Wednesday, May 29, 2013

Section 13 can’t be invoked to deny exemption if siphoning off of funds by trustee can’t be proved

In absence of material on record showing that difference in cost of construction of building disclosed by assessee-society and estimation made by DVO resulted in siphoning off of money by managing trustee, AO was not justified in denying exemption of income to assessee by invoking provisions of section 13(1)(c)

In the instant case, the assessee-society was running an educational institution. During the assessment proceedings, the AO took a view that there was huge difference in the amount claimed to have been spent by the assessee on construction of building and estimation made by the DVO and it could be concluded that the money was being siphoned out of the society to benefit the managing trustee. The AO held that there was clear violation of section 13(1)(c)(ii) and assessee was not entitled to exemption under sections 11 and 12. The CIT (A) confirmed the order of AO. Aggrieved assessee filed instant appeal.

The Tribunal held in favour of assessee as under:

1) If the person in the prohibited category renders services and in lieu thereof a benefit is provided then the case doesn’t fall in clause (ii) of section 13(1)(c);

2) A benefit would be said to have been given to the persons of prohibited category, if they in return do nothing but only enjoy the fruits of the trust/society and take away the funds/income of the society for their personal benefit or for discharging personal obligations. There was no such situation in the case under consideration;

3) Section 13 carves out an exception to the general exemption granted under sections 11 and 12. The onus lies on the revenue to bring on record cogent material/evidence to establish that the trust/charitable institution is hit by provisions of Section 13;

4) The AO had made out the case on presumption, as he had neither brought on record any evidence nor was able to point out modus operandi, and how was the managing trustee directly or indirectly benefited out of the construction cost of building of the society;

5) Thus, it was held that the AO had erroneously invoked section 13 and withdrawn benefit of section 11, read with section 12. Consequently, the appeal filed by the assessee was allowed - Amol Chand Varshney Sewa Sansthan v. ACIT [2013] 33 taxmann.com 366 (Agra - Trib.)

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