2005 (9) TMI 513 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of excess income over expenditure due to investments violating sections 11(5) and 13(2)(d) of the Income Tax Act.
2. Applicability of exemptions under section 11 of the Income Tax Act.
3. Interpretation and application of Circular No. 387 and relevant case laws.

Issue-wise Detailed Analysis:

1. Taxability of Excess Income Over Expenditure:
The primary grievance of the appellant was the confirmation by the Commissioner of Income-tax (Appeals) that the excess income over expenditure, due to investments violating sections 11(5) and 13(2)(d) of the Income Tax Act, was taxable. The Assessing Officer noted that the assessee made investments in fixed deposits with M/s. Chaitravanam Resorts and Sri Ram Investments, which were not in compliance with the specified modes under section 11(5). Consequently, a show-cause notice was issued to the assessee to explain why the exemption under section 11 should not be withdrawn. The assessee contended that these investments were made due to insufficient funds for temple construction and that the entire income was accumulated for future application. The Assessing Officer rejected this explanation, emphasizing that the investments were made during the financial year 2000-01 and that sections 11(2) and 11(5) clearly stipulate the conditions for tax exemption.

2. Applicability of Exemptions Under Section 11:
The appellant argued that only the income from the investments made in contravention of section 11(5) should be taxed, not the entire income of the trust. This argument was based on the decision in the case of Gurdayal Berlia Charitable Trust (34 ITD 489) and Circular No. 387. The Assessing Officer, however, distinguished this case, stating that the investments in question were made before the introduction of section 11(5). The CIT(A) upheld this view, noting that the decision of the Bombay Bench in Gurdayal Berlia Charitable Trust was not applicable as the investments were made prior to the relevant provisions. The CIT(A) also dismissed the applicability of Circular No. 387, stating that it did not support the assessee's claim. The appellant further contended that the donations received were towards the corpus of the trust and thus outside the purview of taxation. However, the CIT(A) observed that there was no material on record to suggest that voluntary contributions were made with the direction to form part of the corpus, and hence, these contributions were deemed as income under section 12.

3. Interpretation and Application of Circular No. 387 and Relevant Case Laws:
The appellant relied on Circular No. 387, which discusses the forfeiture of tax exemption if the funds of the trust are not invested according to the prescribed investment pattern. The CIT(A) and the Tribunal both held that the circular did not aid the appellant's case. The Tribunal further noted that the Delhi High Court's decision in DIT (Exemption) v. Agrim Charan Foundation (253 ITR 593) was not applicable, as the deposits in that case were made based on misrepresentation of facts, which was not argued in the present case. The Kerala High Court's decision in Mendakapadam Mandirams Society v. CIT (258 ITR 395) was also cited, emphasizing that section 13 is an overriding provision mandating that leftover funds must be invested in specified modes under section 11(5). The Tribunal concluded that the appellant was not entitled to the benefit of section 11 due to the non-compliance with the investment conditions.

Conclusion:
The Tribunal dismissed the appeal, affirming that the appellant trust was not entitled to the benefit of section 11 of the Income Tax Act due to the investments made in contravention of section 11(5). The decision was based on a comprehensive analysis of the relevant sections, circulars, and case laws, emphasizing the mandatory nature of the investment conditions for tax exemption.