Application of trust property not treated as private benefit where contemporaneous records show beneficial ownership and exclusive trust use.

Whether properties purchased in trustees' names from trust funds constituted application of trust property for trustees' personal benefit was decided by applying the test that disqualification requires actual enjoyment, diversion or personal advantage to specified persons; contemporaneous transfers of school assets to the trust, payment from those trust funds, recording of the land in trust accounts, trust-led construction and statutory recognition, and title records established beneficial ownership and exclusive enjoyment by the trust, and therefore no personal benefit to trustees was found and the trust exemption remains available.

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Issues: Whether properties purchased in the names of the trustees out of trust funds attracted Section 13(1)(c) read with clause (g) of Section 13(2) of the Income-tax Act, 1961 thereby disentitling the trust to exemption under Section 11 of the Income-tax Act, 1961 for AY 2016-17.

Analysis: The Tribunal examined whether there was use or application of income or property of the trust for the direct or indirect benefit of persons specified in Section 13(3). The Court applied the legal test that Section 13(1)(c) is attracted only where a trustee or specified person derives enjoyment, diversion or personal advantage from the application of trust income or property. The factual matrix considered includes: (i) transfer by the individual trustees of their proprietary schools and assets (including cash/bank balances) to the trust effective 01.04.2015; (ii) payment for the impugned land out of those transferred trust funds; (iii) recording of the land as trust asset in contemporaneous audited financials and absence of the land in individual trustees' balance sheets; (iv) construction and operation of the school by the trust and statutory recognitions/affiliations in the trust's name; (v) registered rectification deed (11.04.2023), mutation and encumbrance records confirming trust title; and (vi) registered will and affidavit executed by trustees. On these facts the Tribunal found no factual application of income or property for the personal benefit of the trustees. The Tribunal also relied on precedent distinguishing mere registration in trustees' names from actual benefit to the trustees where contemporaneous evidence shows beneficial ownership and exclusive enjoyment by the trust.

Conclusion: The Tribunal concludes that Section 13(1)(c) read with clause (g) of Section 13(2) is not attracted on the facts; the trust retained beneficial ownership and no benefit accrued to the trustees, and therefore the exemption under Section 11 of the Income-tax Act, 1961 cannot be denied. The appeal filed by the Revenue is dismissed.

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