2026 (2) TMI 1058 - AT - Income Tax

Diversion of income under Section 13 denies trust exemption while reconciliation of contractual receipts restored for tax purposes.

Reconciliation of contractual receipts shown net of GST against Form 26AS was accepted, leading to deletion of an addition for short-declared receipts and ... Denial of deduction / benefit u/s 11(1) - advance given to Trustee as violation of Section 13(1)(c) and 13(1)(d) - short declaration of contractual receipts - Difference between the receipts shown in the income and expenditure account and income received as per the TDS Certificate issued u/s 194C - As submitted that the difference is because of the fact that the turnover is shown without including the GST amount - for interest payment AO found that the trustee of the trust has received loan HELD THAT:- Trust has not received any donations as per the record before us nor undertaken any act of general public utility or charitable in nature. Obtaining contract and executing the contract cannot be treated as a general public utility or charitable in nature, rather it can be treated as ‘business of contracts’. The assessee has received contract payments as well as TDS deducted u/s 194C of the Act leading credence to the fact that the assessee is in the work of executing contracts. Preservation of watersheds environment can be treated as general public utility, but any entity obtaining a contract for water works, drainage, or any other similar work cannot be treated as charitable work. The assessee-trust has obtained contract and executed the contract obtained from Govt. of Gujarat which is a business venture like any other contractor. Amounts as received and paid on a running account basis from the person specified u/s13(1) of the Act. Thus, the activities of the trust give no credence to the objects reckoned and are not in the nature of activities allowed u/s 2(15) of the Act. Though the assessee is claiming that the trust had carried out working of supplying water through pipelines and making pumping stations, it is found that the pipeline work is indeed a contract work obtained from Govt. of Gujarat. The supplying water through pipelines and making pumping station is not the charitable activity of the trust but performed as a work contract obtained from Govt. of Gujarat in the capacity of a contractor. The main income of the Trust is contract income received from Govt. of Gujarat. There is no work of charity involving carrying out the work contract obtained from the Govt. after tendering for the same. This clearly shows that the activity undertaken by the assessee-trust is not an Incidental Business, the profits of which can be exempt, whereas in this case the receipts are from civil contracts that cannot be exempt as the business is not incidental to the attainment of the trust's objectives and no separate books of account are maintained. The civil contract activity is not incidental to the main charitable objective but is instead a primary profit-making motive, the exemption cannot be accorded. A trustee can receive compensation only if it represents reasonable remuneration for services rendered, rather than profit-taking. Using trust funds for the personal benefit of a trustee is strictly prohibited and shall lead to the loss of tax exemptions u/s 11 and 12, with income taxed at the Maximum Marginal Rate. Section 13(3) prohibits directing income / property to specified persons, including trustees, founders, or managers. Funds used for the benefit of a trustee are to be taxed at the maximum marginal rate. Issues: (i) Whether the addition of Rs. 2,19,43,348/- made on account of short declaration of contractual receipts (difference between books and Form 26AS) was correctly deleted; (ii) Whether the interest free advance of Rs. 9,00,000/- to a trustee invoked Sections 13(1)(c) and 13(1)(d) leading to denial of exemption under Section 11(1).Issue (i): Whether the difference between receipts shown in books and receipts as per Form 26AS justified an addition.Analysis: The difference was reconciled on account of turnover being shown net of GST and supporting reconciliation was placed on record and accepted by the appellate authority.Conclusion: The deletion of the addition of Rs. 2,19,43,348/- is upheld in favour of the assessee.Issue (ii): Whether the interest free advance to a trustee amounted to diversion or application of income in favour of a specified person under Sections 13(1)(c) and 13(1)(d), thereby disentitling the trust from exemption under Section 11(1).Analysis: The trust carried out contract work of a commercial nature as principal activity and received running account receipts from persons specified under Section 13; the trustee received interest free advances which were not shown as reasonable remuneration for services and were treated as benefiting a specified person as contemplated by Section 13. The appellate authority's acceptance of records and finding on the nature of activities and trustee transactions were relied upon to determine applicability of Section 13.Conclusion: The invocation of Sections 13(1)(c) and 13(1)(d) in respect of the interest free advance of Rs. 9,00,000/- is upheld against the assessee and the denial of exemption under Section 11(1) is sustained to that extent (in favour of the Revenue).Final Conclusion: The appeals are disposed of by upholding the appellate authority's reconciliation based deletion of the contractual receipts addition and by confirming the application of Section 13 to the trustee advance, resulting in a mixed outcome with parts allowed for the assessee and parts upheld for the Revenue.Ratio Decidendi: Contract receipts from work contracts not incidental to charitable objects do not attract exemption under Section 11, and transfers or advances conferring benefit on specified persons fall within Section 13 and disentitle the trust to exemption.