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 the trust deed to determine if the shops in question were part of the property as per the trust deed. If so, the assessee would qualify for exemption under sections 11 and 12; otherwise, any addition should be limited to the extent of the violation. The order was pronounced on June 28, 2017.

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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.

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