TMI Blog2005 (8) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... inafter referred to as "the Act"): "1. Whether in law and on the facts of the case, the Income-tax Appellate Tribunal was correct in holding that the assessee trust was not hit by the provisions of sections 13(1)(c) and 13(2)(b) read with sections 13(2) and 13(3) of the Income-tax Act, 1961?" The reference relates to the assessment years 1976-77 to 1978-79. The brief facts of the case are as follows: The assessee/opposite party (hereinafter referred to as "the assessee") is a trust. It was set up on October 27, 1941, by M/s. J.K. Cotton Spinning and Weaving Mills Ltd., inter alia, with the following objects: "2.(b) To erect, establish, equip, furnish, fit, maintain and repair on the said two plots of land and any other land that may hereinafter be acquired by the trustees on behalf of the trust. (i) Residential quarters, chawls or buildings for the workmen in the town of Kanpur and the surrounding areas and extensions and for their respective families and dependents and for such other skilled and unskilled workmen, craftsmen, traders, merchants, technical or professional men whom the trustees may permit to reside or work in the said two plots provided that the benefit i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lease of the second plot in their favour without charging any lease rent from them and that J.K. Synthetics Ltd., was a concern, in which the members of the Singhania family had considerable interest, the said company being one of the numerous companies, which had come to be called popularly as companies of J.K. Group. In the opinion of the Commissioner of Income-tax (Appeals), the provisions of section 13(1)(c) read with sections 13(2) and 13(3) hit the assessee's claim for exemption. With regard to the application of section 13(1)(c), the observations of the learned Commissioner of Income-tax (Appeals) were as below: "The failure of the trust is more glaring in its agreement with M/s. J.K. Synthetics Ltd. As per the agreement, the said company wanted to utilise the land for constructing suitable residential quarters and workmen's settlement. The plan and designs were to be approved by the appellant-trust. The trustees in their meeting held on November 12, 1966, considered it beneficial to allow the construction and installation to be made by the said company as it was being built to provide for the achievement of objects of the trust. The said company, however, proceeded to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal and it was contended before it that the trust was a public charitable trust as had been held by this court in the assessee's case for numerous years, that the income of the said trust consisting of rent and interest accrues and arises exclusively from proper ties held under trust and that it is not the case of the Department that the said income of the trust is not being used for the purposes of the trust. Therefore, it is not open to the Department to refuse exemption to the assessee-trust, except when it can be shown that some of the provisions of sections 12 and 13 have been violated. The grievance of the Revenue that the trustees were not implementing the real object of the trust will not entitle the income-tax authorities to deny the exemption to the trust and that the remedy against the trustees, if there was a genuine breach of trust, itself, lay somewhere else. It was not for the Income-tax Officer to take note of such alleged breaches of the trust objects and hold on that basis that the trust was not a charitable trust. As to the violation of section 13(1)(c), the assessee contended that the said clause provided for failure of the exemption to a public charitable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on this basis, we hold that exemption to the income of the trust cannot be denied under section 11 of the above ground." Referring to the plea based on the violation of the provisions of section 13(1)(c), the Tribunal observed as follows: "As would be clear from the bare provisions of the sub-section, to deny the exemption to the trust in terms of section 13(1)(c), it has to be shown that either the trust income or the trust property was used wholly or partly for the benefit of a person mentioned in the prohibited category as per the provisions of sub-section (3) of section 13. Companies of J.K. Organisation is a very loose term, and by holding that the trust properties are being used for the benefit of the members of J.K. Organisation, it would not be correct to deny benefit of exemption to the assessee in terms of section 13(1)(c). The Department has to be specific about the name of the beneficiary and has thereafter to place facts on record to establish that such a person falls in the category of prohibited persons. No such attempt has been made by the departmental authorities. One has not even cared to find out the number of shares of J.K. Synthetics, which might be held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 12 of the Act to any part of the income of the property of the trust or institution is used or applied directly or indirectly for the benefit of any person referred to in sub-section (3) of section 13. Clause (b) of subsection (2) of section 13 provides a deeming fiction regarding application of income for the benefit of specified person. It provides that if any land, building or other property of the trust or institution is, or continues to be made available for use of any person referred to in sub-section (3), for any period during the previous year without charging adequate rent or other compensation be deemed to have been used for the persons referred to in sub-section (3). The persons referred to in clause (c) of sub-section (1) and sub-section (2) are mentioned in sub-section (3). For ready reference clauses (a) and (c) of sub-section (1) of section 13, clause (b) of sub-section (2) of section 13, clauses (a), (b), (c), (cc) (d), and (e) of sub-section (3) of section 13 and clauses (i) and (ii) of Explanation 3 to section 13 of the Act are reproduced below: "13.(1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for the benefit of a person referred to in sub-section (3),- (a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3), for any period during the previous year without either adequate security or adequate interest or both ; (b) if any land, building or other property of the trust or institution is, or continues to be, made available for the use of any person referred to in sub-section (3), for any period during the previous year without charging adequate rent or other compensation; (3) The persons referred to in clause (c) of sub-section (1) and subsection (2) are the following, namely:- (a) the author of the trust or the founder of the institution; (b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds five thousand rupees; (c) where such author, founder or person is a Hindu undivided family, a member of the family; (cc) any trustee of the trust or manager (by whatever name called) of the institution; (d) any relative of any such author, founder, p ..... 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