TMI Blog2020 (9) TMI 458X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable to tax at MMR. Hence, the action of AO in taxing the surplus at maximum marginal rate without considering the provisions of section 11 12 is bad in law. Provision of Section 164(2) lays down that where relevant income or part of the income is not exempt u/s 11 due to violation of Section 13(1)(c ) or 13(1)(d) of the Act, then in that eventuality tax shall be charged on the relevant income or part of the relevant income at MMR and not that entire income of the trust would be charged to tax at MMR. - Decided against revenue. Disallowing travelling expenses, staff expenses, staff welfare expenses, social welfare expenses and student welfare expenses to the extent of 95% - no proper bills vouchers were maintained by assessee - CIT-A restricted the addition to 5% - HELD THAT:- As during the course of assessment proceeding, the assessee had filed complete ledger account of these expenses alongwith bills and vouchers and the affidavit of temporary staff to whom salary has been paid but debited under the head social welfare and student welfare expenses. In the vouchers, complete details of the nature of expenses are mentioned. In social and staff welfare expenses the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances of the case and in law the ld. CIT(A) erred in allowing travelling expenses, staff expenses, staff welfare expenses, social welfare expenses and student welfare expenses to the extent of 95% without appreciating the fact that no proper bills vouchers were maintained by assessee. 2.1 First of all, we take up the appeal of the Revenue in ITA No.790/JP/2013 for the Assessment Year 2013-14 for adjudication. 2.2 Brief facts of the case are that the assessee society registered under Rajasthan Societies Registration Act, 1958 and is also registered u/s 12AA of the Act. The assessee society filed its return of income declaring Nil income after claiming exemption u/s 11 of the Act. 2.3 However, during the course of assessment proceeding, the AO observed that the society has violated the provisions of Section 11A of the Act. Therefore, interest @ 12% was considered to be diversion of income of the society and accordingly exemption u/s 11 and 12 of the Act was denied and surplus as per income and expenditure account alongwith various additions made in the assessment order were assessed under the head Income from Business Profession and charged to tax u/s 164(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ullers Charitable Institutions (2014) 44 Taxmann.com 275 [Kerala High Court relied upon by ld. CIT(A)] 2.8 On the contrary, the ld.AR appearing on behalf of the assessee relied on the orders of the ld. CIT(A) and reiterated the same arguments as were raised by him before us and also relied on the written submissions submitted before us which is reproduced below. Facts:- 1. The assessee society is registered under Rajasthan Societies Registration Act 1958 vide Registration No.840/Jaipur/2006-07dt. 09.03.2007. It is also registered u/s 12AA of the Income tax Act by CIT-I, Jaipur vide order dt. 20.11.2007. It is solely engaged in imparting education and running 4 schools namely Central Academy School at Shastri Nagar, Ratanada, Paota and CHB at Jodhpur. The assessee filed its return declaring nil income on 30.09.2013after claiming exemption u/s 11. 2. During the assessment proceedings AO observed that the society has paid salary and allowance to three persons covered u/s 13(3) of ₹ 27,33,600/- out of which he considered ₹ 16,21,600/- as excessive and has given advance of ₹ 3.75 crores to various parties stated to be against purchase of immovab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order.The disallowance so deleted by the Ld. CIT(A) as such has not been challenged by the department. Thus, there is no violation of section 13(1)(c). In respect of advances given to the various parties, the same is against the purchase of immovable properties which is one of the mode specified u/s 11(5). However, Ld. CIT(A) at Para 7.2 7.3 of the order has held that the assessee has not filed any agreement for purchase of land in respect of these advances and therefore, directed that notional disallowance of interest of ₹ 45 lacs should be reduced out of application of income. This finding is not challenged by the department. Thus, the order of Ld. CIT(A) on these two issues have attained finality and therefore, there is no violation of section 13(1)(c) or 13(1)(d) of the Act and therefore, theLd. CIT(A) has rightly held that exemption u/s 11 and 12 denied by AO has is uncalled for. 3. Without prejudice to above, even if it is presumed that there is a violation under section 13, the entire surplus cannot be charged to tax but only that part of the income which is not exempt u/s 11 by virtue of section 13(1)(c) or 13(1)(d) shall be charged to tax at MMR. In this conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord, deliberated and through every judgement cited by the parties as well as the orders passed by the Revenue authorities. From the facts of the present case, we noticed that the AO had denied exemption u/s 11 of the Act to the assessee on the ground of unreasonable payments of salary and allowances to the persons covered u/s 13(3) of the Act thereby violating section 13(1) and investment of funds in the mode other hand that specified u/s 11(5), thereby violating section 13(1)(b) of the Act. 2.11 According to the assessee , salary / allowances paid to the person specified u/s 13(3) of the Act are reasonable considering the qualification and duties performed by these persons as discussed by the ld. CIT(A) in para 5.2 and 5.3 of his order. As far as the advance given by the assessee to various parties, the same was against purchase of immovable property and it was held by the ld. CIT(A) in para 7.2 and 7.3 of his order that since the assessee has not filed any agreement for purchase of land in respect of these advances, therefore, he directed that notional disallowance of interest of ₹ 45.00 lacs should be reduced out of application of income. Now the question before us f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO denied the exemption u/s 11 and 12 on ground that since section 13(1)(d) recognizes investment only in specified assets, failure to invest in such specified business would disentitle the assessee for exemption. CIT(A) allowed the assessee's appeals that the entirety of the income of the assessee could not be denied of exemption. On appeal, referring to the decision of the Bombay High Court in DIT(Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust, the Tribunal rejected the Revenue's appeals. High Court held that in DIT (Exemptions) v. Sheth Mafatlal GagalbhaiFoundation Trust, it was held by Bombay High Court that violation of section 11(5),read with section 13(1)(d) by the assessee would result in the maximum marginal rate of tax only on the dividend income on shares, which was not the recognized mode of investment and that the assessee would not be vested with marginal rate of tax on the entire income. Therefore, the income other than dividend income had to be taxed only to the extent to which the violation was found by the AO. Respectfully following the said decision, High Court confirmed the order of the Tribunal and dismissed the revenue s appeal. Special leav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent-trust ought to have been assessed and they are not entitled for any exemption under Sections 11 and 12 of the Act and revised the order passed by the Assessing Officer. The said order was questioned before the Tribunal. The Tribunal allowed the appeals and set aside the order passed by the Commissioner of Income Tax under section 263 of the Act. Being aggrieved by the said order, the revenue preferred these two appeals . On these facts the Hon ble High Court in para 11 held as under:- With regard to second and third substantial questions of law are concerned, reading of section 13(l)(d) of the Act 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 that violation under section 13(l)(d) does not tantamount to denial of exemption under section 11 on the total income of the assessee. An identical question came before the Bombay High Court in the case reported in (2001) 249 ITR 533 (Bom) (supra). The question before the Bombay High Court is Whether violation of Section 11(5) r/w Section 13(l)(d) by the assessee-trust attracts maximum marginal rate of tax on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. 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, there is merit in the contention of the assessee that in the present case the maximum marginal rate of tax will apply only to the divided income from shares held in contravention of s. 13(1)(a) and not to the entire income. Therefore, income other than dividend income shall be taxed at normal rate of taxation under the Act. A similar view has been taken by the Delhi High Court in a judgment reported in (2002) 253 ITR 593 (Supra).Reading of the proviso to Section 142 is very clear that the legislature has clearly contemplated that in a case, 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 a part of the relevant income at the maximum marginal rate. The said analogy is applicable to the facts of the present case . 4. CIT Vs. Orpat Charitable Trust (2015) 230 Taxman 66 (Guj.) (HC) :-Assessee filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1984 w.e.f. 1st April, 1985, under which in cases where the whole or any part of the relevant income is not exempt under s. 11 or s. 12 because of the contravention of s. 13(1)(d), then the 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 an AOP. Sec. 11(5) lays down various modes or forms in which a trust is required to deploy its funds. Sec. 13(1) lays down cases in which s. 11 shall not apply. Under s. 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 30th Nov., 1983, shall result in forfeiture of exemption. By virtue of the proviso (iia) it has been laid down that any asset which does not form part of permissible investment under s. 11(5) shall be disposed of within one year from the end of the previous year in which such asset is acquired or by 31st March, 1993, whichever is later. In the present case, the assessee was required to dispose of the shares under the said proviso by 31st March, 1993, see the judgment of this Court in IT Appeal N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 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 s. 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 s. 164(2) which has been on the statute book right from 1st April 1985. The said proviso was inserted by the Finance Act, 1984. The proviso specifically refers to violation of s. 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 Ltd. and not to the entire income. Therefore, income other than dividend income shall be taxed at normal rate of taxation under the Act. (6) DCIT Vs. Mahatma Gandhi Charitable Society for Education Research ITA No.359/JP/19 dt. 23.01.2020 (Jaipur) (Trib.) :-Hon ble ITAT in Para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re there is violation of section 13, the entire income of the trust is not chargeable to tax at maximum marginal rate and it is only that income which has violated section 13 which shall suffer maximum marginal rate as per proviso to section 164(2) of the Act. Further, the appellant has submitted that the amount of ₹ 20,00,000/- with interest of ₹ 2,16,000/- i.e. ₹ 22,16,000/- was received back by the trust and the interest income of ₹ 2,16,000/- was offered in the return for AY 2012-13 and there is no income generated on amount of ₹ 20 lacs advanced to M/s Rajakala Industries Limited during the year. There is nothing on record to controvert the said submissions of the appellant. Thus, there is no income during the year which can be brought to tax at maximum marginal rate in the hands of the trust in a scenario where it is held that there is violation of provisions of section 13. In view of the same, we don t think it would be relevant to examine whether the appellant trust has violated the provisions of section 13 of the Act as the same has become infructious in the facts and circumstances of the present case. The AO is accordingly, directed to allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions of Hon'ble High Courts and Hon'ble Supreme Court which have already been discussed by us in the above paragraphs wherein it was unanimously held that once there is a violation of Section 13 of the Act then entire income of the trust is not chargeable to tax at MMR and its only that part of income which has violated Section 13 shall suffer MMR as per proviso to Section 164(2) of the Act. 2.13 No new facts and circumstances have been brought before us by the ld. DR in order to controvert or rebut the lawful findings recorded by the ld. CIT(A), Therefore, we see no reason to interfere or deviate from the findings so recorded by the ld. CIT(A). Thus Ground No. 1 to 3 of the Revenue are dismissed. 3.1 In Ground No. 4, the Department is aggrieved that the ld. CIT(A) has erred in allowing travelling expenses, staff expenses, staff welfare expenses, social welfare expenses and student welfare expenses to the extent of 95% without appreciating the fact that no proper bills vouchers were maintained by assessee. 3.2 Brief facts of the case are that the AO during the course of assessment proceedings observed that the assessee had incurred expenditure of ₹ 1,77, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partment. 3.6 We have heard the ld. counsels for both the parties and we have also perused the materials available on record and the orders of the lower authorities. From the records, we noticed that during the course of assessment proceeding, the assessee had filed complete ledger account of these expenses alongwith bills and vouchers and the affidavit of temporary staff to whom salary has been paid but debited under the head social welfare and student welfare expenses. In the vouchers, complete details of the nature of expenses are mentioned. In social and staff welfare expenses the assessee had debited mainly the salary of the temporary employees in respect of which no PF was deducted. Since the assessee could not produce some of the documents of the employees as they were working in different schools of the society. Therefore, the ld. CIT(A) considering the details mentioned in the vouchers and facts circumstances of the had rightly restricted the disallowance out of these expenses at 5%. In this view of the matter, we see no reason to interfere with the order of the ld. CIT(A) which is confirmed. Thus Ground No. 4 of the Revenue is dismissed. 4.1 During the course o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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