Case Law Details

Case Name : ito (Exemption), Vs Progressive Education Society, (ITAT Pune)
Appeal Number : ITA No. 580/PUN/2015
Date of Judgement/Order : 10/03/2017
Related Assessment Year : 2010-11
Courts : All ITAT (2767) ITAT Pune (90)

The Assessing Officer has denied the benefit of exemption u/s. 11 and 12 of the Act on the entre surplus generated by the assessee merely for the reason that the assessee has made investment in funds not approved u/s. 10(23D) of the Act. It is no more res integra that where the investments or deposits are made by charitable trust are in violation of section 11(5) of the Act, the benefit of exemption u/s. 11 of the Act would not be denied on the entire income of the assessee. It is only the investments or deposits made in violation of provisions of section 11(5) of the Act that would attract maximum marginal rate of tax as per the provisions of law.

RELEVANT EXTRACT OF THE JUDGMENT

2. The facts of the case as emanating from record are: The assessee is a public charitable trust. The assessee is engaged in providing education. The assessee is enjoying the benefit of registration u/s. 12A and u/s. 80G of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). The assessee filed its return of income for the impugned assessment year on 18-07-2011 declaring total income as Nil. The case of the assessee was selected for scrutiny under CASS and accordingly notice u/s. 143(2) was issued to the assessee on 06-08-20 12. During the course of scrutiny assessment proceedings the Assessing Officer observed that the assessee has made investment in various mutual funds. During the period relevant to the assessment year under appeal the assessee made investment in JP Morgan India Equity Fund 5,00,000/- and Reliance Vision Fund 4,00,000/-. Both the above said funds were not approved u/s. 10(23D) of the Act. The Assessing Officer held that since the assessee has made investment in the funds in violation of the provisions of section 11(5) of the Act, therefore, in terms of section 13(1)(d) of the Act, the assessee shall not be eligible to claim the benefit of sections 11 and 12 in the assessment year under appeal. The Assessing Officer further observed that the assessee trust is accepting donations from students which is in the nature of capitation fees, therefore, the assessee trust cannot be said to be existing solely for education purposes. The assessee is not eligible for accumulation of income and hence, not eligible for deduction / exemption u/s. 11 of the Act. The Assessing Officer treated the assessee as AOP and made addition of the entire surplus i.e. 1,44,42,360/- as income of the assessee.Aggrieved by the assessment order dated 25-03-20 13, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) partly modified the assessment order by restricting the disallowance u/s. 11 and 12 only to the extent of investment made in mutual funds of JP Morgan India Equity Fund and Reliance Vision Fund. The Commissioner of Income Tax (Appeals) held that the investments made in the above said funds are liable to be taxed at the maximum marginal rate of tax. In so far as remaining amount, the Commissioner of Income Tax (Appeals) accepted the contentions of the assessee and directed the Assessing Officer to delete the addition. Now, the Department is in appeal assailing the order of Commissioner of Income Tax (Appeals) directing the Assessing Officer to delete the addition on account of surplus taxed as income when the assessee has violated the provisions of section 11(5) of the Act.

3. Shri C.H. Naniwadekar appearing on behalf of the assessee submitted at the outset that the Commissioner of Income Tax (Appeals) is fully justified in restricting the disallowance to the extent of investment made in mutual funds that is not in accordance with the provisions of section 11(5) of the Act. The ld. AR submitted that the Assessing Officer has erred in withdrawing exemption u/s. 11 and 12 of the Act on the entire surplus generated by the assessee. The ld. AR of the assessee submitted that the case of the assessee is squarely covered by the decision of Hon’ble Karnataka High Court rendered in the case of Commissioner of Income Tax Vs. FR. Mullers Charitable Institutions reported as 363 ITR 230. The ld. AR pointed that one of the questions of law before the Hon’ble High Court for adjudication was:

“(ii) Whether the Tribunal is correct in holding that when a part of income is held to be violative of the provisions of section 13(1)(d) only to the said extent maximum marginal rate of tax is to be levied and not for the whole income more particularly when there is violation of the provisions of section 11(5) of the Act ?”

The Hon’ble High Court following the ratio laid down by the Hon’ble Bombay High Court in the case of Director of Income Tax (Exemptions) Vs. Sheth Mafatlal Gagalbhai Foundation Trust reported as 249 ITR 533 (Bom) answered the question in favour of the assessee.4. On the other hand Shri Hemant Kumar C. Lueva representing the Department vehemently supported the order of Assessing Officer and prayed for reversing the findings of Commissioner of Income Tax (Appeals). The ld. DR submitted that the assessee has made investment in mutual funds in violation of the provisions of section 11(5). The activities carried out by the assessee show that the assessee is not merely carrying charitable activities, the assessee is also engaged in commercial transaction, therefore, the benefit of exemption u/s. 11 and 12 was rightly withdrawn by the Assessing Officer.

5. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. It is an undisputed fact the assessee has made investment to the tune of 9,00,000/- in mutual funds i.e. JP Morgan India Equity Fund 5,00,000/- and Reliance Vision Fund 4,00,000/- in violation of the provisions of section 11(5) of the Act. The Assessing Officer has denied the benefit of exemption u/s. 11 and 12 of the Act on the entre surplus generated by the assessee merely for the reason that the assessee has made investment in funds not approved u/s. 10(23D) of the Act. It is no more res integra that where the investments or deposits are made by charitable trust are in violation of section 11(5) of the Act, the benefit of exemption u/s. 11 of the Act would not be denied on the entire income of the assessee. It is only the investments or deposits made in violation of provisions of section 11(5) of the Act that would attract maximum marginal rate of tax as per the provisions of law.

6. The Hon’ble Karnataka High Court in the case of Commissioner of Income Tax Vs. FR. Mullers Charitable Institutions (supra) while dealing with the similar issue has held:

“11. With regard to the second and the third substantial questions of law are concerned, reading of section 13(1)(d) of the Act makes it clear that it is only the income from such investment or deposit which has been made in violation of section 11(5) of the Act that is liable to be taxed and that the violation under section 13(1)(d) does not tantamount to denial of exemption under section 11 on the total income of the assessee. An identical question came before the Bombay High Court in the case reported in DIT (Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 (Bom). The question before the Bombay High Court is “Whether violation of section 11(5) read with section 13(1)(d) by the assessee-trust attracts the maximum marginal rate of tax on the  entire income of the trust ?” The Bombay High Court held that in case of contravention of section 1 3(1)(d), the maximum marginal rate of tax under section 164(2), proviso is applicable only to that part of income of the trust which has forfeited exemption and not the entire income. The relevant paragraph reads as under:

“Section 164(2) refers to the relevant income which is derived from property held under trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as tax able, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of an association of persons. Therefore, a proviso was inserted by the Finance Act, 1984, with effect from April 1, 1985, under which in cases where the whole or any part of the relevant income is not exempt under section 11 or section 12 because of the contravention of section 13(1)(d), the tax shall be charged on such income or part thereof, as the case may be, at the maximum marginal rate. In other words, only the non- exempt income portion would fall in the net of tax as if it was the income of an association of persons . . . The phrase ‘relevant income or part of the relevant income’ in the proviso is required to be read in contradistinction to the phrase ‘whole income’ under section 161 (1A). This is only by way of comparison. Under section 161 (1A), which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, the tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the above two phrases shows that the Legislature has clearly indicated its mind in the proviso to section 164(2) when it categorically refers to forfeiture of exemption for breach of section 13(1)(d), resulting in levy of maxi mum marginal rate of tax only to that part of the income which has forfeited exemption. It does not refer to the entire income being subjected to the maximum marginal rate of tax. This interpretation is also supported by Circular No. 387, dated 6th July, 1984 ([1985] 152 ITR (St.) 1). Vide the said Circular, it has been laid down in paragraph 28.6 that where a trust contravenes section 13(1)(d), the maximum marginal rate of Income-tax will apply only to that part of the income which has forfeited exemption under the said provision and not to the entire income. There is a vital difference between eligibility for exemption and withdrawal of exemption/forfeiture of exemption for contravention of the provisions of law. These two concepts are different. They have different consequences. In the circumstances, there is merit in the contention of the assessee that in the present case the maximum marginal rate of tax will apply only to the dividend income from shares held in contravention of section 13(1)(a) and not to the entire income. Therefore, income other than dividend income shall be taxed at normal rate of taxation under the Act.”

A similar view has been taken by the Delhi High Court in a judgment reported in DIT (Exemption) v. Agrim Charan Foundation [2002] 253 ITR 593 (Delhi). Reading of the proviso to section 142 is very clear that the Legislature has clearly contemplated that in a case, where the whole or part of the relevant income is not exempted under section 11 by virtue of violation of section 1 3(1)(d) of the Act, tax shall be levied on the relevant income or a part of the relevant income at the maximum marginal rate. The said analogy is applicable to the facts of the present case.

12. We are in respectful agreement with the views expressed by the Bombay High Court as well as the Delhi High Court for violating section 11(5) of the Act and the entire income of the respondent-trust cannot be assessed for the tax.”

7. We do not find any infirmity in the order of Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) has rightly followed the law laid down in the case of Commissioner of Income Tax Vs. FR. Mullers Charitable Institutions (supra). The ld. DR could neither rebut the findings of First Appellate Authority nor any contrary judgment was brought to our notice. The impugned order is upheld and the appeal of the Department is dismissed being devoid of any merit.

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Category : Income Tax (24133)
Type : Judiciary (9270)
Tags : ITAT Judgments (3852) section 11 (81) section 12 (7)

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