TMI Blog2014 (11) TMI 444X X X X Extracts X X X X X X X X Extracts X X X X ..... e or religious purposes - This is subject to application of other provisions of Act like exemptions, deduction etc. - a proviso was inserted by the Finance Act, 1984, with effect from April 1, 1985, under which in cases where the whole or any part of the relevant income is not exempt u/s 11 or section 12, because of the contravention of section 13(1)(d), then tax shall be charged on such income or part at the maximum marginal rate - only non-exempt income portion would fall in the net of tax, as if it was the income of an association of persons. The dividend income being exempt from income by express provisions of sec 10(34), the dividend income is exempt from Income Tax - This being so, in the result there remains no tax liability on the trust - even department has not been taking any particular stand and allowing the benefits of sec 11 and 12 in some of the years, then rethinking and refusing the benefits by reopening the assessments - even the department has its own share of interpretations, leading to repetitive proceedings – Decided in favour of assessee. - ITA No. 169/JP/2012 - - - Dated:- 5-11-2014 - Shri R. P. Tolani And Shri T. R. Meena,JJ. For the Petitioner : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was established for the charitable purposes including relief for the poor by providing medical aid. In furtherance of its objects it runs Santokba Durlabhji Memorial Hospital cum Research Institute. On 25-5-1982 trust received a corpus donation of 11,909 TISCO shares having face value of ₹ 100/- each from late Maharani Geetadevi Gaekwad of Baroda. These shares amounting to face value of ₹ 11,90,900/- were credit to corpus fund of the trust on 25-05-1982. Volume of these TISCO shares went on increasing in corpus fund due to accrual by issue of bonus shares received in various years. Thus facts indicate that no trust fund was utilized for acquisition of these TISCO shares. It is well known that TISCO shares are valuable as apart from increase in their market value, they keep on getting bonus shares as well as right shares from time to time. In impugned year a preferential rights issue was declared on TISCO shares, the assessee trust paid a sum of ₹ 93,06,900/- on 15-12-07 for availing the allotment of preferential rights issue from its Union Bank saving a/c. Till A.Y. 2007-08 exemption u/s 11 12 of I. T. Act,1961 claimed by the assessee was allowed in all the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed by A.O. u/s 143 (3) holding that assessee trust as eligible to exemption u/s 11 thereby accepting declared income at NIL. However concerned CIT is understood to have initiated proceedings u/s 263 of I. T. Act, 1961 for A.Y. 2005-06, 2010- 11 2011-12 which are pending. vii. Thus the department has been consciously adopting a vacillating approach in granting exemption u/s 11 12 for different assessment years. 3.2 Aggrieved, assessee preferred first appeal where detailed submissions were made and a catena of judgment was cited to support the claim of the assessee for its eligibility to exemption. The relevant observations and conclusion of ld. CIT(A) are reproduced as under:- ''The AO observed that the Trust held some shares in TISCO Ltd. at the beginning of the year worth ₹ 51,45,915/- and this investment increased to Rs.l,44,52,815/-during the year. This investment was in shares in a non public sector company and in violation of the provisions of section 13(l)(d)(iii) as the reply of the assessee was discussed by the AO in his order from pages 2 to 5 and then rejected after a detailed discussion. On page 7 of his order he observed that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its functions. f) In the case of the Trust shares forming part of corpus were received by it after 1st June,1973 and even then the accretion was not necessarily by way of bonus shares. The assessee had grossly ignored the phrase by way of bonus while stressing on the definition of word accretion . The statute has allowed accretion only by way of bonus shares and that too in cases when such shares were with the trust on 1st June, 1973. When the shares are forming part of corpus after 1st June, 1973, question of accretion does not even arise. Clearly the investment in right-issue cannot, by any stretch of imagination, be equated with the phrase accretion by way of bonus shares. On the basis of these facts of the case and law as applicable to the facts, it was held by the AO that there should be withdrawal of benefit of section 11 12 for violation of section 13(l)(d). In the first appeal, the assessee made following submissions. i) For the assessment year 2008-09 the appellant filed its return of income declaring Nil income on 30.9.2008 as the appellant applied more than 85% of its income for charitable purposes. ii) Out of the balance, constituting less than 15% o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1(2) he did not fall within the mischief of section 13(l)(d). When some amount was invested out of the balance income of less than 15% over which no conditions were imposed in the statute for accumulation in any form. The only condition to be fulfilled was that no amount can be utilized for the benefit of any of the trustees or founder, manager etc. Since there is no such allegation against the appellant, relief was sought. vii) Reliance was placed on the following case laws:- a) Addl. CIT vs. ALN Rao Charitable Trust (1995) 216 ITR 697 (SC) b) S.RM.M.CT.M. Tiruppani Trust vs. CIT vs. CIT (1998) 230 ITR 636 (SC). It was submitted that on the basis of the above orders when there was violation of section 11(2) then there is no chance of falling under the mischief of section 13(1)(d). viii) It was also submitted that original investment was received as a donation and no income of the appellant was deposited for the same. Secondly, there was no requirement for divesting of those shares since sub clause (i) and (ii) of section 13(l)(d) lay emphasis on the fact of investment of the funds of the trust in shares. Since the appellant's funds were never invested in 1982, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ha Rama Reddy Charites vs. CIT (1989) 177 ITR 249; (e) CIT vs. Pitti Charitable Trust 207 ITR 1053 ; (f) VIT vs. Shri Radha Krishna Temple Trust 227 ITR 159 (Allahabad H.C.); (g) CIT vs. Madras H.C. in the case of CIT vs. Kumudam Endowments (2000) 242 ITR 159; (h) CIT vs. Agrim Charan Foundation 253 ITR 593 (Del); (i) DIT (Exemption) vs. Sheth Mafatlal Gagalbhai Foundation Trust (2001) 249 ITR 533 (Bom.) The Finance Act, 1983 amended the provision of Section 13(10(d) w.e.f. 01-04-1983 and laid down a uniform pattern for investment in the income accumulated u/s 11(2) and (emphasis provided) the funds referred to in Section 13(1)(d). Section 13(1)(d) is applicable not only to income accumulated u/s 11(2) but to ''any income'' for any period during the previous year of the trust. Thus Section 13(1)(d) is not limited to by the provision of Section 11(2) as submitted by the A.R. As clause 13(1)(d) stands at present, the rigorous of the Section regarding investment are applied to:- (i) Investments or deposits made after 28.2.1983; (ia) bonus shares where the original shares formed part of the corpus of the trust or the Institution as on 1.6.1973; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot adhere to the provision (iia) of Section 13(1)(d) in so far that these shares were held by it even after the expiry of one year from the end of the previous year i.e. 31/3/2008 in which they were acquired. As per this proviso they should have been sold by 31/3/2009 which was not done. Therefore, the appellant is not entitled to relief under the proviso (iia) of Section 13(1)(d).'' 3.3 Aggrieved, assessee is before us. 3.4 Ld counsel for the assessee Shri G G Mundra reiterated the facts and contends that Section 13 lays down situations when provisions of u/s 11 will not to apply, sec. 13 (1) (d) provides that exemption to a charitable or religious trust/institution will be denied if any funds of the trust/institution are invested or deposited after February 28, 1983 (extended upto 28-2-1993) otherwise than in any one or more of the forms or modes specified therein. Sec 13(2) of the Act, without prejudice to the generality of the provisions of section 13 (1) (c) and section 13 (1) (d), provides that the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maximum marginal rate. 3.5 It is pleaded that both the ld. Authorities have failed to apply these provisions in a correct manner and have held the entire income of the trust to be chargeable to tax at maximum marginal rate. While doing so they have failed to appreciate the correct and plain reading of provisions of section 164(2) which clearly lay down that in the case of such default, tax shall be charged as an AOP at maximum rate, only to that part of income which is not exempt under section 11 or 12 due to such default. The provisions unambiguously postulate that in eventuality of any technical default only non exempt part may be brought to tax, as the income of an AOP. At the same time it clearly lays down that the balance income of the charitable trust/institution to which no default is attributed will remain exempt in terms of secs. 11 12. Sec 13 is to be read together with proviso to section 164 (2), which provides that - where the whole or any part of the relevant income is not exempt under section 11 or section 12, by virtue of the provisions of section 13 (1) (c) or section 13 (1) (d), tax shall be charged on the relevant income or part of relevant income, at the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 13 (1) (d) of the Act, the maximum marginal rate of income-tax will apply only to that part of income, which has forfeited exemption under the said provisions. Both the ld. Authorities below failed to apply this binding circular of the Board. It is pleaded that assesses case is supported by catena of legal precedents supporting this legal proposition, including the following judgments of the Karnataka and the Bombay High Courts. which held as under: - 1. CIT v. Fr. Mullers Charitable Institutions [2014] 363 ITR 230 (Karn). In this case, the assessee, a charitable trust, for the assessment years 2000-01 and 2001-02 claimed exemption under section 11. The Assessing Officer noticed that the assessee had advanced a sum of ₹ 30 lakhs during the assessment year 2000-01 and a sum of ₹ 50 lakhs during the assessment year 2001-02, respectively, to a company which was running a Kannada daily. According to the Assessing Officer, advancing of such a huge amount was in violation of section 11 (5). Further, as per section 13 (1) (d), the trust shall not be entitled for exemption under section 11 and 12 of the Act. Accordingly, the Assessing Officer assessed the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant income, at the maximum marginal rate. However, violation of section 13 (1) (d) does not result in the denial of exemption under section 11, to the total income of the assessee. 2. DIT(E) v. Sheth Mafatlal Gagalbhai Foundation Trust 249 ITR 533 (Bom). In this case, according to the Assessing Officer, on account of violation of section 11(5) of the Act, the assessee forfeited exemption under section 11, in respect of its entire income, viz. dividend income plus interest income, whereas according to the assessee, they were entitled to claim exemption and they were entitled to continuance of exemption in respect of interest income, though they had forfeited the right to claim exemption vis- - vis the dividend income, as the assessee continued to hold the shares in a non-Government company even after March 31, 1993. On appeal, the Commissioner of Income-tax (Appeals) came to the conclusion that the assessee was not entitled to the benefit of exemption under section 11, in respect of the entire income. On further appeal, the Tribunal came to the conclusion that in view of section 164 (1), the income receivable by the trust was the relevant income. That a portion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is derived from property held under trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of the association of persons. Therefore, a proviso was inserted by the Finance Act, 1984, with effect from 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 non-exempt income portion would fall in the net of tax, as if it was the income of an association of persons. It was further held by the High Court that as per proviso to section 164 (2), it is, inter alia, laid down that in cases where the whole or part of the relevant income is not exempt by virtue of section 13 (1) (d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. The phrase relevant income or part of relevant income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot to the entire income of the trust, if the other income of the trust, otherwise fulfils the condition for exemption. Therefore, the exemption under section 11 is available to the assessee only in respect of income, to the extent the same is derived in conformity to section 11 and applied during the year for the purposes of the trust. While reaching the aforesaid conclusion, the Hon. Tribunal had followed the judgment of the Bombay High Court, in the case of DIT (E) v. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 (Bom). It is submitted here that in the aforesaid judgment, the Tribunal has also followed the earlier judgment of Mumbai Bench of the Tribunal, in the case of Gurdayal Berlia Charitable Trust v. Fifth ITO [1990] 34 ITD 489 (Bom). It was held in this judgment that non-fulfilment of the condition of investment under section 11(5) cannot deprive the trust of exemption of its other income, which has already been granted to it in the earlier years. The non-fulfilment of the condition under section 11 (5) would only make a portion of the relevant income as specified under section 164 (1), liable to tax. It was further held that in such a case, the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -condition is provided either under ss. 10 or 11 to 13. Therefore. Ss. 11 to 13 would not operate as overriding effect to s. 10. The language of these provisions does not suggest that either s. 10 is subject to the provisions of ss. 11 to 13 or ss. 11 to 13 has any overriding effect over s. 10. Therefore, the benefit of s. 10 cannot be denied by invoking the provisions of ss. 11 to 13. Once the conditions of s. 10 are satisfied then no other condition can be fastened for denying the claim under s. 10. In view of the above submissions the dividend income on shares and mutual funds and long term capital gain on sale of shares are exempt under s. 10 (34), 10 (35) and 10 (38) respectively and cannot be brought to tax by applying s. 11 and 13. The above judgement of Mumbai ITAT in case of Jamsetji Tata Trust has been taken note by the legislature and to nullify the effect of this part of Judgement section 11(6) and 11 (7) in the I. T. Act, 1961 has been inserted w.e.f. 1-4-2015 (A.Y. 2015 - 16) The substance of the provision was explained in Finance bill (No. 2) 2014 as Sections 11, 12 and 13 are special provisions governing institutions which are being given benefit of tax ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 11 12 shall not apply to Trust by which exemption of whole of income of trust will not be available u/s 11 12 of I. T. Act, 61. The provision of Section 12AA (4) will also come into force w.e.f. 1-4-2015 (A.Y. 2015-16). This also supports the above legal position that on operation of provisions of Section 13(1) denial of exemption of whole of income of Trust could not be made prior to A.Y. 2015-16''. 3.8 It is pleaded that there is no ambiguity in this behalf in view of the combined reading of the CBDT circular(supra) Hon'ble Bombay Karnataka High court judgments and various other judicial precedents cited above. Hon'ble Supreme Court recently in the case of CIT v. DAWOODI BOHRA JAMAT case 364 ITR 31 has held that if the activities of the trust are composite i.e. partly charitable and partly not held to be so; the entire benefits of sec 11 12 cannot be denied to the trust, what is to be excluded from benefits is the activity which is not held to be in accordance with provisions of Secs. 11,12 and 13. The view adopted by ld. AO and ld. CIT(A) leads to unintended and harsh results besides they make the conjoint provisions of sec. 164 otios and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were purchased out of the sale proceeds of old shares. This plea was also rejected as there was no sale of shares during the year under consideration. And if it was in earlier years then it is further established that the Trust had invested money out of its own funds. iv. The assessee has further claimed that had the Trust not opted to subscribe for rights issue it would have resulted in a big loss to the Trust. The trustees are in a fiduciary position and had to act for the benefit of the Trust. v. The AO observed that the assessee was trying to compare a case of a company with that of the Trust. The functions of a Trust are altogether different from the functions of a company. The Trust gets tax benefit under the Act only if it satisfies certain conditions laid down in sections 11,12 13 and it is not meant for profit motive. On the contrary, in the case of a company profit is the most powerful driving force in its functions. vi. The shares forming part of corpus were received by it after 1st June,1973 and even then the accretion was not necessarily by way of bonus shares. The assessee had grossly ignored the phrase by way of bonus while stressing on the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing a beneficial circular is to be also applied. A combined reading leads to a harmonious construction, proviso to section 164(2) is very important, Legislature has clearly contemplated that in a case where the whole or part of the relevant income is not exempt under section 11, by virtue of violation of section 13 (1) (d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. CBDT Circular No. 387, dated July 6, 1984, issued by the Central Board of Direct Taxes [152 ITR (St.) 1] also supports this proposition. Section 164 (2) refers to the relevant income which is derived from property held under trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of the association of persons. This is subject to application of other provisions of Act like exemptions, deduction etc. Therefore, a proviso was inserted by the Finance Act, 1984, with effect from April 1, 1985, under which in cases where the whole or any part of the relevant income is not exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merit in the contention of ld. Counsel for the assesse that the proposition of apportionment of income eligible for benefits u/s 11 and 12 between exempted or non exempted income is upheld by Hon'ble Supreme Court in Dawoodi Bohra Trust (supra). Thus Hon'ble Supreme court has rationally dealt with this situation and instead of denying the entire benefits of sec 11 and 12 even for a technical, venial or smaller breach a sound and reasonable proposition has been laid down. In view of the foregoings we have no hesitation to hold that the entire benefits of sec. 11 and 12 cannot be forfeited from the trust and the corresponding dividend income from TISCO shares will not be eligible for Benefits of sec. 11 and 12. 5.1 Now we advert to the assessee's contention that income not eligible for benefits of sec 11 and 12 is to be subjected to other provisions of the IT Act and thereafter the taxable income is to be subjected to maximum marginal rate. We find force in this argument. As per the scheme of the Act, first the trust income is to be worked out, thereafter, benefits of provision of secs. 11 and 12 are to be applied. Remainder income is than to be treated with regular p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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