2023 (2) TMI 249 - AT - Income Tax

Tribunal Upholds Decision on Tax Act Violation, No Benefit to Interested Parties

Deputy Director of Income-Tax (Exemptions) -II, Chennai Versus M/s. Sri Vekkaliamman Educational And Charitable Trust, Chennai

Deputy Director of Income-Tax (Exemptions) -II, Chennai Versus M/s. Sri Vekkaliamman Educational And Charitable Trust, Chennai - TMI Issues:Violation of provisions of section 13(1)(c) of the Income-tax Act, 1961 regarding civil contract awarded to a firm where the managing trustee is proprietor.Analysis:Issue 1: Violation of Section 13(1)(c) of the ActThe appellant, a charitable trust, claimed exemption under section 11 of the Act for income derived from property held under the trust. The Assessing Officer (AO) noted a violation under section 13(1)(c) as the trust awarded a civil contract to a firm where the managing trustee was a proprietor, leading to direct benefits to the trustee. The AO rejected the exemption claimed and treated the income as normal business. The Commissioner of Income Tax (Appeals) held that there was no violation of section 13(1)(c) and allowed the exemption. The Revenue challenged this decision before the Tribunal.Issue 2: Interpretation of Section 13(1)(c) and Relevant Case LawThe Revenue argued that the High Court's decision in TCA No. 326 of 2015 supported the violation under section 13(1)(c) due to the civil contract awarded to the related firm. The Tribunal had previously allowed relief to the assessee, but the High Court remanded the issue back to determine if the construction contract amounted to service under section 13(2)(c). The Tribunal, in a subsequent order, allowed the Revenue's appeal, leading to further litigation.Issue 3: Compliance with Due Procedure and Profit EarningsThe assessee contended that due procedure was followed in awarding the tender to the firm and that the firm's profit was not substantial. The Tribunal found that the trust had followed due procedure and that the profit earned by the firm was reasonable, thereby rejecting the AO's claims of violation under section 13(1)(c).ConclusionAfter thorough consideration of the facts, the Tribunal upheld the Commissioner's decision, stating that there was no violation of section 13(1)(c) regarding the civil contract. The Tribunal also noted that the civil contract awarded to a firm where the managing trustee was a proprietor could be considered a service under section 13(2)(c) but found no direct or indirect benefit to the interested persons. Consequently, the appeal filed by the Revenue was dismissed, affirming the decision in favor of the assessee.