Denial of the entire exemption

In DIT (Exemption) v. Charanjiv Charitable Trust[2], the Delhi High Court considered whether the assessee had transacted with one APIL in a manner that breached Sections 13(1)(c)(ii) and 13(3) of the IT Act.

A charitable trust that received registration under Section 12A of the IT Act was the Assessee. The Assessee entered into agreements with APIL in FY 2003–04 for the acquisition of land, and an advance was also made, in order to promote its objectives of opening a school. It was acknowledged that APIL fell under the purview of Section 13(3)(e) of the IT Act as a defined person.

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The donation was considered to be a use of revenue (for charitable purposes) for the relevant fiscal year. Due to a variety of factors, the assessee changed his mind and the agreements were terminated. The assessee received a reimbursement of the advance payment made during the financial year associated with the AY 2006–07. The AO noticed that the advance money continued to be with APIL for the whole financial year without any advancement in the transaction while considering the assessment for FY 2003-04 pertinent to AY 2004-05.

No sale document was signed for more than a year, and no interest or compensation was provided for the delay in the conveyance of the land. The Revenue argued that the Trust should have insisted on the transport of the lands within a reasonable time frame or, at the very least, prescribed for interest or entitlements or damages in case of failure to honour the alleged agreement if it was really serious about pursuing its objectives of operating schools and dispensaries. The fact that the funds had been with APIL for such a prolonged length of time without receiving interest or security pleased the Revenue even more.

Since APIL was a prohibited person under Section 13(3), the Court agreed with the Revenue's arguments that the assessee's true motivation was to advance its surplus funds to APIL without charging any interest. As a result, it was determined that the assessee had violated Section 13 of the IT Act, and as a result, the Trust was not eligible for the full exemption.

Similar issues were addressed by the High Court of Kerala in Agappa Child Centre v. CIT[4]. A refrigerator was acquired by the Assessee, a public charity trust, and was maintained at the home of its managing trustee. The ITO determined that the pursuant to Section 13 was applied because the trustee was taking advantage of using the trust's property.

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