Charitable exemption and corpus donations: unverified rent allegations could not defeat section 11, and corpus receipts stayed capital.

Charitable exemption under section 11 could not be denied on the basis of alleged under-valuation of lease rentals where the Revenue relied only on market comparisons and internet material, with no independent corroborative evidence of a prohibited benefit to specified persons; the consistent acceptance of the arrangements and the higher-than-municipal rent also supported the assessee, so section 13 was not attracted. Corpus donations received for the trust's objects were voluntary contributions of capital nature and did not become taxable income merely because exemption was disputed. The assessee therefore remained entitled to section 11 exemption, and the corpus receipts were not assessable as revenue 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)(b) on the basis of alleged under-valuation of lease rentals and alleged benefit to specified persons. (ii) Whether corpus donations received by the assessee were taxable as income or constituted capital receipts.

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)(b) on the basis of alleged under-valuation of lease rentals and alleged benefit to specified persons.

Analysis: The Revenue relied on market-rent comparisons and internet-based material, but no independent, corroborative evidence was brought on record to establish that the lease arrangements were not bona fide or that any specified person had derived a prohibited benefit. The rent received was also shown to be higher than the municipal valuation and the transactions had been consistently accepted over a long period. In the absence of a material change in facts, and applying the rule of consistency, the invocation of section 13 could not be sustained merely on conjectures or unverified information.

Conclusion: The denial of exemption under section 11 by invoking section 13(2)(b) read with section 13(3)(b) was unsustainable and was rightly deleted.

Issue (ii): Whether corpus donations received by the assessee were taxable as income or constituted capital receipts.

Analysis: Corpus donations received for the trust's objects were held to be voluntary contributions of capital nature. Such receipts did not assume the character of income merely because exemption under section 11 was in dispute. On the facts, the donations formed part of the corpus and were not liable to be brought to tax as revenue income.

Conclusion: The corpus donations were capital receipts and were not taxable as income.

Final Conclusion: The assessee remained entitled to exemption under section 11, the rental transactions did not justify denial of charitable status, and the corpus donations could not be assessed to tax as income.

Ratio Decidendi: Denial of charitable exemption on alleged violation of section 13 requires cogent, corroborative evidence of prohibited benefit, and voluntary contributions forming part of the corpus retain the character of capital receipts.

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