2014 (11) TMI 1111 - HC - Income Tax

Income of the trust which loses exemption u/s 11 - investment made by assessee with (GLFL) is not a specified investment and hence assessee is not entitled for exemption u/s 11(5) - Held that - Tribunal was justified in upholding the order passed by CIT(A) who has very clearly observed that the provisions of Section 11(1)(a) are very clear and provide that the income derived from the property held under trust shall not be included in the income to the extent it is applied for the charitable or religious purposes (expenses incurred during the year) or accumulated/set apart to be applied for that purpose in future out of 75% to which the restriction u/s 11(5) applies. We are in complete agreement with the reasonings adopted by the CIT(A) as well as Tribunal. In the case of Fr. Mullers Charitable Institutions (2014 (2) TMI 1033 - KARNATAKA HIGH COURT) held that a perusal of section 13(1)(d) of the Income-tax Act 1961 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 violation under section 13(1)(d) does not result in denial of exemption under section 11 to the total income of the assessee and that where the whole or part of the relevant income is not exempted under section 11 by virtue of violation of section 13(1)(d) of the Act tax shall be levied on the relevant income or part of the relevant income at the maximum marginal rate. Therefore we do not see any reason in interfering with the impugned orders. - Decided in favour of assessee

Summary

Issues:
Interpretation of Section 11(5) of the Income Tax Act for trust income exemption.

Detailed Analysis:

Issue 1:
The main issue in this case was whether the income of the trust, which loses exemption under Section 11 of the Income Tax Act if certain conditions are not met, can be considered as the income of the trust for violating Section 11(5) of the Act.

Analysis:
The appellant, a trust, declared its total income as NIL for the relevant assessment years but faced a challenge during assessment proceedings regarding an investment made in Gujarat Lease Finance Ltd (GLFL) claiming exemption under Section 11(5). The Assessing Officer disallowed the exemption, adding the amount to the total income, as the investment was not considered a specified investment. The CIT(A) later deleted this addition, which was upheld by the Tribunal. The core argument revolved around whether the interest income earned from investments qualified for exemption under Section 11 of the Act.

Issue 2:
The second issue involved the interpretation of the law regarding the exemption of trust income under Section 11 and the impact of violating Section 11(5) on the trust's total income.

Analysis:
The appellant argued that the authorities erred in concluding that there was a bona fide belief on their part and that the interest income earned from investments did not qualify for exemption under Section 11. On the other hand, the respondent supported the Tribunal's decision, citing precedents from the Bombay High Court, Delhi High Court, and Karnataka High Court to justify that only the income earned in violation of Section 11(5) should lose exemption, not the entire income of the trust.

Judgment:
After hearing both parties, the Court upheld the Tribunal's decision, agreeing with the CIT(A)'s interpretation of Section 11(1)(a) that income derived from trust property should not be included in the income if applied for charitable purposes or accumulated for future use, subject to restrictions under Section 11(5). The Court also referenced a similar issue in a previous decision and cited the Karnataka High Court's ruling that only income from investments violating Section 11(5) is taxable, not the entire trust income. Consequently, the Court dismissed the appeals in favor of the assessee, ruling against the revenue authorities.