Trustees' Interests Upheld, Remuneration Deemed Reasonable by Tribunal

The Tribunal found that the trustees did not have substantial interest in the companies, thus dismissing the violation of section 13(1)(c). Regarding section 13(1)(d), the Tribunal ruled that the remuneration paid to trustees was not proven to be excessive or unreasonable, overturning the allegation. Consequently, the Tribunal set aside the lower authorities' decisions, instructing the Assessing Officer to grant exemption under sections 11 & 12 to the assessee. The appeals of the assessee were allowed, and the order was pronounced on 24/09/2018.

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Issues Involved:
1. Violation of provisions of section 13(1)(c) of the Income Tax Act.
2. Violation of provisions of section 13(1)(d) of the Income Tax Act.
3. Denial of exemption under sections 11 & 12 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Violation of Provisions of Section 13(1)(c) of the Income Tax Act:
The Assessing Officer (AO) observed that the assessee, a charitable trust registered under section 12A, had advanced interest-free loans to Adhikar Micro Finance Pvt Ltd. and Adhikar Grameen Products Pvt Ltd., where trustees held shares, thus violating section 13(1)(c). For the assessment year 2010-2011, a sum of Rs. 50,00,000 was advanced, and for 2011-2012, interest-free advances amounted to Rs. 3,95,00,000 and Rs. 7,48,851 respectively. The AO concluded that these transactions benefited the trustees, thus breaching section 13(1)(c).

2. Violation of Provisions of Section 13(1)(d) of the Income Tax Act:
The AO also noted that the assessee paid salaries and consultancy fees to trustees and their relatives, which was seen as a violation of section 13(1)(d). For 2010-2011, payments included Rs. 6,45,600 to the President, Rs. 1,63,000 to the Secretary, and other amounts to relatives. For 2011-2012, similar payments were made, leading the AO to conclude a breach of section 13(1)(d).

3. Denial of Exemption Under Sections 11 & 12 of the Income Tax Act:
Based on the alleged violations of sections 13(1)(c) and 13(1)(d), the AO denied the assessee exemption under sections 11 & 12 for both assessment years and levied tax at the maximum marginal rate on the entire income of the trust. The CIT(A) upheld the AO’s decision.

Tribunal’s Findings:

1. On Section 13(1)(c) Violation:
The Tribunal found no material evidence from the lower authorities showing that the trustees had substantial interest in the said companies as defined under section 13(3) and Explanation 3. The Tribunal referenced the Allahabad High Court's decision in CIT vs. Kamla Town Trust, emphasizing that the Revenue failed to prove the trustees had substantial interest. Thus, the allegation of violating section 13(1)(c) was deemed unsustainable.

2. On Section 13(1)(d) Violation:
The Tribunal clarified that for section 13(1)(d) to apply, it must be shown that remuneration paid to trustees was excessive or unreasonable. The AO did not allege or prove that the remuneration was excessive or unreasonable. The Tribunal thus found the AO's assumption incorrect and the allegation of violating section 13(1)(d) unsustainable.

Conclusion:
The Tribunal set aside the orders of the lower authorities, directing the AO to allow exemption under sections 11 & 12 to the assessee as per law. The appeals of the assessee were allowed.

Order Pronounced:
The order was pronounced on 24/09/2018.

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