TMI Blog2014 (5) TMI 890X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome in terms of sections 11 (1) and (2), the entire income of the trust has to be considered including the dividend and long term capital gain claimed as exempt u/s 10 of the act - the assessee has applied ₹ 164.93 crore during the year and nothing has been brought to show that the shortfall of more than 446 crore has been applied in the immediate following year - apparently the assessee trust has not applied the shortfall of more than 446 crore in the immediate next year in terms of the Explanation to section 11(1) of the Act - the assessee has already applied the entire balance amount in the shares of Tata Sons Ltd. – thus, the question of application of shortfall in the immediate next year does not arise. The assessee held the bonus shares of TCS for the duration which is within the time limit prescribed under clause (iia) of the proviso to section 13(1)(d) the assessee converted the assets being bonus shares of TCS into the preferential share of Tata sons Ltd. which is not a conversion into the asset/investment permissible u/s 11(5) of the Act - clause (iia) of proviso to section 13(1)(d) would not rescue the assessee from the mischief of section 13(1)(d) (iii) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... studying abroad – Held that:- Following CEO Clubs India Versus Director of Income-tax (Exemption) 2012 (10) TMI 895 - ITAT MUMBAI] - the education grant given to the Indian students in India for education/higher education abroad fulfills the conditions of application of money for such purpose in India – Decided in favour of Assessee. Denial of deduction – Income applied to objects of trust in India – Administrative expenses – Held that:- The AO denied the exemption u/s 11 and computed the income in commercial manner - CIT(A) has recorded that the AO has not made any disallowance on account of administrative expenses - the AO has computed the total income by taking the income from various sources and has not allowed any deduction - the question of exemption u/s 11 is required to be remitted back to the AO for reconsideration – Decided in favour of Assessee. Denial of TDS credit – Held that:- CIT(A) has directed the AO to verify and allow the claim of TDS – thus, no grievance arises from the order of CIT(A) – Decided against Assessee. Applicability of MAT to the entire income – Denial of applicability of rate of tax to STCG and LTCG – Held that:- The rate of tax on short te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plies to the entire income and in denying the applicability of the rates of tax applicable to short term and long term capital gains. 2. Ground No. 1 is regarding denial of exemption u/s 11 of the Income-tax Act. 2.1 The assessee is a charitable trust. During the Financial year relevant to Assessment year under consideration, the assessee has earned the following income: Assessment year 2010-2011 Revised Computation Income Under Section 10 Rs. crore Dividend on shares 148.00 Dividend on units 0.08 Long term Capital gains 296.04 Total 444.12 Under section 11 Interest on bonds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) in terms of shares of TCS and Tata Sons Ltd held by the assessee. Accordingly a notice u/s 142(1) was issue to the assessee. The assessee responded to the notice by its reply and explanation. After considering the reply the AO held that benefit of section 11(1A) is not available to assessee because investment in shares of Tata sons Ltd as per section 11(1) and further the investment in shares of Tata Sons Ltd is not held as Corpus fund. The AO was also of the view that as per the proviso to section 13(1)(d) exempt assets from disqualification must be held by the trust as its Corpus as on 1.06.1973. Shares of TCS are held by assessee only from the A.Y. 2001-02, hence the assesseee does not fulfil the conditions of holding of TCS shares in terms of the proviso to section 13(1)(d). Accordingly the AO held that the assessee is hit by the provisions of section 13(1)(d)(i) in terms of investment in shares of Tata Sons Ltd and by provisions of section 13(1)(d)(iii) in terms of shares of TCS and Tata Sons Ltd held by it and exemption u/s 11 and 12 will not be allowable in respect of any income of the assessee's trust. 3. On appeal, CIT(A) appeal concurred with the view taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of Explanation 3 to section 13(2)(h). Alternatively the ld. Senior Counsel has submitted that the if it is held that the investment with Tata Sons Ltd., is hit by the provisions of section 13(2)(h) then only the income arising from such investment is disqualified from the exemption u/s 11 of the Act and not the entire income of the assessee. In support of his contention he has relied upon the decision of Hon ble Supreme Court in the case of Addl. Commissioner of Income-tax. v. Surat Art Silk Cloth Manufacturers Association. The ld. Counsel has also referred the decision of this Tribunal in the case of Tata Education Trust and Tata Social Welfare Trust dated 26-02-2008 and submitted the Tribunal has held that the entire income of the assessee would not attract the disqualification for the purpose of section 11 but only the income derived from the investment falling under the prohibited category would be chargeable to tax. He has pointed out that the Tribunal while deciding the issue has followed the earlier decision of the Tribunal in the case of Gurudayal Berlia Charitable Trust v. Fifth ITO [1990] 34 ITD 489 (Bom.). Hence the ld. Senior Counsel has submitted that the only incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions should not conflict with the intent of the legislature and the object of the provisions as a whole. In support of his contentions he has relied upon the decision of Hon'ble Supreme Court in the case of K.P. Varghese. v. ITO [1981] 131 ITR 597. He has also relied upon the orders of authorities below. 6. We have considered the rival submissions as well as relevant material on record. The income of the charitable/religious trust or institution is exempt u/s 11 of the Income-tax Act subject to the fulfilment of conditions stipulated u/ss 11 and 13 of the Act. There are two testes to be qualified by the trust or institution to avail the exemption u/s 11 of the Act. These two tests are broadly categorized as application of income and source of income the conditions and manner of application of income as enumerated u/s 11 (5) of the Act. Whereas the condition of source of income are provided under section 13 and particularly under sub-sections 1 and 2 of section 13 of Income-tax Act. We are concerned only with the conditions prescribed in clause (d) of sub-section (1) and clause (h) of sub-section (2) of section 13. Both these tests are to be qualified for ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount (i) for the reason that the whole or any part of the income has not been received during that year, or (ii) for any other reason, then (a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and (b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calcul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 insti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment in debentures issued by, or on behalf of, any company or corporation both the principle 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 section company has been made and such public sector company ceases to be a public section 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 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 approved by the Central Government for the purposes of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year. He has referred the letter dated 13.09.2010 whereby the assessee exercised its option under clause 2 of the Explanation to section 11 (1)(a) of the Income-tax Act. It is pertinent to note that while computing the application of the income the assessee has excluded dividend and long term capital gain as well as short term capital gain and shown the income at Rs. 25.78 crore. Whereas the total income of the assessee including capital gain and dividend income is Rs. 714.42 crore. To meet the requirement of 85% of the income of Rs. 714.42 crore, the assessee was required to apply or deemed to have been applied the income to the extent of Rs. 607.43 crore. As per the details, the assessee has applied Rs. 164.93 crore during the year and nothing has been brought before us to show that the shortfall of more than 446 crore has been applied in the immediate following year. Therefore, apparently the assessee trust has not applied the shortfall of more than 446 crore in the immediate next year in terms of the Explanation to section 11(1) of the Act. Because the assessee has already applied the entire balance amount in the shares of Tata Sons Ltd., therefore, the question of applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel however has argued that the bonus shares received by the assessee on 19.06.2009 are not held by the assessee beyond the limit permitted by the proviso to section 13(1)(d) of the Act. This contention of the Ld. Senior Counsel is not acceptable simply on the reason that the time period permitted under proviso to section 13(1)(d) is to exit from non permissible investment/holding of shares and convert the same into permissible investment. Clause (iia) of proviso has been inserted by the Finance Act 1991 to secure that mere accretion of the existing holding of shares by way of bonus shares or acceptance of donation in kind or any asset not conforming to the provisions of section 11(5) will not make the fund or trust or institution lose tax exemption if the trust/institution covert the asset not conforming to section 11(5) into permissible investment within one year from the end of the Financial Year in which such bonus shares or other assets are received or on 31.3.1992 whichever is later. The explanatory note on the provision as issued by the CBDT vide Circular no. 621 dated 19.12.1991 reported in 195 ITR (st) 154 is relevant on this point. Para 15.2 of the said Circular reads a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971) in any concern in which any person referred to in sub- section (3) has a substantial interest. 8.1 The AO held that investment in shares of Tata Sons Ltd is in contravention of clause (h) of sub section 2 of section 13 because Tata Sons Ltd., is a concern in which the person referred in sub section 3 has substantial interest. Ld. Senior Counsel though reiterated the assessee's stand taken before the authorities below however he has contended that violation of section 13(2)(h) would not render the entire income of the trust lose exemption u/s 11. In support of his contention he has relied upon the decision of the Tribunal in the case of Tata Education Trust and Tata Social Welfare Trust (supra). As far as the violation of clause (h) of section 13(2) is concerned we find that the author of the assessee trust and its relative definitely have a substantial interest in the Tata Sons Ltd, therefore, the investment in the shares of Tata Sons Ltd is clear violation of clause (h) of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come up in appeal before the Tribunal. The learned counsel for the assessee reiterated the submissions, which were made before the IT authorities and strongly urged that they should have accepted the assessee's contention that it would lose exemption under S. 11 of the Act in respect of the dividend income only. He was fair enough to state that it is not in dispute that by virtue of the provisions of S. 11 (5) of the Act, the assessee would lose exemption under S. 11 of the Act, as it is holding 12,000 preference shares of the National Rayon Corporation Ltd. However, he hastened to state that the assessee would lose exemption under S. 11 of the Act in respect of the dividend income received on the said shares and not in respect of other income earned by it. In other words the learned counsel for the assessee wanted to impress upon us that just ca se the assessee was not in a position to dispose of the shares of National Rayon Corporation Ltd., it should not lose exemption contemplated under S. 11 of the Act in respect of other income earned by it. In this connection it invited our attention to Circular No. 387 containing explanatory notes on the Finance Act, 1984, more particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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), then 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 the association of persons. On the other hand, Section 11(5) lays down various modes or forms in which a trust is required to deploy its funds. Section 13(1) lays down cases in which Section 11 shall not apply. Under Section 13(1)(d)(iii), it has been laid down that any share in a company, not being a Government company, held by the trust after November 30,1983, shall result in forfeiture of exemption. By virtue of proviso (iia) it has been laid down that any asset which does not form part of permissible investment under Section 11(5) shall be disposed of within one year from the end of the previous year in which such asset is acquired or by March 31, 1993, whichever is later. In the present case, the assessee was required to dispose of the shares under the said proviso by March 31, 1995 (se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted exemption under the said provision and not to the entire income. We may also add that in law, 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. It is interesting to note that although the Legislature withdrew Section 164(2) by the Direct Tax Laws (Amendment) Act, 1987, which provision was reintroduced by the Direct Tax Laws (Amendment) Act, 1989, the Legislature did not touch the proviso to Section 164(2) which has been on the statute book right from April 1, 1985. The said proviso was inserted by the Finance Act, 1984, The proviso specifically refers to violation of Section 13(1)(d) and its consequences. In the circumstances, we find 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 in Mafatlal Industries Limited and not to the entire income. Therefore, income other than dividend income shall be taxed at the normal rate of taxation under the Act.' 8.4 Following the above decision we hold that the br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 11 of the Income-tax Act. Thus the ld. Senior Counsel has submitted that if exemption is available u/s 10 then section 11 is irrelevant. He has relied upon the following decisions: (i) CIT. v. Seethakathl Trust [2007] 295 ITR 520 (Mad.). (ii) Brahmin Educational Society v. Asstt. CIT [1997] 227 ITR 317 (iii) CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad.) (iv) Bar Council of Uttar Pradesh v. CIT [1983] 143 ITR 584 (All.) (v) CIT. v. Bar Council of Maharashtra [1981] 130 ITR 28 (SC). 9.4 The ld. Senior Counsel referred the observations of these decisions and submitted that once the income is exempt u/ss 10, same cannot be said to be taxed u/s 11 to 13. He has further contended that if the exemption is available to the assessee under two provisions of the Act, then the assessee is entitled to exemption under the provision which is more beneficial. 9.5 On the other hand, ld. DR has submitted that as per section 11 of the Act, the income from the property held under trust is covered under this section and not u/s 10 of the Income-tax Act. He has contended that both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax u/ss 11 to 13. Similar view has been taken in the series of decisions as relied upon by the ld. Senior Counsel when the question involved was the allowability of exemption u/s 10, (22), (23) Vs. sections 11 and 13. In our view the exemption u/s 11 is available on the income of the public charitable /religious trust or institution which is otherwise taxable in the hands of other persons. Thus the income which is exempt u/s 10 cannot be brought to tax by virtue of sections 11 and 13 of the Act because no such pre condition is provided either u/s 10 or 11 to 13 of Income-tax Act. Therefore, section 11 to 13 would not operate as overriding affect to the section 10 of the Act. The language of these provisions does not suggest that either section 10 is subjected to the provisions of sections 11 to 13 or sections 11 to 13 has any overriding affect over section 10. Therefore, the benefit of section 10 cannot be denied by invoking the provisions of sections 11 to 13 of the Act. Once the conditions of section 10 are satisfied then no other condition can be fastened for denying the claim under section 10 of the Act. 9.8 In view of the above discussion and following the various decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity of the assessee does not end with the selection of candidates for assistance and disbursing amount to him but necessarily involves monitoring of the progress of the scholar's education outside Indian and completion of education outside India subject to the performance of the students, the financial assistance is granted and continued. Even only those students were selected who have already started their education outside India. Therefore, the trust is not merely handing over the grant for education of the scholars but is actively monitoring the education of scholars abroad. The assessee has not applied its income for charitable purpose in India. Merely making payment in India is not sufficient but the charitable purpose should also happen within Indian territory. He has relied upon the decision of Hon'ble Delhi High Court in the case of National Association of Software Services Companies (supra). 10.5 We have considered the rival submissions and perused the relevant material. The assessee has given grant to 97 scholars studying in various institutions and universities outside Indian and the total amount of grant is Rs. 1,53,50,000/-. The assessee paid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of charges paid outside their countries and hence the relevant consideration is whether the situs of the application of the money and not the place in which the objects of the trust may become effective. It may be pertinent to refer to section 1 of 16 which exempts scholarships granted to meet the cost of education where also the CBDT itself does not consider scholarship granted for education abroad as money spent outside India. Similarly in the present case of such a wide object of propagation of art it would be difficult to confine it to the shores of the land. We are of the considered opinion that the expression applied to such purposes in India refers only to the situs of the expenditure and not to the place 'where the purposes are carried out. The fact that the troupe gave the performance abroad is therefore no disqualification for treating he amount actually spent in India as application of the amount for charitable purposes. The Commissioner also referred to collections made for performances given as an activity for profit. We find that such performances do not constitute activities for profit as the collections are in the nature of donations received for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rces and has not allowed any deduction. In view of our finding on the question of exemption u/s 11, this issue is set aside to the AO to reconsider the claim in the light of our finding on other issues. 12. Ground No. 5 is regarding TDS credit. 12.1 We have heard the ld. AR as well as ld. DR and considered the relevant material on record. At the outset we note that the CIT(A) has considered this issue in para 8 as under: The A.O. is directed to verify and allow claim of TDS if any, u/s. 154 of the I. T. Act as an alternative remedy available with the appellant. Therefore, to that extent ground No. 6 survives for direction as given, but treated as dimissed for statistical purposes 12.2 As it is evident from the finding of CIT(A) that the AO was directed to verify and allow the claim of TDS, therefore, no grievance arises from the impugned order of CIT(A). However the AO is directed to consider and decide the claim of TDS credit. 13. Ground No. 6 is regarding maximum marginal rate of tax applied to the entire income. 13.1 While denying the exemption u/s 11, the AO has applied the maximum marginal rate of tax on the entire income as per section 164(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (NO.2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that that chapter, the tax payable by the assessee on the total income shall be the aggregate of (i) the amount of income tax calculated on such short-term capital gains at the rate of fifteen per cent; and (ii) the amount of income tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee: Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income tax, then, such income as so reduced falls short of the maximum amount which is not chargeable income tax and the tax on the balance of such short term capital gains shall be computed at the rage of fifteen per cent. 2. Where the gross total income of an assessee includes any short-term capital gains referred to in sub-section (1), the deduction under Chapter Vl-A shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
