INCOME TAX ACT, 1961

Section 11 read with sections 13(1)(c) and 13(3)

Charitable trust - Bar to exemption under section 11 - Remuneration to specified person(s) under section 13(1)(c) -

Certain payments have been made to Smt. Malvika Rai and Smt. Aarti Rai, who falls within the category of a specified person within the meaning of section 13(3). AO inferred that these payments were in violation of section 13(1)(c) read with section 13(3) and on this account the assessee was liable to lose its exemption. He further noted that the name(s) of these two persons do not appear as employee of the Banyan Tree School. Accordingly, he disallowed the certain payments made to both the persons. Apart from the allegation of remuneration paid to Mrs. Malvika Rai in violation of section 13(1)(c), the AO had also made an adverse inference on account of payment of remuneration and scholarship to Ms. Aarti Rai which again was made without giving any proper opportunity of being heard. Assessee's explanation was that the trust had granted scholarship of Rs. 13.36 lakhs during the relevant previous year which was on account of payment of fees for doing higher education from London School of Economics and study charges of Smt. Aarti Rai in London. The AO held that the details and supportive documents of such expenditure had not been filed. He also observed that the appellant trust had failed to prove any evidence that it had granted similar scholarship to other students of weaker section or offered any other students belonging to EWS. Activities of assessee were held to be not charitable within the meaning of section 2(15) from the nature of actual activities, accounts and transactions and as such the assessee was thus, not entitled for exemption under sections 11 and 12. He also noted that perhaps, the students who have graduated during this period have not claimed any refund. Therefore, he had worked out understatement of income of Rs. 34,41,98. Further, AO had also made ad hoc disallowance of Rs. 7,09,468 being maintenance and fuel expenses on car amounting to Rs. 14,18,936 on the ground that log books were not maintained by the assessee. CIT(A) confirmed the order of AO. Held: The AO had failed to take note of the fact that the appellant had applied 92.83% of its income for charitable purposes during the year under consideration. Even assuming there was a violation of section 13, then entire exemption under section 11 and 12 cannot be forfeited and the exemption should have been denied only to the extent of expenditure/income amount of alleged violation under section 13. Assessee was a trust incorporated with the pre-dominant object of imparting education since imparting of education is a charitable activity within the meaning and scope of section 2(15). Looking to its activities, it was duly granted registration under section 12A, way back on 25-6-2002. The onus was on the Revenue to prove that payment made to the person specified in section 13(3) was excessive or unreasonable by placing material on record and the services rendered were not in commensurate with the payments made. In so far as the payment of remuneration of Rs. 16,20,000 per annum made to Mrs. Malvika Rai was not excessive and does not violate the provision of section 13(1)(c) and accordingly the entire payment made to her was treated as application of income. To the extent of Rs. 13.36 lakhs towards the scholarship payment for Ms. Aarti Rai, the same cannot be treated as application of income, and therefore, AO and CIT(A) were justified in disallowing the payment as non application of income. Only to the extent of expenditure incurred on scholarship of Rs. 13.36 lakhs for which there was a violation under section 13, same should alone be disallowed and entire exemption under section 11 cannot be denied. Where the trust contravenes the provisions of section 13(1)(c) or (d) the maximum marginal rate will apply only to that part of the income which had forfeited exemption. Accordingly, the AO was thus, not justified in completing denying exemption under section 11.

Relied:Pr. CIT v. Gulmohar Green Golf & Country Club Ltd. (2016) 392 ITR 601 (Guj-HC.) : 2016 TaxPub(DT) 5194 (Guj-HC), CIT v. Mantra Tantra Yantra Vigyan (2008) 300 ITR 140 (Raj-HC) : 2008 TaxPub(DT) 1481 (Raj-HC), Dalmia Cement (Bharat) Ltd. v. CIT (2013) 357 ITR 419 (Del-HC) : 2013 TaxPub(DT) 2461 (Del-HC), Bharat Hotels Ltd. v. Dy. CIT: (1995) 53 ITD 450 (Del-Trib) : 1995 TaxPub(DT) 1209 (Del-Trib), Kabsons Gas Equipment Ltd. v. Dy. CIT (2013) 25 Taxmann.com 172 (Hyd) : (2013) 53 SOT 196 (Hyd-Trib.) : 2013 TaxPub(DT) 1178 (Hyd-Trib), Landbase India Ltd. v. Dy. CIT ITA 4536/Del/2009 (Del-Trib.) : 2019 TaxPub(DT) 5899 (Del-Trib), CIT v. FR. Mullers Charitable Institutions (2014)363 ITR 30 (Karn-HC) : 2014 TaxPub(DT) 1568 (Karn-HC) and CIT v. Working Women's Forum (2014) 365 ITR 353 (Mad-HC) : 2014 TAxPub(DT) 2841 (Mad-HC).

REFERRED : Pariwar Seva Sansthan (2002) 254 ITR 268 (Del-HC) : 2002 TaxPub(DT) 380 (Del-HC), SRMMCTM Tiruppani Trust v. CIT: (1998) 230 ITR 637 (SC) : 1998 TaxPub(DT) 1159 (SC) (pg. 240-243 of case law PB) 18, St. Lawrence Educational Society (Regd). v. CIT (2011) 197 Taxman 504 (Del-HC) : 2011 TaxPub(DT) 903 (Del-HC) (pg. 244-247 of case law PB), Pinegrove International Charitable Trust v. UOI (2010) 327 ITR 73 (P&H) : 2010 TaxPub(DT) 1405 (P&H-HC), United Education Society v. Jt. CIT (019) 178 ITD 716 (Del-Trib) : 2019 TaxPub(DT) 4755 (Del-Trib), CIT v. Queen Educational Society (2009) 177 Taxman 326 (Uttara-HC) : 2009 TaxPub(DT) 173 (Uttara-HC), Queen's Educational Society v. CIT (2009) 372 ITR 699 (SC) : 2015 TaxPub(DT) 1436 (SC), Span Foundation v. ITO 2008-TIOL-108 : 2009 TaxPub(DT) 1010 (Del-HC) and CIT v. FR. Mullers Charitable Institutions (2014) 363 ITR 230 (Karn-HC.) : 2014 TaxPub(DT) 1568 (Karn-HC).

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