Case Law Details
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.
2. The brief facts of the case are that, the appellant is a registered public charitable trust and is running educational institution. The appellant trust is registered u/s. 12A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), and claimed exemption u/s. 11 of the Act, towards income derived from property held under the ‘Trust’. The appellant has filed its return of income for assessment year 2010-11 on 18.10.2010, declaring Nil total income after claiming exemption u/s. 11 of the Act. The case was taken up for scrutiny and during the course of assessment proceedings, the AO noticed that there is a violation referred to u/s. 13(1)(c) of the Act, in so far as, civil contract awarded to Shri Vekkaliamman Builders and Promoters, in which the managing trustee of the trust is proprietor. The AO further noted that the appellant trust has awarded civil contract to the related party without following due procedure. Further M/s. Vekkaliamman Builders and Promoters has earned substantial profit from contract receipts received from appellant trust. Therefore, the AO opined that the trustee of the trust got benefit directly by diversion of trust funds, through civil contract and thus, it amounts to violation u/s. 13(1)(c) of the Act. Hence, rejected exemption claimed u/s. 11 of the Act and computed income from property held under trust as a normal business. The assessee carried the matter in appeal before Ld. CIT(A) and challenged rejection of exemption u/s. 11 of the Act on the issue of violation referred to u/s. 13(1)(c) of the Act, towards civil contract awarded to a firm, where managing trustee is proprietor. The ld. CIT(A), after considering relevant submissions held that the appellant did not violate the provisions of section 13(1)(c) of the Act and thus, is entitled to exemption u/s. 11 of the Act. Aggrieved by the Ld. CIT(A) order, the Revenue is in appeal before the Tribunal.
3. The Ld. DR, submitted that the Ld. CIT(A) has erred in holding that there is no violation as referred to u/s. 13(1)(c) of the Act, in respect of payment made to a firm in which managing trustee is proprietor, because the Hon’ble High Court of Madras in TCA No. 326 of 2015, dated 24.08.2021, while dealing with the issue in para 12 of their order specifically discussed the issue and held that how to interpret sub-section (2) of section 13, which is a deeming provision and also to test as to whether construction contract which has been granted to the firm in which the managing trustee was a partner would tantamount to service as contemplated u/s. 13(2)(c) of the Act. The Ld. DR, further referring to para 13 of the Hon’ble High Court of Madras order, submitted that the Hon’ble High Court has given clear finding on violation committed by the trust u/s. 13(1)(c) r.w.s. 13(2) and section 13(3) of the Act, in respect of building contract awarded to a firm in which managing trustee was a partner and the firm having earned profit, whether the assessee is entitled to exemption u/s. 11 of the Act or not. In this case, the AO has brought out clear facts to the effect that amount paid to a firm in which managing trustee was a partner has got benefitted by way of diversion of fund through civil contract, which violates provisions of section 13(1)(c) of the Act. But, the ld. CIT(A) without appreciating relevant facts simply held that there is no violation referred to u/s. 13(1)(c) of the Act.
4. The Ld. Counsel for the assessee, submitted that the assessee has followed due procedure while awarding the tender to a firm in which managing trustee of the trust is a proprietor. Further, payment made in pursuant to tender is continuing from earlier financial years, and in earlier financial years the matter reached to the Tribunal and the Tribunal, after considering relevant facts, rightly held that the assessee has followed due procedure while awarding tender to a firm in which managing trustee was a proprietor, and also the firm has not earned substantial profit to allege that there is diversion of fund. Since, the payment made in the impugned assessment year is continuation of civil contract awarded in earlier years and said issue has already been decided by the Tribunal in assessee’s favour, the Ld. CIT(A) has rightly held that there is no diversion of funds as referred to u/s. 13(1)(c) of the Act. As regards, the observations of the Hon’ble Madras High Court, that whether civil contract awarded is tantamount to service as referred to u/s. 13(2) of the Act, he submitted that civil contract has been defined to include in any services as per GST laws and Erstwhile Service Tax laws. Therefore, civil contract awarded to a firm in which the managing trustee is a partner was tantamount to service as contemplated u/s. 13(2)(c) of the Act. Since, the payment made to the firm after following due procedure does not give raise to any undue benefit to the Managing trustee, same cannot be considered as violation referred to u/s. 13(1)(c) of the Act to deny benefit of exemption u/s. 11 of the Act.
5. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. This case has a checkered history. In the first round of litigation before the Tribunal, the Tribunal has allowed relief to the assessee on the issue of payment made to a firm in which managing trustee was proprietor, in light of provisions of section 13(1)(c) of the Act, and held that the transactions between the appellant trust and the firm does not violate provisions of section 13(1)(c) of the Act. The Revenue challenged the findings of the Tribunal before the Hon’ble High Court and the Hon’ble High Court restored the issue back to the file of the ITAT to decide as to whether construction contract would tantamount to service as contemplated u/s.13(2)(c) of the Act and also how to interpret section 13(2) of the Act, in light of transactions between related parties. In pursuant to directions of Hon’ble High Court the appeal has been disposed by the Tribunal vide their order dated 31.03.2022 in ITA No. 970/Chny/2014 and allowed appeal of the Revenue. The assessee has filed a Miscellaneous Application against order of the Tribunal, and vide order dated 13.05.2022 in MP No. 18/Chny/2022, the Tribunal recalled the order of the Tribunal dated 31.03.2022 to adjudicate the issue in respect of the civil contract awarded to a firm in which the managing trustee of the trust was proprietor. Therefore, to resolve the dispute, it is necessary to recapitulate facts with regard to impugned dispute. The fact born out from record indicates that the appellant has awarded a civil contract for construction of building to a firm in which the managing trustee of the trust was proprietor. The AO held that civil contract awarded to a firm in which managing trustee of the trust was proprietor, has derived direct benefit by way of payment which violates provisions of section 13(1)(c) of the Act. According to the AO, due procedure was not followed while awarding tender and also the firm has earned substantial profit which tantamount to direct benefit as contemplated u/s. 13(1)(c) of the Act and thus, rejected exemption claimed u/s. 11 of the Act.
6. We have given out thoughtful consideration to the reasons given by the AO, in light of various arguments advanced by the Ld. Counsel for the assessee. We have also carefully gone through orders of the Tribunal in earlier round of litigation and also for earlier assessment years in assessee’s own case. We have also carefully taken note of observations of the Hon’ble High Court of Madras in TCA No. 326/2015 dated 24.08.2021. Having considered relevant materials, we find that the sole basis for the AO to deny exemption u/s. 11 of the Act, is in light of the transactions between appellant trust and Shri. Vekkaliamman Builders and Promoters, where the appellant trust has awarded civil contract for construction of building in the earlier financial years. The AO, held that said transaction between appellant trust and firm is violation of section 13(1)(c) of the Act, because the appellant trust did not follow due procedure while awarding tender and further the firm has earned substantial profit which amounts to direct benefit to the interested persons.
7. As regards the first observation of the AO on not following due procedure while awarding tender, we find that the co-ordinate bench of ITAT had considered an identical issue for assessment year 2009-10 in ITA No. 1420/Chny/2013 in their order dated 27.09.2013 and held that the construction contract has been awarded to the firm M/s. Vekkaliamman Builders and Promoters on the basis of open bid. Since, the firm quoted lowest rates, the contract was awarded to the firm. Based on said findings, the Tribunal has held in the impugned assessment year that the appellant trust has followed due procedure while awarding tender. From the above, it is very clear that the observations of the Assessing Officer that the trust has not followed due procedure is devoid of merits. As regards, second observation of the AO with regard to profit earned by Shri. Vekkaliamman Builders and Promoters, the Tribunal has recorded a categorical finding in their order that the firm has earned net profit of Rs. 21.51 Lakhs and the profit earned by the firm is 4.28% of total turnover, which is quite reasonable. Therefore, from the above it is very clear that the observations of the AO, that the firm has made substantial profit which amounts to direct benefit to interested persons as referred to u/s. 13(1)(c) of the Act is also fails. Therefore, we are of the considered view that there is no error in the reasons given by the ld. CIT(A) to hold that there is no violation of provisions of section 13(1)(c) of the Act, in respect of civil contract awarded to Vekkaliamman Builders and Promoters by the appellant trust and for this reason, the benefit of exemption u/s. 11 of the Act cannot be denied, and thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject ground taken by the Revenue.
8. As regards the observations of the Hon’ble High Court of Madras in TCA No. 326 of 2015 dated 24.08.2021, in para 12 that whether construction contract which has been granted to the firm in which the managing trustee was a partner would tantamount to service as contemplated u/s. 13(2)(c) of the Act. We find that civil contract has been included in the definition of services as per GST laws and also as per Erstwhile Service Tax laws. Therefore, in our considered view, civil contract awarded to a firm in which the managing trustee of the trust is proprietor is tantamount to services as defined u/s. 13(2)(c) of the Act. Since, payment made in pursuant to services rendered by the interested persons is not in excess of consideration paid for relevant work, it cannot be held that there is a direct or indirect benefit to the interested persons as referred to u/s. 13(2) of the Act and violation of provisions of section 13(1)(c) of the Act.
9. In this view of the matter and considering facts and circumstances of the case, we are of the considered view that there is no violation of provisions of section 13(1)(c) of the Act, in so far as payment made by the appellant trust to said Vekkaliamman Builders and Promoters for civil contract. The Ld. CIT(A) after considering relevant facts has rightly held that there is no violation of provisions of section 13(1)(c) of the Act in respect of civil contract awarded to a firm in which managing trustee of the trust is proprietor. Thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the Revenue.
10. In the result, appeal filed by the Revenue is dismissed. Order pronounced in the court on 14th December, 2022 at Chennai.
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