2016 (2) TMI 1022 - AT - Income Tax

Entitled for claiming exemption u/s.11 - Held that - Breach of section 13(1)(d) and 13(2)(h) would lead to forfeiture of exemption of income derived from such investment and not the entire income would be subjected to the maximum marginal rate of tax u/s 164(2). Thus the exemption u/s 11 is available to the assessee only on the income to the extent the same is derived in conformity of section 11 and applied during the year for such purpose of charitable trust. Dividend income on shares and mutual funds and long term capital gain on sale of shares an exempt u/s 10(34),10(35) and 10(38) respectively and cannot be brought to tax by applying section 11 and 13 of the Act. 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.

Issues Involved:
1. Violation of Section 13(1)(d) and 13(2)(h) of the Income Tax Act.
2. Denial of exemption under Section 11 of the Income Tax Act.
3. Denial of exemption under Sections 10(34), 10(35), and 10(38) of the Income Tax Act.
4. Denial of exemption for education grants given to Indian students for studying abroad.

Detailed Analysis:

1. Violation of Section 13(1)(d) and 13(2)(h) of the Income Tax Act:
The Assessing Officer (AO) observed that the assessee had sold one crore shares of TCS Ltd. and reinvested the proceeds in 8% cumulative redeemable preference shares of Tata Sons Ltd. (TSL). The AO held that this investment violated the provisions of Section 13(1)(d) and 13(2)(h) of the Act, leading to the denial of exemption under Section 11 for the earlier assessment year (AY). The Tribunal found that the assessee had not complied with the condition of applying 85% of the income during the year and had invested the shortfall in non-conforming investments, thus violating Section 11(5). The Tribunal upheld that the breach of Section 13(1)(d) and 13(2)(h) would lead to forfeiture of exemption of income derived from such investments but not the entire income of the trust.

2. Denial of Exemption under Section 11 of the Income Tax Act:
The AO denied the exemption under Section 11, stating that the assessee had not applied 85% of its income for charitable purposes and had invested in non-conforming investments. The Tribunal noted that the entire income of the trust, including dividend and long-term capital gains, must be considered for the application of income under Section 11. The Tribunal found that the assessee had applied only a portion of its income and had not shown that the shortfall was applied in the immediate following year. Therefore, the Tribunal held that the assessee was not entitled to full exemption under Section 11.

3. Denial of Exemption under Sections 10(34), 10(35), and 10(38) of the Income Tax Act:
The AO denied the exemption for dividend income and long-term capital gains under Sections 10(34), 10(35), and 10(38), stating that these sections do not apply to income derived from property held under trust. The Tribunal, however, held that the income exempt under Section 10 cannot be brought to tax by applying Sections 11 and 13. The Tribunal cited various judicial precedents, including the case of CIT Vs. Divine Light Mission, to support the view that income exempt under Section 10 should not be considered for the purpose of Section 11. Therefore, the Tribunal allowed the exemption under Sections 10(34), 10(35), and 10(38).

4. Denial of Exemption for Education Grants Given to Indian Students for Studying Abroad:
The AO disallowed the exemption for education grants given to Indian students for studying abroad, stating that the application of income and charitable purpose should both be in India. The Tribunal, however, held that the application of income took place in India when the grants were released, and the charitable purpose was the education of Indian students. The Tribunal cited the case of Bharata Kalanji Vs. Income Tax Officer, where it was held that the situs of expenditure is relevant, not the place where the purpose is carried out. Therefore, the Tribunal allowed the exemption for education grants given to Indian students for studying abroad.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee, deciding all effective grounds against the AO. The appeal filed by the AO was dismissed, and the order was pronounced in the open court on 4 February 2016.

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