The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has held that exemption under section 11 is allowable when there is no violation of section 13(1)(c) of the Income Tax Act since the civil contract awarded to a firm in which managing trustee of the trust is the proprietor.
Sri Vekkaliamman v. Educational And Charitable Trust, the assessee is a registered public charitable trust and is running an educational institution. The assessee trust is registered u/s. 12A of the Income-tax Act, 1961 and claimed exemption u/s. 11 of the Act, towards income derived from property held under the ‘Trust’.
The assessee has filed its return of income for the assessment year 2010-11 on 18.10.2010, declaring Nil total income after claiming exemption u/s. 11 of the Act. The AO noticed that there is a violation referred to u/s. 13(1)(c) of the Act, in so far as, a civil contract awarded to Shri Vekkaliamman Builders and Promoters, in which the managing trustee of the trust is the proprietor.
The AO further noted that the appellant trust has awarded a civil contract to the related party without following due procedure and opined that the trustee of the trust got benefit directly from the diversion of trust funds, through a civil contract and thus, it amounts to a violation u/s. 13(1)(c) of the Act.
The AO rejected the exemption claimed under section 11 of the Act and computed income from property held under trust as a normal business. On appeal, the CIT(A) held that the appellant did not violate the provisions of section 13(1)(c) of the Act and is entitled to exemption u/s. 11 of the Act.
The AO held that the civil contract awarded to a firm in which the managing trustee of the trust was the proprietor, has derived direct benefit by way of payment which violates provisions of section 13(1)(c) of the Act. According to the AO, the due procedure was not followed while awarding the tender and also the firm has earned substantial profit which is tantamount to direct benefit as contemplated u/s. 13(1)(c) of the Act and thus, rejected exemption claimed u/s. 11 of the Act.
A Coram comprising of Shri V Durga Rao, Judicial Member and Shri G Manjunatha, Accountant Member observed that civil contract has been included in the definition of services as per GST laws and also as per Erstwhile Service Tax laws. Therefore, a civil contract awarded to a firm in which the managing trustee of the trust is the proprietor is tantamount to services as defined u/s. 13(2)(c) of the Act.
Further viewed that Since payment made in under services rendered by the interested persons is not more than the consideration paid for relevant work, it cannot be held that there is a direct or indirect benefit to the interested persons as referred to under section 13(2) of the Income Tax Act and violation of provisions of section 13(1)(c) of the Act.
While dismissing the appeal of the revenue, the Tribunal upheld the findings of the CIT(A) and rejected the ground taken by the Revenue.
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