Section 13 read with section 11 – Provisions of section 13(1)(c) and
13(2)(c), are not violated when contract for construction is awarded by
the assessee trust on basis of open bid to a firm belonging to managing
trustee as the said firm quoted the lowest rates. Further, the sum
advanced by the assessee to the said firm for ongoing construction work
in normal course of business activity are business advances and the said
advances would not come within the ambit of advances u/s. 13(1)(d).
FACTS
The assessee was registered as a charitable trust u/s. 12AA. It declared nil income and claimed deduction u/s. 11.
The
assessee had given, a contract of building construction, to the firm of
the managing trustee for which the assessee had advanced certain sum to
the said firm. The AO held that the aforesaid advances come within the
ambit of section 13(1)(d) and thus disentitles the assessee to claim
exemption u/s. 11 of the Act.
Also it was admitted fact that the
said firm had earned a benefit of Rs. 17.30 lakh from the said
contract. The AO therefore held that the Managing Trustee enjoyed
benefits out of the income derived by the trust which is against the
provisions of section 13(1)(c) and thereby disallowed the exemption
claimed by the assessee u/s. 11 of the Act.
The CIT(A) after
considering the submissions of both the sides, held that there is no
violation of provisions of section 13(1)(c) or (d) and allowed exemption
u/s. 11.
On appeal by the Revenue before the Tribunal.
HELD THAT
It is an admitted fact that the firm of the managing trustee had carried out the construction of building of the trust.
A
perusal of section 13(1)(c) would show that the Act puts restriction on
the use of income or any property of the trust directly or indirectly
for the benefit of any person referred to in sub-section(3) of section
13.
A reading of Clause (cc) of sub-section (3) of section 13
would show that it includes any trustee of the trust or manager. The
Assessing Officer declined to grant benefit of section 11, as in the
present case construction of building has been carried out by the firm
of a Managing Trustee and thus, derived direct benefit from the
assessee-trust.
A further perusal of clause(c) of sub-section(2)
of section 13 would show that without prejudice to the generality of
the provisions of clause-(c) and clause-(d) of subsection( 1) of section
13, the income or property of the trust or any part of such income or
property shall be deemed to have been used or applied for the benefit of
the person referred to in s/s. (3), if any amount is paid by way of
salary, allowance or otherwise during the previous year to any person
referred to in s/s. (3) out of the resources of the trust or institution
for services rendered and the amount so paid is in excess of what may
be reasonably paid for such services. In the present case, the Assessing
Officer has out rightly held that the assessee is not entitled to the
benefit of section 11 without ascertaining the reasonableness of the
amount paid for the services rendered.
The construction contract
has been awarded to the firm on the basis of open bid. Since the firm
quoted lowest rates, the contract was awarded to the firm. The
Commissioner (A) has categorically given a finding that in cases of
civil construction contracts, especially were no proper books are
maintained the Act recognises normal profit margins at the rate of 8 %.
The firm has earned a profit of 5.8 % which is very reasonable.
Since
the contract was awarded on competitive basis and the profit earned is
reasonable, hence it is held that the provisions of section 13(2)(c) are
not violated.
The CIT(A) has given a well reasoned finding
that certain sum was advanced by the assessee to the firm of Managing
Trustee for the on-going construction work in the normal course of
business activity and thus it was business advance. The aforesaid advances thus do not come within the ambit of advances u/s. 13(1)(d) of the Act.
The appeal of the Revenue is dismissed.
