1991 (2) TMI 181 - AT - Income Tax

Summary

Issues Involved:
1. Denial of exemption under Section 11 and Section 2(15) of the Income-tax Act.
2. Alleged diversion of funds to benefit the children of the settlor of the trust.
3. Application of Section 13(3) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11 and Section 2(15) of the Income-tax Act:
The appellant trust claimed benefits under Section 11 and Section 2(15) of the Income-tax Act, which were denied by the assessing officer on the grounds that the trust's funds were utilized to benefit the children of the settlor. The trust's balance sheet as of 31-3-1985 showed a payment under 'Advance Rent' of Rs. 2,38,500. The trust had taken a building on long lease from M/s. Atul Trust for Rs. 1,200 per month with a deposit of Rs. 2,60,000, adjustable monthly against the rental. The premises were then given free of rent to Cambridge School of Society to run a school.

2. Alleged Diversion of Funds to Benefit the Children of the Settlor:
The assessing officer objected to the transaction, claiming it was colorable and that the funds were made available to a private family trust, thus benefiting its beneficiaries. The appellant trust argued that the registration and recognition granted under Section 12A(e) and exemption under Section 80G were still effective. The trust contended that giving the premises free of rent to another charitable trust was akin to a donation, which is considered an application of income. The trust further argued that the transaction was in furtherance of its objectives and should be considered charitable in nature.

3. Application of Section 13(3) of the Income-tax Act:
The primary objection of the revenue was based on the close relationship between the trustees of the private family trust, the appellant trust, and the Cambridge School. The revenue alleged that the transaction was colorable and caught by the mischief of Section 13(3) of the Act. The appellant trust argued that transactions between trustees of charitable and private trusts are not restricted as long as they are in furtherance of the charitable objectives and do not provide undue benefits. The appellant provided evidence that the rental and deposit paid were lower than those paid by other tenants, indicating that the transaction was not excessive.

Examination of Section 13 Provisions:
The judgment examined the provisions of Section 13 to determine if the trust's actions were restricted. Section 13(1)(a) states that income should benefit the public, and Section 13(1)(d) specifies that funds should not be invested or deposited in modes other than those specified in Section 11(5). Section 13(2) outlines circumstances under which income or property is deemed to benefit specified persons, including lending without adequate security, providing property without adequate rent, and paying excessive salaries.

Conclusion:
The judgment concluded that the trust's actions did not violate the provisions of Section 13. The security deposit was not considered an investment or deposit for profit but a condition for obtaining a lease. The rental and deposit were found to be lower than those paid by other tenants, indicating that the transaction was not excessive. The trust's actions were in furtherance of its charitable objectives, and the benefit to the public was maintained. Therefore, the denial of exemption under Sections 11 and 12 was deemed improper.

Result:
The appeal was allowed, and the assessing officer was directed to grant the exemption under Section 11 to the appellant trust.