The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) held that an agreement for the transfer of operations and movable assets cannot be grounds to deny exemption under sections 11 and 12 of the Income Tax Act.
Adarsh Foundation Trust (assessee) is a trust that operates various charitable institutions including SAL Hospital and Medical Institute (SHMI) and Kesar SAL Medical College and Research Institute (KSMC). The assessee entered into agreement with SAL Care Pvt Ltd., to address the financial difficulties.
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The assessee trust in return received an amount of Rs. 1 crore or SCPL’s profit. Thus in assessment proceedings, the Assessing officer (AO) observed that the agreement resulted in undue benefits to the trust. Thus the AO held that the agreement violated the principles of charity. Therefore, the AO denied the exemptions under sections 11 and 12 of the Income Tax Act.
The assessee submitted a detailed explanation and favourable decisions of the Commissioner of Income Tax(appeals) [CIT(A)]. Therefore, the AO classified trust income as Association of Persons (AOP). However, the AO denied the exemptions under sections 11 and 12 of the Income Tax Act.
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Aggrieved by the order of the AO, the assessee filed an appeal before CIT(A). The CIT(A) allowed the assessee to appeal. The commissioner noted that the agreement’s objective was to secure trust interest and not to generate profits.
The Department filed an appeal against the order of the CIT(A). The counsel for revenue relied on the order of the AO.
On the other hand, the counsel for the assessee relied on the Judgement of the Bombay High Court in the case of Thana Electricity which held in favor of the assessee,and also the counsel relied on the assessee’s own case.
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The tribunal bench comprising Siddhartha Nautiyal (Judicial Member) and Annapurna Gupta (Accountant Member) observed that Judgement that the assessee was granted with exemption considering the nature of the agreement. The tribunal further observed that the agreement’s objective was to counter the losses incurred by the assessee but not derive profit. Therefore, the tribunal upheld the order of the CIT(A) which allowed the exemption under sections 11 and 12 of the Income Tax Act. Thereby the appeal of the revenue was dismissed.
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