Charitable exemption and corpus donations: unverified rent comparisons, royalty, and scholarship allegations did not defeat tax relief.

Charitable exemption under section 11 could not be denied on the basis of unverified rent comparisons, as the anti-benefit provisions in section 13(2)(b) read with section 13(3) require credible evidence of undervaluation and benefit to specified persons. Royalty income from exploitation of owned patents did not attract the proviso to section 2(15) where the institution's dominant objects were education, medical relief, and relief of the poor. Scholarship payments did not breach section 13(1)(b) because they were not confined to one religious community. Corpus donations retained their capital character and were not taxable as income.

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Issues: (i) whether exemption under section 11 of the Income-tax Act, 1961 could be denied by invoking section 13(2)(b) read with section 13(3); (ii) whether royalty income attracted the proviso to section 2(15) of the Income-tax Act, 1961; (iii) whether scholarships extended violation of section 13(1)(b) of the Income-tax Act, 1961; and (iv) whether corpus donations were taxable income.

Issue (i): whether exemption under section 11 of the Income-tax Act, 1961 could be denied by invoking section 13(2)(b) read with section 13(3).

Analysis: The addition was founded on alleged under-valuation of rent for properties let to another charitable institution. The material used against the assessee consisted mainly of website information and letters from estate agents, without independent verification of comparables, property-specific assessment, or credible corroboration. The rent actually received was found to be higher than municipal valuation and had been accepted in prior years. The consistent past treatment, the absence of fresh material, and the failure to discharge the burden of proof made the invocation of the anti-benefit provisions unsustainable.

Conclusion: The denial of exemption under section 11 by invoking section 13(2)(b) read with section 13(3) was unjustified and was deleted in favour of the assessee.

Issue (ii): whether royalty income attracted the proviso to section 2(15) of the Income-tax Act, 1961.

Analysis: The assessee's dominant objects were education, medical relief, and relief of the poor. The proviso to section 2(15) restricts only entities pursuing the residuary limb of charitable purpose, namely advancement of any other object of general public utility. The royalty arose from exploitation of owned patents under an existing arrangement and did not convert the charitable institution into one engaged in trade, commerce, or business. The character of the assessee's objects, as already recognised in binding proceedings, placed it outside the proviso.

Conclusion: The proviso to section 2(15) did not apply and the issue was decided in favour of the assessee.

Issue (iii): whether scholarships extended violation of section 13(1)(b) of the Income-tax Act, 1961.

Analysis: The factual finding recorded below was that scholarship benefits were not confined to one religious community and were extended to eligible students across communities. No contrary material was brought to displace that finding for the relevant years. In the absence of evidence showing a religiously selective distribution, the condition for invoking section 13(1)(b) was not met.

Conclusion: Section 13(1)(b) could not be invoked and the issue was decided in favour of the assessee.

Issue (iv): whether corpus donations were taxable income.

Analysis: Corpus donations received for the trust were treated as capital receipts. The finding was supported by the absence of material showing business-like activity and by the character of the receipts as voluntary contributions intended for the trust corpus. Once exemption under section 11 was sustained, there was no basis to subject such receipts to tax as income.

Conclusion: Corpus donations were not taxable and the issue was decided in favour of the assessee.

Final Conclusion: The assessee succeeded on the substantive exemption and taxability questions, while the connected objections based on those very issues failed. The overall effect is that the assessee's charitable exemption was substantially upheld and the disputed additions on rent, royalty, scholarship, and corpus donations were not sustained.

Ratio Decidendi: Charitable exemption cannot be withdrawn on conjectural valuation of rent or unsupported comparisons; where the assessee's objects remain within the first three limbs of charitable purpose, royalty from exploitation of owned assets does not attract the proviso to section 2(15), selective scholarship allegations must be proved by evidence, and corpus donations retain their capital character absent material showing taxable income.

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