Supreme Court confirms Kerala High Court decision upholding Income Tax Levy on Compensation for Relinquishing Trusteeship [Read Judgement]

The Division Bench of the Supreme Court of India confirmed the decision of the High Court of Kerala upholding the Income Tax levying on compensation for relinquishing Trusteeship. Because the consideration received for this relinquishment cannot be classified as a capital receipt for capital gains assessment.

The Carmel Educational Trust, Adoor was constituted by a registered trust deed dated 14.08.2001. It is engaged in running educational institutions imparting education in the subjects of Engineering and Management. The 12 trustees of the Trust belong to three closely related family groups, and their details are as follows:

Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here

 (1) Sri.Babu P. Thomas, his wife Smt.Gracy Babu and their two major sons.

 (2) Sri.Jose Thomas, his wife Smt.Reena Jose and their major son and daughter.

 (3) Sri.P.J.Paulose, his wife Smt.Lizzy Paulose and their two major daughters.

Due to difficulties in managing the College, and also due to the personal differences, the trustees decided to discontinue the business and entered into an agreement with the Believers Church on 10.03.2009, whereby, all the existing trustees resigned from their trusteeship and simultaneously, new trustees nominated by the Believers Church were inducted.

Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here

The agreement between the parties also provided for payment of Rs.37.5 crores to the erstwhile trustees for settling their liabilities as well as completing certain construction activities that had been commenced by them prior to the agreement. The agreement also provided for sale of 55.15 acres of land belonging to some of the erstwhile trustees for a consideration of Rs.12.50 crores.

A search under Section 132 of the Income Tax Act [hereinafter referred to as the “I.T. Act”] was conducted at the residence of Sri. Jose Thomas, Smt.Gracy Babu and Sri. P.J.Paulose on 04.03.2009 and certain documents were seized.

Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here

An unsigned draft agreement dated 23.02.2009 was found which indicated that the amount envisaged for settlement of liability was Rs.43.50 crores and that the value of the rubber estate extending to 55.15 acres of land was Rs.6.50 crores.

Certain other documents relating to fee collection from students in excess of what was fixed by the Government, and investment details of trustees etc. were also seized, but those particulars are not of any concern to us in these appeals.

Assessments were completed under Section 143(3) read with Section 153A for the assessment years 2003-04 to 2008-09 and under Section 143(3) for the assessment year 2009-10 in relation to the persons who were searched, namely, Gracy Babu, Jose Thomas and P.J. Paulose, who were the heads of the respective trustee families. No assessments in consequence to search were made in relation to other family members who were trustees by invoking provisions of Section 153C of the I.T. Act.

Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here

Placing reliance on the seized documents, the Assessing Authority found that the erstwhile trustees had in fact received approximately Rs.37.5 crores towards consideration for relinquishing their trusteeship but they had camouflaged these receipts under different heads by showing the receipt of Rs.14.55 crores towards reimbursement of amounts paid by assessees for clearing outstanding debts and liabilities of the Trust as on the date of the agreement, and also for completing certain ongoing constructions that had been undertaken by them. An amount of Rs.12.5 crores was shown as received by way of consideration for sale of approximately 56 acres of rubber plantation to the Believers Church.

The Income Tax Appellate Tribunal ( ITAT ) ruled that the amounts received by the assessees for relinquishing their trusteeship are considered capital receipts under the Income Tax Act. Additionally, since there is no statutory provision in the Act to determine the cost of acquisition for this asset, capital gains cannot be assessed.

Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here

Against which department filed the appeal before the Kerala High Court challenging the order passed by ITAT.

The Division Bench comprising Judges Dr. A.K. Jayasankaran Nambiar and Syam Kumar V.M ruled that, while overturning the ITAT's decision, the resignation or relinquishment by the assessees of their trusteeship in the Carmel Educational Trust, especially for a consideration, is not supported by this Court. The consideration received for this relinquishment cannot be classified as a capital receipt for capital gains assessment. Instead, it should be treated as individual income for the assessees and assessed under the appropriate income category.

Complete Supreme Court Judgment on GST from 2017 to 2024 with Free E-Book Access, Click here

Upon which the Petitioner, Jose Thomas filed a special leave petition in Supreme Court of India against the decision of the High Court of Kerala. Upon hearing the counsel, the Division Bench comprising Justice Sanjiv Khanna and Justice Sanjay Kumar ruled that “In the interest of justice, we are not inclined to interfere with the impugned judgment and, hence, the special leave petitions are dismissed”.

Pending applications, if any, shall also stand disposed of.

The Petitioner, Jose Thomas was represented by Mr. Anil D Nair, Sr. Adv. Mr. Jogy Scaria, AOR Mrs. Beena Victor, Adv. Mr. Vivek Guruprasad Ballekere, Adv. Mr. Keerthipriyan E, Adv. Ms. M Priya, Adv.

To Read the full text of the Judgement CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates