2024 (12) TMI 1390 - AT - Income Tax

Charitable trust exemption under section 11 upheld despite revenue's section 13 violation claims and Form 10B errors

ITAT Ahmedabad upheld CIT(A)'s decision allowing exemption under section 11 to a charitable trust. Revenue contended violation of section 13 due to undue ... Denial of exemption u/s 11 - violation of section 13 - erroneous presentation of Form No. 10B report - agreement constituted a violation of the charitable trust's purpose and allowed for undue benefits to SCPL, a related party - HELD THAT:- As decided in assessee’s own case for assessment year 2016-17 [2022 (8) TMI 733 - ITAT AHMEDABAD] Sec.13(1)(c)(ii) can apply only if any part of the charitable income of the trust has been used or applied for the benefits of the said persons during the previous year. Since no portion of the income of the assessee has been applied for said person, therefore, the case of the assessee falls outside the scope of this section. Trust is in receipt of income by way of management charges from SCPL and also all of its liabilities have been taken over by the same therefore there is a fact that there is no undue benefits of the use of trust property have been taken by any other persons. There is no diversion of income of the trust as per Explanation of Sec. 13(2)(d) and 13(2)(g) of the Act as the trust has been benefitted greatly and its deficit of trust duly reduced to a great extent. Some erroneous presentation of Form No. 10B report does not disentitle the trust for claiming exemption u/s. 11 of the Act. Similarly, the amount of advance in favour of SCPL appearing in the balance sheet was not advance but the reimbursement of the expenses. In the light of the aforesaid facts and circumstances, we are of the considered opinion that the CIT(A) has analyzed the facts correctly and given a judicious finding which does not call for any interference from outside - Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions in this judgment are:Whether the Ld. CIT(A) erred in law and on facts by allowing the exemption under Section 11 of the Income Tax Act and directing the re-computation of income.Whether the Ld. CIT(A) should have upheld the Assessing Officer's (AO) order, which found that the assessee violated the provisions of sections 13(1)(c), 13(2)(b), 13(2)(d), 13(2)(g), and 13(3)(e) of the Income Tax Act.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Exemption under Section 11Relevant Legal Framework and Precedents: Section 11 of the Income Tax Act provides tax exemptions for income derived from property held under trust for charitable or religious purposes. The exemption is contingent upon compliance with specific conditions, including the non-application of income for the benefit of related parties as outlined in Section 13.Court's Interpretation and Reasoning: The court considered the previous decisions favoring the assessee, including those from the CIT(A) and ITAT for earlier assessment years. The court noted that the agreement with SCPL was intended to secure the trust's interests and not to generate profits from asset transfers.Key Evidence and Findings: The court reviewed the agreement between the assessee and SCPL, which included management fees and profit-sharing arrangements, and found that the agreement was structured to ensure the continued charitable operations of the trust.Application of Law to Facts: The court applied the principles from prior rulings, emphasizing that the agreement did not violate Section 13 as the income was not used for the benefit of related parties.Treatment of Competing Arguments: The Revenue argued that the agreement violated Section 13 provisions, but the court found that the CIT(A) and ITAT had consistently ruled in favor of the assessee, demonstrating compliance with the charitable objectives.Conclusions: The court upheld the CIT(A)'s decision to allow the exemption under Section 11, affirming that the trust's activities aligned with its charitable objectives.Issue 2: Violation of Section 13 ProvisionsRelevant Legal Framework and Precedents: Section 13 of the Income Tax Act restricts the use of income or property of a charitable trust for the benefit of related parties, defined under Section 13(3).Court's Interpretation and Reasoning: The court examined whether the agreement with SCPL resulted in undue benefits to related parties, as alleged by the AO. It relied on previous decisions that found no such violations.Key Evidence and Findings: The court noted that SCPL was incorporated shortly before the agreement, raising concerns about its qualifications. However, it found that the agreement's terms were consistent with market practices and aimed at sustaining the trust's charitable operations.Application of Law to Facts: The court applied Section 13's provisions, concluding that the agreement did not result in the application of income for the benefit of related parties.Treatment of Competing Arguments: The Revenue's contention that the agreement violated Section 13 was countered by the court's reliance on prior favorable rulings for the assessee, which demonstrated compliance with the Act's provisions.Conclusions: The court concluded that the trust did not violate Section 13 provisions, and its income should remain exempt under Sections 11 and 12.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: 'The object of the transfer agreement with SCPL was to ensure that the hospital is managed professionally, and in doing so, the purpose of charity is not violated as a reputed hospital of such huge size requires professional handling.'Core Principles Established: The court reaffirmed that agreements aimed at securing the trust's interests and ensuring continued charitable operations do not inherently violate Section 13, provided no undue benefits are conferred on related parties.Final Determinations on Each Issue: The court dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the exemption under Section 11 and concluding that the trust did not violate Section 13 provisions.