1988 (8) TMI 162 - AT - Income Tax

Trust's corpus not taxable under IT Act despite income loss - Tribunal clarifies distinction.

LAKSHMI KANTHAMMAL RAJAGOPAL CHARITABLE TRUST. Versus INCOME TAX OFFICER.

The Tribunal allowed the appeal, holding that the trust's corpus advanced to a company for the benefit of the author did not fall under the provisions of ... - Issues:- Appeal against order under section 263 of the IT Act, 1961.- Application of provisions of section 13(1)(c) regarding charitable trust's income.- Taxability of corpus of the trust advanced to a company.Analysis:1. The appeal before the Appellate Tribunal ITAT MADRAS-C was against an order made under section 263 of the IT Act, 1961. The case involved a public charitable trust where the author of the trust was also a Managing Director of a company. The trust had debits in its accounts with the bank, including an amount appropriated as margin for a letter of Guarantee issued by the bank and a sum given as a loan to the company. The Income Tax Officer (ITO) found that the trust's income was only from bank interest and had not been applied for charitable purposes, leading to a non-eligibility for exemption under section 11 and the applicability of section 13(1)(c). The assessment was completed with a statement of 'No Assessment' for the relevant year.2. Upon review, the Commissioner of Income Tax (CIT) considered the assessment to be erroneous and prejudicial to the Revenue's interests due to non-compliance with the conditions of section 13(1)(c). The CIT directed the ITO to tax the amount advanced by the trust to the company. In the appeal, it was contended that the provisions of section 13(1)(c) could not be applied as the authors of the trust were shareholders of the company in a representative capacity, not falling within the definition of persons in section 13(3). Additionally, it was argued that section 13 only provided for taxing the income of the trust, not the corpus invested.3. The Tribunal held that the assessee was entitled to succeed in the appeal. It was noted that section 13 states that only section 11 shall not apply to exclude any part of the trust's income applied for the benefit of a person referred to in section 13(3). In this case, it was acknowledged that the corpus of the trust was advanced to the company for the benefit of the author, not the income of the trust. Even if the trust was denied exemption under section 11, it did not warrant taxing the corpus itself. The order of the Commissioner was deemed beyond the scope of section 13 and was canceled by the Tribunal, allowing the appeal.4. The Tribunal's decision clarified that while the trust's income might lose exemption under section 11 for not complying with the provisions, taxing the corpus itself, advanced for the author's benefit, was not justified under the law. The judgment emphasized the distinction between the trust's income and the corpus, highlighting that the provisions of section 13 did not extend to taxing the corpus of the trust.