DCIT Vs Energy and Resources Institute (ITAT Delhi)
Wrong Investment by a Trust: Does the Entire Exemption Disappear?
Holding shares outside the modes permitted by Section 11(5) may violate Section 13(1)(d), but it does not necessarily make the trust’s entire income taxable. The Delhi Bench of the ITAT has applied this principle in the case of The Energy and Resources Institute (TERI). Since the disputed investments produced no income in the relevant years, the Tribunal upheld the availability of exemption on TERI’s other income.
The decision is DCIT (Exemption) v. The Energy and Resources Institute, ITA Nos. 5991 and 5992/Del/2026, concerning AYs 2016–17 and 2017–18, pronounced on 28 September 2026.
Investments made earlier, but held during the assessment years
TERI is a society registered under Section 12A. Its activities include preservation of the environment, a recognised charitable purpose under Section 2(15). During scrutiny, the AO noticed that TERI held shares in certain joint ventures, including foreign entities. The investments totalled ₹2,44,39,291.
The AO considered these shares to be outside the permitted investment modes under Section 11(5). Although TERI stated that it had made no fresh investment and received no income from these shares during the year, the AO held that their continued holding attracted Section 13(1)(d). He consequently denied exemption under Sections 11 and 12 on the entire income. For AY 2017–18, the assessment was completed at taxable income of ₹16,19,74,743.
TERI did not succeed by arguing that its holdings complied with Section 11(5). The appellate dispute concerned the consequence of the violation: whether the AO could withdraw exemption from all income, including income unrelated to the offending shares.
The CIT(A)’s distinction
The CIT(A) accepted that holding the shares amounted to a violation of Section 13(1)(d). However, the CIT(A) held that the consequence was confined to income arising from those investments, rather than the society’s entire income.
On examination of the accounts for AY 2017–18, the CIT(A) found no dividend, capital gain, interest or other income arising from the shares during the relevant previous year. With no income attributable to the offending investments, there was no amount to tax on that account. The CIT(A) therefore restored TERI’s exemption under Sections 11 and 12.
The Revenue appealed. It argued that a Section 13(1)(d) violation required denial of the Section 11 benefit. It also relied on a Delhi Tribunal decision taking an adverse view and questioned the CIT(A)’s reliance on the litigation concerning Fr. Mullers Charitable Institutions.
Tribunal: Identify the income affected by the violation
The ITAT agreed that the shares were not held in modes prescribed by Section 11(5) and that Section 13(1)(d) was attracted. It nevertheless rejected the AO’s decision to tax all of TERI’s income.
The Tribunal held that the loss of exemption was restricted to income derived from the impermissible investments. Such income, where it exists, would be subject to the applicable treatment under Section 164. The mere holding of those investments did not, in the Tribunal’s view, strip the institution’s unrelated income of Section 11 relief.
A decisive fact was that no income from the shares had been received during the years in question, and the AO did not dispute this. The investments had also been made in earlier years. The Tribunal observed that any question of treating the investment itself as deemed income would have to be examined with reference to those earlier years; it could not justify taxing the whole of the current year’s income.
TERI also placed its earlier and later scrutiny assessments before the Bench. According to the order, exemption had been allowed under comparable circumstances in several years. The Tribunal noted that history while holding that the AO had wrongly denied the benefit on the entire income. It applied its conclusion to both AY 2016–17 and AY 2017–18.
A qualification concerning Fr. Mullers
The Revenue’s ground specifically pointed out that, when the Supreme Court disposed of the matter involving Fr. Mullers Charitable Institutions, it left the question of law open. A dismissal of an SLP on those terms should not be described as a conclusive Supreme Court ruling settling that question for every case.
The practical reasoning in TERI’s favour remains clear from the Tribunal’s own order: first identify the income arising from an investment that violates Section 11(5), and then determine the tax consequence for that income. The AO had instead denied exemption to TERI’s entire income despite the absence of income from the disputed shares.
Author’s comment
This ruling draws a useful distinction between a defect in how trust funds are invested and the taxation of every receipt of the trust. An investment violation should be taken seriously, but the assessment must still identify what income is affected by it. In TERI’s case, the answer for the years before the Tribunal was none from those investments.
For trust assessments, the important records are the year of acquisition of each investment, the investment schedule, and the income, if any, arising from each holding during the relevant previous year. Those details permit the tax consequence to be measured precisely. TERI supports a limited consequence for the Section 13(1)(d) violation on its facts; it does not treat the impermissible investments themselves as compliant.
Cases Discussed
- CIT Vs Fr. Mullers Charitable Institutions, (2014) 363 ITR 230 (Karnataka High Court); SLP(C) No. 22223/2014 — Relied upon on the proposition that violation involving investments outside Section 11(5) does not result in denial of exemption on the trust’s entire income; the Revenue’s grounds specifically recorded that the Supreme Court dismissed the SLP while keeping the question of law open.
- Indian Gold Union Vs ITO (Exemption), [2022] 141 taxmann.com 187 (ITAT Delhi) — Relied upon by the Revenue for the contrary proposition that the benefit of exemption under Section 11 could not be granted in view of Section 13(1)(d) in such circumstances.
- CIT Vs Working Women’s Forum, [2015] 63 taxmann.com 324 (SC) — Relied upon by the assessee; the order records dismissal of the Revenue’s SLP against the Madras High Court order where it was held that only the income affected by Section 13(1)(d) could be brought to tax at the maximum marginal rate and exemption could not be denied on the entirety of the income.
- DIT(E) Vs Sheth Mafatlal Gagalbhai Foundation Trust, [2001] 249 ITR 533 (Bombay High Court) — Relied upon for the proposition that violation of Section 13(1)(d) attracts the maximum marginal rate only on that part of the income which forfeits exemption and not on the entire income of the trust.
FULL TEXT OF THE ORDER OF ITAT DELHI
These two appeals by the Revenue are directed against the orders dated 27.02.2026 of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the ‘Ld. CIT(A)] arising out of the assessment orders dated 30.12.2018 and 30.12.2019 passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by ITO, Circle Exemption 2(1), Delhi (hereinafter referred to as the ‘AO’) pertaining to Assessment Years (A.Y.) 2016-17 and 2017-18 respectively.
2. The Revenue has raised the following grounds of appeal in ITA No. – 5991/Del/2026:-
“1. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the ground of appeal of the assessee, regarding allowability of exemption under section 11 and 12 of the Act, despite the clear violation of section 13(1)(d) of the Act.
2. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in referring to the order of the Hon’ble Supreme Court of India in the case of CIT Vs Fr. Mullers Charitable Institutions despite the fact that the Hon’ble Supreme Court in the SLP(C)/22223/2014 filed by the revenue in the case of CIT Vs Fr. Mullers Charitable Institutions has dismissed the appeal but kept the question of law open.”
2.1 The Revenue has raised the following grounds of appeal in ITA No. – 5992/Del/2026:-
“1.. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the ground of appeal of the assessee, regarding allowability of exemption under section 11 and 12 of the Act, despite the clear violation of section 13(1)(d) of the Act.
2. Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in referring to the order of the Hon’ble Supreme Court of India in the case of CIT VS Fr. Mullers Charitable Institutions despite the fact that the Hon’ble Supreme Court in the SLP(C)/22223/2014 filed by the revenue in the case of CIT Vs Fr. Mullers Charitable Institutions has dismissed the appeal but kept the question of law open.”
Since the issues involved are identical, therefore, both the appeals are being disposed off vide this common order.
We take ITA No. 5992/Del/2026 for A.Y. 2017-18 as a lead case.
3. Brief facts of the case are that return declaring Nil income for A.Y. 2017-18 was filed on 16.10.2017. The assessee is a registered society vide registration no. S-7159 dated 12.03.2003 under the Societies Registration Act, 1860 and also u/s 12A of the IT Act vide order dated 1.07.2005. Further, approval u/s 80G has also been granted to the assessee vide order dated 1.5.2012. The assessee’s institute has been working on preservation of environment which is covered under the fifth limb of the definition of charitable activities under section 2(15) of the Act.
3.1 The case was selected for complete scrutiny during the course of which the AO noted that the assessee had made investments amounting to Rs. 2,44,39,291/- in joint ventures with foreign entities such as Glori Engery Inc., TIME, Kuwait and ONGC TERI Biotech Ltd. which were held in the form of shares. The assessee submitted that no investment was done during the year and no income was received an above investment during the year under consideration.
However, the AO observed that the investments have continued during the year and therefore provisions of section 11(5) have been violated as the investment is not as per prescribed modes.
He, therefore, held that on the basis of violation covered u/s 13(1)(c)/(d), the assessee is not entitled to exemption u/s 11 r.w.s. 12 of the Act. Assessment was accordingly completed at total taxable income of Rs. 16,19,74,743/-.
3.2 Aggrieved, the assessee preferred an appeal before the CIT(A). After considering the assessee’s submissions, the CIT(A) allowed the appeal with the following observations:
“Ground relating to denial of exemption under sections 11 and 12
The exemption was denied on the ground that the appellant held shares in Glori Oil Ltd., TIMES (Kuwait) and ONGC TERI Biotech Ltd., which are not modes specified under section 11(5), thereby attracting section 13(1)(d).
On examination of the audited balance sheet and investment schedules for the relevant previous year, it is evident that such shares continued to be held. Equity shares in private or foreign companies do not fall within the prescribed and exhaustive modes under section 11(5). Therefore, there exists a technical violation of section 13(1)(d).
However, the legal consequence of such violation is settled by binding judicial precedents.
The Hon’ble Supreme Court in CIT v. Fr. Mullers Charitable Institutions has categorically held that violation of section 11(5) read with section 13(1)(d) does not result in denial of exemption in respect of the entire income of the trust. The forfeiture is confined only to the income arising from such offending investments, which alone is liable to be taxed at the maximum marginal rate in terms of section 164(2). The violation does not ipso facto render the whole income of the trust taxable.
The income and expenditure account for A.Y. 2017-18 has been carefully examined. No dividend income, capital gain, interest income or any other revenue has been credited in respect of the shares held in Glori Oil Ltd., TIMES (Kuwait) or ONGC TERI Biotech Ltd. during the relevant previous year. There is no material on record indicating accrual or receipt of any income from such investments during A.Y. 2017-18.
Where no income arises from the non-specified investments during the relevant year, there is no income which can be subjected to tax under section 164(2) merely on account of the technical violation in holding such shares.
Accordingly, it is conclusively held:
- The appellant has technically violated section 13(1)(d) by holding investments not specified under section 11(5).
- However, since no income has arisen from such investments during A.Y. 2017-18, no amount is liable to be taxed on this account.
- Denial of exemption under sections 11 and 12 in entirety is legally unsustainable and is hereby vacated.
The appellant is therefore entitled to exemption under sections 11 and 12 for A.Y. 2017-18.”
3.3 Aggrieved, the Revenue has filed the present appeal before the Tribunal.
4. Before us, Ld. DR has strongly relied the order of the AO and argued that in view of violation of provisions of section 13(1)(d), the assessee is not entitled to exemption u/s 11of the Act. He has also placed before us, a decision of the coordinate bench in the case of Indian Gold Union vs. ITO (Exemption) [2022] 141.taxmann.com 187 (Delhi-Trib.), wherein it has been held that the benefit of exemption u/s 11 of the Act could not be granted in view of the provisions of section 13(1)(d) in such circumstances.
5. On the other hand, Ld. AR has supported the order of the CIT(A) and has also filed copies of assessment orders u/s 143(3) of the Act, passed in assessee’s own case from A.Y. 2007-08 to A.Y. 2012-13 and also for A.Y. 2018-19, wherein after scrutiny, the assessee has been consistently granted benefit of exemption u/s 11 of the Act. Moreover, Ld. AR has reiterated that there is no investment made during the year nor any income has been earned from the investment in question during the year.
He has further placed reliance on the decision of the Hon’ble Apex Court in the case of CIT vs. Fr. Mullers Charitable Institution [2014] 51 taxmann.com 378 (SC), wherein the decision of Karnataka High Court has been upheld on the proposition that only income from investment or deposit made in violation of section 11(5) was liable to be taxed and that violation under section 13(1)(d) does not tantamount to denial of exemption u/s 11 of the Act on total income of the Trust.
Ld. AR has also placed reliance on several other judgments in support of his contention some of which are as under:
(i) CIT vs. Working Women’s Forum [2015] 63 taxmann.com 324 (SC), which the SLP of the Revenue was dismissed against the order of the Hon’ble Madras High Court where it was held that in case of a trust registered u/s 12AA, only such part of income which is violative of section 13(1)(d) can be brought to tax at maximum marginal rate and entirety of income cannot be denied exemption u/s 11 of the Act.
(ii) DIT(E) vs. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 (Bom), wherein it has been held that violation of section 13(1)(d) by assessee’s trust will attract maximum marginal rate of tax only on that part of income which has forfeited exemption under said provisions and not an entire income of trust.
6. We have heard the rival submissions and carefully perused the material available on record in the light of legal provisions related to trust and the relevant judicial pronouncements.
6.1 Admittedly, the assessee society is registered u/s 12A of the Act vide order dated 1.7.2005 and also u/s 80G vide order dated 1.5.2012. It runs an Institute working on preservation of environment which is a charitable activity u/s 2(15) of the Act. Investments were made in joint venture with various entities, which included foreign entities in earlier years amounting to Rs. 2,44,39,291/-. Since, the investment is not as per prescribed modes u/s 11 (5) of the Act, provisions of section 13(1)(d) are attracted in this case. For the sake of convenience, relevant portion of section 13 is reproduced below:
Section 11 not to apply in certain cases.
13. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof—
(a) ….
(b) …..
(c) ….
(d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year—
(i) any funds of the trust or institution are invested or deposi- ted after the 28th day of February, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11; or
(ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983; or
(iii) any shares in a company, other than—
(A) shares in a public sector company;
(B) shares prescribed as a form or mode of investment under clause (xii) of sub-section (5) of section 11,
are held by the trust or institution after the 30th day of November, 1983, to the extent of such deposits or investments referred to in sub-clauses (i), (ii) and (iii):
Provided that nothing in this clause shall apply in relation to—
(i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1st day of June, 1973;
(ia) any accretion to the shares, forming part of the corpus mentioned in clause (i), by way of bonus shares allotted to the trust or institution;
(ii) any assets (being debentures issued by, or on behalf of, any company or corporation) acquired by the trust or institution before the 1st day of March, 1983;
(iia) any asset, not being an investment or deposit in any of the forms or modes specified in sub-section (5) of section 11, where such asset is not held by the trust or institution, otherwise than in any of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 1993, whichever is later;
(iii) any funds representing the profits and gains of business, being profits and gains of any previous year relevant to the assessment year commencing on the 1st day of April, 1984 or any subsequent assessment year.
Explanation.—Where the trust or institution has any other income in addition to profits and gains of business, the provisions of clause (iii) of this proviso shall not apply unless the trust or institution maintains separate books of account in respect of such business;
[(iv) any asset referred to in sub-clauses (i), (ia) and (ii) of clause (b) of the third proviso to clause (23C) of section 10 or any accretion to the shares, forming part of the corpus mentioned in the said sub-clauses (i) and (ia) and voluntary contributions referred to in sub-clause (iv) of clause (b) of the said proviso.]
Explanation.—For the purposes of sub-clause (ii) of clause (c), in determining whether any part of the income or any property of any trust or institution is during the previous year used or applied, directly or indirectly, for the benefit of any person referred to in sub-section (3), in so far as such use or application relates to any period before the 1st day of July, 1972, no regard shall be had to the amendments made to this section by section 7 [other than sub-clause (ii) of clause (a) thereof] of the Finance Act, 1972.
(2) …………..
(3) ….
(4…..
(5) Notwithstanding anything contained in clause (d) of sub-section (1), where any assets (being debentures issued by, or on behalf of, any company or corpora-tion) are acquired by the trust or institution after the 28th day of February, 1983 but before the 25th day of July, 1991, the exemption under section 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such assets, by reason only that the funds of the trust or the institution have been invested in such assets if such funds do not continue to remain so invested in such assets after the 31st day of March, 1992.
….”
From the above provisions read in the light of the decision of Hon’ble Apex Court in the case of Fr. Mullers Charitable Institution (supra) , it is clear that the denial of exemption is restricted to the income derived from such investments as fall under the provisions of section 13(1)(d) on account of having been made in violation of modes specified in section 11 (5) of the Act. Simply for the reason of such investment, the entire income of the trust cannot be denied the benefit of exemption u/s 11 of the Act and it is only the income derived from such investments which is taxable at maximum marginal rate (in terms of section 164 of the Act).
6.2 We also note that the department has been conducting scrutiny year after year and has accepted the genuineness of the activities of the assessee and assessed the income at Nil after allowing benefit of section 11 of the Act under identical facts and circumstances. Further, it is seen that no income has been received from these investments during the year under consideration and this fact is not disputed by the Assessing Officer. The impugned investments were admittedly made in earlier years and therefore, the action of taxing the same as deemed income could be taken only in those years. Accordingly, we note that the AO has incorrectly denied the benefit of section 11 & 12 an entire income holding that there is a violation under section 13(1)(d) of the Act.
6.3 In light of above, we are of the considered view only the income from the investments made earlier in violation of section 11(5) is to be taxed at maximum marginal rate during the year under consideration. The trust does not lose the benefit of section 11 on its other income and for the denial of benefit u/s 11 of the Act, the cancellation of registration can only be done by the CIT(E) for specified violations u/s 12AB(4) of the Act.
6.4 In view of above factual matrix and the judicial pronouncements clarifying the scope of section 13(1)(d) and related provisions, we hold that the AO has incorrectly denied the benefit of section 11 of the Act and taxed the entire income of the assessee. Since no income has been received from the impugned investments during the year, we direct the AO to allow the benefit of exemption u/s 11 of the Act on the entire income of the assessee.
7. In the result, this appeal of the assessee in ITA No.- 5992/Del/2026 is allowed.
8. In ITA No. 5991/Del/2026 for A.Y. 2016-17, issues involved and the facts and circumstances are identical and hence above order shall apply mutatis mutandis to this appeal also.
Order pronounced in the open court on 28.09.2026
