CIT Vs CMR Jnanadhara Trust (Karnataka High Court)
Sec. 13(1)(c) Not Attracted Merely Because Trust Paid Related Concerns Higher Profits – Consistency Principle Applied: Karnataka HC
The assessee-trust, registered u/s 12A, claimed exemption u/s 11. During scrutiny u/s 143(3), the AO held that payments made by the trust to certain related concerns in which trustees had substantial interest were excessive and unreasonable. The AO invoked Sec. 13(1)(c) r.w.s. 13(3) and denied exemption on the ground that the payments amounted to diversion of income to specified persons.
On appeal, CIT(A) allowed the assessee’s claim by following earlier Tribunal decisions involving identical transactions. The ITAT also dismissed the Revenue’s appeal noting that for earlier years the AO himself had accepted similar payments without invoking Sec. 13(1)(c) and there was no change in facts or law.
Before the High Court, the Revenue argued that the related entities were controlled by trustees and had earned abnormal profit margins (up to 85%), indicating diversion of trust funds. The assessee contended that the entities carried on genuine business activities and higher profit margin alone cannot establish diversion of income.
The Karnataka High Court held that Sec. 13(1)(c) is attracted only when income of the trust is applied for the benefit of specified persons. Mere transactions with concerns in which trustees have interest or existence of high profit margins cannot automatically lead to denial of exemption unless there is material to show diversion of funds or excessive payments.
Further, since in earlier assessment years the AO had accepted similar payments and there was no change in facts or law, the principle of consistency required the Department to maintain the same view. Accordingly, the Tribunal’s order was upheld and the Revenue’s appeals were dismissed as no substantial question of law arose.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
Heard Sri.Aravind V.Chavan, learned Senior Standing counsel for the appellants and Sri. A. Shankar, learned Senior counsel for Sri. Narendra Kumar Jayantilal Jain, learned counsel for the respondent.
