2013 (12) TMI 1538 - AT - Income Tax

Exemption u/s 11 - whether the amount lying with Credit Industrial at Commercial Paris was in violation of provisions of section 11(5) or not? - Held that - There was no violation of the provisions of sec. 11(5) in the present set off facts. Further AO has not demonstrated with facts and figures that submission of assessee that in the relevant assessment year under consideration i.e. A.Y. 2008-09 there was no accumulated income is not correct. Therefore in any views of the matter there was no question of any violation of section 11(5). As regards the applicability of provisions of section 13(1)(d) as we have already held that the provisions of section 11(5) are not attracted in the present set of facts the provisions of section13(1)(d) will also not apply. The assessee has been granted exemption u/s 11(1)(c) by the Board in respect of income applied outside India.Therefore to the extent amount was not applied to the objects of society outside India the amount remained with the French Bank. Therefore it could not be said that there was any violation of provisions of sec. 11(5).

Summary

Issues Involved:
1. Violation of Section 13(1)(d) of the Income Tax Act.
2. Applicability of Section 11(5) of the Income Tax Act.
3. Eligibility for benefits under Sections 11 and 12 of the Income Tax Act.
4. Set-off of brought forward losses.
5. Applicability of Section 164(2) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Violation of Section 13(1)(d) of the Income Tax Act:
The primary issue was whether the funds held by the assessee in the Credit Industrial et Commercial Bank, Paris, constituted a violation of Section 13(1)(d) of the Income Tax Act. The Assessing Officer (AO) contended that the funds were investments or deposits, thus violating Section 11(5) and invoking Section 13(1)(d). However, the tribunal found that the funds were not investments or deposits but were directly deposited as grants from the French Government for mandated purposes. The tribunal concluded that there was no violation of Section 13(1)(d) since the funds were not parked with the bank for earning interest but were part of an arrangement between the Indian and French governments.

2. Applicability of Section 11(5) of the Income Tax Act:
The AO argued that the funds should comply with Section 11(5), which prescribes specific forms and modes of investing or depositing money. The tribunal examined whether the assessee had applied less than 85% of its income towards its objectives and whether the funds in the French bank violated Section 11(5). It was determined that the funds were not investments or deposits but were part of a bilateral arrangement, and thus, there was no violation of Section 11(5).

3. Eligibility for Benefits under Sections 11 and 12 of the Income Tax Act:
The tribunal upheld the CIT(A)'s decision to allow the benefits of Sections 11 and 12 to the assessee. The tribunal found that the assessee's income was eligible for exemption under these sections, as there was no violation of Section 11(5) and consequently no applicability of Section 13(1)(d). The income applied outside India was exempt under Section 11(1)(c) as granted by the Board.

4. Set-off of Brought Forward Losses:
The AO denied the assessee's request to set off brought forward losses from A.Y. 2008-09. The CIT(A), however, directed the AO to allow the set-off, following the Delhi High Court's decision in DIT vs. Raghu Vanshi Charitable Trust, which held that income derived from trust property should be computed on commercial principles. The tribunal agreed with the CIT(A), allowing the set-off of brought forward losses.

5. Applicability of Section 164(2) of the Income Tax Act:
The AO taxed the interest earned from the French bank at the maximum marginal rate under Section 164(2), arguing that the assessee violated Section 13(1)(d). However, since the tribunal found no violation of Sections 11(5) and 13(1)(d), it ruled that the provisions of Section 164 could not be invoked. Thus, the tribunal upheld the CIT(A)'s decision that the maximum marginal rate was not applicable.

Conclusion:
The tribunal dismissed the Department's appeals, upholding the CIT(A)'s orders for both A.Y. 2008-09 and A.Y. 2009-10. The tribunal found no violations of Sections 11(5) and 13(1)(d), affirmed the eligibility for benefits under Sections 11 and 12, allowed the set-off of brought forward losses, and ruled out the applicability of Section 164(2). The order was pronounced on 31/12/2013.