9911796707
TMI Blog2014 (11) TMI 444X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 13(1)(d). (b) The ld. CIT(A) failed to appreciate that conditions stipulate4d in Section 11(5) with regard to accumulated income are only in respect of income of the trust falling within the statutory limit of 85% of such income and not in respect of the balance 15% of the income when such trus4t has applied 85% of its income in attaining the objects of the trust. Consequently, she erred in confirming the denial of the exemption to the appellant. 4. (a) The ld. CIT(A) grossly erred in holding that the original Tisco shares held by the appellant received as donations was also an investment of funds belonging to the appellant falling within the mischief of Section 13(1)(d) r/w Section 11(2) and 11(5). (b) The ld. CIT(A) failed to appreciate that the funds of the appellant were never invested in the original holding of Tisco shares and that such shares were received as corpus donations and consequently failed to appreciate that there was no violation of the provisions of Section 13(1)(d) r/w 1(2) and 11(5) of the I.T. Act, 1961. (c) The ld. CIT(A) failed to appreciate that acceptance of offer of rights shares which was received because of shares held from earlier years re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefits u/s 11 & 12 cannot be denied; in the worst scenario the income earned on unspecified investment i.e. TISCO shares may be denied exemption and subjected to maximum marginal rate of tax as per other provisions of I T Act. Rejecting assesses explanation in this behalf, ld. AO was of the view that even if there is a small violation of provisions of sec. 13(1)9d) it leads to denial of entire benefits of sec 11 and 12. This resulted in assessment of trust at RS. 6,23,44,980/-and further subjected it to tax at maximum marginal rate. It may be pertinent to mention here that parallelly ld. A.O. also initiated reassessment proceedings for A.Y. 2004-05 to A.Y. 2007-08 by issuing notices u/s 148 of I. T. Act, 1961. The department has been adopting an ambivalent approach by allowing exemption u/s 11 & 12 in some years and denying the same in some other years. The status of proceedings for different years is summarized as under: i. For A.Y. 2004-05 benefits of exemption u/s 11are denied. ii. For A.Y. 2005-06 it is held that Trust is entitled to benefits of exemption u/s 11. iii. Proceedings for reassessment for A.Y. 2006-07 are dropped holding that trust is entitled for exemption u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . c) The shares, which were with the Trust as part of its corpus as on 1.6.1973 and increased by way of bonus shares, then section 13(l)(d)(iii) shall not apply. Apparently it was not the case of the assessee during this A.Y. d) It was claimed that these shares 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 further established that the Trust had invested money out of the funds available with it. e) 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. One case law was been cited in this context contemplating a situation when court may interfere if directors of a company do not exercise their powers for thebenefit of the company. 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 satisfi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended that the AO should have treated the income of the appellant as exempt in terms of section 11(l)(a) of IT Act, 1961. The AO had not only charged this amount to tax but had also held that the investment in rights issue of TISCO shares had violated the provisions of section 13(l)(d) of IT Act, 1961. v) It was admitted that the appellant had subscribed to the right issue of TISCO shares out of the income of the appellant earned during the FY 2007-08. However, provisions of section 13(l)(d) would be attracted only when the investment was made otherwise than in any one or more of the forms or modes specified in section 11(5) of IT Act, 1961. The provisions of section 11(5) are applicable only for investment or deposit of money referred to in clause (b) of sub-section (2) of section 11. Section 11(2) is attracted only where 85% of income u/s 11(l)(a) or (b) is not applied for charitable purposes. Since the appellant did not apply more than 85% of its income referred to in section 11(l)(a) for charitable purposes exemption u/s 11(1) has to be granted to the appellant on this preliminary ground itself, raised as an additional ground l(a) and ground No.4 in the main ground. vi) It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard to the ground No.3, it was submitted that the AO did not discuss anywhere in the impugned assessment order the reason for non-consideration of purchase of assets (medical equipment) amounting to Rs. 3,44,07,618/- and diagnostic equipment of Rs. 15,600/-. Once these amounts are also treated as application of income then the total application of income works out to Rs. 39,41,15,839/- and consequently the claim for exemption u/s 11(l)(a) is of the order of 93.48% of income applied for charitable purposes. Thus, the investment in right issue constituting about 2.5% of total income cannot be called a "huge investment" and the funds coming out of the balance income of about 6.52% cannot be denied exemption. Reliance was also placed on the following case laws:- (a) Calcutta H.C. in the case of Birla Charitable Trust (1988) 170 ITR 150; (b) Gujarat H.C. in the case of CIT vs. Insaniyat Trust (1988) 173 ITR 248 and (c) Bombay H.C. in Trustees of Mangaldas N. Varma Charitable Trust vs. CIT 207 ITR 332 wherein the court held that section 13(2)(h) did not apply to assets received as a donation since no 'funds' were 'invested'. It has been submitted that these decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not required to be sought when the meaning has been specified in the proviso (iv) to Section 13(1)(d). As per this definition the purchase of shares of TISCO by the appellant cannot be termed as accretion to shares as per the proviso (ia) to Section 13(1)(d). It was an act of commission on part of the appellant to divert this income in purchase of these preferential rights issue. Therefore, the submissions of the A.R. that the provisions of Section 13(1)(d) would be attracted only when investment or deposit of money referred to in Section 11(2)(a) or (b) was involved as rejected as being contrary to law. The AO erred in charging to tax the entire surplus without waiting for a period of one year as required vide proviso (iia) to Section 13(1)(d). This submission of the AR is also not supported by the facts of the case of the assessee. From the details of particulars of shares received/purchased or sold of TISCO by the appellant (annexure A to the order), it is seen that the appellant purchased 3102 preferential right issue on 15/12/2007 which came in its D-MAT account on 22/1/2008. As per its own submission the total number of shares of TISCO were 185614 till 17/2/2011. Thus, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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:" In this context, the provisions of section 164 (2) are also relevant and applicable, which are as under :- "164. Charge of tax where share of beneficiaries unknown. (2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, or which is of the nature referred to in sub- clause (iia) of clause (24), of section 2 or which is of the nature referred to in sub-section (4A) of section 11, tax shall be charged on so much of the relevant income as is not exempt under section 11 or section 12, as if the relevant income not so exempt were the income of an association of persons. ....... Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trusts at the maximum marginal rates is applicable only in the case of private trusts having profits and gains of business. So far as public charitable and religious trusts are concerned, their business profits are not exempt from tax, except in the cases falling under clause (a) or clause (b) of section 11 (4A) of the Income - tax Act. As the maximum marginal rate of tax under the new proviso to section 164 (2) applies to the whole or a part of the relevant income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the Income-tax Act in regard to investment pattern or use of the trust property for the benefit of the settler, etc., contained in section 13 (1) (c) and (d) of that Act, the said rate will not apply to the business profits of such trusts which are otherwise chargeable to tax. In other words, where such a trust contravenes the provisions of section 13 (1) (c) or (d) of the Act, the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provisions." 3.6 It is vehemently argued that CBDT Circular itself lays down that-where such a trust contravenes the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 that the violation of section 13 (1) (d) was not tantamount to denial of exemption under section 11 to the total income of the assessee. Accordingly, the appeals of the IT Department were dismissed. It is emphasized that while deciding this case, the Hon'ble Karnataka High Court has placed reliance on various other judgments available on the issue like- 1. Hon'ble Delhi High Court, in the case of DIT (E) V. Agrim Charan Foundation [2002] 253 ITR 593 (Delhi). In this context, the following observations of the Honourable High Court, on page 238 of the Report are very relevant : "We are in respectful agreement that the views expressed by the Bombay High Court as well as Delhi High Court for violation section 11(5) of the Act and the entire income of the Respondent trust cannot be assessed for the tax." Thus, it is very clear 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 rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee contended that the requirement of investment for specified securities under section 11(5) results in an income to the trust which is receivable by the trustees and it is called relevant income under section 164(1). He further contended that a portion of such relevant income in the present case would suffer tax because the condition of investment as prescribed under section 11(5) had not been fulfilled. But non-fulfilment of such condition could not deprive the trust of the exemption of its other income, which had been granted in earlier years. He further contended that in this connection, the proviso to section 164(2) is very important. According to him, the 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. In this connection, he also relied upon Circular No. 387, dated July 6, 1984, issued by the Central Board of Direct Taxes [152 ITR (St.) 1]. It was held by the High Court that section 164 (2) refers to the relevant income which is derived ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent consequences. In the circumstances, it was held that there was merit in the contention of the assessee that in the present case, the maximum marginal rate of tax would apply only to the dividend income from shares in Mafatlal Industries Ltd. And not to the entire income. Accordingly, the aforesaid question was answered in the negative, that is, in favour of the assessee and against the Department. It is, therefore, clearly established that the Bombay High Court approved the judgment of the Tribunal to the effect that non-fulfilment of condition of investment prescribed under section 11(5) of the Act, could not deprive the trust of the exemption of its other income, which had been granted to it in the earlier years. In other words, it is clearly established that violation of section 13 (1) (d) was not tantamount in denial of exemption under section 11 to the total income of the assessee. 3. Jamestji Tata Trust v. Joint DIT (E) [2014] 101 DTR (Trib) 305 (Mum) It was, inter alia, held in this case that violation of section 13 (1) (d) and section 13 (2) (h) deprives exemption only to the income from investments not permitted under section 11(5) and not to the entire income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly the dividend income of Rs. 24,02,298/- which do not form part of total income u/s 10 (34) of I. T. Act, 1961 and thus exempt under the Act. In case of Jamsetji Tata Trust vs. Joint DIT (E) the Mumbai ITAT Bench in (2014) 161 TTJ (Mumb) 742/ [2014] 101 DTR (Trib) 305 (Mum.) in para 9.6 to 9.8 of appeal order relying on decisions of CIT vs. Divine Light Mission (2005) 196 CTR (SC) 135 : (2005) 278 ITR 659 (Del) and His Holiness Silasri Kasivasi Muthukumara Swami Thambiran & Ors. Vs. Agrl. ITO & Ors. 1978 CTR (Mad) 217 : (1978) 113 ITR 889 (Mad). held that the exemption under s. 10 is income specific irrespective of the status / class of person. The exemption under s. 11 is person specific though on the income derived from the property held under the trust. Further the exemption under s. 11 is subject to the application of income and modes or form of deposit and investment. The exemption under 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 under s. 10 cannot be brought to tax by virtue of s. 11 and 13 because no such pre-condition is provided either un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under section 10(23C) would not be entitled to claim any benefit of exemption under other provisions of section 10 (except the exemption in respect of agricultural income).With the above prospective amendment w.e.f. 1-4-2015 in the Income Tax Act, 1961 it is now settled in law that earlier to that date of 1-4- 2015 (A.Y. 2015-16) the income which are exempt u/s 10 of I. T. Act, 1961 cannot be subjected to tax even if whole or part of income of any trust or institution is not entitled to exemption u/s 11 & 12 of I. T. Act, 1961. Thus for the year under consideration even the dividend income of assessee trust derived from holding of said TISCO shares is not taxable as per rates prescribed in Section 164 (2) even if that part of income is not entitled to exemption u/s 11 & 12 of I. T. Act, 61. A further amendment to tackle the effect of remaining part of judgement the provisions of Section 12AA were amended by inserting clause (4) to Section 12AA by Finance Act No. (2), 2014 w.e.f. 1-4-2015 enabling the Commissioner to cancel registration u/s 12AA on coming into operation of Section 13(1) in case of a Trust which will result in that provision of Section 11 & 12 shall not apply to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f IT Act i.e. 10(34) the dividend income of assessee trust is also not liable to tax. The orders of Ld. AO & CIT (A) forfeiting exemption u/s 11 and u/s 12 on entire income of tax, holding the trust as A.O.P. and applying maximum marginal rate is erroneous and contrary to the provisions of law, judicial precedents and CBDT circular. The orders of lower authorities may be reversed on this issue. 4.1 The ground No. (2) of appeal is not pressed. Grounds no. 3 and 4 are pleaded to be alternative in nature on which no submissions are made. 4.2 Ld. CIT (DR) contends that i. Assessee consciously violated the statutory provision by continuing with the investment of shares in a non public sector company. In this eventuality law will take its course as per plain meaning once the assesse trust violates a specific provision of sec. 13(1)(d); it leads to denial of benefits of sec 11 & 12 to entire trust income. ii. The assessee was under an obligation to dispose off or convert TISCo shares in to permissible investments by 31st March 1993, which it failed to do and thereby contravened S. 13(l)(d) iii. It was claimed that these shares were purchased out of the sale proceeds of old shares. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed at maximum marginal rates. 4.3 The Orders of lower authorities are relied on. 4.4 We have heard the rival contentions and case laws and carefully perused the material available on the record. The controversy in question be dealt with by framing following question: i. Whether the trust was obliged to convert its TISCO share holding into specified securities by the due date or thereafter? In our considered view there cannot be dispute on this issue that the trust should had converted the TISCO share into investment of permissible securities in this behalf. ii. Whether the nonconversion of TISCO corpus shares into permissible securities will disentitle the assessee from the benefits of secs. 11 and 12 from the entire income. OR Conjointly reading sec. 164(2), it will disentitle the benefits on the portion of the income attributable to impermissible securities to be taxed at maximum marginal rates after applying other provisions of the Act? 4.5 In our considered view the provisions of secs. 11, 12, 13 and 16(2) are to be conjointly read and the CBDT circular referred to above being a beneficial circular is to be also applied. A combined reading leads to a harmonious constru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly indicated its mind in the proviso to section 164 (2), when it categorically refers to forfeiture of exemption for breach of section 13 (1) (d), resulting in levy of maximum marginal rate of tax only to that part of income, which has forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. This interpretation is also supported by Circular No. 387 dated July 6, 1984 [152 ITR (St.) 1]. It was also held 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. In the circumstances, it was held that there was merit in the contention of the assessee that in the present case, the maximum marginal rate of tax would apply only to the dividend income from shares in Mafatlal Industries Ltd. and not to the entire income. Accordingly, the aforesaid question was answered in the negative, that is, in favour of the assessee and against the Department. 4.7 We find merit in the contention of ld. Counsel for the assesse that the proposition of apportionment of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
