2017 (6) TMI 1369 - AT - Income Tax

Trust deed re-examination ordered for tax exemption eligibility. Order pronounced on June 28, 2017.

The appeals for the assessment years 2010-11 and 2011-12 were allowed for statistical purposes. The Tribunal directed the Assessing Officer to re-examine ... Exemption u/s 11 - violation of provisions of section 13(1)(c)(ii) and 13(2)(b) - HELD THAT:- A perusal of the trust deed shows that the trust was created in the year 1930 i.e. much prior to the enactment of Income Tax Act, 1962. Thus, the first condition to fall within the scope of proviso to section 13(1)(c)(ii) of the Act is satisfied. Benefit to be granted to the assessee or the person referred to in sub-section (3) in application or uses of the property or income of trust is concerned, the use or application of the property should be in compliance of the mandatory terms of the trust - From perusal of English translation of the Trust Deed it appears that the trustees were in possession of the residential part of the property on second floor. As per the assertions of ld. AR, the legal heirs of the author of the trust were in possession of part of property on ground floor as well. Admittedly, there is a clear mandate in the trust deed that part of the property which is in possession of author of the trust shall be for the sole purpose of occupancy by the author of the trust or his legal heirs. The part of the property which is subject matter of dispute are 3 shops on ground floor of the building. From the perusal of English translation of Trust Deed the details of the property in possession of the author of the trust at the time of execution of Trust Deed is not discernible. Under such circumstances, we are of considered opinion that this issue needs a re-visit to the Assessing Officer. Representative of both the sides concur on the point that the part of property referred to in the Trust Deed has to be clearly identified - Assessing Officer is directed to ascertain the part of property which was in the possession of author of the trust at the time of execution of the trust in the year 1930, qua which mandate has been given for the exclusive use by the author of the trust and his legal heirs. In case the shops under question are part of the property which was in possession of the author of the trust deed at the time of execution, then the assessee clearly falls within the exception as mentioned in proviso to section 13(1)(c)(ii) of the Act. The benefit of exemption shall not be available to the extent there is violation of provisions of section 13(1)(c) and the same be brought to tax at the maximum marginal rate. In case the Assessing Officer comes to the conclusion that shops are not part of the property as mandated in the Trust Deed, the addition has to be made to the extent of violation of provision of section 13(1)(c)(ii) and 13(2)(b) of the Act. The Assessing Officer before deciding this issue afresh in accordance with our directions shall grant opportunity of hearing to the assessee, in accordance with law. Both the appeals i.e. the appeal by the assessee in assessment year 2010-11 and the appeal of the Department in assessment year 2011-12 are allowed for the statistical purpose in the aforesaid terms. Issues Involved:1. Eligibility of the assessee to claim the benefit under sections 11 and 12 of the Income Tax Act, 1961, despite the purported violation of section 13(1)(c)(ii) and section 13(2)(b).Detailed Analysis:1. Eligibility to Claim Benefit under Sections 11 and 12:The central issue in both appeals is whether the assessee, a trust, is eligible to claim the benefit under sections 11 and 12 of the Income Tax Act, 1961, despite the alleged violation of section 13(1)(c)(ii) and section 13(2)(b). The trust had rented out three shops to one of its trustees at a rate lower than the market rent, leading the Assessing Officer (AO) to conclude that the trust violated the provisions of section 13(1)(c)(ii) and section 13(2)(b). Consequently, the AO denied the benefit of exemption under sections 11 and 12 and made substantial additions to the trust's income for the assessment years 2010-11 and 2011-12.2. Provisions of Section 13(1)(c)(ii):Section 13(1)(c)(ii) stipulates that the benefits of sections 11 and 12 shall not apply if any part of the income or property of the trust is used or applied directly or indirectly for the benefit of any trustee or specified persons. However, the proviso to this section provides an exception for trusts created before the commencement of the Act, allowing them to retain the benefits if the trust deed explicitly permits such use by trustees or their legal heirs.3. Trust Deed Analysis:The trust deed, created in 1930, predates the Income Tax Act, 1961. The deed allows trustees and their legal heirs to use the property without paying rent. The assessee argued that this provision should exempt them from the violation under section 13(1)(c)(ii) due to the proviso. The AO, however, contended that the trust deed's provision applied only to the residential part of the property and not the commercial shops in question.4. Commissioner of Income Tax (Appeals) Findings:For the assessment year 2010-11, the Commissioner of Income Tax (Appeals) upheld the AO's decision to deny the exemption. Conversely, for the assessment year 2011-12, the Commissioner of Income Tax (Appeals) reversed the AO's decision, granting relief to the assessee based on the proviso to section 13(1)(c)(ii).5. Tribunal's Decision:The Tribunal noted that the trust deed must be scrutinized to determine whether the shops rented to the trustee were part of the property originally in possession of the trust's author. If the shops were indeed part of the property as per the trust deed, the assessee would fall within the exception provided by the proviso to section 13(1)(c)(ii). The Tribunal directed the AO to re-examine the trust deed and ascertain the exact part of the property in possession of the author at the time of the trust's creation.6. Alternate Plea:The assessee raised an alternate plea to restrict the disallowance to the extent of the violation. The Tribunal referenced a previous decision (Sinhgad Technical Education Society Vs. ACIT) which held that exemption denial should be proportional to the violation. The AO was instructed to limit the addition to the extent of the violation if the shops were not part of the property as per the trust deed.7. Conclusion:Both appeals, for the assessment years 2010-11 and 2011-12, were allowed for statistical purposes. The AO was directed to re-examine the trust deed and determine whether the shops in question were part of the property as per the trust deed. If the shops were part of the property, the assessee would qualify for the exemption under sections 11 and 12. If not, the addition should be limited to the extent of the violation.Order Pronounced:The appeals filed by the assessee and the Revenue were allowed for statistical purposes, with directions for the AO to revisit the trust deed and ascertain the specifics of the property in question. The order was pronounced on June 28, 2017.