INCOME TAX ACT, 1961

Charitable Trust- Bar to exemption under section 13(3)-Benefit to relative of chairperson, members of society

Assessee-society was running an educational institution and was enjoying exemption under section 10(22). It filed application for registration under section 10(23C)( vi) during the relevant assessment year. The assessee claimed exemption under sections 11 and 12 during the pendency of the application. AO found that financial benefits were provided to the relatives of the Chairman, Members of Governing Board and Members of the society. He also observed that huge surplus arose to the assessee during the year which showed that activities of the assessee was profit earning activity and not entirely for educational purposes. AO was of view that the assessee had infringed the provisions of section 13(1)(c) and hence, benefit of exemption under sections 11 and 12 would not be allowed to it. The other reason for disallowing the exemption under sections 11 and 12 was that the assessee had not filed Form No. 10 in respect of surplus of income while claiming exemption. CIT(A) found that the payments were made to the members of the society for the services rendered by them. He further found that the assessee-society existed solely for educational purposes and was running two schools, all the receipts of the society had been exclusively used for the purpose of society and the surplus generated had also been applied for construction of new blocks for educational activities which was the main object of the society and there was no finding of AO that surplus had been utilized for any non-charitable activity or any other object. The profit/surplus which had been generated had not been applied for any personal purposes. Therefore, he held that the exemption under sections 11 and 12 could not be denied and directed AO to compute income under sections 11 and 12 till the decision on application under section 10(23C) (vi).The assessee submitted that form No. 10 can be filed at any time during pendency of assessment proceedings. Held:In the present case the assessee had been claiming and being allowed exemption under section 10(22) which could be allowed only when the assessee was an educational institution and existing solely for educational purposes and not for the purpose of profit. Thus, the contention of AO that huge surplus was accruing to the assessee and exemption under sections 11 and 12 was not admissible was not appropriate. As the object were for charitable purposes, merely because there was some surplus in the activities carried out by the society same would not disentitle it to claim exemption under sections 11 and 12. Such exemption under sections 11 and 12 can be denied provided there is violation as contemplated in section 13. Under section 13(1)(c ) only where the income or property is used for applying directly or indirectly for the benefit of any person like author of the trust or the person who has made substantial contribution or any trustee or manager or any relative of such aforesaid person, etc., is given. CIT(A) found the payments made to person referred to in section 13(3) were for the services rendered by those persons and which was commensurate with the nature of services rendered. There is no prohibition in the Act to remunerate the interested person but such remuneration should be commensurate with the services rendered by them. If so found, it could not be said that provisions of section 13(1)(c) were attracted so as to deny benefit of exemption under sections 11 and 12. Since CIT(A) found that payment was not undue or unreasonable, the exemption under sections 11 and 12 could not be denied. Therefore, there was no ground to deny the benefit of sections 11 and 12. [Para 3]

Various courts held that though filing of Form No. 10 in respect of accumulation of surplus income is mandatory to claim exemption under sections 11 and 12, the same can be filed at any time during the pendency of assessment proceedings. If Form No. 10 is filed, the benefit of accumulation of income for charitable purpose cannot be denied. Therefore, AO was to be directed to compute the income after allowing exemption under sections 11 and 12 and also considering the application in Form No. 10 regarding accumulation of surplus income for the purpose of objects of trust. [Para 5]

Income Tax Act, 1961 Section 11 read with sections 12 and 13

Case Law Analysis:CIT v. Mayur Foundation [2005] 274 ITR 562 (Guj.) (para 4).

Decision: In favour of Assessee.
A.Y. 2001-02