No Violation of sec. 13(1)(c) in respect of Civil Contract awarded to a Firm in which Managing Trustee of Trust was Proprietor

Deputy Director of Income- Tax Vs Vekkaliamman Educational And Charitable Trust (ITAT Chennai)

Conclusion: Exemption under section 11 was allowable and there was no violation of section 13(1)(c) in case the civil contract awarded to a firm in which managing trustee of the trust was the proprietor as the civil contract had been included in the definition of services as per GST laws and also as per Erstwhile Service Tax laws and payment made in under services rendered by the interested persons was not more than the consideration paid for relevant work.

Held: Assessee was a registered public charitable trust and was running an educational institution. It was registered u/s. 12A of the Income-tax Act, 1961 and claimed exemption u/s. 11 towards income derived from property held under the ‘Trust’. Assessee had filed its return of income for the assessment year 2010-11 on 18.10.2010, declaring Nil total income after claiming exemption u/s. 11.  AO noticed that there was a violation referred to u/s. 13(1)(c), in so far as, a civil contract awarded to Shri Vekkaliamman Builders and Promoters, in which the managing trustee of the trust was the proprietor. AO further noted that assessee trust had awarded a civil contract to the related party without following due procedure and opined that the trustee of the trust got benefit directly from the diversion of trust funds, through a civil contract and thus, it amounted to a violation u/s. 13(1)(c). AO rejected the exemption claimed under section 11 and computed income from property held under trust as a normal business.  On appeal, CIT(A) held that the appellant did not violate the provisions of section 13(1)(c) and was entitled to exemption u/s. 11. AO held that the civil contract awarded to a firm in which the managing trustee of the trust was the proprietor, had derived direct benefit by way of payment which violated provisions of section 13(1)(c).  According to AO, the due procedure was not followed while awarding the tender and also the firm had earned substantial profit which was tantamount to direct benefit as contemplated u/s. 13(1)(c) and thus, rejected exemption claimed u/s. 11. It was held that the civil contract had been included in the definition of services as per GST laws and also as per Erstwhile Service Tax laws.  Therefore, a civil contract awarded to a firm in which the managing trustee of the trust was the proprietor was tantamount to services as defined u/s. 13(2)(c) of the Act. Further since payment made in under services rendered by the interested persons was not more than the consideration paid for relevant work, it could not be held that there was a direct or indirect benefit to the interested persons as referred to under section 13(2) of the Income Tax  Act and violation of provisions of section 13(1)(c).

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal filed by the Revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-VII, Chennai, dated 27.12.2013 and pertains to assessment year 2010-11.

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