Case Law Details
ITAT CHENNAI BENCH ‘C’
Sethu Valliammal Educational Trust
Versus
Income tax Officer (Exemptions)-III
IT Appeal No. 1445 (MDS.) of 2012
[Assessment Year 2008-09]
Date of Pronouncement – 10.01.2013
ORDER
Abraham P. George, Accountant Member
In this appeal filed by the assessee, its grievance is that it was denied exemption under Section 11 of Income-tax Act, 1961 (in short ‘the Act’) for a reason that it had violated Section 11(5) by subscribing to certain chits.
2. Facts apropos are that assessee, a Trust registered under Section 12AA of the Act, running educational institutions, had filed its return for impugned assessment year, inter alia, claiming exemption under Section 11 on its total income of Rs. 6,24,91,961/-. During the course of assessment proceedings, it was noted by the Assessing Officer that assessee had placed Rs. 2,08,456/- with one M/s Tern Credits & Chits Private Limited and Rs. 96,230/- with one M/s K.R. Palaniappan (Chit), during the relevant previous year. As per the A.O., these were not approved investments under Section 11(5) of the Act. Hence it resulted in violation of the nature specified in Section 13(1)(d) of the Act. Therefore, according to her, excess of income over expenditure of the Trust had to be taxed in the status of AOP. Though the assessee asserted before the A.O. that decisions of Hon’ble Bombay High Court in the case of DIT(E) v. Seth Mafatlal Gagalbhai Foundation [2001] 249 ITR 533 and that of DIT(E) v. Shardaben Baghubai Mafatlal Public Charitable Trust [2001] 247 ITR 1 were in its favour, A.O. was not impressed. According to her, these decisions on the other hand, clearly went to show that a Trust will forfeit its eligibility to claim exemption if there is a violation of the nature mentioned in Section 13(1)(d) of the Act. She therefore held that assessee was not eligible for exemption under Section 11 for the impugned assessment year and the excess of income over expenditure was accordingly assessed to tax.
3. In its appeal before CIT(Appeals), argument of the assessee was that the amounts placed with chit companies were insignificant. Such chit subscriptions totalled to Rs. 3,04,686/- only, whereas, income of the assessee on which exemption was claimed came to Rs. 2,65,15,237/-. As per the assessee, it had applied more than 85% of its total receipts for charitable purpose during the relevant previous year. Further argument was that the amount liable for tax, at the best, could be the sum of Rs. 3.05 lakhs, as specified in proviso to Section 164(2) of the Act. Further, according to assessee, Circular No.387 of 1984 of CBDT was misinterpreted by the Assessing Officer. In any case, according to it, if the Trust had contravened the provisions of Section 13(1)(c) or 13(1)(d) of the Act, tax could be levied at marginal tax rate only to that part of the income on which exemption was forfeited.
4. However, the CIT(Appeals) was not impressed by any of these arguments. According to him, Section 164(2) applied only on income derived by a charitable trust on business activities pursued by it and falling within Section 11 (4A) of the Act. But, for this amount, which was to be taxed at normal rate, the balance of the assessee had to be taxed at maximum marginal rate when there was a violation of Section 13(1)(c) or Section 13(1)(d) of the Act. Further, according to him, once it was proved that there were investments in violation of Section 13(1)(c) or Section 13(1)(d) of the Act, then tax had to be levied on the income of the assessee at maximum marginal rate. Reliance was placed on the decision of Hon’ble Apex Court in the case of DIT v. Bharat Diamond Bourse [2003] 259 ITR 280, Rabindranath Educational Trust v. Union of India [2010], Priyadarshini Educational Academy v. DGIT [2011] 333 ITR 347, Kanahya Lal Punj Charitable Trust v. DIT(Exemptions) [2008] 297 ITR 66 and Mundakapadam Mandirams Society v. CIT [2002] 258 ITR 395. He thus confirmed the view taken by the A.O. that whole of the income of the assessee had to be taxed at maximum marginal rate.
5. Now before us, learned A.R., strongly assailing the orders of authorities below, submitted that lower authorities completely mistook the subscriptions paid by the assessee to the two chit companies to be investments. According to him, neither were such subscriptions investments nor they were deposits. Relying on copies of ledger pages placed at paper-book from pages 14 to 17, learned A.R. submitted that the amounts represented monthly subscriptions paid by the assessee to M/s Tern Credits & Chits Private Limited and M/s K.R. Palaniappan (Chit), both of which were registered chit companies. When subscriptions were paid to a chit fund, it was not with an aim of earning interest income, but only for raising funds by prizing the chits when a need arose. Monthly subscription placed in a chit was neither investment nor deposit. These were payments essentially required to be made for participating in the chit, with a right to prize the chit during the tenure of the chit. Authorities below fell in error when they treated it as investment or deposit. According to him, Section 11(5) spelt out the requirement of investing or depositing money, which was accumulated or set apart by an assessee-Trust. Only when money was invested or deposited in a manner other than what were provided under Section 11(5) of the Act, violation specified under Section 13(1) could be fastened. According to him, subscription to chits neither being an investment nor a deposit, assessee could not have been saddled with a tax on its total income, citing violation of Section 13(1)(d) of the Act. Relying on the decision of Hon’ble Kerala High Court in the case of CIT v. Kottayam Co-operative Bank Ltd. [1974] 96 ITR 181, learned A.R. submitted that the dominant motive which prompted people to join chit fund schemes was to avail themselves of the facility of bidding the kuris when they were in urgent need of finance. Chit amount received on prizing could only be treated as a loan with the facility of repaying it in monthly instalments. Further, according to him, even if the amounts were treated as loans given by assessee-Trust to the chit fund, still rigours of Section 13 would not be attracted by virtue of decision of Hon’ble jurisdictional High Court in the case of CIT v. Nachimuthu Industrial Association [1982] 138 ITR 585.
6. Continuing his arguments, learned A.R. submitted that the amount placed by the assessee with the chit funds could not be considered as deposit also. For canvassing this view, learned A.R. relied on a decision of Amritsar Bench of this Tribunal in the case of Onkar Capital Growth (P.) Ltd. v. CIT [2005] 92 ITD 453(ASR). Subscribers of the chit were contributing money each month and when a bid took place among the members, highest bidder was entitled to take chit. There were no investment or deposit made by a subscriber in the course of these transactions. For this reliance was placed on the decision of Hon’ble Delhi High Court in the case of CIT v. Sahib Chits (P.) Ltd. [2010] 328 ITR 342. In any case, according to him, there was no malafide intention since the chit funds were no way related to the assessee-Trust nor to any person associated with assessee-Trust. Therefore, according to him, assessee was under a bonafide impression that it was not violating any provision by placing the subscriptions with chit funds. Learned A.R. submitted that in a similar situation, Hon’ble Delhi High Court had in the case of DIT v. Agrim Charan Foundation [2002] 253 ITR 593 held that claim of exemption under Section 11 could not be disallowed. In any case, learned A.R. argued that even if there was any violation under Section 11(5) of the Act, tax at maximum marginal rate could be applied only to that part of the income which arose out of such investment and not on the balance of the income. Even in a case where the Trust itself carrying on a chit business, Hon’ble jurisdictional High Court had held in the case of Dasa Balinjika Seva Sangam v. CIT [1999] 240 ITR 854 that forfeiture of exemption was only with regard to the income derived from such business and not the whole of the receipts of the Trust.
7. Per contra, learned D.R., strongly supporting the orders of authorities below, submitted that assessee had made investment in two chit companies. Though the amounts could be small when compared to the total earnings of the assessee, there was clear violation of Section 11(5) of the Act. Once the funds were employed in a mode other than what where specified under Section 11(5) of the Act, there was a violation of the nature mentioned in Section 13(1)(d) of the Act. Even if a chit fund is not considered as a banker, the subscription given by the assessee to the chit companies were intended to finance the prized amounts of chits every month. Therefore, it was only an indirect way of investment. Even a single violation of the investment pattern specified under Section 11(5), will result in forfeiture of exemption under Section 11 of the Act. For this, reliance was placed on the decision of co-ordinate Bench of this Tribunal in the case of ITO (OSD) Exemptions v. KAS Foundation [2012] 52 SOT 195 (Chennai)(URO).
8. We have perused the orders and heard the rival submissions. There is no dispute that assessee had, during the relevant previous year, subscribed to two chits, one conducted by M/s Tern Credits & Chits Private Limited and the other by M/s K.R. Palaniappan (Chit). Learned D.R. has also not disputed the averment that both these were registered chit funds, running chits. Assessee had placed money with these chit companies by way of subscriptions. The amounts were paid on a monthly basis to the two chit companies. This is clear from paper-book pages 14 to 17, which are copies of relevant ledger folios in the books of the assessee. The total amount placed by the assessee, during the relevant previous year, with M/s Tern Credits & Chits Private Limited was Rs. 2,08,456/- and with M/s K.R. Palaniappan (Chit) was Rs. 96,230/-. The annual income of the Trust came to Rs. 7,35,19,954/- against which, utilization for charitable purpose came to Rs. 6,98,07,198/-, which was well above the limit of 85% prescribed under Section 11(1)(a) of the Act. As per the assessee, subscriptions paid to chit funds were not deposits nor investments and it could not have been a reason for denying it the exemption claimed under Section 11 of the Act. Subscription paid by a subscriber of a chit to a chit company acting as the foreman of the chit, in our opinion, cannot be considered as an investment. Subscribing to a chit fund is not with an intention to earn interest or dividend. The only intention is to prize the chits either by competitive bidding or when lots are drawn. If there was no bidding done in a given month, there will be no income whatsoever derived. The income that can be derived was only the amount forgone by the bidders in an auction. Thus a chit fund is primarily intended to operate as a scheme for advancing loans from a common fund created by the subscribers, and their turn for getting such loan is decided either by auction or by drawing lots. The nature of chit as aforesaid has been vividly described in the judgment of Kerala High Court in the case of Kottayam Co-operative Bank Ltd. (supra).
9. Amritsar Bench of this Tribunal in the case of Onkar Capital Growth (P) Ltd. (supra) has clearly held that the subscribers to a chit fund were entitled only for prizing the chits and the money placed by a subscriber to a chit fund could not be equated with deposits. The foreman of a chit fund is only acting as a conduit for the subscribers to pool their money every month for the benefit of one of them. Chit Funds Act, 1982 requires the concern running a chit to a subscriber of the chit also. We cannot say that persons, who are subscribers to a chit, are making any investment in the concern running the chit fund. We cannot say that subscriber to a chit fund is placing any deposit in the concern running the chit fund. Pooling of money by a group of persons for the benefit of one of them, through chits, cannot be equated with investments or deposits.
10. A look at Section 11(5) of the Act would clearly show that said Section applies only to investments and deposits of money which are accumulated or set apart by an assessee-Trust. Section 11(2) and Section 11(5) of the Act are reproduced hereunder:-
“11(2) [Where [eighty-five] per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:—]
(a) such person specifies, by notice in writing given to the [Assessing] Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years;
[(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5)]:]
[Provided that in computing the period of ten years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded:]
[Provided further that in respect of any income accumulated or set apart on or after the 1st day of April, 2001, the provisions of this sub-section shall have effect as if for the words “ten years” at both the places where they occur, the words “five years” had been substituted.]
[Explanation.- Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.]”
“11(5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely :-
(i) investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government;
(ii) deposit in any account with the Post Office Savings Bank;
(iii) deposit in any account with a scheduled bank or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).
Explanation.—In this clause, “scheduled bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);
(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);
(v) investment in any security for money created and issued by the Central Government or a State Government;
(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government;
(vii) investment or deposit in any [public sector company]:
[Provided that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company,—
(A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company;
(B) such other investment or deposit shall be deemed to be an investment or deposit made under this clause for the period up to the date on which such investment or deposit becomes repayable by such company;]
(viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India and [which is eligible for deduction under clause (viii) of sub-section (1) of section 36];
(ix) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and [which is eligible for deduction under clause (viii) of sub-section (1) of section 36];
[(ixa) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India.
Explanation.—For the purposes of this clause,—
(a) “long-term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;
(b) “public company” shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);
(c) “urban infrastructure” means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers or urban transport;]
(x) investment in immovable property.
Explanation.- “Immovable property” does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth;]
[(xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964);]
[(xii) any other form or mode of investment or deposit as may be prescribed.]”
It is clear from the above Sections that the intention of the Legislature is to regulate the manner of investment of the money left with an assessee-Trust after utilization for charitable purpose. Subscription to chit funds itself will be utilization of the funds of the assessee since right of the assessee is only to prize a chit or participate in a draw of lots. It is not an investment or deposit of a money which is available as surplus with assessee.
11. Therefore, in our opinion, the lower authorities fell in error in concluding that such subscriptions were investments which violated the modes specified under Section 11(5) of the Act. The question of denial of exemption under Section 11 would arise only if investments were there. We are, therefore, of the opinion that assessee could not have been denied exemption claimed by it under Section 11of the Act, for a reason that it had subscribed to the chit funds. There is no case for the Revenue that any of the Trustees, Managers, contributors of relatives of such persons were having interest in the two chit companies. We are, therefore, of the opinion that assessee was eligible for exemption under Section 11 of the Act and its claim was denied unjustly. We, therefore, set aside the orders of the authorities below and direct the A.O. to grant the assessee its claim of exemption under Section 11 of the Act for the impugned assessment year.
12. Before parting with, it will be inappropriate if we do not deal with the decision of co-ordinate Bench of this Tribunal in the case of KAS Foundation (supra), relied on by the learned D.R. There the money placed by the assessee was in a company, by subscribing to its share capital. In other words, assessee had acquired shares in a company in which its founders had substantial interest. Acquisition of shares is definitely an investment and cannot be equated with subscription paid to the chit fund. We are, therefore, of the opinion that this decision will not have any applicability here.
13. In the result, appeal filed by the assessee is allowed.
