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2022 (2) TMI 532 - HC - Income TaxExemptions u/s 11 - assessee is a trust registered under Section 12AA - Purchases made by the assessee from one Pawansut Trading Company Pvt. Ltd. which was a specified person under Section 13(3) - As per AO substantial purchases made from a related party had to be at arm's length - ITAT allowed deduction - HELD THAT:- We do not see any error in the view of the Commissioner of Appeals and the Tribunal. As is well known Section 11 of the Act pertains to income from property held for charitable and religious purposes. Section 13 on the other hand pertains to cases where Section 11 would have no application. Sub-section (1) of Section 13 provides that nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof under specified circumstances. Sub-section (2) of Section 13 provides that without prejudice to the generality of the provisions of clause (c) and clause (d) of sub-section (1), the income or the property of the trust or institution or any part thereof shall for the purposes of that clause would be deemed to have been used or applied for the benefit of a person referred to in sub-section (3), as provided in clauses (a) to (h) of sub-section (2). It is not in dispute that the assessee and the M/s Pawansut Trading Company Pvt. Ltd. are entities covered under sub-section (3) of Section 13. However the question is merely because such sale and purchase transaction took place between two such persons, clause (g) of sub-section (2) of Section 13 would automatically kick in? The answer has to be in the negative. Clause (g) would apply where any income or property of the trust or institution is 'diverted' during the previous year in favour of any person referred to in sub-section (3). The crux of this provision is diversion of income. Mere transaction of sale and purchase between two related persons would not be covered under the expression 'diversion' of income. Diversion of income would arise when transaction is not at arm's length and the sale or purchase price is artificially inflated so as to cause undue advantage to other person and divert the income. In the present case, the assessing officer never examined whether the transactions between the assessee and the said company were at arm's length. He merely referred to statutory provisions and without further discussion came to the conclusion that disallowance had to be made. CIT (Appeals) not only criticised this approach of the assessing officer but also independently examined whether the transaction was at arm's length. It was found that the rate paid to the related person was same as paid to the unrelated party. - Decided against revenue.
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