Income Tax Appellate Tribunal (ITAT) Kolkata in a recent order hearing a bunch of appeals filed by the appellant trusts denied exemption under section 11 of the Income Tax Act, 1961 to trusts who were cross donating to other trust and none was engaged in charitable activities.

Regarding the claim of the assessees for exemption on account of contributions received towards corpus fund, ITAT restored the matter to the AO for deciding afresh.

Case Details:
ITA-382/2014 Lakshmi Trust; 383/2014 Kishore Kanti Khandelwal Charity Trust ; 384/2014 Nawal Kishore Kejriwal Charity Trust ; 385/2014 Krishna Charity Trust; 386/2014 Akling Charity Trust; 396/2014 Harsh Vardhan Charity Trust
Order Date 16-09-2015.

Facts of the Case:
All the six assessees in the present case were Trusts registered under section 12A. they mainly derived investment income in the form of interest, income from Mutual Fund, etc. which was mainly applied for giving donations to certain other Institutions, which are stated to be Charitable Trust. These donations were considered as application of income in their returns of income filed for the year under consideration whereby NIL income was declared by all the six assesses after claiming exemption under section 11. In the Survey carried out by the Income Tax Department, it was found that all the six assessee-Trusts as well as four more Trusts were having their Offices at the same premises. It was also noticed on further scrutiny that all the ten Trust s belonged to one Group and they did not carry on any real charitable activities except giving donations to each other.

In this regard, a flow chart was prepared by the Assessing Officer showing the transfer of funds by way of donations by all the ten Trusts among themselves as under:

On the basis of the above flow chart, the Assessing officer arrived at a conclusion that all the ten Trusts including the six Trust s in the present case have only transferred their funds to each other mutually in order to claim the benefit of exemption under section 11 without doing any real charitable work. He held that in the absence of any real charitable activity carried on by any of the ten Trusts between whom the funds were transferred by way of donations, the benefit of section 11 was not allowable to any of such Trusts. Accordingly, he denied the benefit of section 11 to all the six assessee.

CIT(Appeals) did not find merit in the submissions made on behalf of the assessee-Trusts. According to him, all the Trusts belonging to the same group were only transferring their funds to each other in order to get the benefit of section 11 without doing any real charitable activities. He noted that the donations were made by each Trust to other Charitable Trusts wherein the trustees were ‘related persons’ as envisaged in the provisions of section 13(2) of the Income Tax Act. By invoking the doctrine of over form substance and relying on the various judicial pronouncements, he held that there was no charitable activity in substance carried out by any of the assessee-Trusts in order to be eligible to claim the benefit of section 11. In the present case trusts were not passing any money to another Charitable Trust for their utilisation for charitable ac tivities, but the money was being rotated among the Trusts belonging to the same group having common trustees merely for the purpose of claiming exemption under section 11. Accordingly, the action of the Assessing Officer in denying the benefit of sect ion 11 to all the six assessee-Trusts was upheld by the CIT(Appeals).

Relevant Excerpt from ITAT Order:

6. In so far as the first issue is concerned relating to the benefit claimed by the assessees under section 11 in respect of the donations given to other Trusts as application of their income, the ld. counsel for the assessee at the time of hearing was given an opportunity by me to explain any activity of charitable nature having been carried on by any of the ten Trusts except the transfer of funds between them by way of donation. She, however, has failed to explain or show any activity in the nature of charitable activity having been carried on by any of these Trust s during the year under consideration. The only contention raised by her is that giving donations to other Trusts for charitable purpose by itself is an activity of charitable nature making the assessees eligible for benefit under section 11. I am unable to accept this contention. When none of the ten Trusts has carried on any real charitable activity during the year under consideration as found by the Assessing Officer as well as by the ld. CIT(Appeal s) and this finding has not been rebutted or controverted by the ld. counsel for the assessees at the time of hearing despite giving specific opportunity, I am of the view that the benefit of section 11 cannot be allowed to the assessee-Trusts merely on the basis of donations given to other Trusts which admittedly did not carry on any charitable activity. The payment of said donation, therefore, cannot be considered as application of thei r income by the assessee-Trust s for any charitable purpose in order to make them entitled for benefit under sect ion 11. I, therefore, find no infirmity in the impugned orders of ld. CIT(Appeals) upholding the action of the Assessing Officer in denying the benefit of section 11 to the assessee-Trusts in respect of donations given by them to other Trusts.

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