Section 13(1)(c) Not Triggered by High Profit Margins Alone — Karnataka HC Upholds Consistency Principle in Trust Exemption Dispute

Overview of the Case

The Karnataka High Court recently delivered a significant ruling in CIT Vs CMR Jnanadhara Trust, addressing a recurring question in trust taxation — whether payments made by a charitable trust to related concerns, in which trustees hold substantial interest, can automatically attract the disallowance provisions under Section 13(1)(c) of the Income Tax Act, 1961. The Court answered in the negative, reinforcing that mere existence of elevated profit margins is insufficient to deny exemption under Section 11, and that the Department must maintain consistency where facts and law remain unchanged across assessment years.

Background and Facts of the Case

The assessee, CMR Jnanadhara Trust, is a charitable trust registered under Section 12A of the Income Tax Act, 1961. It had been regularly filing returns of income and claiming exemption under Section 11 of the Act.

During scrutiny proceedings initiated under Section 143(2), the Assessing Officer (AO) examined payments made by the trust to three related entities:

• M/s. Edufice Education Services Pvt. Ltd.
• M/s. CMR Education and Consultancy Services
• M/s. Jaista Developers and Constructions (P) Ltd.

The AO noted that the trustees and/or their relatives held substantial interest in these concerns. On examining the financial statements of these entities, the AO concluded that the payments were excessive and unreasonable, and that they amounted to a diversion of the trust's income to specified persons. On this basis, Section 13(1)(c) read with Section 13(3) was invoked, and exemption was denied.

Assessment orders were passed for the following years:

Proceedings Before CIT(A) and ITAT

The assessee appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre (NFAC). The CIT(A) allowed the assessee's appeals for all three years by following earlier orders of the Income Tax Appellate Tribunal (ITAT) that had dealt with an identical set of facts, transactions, and the same concerns. Orders were passed in favour of the assessee on 17.05.2023, 18.05.2023, and 15.06.2023 for the respective assessment years.

The Revenue then challenged these orders before the ITAT, Bangalore Bench "A". The Tribunal, while disposing of ITA Nos. 290, 291, and 292/Bang/2024 through a common order dated 03.12.2024, observed that for Assessment Years 2014-15 and 2015-16, the AO had conducted scrutiny assessments under Section 143(3) on identical facts involving the same concerns and had not invoked Section 13(1)(c). Since no change in facts or law had been brought on record, the Tribunal dismissed the Revenue's appeals.

Revenue's Arguments Before the Karnataka High Court

The Revenue, represented by Sri Aravind V. Chavan, Senior Standing Counsel, advanced the following contentions: