO rejected the exemption claimed and treated the income as normal business. The Commissioner of Income Tax (Appeals) held that there was no violation of section 13(1)(c) and allowed the exemption. The Revenue challenged this decision before the Tribunal.

Issue 2: Interpretation of Section 13(1)(c) and Relevant Case Law

The Revenue argued that the High Court's decision in TCA No. 326 of 2015 supported the violation under section 13(1)(c) due to the civil contract awarded to the related firm. The Tribunal had previously allowed relief to the assessee, but the High Court remanded the issue back to determine if the construction contract amounted to service under section 13(2)(c). The Tribunal, in a subsequent order, allowed the Revenue's appeal, leading to further litigation.

Issue 3: Compliance with Due Procedure and Profit Earnings

The assessee contended that due procedure was followed in awarding the tender to the firm and that the firm's profit was not substantial. The Tribunal found that the trust had followed due procedure and that the profit earned by the firm was reasonable, thereby rejecting the AO's claims of violation under section 13(1)(c).

Conclusion

After thorough consideration of the facts, the Tribunal upheld the Commissioner's decision, stating that there was no violation of section 13(1)(c) regarding the civil contract. The Tribunal also noted that the civil contract awarded to a firm where the managing trustee was a proprietor could be considered a service under section 13(2)(c) but found no direct or indirect benefit to the interested persons. Consequently, the appeal filed by the Revenue was dismissed, affirming the decision in favor of the assessee.