By TIOL News Service

CHENNAI, APRIL 20, 2018: THE ISSUE BEFORE THE TRIBUNAL IS - Whether exemption u/s 11 should not be refused to a registered trust, merely because it has received payments through its construction creditors. YES IS THE VERDICT.

Facts of the case:

The assessee is a registered trust, which was established to administer several educational institutions. During the relevant year, there was a survey u/s 133A in the premises of assessee, wherein it was found that assessee had paid certain amounts to interested persons u/s 13(3) and it was submitted that these payments were made to the daughters of the trustees. The AR submitted that there was no violation of Section 13 since the amounts were transferred and credited to the accounts of the trust on the same day. Referring to CBDT Circular No.387 dated July 06, 1984, the AR submitted that if at all there was violation of Section 13, the maximum marginal rate had to be applied only to that extent of income which was not eligible for exemption in view of violation of Section 13. The AO however, disregarding the submissions of assessee, denied exemption u/s 11 claimed by it. On appeal, the FAA confirmed the order of AO.

The Tribunal held that,

++ in the present case, the payment was said to be made to Ms. Savitha, Ms. Swathika, Senthur Steel Works, Nivetha Marketing, etc. The question therefore arises for consideration is whether these persons are related to the trustee or founder of the institution. Admittedly, Shri Kandasamy and his wife Smt. K. Malarvizhi are the trustees and founder. The Department claims that certain payments were made to construction creditors of the trust. The construction creditors of the trust cannot be construed to be interested persons u/s 13(3). In case the payment was made to construction contractor and the construction was carried on at market value, even though the contractor was a related person to trustee or founder, this Tribunal is of the considered opinion that there cannot be any violation of Section 13(1). It is not the case of Revenue that the payment made to contractor was excessive and above market rate. Ms. Savitha and Ms. Swatika appear to be the daughters of the trustees. From the material available on record, it appears that the amounts were transferred to Ms. Savitha and Ms. Swatika and retransferred to the assessee-trust/ educational institution on the same day. Therefore, it is obvious that the funds of the trust were not applied for the benefit of close relatives of the trustee or founder of the trust. Since the amounts were transferred to the trust as disclosed in the accounts, the FAA is not justified in disallowing the claim of assessee.

(See 2018-TIOL-581-ITAT-MAD)